UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


	☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended ~~September 30, 2017~~

March 31, 2020


	☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ~~________~~ to ~~________~~

Commission file number ~~0-22345~~0‑22345

SHORE BANCSHARES, INC.

(Exact name of registrant as specified in its charter)


Maryland		~~52-1974638~~52‑1974638
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)

28969 Information Lane, Easton, Maryland		21601
(Address of Principal Executive Offices)		(Zip Code)

(410) ~~763-7800~~763‑7800

Registrant’s Telephone Number, Including Area Code

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	SHBI	NASDAQ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

◻

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes ☑ No ☐

◻

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule ~~12b-2~~12b‑2 of the Exchange Act.



Large accelerated filer	☐		Accelerated filer	☑
	Non-accelerated filer	☐		Smaller reporting company	☐☑
		~~(Do not check if a smaller reporting company)~~	Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

◻

Indicate by check mark whether the registrant is a shell company (as defined in Rule ~~12b-2~~12b‑2 of the Act). Yes ☐◻ No ☑

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: ~~12,688,224~~12,523,667 shares of common stock outstanding as of ~~October 31, 2017.~~May 11, 2020.

~~INDEX~~

Table of Contents

INDEX


	Page

Part I. Financial Information	2	3

Item 1. Financial Statements	2	3

Consolidated Balance Sheets ~~–September 30, 2017~~– March 31, 2020 (unaudited) and December 31, ~~2016~~2019	2	3

Consolidated Statements of Income ~~-For~~For the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019 (unaudited)	3	4

Consolidated Statements of Comprehensive Income ~~-For~~For the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019 (unaudited)	4	5

Consolidated Statements of Changes in Stockholders’ Equity ~~-For~~For the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019 (unaudited)	5	6

Consolidated Statements of Cash Flows ~~-For~~For the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019 (unaudited)	6	7

Notes to Consolidated Financial Statements (unaudited)		8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	36	35

Item 3. Quantitative and Qualitative Disclosures about Market Risk	46	47

Item 4. Controls and Procedures	46	47

Part II. Other Information		47

Item 1. Legal Proceedings		47

Item 1A. Risk Factors		47

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	47	50

Item 3. Defaults Upon Senior Securities	47	50

Item 4. Mine Safety Disclosures	47	50

Item 5. Other Information	47	50

Item 6. Exhibits	47	50

~~Signatures~~Exhibit Index	47	51

~~Exhibit Index~~Signatures	48	52

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

SHORE BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share amounts)

SHORE BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)

September 30,

December 31,

2017

2016
ASSETS

(Unaudited)

Cash and due from banks

$
22,315

$
14,596
Interest-bearing deposits with other banks

21,601

61,342
Cash and cash equivalents

43,916

75,938
Investment securities:

Available-for-sale, at fair value

213,390

163,902
Held to maturity, at amortized cost - fair value of $6,451 (2017)

and $6,806 (2016)

6,241

6,704

Loans

1,047,247

871,525
Less: allowance for credit losses

(9,295)

(8,726)
Loans, net

1,037,952

862,799

Premises and equipment, net

23,124

16,558
Goodwill

27,909

11,931
Other intangible assets, net

4,831

1,079
Other real estate owned, net

1,809

2,477
Other assets

16,955

18,883
TOTAL ASSETS

$
1,376,127

$
1,160,271

LIABILITIES

Deposits:

Noninterest-bearing

$
326,020

$
261,575
Interest-bearing

880,175

735,914
Total deposits

1,206,195

997,489

Short-term borrowings

1,469

3,203
Other liabilities

5,815

5,280
TOTAL LIABILITIES

1,213,479

1,005,972

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY

Common stock, par value $.01 per share; shares authorized -

35,000,000; shares issued and outstanding - 12,686,767 (including 15,913 unvested

restricted stock) (2017) and 12,664,797 (including 12,488 unvested restricted stock) (2016)

127

127
Additional paid in capital

64,949

64,201
Retained earnings

97,626

90,964
Accumulated other comprehensive (loss)

(54)

(993)
TOTAL STOCKHOLDERS' EQUITY

162,648

154,299
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$
1,376,127

$
1,160,271

~~See accompanying notes to Consolidated Financial Statements.~~

SHORE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands, except per share amounts)

For Three Months Ended

For Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016

INTEREST INCOME

Interest and fees on loans

$
11,771

$
9,398

$
31,762

$
27,476
Interest and dividends on investment securities:

Taxable

1,035

754

2,799

2,448
Tax-exempt

-

2

3

6
Interest on federal funds sold

-

1

-

6
Interest on deposits with other banks

131

81

269

211
Total interest income

12,937

10,236

34,833

30,147

INTEREST EXPENSE

Interest on deposits

607

574

1,656

1,852
Interest on short-term borrowings

4

4

18

11
Total interest expense

611

578

1,674

1,863

NET INTEREST INCOME

12,326

9,658

33,159

28,284
Provision for credit losses

345

605

1,746

1,430

NET INTEREST INCOME AFTER PROVISION

FOR CREDIT LOSSES

11,981

9,053

31,413

26,854

NONINTEREST INCOME

Service charges on deposit accounts

945

899

2,657

2,582
Trust and investment fee income

389

358

1,122

1,073
Gains on sales and calls of investment securities

5

30

5

31
Insurance agency commissions

2,088

2,054

6,939

6,754
Other noninterest income

998

666

2,688

2,149
Total noninterest income

4,425

4,007

13,411

12,589

NONINTEREST EXPENSE

Salaries and wages

5,203

4,346

14,508

13,245
Employee benefits

1,197

1,009

3,564

3,087
Occupancy expense

696

643

1,950

1,839
Furniture and equipment expense

286

245

803

728
Data processing

922

976

2,809

2,639
Directors' fees

99

120

281

355
Amortization of other intangible assets

115
��

33

203

99
FDIC insurance premium expense

189

104

398

654
Other real estate owned expense, net

136

2

299

75
Legal and professional

493

440

1,855

1,434
Other noninterest expenses

1,384

1,299

3,900

3,766
Total noninterest expense

10,720

9,217

30,570

27,921

INCOME BEFORE INCOME TAXES

5,686

3,843

14,254

11,522
Income tax expense

2,274

1,432

5,690

4,379

NET INCOME

$
3,412

$
2,411

$
8,564

$
7,143

Earnings per common share - Basic

$
0.27

$
0.19

$
0.68

$
0.56
Earnings per common share - Diluted

0.27

0.19

0.67

0.56
Dividends paid per common share

0.05

0.03

0.15

0.09

~~See accompanying notes to Consolidated Financial Statements.~~

SHORE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Dollars in thousands)

For Three Months Ended

For Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016

Net Income

$
3,412

$
2,411

$
8,564

$
7,143

Other comprehensive (loss) income:

Investment securities:

Unrealized holding (losses) gains on available-for-sale-securities

(385)

617

1,555

2,628
Tax effect

155

(250)

(628)

(1,062)
Reclassification of (gains) recognized

in net income

(5)

(30)

(5)

(31)
Tax effect

2

12

2

13
Amortization of unrealized loss on securities transferred from

available-for-sale to held-to-maturity

8

-

23

-
Tax effect

(3)

-

(8)

-
Net of tax amount

(228)

349

939

1,548

Total other comprehensive (loss) income

(228)

349

939

1,548
Comprehensive income

$
3,184

$
2,760

$
9,503

$
8,691

~~See accompanying notes to Consolidated Financial Statements.~~

SHORE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
For the Nine Months Ended September 30, 2017 and 2016
(Dollars in thousands)

Accumulated

Additional

Other

Total

Common

Paid in

Retained

Comprehensive

Stockholders'

Stock

Capital

Earnings

Income (Loss)

Equity

Balances, January 1, 2017

$
127

$
64,201

$
90,964

$
(993)

$
154,299

Net Income

-

-

8,564

-

8,564

Other comprehensive income

-

-

-

939

939

Stock-based compensation

-

748

-

-

748

Cash dividends declared

-

-

(1,902)

-

(1,902)

Balances, September 30, 2017

$
127

$
64,949

$
97,626

$
(54)

$
162,648

Balances, January 1, 2016

$
126

$
63,815

$
83,097

$
(71)

$
146,967

Net Income

-

-

7,143

-

7,143

Other comprehensive income

-

-

-

1,548

1,548

Common shares issued for employee stock-

based awards

-

53

-

-

53

Stock-based compensation

1

261

-

-

262

Cash dividends declared

-

-

(1,138)

-

(1,138)

Balances, September 30, 2016

$
127

$
64,129

$
89,102

$
1,477

$
154,835


	March 31,		December 31,
(In thousands, except share and per share data)	2020		2019
ASSETS		(Unaudited)
Cash and due from banks	$	16,432	$	18,465
Interest-bearing deposits with other banks		79,819		76,506
Cash and cash equivalents		96,251		94,971
Investment securities:
Available-for-sale, at fair value		104,375		122,791
Held to maturity, at amortized cost - fair value of $8,718 (2020) and $8,654 (2019)		8,687		8,786
Equity securities, at fair value		1,350		1,342
Restricted securities		4,263		4,190

Loans		1,276,993		1,248,654
Less: allowance for credit losses		(10,378)		(10,507)
Loans, net		1,266,615		1,238,147

Premises and equipment, net		24,930		23,821
Goodwill		17,518		17,518
Other intangible assets, net		2,108		2,252
Other real estate owned, net		38		74
Right-of-use assets		5,019		4,771
Other assets		40,267		40,572
TOTAL ASSETS	$	1,571,421	$	1,559,235

LIABILITIES
Deposits:
Noninterest-bearing	$	355,054	$	356,618
Interest-bearing		993,740		984,716
Total deposits		1,348,794		1,341,334

Short-term borrowings		2,162		1,226
Long-term borrowings		15,000		15,000
Lease liabilities		5,072		4,792
Other liabilities		4,699		4,081
TOTAL LIABILITIES		1,375,727		1,366,433

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share; shares authorized - 35,000,000; shares issued and outstanding - 12,524,569 (2020) and 12,500,372 (2019)		125		125
Additional paid in capital		61,067		61,045
Retained earnings		133,044		131,425
Accumulated other comprehensive income		1,458		207
TOTAL STOCKHOLDERS' EQUITY		195,694		192,802
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	1,571,421	$	1,559,235

See accompanying notes to Consolidated Financial Statements.

Table of Contents

SHORE BANCSHARES, INC.

5CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(Dollars in thousands, except per share amounts)

SHORE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)

For Nine Months Ended

September 30,

2017

2016
CASH FLOWS FROM OPERATING ACTIVITIES:

Net Income

$
8,564

$
7,143
Adjustments to reconcile net income to net cash provided by operating

activities:

Net accretion of acquisition accounting estimates

(347)

-
Provision for credit losses

1,746

1,430
Depreciation and amortization

1,195

1,856
Net amortization of securities

612

(17)
Stock-based compensation expense

748

262
Deferred income tax expense

3,075

4,008
(Gains) on sales of securities

(5)

(31)
Losses on disposals of premises and equipment

2

-
(Gains) losses on sales of other real estate owned

(3)

125
Write-downs of other real estate owned

296

75
Net changes in:

Accrued interest receivable

(447)

(15)
Other assets

(2,236)

(1,602)
Accrued interest payable

(15)

(32)
Other liabilities

543

(272)
Net cash provided by operating activities

13,728

12,930

CASH FLOWS FROM INVESTING ACTIVITES:

Proceeds from maturities and principal payments of investment securities

available for sale

35,957

47,373
Proceeds from sales of securities available for sale

-

3,961
Purchases of investment securities available for sale

(84,495)

(12,142)
Proceeds from maturities and principal payments of investment securities

held to maturity

479

376
Net change in loans

(53,834)

(68,171)
Purchases of premises and equipment

(1,035)

(542)
Proceeds from sales of other real estate owned

470

3,454
Cash received in branch acquisition (net of cash paid)

64,045

-
Net cash used in investing activities

(38,413)

(25,691)

CASH FLOWS FROM FINANCING ACTIVITIES:

Net changes in:

Noninterest-bearing deposits

29,883

26,874
Interest-bearing deposits

(33,584)

(10,042)
Short-term borrowings

(1,734)

(1,672)
Proceeds from the issuance of common stock

-

53
Common stock dividends paid

(1,902)

(1,138)
Net cash (used in) provided by financing activities

(7,337)

14,075
Net (decrease) increase in cash and cash equivalents

(32,022)

1,314
Cash and cash equivalents at beginning of period

75,938

73,811
Cash and cash equivalents at end of period

$
43,916

$
75,125


	For Three Months Ended
	March 31,
(In thousands, except per share data)	2020		2019

INTEREST INCOME
Interest and fees on loans	$	13,795	$	13,499
Interest and dividends on investment securities:
Taxable		719		998
Interest on deposits with other banks		172		163
Total interest income		14,686		14,660

INTEREST EXPENSE
Interest on deposits		2,059		1,947
Interest on short-term borrowings		2		213
Interest on long-term borrowings		107		106
Total interest expense		2,168		2,266

NET INTEREST INCOME		12,518		12,394
Provision for credit losses		350		100

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES		12,168		12,294

NONINTEREST INCOME
Service charges on deposit accounts		866		934
Trust and investment fee income		375		372
Other noninterest income		1,111		882
Total noninterest income		2,352		2,188

NONINTEREST EXPENSE
Salaries and wages		4,296		3,766
Employee benefits		1,722		1,254
Occupancy expense		698		691
Furniture and equipment expense		317		263
Data processing		1,044		910
Directors' fees		141		86
Amortization of other intangible assets		144		162
FDIC insurance premium expense		91		205
Other real estate owned expenses, net		18		233
Legal and professional fees		634		601
Other noninterest expenses		1,244		1,172
Total noninterest expense		10,349		9,343

Income from continuing operations before income taxes		4,171		5,139
Income tax expense		1,053		1,311
Income from continuing operations		3,118		3,828

Loss from discontinued operations before income taxes		—		(99)
Income tax benefit		—		(25)
Loss from discontinued operations		—		(74)

NET INCOME	$	3,118	$	3,754

Supplemental cash flows information:

Interest paid

$
1,738

$
1,895
Income taxes paid

$
2,000

$
588
Transfers from loans to other real estate owned

$
95

$
1,599
Change in unrealized gains on securities available for sale

$
1,550

$
2,596
Amortization of unrealized loss on securities transferred from

available for sale to held to maturity

$
23

$
-

Branch purchase:

Tangible assets acquired (net of cash received)

$
129,188

$
-
Identifiable intangible assets acquired

$
3,954

$
-
Liabilities assumed

$
212,463

$
-

See accompanying notes to Consolidated Financial Statements.

Table of Contents

SHORE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(Dollars in thousands)


	For Three Months Ended
	March 31,
(Dollars in thousands)	2020		2019
Net income	$	3,118	$	3,754

Other comprehensive income:
Investment securities:
Unrealized holding gains on available-for-sale-securities		1,714		1,983
Tax effect		(468)		(541)

Amortization of unrealized loss on securities transferred from available-for-sale to held-to-maturity		8		7
Tax effect		(3)		(3)
Total other comprehensive income		1,251		1,446
Comprehensive income	$	4,369	$	5,200

See accompanying notes to Consolidated Financial Statements.

Table of Contents

SHORE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)

For the Three months Ended March 31, 2020 and 2019

(Dollars in thousands)


							Accumulated
			Additional				Other		Total
	Common		Paid in		Retained		Comprehensive		Stockholders’
	Stock		Capital		Earnings		Income		Equity
Balances, January 1, 2020	$	125	$	61,045	$	131,425	$	207	$	192,802

Net income		—		—		3,118		—		3,118

Other comprehensive income		—		—		—		1,251		1,251

Stock-based compensation		—		61		—		—		61

Vesting of restricted stock, net of shares surrendered		—		(39)		—		—		(39)

Cash dividends declared		—		—		(1,499)		—		(1,499)

Balances, March 31, 2020	$	125	$	61,067	$	133,044	$	1,458	$	195,694


							Accumulated
			Additional				Other		Total
	Common		Paid in		Retained		Comprehensive		Stockholders’
	Stock		Capital		Earnings		(Loss)		Equity
Balances, January 1, 2019	$	127	$	65,434	$	120,574	$	(2,950)	$	183,185

Net Income		—		—		3,754		—		3,754

Other comprehensive income		—		—		—		1,446		1,446

Stock-based compensation		—		63		—		—		63

Exercise of options and vesting of restricted stock, net of shares surrendered		1		(89)		—		—		(88)

Cash dividends declared		—		—		(1,278)		—		(1,278)

Balances, March 31, 2019	$	128	$	65,408	$	123,050	$	(1,504)	$	187,082

See accompanying notes to Consolidated Financial Statements.

Table of Contents

SHORE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Dollars in thousands)


	For Three Months Ended
	March 31,
	2020		2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	3,118	$	3,754
Adjustments to reconcile net income to net cash provided by operating activities:
Net accretion of acquisition accounting estimates		(110)		(145)
Provision for credit losses		350		100
Depreciation and amortization		620		506
Net amortization of securities		111		127
Stock-based compensation expense		61		63
Deferred income tax benefit		(108)		(143)
Losses on sales and valuation adjustments on other real estate owned		18		226
Fair value adjustment on equity securities		(1)		(22)
Bank owned life insurance income		(257)		(38)
Net changes in:
Accrued interest receivable		(215)		(414)
Other assets		397		3,612
Accrued interest payable		—		(295)
Other liabilities		479		404
Net cash provided by operating activities		4,463		7,735

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and principal payments of investment securities available for sale		20,021		5,475
Proceeds from maturities and principal payments of investment securities held to maturity		105		150
Purchases of equity securities		(7)		(8)
Net change in loans		(28,739)		(16,304)
Purchases of premises and equipment		(1,397)		(192)
Proceeds from sales of other real estate owned		18		17
Net (purchase) redemption of restricted securities		(73)		1,184
Net cash (used in) investing activities		(10,072)		(9,678)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net changes in:
Noninterest-bearing deposits		(1,564)		14,685
Interest-bearing deposits		9,055		10,306
Short-term borrowings		936		(30,088)
Common stock dividends paid		(1,499)		(1,278)
Repurchase of shares for tax withholding on exercised options and vested restricted stock		(39)		(88)
Net cash provided by (used in) financing activities		6,889		(6,463)
Net increase in cash and cash equivalents		1,280		(8,406)
Cash and cash equivalents at beginning of period		94,971		67,225
Cash and cash equivalents at end of period	$	96,251	$	58,819

Supplemental cash flows information:
Interest paid	$	2,199	$	2,624
Income taxes paid	$	77	$	—
Lease liabilities arising from right-of-use assets	$	419	$	3,877
Unrealized gain on securities available for sale	$	1,714	$	1,983
Amortization of unrealized loss on securities transferred from available for sale to held to maturity	$	8	$	7

See accompanying notes to Consolidated Financial Statements.

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Shore Bancshares, Inc.

Notes to Consolidated Financial Statements

For the Three and ~~Nine~~ Months Ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019

(Unaudited)

Note 1 -– Basis of Presentation

The consolidated financial statements include the accounts of Shore Bancshares, Inc. and its subsidiaries with all significant intercompany transactions eliminated. The consolidated financial statements conform to accounting principles generally accepted in the United States of America (“GAAP”) and to prevailing practices within the banking industry. The accompanying interim financial statements are unaudited; however, in the opinion of management all adjustments necessary to present fairly the consolidated financial position at ~~September 30, 2017,~~March 31, 2020, the consolidated results of income and comprehensive income for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2020 and ~~2016, and~~2019, changes in stockholders’ equity for the three months ended March 31, 2020 and 2019 and cash flows for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 and ~~2016,~~2019, have been included. All such adjustments are of a normal recurring nature. The amounts as of December 31, ~~2016~~2019 were derived from the ~~2016~~2019 audited financial statements. The results of operations for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2020 are not necessarily indicative of the results to be expected for any other interim period or for the full year. This Quarterly Report on Form 10-Q should be read in conjunction with the Annual Report of Shore Bancshares, Inc. on Form 10-K for the year ended December 31, ~~2016.~~2019. For purposes of comparability, certain immaterial reclassifications have been made to amounts previously reported to conform with the current period presentation.

When used in these notes, the term “the Company” refers to Shore Bancshares, Inc. and, unless the context requires otherwise, its consolidated ~~subsidiaries.~~subsidiary.

~~Reclassification~~Risks and Uncertainties

~~During~~The novel coronavirus (“COVID-19”) spread rapidly across the ~~period~~world in the first quarter of ~~September 30, 2017, management made an immaterial reclassification adjustment~~2020 and was declared a pandemic by the World Health Organization. The government and private sector responses to ~~goodwill~~contain its spread began to significantly affect our operations in March and ~~deferred income taxes for a transaction involving a stock-based acquisition~~will likely adversely affect our operations in subsequent quarters, although such effects may vary significantly. The duration and extent of ~~an insurance entity which occurred~~the effects over longer terms cannot be reasonably estimated at this time. The risks and uncertainties resulting from the pandemic most likely to affect our future earnings, cash flows and financial condition in ~~2007. This reclassification was deemed an immaterial correction~~future quarters primarily include the nature and duration of ~~an error as it had no~~the financial effects felt by our customers and the related impact on ~~total assets or earnings per share previously reported~~the customers' ability to fulfill their financial obligations to the Company as well as the potential decline of real estate values resulting from market disruption which may impair the recorded values of collateral-dependent loans. Further, these factors, in addition to those pervasive to the industry and overall U.S. economy, may negatively impact the overall value of our Company in such a way that an impairment charge to the carrying value of goodwill is required. Accordingly, significant estimates used in the ~~Consolidated Balance Sheets and Consolidated Statements~~preparation of ~~Income for any period but was necessary in order to properly reflect goodwill and deferred income taxes on the Company’s consolidated balance sheet.~~

~~Effective July 1, 2016, the Company’s two bank subsidiaries, The Talbot Bank of Easton Maryland and CNB were consolidated into one bank known as Shore United Bank. In these notes to the consolidated~~our financial statements may be subject to significant adjustments in future periods. The greater the duration and ~~the management discussion and analysis section, the term “the Bank” refers to Shore United Bank, unless the context requires stipulating results~~severity of the ~~individual banks before~~pandemic the ~~consolidation occurred.~~more likely that estimates will be materially impacted by its effects.

Recent Accounting Standards

and Other Authoritative Guidance

ASU No. ~~2014-09,~~ ~~“Revenue from Contracts with Customers~~2016-13 – In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic ~~606)~~326): Measurement of Credit Losses on Financial Instruments.” ~~amendment requires entities~~ The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to ~~recognize revenue~~better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to ~~depict the transfer of promised goods or services~~those techniques will change to ~~customers in amounts that~~ reflect the ~~consideration~~full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. At the FASB’s October 16, 2019 meeting, the Board affirmed its decision to ~~which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective for periods beginning after December 15, 2016. ASU 2015-14, “Revenue from Contracts with Customers (Topic 606) Deferral of the Effective Date”~~– ~~ASU 2015-14 amendments defer~~amend the effective date of ~~Update 2014-09~~this ASU for ~~all entities by one year.~~many companies. Public business entities ~~certain not-for-profit entities, and certain employee benefit plans should apply~~that are SEC filers, excluding those meeting the ~~guidance in ASU 2014-09 to annual~~smaller reporting ~~periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as~~company definition, will retain the initial required implementation date of ~~annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. ASU 2016-08,~~ ~~“Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations” – ASU 2016-08 amendments are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. ASU 2016-10,~~ ~~“Revenue from Contracts with Customers (Topic 606)~~: ~~Identifying Performance Obligations and Licensing”~~ – ASU 2016-10 amendments clarify that contractual provisions that, explicitly or implicitly, require an entity to transfer control of additional goods or services to a customer should be distinguished from contractual provisions that, explicitly or implicitly, define the attributes of a single promised license. Attributes of a promised license define the scope of a customer’s right to use or right to access an entity’s intellectual property and, therefore, do not define whether the entity satisfies its performance obligation at a point in time or over time and do not create an obligation for the entity to transfer any additional rights to use or access its intellectual property. Revenues from services provided by financial institutions that could be impacted by the new guidance includes credit card arrangements, trust and custody services and administration services for customer deposits accounts (e.g., ATM and wire transfer transactions). This update will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Adoption of the ASU is not expected to have a significant impact on the Company’s consolidated financial statements and related disclosures. The Company’s primary sources of revenue are derived from interest and dividends earned on loans, investment securities, and2019. All other financial instruments that are not within the scope of ASU 2014-09. The Company’s revenue recognition pattern for revenue streams within the scope of ASU 2014-09, including but not limited to service charges on deposit accounts and gains/losses on the sale of OREO, is not expected to change significantly from current practice. The standard permits the use of either the full retrospective or modified retrospective transition method. The Company is currently planning to use the modified retrospective transition method which requires

application of ASU 2014-09 to uncompleted contracts at the date of adoption. Periods prior to the date of adoption are not retrospectively revised, but a cumulative effect of adoption is recognized for the impact of the ASU on uncompleted contracts at the date of adoption.

~~ASU No. 2016-01,~~ ~~“Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”.~~ ~~This ASU, among other things, (i) requires equity investments, with certain exceptions, to~~entities will be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to ~~be disclosed for financial instruments measured at amortized cost on~~apply the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (vii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities. ASU 2016-01 will be effective for us on January 1, 2018 and is not expected to have a significant impact on our financial statements.

~~ASU No. 2016-02,~~ ~~“Leases (Topic 842).”~~ This ASU stipulates that a lessee should recognize the assets and liabilities that arise from leases. All leases create an asset and a liability for the lessee in accordance with FASB Concepts Statement No. 6, ~~Elements of Financial Statement~~ , and, therefore, recognition of those lease assets and lease liabilities represents an improvement over previous GAAP, which did not require lease assets and lease liabilities to be recognized for most leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. When measuring assets and liabilities arising from a lease, a lessee (and a lessor) should include payments to be made in optional periods only if the lessee is reasonably certain to exercise an option to extend the lease or not to exercise an option to terminate the lease. Similarly, optional payments to purchase the underlying asset should be included in the measurement of lease assets and lease liabilities only if the lessee is reasonably certain to exercise that purchase option. In addition, also consistent with the previous leases guidance a lessee (and a lessor) should exclude most variable lease payments in measuring lease assets and lease liabilities, other than those that depend on an index or a rate or are in substance fixed payments. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. The amendments in this ASU are effective for fiscal years, after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Leases and lessors may not apply a full retrospective transition approach. While the Company is currently evaluating the impact of the new standard, we expect an increase to the Consolidated Balance Sheets for right-of-use assets and interest expense of the lease liabilities in the Consolidated Statements of Income, for arrangements previously accounted for as operating leases.

~~ASU No. 2016-09,~~ ~~“Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.”~~ This ASU simplifies the treatment and accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public business entities, the amendments in this update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any entity in any interim or annual period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. Upon adoption of ASU No. 2016-09 on January 1, 2017, the Company made an accounting policy election to recognize forfeitures of stock-based awards as they occur. The adoption of ASU No. 2016-09 did not have a material impact on our consolidated financial statements.

~~ASU No. 2016-13,~~ ~~“Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.”~~ The amendments in this ASU will replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The use of forecasted information incorporates more timely information in the estimate of expected credit losses, which will be more decision useful to users of the financial statements. It is not expected that an entity will need to create an economic forecast over the entire contractual life of long-dated financial assets. Therefore, the amendments will allow an entity to revert to historical loss information that is reflective of the contractual term (considering the effect of prepayments) for periods that are beyond the time frame for which the entity is able to develop reasonable and supportable forecasts. The amendments retain many of the disclosure amendments in Accounting Standards Update No. 2010-20, Receivables (Topic 310): ~~Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses,~~ updated to reflect the change from an incurred loss methodology to an expected credit loss methodology. Credit losses on available-for-sale debt securities should be measured in a manner similar to current GAAP. However, the amendments require that credit losses be presented as an allowance rather than a write-down. For public entities that are U.S. Securities and Exchange Commission (SEC) filers, the amendments are effective for fiscal years, beginning after December 15, ~~2019, including interim periods within those fiscal years. All entities may adopt the amendments earlier~~2022.

asTable of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company believes this ASU will have a significant impact on our consolidated financial statements and the method in which we calculate our credit losses, primarily on loans and held to maturity securities. Contents

At this time, the Company has established a project management team which meets periodically to discuss and assign roles and responsibilities, key tasks to complete, and a general timeline to be followed for implementation. The team has been working with an advisory consultant and has purchased a vendor model for implementation. Historical data has been collected and uploaded to the new model and the team is in the process of ~~developing and understanding this pronouncement, evaluating~~finalizing the methodologies that will be utilized. The team is currently running a parallel simulation to its current incurred loss impairment model. The Company is continuing to evaluate the extent of the potential impact of this ~~pronouncement~~standard and ~~researching additional software resources that could assist~~continues to keep current on evolving interpretations and industry practices via webcasts, publications, conferences, and peer bank meetings.

Effective November 25, 2019, the SEC adopted Staff Accounting Bulletin (SAB) 119. SAB 119 updated portions of SEC interpretative guidance to align with FASB ASC 326, “Financial Instruments – Credit Losses.” It covers topics including (1) measuring current expected credit losses; (2) development, governance, and documentation of a systematic methodology; (3) documenting the ~~implementation.~~results of a systematic methodology; and (4) validating a systematic methodology.

ASU No. ~~2016-15,~~ 2019-12 – In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes~~“Classification~~.” The ASU is expected to reduce cost and complexity related to the accounting for income taxes by removing specific exceptions to general principles in Topic 740 (eliminating the need for an organization to analyze whether certain exceptions apply in a given period) and improving financial statement preparers’ application of ~~Certain Cash Receipts and Cash Payments."~~ ~~Current GAAP is unclear or does not include specific guidance on how to classify~~ certain ~~transactions in the statement of cash flows.~~income tax-related guidance. This ASU is intended to reduce diversity in practice in how eight particular transactions are classified in the statement of cash flows. ASU No. 2016-15 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, provided that allpart of the ~~amendments are adopted in~~FASB’s simplification initiative to make narrow-scope simplifications and improvements to accounting standards through a series of short-term projects. Forpublic business entities, the ~~same period. Entities will be required to apply the guidance retrospectively. If it is impracticable to apply the guidance retrospectively for an issue, the~~ amendments related to that issue would be applied prospectively. We adopted the amendments in this ASU effective January 1, 2017. The adoption of ASU No. 2016-15 did not have a material impact on our consolidated financial statements.

~~ASU No. 2017-01 – In January 2017, FASB issued ASU No. 2017-01,~~ ~~Business Combinations (Topic 805)” Clarifying the Definition of a Business.~~ The ASU clarifies the definition of a business to assist with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in this update are effective for fiscal years beginning after December 15, ~~2017, including~~2020, and interim periods within those fiscal years. Early adoption is permitted. The ~~guidance~~Company is ~~not expected to~~currently assessing the impact that ASU 2019-12 will have ~~a significant impact~~ on ~~the Company’s~~its consolidated financial ~~positions, results of operations or disclosures.~~statements.

ASU No. ~~2017-03~~2020-01 – In January ~~2017,~~2020, the ~~Financial Accounting Standards Board (“FASB”)~~FASB issued ~~Accounting Standards Update (“ASU”) No. 2017-03, “Accounting Changes and Error Corrections~~ASU 2020-01, “Investments – Equity Securities (Topic ~~250) and~~321), Investments – Equity Method and Joint Ventures (Topic 323)~~: Amendments to SEC Paragraphs Pursuant to Staff Announcements at~~, and Derivatives and Hedging (Topic 815) – Clarifying the ~~September 22, 2016~~Interactions between Topic 321, Topic 323, and ~~November 17, 2016 EITF Meetings.~~Topic 815.” The ASU ~~adds an SEC paragraph to ASUs 2014-09, 2016-02, and 2016-13 which specifies the SEC staff view that~~is based on a registrant should evaluate ASUs that have not yet been adopted to determine the appropriate disclosure about the potential material effects of those ASUs on the financial statements when adopted. The guidance also specifies the SEC staff view on financial statement disclosures when the company does not know or cannot reasonably estimate the impact that adoptionconsensus of the ~~ASUs will have on the financial statements. The ASU also conforms SEC guidance on~~Emerging Issues Task Force and is expected to increase comparability in accounting for ~~tax benefits~~these transactions. ASU 2016-01 made targeted improvements to accounting for financial instruments, including providing an entity the ability to measure certain equity securities without a readily determinable fair value at cost, less any impairment, plus or minus changes resulting from ~~investments~~observable price changes in ~~affordable housing projects~~orderly transactions for the identical or a similar investment of the same issuer. Among other topics, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the ~~guidance in ASU 2014-01,~~ ~~Investments – Equity Method and Joint Ventures (Topic 323).~~ ~~The~~equity method of accounting. For public business entities, the amendments in ~~this update are effective upon issuance. The guidance did not have a significant impact on our consolidated financial statements.~~

~~ASU No. 2017-04 – In January 2017, FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying~~ the ~~Test for Goodwill Impairment.”~~ ~~The~~ ASU simplifies measurement of goodwill and eliminates Step 2 from the goodwill impairment test. The Company should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. The impairment charge is limited to the amount of goodwill allocated to that reporting unit. The amendments in this update are effective for fiscal years beginning after

December ~~15, 2019, including~~31, 2020, and interim periods within those fiscal years. Early adoption is ~~permitted for goodwill impairment tests performed on testing dates after January 1, 2017.~~permitted. The ~~guidance is~~Company does not ~~expected~~expect the adoption of ASU 2020-01 to have a ~~significant~~material impact on ~~the Company’s~~its consolidated financial ~~positions, results of operations or disclosures~~ statements.

ASU No. ~~2017-08~~ 2020-04 – In March ~~2017,~~2020, the ~~FASB~~Financial Accounting Standards Board (FASB) issued ~~ASU~~Accounting Standards Update (ASU) No. ~~2017-08,~~ ~~“Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities.”~~ ~~Under current GAAP, entities normally amortize the premium as an adjustment of yield over the contractual life~~2020-04 “Reference Rate Reform (Topic 848): Facilitation of the ~~instrument. This~~Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance ~~shortens~~to ease the ~~amortization period of~~potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain ~~callable debt securities held at a premium~~criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the ~~earliest call date. This update~~global market-wide reference rate transition period. The guidance is effective for ~~fiscal years,~~all entities as of March 12, 2020 through December 31, 2022. At present, the Bank has limited exposure to Libor based pricing. Libor based loans only comprise 14 loans or 2.6% of the loan portfolio. The bank is confident it can successfully negotiate a migration to SOFR between now and ~~interim periods~~the implementation date. The Bank will notify customers within ~~those fiscal years,~~120 days prior to migration to SOFR. The Bank acknowledges the replacement rate will be more volatile based on different countries migrating to different indexes and limited liquidity to support the rate. The Bank further acknowledges the volatility will be greatly influenced by the support provided by the Federal Reserve.

On March 12, 2020, the SEC finalized amendments to its “accelerated filer” and “large accelerated filer” definitions. The amendments increase the threshold criteria for meeting these filer classifications and are effective on April 27, 2020. Any changes in filer status are to be applied beginning with the filer’s first annual report filed with the SEC subsequent to the effective date. Prior to these changes, the Company was required to comply with section 404(b) of the Sarbanes Oxley

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Act concerning auditor attestation over internal control over financial reporting as an “accelerated filer” as it had more than $75 million in public float but less than $700 million at the end of the Company’s most recent second quarter. The rule change expands the definition of “smaller reporting companies” to include entities with public float of less than $700 million and less than $100 million in annual revenues. The Company expects to meet this expanded category of small reporting company and will no longer be considered an accelerated filer after ~~December 15, 2018.~~the 2020 Annual report. If the Company’s annual revenues exceed $100 million, its category will change back to “accelerated filer”. The ~~adoption~~classifications of ~~ASU No. 2017-08~~“accelerated filer” and “large accelerated filer” require a public company to obtain an auditor attestation concerning the effectiveness of internal control over financial reporting (ICFR) and include the opinion on ICFR in its annual report on Form 10-K. Smaller reporting companies also have additional time to file quarterly and annual financial statements. All public companies are required to obtain and file annual financial statement audits, as well as provide management’s assertion on effectiveness of internal control over financial reporting, but the external auditor attestation of internal control over financial reporting is not required for smaller reporting companies. As the Bank has total assets exceeding $1.0 billion, it remains subject to FDICIA, which requires an auditor attestation concerning internal controls over financial reporting. As such, other than the additional time provided to file quarterly and annual financial statements, this change does not significantly change the Company’s annual reporting and audit requirements.

In March 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (“the agencies”) issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by the Coronavirus. The interagency statement was effective immediately and impacted accounting for loan modifications. Under Accounting Standards Codification 310-40, “Receivables – Troubled Debt Restructurings by Creditors,” (“ASC 310-40”), a restructuring of debt constitutes a troubled debt restructuring (“TDR”) if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. As of March 31, 2020, the Company has offered payment deferrals for commercial and consumer customers for up to six months. The loan modifications offered to specific loan types are as follows:

Full payment-balloon or full amortization loans – Once the deferral period has ended, the Company will go back to billing principal and interest. As payments are made, all funds will go towards interest until all accrued interest has been caught up. Once the accrued interest is satisfied, future payments will be broken out for both principal and interest. The amount of principal that had been deferred will be re-amortized when the balloon maturity/payoff date occurs.

Full payment ARM loans – Once the deferral period has ended, the Company will go back to billing principal and interest. As payments are made, all funds will go towards interest until all accrued interest has been caught up. Once the accrued interest is satisfied, future payments will be broken out for both principal and interest. The amount of principal that had been deferred will be re-amortized when the ARM repricing occurs.

Full Payment Rate Reset Loans - Once the deferral period has ended, the Company will go back to billing principal and interest. As payments are made, all funds will go towards interest until all accrued interest has been caught up. Once the accrued interest is satisfied, future payments will be broken out for both principal and interest. The amount of principal that had been deferred will be re-amortized when the rate reset occurs.

Principal deferral only loans (any type) - Once the deferral period has ended, the Company will go back to billing principal and interest. The principal amount that has been deferred will be re-amortized when either the maturity, ARM repricing or rate reset occurs.

Consumer loans – Borrowers are required to sign a change in the terms and agreements at the time of deferral, which re-amortizes the loan and extends the maturity date based on the number of months deferred.

This interagency guidance is expected to have a material impact on the Company’s ~~consolidated~~ financial ~~statements.~~statements; however, this impact cannot be quantified at this time.

~~ASU No. 2017-09~~

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Note 2 – ~~In May 2017,~~Discontinued Operations

On December 31, 2018, the ~~FASB issued ASU No. 2017-09~~ ~~“Stock Compensation, Scope of Modification Accounting.”~~ ~~This ASU clarifies when changes to~~Company completed the ~~terms of conditions of a share-based payment award must be accounted for as modifications. Companies will apply the modification accounting guidance if the value, vesting conditions or classification~~sale of the ~~award changes. The new guidance should reduce diversity in practice~~specific assets and ~~result in fewer changes~~activities related to its insurance agency, Avon-Dixon Agency, LLC (“Avon-Dixon”) to Avon-Dixon, an Alera Group Agency, LLC (“Alera”). Also, on this date the ~~terms~~Company discontinued the operations of ~~an award being accounted for as modifications,~~its premium finance company, Mubell Finance, LLC (“Mubell”). Together, Avon-Dixon and Mubell companies are referred to as the ~~guidance will allow companies~~“Insurance Subsidiaries”. The Insurance Subsidiaries represented the Company’s insurance products and services segment, the activities of which related to ~~make certain non-substantive changes~~originating, servicing and underwriting retail insurance policies. Certain other assets and liabilities to ~~awards without accounting for them~~be sold or settled separately within one year, were classified as modifications. It does not change the accounting for modifications. ASU No. 2017-09 is effective for interim and annual reporting periods beginning after December 15, 2017; early adoption is permitted. ASU No. 2017-09 is not expected to have a material impact ondiscontinued operations in the Company’s consolidated financial statements.

~~Note 2 – Business Combination~~

~~Northwest Bank Branch Acquisition~~

On May 19, 2017, the Bank purchased three branches from Northwest Bank (“NWBI”) located in Arbutus, Elkridge, and Owings Mills, Maryland. Pursuant to the transaction, the Bank acquired $122.9 million in loans and $212.5 million in deposits, as well as the branch premises and equipment. In connection with its purchase All of the ~~branches from Northwest, the Bank received a cash payment from Northwest of $64.0 million, which was net of a premium paid on deposits of $17.2 million.~~ This acquisition provides the Bank with the opportunity to enhance its footprint in Maryland by extending its branch network across the Eastern Shore to the greater Baltimore area communities of Elkridge, Owings Mills and Arbutus.

~~The Company has accounted for the branch purchases under the acquisition method of accounting in accordance with FASB ASC topic 805, “Business Combinations,” whereby the acquired~~remaining assets and liabilities of discontinued operations were ~~recorded by the Bank at their estimated fair values as of their acquisition date.~~settled prior to December 31, 2019.

~~The acquired~~There were no assets ~~and assumed~~or liabilities of ~~the NWBI branches were measured~~discontinued operations at estimated fair value. Management made significant estimates and exercised significant judgement in accounting for the acquisition of the NWBI branches. Management evaluated expected cash flows, prepayment speeds and estimated loss factors to measure fair values for loans. Deposits were valued based upon interest rates, original and remaining terms and maturities, as well as current rates for similar funds in the same markets. Premises were based on recent appraised values, whereas equipment was acquired based on the remaining book value from NWBI, which approximated fair value. Management engaged independent outside experts to provide the fair value estimates.

March 31, 2020 or December 31, 2019. The following table ~~provides~~presents the ~~purchase price as~~financial information of discontinued operations for the ~~acquisition date, the identifiable assets acquired and liabilities assumed at their estimated fair values, and the resulting goodwill of $15.3 million recorded from the acquisition:~~

~~(in thousands)~~

periods indicated:


~~Purchase Price Consideration:~~
~~Cash consideration~~	$	~~17,186~~
~~Total purchase price for NWBI branch acquisition~~	$	~~17,186~~

~~Assets acquired at fair value:~~
~~Cash and cash equivalents~~	$	~~81,231~~
~~Loans~~		~~122,862~~
~~Premises and equipment, net~~		~~6,326~~
~~Core deposit intangible~~		~~3,954~~
~~Total fair value of assets acquired~~	$	~~214,373~~

~~Liabilities assumed at fair value:~~
~~Deposits~~	$	~~212,456~~
~~Other liabilities~~		7
~~Total fair value of liabilities assumed~~	$	~~212,463~~

~~Net assets acquired at fair value:~~	$	~~1,910~~

~~Transaction consideration paid to Northwest Bank~~	$	~~17,186~~

~~Amount of goodwill resulting from acquisition~~	$	~~15,276~~


	For Three Months Ended
	March 31,
($ in thousands)	2020		2019
Noninterest income
All other income	$	—	$	14
Total noninterest income		—		14
Noninterest expense
Salaries and wages		—		31
Employee benefits		—		7
Occupancy expense		—		18
Furniture and equipment		—		1
Legal and professional fees		—		64
Other noninterest expenses		—		(8)
Total noninterest expense		—		113
Loss from discontinued operations before income taxes		—		(99)
Income tax benefit		—		(25)
Loss from discontinued operations	$	—	$	(74)

~~The total amount of goodwill arising from this transaction of $15.3 million is expected to be deductible for tax purposes, pursuant to section 197 of the Internal Revenue Code.~~

~~Acquired loans~~

~~The following table outlines the contractually required payments receivable, cash flows we expect to receive, and the accretable yield for all NWBI loans as~~Table of ~~the acquisition date.~~

Contractually

Required

Cash Flows

Carrying Value

Payments

Expected To Be

Accretable FMV

of Loans

Receivable

Collected

Adjustments

Receivable

Performing loans acquired

$
125,131

125,131

2,269

$
122,862

The Company recorded all loans acquired at the estimated fair value on the purchase date with no carryover of the related allowance for loan losses. The Company only acquired loans which were deemed to be performing loans with no signs of credit deterioration.

The Company determined the net discounted value of cash flows on approximately 864 performing loans totaling $125.1 million. The valuation took into consideration the loans’ underlying characteristics, including account types, remaining terms, annual interest rates, interest types, past delinquencies, timing of principal and interest payments, current market rates, loan-to-value ratios, loss exposures, and remaining balances. These performing loans were segregated into pools based on loan and payment type. The effect of this fair valuation process was a net accretable discount adjustment of $2.3 million at acquisition.

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Note 3 – Earnings Per Share

Basic earnings per common share is calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per common share is calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period, adjusted for the dilutive effect of potential common stock equivalents (stock-based awards). The following table provides information relating to the calculation of earnings per common share:


	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
(In thousands, except per share data)	2017		2016		2017		2016		2020		2019

Net income from continuing operations									$	3,118	$	3,828
Net loss from discontinued operations										-		(74)
Net Income	$	3,412	$	2,411	$	8,564	$	7,143	$	3,118	$	3,754
Weighted average shares outstanding - Basic		12,687		12,661		12,679		12,648		12,513		12,769
Dilutive effect of common stock equivalents-options		21		-		21		-		5		4
Dilutive effect of common stock equivalents-restricted stock units		8		15		6		15
Weighted average shares outstanding - Diluted		12,716		12,676		12,706		12,663		12,518		12,773
Earnings per common share - Basic	$	0.27	$	0.19	$	0.68	$	0.56
Earnings per common share - Diluted	$	0.27	$	0.19	$	0.67	$	0.56

Basic earnings per common share
Income from continuing operations									$	0.25	$	0.30
Loss from discontinued operations										—		(0.01)
Net income									$	0.25	$	0.29

Diluted earnings per common share
Income from continuing operations									$	0.25	$	0.30
Loss from discontinued operations										—		(0.01)
Net income									$	0.25	$	0.29

There were no weighted average common stock equivalents excluded from the calculation of diluted earnings per share for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2020 and ~~2016.~~2019.

Note 4 – Investment Securities

The following ~~table provides~~tables provide information on the amortized cost and estimated fair values of ~~investment~~debt securities.


			Gross		Gross		Estimated				Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair		Amortized		Unrealized		Unrealized		Fair
(Dollars in thousands)	Cost		Gains		Losses		Value		Cost		Gains		Losses		Value
Available-for-sale securities:
September 30, 2017
March 31, 2020
U.S. Government agencies	$	52,093	$	64	$	154	$	52,003	$	9,721	$	37	$	3	$	9,755
Mortgage-backed		160,645		660		580		160,725		92,641		2,001		22		94,620
Equity		662		-		-		662
Total	$	213,400	$	724	$	734	$	213,390	$	102,362	$	2,038	$	25	$	104,375

December 31, 2016
December 31, 2019
U.S. Government agencies	$	34,320	$	56	$	58	$	34,318	$	23,854	$	3	$	31	$	23,826
Mortgage-backed		130,490		263		1,809		128,944		98,638		574		247		98,965
Equity		652		-		12		640
Total	$	165,462	$	319	$	1,879	$	163,902	$	122,492	$	577	$	278	$	122,791

Held-to-maturity securities:
September 30, 2017
U.S. Government agencies	$	1,837	$	42	$	-	$	1,879
States and political subdivisions		1,404		61		-		1,465
Other debt securities (1)		3,000		107		-		3,107
Total	$	6,241	$	210	$	-	$	6,451

December 31, 2016
U.S. Government agencies	$	2,089	$	26	$	-	$	2,115
States and political subdivisions		1,615		76		-		1,691
Other debt securities (1)		3,000		-		-		3,000
Total	$	6,704	$	102	$	-	$	6,806

~~(1)~~

~~On December 15, 2016, the Company bought $3.0 million in subordinated notes with a fixed to floating rate of 6.5% from a local regional bank which it intends to hold to maturity of December 30, 2026.~~

1312

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Held-to-maturity securities:
March 31, 2020
U.S. Government agencies	$	1,287	$	43	$	—	$	1,330
States and political subdivisions		400		1		—		401
Other Debt securities		7,000		20		33		6,987
Total	$	8,687	$	64	$	33	$	8,718

December 31, 2019
U.S. Government agencies	$	1,386	$	—	$	5	$	1,381
States and political subdivisions		400		1		—		401
Other Debt securities		7,000		—		128		6,872
Total	$	8,786	$	1	$	133	$	8,654

Equity securities with an aggregate fair value of $1.4 million at March 31, 2020 and $1.3 million at December 31, 2019 are presented separately on the balance sheet. The fair value adjustment recorded through earnings totaled $1 thousand for the three months ended March 31, 2020 and $22 thousand for the three months ended March 31, 2019, respectively.

The following tables provide information about gross unrealized losses and fair value by length of time that the individual securities have been in a continuous unrealized loss position at ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016.~~2019.


	Less than				More than
	12 Months				12 Months				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(Dollars in thousands)	Value		Losses		Value		Losses		Value		Losses
March 31, 2020
Available-for-sale securities:
U.S. Government agencies	$	—	$	—	$	407	$	3	$	407	$	3
Mortgage-backed		—		—		4,605		22		4,605		22
Total	$	—	$	—	$	5,012	$	25	$	5,012	$	25

Held-to-maturity securities:
Other debt securities	$	—	$	—	$	2,967	$	33	$	2,967	$	33
Total	$	—	$	—	$	2,967	$	33	$	2,967	$	33


	Less than				More than								Less than				More than
	12 Months				12 Months				Total				12 Months				12 Months				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(Dollars in thousands)	Value		Losses		Value		Losses		Value		Losses		Value		Losses		Value		Losses		Value		Losses
September 30, 2017
December 31, 2019
Available-for-sale securities:
U.S. Government agencies	$	40,819	$	150	$	2,998	$	4	$	43,817	$	154	$	4,995	$	5	$	18,516	$	26	$	23,511	$	31
Mortgage-backed		60,113		289		11,086		291		71,199		580		12,180		27		22,282		220		34,462		247
Total	$	100,932	$	439	$	14,084	$	295	$	115,016	$	734	$	17,175	$	32	$	40,798	$	246	$	57,973	$	278


	Less than				More than
	12 Months				12 Months				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(Dollars in thousands)	Value		Losses		Value		Losses		Value		Losses
December 31, 2016
Available-for-sale securities:
Held-to-maturity securities:
U.S. Government agencies	$	11,926	$	58	$	-	$	-	$	11,926	$	58	$	1,381	$	5	$	—	$	—	$	1,381	$	5
Mortgage-backed		100,237		1,546		9,208		263		109,445		1,809
Equity securities		640		12		-		-		640		12
Other debt securities														3,905		95		2,967		33		6,872		128
Total	$	112,803	$	1,616	$	9,208	$	263	$	122,011	$	1,879	$	5,286	$	100	$	2,967	$	33	$	8,253	$	133

All of the securities with unrealized losses in the portfolio have modest duration risk, low credit risk, and minimal losses when compared to total amortized cost. The unrealized losses on debt securities that exist are the result of market changes in interest rates since original purchase. Because the Company does not intend to sell these securities and it is not more likely than not that the Company will be required to sell these securities before recovery of their amortized cost bases,

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which may be at maturity for debt securities, the Company considers the unrealized losses to be temporary.

There were five available-for-sale securities and one held-to-maturity security in an unrealized loss position at March 31, 2020.

The following table provides information on the amortized cost and estimated fair values of investment securities by maturity date at ~~September 30, 2017.~~

March 31, 2020.


	Available for sale				Held to maturity				Available for sale				Held to maturity
	Amortized		Estimated		Amortized		Estimated		Amortized				Amortized
(Dollars in thousands)	Cost		Fair Value		Cost		Fair Value		Cost		Fair Value		Cost		Fair Value
Due in one year or less	$	9,000	$	8,996	$	-	$	-	$	9,003	$	9,036	$	—	$	—
Due after one year through five years		40,973		40,831		902		946		2,185		2,217		400		401
Due after five years through ten years		34,242		34,241		3,502		3,626		49,727		50,899		7,000		6,987
Due after ten years		128,523		128,660		1,837		1,879		41,447		42,223		1,287		1,330
		212,738		212,728		6,241		6,451
Equity securities		662		662		-		-
Total	$	213,400	$	213,390	$	6,241	$	6,451	$	102,362	$	104,375	$	8,687	$	8,718

The maturity dates for debt securities are determined using contractual maturity dates.

Note 5 – Loans and Allowance for Credit Losses

The Company makes residential mortgage, commercial and consumer loans to customers primarily in Talbot County, Queen Anne’s County, Kent County, Caroline County, Dorchester County, Wicomico County, Baltimore County and Howard County in Maryland, Kent County, Delaware and Accomack County, Virginia. The following table provides information about the principal classes of the loan portfolio at ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016.~~

2019.


(Dollars in thousands)	September 30, 2017		December 31, 2016		March 31, 2020		December 31, 2019
Construction	$	106,617	$	84,002	$	109,608	$	99,829
Residential real estate		387,722		325,768		437,197		442,506
Commercial real estate		454,626		382,681		610,889		586,562
Commercial		91,799		72,435		96,905		102,020
Consumer		6,483		6,639		22,394		17,737
Total loans		1,047,247		871,525		1,276,993		1,248,654
Allowance for credit losses		(9,295)		(8,726)		(10,378)		(10,507)
Total loans, net	$	1,037,952	$	862,799	$	1,266,615	$	1,238,147

Loans are stated at their principal amount outstanding net of any purchase ~~premiums,~~premiums/discounts, deferred fees and costs. Loans included deferred costs, net of deferred fees, of ~~$632 thousand~~$1.8 million and discounts on acquired loans of ~~$2.0 million~~$967 thousand at ~~September 30, 2017.~~March 31, 2020. Loans included deferred costs, net of deferred fees, of ~~$509 thousand~~$1.8 million and discounts on acquired loans of $1.1 million at December 31, ~~2016.~~2019. At March 31, 2020 and December 31, 2019, included in total loans were $76.5 million and $79.2 million in loans, respectively, acquired as part of the NWBI branch acquisition. Interest income on loans is accrued at the contractual rate based on the principal amount outstanding. ~~fees~~Fees charged and costs capitalized for originating loans are being amortized substantially on the interest method over the term of the loan. A loan is placed on nonaccrual (i.e., interest income is no longer accrued) when it is specifically determined to be impaired or when principal or interest is delinquent for 90 days or more, unless the loan is well secured and in the process of collection. Any unpaid interest previously accrued on those loans is reversed from income.

Interest payments received on nonaccrual loans are applied as a reduction of the loan principal balance unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.

A loan is considered impaired if it is probable that the Company will not collect all principal and interest payments according to the loan’s contractual ~~terms.~~terms when due. An impaired loan may show deficiencies in the borrower’s overall financial condition, payment history, support available from financial guarantors and/or the fair market value of collateral. The impairment of a loan is measured at the present value of expected future cash flows using the loan’s effective interest

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rate, or at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. Generally, the Company measures impairment on such loans by reference to the fair value of the collateral. Once the amount of impairment has been determined, the uncollectible portion is charged off. ~~Income~~Loan payments received on nonaccrual impaired loans isare generally applied to the outstanding principal balance. In certain circumstances, income may be recognized on a cash ~~basis, and payments are first applied against the principal balance outstanding (i.e., placing impaired loans on nonaccrual status).~~basis. Generally, interest income is not recognized on impaired loans unless the likelihood of further loss is remote. The allowance for credit losses may include specific reserves related to impaired loans. Specific reserves remain until charge offs are made. Impaired loans do not include groups of smaller balance homogenous loans such as residential mortgage and consumer installment loans that are evaluated collectively for impairment. Reserves for probable credit losses related to these loans are based on historical loss ratios and are included in the formula portion of the allowance for credit losses. See additional discussion under the caption “Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

A loan is considered a troubled debt restructuring (“TDR”) if a borrower is experiencing financial difficulties and a creditor has granted a concession. Concessions may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules and other actions intended to minimize potential losses. Loans are identified to be restructured when signs of impairment arise such as borrower interest rate reduction request, slowness to pay, or when an inability to repay becomes evident. The terms being offered are evaluated to determine if they are more liberal than those that would be indicated by policy or industry standards for similar, untroubled credits. In those situations where the terms or the interest rates are considered to be more favorable than industry standards or the current underwriting guidelines of the Company’s banking subsidiary, Shore United Bank (the “Bank”), the loan is classified as a TDR. All loans designated as TDRs are considered impaired loans and may be on either accrual or nonaccrual status. In instances where the loan has been placed on nonaccrual status, six consecutive months of timely payments are required prior to returning the loan to accrual status.

All loans classified as TDRs which are restructured and accrue interest under revised terms require a full and comprehensive review of the borrower’s financial condition, capacity for repayment, realistic assessment of collateral values, and the assessment of risk entered into any workout agreement. Current financial information on the borrower, guarantor, and underlying collateral is analyzed to determine if it supports the ultimate collection of principal and interest. For commercial loans, the cash flows are analyzed, both for the underlying project and globally. For consumer loans, updated salary, credit history and cash flow information is obtained. Current market conditions are also considered. Following a full analysis, the determination of the appropriate loan structure is made.

In the normal course of banking business, risks related to specific loan categories are as follows:

Construction loans – Construction loans ~~generally~~are offered primarily to builders and individuals to finance the construction of ~~residential real estate for builders and individuals for single family~~single-family dwellings. In addition, the Bank periodically finances the construction of commercial projects. Credit risk factors include the borrower’s ability to successfully complete the construction on time and within budget, changing market conditions which could affect the value and marketability of projects, changes in the borrower’s ability or willingness to repay the loan and potentially rising interest rates which can impact both the borrower’s ability to repay and the collateral value.

Residential real estate – Residential real estate loans are typically made to consumers and are secured by residential real estate. Credit risk arises from the borrower’s continuing financial stability, which can be adversely impacted by job loss, divorce, illness, or personal bankruptcy, among other factors. Also impacting credit risk would be a shortfall in the value of the residential real estate in relation to the outstanding loan balance in the event of a default or subsequent liquidation of the real estate collateral.

Commercial real estate – Commercial real estate loans consist of both loans secured by owner occupied properties and ~~non-owner~~nonowner occupied properties where an established banking relationship exists and involves investment properties for warehouse, retail, and office space with a history of occupancy and cash flow. These loans are subject to adverse changes in the local economy and commercial real estate markets. Credit risk associated with owner occupied properties arises from the borrower’s financial stability and the ability of the borrower and the business to repay the loan. ~~Non-owner~~Nonowner occupied properties carry the risk of a tenant’s deteriorating credit strength, lease expirations in soft markets and sustained vacancies which can adversely impact cash flow.

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Commercial – Commercial loans are secured or unsecured loans for business purposes. Loans are typically secured by accounts receivable, inventory, equipment and/or other assets of the business. Credit risk arises from the successful operation of the business which may be affected by competition, rising interest rates, regulatory changes and adverse conditions in the local and regional economy.

Consumer – Consumer loans include home equity loans and lines, installment loans and personal lines of credit. Credit risk is similar to residential real estate loans above as it is subject to the borrower’s continuing financial stability and the value of the collateral securing the loan.

The following tables include impairment information relating to loans and the allowance for credit losses as of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016.~~2019.


			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Total
March 31, 2020
Loans individually evaluated for impairment	$	335	$	7,652	$	11,161	$	557	$	—	$	19,705
Loans collectively evaluated for impairment		109,273		429,545		599,728		96,348		22,394		1,257,288
Total loans	$	109,608	$	437,197	$	610,889	$	96,905	$	22,394	$	1,276,993

Allowance for credit losses allocated to:
Loans individually evaluated for impairment	$	—	$	268	$	85	$	—	$	—	$	353
Loans collectively evaluated for impairment		1,128		2,214		3,880		2,263		540		10,025
Total allowance	$	1,128	$	2,482	$	3,965	$	2,263	$	540	$	10,378

Residential

Commercial

(Dollars in thousands)

Construction

real estate

real estate

Commercial

Consumer

Total
September 30, 2017

Loans individually

evaluated for impairment

$
6,986

$
7,190

$
5,265

$
341

$
-

$
19,782
Loans collectively

evaluated for impairment

99,631

380,532

449,361

91,458

6,483

1,027,465
Total loans

$
106,617

$
387,722

$
454,626

$
91,799

$
6,483

$
1,047,247

Allowance for credit

losses allocated to:

Loans individually

evaluated for impairment

$
589

$
251

$
35

$
-

$
-

$
875
Loans collectively

evaluated for impairment

1,652

1,792

2,849

1,804

323

8,420
Total allowance

$
2,241

$
2,043

$
2,884

$
1,804

$
323

$
9,295


			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Total
December 31, 2019
Loans individually evaluated for impairment	$	41	$	7,072	$	12,006	$	298	$	—	$	19,417
Loans collectively evaluated for impairment		99,788		435,434		574,556		101,722		17,737		1,229,237
Total loans	$	99,829	$	442,506	$	586,562	$	102,020	$	17,737	$	1,248,654

Allowance for credit losses allocated to:
Loans individually evaluated for impairment	$	—	$	395	$	580	$	—	$	—	$	975
Loans collectively evaluated for impairment		1,576		2,106		3,452		1,929		469		9,532
Total allowance	$	1,576	$	2,501	$	4,032	$	1,929	$	469	$	10,507

In the first quarter of 2020, the Company transitioned from its in-house allowance model to an external vendor's allowance model software for the calculation of the allowance for loan losses. Prior to the adoption of the new model, the Company ran both models parallel for multiple periods to confirm the reasonableness of the new model's output as compared to the old. The primary motivation for the change was to increase efficiencies in the calculation of the allowance estimate under the current incurred loss standard and also allow for a more seamless transition for the Company's eventual adoption of the CECL standard in 2023. The Company's processes for loan segmentation, assessing qualitative factors, and determining specific reserves for impaired loans remained substantially unchanged when comparing the models. As part of the new model, more precise averages are utilized in the calculation of the net

Residential

Commercial

(Dollars in thousands)

Construction

real estate

real estate

Commercial

Consumer

Total
December 31, 2016

Loans individually

evaluated for impairment

$
8,007

$
7,778

$
6,088

$
-

$
99

$
21,972
Loans collectively

evaluated for impairment

75,995

317,990

376,593

72,435

6,540

849,553
Total loans

$
84,002

$
325,768

$
382,681

$
72,435

$
6,639

$
871,525

Allowance for credit

losses allocated to:

Loans individually

evaluated for impairment

$
1,639

$
317

$
185

$
-

$
-

$
2,141
Loans collectively

evaluated for impairment

1,148

1,636

2,425

1,145

231

6,585
Total allowance

$
2,787

$
1,953

$
2,610

$
1,145

$
231

$
8,726

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charge-off ratios used in the historical loss analysis and the historical loss rates are applied to all pools of loans accounted for under ASC 450. Additionally, the historical look-back periods for retail loan pools were adjusted to four years in the new model as compared to two years under the prior in-house model. While there were some variances between loan pools when comparing the two models, the Company's ending recorded allowance and provision for loan losses during the first quarter of 2020 were unchanged as a result of the transition.

The following tables provide information on impaired loans and any related allowance by loan class as of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016.~~2019. The difference between the unpaid principal balance and the recorded investment is the amount of partial charge-offs that have been ~~taken.~~taken and interest paid on nonaccrual loans that has been applied to principal.



			Recorded		Recorded
	Unpaid		investment		investment				Year-to-date		Interest
	principal		with no		with an		Related		average recorded		recorded
(Dollars in thousands)	balance		allowance		allowance		allowance		investment		investment
March 31, 2020
Impaired nonaccrual loans:
Construction	$	297		297		—		—		99		—
Residential real estate		3,854		2,083		1,367		94		2,871		—
Commercial real estate		7,932		7,169		67		67		7,352		—
Commercial		684		557		—		—		382		—
Consumer		—		—		—		—		—		—
Total	$	12,767	$	10,106	$	1,434	$	161	$	10,704	$	—

Impaired accruing TDRs:
Construction	$	38	$	38	$	—	$	—	$	39	$	1
Residential real estate		4,013		2,563		1,450		174		4,023		38
Commercial real estate		3,393		2,728		665		18		3,406		24
Commercial		—		—		—		—		—		—
Consumer		—		—		—		—		—		—
Total	$	7,444	$	5,329	$	2,115	$	192	$	7,468	$	63

Other Impaired accruing loans:
Construction	$	—	$	—	$	—	$	—	$	—	$	—
Residential real estate		189		189		—		—		—		—
Commercial real estate		532		532		—		—		—		—
Commercial		—		—		—		—		—		—
Consumer		—		—		—		—		—		—
Total	$	721	$	721	$	—	$	—	$	—	$	—

Total impaired loans:
Construction	$	335	$	335	$	—	$	—	$	138	$	1
Residential real estate		8,056		4,835		2,817		268		6,894		38
Commercial real estate		11,857		10,429		732		85		10,758		24
Commercial		684		557		—		—		382		—
Consumer		—		—		—		—		—		—
Total	$	20,932	$	16,156	$	3,549	$	353	$	18,172	$	63

Recorded

Recorded

Quarter-to-

Year-to-date

Unpaid

investment

investment

date average

average

Interest

principal

with no

with an

Related

recorded

recorded

income
(Dollars in thousands)

balance

allowance

allowance

allowance

investment

investment

recognized
September 30, 2017

Impaired nonaccrual loans:

Construction

$
3,035

$
125

$
2,828

$
548

$
2,890

$
3,253

$
-
Residential real estate

2,736

2,439

126

23

2,840

3,573

-
Commercial real estate

1,075

430

-

-

489

627

-
Commercial

425

341

-

-

344

153

-
Consumer

-

-

-

-

-

55

-
Total

$
7,271

$
3,335

$
2,954

$
571

$
6,563

$
7,661

$
-

Impaired accruing TDRs:

Construction

$
4,033

$
3,098

$
935

$
41

$
4,034

$
4,086

$
82
Residential real estate

4,625

2,190

2,435

228

3,691

3,620

117
Commercial real estate

4,835

4,094

741

35

4,841

4,872

145
Commercial

-

-

-

-

-

-

-
Consumer

-

-

-

-

-

-

-
Total

$
13,493

$
9,382

$
4,111

$
304

$
12,566

$
12,578

$
344

Total impaired loans:

Construction

$
7,068

$
3,223

$
3,763

$
589

$
6,924

$
7,339

$
82
Residential real estate

7,361

4,629

2,561

251

6,531

7,193

117
Commercial real estate

5,910

4,524

741

35

5,330

5,499

145
Commercial

425

341

-

-

344

153

-
Consumer

-

-

-

-

-

55

-
Total

$
20,764

$
12,717

$
7,065

$
875

$
19,129

$
20,239

$
344

Table of Contents



			Recorded		Recorded				March 31, 2019
	Unpaid		investment		investment				Year-to-date		Interest
	principal		with no		with an		Related		average recorded		income
(Dollars in thousands)	balance		allowance		allowance		allowance		investment		recognized
December 31, 2019
Impaired nonaccrual loans:
Construction	$	—	$	—	$	—	$	—	$	2,791	$	—
Residential real estate		2,660		678		1,797		215		3,338		—
Commercial real estate		8,242		5,680		2,137		561		9,318		—
Commercial		421		298		—		—		325		—
Consumer		—		—		—		—		—		—
Total	$	11,323	$	6,656	$	3,934	$	776	$	15,772	$	—

Impaired accruing TDRs:
Construction	$	41	$	41	$	—	$	—	$	50	$	7
Residential real estate		4,041		2,583		1,458		180		4,308		39
Commercial real estate		3,419		2,748		671		19		3,550		39
Commercial		—		—		—		—		—		—
Consumer		—		—		—		—		—		—
Total	$	7,501	$	5,372	$	2,129	$	199	$	7,908	$	85

Other impaired accruing loans:
Construction	$	—	$	—	$	—	$	—	$	—	$	—
Residential real estate		556		556		—		—		—		—
Commercial real estate		770		770		—		—		—		—
Commercial		—		—		—		—		—		—
Consumer		—		—		—		—		—		—
Total	$	1,326	$	1,326	$	—	$	—	$	—	$	—

Total impaired loans:
Construction	$	41	$	41	$	—	$	—	$	2,841	$	7
Residential real estate		7,257		3,817		3,255		395		7,646		39
Commercial real estate		12,431		9,198		2,808		580		12,868		39
Commercial		421		298		—		—		325		—
Consumer		—		—		—		—		—		—
Total	$	20,150	$	13,354	$	6,063	$	975	$	23,680	$	85

September 30, 2016

Recorded

Recorded

Quarter-to-

Year-to-date

Unpaid

investment

investment

date average

average

Interest

principal

with no

with an

Related

recorded

recorded

income
(Dollars in thousands)

balance

allowance

allowance

allowance

investment

investment

recognized
December 31, 2016

Impaired nonaccrual loans:

Construction

$
7,247

$
-

$
3,818

$
1,621

$
5,361

$
6,022��

$
-
Residential real estate

4,013

1,957

1,946

166

4,012

3,406

-
Commercial real estate

1,801

959

193

117

2,177

2,265

-
Commercial

-

-

-

-

108

143

-
Consumer

99

99

-

-

99

109

-
Total

$
13,160

$
3,015

$
5,957

$
1,904

$
11,757

$
11,945

$
-

Impaired accruing TDRs:

Construction

$
4,189

$
3,479

$
710

$
18

$
4,213

$
4,166

$
74
Residential real estate

3,875

2,829

1,046

151

4,100

4,900

149
Commercial real estate

4,936

1,573

3,363

68

4,982

5,137

127
Commercial

-

-

-

-

-

-

-
Consumer

-

-

-

-

-

-

-
Total

$
13,000

$
7,881

$
5,119

$
237

$
13,295

$
14,203

$
350

Total impaired loans:

Construction

$
11,436

$
3,479

$
4,528

$
1,639

$
9,574

$
10,188

$
74
Residential real estate

7,888

4,786

2,992

317

8,112

8,306

149
Commercial real estate

6,737

2,532

3,556

185

7,159

7,402

127
Commercial

-

-

-

-

108

143

-
Consumer

99

99

-

-

99

109

-
Total

$
26,160

$
10,896

$
11,076

$
2,141

$
25,052

$
26,148

$
350

Table of Contents

The following tables provide a roll-forward for ~~troubled debt restructurings~~TDRs as of ~~September 30, 2017~~March 31, 2020 and ~~September 30, 2016.~~March 31, 2019.


	1/1/2020												3/31/2020
	TDR		New		Disbursements		Charge-		Reclassifications/				TDR		Related
(Dollars in thousands)	Balance		TDRs		(Payments)		offs		Transfer In/(Out)		Payoffs		Balance		Allowance
For three months ended
March 31, 2020
Accruing TDRs
Construction	$	41	$	—	$	(3)	$	—	$	—	$	—	$	38	$	—
Residential real estate		4,041		—		(28)		—		—		—		4,013		174
Commercial real estate		3,419		—		(26)		—		—		—		3,393		18
Commercial		—		—		—		—		—		—		—		—
Consumer		—		—		—		—		—		—		—		—
Total	$	7,501	$	—	$	(57)	$	—	$	—	$	—	$	7,444	$	192

Nonaccrual TDRs
Construction	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential real estate		1,393		—		(26)		—		—		—		1,367		94
Commercial real estate		—		1,506		(344)		—		—		—		1,162		—
Commercial		299		—		(10)		—		—		—		289		—
Consumer		—		—		—		—		—		—		—		—
Total	$	1,692	$	1,506	$	(380)	$	—	$	—	$	—	$	2,818	$	94

Total	$	9,193	$	1,506	$	(437)	$	—	$	—	$	—	$	10,262	$	286


	1/1/2017												9/30/2017				1/1/2019												3/31/2019
	TDR		New		Disbursements		Charge		Reclassifications/				TDR		Related		TDR		New		Disbursements		Charge-		Reclassifications/				TDR		Related
(Dollars in thousands)	Balance		TDRs		(Payments)		offs		Transfer In/(Out)		Payoffs		Balance		Allowance		Balance		TDRs		(Payments)		offs		Transfer In/(Out)		Payoffs		Balance		Allowance
For nine months ended
September 30, 2017
For three months ended
March 31, 2019
Accruing TDRs
Construction	$	4,189	$	-	$	(22)	$	-	$	-	$	(134)	$	4,033	$	41	$	51	$	—	$	(2)	$	—	$	—	$	—	$	49	$	—
Residential real estate		3,875		-		(120)		(89)		1,411		(452)		4,625		228		4,454		—		(23)		—		—		(197)		4,234		174
Commercial real estate		4,936		-		(101)		-		-		-		4,835		35		4,158		—		(613)		—		—		—		3,545		27
Commercial		-		-		-		-		-		-		-		-		—		—		—		—		—		—		—		—
Consumer		-		-		-		-		-		-		-		-		—		—		—		—		—		—		—		—
Total	$	13,000	$	-	$	(243)	$	(89)	$	1,411	$	(586)	$	13,493	$	304	$	8,663	$	—	$	(638)	$	—	$	—	$	(197)	$	7,828	$	201

Nonaccrual TDRs
Construction	$	3,818	$	-	$	(882)	$	-	$	(108)	$	-	$	2,828	$	548	$	2,798	$	—	$	(33)	$	—	$	—	$	—	$	2,765	$	279
Residential real estate		1,603		-		(66)		-		(1,411)		-		126		23		—		—		—		—		—		—		—		—
Commercial real estate		83		-		-		-		-		-		83		-		—		—		—		—		—		—		—		—
Commercial		-		345		(4)		-		-		-		341		-		320		—		(5)		—		—		—		315		12
Consumer		-		-		-		-		-		-		-		-		—		—		—		—		—		—		—		—
Total	$	5,504	$	345	$	(952)	$	-	$	(1,519)	$	-	$	3,378	$	571	$	3,118	$	—	$	(38)	$	—	$	—	$	—	$	3,080	$	291

Total	$	18,504	$	345	$	(1,195)	$	(89)	$	(108)	$	(586)	$	16,871	$	875	$	11,781	$	—	$	(676)	$	—	$	—	$	(197)	$	10,908	$	492

1/1/2016

9/30/2016

TDR

New

Disbursements

Charge

Reclassifications/

TDR

Related
(Dollars in thousands)

Balance

TDRs

(Payments)

offs

Transfer In/(Out)

Payoffs

Balance

Allowance
For nine months ended

September 30, 2016

Accruing TDRs

Construction

$
4,069

$
-

$
130

$
-

$
-

$
-

$
4,199

$
21
Residential real estate

5,686

565

(375)

-

(1,595)

(179)

4,102

154
Commercial real estate

5,740

495

(689)

(117)

(458)

-

4,971

89
Commercial

-

-

-

-

-

-

-

-
Consumer

-

-

-

-

-

-

-

-
Total

$
15,495

$
1,060

$
(934)

$
(117)

$
(2,053)

$
(179)

$
13,272

$
264

Nonaccrual TDRs

Construction

$
4,960

$
2,570

$
(2,012)

$
(263)

$
-

$
-

$
5,255

$
810
Residential real estate

445

-

(294)

-

1,595

-

1,746

25
Commercial real estate

-

-

-

(258)

458

-

200

112
Commercial

-

-

-

-

-

-

-

-
Consumer

23

-

(23)

-

-

-

-

-
Total

$
5,428

$
2,570

$
(2,329)

$
(521)

$
2,053

$
-

$
7,201

$
947

Total

$
20,923

$
3,630

$
(3,263)

$
(638)

$
-

$
(179)

$
20,473

$
1,211

Table of Contents

The following tables provide information on loans that were modified and considered TDRs during the ~~nine~~three months ended ~~September~~March 31, 2020 and March 31, 2019.


		Premodification		Postmodification
		outstanding		outstanding
	Number of	recorded		recorded		Related
(Dollars in thousands)	contracts	investment		investment		allowance
TDRs:
For three months ended
March 31, 2020
Construction	—	$	—	$	—	$	—
Residential real estate	—		—		—		—
Commercial real estate	1		1,535		1,162		—
Commercial	—		—		—		—
Consumer	—		—		—		—
Total	1	$	1,535	$	1,162	$	—

For three months ended
March 31, 2019
Construction	—	$	—	$	—	$	—
Residential real estate	—		—		—		—
Commercial real estate	—		—		—		—
Commercial	—		—		—		—
Consumer	—		—		—		—
Total	—	$	—	$	—	$	—

As of March 31, 2020, the Company had executed principal and/or interest deferrals on outstanding loan balances of $131 million during the first quarter of 2020. These deferrals were no more than six months in duration and were for loans not more than 30 ~~2017~~days past due as of December 31, 2019. As such, they were not considered troubled debt restructurings based on the relief provisions of the CARES Act and ~~September 30, 2016.~~recent interagency regulatory guidance.

Table of Contents

Premodification

Postmodification

outstanding

outstanding

Number of

recorded

recorded

Related
(Dollars in thousands)

contracts

investment

investment

allowance
TDRs:

For nine months ended

September 30, 2017

Construction

-

$
-

$
-

$
-
Residential real estate

-

-

-

-
Commercial real estate

1

760

755

-
Commercial

1

462

345

-
Consumer

-

-

-

-
Total

2

$
1,222

$
1,100

$
-

For nine months ended

September 30, 2016

Construction

-

$
-

$
-

$
-
Residential real estate

3

667

699

-
Commercial real estate

1

495

495

-
Commercial

-

-

-

-
Consumer

-

-

-

-
Total

4

$
1,162

$
1,194

$
-

~~During~~There were no defaults for the ~~nine~~three months ended ~~September 30, 2017, there was one new TDR~~March 31, 2020 and ~~one previously recorded TDR which was modified. The new TDR consisted of a reduction in principal, whereas, the previously recorded TDR consisted of a change in maturity date.~~

~~The following tables provide information on TDRs that defaulted within twelve months of restructuring during the nine months ended September 30, 2017 and September 30, 2016.~~2019. Generally, a loan is considered in default when principal or interest is past due 90 days or more, the loan is placed on nonaccrual, the loan is charged off, or there is a transfer to OREO or repossessed assets.

Number of

Recorded

Related
(Dollars in thousands)

contracts

investment

allowance
TDRs that subsequently defaulted:

For nine months ended

September 30, 2017

Construction

-

$
-

$
-
Residential real estate

1

89

-
Commercial real estate

-

-

-
Commercial

-

-

-
Consumer

-

-

-
Total

1

$
89

$
-

For nine months ended

September 30, 2016

Construction

1

$
263

$
-
Residential real estate

-

-

-
Commercial real estate

2

375

-
Commercial

-

-

-
Consumer

-

-

-
Total

3

$
638

$
-


	Number of	Recorded		Related
(Dollars in thousands)	contracts	investment		allowance
TDRs that subsequently defaulted:
For three months ended
March 31, 2020
Construction	—	$	—	$	—
Residential real estate	—		—		—
Commercial real estate	—		—		—
Commercial	—		—		—
Consumer	—		—		—
Total	—	$	—	$	—

For three months ended
March 31, 2019
Construction	—	$	—	$	—
Residential real estate	—		—		—
Commercial real estate	—		—		—
Commercial	—		—		—
Consumer	—		—		—
Total	—	$	—	$	—

Management uses risk ratings as part of its monitoring of the credit quality in the Company’s loan portfolio. Loans that are identified as special mention, substandard or doubtful are adversely rated. ~~They~~These loans and the pass/watch loans are assigned higher ~~risk ratings~~qualitative factors than favorably rated loans in the calculation of the formula portion of the allowance for credit losses. At ~~September 30, 2017,~~March 31, 2020, there were no nonaccrual loans classified as special mention or doubtful and ~~$6.3~~$11.5 million of nonaccrual loans were ~~identified~~classified as substandard. Similarly, at December 31, ~~2016,~~2019, there were no nonaccrual loans classified as special mention or doubtful and ~~$9.0~~$10.6 million of nonaccrual loans were ~~identified~~classified as substandard.

The following tables provide information on loan risk ratings as of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016.~~2019.


					Special
(Dollars in thousands)	Pass/Performing		Pass/Watch		Mention		Substandard		Doubtful		Total
March 31, 2020
Construction	$	91,507	$	15,730	$	2,074	$	297	$	—	$	109,608
Residential real estate		399,006		29,645		4,550		3,996		—		437,197
Commercial real estate		470,751		123,013		6,568		10,557		—		610,889
Commercial		63,627		32,236		454		588		—		96,905
Consumer		22,033		355		2		4		—		22,394
Total	$	1,046,924	$	200,979	$	13,648	$	15,442	$	—	$	1,276,993


			Special												Special
(Dollars in thousands)	Pass/Performing		Mention		Substandard		Doubtful		Total		Pass/Performing		Pass/Watch		Mention		Substandard		Doubtful		Total
September 30, 2017
December 31, 2019
Construction	$	97,304	$	3,127	$	6,186	$	-	$	106,617	$	84,357	$	13,068	$	2,404	$	—	$	—	$	99,829
Residential real estate		376,600		5,509		5,613		-		387,722		404,500		29,223		5,549		3,234		—		442,506
Commercial real estate		438,694		6,780		9,152		-		454,626		455,388		115,190		4,822		11,162		—		586,562
Commercial		90,680		660		459		-		91,799		80,816		20,130		746		328		—		102,020
Consumer		6,483		-		-		-		6,483		17,347		383		2		5		—		17,737
Total	$	1,009,761	$	16,076	$	21,410	$	-	$	1,047,247	$	1,042,408	$	177,994	$	13,523	$	14,729	$	—	$	1,248,654

Special

(Dollars in thousands)

Pass/Performing

Mention

Substandard

Doubtful

Total
December 31, 2016

Construction

$
72,641

$
4,195

$
7,166

$
-

$
84,002
Residential real estate

312,242

6,646

6,880

-

325,768
Commercial real estate

363,461

10,939

8,281

-

382,681
Commercial

71,313

857

265

-

72,435
Consumer

6,540

-

99

-

6,639
Total

$
826,197

$
22,637

$
22,691

$
-

$
871,525

Table of Contents

The following tables provide information on the aging of the loan portfolio as of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016.~~2019.


	Accruing
				30‑59 days			60‑89 days			Greater than			Total
(Dollars in thousands)	Current			past due			past due			90 days			past due			Nonaccrual			Total
March 31, 2020
Construction	$	109,101		$	210		$	—		$	—		$	210		$	297		$	109,608
Residential real estate		428,930			4,073			555			189			4,817			3,450			437,197
Commercial real estate		600,382			2,249			490			532			3,271			7,236			610,889
Commercial		96,024			95			229			—			324			557			96,905
Consumer		22,331			63			—			—			63			—			22,394
Total	$	1,256,768		$	6,690		$	1,274		$	721		$	8,685		$	11,540		$	1,276,993
Percent of total loans		98.4	%		0.5	%		0.1	%		0.1	%		0.7	%		0.9	%		100.0	%


		Accruing																				Accruing
				30-59 days			60-89 days			Greater than			Total												30‑59 days			60‑89 days			Greater than			Total
(Dollars in thousands)	Current			past due			past due			90 days			past due			Nonaccrual			Total			Current			past due			past due			90 days			past due			Nonaccrual			Total
September 30, 2017
December 31, 2019
Construction	$	103,606		$	58		$	-		$	-		$	58		$	2,953		$	106,617		$	99,234		$	595		$	—		$	—		$	595		$	—		$	99,829
Residential real estate		383,913			572			667			5			1,244			2,565			387,722			435,671			3,021			783			556			4,360			2,475			442,506
Commercial real estate		451,789			2,407			-			-			2,407			430			454,626			577,015			743			217			770			1,730			7,817			586,562
Commercial		91,225			202			31			-			233			341			91,799			101,476			246			—			—			246			298			102,020
Consumer		6,478			-			5			-			5			-			6,483			17,680			57			—			—			57			—			17,737
Total	$	1,037,011		$	3,239		$	703		$	5		$	3,947		$	6,289		$	1,047,247		$	1,231,076		$	4,662		$	1,000		$	1,326		$	6,988		$	10,590		$	1,248,654
Percent of total loans		99.0	%		0.3	%		0.1	%		-	%		0.4	%		0.6	%		100.0	%		98.6	%		0.4	%		0.1	%		0.1	%		0.6	%		0.8	%		100.0	%

Accruing

30-59 days

60-89 days

Greater than

Total

(Dollars in thousands)

Current

past due

past due

90 days

past due

Nonaccrual

Total
December 31, 2016

Construction

$
80,079

$
-

$
105

$
-

$
105

$
3,818

$
84,002

Residential real estate

317,992

1,778

2,095

-

3,873

3,903

325,768

Commercial real estate

375,552

3,219

2,758

-

5,977

1,152

382,681

Commercial

72,272

19

134

10

163

-

72,435

Consumer

6,515

13

2

10

25

99

6,639

Total

$
852,410

$
5,029

$
5,094

$
20

$
10,143

$
8,972

$
871,525

Percent of total loans

97.8
%

0.6
%

0.6
%

-
%

1.2
%

1.0
%

100.0
%

~~Management evaluates the adequacy of the allowance for credit losses at least quarterly and adjusts the provision for credit losses based on this analysis.~~ The following tables provide a summary of the activity in the allowance for credit losses allocated by loan class for the three months ended March 31, 2020 and ~~nine months ended September 30, 2017 and 2016.~~March 31, 2019. Allocation of a portion of the allowance to one loan class does not preclude its availability to absorb losses in other loan classes.

Management re-evaluated the allowance methodology during the third quarter of 2016, in connection with the consolidation of the two former bank subsidiaries. Prior to consolidation, each bank subsidiary applied a separate allowance methodology based on their respective loan portfolios. The revised methodology incorporates both previous methodologies to align with a consolidated loan portfolio. In addition, beginning in January of 2017, the allowance methodology was expanded to require the allocation of general reserves to pass/watch loans. This change resulted in an increase in allowance for the first quarter of 2017 when compared to the fourth quarter of 2016 of $1.1 million, which was partially offset by a reduction in specific reserves of $850 thousand.


			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Total
For three months ended
March 31, 2020
Allowance for credit losses:
Beginning Balance	$	1,576	$	2,501	$	4,032	$	1,929	$	469	$	10,507

Charge-offs		—		(191)		(271)		(82)		(7)		(551)
Recoveries		3		3		1		63		2		72
Net charge-offs		3		(188)		(270)		(19)		(5)		(479)

Provision		(451)		169		203		353		76		350
Ending Balance	$	1,128	$	2,482	$	3,965	$	2,263	$	540	$	10,378


			Residential		Commercial												Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Unallocated		Total		Construction		real estate		real estate		Commercial		Consumer		Total
For three months ended
September 30, 2017
March 31, 2019
Allowance for credit losses:
Beginning Balance	$	2,349	$	2,096	$	2,802	$	1,652	$	233	$	-	$	9,132	$	2,662	$	2,353	$	3,077	$	1,949	$	302	$	10,343

Charge-offs		-		(70)		(100)		(99)		(18)		-		(287)		—		(123)		—		(81)		(6)		(210)
Recoveries		11		11		8		67		8		-		105		3		8		99		75		—		185
Net charge-offs		11		(59)		(92)		(32)		(10)		-		(182)		3		(115)		99		(6)		(6)		(25)

Provision		(119)		6		174		184		100		-		345		(8)		195		(119)		66		(34)		100
Ending Balance	$	2,241	$	2,043	$	2,884	$	1,804	$	323	$	-	$	9,295	$	2,657	$	2,433	$	3,057	$	2,009	$	262	$	10,418

Residential

Commercial

(Dollars in thousands)

Construction

real estate

real estate

Commercial

Consumer

Unallocated

Total
For three months ended

September 30, 2016

Allowance for credit losses:

Beginning Balance

$
1,744

$
2,035

$
2,871

$
677

$
206

$
825

$
8,358

Charge-offs

(9)

(407)

-

(139)

(13)

-

(568)
Recoveries

8

121

10

79

1

-

219
Net charge-offs

(1)

(286)

10

(60)

(12)

-

(349)

Provision

275

331

306

300

(40)

(567)

605
Ending Balance

$
2,018

$
2,080

$
3,187

$
917

$
154

$
258

$
8,614

Residential

Commercial

(Dollars in thousands)

Construction

real estate

real estate

Commercial

Consumer

Unallocated

Total
For nine months ended

September 30, 2017

Allowance for credit losses:

Beginning Balance

$
2,787

$
1,953

$
2,610

$
1,145

$
231

$
-

$
8,726

Charge-offs

(54)

(393)

(100)

(870)

(33)

-

(1,450)
Recoveries

27

32

27

167

20

-

273
Net charge-offs

(27)

(361)

(73)

(703)

(13)

-

(1,177)

Provision

(519)

451

347

1,362

105

-

1,746
Ending Balance

$
2,241

$
2,043

$
2,884

$
1,804

$
323

$
-

$
9,295

Residential

Commercial

(Dollars in thousands)

Construction

real estate

real estate

Commercial

Consumer

Unallocated

Total
For nine months ended

September 30, 2016

Allowance for credit losses:

Beginning Balance

$
1,646

$
2,181

$
2,999

$
558

$
156

$
776

$
8,316

Charge-offs

(263)

(525)

(503)

(264)

(23)

-

(1,578)
Recoveries

24

188

20

201

13

-

446
Net charge-offs

(239)

(337)

(483)

(63)

(10)

-

(1,132)

Provision

611

236

671

422

8

(518)

1,430
Ending Balance

$
2,018

$
2,080

$
3,187

$
917

$
154

$
258

$
8,614

Table of Contents

Foreclosure Proceedings

Consumer mortgage loans collateralized by residential real estate property that were in the process of foreclosure totaled ~~$620 thousand and $687~~$23 thousand as of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016,~~2019, respectively. ~~At September 30, 2017, there~~There were 2no residential real estate properties ~~held~~included in the balance of other real estate owned ~~totaling $0, compared to 3 residential properties totaling $92 thousand~~ at March 31, 2020 and December 31, ~~2016.~~

2019.

All accruing TDRs were in compliance with their modified ~~terms~~terms. Both performing and ~~there are~~non-performing TDRs had no further commitments associated with ~~these loans~~them as of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016.~~2019.

Note 6 – Leases

On January 1, 2019, the Company adopted ASU No. 2016-02 “Leases (Topic 842)” and all subsequent ASUs that modified Topic 842. The Company elected the prospective application approach provided by ASU 2018-11 and did not adjust prior periods for ASC 842. The Company also elected certain practical expedients within the standard and consistent with such elections did not reassess whether any expired or existing contracts are or contain leases, did not reassess the lease classification for any expired or existing leases, and did not reassess any initial direct costs for existing leases. As stated in the Company’s 2019 Form 10-K, the implementation of the new standard resulted in recognition of right-of-use assets and lease liabilities totaling $3.8 million at the date of adoption, which are primarily related to the Company’s lease of premises used in operations. During the course of 2019, the Company recognized additional right-of-use assets and lease liabilities of $1.4 million, primarily related to the lease of additional premises used in operations. During the first quarter of 2020, the Company renewed its copier lease for all locations which added approximately $419 thousand to right-of-use assets and lease liabilities.

Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows. Cash flows are discounted at the Company’s incremental borrowing rate in effect at the commencement date of the lease. Right-of-use assets represent the Company’s right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs and any incentives received from the lessor.

The Company’s long-term lease agreements are classified as operating leases. Certain of these leases offer the option to extend the lease term and the Company has included such extensions in its calculation of the lease liabilities to the extent the options are reasonably certain of being exercised. The lease agreements do not provide for residual value guarantees and have no restrictions or covenants that would impact dividends or require incurring additional financial obligations.

The following tables present information about the Company’s leases:


(Dollars in thousands)	March 31, 2020			December 31, 2019
Lease liabilities	$	5,072		$	4,792
Right-of-use assets	$	5,019		$	4,771
Weighted average remaining lease term		11.08	years		11.76	years
Weighted average discount rate		2.92	%		3.13	%


	For the three months ended		For the three months ended
Lease cost (in thousands)	March 31, 2020		March 31, 2019
Operating lease cost	$	180	$	139
Short-term lease cost		—		—
Total lease cost	$	180	$	139

Cash paid for amounts included in the measurement of lease liabilities	$	164	$	143

Table of Contents

A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total of operating lease liabilities is as follows:


	As of
Lease payments due (in thousands)	March 31, 2020
Nine months ending December 31, 2020		491
Twelve months ending December 31, 2021	$	645
Twelve months ending December 31, 2022		616
Twelve months ending December 31, 2023		621
Twelve months ending December 31, 2024		575
Twelve months ending December 31, 2025		505
Thereafter		3,055
Total undiscounted cash flows	$	6,508
Discount		1,436
Lease liabilities	$	5,072

Note 67 – Goodwill and Other Intangibles

~~On May 19, 2017,~~Due to the ~~Bank~~COVID-19 pandemic and its impact on market conditions, the Company performed a qualitative assessment of goodwill as of March 31, 2020. As a result of management’s qualitative evaluation of relevant events and circumstances at March 31, 2020, the Company concluded that it was not more likely than not that fair value was less than carrying value. Changes in the economic environment, operations, or other adverse events could result in future impairment charges which could have a material adverse impact on the Company's operating results. The following table provides information on the significant components of goodwill and other acquired ~~three branches located in Arbutus, Owings Mills~~intangible assets at March 31, 2020 and ~~Elkridge, Maryland from NWBI. The purchase of these branches resulted in core deposit intangibles of $4.0 million and goodwill of $15.3 million.~~December 31, 2019.


March 31, 2020
									Weighted
	Gross		Accumulated				Net		Average
	Carrying		Impairment		Accumulated		Carrying		Remaining Life
(Dollars in thousands)	Amount		Charges		Amortization		Amount		(in years)

Goodwill	$	19,728	$	(1,543)	$	(667)	$	17,518		—

Other intangible assets
Amortizable
Core deposit intangible	$	3,954	$	—	$	(1,846)	$	2,108		5.4
Total other intangible assets	$	3,954	$	—	$	(1,846)	$	2,108


December 31, 2019
									Weighted
	Gross			Accumulated			Net		Average
	Carrying		Impairment			Accumulated	Carrying		Remaining Life
(Dollars in thousands)	Amount		Charges			Amortization	Amount		(in years)

Goodwill	$	19,728	$	(1,543)	$	(667)	$	17,518		—

Other intangible assets
Amortizable
Core deposit intangible	$	3,954	$	—	$	(1,702)	$	2,252		5.7
Total other intangible assets	$	3,954	$	—	$	(1,702)	$	2,252

The ~~gross carrying amount~~aggregate amortization expense included in continuing operations was $144 thousand for the three months ended March 31, 2020 and ~~accumulated amortization of intangible assets is as follows:~~

September 30, 2017

Weighted

Gross

Accumulated

Net

Average

Carrying

Impairment

Accumulated

Carrying

Remaining Life
(Dollars in thousands)

Amount

Charges

Amortization

Amount

(in years)

Goodwill

$
31,213

$
(2,637)

$
(667)

$
27,909

-

Other intangible assets

Amortizable

Employment agreements

$
440

$
-

$
(440)

$
-

-
Insurance expirations

1,270

-

(1,268)

2

0.0
Customer relationships

795

(95)

(473)

227

4.9
Core deposit intangible

3,954

-

(132)

3,822

9.7

6,459

(95)

(2,313)

4,051

Unamortizable

Trade name

780

-

-

780

-
Total other intangible assets

$
7,239

$
(95)

$
(2,313)

$
4,831

December 31, 2016

Weighted

Gross

Accumulated

Net

Average

Carrying

Impairment

Accumulated

Carrying

Remaining Life
(Dollars in thousands)

Amount

Charges

Amortization

Amount

(in years)

Goodwill

$
15,235

$
(2,637)

$
(667)

$
11,931

-

Other intangible assets

Amortizable

Employment agreements

$
440

$
-

$
(440)

$
-

-
Insurance expirations

1,270

-

(1,233)

37

0.4
Customer relationships

795

(95)

(438)

262

5.6

2,505

(95)

(2,111)

299

Unamortizable

Trade name

780

-

-

780

-
Total other intangible assets

$
3,285

$
(95)

$
(2,111)

$
1,079

$162 thousand for the three months ended March 31, 2019.

Table of Contents

At ~~September~~March 31, ~~2017,~~2020, estimated future remaining amortization for amortizing intangibles within the years ending December 31, ~~was~~is as follows:


(Dollars in thousands)			Amortization Expense
2017	$	282
2018		442
2019		442
2020		395	$	389
2021		439		461
2022				389
2023				317
2024				246
2025				174
Thereafter		2,051		132
Total amortizing intangible assets	$	4,051	$	2,108

Note 78 – Other Assets

The Company had the following other assets at ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016.~~

2019.


(Dollars in thousands)	September 30, 2017		December 31, 2016		2020		2019
Nonmarketable investment securities	$	3,069	$	1,650
Accrued interest receivable		3,122		2,675	$	3,670	$	3,455
Deferred income taxes, net		2,628		7,040
Deferred income taxes						2,396		2,754
Prepaid expenses		1,528		1,148		1,687		1,157
Cash surrender value on life insurance		671		2,589		30,027		29,770
Income taxes receivable						—		175
Other assets		5,937		3,781		2,487		3,261
Total	$	16,955	$	18,883	$	40,267	$	40,572

The following table provides information on significant components of the Company’s deferred tax assets and liabilities as of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016.~~

2019.


	September 30,		December 31,
(Dollars in thousands)	2017		2016		2020		2019
Deferred tax assets:
Allowance for credit losses	$	3,712	$	3,486	$	2,815	$	2,850
Reserve for off-balance sheet commitments		121		122
Net operating loss carry forward		842		2,232
Write-downs of other real estate owned		310		387		2		9
Deferred income		127		1,011
Unrealized losses on available-for-sale securities		4		672
Unrealized losses on available-for-sale securities transferred
to held to maturity		33		-
AMT Credits		-		869
Amortization on loans FMV adjustment		194		-
Nonaccrual loan interest						396		353
Unrealized losses on available-for-sale securities transferred to held to maturity						1		4
Other		982		1,192		923		735
Total deferred tax assets		6,325		9,971		4,137		3,951
Less valuation allowance						(77)		(63)
Deferred tax assets net of valuation allowance						4,060		3,888
Deferred tax liabilities:
Depreciation		159		239		187		198
Amortization on loans FMV adjustment		-		156
Purchase accounting adjustments		2,927		2,019
Acquisition accounting adjustments						573		508
Deferred capital gain on branch sale		347		401		192		194
Unrealized gains on available-for-sale securities						542		74
Other		264		116		170		160
Total deferred tax liabilities		3,697		2,931		1,664		1,134
Net deferred tax assets	$	2,628	$	7,040	$	2,396	$	2,754

The Company’s deferred tax assets consist of gross net operating loss carryovers for state tax purposes of $15.7 million that will be used to offset taxable income in future periods. The Company’s state net operating loss carryovers will begin to expire in the year ended December 31, 2026 with limited amounts available through December 31, 2034.

No valuation allowance on these deferred tax assets was recorded at September 30, 2017 and December 31, 2016 as management believes it is more likely than not that all deferred tax assets will be realized.

Table of Contents

Note 89 – Other Liabilities

The Company had the following other liabilities at ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016.~~

2019.


(Dollars in thousands)	September 30, 2017		December 31, 2016		2020		2019
Accrued interest payable	$	59	$	74	$	330	$	330
Other accounts payable		4,146		2,461
Deferred compensation liability		1,197		1,444		1,883		1,401
Income taxes payable						991		—
Other liabilities		413		1,301		1,495		2,350
Total	$	5,815	$	5,280	$	4,699	$	4,081

Note 910 - Stock-Based Compensation

At the 2016 annual meeting, stockholders approved the Shore Bancshares, Inc. 2016 Stock and Incentive Plan (“2016 Equity Plan”), replacing the Shore Bancshares, Inc. 2006 Stock and Incentive Plan (“2006 Equity Plan”), which expired on that date. The Company may issue shares of common stock or grant other equity-based awards pursuant to the 2016 Equity Plan. Stock-based awards granted to date generally are time-based, vest in equal installments on each anniversary of the grant date and range over a one- to five-year period of time, and, in the case of stock options, expire 10 years from the grant date. As part of the 2016 Equity Plan, a performance equity incentive award program, known as the “Long-term incentive plan” allows participating officers of the Company to earn incentive awards of performance share/restricted stock units if certain pre-determined targets are achieved at the end of a three-year performance cycle. Stock-based compensation expense based on the grant date fair value is recognized ratably over the requisite service period for all awards and reflects forfeitures as they occur. The 2016 Equity Plan originally reserved 750,000 shares of common stock for grant, and ~~709,873~~616,298 shares remained available for grant at ~~September 30, 2017.~~

March 31, 2020.

The following tables provide information on stock-based compensation expense for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2020 and ~~2016.~~2019.

For Three Months Ended

For Nine Months Ended

September 30,

September 30,
(Dollars in thousands)

2017

2016

2017

2016
Stock-based compensation expense

$
158

$
85

$
748

$
262
Excess tax benefits related to stock-based

compensation

15

12

26

25


	March 31,
(Dollars in thousands)	2020			2019
Unrecognized stock-based compensation expense	$	257		$	388
Weighted average period unrecognized expense is expected to be recognized		1.8	years		1.3	years

September 30,
(Dollars in thousands)

2017

2016
Unrecognized stock-based compensation

expense

$
1,147

$
132

Weighted average period unrecognized

expense is expected to be recognized

1.3
years

0.6
years

The following table summarizes restricted stock award activity for the Company under the 2016 Equity Plan for the ~~nine~~three months ended ~~September 30, 2017 and 2016.~~

March 31, 2020.


	Nine Months Ended September 30, 2017			Three Months Ended March 31, 2020
		Weighted Average			Weighted Average
	Number of	Grant Date		Number of	Grant Date
	Shares	Fair Value		Shares	Fair Value
Nonvested at beginning of period	17,066	$	11.46	15,702	$	15.36
Granted	21,470		16.69	20,167		14.50
Vested	(22,623)		13.66	(15,702)		15.36
Cancelled	-		-
Forfeited				—		—
Nonvested at end of period	15,913	$	12.49	20,167	$	14.50

The fair value of restricted stock awards that vested during the first ~~nine~~three months of ~~2017~~2020 and ~~2016~~2019 was ~~$309 thousand~~$254 and ~~$204~~$520 thousand, respectively.

Table of Contents

Restricted stock units (RSUs) are similar to restricted stock, except the recipient does not receive the stock immediately, but instead receives it upon the terms and conditions of the Company’s long-term incentive plans which are subject to performance milestones achieved at the end of a three-year period. Each RSU cliff vests at the end of the three-year period and entitles the recipient to receive one share of common stock on a specified issuance date. The recipient does not have any stockholder rights, including voting rights, with respect to the shares underlying awarded RSUs until the recipient becomes the holder of those shares.

During 2017, the Company entered into a long-term incentive ~~program~~plan agreement with officers of the Company and its subsidiaries to award RSUs based on a performance metric to be achieved as of December 31, 2019. ~~These awards will cliff vest~~Based on ~~this date, in which~~ the ~~final number of common shares to be issued will be determined. The range of RSUs which could potentially be awarded at~~results for the end of the performance cycle is between 12,703 shares and 50,830 shares, assuming a certain performance metric is met. The table below presents management’s evaluation of the probable number of common stock awards to be issued at the end of the performance cycle.

~~During 2016, the Company entered into a long-term incentive program agreement with officers of the Company and its subsidiaries to award RSUs based on a performance metric to be achieved as of~~year ended December 31, ~~2018. These awards will cliff vest on this date, in which the final number of common~~2019, 6,451 shares to be issued will be determined. The range of RSUs which could potentially be awarded at the end of the performance cycle is between 12,214 shares and 48,871 shares, assuming a certain performance metric is met. In addition, two members of the long-term incentive plan from 2015 forfeited their RSUs due to leaving the Company before the end of the vesting period. The table below presents management’s evaluation of the probable number of common stock awards to be issued at the end of the performance cycle.

During 2015, the Company entered into a long-term incentive program agreement with officers of the Company and its subsidiaries to award RSUs based on performance metrics to be achieved as of December 31, 2017. These awards will cliff vest on this date, in which the final number of common shares to be issued will be determined. The range of RSUs which could potentially be awarded at the end of the performance cycle is between 10,953 shares and 43,821 shares, assuming certain performance metrics are met. The table below presents management’s evaluation of the probable number of common stock awards to be issued at the end of the performance cycle.

were vested.

The following table summarizes restricted stock units activity ~~based on management’s evaluation of the probable number of common stock awards to be issued~~ at the end of the performance cycle for the Company under the 2016 ~~and 2006~~ Equity ~~Plans~~Plan for the ~~nine~~three months ended ~~September 30, 2017 and 2016.~~March 31, 2020.


	Three Months Ended March 31, 2020
		Weighted Average
	Number of	Grant Date
	Shares	Fair Value
Outstanding at beginning of period	6,451	$	16.57
Granted	—		—
Vested	(6,451)		16.57
Forfeited	—		—
Outstanding at end of period	—	$	—

Nine Months Ended September 30, 2017

Weighted Average

Number of

Grant Date

Shares

Fair Value

Outstanding at beginning of period

46,342

$
10.64

Granted

25,410

16.57

Vested

-

-

Forfeited

-

-

Outstanding at end of period

71,752

$
12.01

The fair value of restricted stock units that vested during the first three months of 2020 and 2019 was $107 thousand and $237 thousand, respectively.

The following table summarizes stock option activity for the Company under the 2016 Equity Plan for the ~~nine~~three months ended ~~September 30, 2017 and 2016.~~

March 31, 2020.


	Nine Months Ended September 30, 2017			Three Months Ended March 31, 2020
		Weighted Average			Weighted Average
	Number of	Grant Date		Number of	Grant Date
	Shares	Exercise Price		Shares	Exercise Price
Outstanding at beginning of period	62,086	$	8.29	11,671	$	9.25
Granted	1,202		10.99	—		—
Exercised	(859)		6.64	—		—
Expired/Cancelled	-		-	—		—
Outstanding at end of period	62,429	$	8.36	11,671	$	9.25

Exercisable at end of period	61,828	$	8.34	11,671	$	9.25

~~The weighted average fair value of~~There were no stock options granted during the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 and ~~September 30, 2016 was $10.99~~and $5.03, respectively. The Company estimates the fair value of options using the Black-Scholes valuation model with weighted average assumptions for dividend yield, expected volatility, risk-free interest rate and expected lives (in years). The expected dividend yield is calculated by dividing the total expected annual dividend payout by the average stock price. The expected volatility is based on historical volatility of the underlying securities. The risk-free interest rate is based on the Federal Reserve Bank’s constant maturities daily interest rate in effect at grant date. The expected contract life of the options represents the period of time that the Company expects the awards to be outstanding based on historical experience with similar awards. The following weighted average assumptions were used as inputs to the Black-Scholes valuation model for options granted in 2017 and 2016.

2017

2016
Dividend yield

0.84
%

0.73
%
Expected volatility

64.80
%

38.60
%
Risk-free interest rate

2.42
%

1.75
%
Expected contract life (in years)

10 years

10 years

March 31, 2019.

At the end of the ~~third~~first quarter of ~~2017,~~2020, the aggregate intrinsic value of the options outstanding under the 2016 Equity Plan was ~~$517~~$19 thousand based on the ~~$16.65~~$10.85 market value per share of the Company’s common stock at ~~September 30, 2017.~~March 31, 2020. Similarly, the aggregate intrinsic value of the options exercisable was ~~$514~~$19 thousand at September 30, 2017. The intrinsic value on options exercised during the nine months ended September 30, 2017 was $8 thousand based on the $15.89 market value per share of the Company’s common stock at January 30, 2017. The intrinsic value on options exercised in 2016 was $2 thousand based on the $11.35 market value per share of the Company’s common stock at February 8, 2016.March 31, 2020. At ~~September 30, 2017,~~March 31, 2020, the weighted average remaining contract life of options outstanding and exercisable was ~~6.4~~4.5 years.

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Note 1011 – Accumulated Other Comprehensive Income

The Company records unrealized holding gains (losses), net of tax, on investment securities available for sale as accumulated other comprehensive income (loss), a separate component of stockholders’ equity. The following table provides information on the changes in the components of accumulated other comprehensive income (loss) for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 and ~~2016.~~

2019.

Unrealized gains

(losses) on securities

Unrealized

transferred from

Accumulated

gains (losses) on

Available-for-sale

other

available for sale

to

comprehensive
(Dollars in thousands)

securities

Held-to-maturity

income (loss)
Balance, December 31, 2016

$
(931)

$
(62)

$
(993)
Other comprehensive income

927

15

942
Reclassification of (gains) recognized

(3)

-

(3)
Balance, September 30, 2017

$
(7)

$
(47)

$
(54)

Balance, December 31, 2015

$
(71)

$
-

$
(71)
Other comprehensive income

1,566

-

1,566
Reclassification of (gains) recognized

(18)

-

(18)
Balances, September 30, 2016

$
1,477

$
-

$
1,477


			Unrealized gains
			(losses) on securities
	Unrealized		transferred from		Accumulated
	gains (losses) on		Available-for-sale		other
	available for sale		to		comprehensive
(Dollars in thousands)	securities		Held-to-maturity		income (loss)
Balance, December 31, 2019	$	218	$	(11)	$	207
Other comprehensive income		1,246		5		1,251
Balance, March 31, 2020	$	1,464	$	(6)	$	1,458

Balance, December 31, 2018	$	(2,918)	$	(32)	$	(2,950)
Other comprehensive income		1,442		4		1,446
Balances, March 31, 2019	$	(1,476)	$	(28)	$	(1,504)

Note 1112 – Fair Value Measurements

Accounting guidance under GAAP defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This accounting guidance also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available for sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as impaired loans, loans held for sale and other real estate owned (foreclosed assets). These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

Under fair value accounting guidance, assets and liabilities are grouped at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine their fair values. These hierarchy levels are:

Level 1 inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.

Level 2 inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 inputs – Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

Below is a discussion on the Company’s assets measured at fair value on a recurring basis.

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Investment Securities Available for Sale

Fair value measurement for investment securities available for sale is based on quoted prices from an independent pricing service. The fair value measurements consider observable data that may include present value of future cash flows, prepayment assumptions, credit loss assumptions and other factors. The Company classifies its investments in U.S. Treasury securities, if any, as Level 1 in the fair value hierarchy, and it classifies its investments in U.S. Government agencies securities and mortgage-backed securities issued or guaranteed by U.S. Government sponsored entities as Level 2.

Equity Securities

Fair value measurement for equity securities is based on quoted market prices retrieved by the Company via on-line resources. Although these securities have readily available fair market values, the Company determined that they should be classified as level 2 investments in the fair value hierarchy due to not being considered traded in a highly active market.

The tables below present the recorded amount of assets measured at fair value on a recurring basis at ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016.~~2019. No assets were transferred from one hierarchy level to another during the first ~~nine~~three months of ~~2017~~2020 or ~~2016.~~2019.


					Significant
					Other		Significant
			Quoted		Observable		Unobservable
			Prices		Inputs		Inputs
(Dollars in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
March 31, 2020
Securities available for sale:
U.S. Government agencies	$	9,755	$	—	$	9,755	$	—
Mortgage-backed		94,620		—		94,620		—
		104,375		—		104,375		—

Equity		1,350		—		1,350		—
Total	$	105,725	$	—	$	105,725	$	—


					Significant								Significant
					Other		Significant						Other		Significant
			Quoted		Observable		Unobservable				Quoted		Observable		Unobservable
			Prices		Inputs		Inputs				Prices		Inputs		Inputs
(Dollars in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)		Fair Value		(Level 1)		(Level 2)		(Level 3)
September 30, 2017
December 31, 2019
Securities available for sale:
U.S. Government agencies	$	52,003	$	-	$	52,003	$	-	$	23,826	$	—	$	23,826	$	—
Mortgage-backed		160,725		-		160,725		-		98,965		—		98,965		—
										122,791		—		122,791		—

Equity		662		-		662		-		1,342		—		1,342		—
Total	$	213,390	$	-	$	213,390	$	-	$	124,133	$	—	$	124,133	$	—

					Significant
					Other		Significant
			Quoted		Observable		Unobservable
			Prices		Inputs		Inputs
(Dollars in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
December 31, 2016
Securities available for sale:
U.S. Government agencies	$	34,318	$	-	$	34,318	$	-
Mortgage-backed		128,944		-		128,944		-
Equity		640		-		640		-
Total	$	163,902	$	-	$	163,902	$	-

Below is a discussion on the Company’s assets measured at fair value on a nonrecurring basis.

Impaired Loans

Loans are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts ~~due~~ according to the contractual terms of the loan ~~agreement.~~agreement when due. Loan impairment is measured using the present value of expected cash flows, the loan’s observable market price or the fair value of the collateral (less selling costs) if the loans are collateral dependent and these are considered Level 3 in the fair value

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hierarchy. Collateral may be real estate and/or business assets including equipment, inventory and/or accounts receivable. The value of business equipment, inventory and accounts receivable, discounted on management’s review and analysis. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and the client’s business.

Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the factors identified above. Valuation techniques are consistent with those techniques applied in prior periods.

Other Real Estate Owned (Foreclosed Assets)

Foreclosed assets are adjusted for fair value upon transfer of loans to foreclosed ~~assets.~~assets establishing a new cost basis. Subsequently, foreclosed assets are carried at the lower of carrying value ~~and~~or fair value. The estimated fair value for foreclosed assets included in Level 3 are determined by independent market based appraisals and other available market information, less costs to sell, that may be reduced further based on market expectations or an executed sales agreement. If the fair value of the collateral deteriorates subsequent to the initial recognition, the Company records the foreclosed asset as a non-recurring Level 3 adjustment. Valuation techniques are consistent with those techniques applied in prior periods.

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The following tables ~~below present~~set forth the ~~recorded amount of~~Company’s financial assets ~~measured at~~subject to fair value adjustments (impairment) on a nonrecurring basis at ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016.~~2019, that are valued at the lower of cost or market. Assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.


	Quantitative Information about Level 3 Fair Value Measurements
								Weighted
(Dollars in thousands)	Fair Value		Valuation Technique		Unobservable Input		Range	Average (3)
March 31, 2020
Nonrecurring measurements:

Impaired loans	$	610	Appraisal of collateral	(1)	Liquidation expense	(2)	10%	(10%)


Impaired loans	$	2,586	Discounted cash flow analysis	(1)	Discount rate		4% - 7.25%	(6%)

Other real estate owned	$	38	Appraisal of collateral	(1)	Appraisal adjustments	(2)	0% - 19%	(19%)


	Quantitative Information about Level 3 Fair Value Measurements										Quantitative Information about Level 3 Fair Value Measurements
(Dollars in thousands)	Fair Value		Valuation Technique			Unobservable Input			Range		Fair Value		Valuation Technique		Unobservable Input		Range
September 30, 2017
December 31, 2019
Nonrecurring measurements:

Impaired loans	$	6,190		Appraisal of collateral	1		Appraisal adjustments	2		20% - 30%	$	2,489	Appraisal of collateral	(1)	Liquidation expense	(2)	10%
							Liquidation expense	2		5% - 10%

Impaired loans											$	2,599	Discounted cash flow analysis	(1)	Discount rate		4% - 7.25%

Other real estate owned	$	1,809		Appraisal of collateral	1		Appraisal adjustments	2		20% - 30%	$	74	Appraisal of collateral	(1)	Appraisal adjustments	(2)	0% - 31%
							Liquidation expense	2		5% - 10%					Liquidation expense	(2)	10%

Quantitative Information about Level 3 Fair Value Measurements
(Dollars in thousands)

Fair Value

Valuation Technique

Unobservable Input

Range
December 31, 2016

Nonrecurring measurements:

Impaired loans

$
8,935

Appraisal of collateral
1

Appraisal adjustments
2

20% - 30%

Liquidation expense
2

5% - 10%

Other real estate owned

$
2,477

Appraisal of collateral
1

Appraisal adjustments
2

20% - 30%

Liquidation expense
2

5% - 10%

(1)

Fair value is generally determined through independent appraisals of the underlying collateral (impaired loans and OREO) or discounted cash flow analyses (impaired loans), which generally include various level III inputs which are not identifiable.

(2)

Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

(3)

Unobservable inputs were weighted by the relative fair value of the instruments.

The following information relates to the estimated fair values of financial assets and liabilities that are reported in the Company’s consolidated balance sheets at their carrying amounts. The discussion below describes the methods and assumptions used to estimate the fair value of each class of financial asset and liability for which it is practicable to estimate that value.

~~Cash and Cash Equivalents~~

~~Cash equivalents include interest-bearing deposits with other banks and federal funds sold. For these short-term instruments, the carrying amount is a reasonable estimate of fair value.~~

~~Investment Securities Held to Maturity~~

~~For all investments in debt securities, fair values are based on quoted prices. If a quoted price is not available, fair value is estimated using quoted prices for similar securities.~~

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~~Loans~~

The fair values of categories of fixed rate loans, such as commercial loans, residential real estate, and other consumer loans, are estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Other loans, including variable rate loans, are adjusted for differences in loan characteristics.

~~Restricted Securities~~

The restricted security category is comprised of FHLB and Federal Reserve Bank stock. These stocks are classified as restricted securities because their ownership is restricted to certain types of entities and they lack a market. When the FHLB or Federal Reserve Bank repurchases stock, they repurchase at the stock’s book value. Therefore, the carrying amounts ~~of restricted securities approximate fair value.~~

~~Bank Owned Life Insurance~~

The carrying value of bank owned life insurance approximates fair value. The Company records these policies at their cash surrender value, which is estimated using information provided by insurance carriers.

~~Deposits~~ and ~~Short-Term Borrowings~~

The fair values of demand deposits, savings accounts, and certain money market deposits are the amounts payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. These estimates do not take into consideration the value of core deposit intangibles. Generally, the carrying amount of short-term borrowings is a reasonable estimate of fair value. The fair values of securities sold under agreements to repurchase (included in short-term borrowings) and long-term debt are estimated using the rates offered for similar borrowings.

~~Commitments to Extend Credit and Standby Letters of Credit~~

The majority of the Company’s commitments to grant loans and standby letters of credit are written to carry current market interest rates if converted to loans. In general, commitments to extend credit and letters of credit are not assignable by the Company or the borrower, so they generally have value only to the Company and the borrower. Therefore, it is impractical to assign any value to these commitments.

~~The following table provides information on the~~ estimated fair values of the Company’s financial ~~assets and liabilities that~~instruments not carried at fair value on the Company’s Consolidated Balance Sheets are ~~reported~~presented in the ~~balance sheets at their carrying amounts. The financial assets~~following table. Fair values for March 31, 2020 and ~~liabilities have been segregated by their classification level in the fair value hierarchy.~~

December 31, 2019 were estimated using an exit price notion.


	September 30, 2017				December 31, 2016				March 31, 2020				December 31, 2019
			Estimated				Estimated				Estimated				Estimated
	Carrying		Fair		Carrying		Fair		Carrying		Fair		Carrying		Fair
(Dollars in thousands)	Amount		Value		Amount		Value		Amount		Value		Amount		Value
Financial assets
Level 1 inputs
Cash and cash equivalents	$	43,916	$	43,916	$	75,938	$	75,938	$	96,251	$	96,251	$	94,971	$	94,971

Level 2 inputs
Investment securities held to maturity	$	6,241	$	6,451	$	6,704	$	6,806	$	8,687	$	8,718	$	8,786	$	8,654
Restricted securities		3,069		3,069		1,650		1,650		4,263		4,263		4,190		4,190
Bank owned life insurance		107		107		105		105
Cash surrender value on life insurance										30,027		30,027		29,770		29,770

Level 3 inputs
Loans, net		1,037,952		1,036,002		862,799		867,594	$	1,266,615	$	1,250,797	$	1,238,147	$	1,242,867

Financial liabilities
Level 2 inputs
Deposits:
Noninterest-bearing demand	$	326,020	$	326,020	$	261,575	$	261,575	$	355,054	$	355,054	$	356,618	$	356,618
Checking plus interest		227,973		227,973		203,724		203,724		296,421		296,421		302,227		302,227
Money market		221,589		221,589		181,871		181,871		268,355		268,355		262,050		262,050
Savings		154,180		154,180		90,051		90,051		146,202		146,202		143,322		143,322
Club		1,565		1,565		393		393		774		774		387		387
Certificates of deposit, $100,000 or more		113,618		112,271		120,602		119,914		131,003		133,113		127,600		128,167
Other time		161,250		158,320		139,273		135,940		150,985		152,240		149,130		149,209
Short-term borrowings		1,469		1,469		3,203		3,203		2,162		2,162		1,226		1,226
Long-term borrowings										15,000		15,005		15,000		15,040

Note 1213 – Financial Instruments with Off-Balance Sheet Risk

In the normal course of business, to meet the financial needs of its customers, the Bank is a party to financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit and standby letters of credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Letters of credit and other commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because many of the letters of credit and commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements.

The following table provides information on commitments outstanding at ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016.~~

2019.


(Dollars in thousands)	September 30, 2017		December 31, 2016		March 31, 2020		December 31, 2019
Commitments to extend credit	$	220,271	$	178,233	$	232,858	$	211,652
Letters of credit		8,335		8,024		7,947		7,691
Total	$	228,606	$	186,257	$	240,805	$	219,343

Note 1314 – ~~Segment Reporting~~Revenue Recognition

Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. Topic 606 is applicable to noninterest revenue streams such as trust and asset management income, deposit related fees, interchange fees and merchant income. Noninterest revenue streams in-scope of Topic 606 are discussed below.

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~~The Company operates two primary~~Service Charges on Deposit Accounts

Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business ~~segments: Community Banking~~ and Insurance Products and Services. Through the Community Banking business, the Company provides services to consumers and small businesses in Maryland, Delaware and Virginia through its 21 branch network and 2 loan production offices. Community banking activities include small business services, retail brokerage, trust services and consumer banking products and services. Loan products available to consumers include mortgage, home equity, automobile, marine, and installment loans, credit cardspublic checking accounts), monthly service fees, check orders, and other ~~secured~~deposit account related fees. The Company’s performance obligation for account analysis fees and ~~unsecured personal lines of credit. Small business lending includes commercial mortgages, real estate development loans, equipment~~monthly service fees is generally satisfied, and ~~operating loans, as well as secured and unsecured lines of credit, credit cards, accounts receivable financing arrangements, and merchant card services.~~the related revenue recognized, over the period in which the service is provided.

~~Through~~Check orders and other deposit account related fees are largely transactional based, and therefore, the ~~Insurance Products~~Company’s performance obligation is satisfied, and ~~Services business,~~related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or at the end of the month through a direct charge to customers’ accounts.

Trust and Investment Fee Income

Trust and investment fee income are primarily comprised of fees earned from the management and administration of trusts and other customer assets. The Company’s performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and the applicable fee rate. Payment is generally received a few days after month end through a direct charge to customers’ accounts. The Company does not earn performance-based incentives.

Optional services such as real estate sales and tax return preparation services are also available to existing trust and asset management customers. The Company’s performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point in time (i.e., as incurred). Payment is received shortly after services are rendered.

Other Noninterest Income

Other noninterest income consists of: fees, exchange, other service charges, safety deposit box rental fees, and other miscellaneous revenue streams. Fees and other service charges are primarily comprised of debit and credit card income, ATM fees, merchant services income, and other service charges. Debit and credit card income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. Other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services. The Company’s performance obligation for fees, exchange, and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. The Company determined that rentals and renewals of safe deposit boxes will be recognized on a monthly basis consistent with the duration of the performance obligation.

The following presents noninterest income from continuing operations, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three months ended March 31, 2020 and 2019.



	March 31,
(Dollars in thousands)	2020		2019
Noninterest Income
In-scope of Topic 606:
Service charges on deposit accounts	$	866	$	934
Trust and investment fee income		375		372
Interchange income		652		588
Other noninterest income		280		253
Noninterest Income (in-scope of Topic 606)		2,173		2,147
Noninterest Income (out-of-scope of Topic 606)		179		41
Total Noninterest Income	$	2,352	$	2,188

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Contract Balances

A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s noninterest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Consideration is often received immediately or shortly after the Company ~~provides a full range~~satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of ~~insurance products~~March 31, 2020, and ~~services~~December 31, 2019, the Company did not have any significant contract balances.

Note 15 – Subsequent Events

In the period subsequent to ~~businesses~~March 31, 2020 and ~~consumers~~through April 30, 2020, the Company executed additional deferrals of principal and/or interest on outstanding loan balances of $138 million.

In the period subsequent to March 31, 2020 and through April 30, 2020, the Company has continued its participation in the ~~Company’s market areas. Products include property and casualty, life, marine, individual health and long-term care insurance. Pension and profit sharing plans and retirement plans~~PPP loan program, funding over 1,000 loans for ~~executives and employees are available to suit the needs~~a balance of ~~individual businesses.~~$114 million.

~~The following table includes selected financial information by business segments for the first nine months of 2017 and 2016.~~

Community

Insurance Products

Parent

Consolidated
(Dollars in thousands)

Banking

and Services

Company

Total
2017

Interest Income

$
34,761

$
(1)

$
73

$
34,833
Interest Expense

(1,674)

-

-

(1,674)
Provision for credit losses

(1,746)

-

-

(1,746)
Noninterest income

6,111

7,300

-

13,411
Noninterest expense

(18,651)

(6,035)

(5,884)

(30,570)
Net intersegment (expense) income

(5,500)

(84)

5,584

-
Income (loss) before taxes

13,301

1,180

(227)

14,254
Income tax (expense) benefit

(5,309)

(472)

91

(5,690)
Net Income (loss)

$
7,992

$
708

$
(136)

$
8,564

Total assets, September 30, 2017

$
1,359,930

$
9,909

$
6,289

$
1,376,127

2016

Interest Income

$
29,957

$
-

$
190

$
30,147
Interest Expense

(1,863)

-

-

(1,863)
Provision for credit losses

(1,430)

-

-

(1,430)
Noninterest income

5,749

6,840

-

12,589
Noninterest expense

(15,874)

(5,205)

(6,842)

(27,921)
Net intersegment (expense) income

(6,027)

(566)

6,593

-
Income (loss) before taxes

10,512

1,069

(59)

11,522
Income tax (expense) benefit

(3,973)

(424)

18

(4,379)
Net Income (loss)

$
6,539

$
645

$
(41)

$
7,143

Total assets, September 30, 2016

$
1,129,427

$
9,647

$
18,792

$
1,157,866

3634

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Unless the context clearly suggests otherwise, references to “the Company”, “we”, “our”, and “us” in the remainder of this report are to Shore Bancshares, Inc. and its consolidated ~~subsidiaries.~~

subsidiary.

Forward-Looking Information

~~Portions~~This Quarterly Report on Form 10-Q contains forward-looking statements. These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “project,” “projection,” “forecast,” “goal,” “target,” “would,” “aim” and “outlook,” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry and management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. The inclusion of these forward-looking statements should not be regarded as a representation by us or any other person that such expectations, estimates and projections will be achieved. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. New risks and uncertainties may emerge from time to time, and it is not possible for us to predict their occurrence. In addition, we cannot assess the impact of each risk and uncertainty on our business or the extent to which any risk or uncertainty, or combination of risks and uncertainties, may cause actual results to differ materially from those contained in any forward-looking statements.

Further, given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be reopened. As the result of the COVID-19 pandemic (as defined below) and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations: the demand for our products and services may decline, making it difficult to grow assets and income; if the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income; collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase; our allowance for loan losses may increase if borrowers experience financial difficulties, which will adversely affect our net income; the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; as the result of the decline in the Federal Reserve Board’s (“Federal Reserve”) target federal funds rate to near 0%, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income; our cybersecurity risks are increased as the result of an increase in the number of employees working remotely; and FDIC premiums may increase if the agency experiences additional resolution costs.

If one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this Quarterly Report on Form 10-Q and other reports and registration statements filed by us with the SEC. For information on the factors that could cause actual results to differ from the expectations stated in the forward- looking statements, see “Risk Factors” under Part I, Item 1A of our 2019 Form 10-K in addition to Part II, Item 1A - Risk Factors of this Quarterly Report on Form 10-Q ~~contain~~and other reports as filed with the SEC.

Any forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. Statements that are not historical in nature, including statements that include the words “anticipate”, “estimate”, “should”, “expect”, “believe”, “intend”, and similar expressions, are expressions about our confidence, policies, and strategies, the adequacy of capital levels, and liquidity and are not guarantees of future performance. Such forward-looking statements involve certain risks and uncertainties, including economic conditions, competition in the geographic and business areas in which we operate, inflation, fluctuations in interest rates, legislation, and governmental regulation. These risks and uncertainties are described in detail in the sectionstatement speaks only as of the ~~periodic reports that Shore Bancshares, Inc. files with the Securities and Exchange Commission (the “SEC”) entitled “Risk Factors” (see Item 1A of Part II~~date of this report, and Item 1A of Part I of the Annual Report of Shore Bancshares, Inc. on Form 10-K for the year ended December 31, 2016 (the “2016 Annual Report”)). Actual results may differ materially from such forward-looking statements, and we ~~assume no~~do not undertake any obligation to publicly update or review any forward-looking ~~statements at any time~~statement, whether because of new information, future developments or otherwise, except as required by law.

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Introduction

The following discussion and analysis is intended as a review of significant factors affecting the Company’s financial condition and results of operations for the periods indicated. This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and related notes presented elsewhere in this report, as well as the audited consolidated financial statements and related notes included in the ~~2016~~2019 Annual Report.

Shore Bancshares, Inc. is the largest independent financial holding company headquartered on the Eastern Shore of Maryland. It is the parent company of Shore United Bank. The Bank operates ~~21 full service~~22 full-service branches in Baltimore County, Howard County, Kent County, Queen Anne’s County, Talbot County, Caroline County, Dorchester County and ~~Dorchester~~Wicomico County in Maryland, Kent County, Delaware and Accomack County, Virginia. The Company engages in ~~the insurance business~~trust and wealth management services through an insurance producer firm, The Avon-Dixon Agency, LLC, (“Avon-Dixon”) with two specialty lines, Elliott Wilson Insurance (Trucking) and Jack Martin Associates (Marine); and an insurance premium finance company, Mubell Finance, LLC (“Mubell”) (Avon-Dixon and Mubell are collectively referred to as the “Insurance Subsidiaries”). Avon-Dixon and Mubell are wholly-owned subsidiariesWye Financial Partners, a division of Shore ~~Bancshares, Inc. The Company engages in the trust services business through the trust department at Shore~~ United ~~Bank under the trade name Wye Financial & Trust.~~

Bank.

The shares of common stock of Shore Bancshares, Inc. are listed on the NASDAQ Global Select Market under the symbol “SHBI”.

Shore Bancshares, Inc. maintains an Internet site at www.shorebancshares.com on which it makes available free of charge its Annual Report on Form ~~10-K,~~10‑K, Quarterly Reports on Form ~~10-Q,~~10‑Q, Current Reports on Form ~~8-K,~~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.

COVID-19 Pandemic

The recent outbreak of COVID-19, which was declared a pandemic by the World Health Organization on March 11, 2020, has led to adverse impacts on economic conditions and created uncertainty in financial markets. Correspondingly, in early March 2020, the Company began preparing for potential disruptions and government limitations of activity in the markets in which we serve. Our team activated our Business Continuity Program and was able to quickly execute on multiple initiatives to adjust our operations to protect the health and safety of our employees and clients. Currently, we have approximately, 50% of our workforce, working remotely without impacting our productivity while continuing to provide a superior level of customer service. Since the beginning of the crisis, we have been in close contact with our clients, assessing the level of impact on their businesses, and providing relief programs according to each client’s specific situation and qualifications. We have also enhanced awareness of digital banking offerings, expanded services at our drive thru locations, and allowed customers to make appointments in the branch for critical services. The Company’s branches remain open and have taken steps to comply with various government directives regarding “social distancing,” as well as, enhanced cleaning and disinfecting of all surface areas to protect its clients and employees.

Small Business Administration’s Paycheck Protection Program

We were able to quickly establish our process for participating in the Small Business Administration’s Paycheck Protection Program (“PPP”) that enabled our clients to utilize this valuable resource beginning in April 2020. Loans under the PPP are designed to provide assistance for small businesses during the COVID-19 pandemic to help meet the costs associated with payroll, mortgage interest, rent and utilities. These loans are guaranteed by the SBA and forgiveness of the loan, by the SBA, is granted to the borrower if the borrower uses at least 75% of the funds to cover payroll costs and benefits. Forgiveness is also based on the small business maintaining or quickly rehiring their employees and maintaining salary levels for their employees. Loans under the PPP do not require any collateral or personal guarantees, as such, these loans are typically included in the commercial loans segment below. Through April 30, 2020, our team has been able to process over 1,100 PPP loans for approximately $117.8 million in the first and second round of the program, which has allowed us to further strengthen and deepen our client relationships, while positively impacting thousands of individuals. We are also closely monitoring the credit quality of the loan portfolio and monitor line of credit draws for deviation from normal activity to improve loan performance and reduce credit risk.

Shore-term Modifications for Borrowers

In keeping with regulatory guidance to work with borrowers during this unprecedented situation and as outlined in Section 4013 of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), the Company is providing modifications

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where appropriate, including potential interest only payments or payment deferrals for clients that are adversely affected by the COVID-19 pandemic. Section 4013 of the CARES Act also addressed COVID-19 related modifications and specified that such modifications made on loans that were current as of December 31, 2019 are not TDRs. In accordance with interagency guidance issued in April 2020, these short-term modifications made to a borrower affected by the COVID-19 pandemic and governmental shutdown orders, such as payment deferrals, fee waivers and extensions of repayment terms, do not need to be identified as TDRs if the loans were current at the time a modification plan was implemented. As of March 31, 2020, we deferred payments of principal and/or interest on a short-term basis for 150 commercial loans with an aggregate balance of $131 million. Through April 30, 2020, we granted additional payment deferrals for commercial and consumer loans with aggregate balances of $138 million.

Liquidity

We are vigilantly monitoring our liquidity position on an ongoing basis as the circumstances surrounding the pandemic continue to evolve. The Company has several available sources of on and off-balance sheet liquidity. Currently, the Company has not needed to tap into these available liquidity sources due to payment deferrals by customers, funding of PPP loans, or organic loan growth. The potential for increased reliance on available liquidity sources may be required based on the effects of the pandemic and their impact on the level of deposits and other factors. Additional discussion on our liquidity as of the report date is reflected in the “Liquidity and Capital Resources” section of management’s discussion and analysis.

Share Repurchases

We have suspended all share buybacks of our Company’s common stock until further notice.

Dividends and Capital

We currently expect to maintain our quarterly cash dividends based on our strong capital position. At March 31, 2020, the Bank exceeded all the capital requirements to which it was subject and based on the most recent notification from its primary federal regulator is considered to be well-capitalized. There are no conditions or events since that notification that management believes would change the Bank’s classification. Additionally, through April 30, 2020, the Bank’s capital ratios continued to exceed the regulatory minimums for well-capitalized institutions. We are closely monitoring our capital position and are taking appropriate steps to ensure our level of capital remains strong. Our capital, while significant, may deteriorate in future periods due to the impact of the pandemic and limit our ability to pay dividends.

Critical Accounting Policies

~~Our~~The Company’s consolidated financial statements are prepared in accordance with ~~GAAP. The financial information contained~~GAAP and follow general practices within the industries in which it operates. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements ~~is, to a significant extent, financial information that is~~and accompanying notes. These estimates, assumptions, and judgments are based on ~~measures~~information available as of the date of the financial ~~effects~~statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of ~~transactions~~estimates, assumptions, and ~~events~~judgments and as such have a greater possibility of producing results that ~~have already occurred. A variety~~could be materially different than originally reported.

The most significant accounting policies that the Company follows are presented in Note 1 of ~~factors could affect~~ the ~~ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability.~~2019 Annual Report. These policies, along with the disclosures presented in the notes to the financial statements and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has determined that the accounting policies with respect to the allowance for credit losses and, goodwill and other intangible assets ~~deferred tax assets, and fair value~~ are critical accounting policies. These policies are considered critical because they relate to accounting areas that require the most subjective or complex judgments, and, as such, could be most subject to revision as new information becomes available.

~~Allowance for Credit Losses~~

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The allowance for credit losses ~~is an~~represents management’s estimate of ~~the~~credit losses ~~that may be sustained~~inherent in the loan ~~portfolio. The allowance is based on two basic principles of accounting: (i) Topic 450, “~~ ~~Contingencies~~ ”,portfolio as of the ~~Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”), which requires that losses be accrued when they are probable~~balance sheet date. Determining the amount of ~~occurring and estimable; and (ii) ASC Topic 310, “~~ ~~Receivables~~ ~~”, which requires that losses be accrued based on~~ the differences between the loan balance and the value of collateral, present value of future cash flows or values that are observable in the secondary market. Management uses many factors to estimate the inherent loss that may be present in our loan portfolio, including economic conditions and trends, the value and adequacy of collateral, the volume and mix of the loan portfolio, and our internal loan processes. Actual losses could differ significantly from management’s estimates. In addition, GAAP itself may change from one previously acceptable method to another. Although the economics of transactions would be the same, the timing of events that would impact the transactions could change.

Three basic components comprise our allowance for credit losses: (i) the specific allowance; (ii) the formula allowance; and (iii) the unallocated allowance. Each component is determined based on estimates that can and do change when the actual events occur. The specific allowance is established against impaired loans (i.e., nonaccrual loans and troubled debt restructurings (“TDRs”)) based on our assessment of the losses that may be associated with the individual loans. The specific allowance remains until charge-offs are made. An impaired loan may show deficiencies in the borrower’s overall financial condition, payment history, support available from financial guarantors and/or the fair market value of collateral. The formula allowance is used to estimate the loss on internally risk-rated loans, exclusive of those identified as impaired. Loans are grouped by type (construction, residential real estate, commercial real estate, commercial or consumer). Each loan type is assigned allowance factors based on management’s estimate of the risk, complexity and size of individual loans within a particular category. Loans identified as special mention, substandard, and doubtful are adversely rated. These loans are assigned higher allowance factors than favorably rated loans due to management’s concerns regarding collectability or management’s knowledge of particular elements regarding the borrower. The unallocated allowance captures losses that have impacted the portfolio but have yet to be recognized in either the specific or formula allowance.

~~Management has significant discretion in making the adjustments inherent in the determination of the provision and~~ allowance for credit losses ~~including in connection with the valuation of collateral, the estimation of~~is considered a ~~borrower’s prospects of repayment,~~critical accounting estimate because it requires significant judgment and the ~~establishment~~use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of similar loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the consolidated balance sheets. Note 1 to the 2019 Annual Report describes the methodology used to determine the allowance for credit losses. A discussion of the allowance determination and factors in the formula allowance and unallocated allowance components of the allowance. The establishment of allowance factors is a continuing exercise, based on management’s ongoing assessment of the totality of all factors, including, but not limited to, delinquencies, loss history, trends in volume and terms of loans, effects ofdriving changes in lending policy, the experience and depth of management, national and local economic trends, concentrations of credit, the quality of the loan review system and the effect of external factors such as competition and regulatory requirements, and their impact on the portfolio. Allowance factors may change from period to period, resulting in an increase or decrease in the amount of the ~~provision or~~ allowance based on the same volume and classification of loans. Changes in allowance factors will have a direct impact on the amount of the provision, and a corresponding effect on net income. Errors in management’s perception and assessment of these factors and their impact on the portfolio could resultfor credit losses is included in the ~~allowance not being adequate to cover losses in the portfolio,~~Provision for Credit Losses and ~~may result in additional provisions or charge-offs.~~

~~Goodwill and Other Intangible Assets~~Allowance for Credit Losses sections below.

Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Other intangible assets represent purchased assets that also lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset or liability. Goodwill and other intangible assets are required to be recorded at fair ~~value.~~value at inception. Determining fair value is subjective, requiring the use of estimates, assumptions and management judgment. Goodwill ~~and other intangible assets with indefinite lives are~~is tested at least annually for impairment, usually during the ~~third~~fourth quarter, or on an interim basis if circumstances dictate. Intangible assets that have finite lives are amortized over their estimated useful lives and also are subject to impairment testing. 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. ~~The Company’s reporting units were identified based on an analysis of each of its individual operating segments (i.e., the Bank and Insurance Subsidiaries).~~ If the fair value of a reporting unit is less than book value, an expense may be required to write down the related goodwill ~~or purchased intangibles~~ to record an impairment loss.

~~Fair Value~~

The Company measures certain financial assets and liabilities at fair value, with the measurements made on a recurring or nonrecurring basis. Significant financial instruments measured at fair value on a recurring basis are investment securities. Impaired loans and other real estate owned are significant financial instruments measured at fair value on a nonrecurring basis. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. In determining fair value, As of March 31, 2020, the Company ~~is required to maximize the use of observable inputs and minimize the use of unobservable inputs, reducing subjectivity.~~

had only one banking reporting unit.

OVERVIEW

The Company reported net income of ~~$3.4~~$3.1 million for the ~~third~~first quarter of ~~2017,~~2020, or diluted income per common share of ~~$0.27,~~$0.25, compared to net income of ~~$2.4~~$3.8 million, or diluted income per common share of ~~$0.19,~~$0.29, for the ~~third~~first quarter of ~~2016.~~2019. For the ~~second~~fourth quarter of ~~2017,~~2019, the Company reported net income of ~~$2.4~~$4.0 million, or diluted income per common share of ~~$0.19.~~$0.32. When comparing net income for the ~~third~~first quarter of ~~2017~~2020 to the ~~third~~first quarter of ~~2016,~~2019, the ~~primary reasons~~decrease was due to increases in noninterest expense and provision for ~~improved net income~~credit losses of $1.0 million and $250 thousand, respectively. Partially offsetting these increases were increases in net interest income ~~of $2.7 million,~~and noninterest income of ~~$418~~$124 thousand and ~~a reduction in provision~~$164 thousand, respectively. When comparing net income from continuing operations for ~~credit losses~~the first quarter of ~~$260 thousand, partially offset by~~2020 to the fourth quarter of 2019, the decrease was due to an increase in noninterest expenses of ~~$1.5 million. When comparing the third quarter of 2017 to the second quarter of 2017, the higher net~~$504 thousand and decreases in noninterest income ~~was primarily attributable to increases in~~and net interest income of ~~$1.4 million, noninterest income of~~$342 thousand and $246 thousand, ~~and a reduction in~~respectively. In addition, the provision for credit losses increased in the first quarter of ~~$629~~2020 by $150 thousand partially offset by an increase in noninterest expenses of $521 thousand. These increases were a direct result of operating the three branches acquired from NWBI for a full quarter. The reduction in provision for credit losses was due to ~~a large charge-off in the second quarter of 2017 which was the result of one borrowing relationship.~~

For the first nine months of 2017, the Company reported net income of $8.6 million, or diluted income per common share of $0.67, compared to net income of $7.1 million, or diluted income per common share of $0.56, for the first nine months of 2016. Earnings improved due to increases in net interest income of $4.9 million and noninterest income of $822 thousand, partially offset by increases in provision for credit losses of $316 thousand and noninterest expenses of $2.6 million, of which $977 thousandeconomic stress related to ~~acquisition costs from~~ the ~~branch purchase.~~COVID-19 pandemic.

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RESULTS OF OPERATIONS

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 $12.6 million for the first quarter of 2020 and $12.4 million for the ~~third~~first quarter of ~~2017 and $9.7 million for the third quarter of 2016.~~2019. Tax-equivalent net interest income was ~~$11.0~~$12.8 million for the ~~second~~fourth quarter of ~~2017.~~2019. The increase in net interest income for the ~~third~~first quarter of ~~2017~~2020 when compared to the ~~third~~first quarter of ~~2016~~2019 was ~~primarily~~ due to ~~an increase~~lower interest expense on short-term borrowings of $211 thousand, or 99.1% and higher interest income on loans of $298 thousand, or 2.2%. These improvements to net interest income were partially offset by a decrease in interest income on taxable investment securities of ~~$2.7 million,~~$279 thousand, or ~~26.1%, partially offset by~~28.0% and an increase in interest expense on interest-bearing deposits of ~~$33~~$112 thousand, or ~~6.1%~~5.8%. ~~The increase in net~~Net interest income decreased for the first quarter of 2020 when compared to the ~~second~~fourth quarter of ~~2017 was primarily~~2019 due to ~~an increase in~~lower interest income on total earning assets of ~~$1.5 million,~~$487 thousand, or ~~12.9%~~3.2%, partially offset by ~~an increase~~a decrease in interest expense on interest-bearing deposits of ~~$62~~$228 thousand, or ~~11.3%~~10.0%. Net interest margin is tax-equivalent net interest income (annualized) divided by average earning assets. The net interest margin ~~increased in~~for the ~~third~~first quarter of ~~2017 to 3.79%~~2020 was 3.48%, which was a decrease of 13 basis points (bps) when compared to ~~both~~3.61% for the ~~third~~first quarter of ~~2016~~2019 and an increase of 1bp when compared to 3.47% for the ~~second~~fourth quarter of ~~2017 of 3.54% and 3.73%, respectively.~~

2019.

Interest Income

On a tax-equivalent basis, interest income increased ~~$2.7 million,~~$28 thousand, or ~~26.1%~~less than 1%, for the ~~third~~first quarter of ~~2017~~2020 when compared to the ~~third~~first quarter of ~~2016.~~2019. The increase was ~~primarily~~ due to a ~~$2.4 million,~~$298 thousand, or ~~24.9%~~2.2%, increase in interest income and fees on ~~loans. This increase was due to a $197.6 million, or 23.6%~~loans, the direct result of an increase in the average balance of loans ~~which primarily resulted from the purchase~~ of ~~$122.9~~$61.5 million, ~~in loans from NWBI in the second quarter of 2017 and organic loan growth of $70.2 million.~~or 5.1%. The average yield on loans ~~increased 4 bps, which increased~~decreased 17bps from ~~4.50% to 4.54%~~the comparable quarter in 2019. Interest on investment securities decreased $279 thousand, or 28.0%, ~~primarily~~ due to the higher yielding loan portfolio acquired from NWBI relative to the Bank’s legacy portfolio. In addition, interest and dividends on taxable investment securities increased $280 thousand, or 37.1%, during the third quarter of 2017 compared to the same period last year, primarily the result of a ~~$28.4 million, or 14.9% increase~~decrease in the average balance of ~~taxable~~ investment securities of $35.6 million, or 21.6% which ~~was partially funded by~~funds were used to fund loan growth between the ~~excess cash received from the branch purchase.~~

comparable quarters.

On a tax-equivalent basis, interest income ~~increased $1.5 million,~~decreased $487 thousand, or ~~12.9%~~3.2%, for the ~~third~~first quarter of ~~2017~~2020 when compared to the ~~second~~fourth quarter of ~~2017.~~2019. The ~~increase~~decrease was primarily due to ~~a $1.3 million, or 12.7%, increase~~decreases in interest income and fees on ~~loans. This increase~~loans of $256 thousand, or 1.8%, taxable investment securities of $108 thousand, or 13.1% and interest-bearing deposits with other banks of $123 thousand, or 41.7%. The decrease in taxable investment securities was primarily due to a decrease in the average balance of $16.1 million. The decrease in interest-bearing deposits was due to a ~~$81.5~~decrease in the average balance of $13.9 million, ~~or 8.6%~~coupled with a decline in the average yield received on these deposits of 43bps a direct result of interest rate cuts by the FRB during the first quarter of 2020. Despite the increase in the average balance on loans of ~~loans due to~~$17.1 million over the ~~full~~fourth quarter ~~impact~~ of 2019, the ~~loans acquired from NWBI. The~~ average yield on these loans increased 12 bps, which increased from 4.42% to 4.54%. In addition, interest and dividends on taxable investment securities increased $97 thousand, or 104%, during the third quarter of 2017 compared to the linked quarter, primarily the result of a $20.5 million, or 10.4% increase in the average balance of taxable investment securities.

decreased 8bps.

Interest Expense

Interest expense ~~increased $33~~decreased $98 thousand, or ~~5.7%~~4.3%, when comparing the ~~third~~first quarter of ~~2017~~2020 to the ~~third~~first quarter of ~~2016.~~2019. The decrease was a direct result of lower interest expense paid on short-term borrowings of $211 thousand, partially offset by an increase in interest expense ~~was due to an increase in~~on interest-bearing deposits of $112 thousand. The average balance of short-term borrowings decreased $31.7 million, or 96.3%, while the average balance of ~~total~~ interest-bearing deposits ~~of $150.5~~increased $89.8 million, or ~~20.3%~~10.2%. The average balance of noninterest-bearing deposits increased $21.6 million, or 6.5% between the comparable quarters.

Interest expense decreased $233 thousand, or 9.7%, ~~primarily~~when comparing the ~~result of the acquisition of interest-bearing deposits from NWBI amounting to $177.9 million in the second~~first quarter of ~~2017, which had~~2020 to the fourth quarter of 2019. The decrease in interest expense was mainly due to a ~~balance of $186.0 million at September 30, 2017. Despite the significant increase~~decrease in ~~average interest-bearing deposits,~~ the rates paid on ~~these~~interest-bearing deposits, which declined 49 bps. Despite the decrease in rates paid on interest-bearing deposits, the average balance increased $8.9 million, or 1.0%. The average balance onof noninterest-bearing deposits ~~increased $75.4~~decreased $15.8 million, or ~~30.8%, and the average balance on short-term borrowings decreased $4.8 million, or 67.9%, all of which resulted in a lower cost of funding for the third quarter of 2017~~4.3% when compared to the ~~third~~fourth quarter of ~~2016.~~

Interest expense increased $62 thousand, or 11.3%, when comparing the third quarter of 2017 to the second quarter of 2017. The increase in interest expense was due to an increase in the average balance of total interest-bearing deposits of $98.4 million, or 12.4%, primarily the result of a full quarter impact of the deposits acquired from NWBI, while the average rate paid on interest-bearing deposits remained unchanged. Interest expense on short-term borrowings declined $7 thousand, or 63.6% which contributed to a 1bp decline in the overall cost of funds when comparing the third quarter 2017 to the second quarter 2017.2019.

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The following ~~table~~tables presents the distribution of the average consolidated balance sheets, interest income/expense, and annualized yields earned and rates paid for the three months ended ~~September 30, 2017~~March 31, 2020 and ~~2016.~~

2019.


	For Three Months Ended						For Three Months Ended						For Three Months Ended						For Three Months Ended
	September 30, 2017						September 30, 2016						March 31, 2020						March 31, 2019
	Average		Income(1)/		Yield/		Average		Income(1)/		Yield/		Average		Income(1)/		Yield/		Average		Income(1)/		Yield/
(Dollars in thousands)	Balance		Expense		Rate		Balance		Expense		Rate		Balance		Expense		Rate		Balance		Expense		Rate
Earning assets
Loans (2), (3)	$	1,034,553	$	11,830	4.54	%	$	836,955	$	9,469	4.50	%	$	1,263,441	$	13,831	4.40	%	$	1,201,913	$	13,533	4.57	%
Investment securities:
Taxable		218,675		1,035	1.89			190,265		754	1.59			129,410		719	2.22			165,009		998	2.45
Tax-exempt		-		-	-			210		3	5.30
Federal funds sold		-		-	-			511		1	0.37
Interest-bearing deposits		42,204		131	1.23			64,164		81	0.50			57,657		172	1.20			27,806		163	2.38
Total earning assets		1,295,432		12,996	3.98	%		1,092,105		10,308	3.75	%		1,450,508		14,722	4.08	%		1,394,728		14,694	4.27	%
Cash and due from banks		16,232						15,678						17,874						17,196
Other assets		75,611						52,836						89,154						58,756
Allowance for credit losses		(9,300)						(8,310)						(10,545)						(10,389)
Total assets	$	1,377,975					$	1,152,309					$	1,546,991					$	1,460,291

Interest-bearing liabilities
Demand deposits	$	224,180		132	0.23	%	$	199,116		58	0.12	%	$	284,176		395	0.56	%	$	239,794		359	0.61	%
Money market and savings deposits		378,711		113	0.12			268,183		86	0.13			410,252		466	0.46			383,738		806	0.85
Brokered Deposits														—		—	—			22,080		129	2.37
Certificates of deposit $100,000 or more		123,538		154	0.50			125,265		192	0.61			129,408		597	1.85			98,535		301	1.24
Other time deposits		164,459		208	0.50			147,780		238	0.64			150,645		601	1.60			140,523		352	1.02
Interest-bearing deposits		890,888		607	0.27			740,344		574	0.31			974,481		2,059	0.85			884,670		1,947	0.89
Short-term borrowings		2,274		4	0.62			7,075		4	0.25			1,235		2	0.65			32,984		213	2.62
Long-term debt														15,000		107	2.87			15,000		106	2.87
Total interest-bearing liabilities		893,162		611	0.27	%		747,419		578	0.31	%		990,716		2,168	0.88	%		932,654		2,266	0.99	%
Noninterest-bearing deposits		320,006						244,596						352,681						331,032
Other liabilities		5,256						6,309						9,262						11,633
Stockholders' equity		159,551						153,985
Total liabilities and stockholders' equity	$	1,377,975					$	1,152,309
Stockholders’ equity														194,332						184,972
Total liabilities and stockholders’ equity													$	1,546,991					$	1,460,291

Net interest spread			$	12,385	3.71	%			$	9,730	3.44	%			$	12,554	3.20	%			$	12,428	3.28	%
Net interest margin					3.79	%					3.54	%					3.48	%					3.61	%

Tax-equivalent adjustment
Loans			$	59					$	72
Investment securities				-						1
Total			$	59					$	73

(1) All amounts are reported on a tax-equivalent basis computed using the statutory federal income tax rate of 35.0%, exclusive of the alternative minimum tax rate and
nondeductible interest expense.
(2) Average loan balances include nonaccrual loans.
(3) Interest income on loans includes amortized loan fees, net of costs, and all are included in the yield calculations.

~~Net Interest Income~~

Tax-equivalent net interest income increased $4.9 million, or 17.3%, during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. The increase in net interest income was primarily due to an increase in interest income of $4.7 million, or 15.6% and a decrease in interest expense of $189 thousand, or 10.1%. These positive variances, resulted in an improved net interest margin of 3.75% for the nine months ended September 30, 2017 compared to 3.54% for the nine months ended September 30, 2016.

~~Interest Income~~

On a tax-equivalent basis, interest income increased $4.7 million, or 15.6%, for the nine months ended September 30, 2017 when compared to the nine months ended September 30, 2016. The increase was primarily due to a $4.3 million, or 15.7%, increase in interest income and fees on loans. This increase was due to a $144.9 million, or 17.9% increase in the average balance of loans resulting from the purchase of $122.9 million

in loans from NWBI in the second quarter of 2017 and organic loan growth of $59.2 million. The average yield on loans declined 8 bps, which decreased from 4.54% to 4.46%. In addition, interest and dividends on taxable investment securities increased $350 thousand, or 14.3%,

~~during the first nine months of 2017 compared to the same period last year, primarily the result of higher average yields on taxable investment securities of 27bps.~~

~~Interest Expense~~

Interest expense decreased $189 thousand, or 10.1%, when comparing the nine months ended September 30, 2017 to the nine months ended September 30, 2016. The decrease in interest expense was due to decreases in the average rate paid on interest-bearing deposits of 6bps and the average balance in short-term borrowings of $2.4 million, or 37.3%. The average balance of total interest-bearing deposits increased $68.7 million, or 9.3% when comparing the first nine months of 2017 to the first nine months of 2016, primarily the result of the acquisition of deposits from NWBI of $212.5 million in the second quarter of 2017.

The following table presents 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, 2017 and 2016.

For Nine Months Ended

For Nine Months Ended

September 30, 2017

September 30, 2016

Average

Income(1)/

Yield/

Average

Income(1)/

Yield/
(Dollars in thousands)

Balance

Expense

Rate

Balance

Expense

Rate
Earning assets

Loans (2), (3)

$
956,694

$
31,941

4.46
%

$
811,747

$
27,608

4.54
%
Investment securities:

Taxable

198,383

2,799

1.88

203,016

2,448

1.61

Tax-exempt

116

5

5.41

210

8

5.30

Federal funds sold

-

-

-

2,347

6

0.34

Interest-bearing deposits

34,506

269

1.04

55,837

211

0.50

Total earning assets

1,189,699

35,014

3.93
%

1,073,157

30,281

3.77
%
Cash and due from banks

14,988

15,554

Other assets

61,537

54,850

Allowance for credit losses

(9,072)

(8,459)

Total assets

$
1,257,152

$
1,135,102

Interest-bearing liabilities

Demand deposits

$
206,033

279

0.18
%

$
192,803

173

0.12
%
Money market and savings deposits

325,660

300

0.12

262,818

258

0.13

Certificates of deposit $100,000 or more

121,508

467

0.51

129,060

647

0.67

Other time deposits

151,179

610

0.54

151,032

774

0.68

Interest-bearing deposits

804,380

1,656

0.28

735,713

1,852

0.34

Short-term borrowings

3,997

18

0.59

6,372

11

0.24

Total interest-bearing liabilities

808,377

1,674

0.28
%

742,085

1,863

0.34
%
Noninterest-bearing deposits

285,324

235,448

Other liabilities

5,109

6,131

Stockholders' equity

158,342

151,438

Total liabilities and stockholders' equity

$
1,257,152

$
1,135,102

Net interest spread

$
33,340

3.65
%

$
28,418

3.43
%
Net interest margin

3.75
%

3.54
%

Tax-equivalent adjustment

Loans

$
179

$
132

Investment securities

2

2

Total

$
181

$
134

(1) All amounts are reported on a tax-equivalent basis computed using the statutory federal income tax rate of 35.0%, exclusive of the alternative minimum tax rate and
nondeductible interest expense.
(2) Average loan balances include nonaccrual loans.
(3) Interest income on loans includes amortized loan fees, net of costs, and all are included in the yield calculations.

(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 amortized loan fees, net of costs, and accretion of discounts on acquired loans, which are included in the yield calculations.

Noninterest Income

Total noninterest income for the ~~third~~first quarter of ~~2017~~2020 increased ~~$418~~$164 thousand, or ~~10.4%~~7.5%, when compared to the ~~third~~first quarter of ~~2016.~~2019. The increase from the ~~third~~first quarter of ~~2016~~2019 was mainly due to ~~higher service charges~~investment gains in BOLI from supplemental executive retirement plans purchased in 2019 and ~~fees on deposit accounts, higher trust~~other bank and ~~investment income, higher insurance agency commissions and a positive result on an insurance agency investment recorded in other income,~~loan fees, partially offset by ~~higher recognized gains~~a decrease in service charges on ~~investment securities in the third quarter of 2016.~~deposit accounts. Noninterest income ~~increased $246~~from continuing operations decreased $342 thousand, or ~~5.9%~~12.7%, when compared to the ~~second~~fourth quarter of ~~2017 mainly due to~~2019 primarily the result of lower service charges on deposit accounts, ~~for~~ a ~~full quarter on the deposits acquired~~decrease in BOLI life insurance proceeds collected in the ~~branch purchase, higher insurance agency commissions and an increase on an insurance agency investment included in other noninterest income.~~

~~Total noninterest income for the nine months ended September 30, 2017 increased $822 thousand, or 6.5%, when compared~~first quarter of 2020 relative to the ~~same period in 2016. The increase was~~ ~~primarily due to increases in insurance agency commissions~~fourth quarter of ~~$185 thousand~~2019 and less activity for other ~~noninterest income~~loan and banking services as a result of ~~$538 thousand which included higher fees on bank services of $241 thousand and positive earnings from an insurance investment of $274 thousand.~~ the COVID-19 pandemic.

Noninterest Expense

Total noninterest expense from continuing operations for the ~~third~~first quarter of ~~2017~~2020 increased ~~$1.5~~$1.0 million, or ~~16.3%~~10.8%, when compared to the ~~third~~first quarter of ~~2016.~~2019. The increase in noninterest ~~expenses~~expense for the ~~third~~first quarter of ~~2017~~2020 compared to the ~~third~~first quarter of ~~2016~~2019 was primarily due to ~~operating three additional branches, acquisition~~higher salary and wages of $530 thousand, employee benefit costs of $468 thousand and higher data processing fees of $134. The increase in salary and wages was the result of pay increases and the addition of supplemental retirement plans. The increase in employee ~~benefits~~benefit costs was due to higher medical insurance costs for the first quarter of 2020 and the increase in data processing fees was due to additional core processor services

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and the addition of a new branch in Ocean City, MD. The increase in total noninterest expenses from continuing operations when compared to the fourth quarter of 2019 of $504 thousand, or 5.1%, was primarily due to higher ~~insurance premiums paid for group insurance and higher salaries~~salary and wages due to pay increases ~~implemented~~and additional payroll days, as well as, an increase in the first quarter of 2017. Total noninterest expenses increased $521 thousand, or 5.1%, when compared to the second quarter of 2017. The increase was primarily due to a full quarter of operating three additional branches acquired in the second quarter of 2017. The branch purchase resulted in increases in salary and wages, employee benefits, and FDIC insurance premium expense ~~which were partially offset by lower legal and professional fees which were elevated~~due to an assessment credit received in the ~~second quarter due to the acquisition.~~

Total noninterest expense for the nine months ended September 30, 2017 increased $2.6 million, or 9.5%, when compared to the same period in 2016. The increase was primarily due to the branch purchase in the secondfourth quarter of 2017 which resulted in acquisition costs of $977 thousand and the cost of operating those branches for four months. In addition, higher salaries/wages and employee benefits resulted in increased non-interest expenses which were partially offset by a decrease in FDIC insurance premiums.2019.

Provision for Credit Losses

The provision for credit losses was ~~$345~~$350 thousand for the ~~third~~first quarter of ~~2017, $605~~2020, $100 thousand for the ~~third~~first quarter of ~~2016~~2019 and ~~$974~~$200 thousand for the ~~second~~fourth quarter of ~~2017.~~ 2019. The ~~lower level~~ratio of ~~provision~~the allowance for credit losses ~~when comparing~~to period-end loans was 0.81% at March 31, 2020, lower than both the ~~third~~0.86% at March 31, 2019 and the 0.84% at December 31, 2019. The primary driver of the reduction in the percentage of the allowance to total loans as compared to both of the prior periods was due to a reduction in specific reserves carried as part of the allowance, which totaled $337 thousand, $812 thousand, and $975 thousand, at March 31, 2019, December 31, 2019, and March 31, 2020, respectively. The provision increased during the first quarter of ~~2017~~2020 over prior periods largely due to ~~both~~an increase in loan volume as well as management's consideration of the ~~third quarter of 2016 and~~COVID-19 pandemic. These contributors to the ~~second quarter of 2017~~ ~~was driven by lower charge-offs and improved credit quality.~~The provision for credit losses for the nine months ended September 30, 2017 and 2016 was $1.7 million and $1.4 million, respectively, while net charge-offs were $1.2 million and $1.1 million, respectively. ~~The~~ increase in provision for the first quarter 2020 were offset in part due to a decline in specific reserves of $638 thousand from December 31, 2019, which resulted from charge-offs during the period. The addition to our historical loss history of charge-offs related to loans with specific reserves provided for in prior periods, coupled with recoveries during the period resulted in a less than one-to-one increase in our historical reserves as compared to the prior recorded specific reserve balances. Considerations related to the COVID-19 pandemic contributed to an increase in our qualitative reserves to legacy non-impaired loans from 0.75% at December 31, 2019 to 0.78% at March 31, 2020. Management will continue to evaluate the adequacy of the allowance for credit losses ~~primarily occurred~~as more economic data becomes available and as the impact on the Company’s portfolio becomes known. Increases in unemployment, declines in consumer confidence, and a reluctance on the part of businesses to invest in and expand their operations, among other things, may result in additional weakness in economic conditions, place strain on our borrowers and ultimately impact the credit quality of our loan portfolio. As a result, we may experience increases in the ~~second quarter~~level of ~~2017~~past due, nonaccrual and classified loans, as well as higher net charge-offs. Deterioration in credit quality in conjunction with weakness in current and expected economic conditions, may require us to ~~the partial charge-off of a negotiated restructured commercial loan. The ratio of annualized net charge-offs to average loans was 0.16%~~record additional provisions for ~~the first nine months of September 30, 2017 and 0.19% for the same period in 2016.~~credit losses.

Income Taxes

~~For the third quarter of 2017 and 2016, the~~

The Company reported income tax expense from continuing operations of ~~$2.3~~$1.1 million for the first quarter of 2020, $1.3 million for the first quarter of 2019 and $1.4 million ~~respectively, while the effective tax rate was 40.0% and 37.3%, respectively. The increase in tax rates~~ for the ~~third~~fourth quarter of ~~2017~~2019. Income tax expense decreased when compared to the ~~same period in 2016 was~~first and fourth quarters of 2019 due to ~~higher pretax income. Income taxes~~lower pre-tax earnings. The effective tax rate on continuing operations was 25.2% for the ~~nine months ended September 30, 2017 increased $1.3 million, or 29.9%, when compared to the same period in 2016. The increase was primarily due higher taxable income~~first quarter of ~~$2.7 million which increased tax rates from 38.0% in the prior period to 39.9%~~2020, 25.5% for the ~~2017 period.~~first quarter of 2019 and 25.8% for the fourth quarter of 2019.

ANALYSIS OF FINANCIAL CONDITION

Loans

Loans totaled ~~$1.0~~$1.277 billion at ~~September 30, 2017~~March 31, 2020 and ~~$871.5 million~~$1.249 billion at December 31, ~~2016,~~2019, an increase of ~~$175.5~~$28.3 million, or ~~20.2%~~2.3%. The ~~significant~~ increase was primarily due to organic growth of $24.3 million in commercial real estate loans, ~~acquired from NWBI of $122.9~~$9.8 million ~~which had a balance of $116.5~~in construction loans and $4.7 million ~~at September 30, 2017. Excluding the~~in consumer loans, ~~acquired from NWBI, total loans increased $58.8 million, or 6.7%. The most significant categories which increased organically were construction of $18.8 million,~~partially offset by decreases in residential real estate loans of ~~$18.6~~$5.3 million and commercial loans of ~~$18.6~~$5.1 million. Loans included deferred costs, net of deferred fees, of ~~$632 thousand~~$1.8 million and discounts on acquired loans of ~~$2.0~~$967 thousand at March 31, 2020, compared to $1.8 million ~~at September 30, 2017. Loans included deferred costs, net of deferred fees, of $509 thousand~~and $1.1 million, respectively, at December 31, ~~2016.~~2019. We do not engage in foreign or subprime lending activities. See Note 4,5, “Loans and Allowance for Credit Losses”, in the Notes to Consolidated Financial Statements and below under the caption “Allowance for Credit Losses” for additional information.

Our loan portfolio has a commercial real estate loan concentration, which is generally defined as a combination of certain construction and commercial real estate loans. Construction loans were ~~$106.6~~$109.6 million, or ~~10.2%~~8.6% of total loans, at ~~September 30, 2017, higher than the $84.0~~March 31, 2020 and $99.8 million, or ~~9.6%~~8.0% of total loans at December 31, ~~2016.~~2019. Commercial real estate loans were ~~$454.6~~ $610.9

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million, or ~~43.4%~~47.8% of total loans, at ~~September 30, 2017,~~March 31, 2020, compared to ~~$382.7~~$586.6 million, or ~~43.9%~~47.0% of total loans, at December 31, ~~2016.~~2019.

The federal banking regulators have issued guidance for those institutions which are deemed to have concentrations in commercial real estate lending. Pursuant to the supervisory criteria contained in the guidance for identifying institutions with a potential commercial real estate concentration risk, institutions which have (1) total reported loans for construction, land development, and other land acquisitions which represent

100% or more of an institution’s total risk-based capital; or (2) total non-owner occupied commercial real estate loans representing 300% or more of the institution’s total risk-based capital and the institution’s non-owner occupied commercial real estate loan portfolio (including construction) has increased 50% or more during the prior 36 months are identified as having potential commercial real estate concentration risk. Institutions which are deemed to have concentrations in commercial real estate lending are expected to employ heightened levels of risk management with respect to their commercial real estate portfolios, and may be required to hold higher levels of capital. The Company, like many community banks, has a concentration in commercial real estate loans, and the Company has experienced significant growth in its commercial real estate portfolio in recent years. At ~~September 30, 2017,~~March 31, 2020, non-owner-occupied commercial real estate loans (including construction, land and land development loans) represented ~~269.9%~~284.9% of total ~~risk based~~risk-based capital. At such time, construction, land and land development loans represented ~~79.4%~~61.8% of total ~~risk based~~risk-based capital.

The commercial real estate portfolio (including construction) has increased ~~95.3%~~75.2% during the prior 36 months. Management has extensive experience in commercial real estate lending, and has implemented and continues to maintain heightened risk management procedures, ~~and~~as well as strong underwriting criteria with respect to its commercial real estate portfolio. Monitoring practices include periodic stress testing analysis to evaluate changes to cash flows, owing to interest rate increases and declines in net operating income. We may be required to maintain higher levels of capital as a result of our commercial real estate concentrations, which could require us to obtain additional capital ~~and~~or be required to sell/participate portions of loans, which may adversely affect shareholder returns.

Allowance for Credit Losses

We have established an allowance for credit losses, which is increased by provisions charged against earnings and recoveries of previously charged-off ~~debts~~loans and is decreased by current period charge-offs of uncollectible ~~debts.~~loans. Management evaluates the adequacy of the allowance for credit losses at least quarterly and adjusts the provision for credit losses based on this analysis. The evaluation of the adequacy of the allowance for credit losses is based primarily on a risk rating system of individual loans, as well as on a collective evaluation of smaller balance homogenous loans, each grouped by loan type. Each loan type is assigned allowance factors based on criteria such as past credit loss experience, local economic and industry trends, and other measures which may impact collectability. Please refer to the discussion above under the caption “Critical Accounting Policies” for an overview of the underlying methodology management employs to maintain the allowance.

The allowance for credit losses was $10.4 million at March 31, 2020 and March 31, 2019 and $10.5 million at December 31, 2019. Net charge-offs were ~~$182~~$479 thousand for the ~~third~~ quarter ~~of 2017 and $349~~ended March 31, 2020, compared to $25 thousand for the ~~third~~ quarter ended March 31, 2019 and $131 thousand for the quarter ended December 31, 2019. The ratio of ~~2016.~~ net charge-offs to average loans was 0.15% and 0.04% for the quarters ended March 31, 2020 and December 31, 2019, respectively.

Management remains focused on its efforts to dispose of problem loans and to prudently charge-off nonperforming ~~assets~~loans to enable the Company to continue to improve its overall credit quality. The allowance for credit losses as a percentage of period-end loans was ~~0.89% as of September 30, 2017~~0.81% at March 31, 2020, 0.86% at March 31, 2019 and ~~1.00% for both~~0.84% at December 31, ~~2016 and September 30, 2016.~~ ~~The decrease in such ratio at September 30, 2017 was due to the performing loans acquired in the~~ ~~NWBI~~ ~~transaction with no associated allowance since they were recorded at fair value.~~ ~~The allowance for credit losses as a percentage of period-end loans, excluding the acquired loans from NWBI was 1.00% at September 30, 2017.~~2019. Management currently believes that the provision for credit losses and the resulting allowance ~~were~~was adequate to provide for probable losses inherent in our loan portfolio at ~~September 30, 2017.~~March 31, 2020. However, management will continue to evaluate the adequacy of the allowance for credit losses as more economic data becomes available and as the impact of the COVID 19 pandemic on the Company’s portfolio becomes known. Increases in unemployment, declines in consumer confidence, and a reluctance on the part of businesses to invest in and expand their operations, among other things, may result in additional weakness in economic conditions, place strain on our borrowers and ultimately impact the credit quality of our loan portfolio. As a result, we may experience increases in the level of past due, nonaccrual and classified loans, as well as

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higher net charge-offs. Deterioration in credit quality in conjunction with weakness in current and expected economic conditions, may require us to record additional provisions for credit losses.

The following table presents a summary of the activity in the allowance for credit losses at or for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2020 and ~~2016.~~

2019.


	At or for Three Months				At or for Nine Months				At or for Three Months Ended
	Ended September 30,				Ended September 30,				March 31,
(Dollars in thousands)		2017	2016		2017		2016		2020			2019
Allowance balance - beginning of period	$	9,132	$	8,358	$	8,726	$	8,316	$	10,507		$	10,343

Charge-offs:
Construction		-		(9)		(54)		(263)		—			—
Residential real estate		(70)		(407)		(393)		(525)		(191)			(123)
Commercial real estate		(100)		-		(100)		(503)		(271)			—
Commercial		(99)		(139)		(870)		(264)		(82)			(81)
Consumer		(18)		(13)		(33)		(23)		(7)			(6)
Total		(287)		(568)		(1,450)		(1,578)		(551)			(210)

Recoveries:
Construction		11		8		27		24		3			3
Residential real estate		11		121		32		188		3			8
Commercial real estate		8		10		27		20		1			99
Commercial		67		79		167		201		63			75
Consumer		8		1		20		13		2			—
Totals		105		219		273		446		72			185
Net charge-offs		(182)		(349)		(1,177)		(1,132)		(479)			(25)
Provision for credit losses		345		605		1,746		1,430		350			100
Allowance balance - end of period	$	9,295	$	8,614	$	9,295	$	8,614	$	10,378		$	10,418

Average loans outstanding during the period	$	1,034,553	$	836,955	$	956,694	$	811,747	$	1,263,441		$	1,201,913
Net charge-offs (annualized) as a percentage of
average loans outstanding during the period		0.07%		0.17%		0.16%		0.19%
Allowance for credit losses at period end as a
percentage of total period end loans		0.89%		1.00%		0.89%		1.00%
Net charge-offs (annualized) as a percentage of average loans outstanding during the period										0.15	%		0.01	%
Allowance for credit losses at period end as a percentage of total period end loans										0.81	%		0.86	%
Percentage of allowance for credit losses at
period end to average loans										0.82	%		0.89	%

Nonperforming Assets and Accruing TDRs

As shown in the following table, nonperforming assets ~~decreased $3.4 million~~increased $309 thousand to ~~$8.1~~$12.3 million at ~~September 30, 2017~~March 31, 2020 from ~~$11.5~~$12.0 million at December 31, ~~2016,~~2019, primarily due to ~~decreases~~an increase in nonaccrual loans of ~~$2.7~~$950 thousand, or 9.0%, partially offset by a decrease in loans 90 days past due and still accruing of $605 thousand, or 45.6%. Accruing TDRs decreased $57 thousand to $7.4 million ~~and~~at March 31, 2020 from $7.5 million at December 31, 2019. Additionally, other real estate owned ~~of $668 thousand. Accruing TDRs increased $493~~decreased $36 thousand, or 48.6% when compared to ~~$13.5 million at September 30, 2017 from $13.0 million at~~ December 31, ~~2016. This~~2019. The increase in nonaccrual loans was ~~primarily~~ due to a ~~significant nonaccrual TDR being upgraded~~specific relationship with a residential real estate customer of $1.1 million, which the Bank has been monitoring for several quarters. The decrease in accruing TDRs was due to ~~an accruing TDR during the third quarter of 2017.~~normal payments. The ratio of nonaccrual loans and accruing TDRs to total loans ~~decreased~~increased 4 bps to ~~0.60%~~1.49% at ~~September 30, 2017~~March 31, 2020 from ~~1.03%~~1.45% at December 31, ~~2016 which was primarily due to the acquired performing loans from NWBI. Excluding the acquired loans from NWBI the ratio of nonaccrual loans to total loans decreased to 0.68% at September 30, 2017.~~

2019.

The Company continues to focus on the resolution of its nonperforming and problem ~~loans.~~assets. The efforts to accomplish this goal include frequently contacting borrowers until the delinquency is cured or until an acceptable payment plan has been agreed upon; obtaining updated appraisals; provisioning for credit losses; charging-off loans; transferring loans to other real estate owned; aggressively marketing other real estate ~~owned; and selling loans.~~owned. The reduction of nonperforming and problem ~~loans~~assets is and will continue to be a high priority for the Company.

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The following table summarizes our nonperforming assets and accruing TDRs at ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016.~~

2019.


(Dollars in thousands)	September 30, 2017			December 31, 2016			March 31, 2020			December 31, 2019
Nonperforming assets
Nonaccrual loans
Construction	$	2,953		$	3,818		$	297		$	—
Residential real estate		2,565			3,903			3,450			2,475
Commercial real estate		430			1,152			7,236			7,817
Commercial		341			-			557			298
Consumer		-			99			—			—
Total nonaccrual loans		6,289			8,972			11,540			10,590
Loans 90 days or more past due and still accruing
Construction		-			-			—			—
Residential real estate		5			-			189			556
Commercial real estate		-			-			532			770
Commercial		-			10			—			—
Consumer		-			10			—			—
Total loans 90 days or more past due and still accruing		5			20			721			1,326
Other real estate owned		1,809			2,477			38			74
Total nonperforming assets	$	8,103		$	11,469		$	12,299		$	11,990

Accruing TDRs
Construction	$	4,033		$	4,189		$	38		$	41
Residential real estate		4,625			3,875			4,013			4,041
Commercial real estate		4,835			4,936			3,393			3,419
Commercial		-			-			—			—
Consumer		-			-			—			—
Total accruing TDRs	$	13,493		$	13,000		$	7,444		$	7,501

Total nonperforming assets and accruing TDRs	$	21,596		$	24,469

As a percent of total loans:
Nonaccrual loans		0.60	%		1.03	%		0.90	%		0.85	%
Accruing TDRs		1.29	%		1.49	%		0.58	%		0.60	%
Nonaccrual loans and accruing TDRs		1.89	%		2.52	%		1.49	%		1.45	%

As a percent of total loans and other real estate owned:
Nonperforming assets		0.77	%		1.31	%		0.96	%		0.96	%
Nonperforming assets and accruing TDRs		2.06	%		2.80	%		1.55	%		1.56	%

As a percent of total assets:
Nonaccrual loans		0.46	%		0.77	%		0.73	%		0.68	%
Nonperforming assets		0.59	%		0.99	%		0.78	%		0.77	%
Accruing TDRs		0.98	%		1.12	%		0.47	%		0.48	%
Nonperforming assets and accruing TDRs		1.57	%		2.11	%		1.25	%		1.25	%

Investment Securities

The investment portfolio is comprised of debt securities that are classified either available for sale or held to maturity. Investment securities available for sale are stated at estimated fair value based on quoted prices. They represent securities which may be sold as part of the asset/liability management strategy or in response to changing interest rates. Net unrealized holding gains and losses on these securities are reported net of related income taxes as accumulated other comprehensive income (loss), a separate component of stockholders’ equity.

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Investment securities in the held to maturity category are stated at cost adjusted for amortization of premiums and accretion of discounts. We have the intent and current ability to hold such securities until maturity. At ~~September 30, 2017 and December~~March 31, ~~2016, 97%~~2020, 92.3% of the portfolio of debt securities was classified as available for sale and 3%7.7% was classified as held to ~~maturity. With the exception of municipal securities, our general practice is~~maturity, compared to ~~classify all newly-purchased securities as available for sale.~~93.5% and 6.5% respectively, at December 31, 2019. See Note ~~3 - Investment Securities,~~4 – “Investment Securities”, in the Notes to Consolidated Financial Statements for additional details on the composition of our investment portfolio.

Investment securities including restricted stock totaled ~~$219.6~~$118.7 million at ~~September 30, 2017,~~March 31, 2020, a ~~$49.0~~$18.4 million, or ~~28.7%~~13.4%, ~~increase~~decrease since December 31, ~~2016.~~2019. The ~~increase~~decrease was due to ~~utilizing~~agency bonds being called during the ~~net cash received from~~first quarter of 2020, in which the ~~NWBI branch acquisition~~proceeds were redeployed to ~~purchase available-for-sale securities.~~fund loan growth during the quarter. At ~~the end of September 2017, 75.3%~~March 31, 2020, 90.7% of the securities available for sale were mortgage-backed and ~~24.4%~~9.3% were U.S. Government agencies, compared to ~~78.7%,~~80.6% and ~~20.9%~~19.4%, respectively, at year-end ~~2016.~~2019. Our investments in mortgage-backed securities are issued or guaranteed by U.S. Government agencies or government-sponsored agencies.

Deposits

Total deposits at ~~September 30, 2017 were $1.2~~March 31, 2020 totaled $1.35 billion, ~~a $208.7~~an increase of $7.5 million, or ~~20.9%, increase~~less than 1% when compared to the level at December 31, ~~2016.~~2019. The increase ~~was primarily the result of the acquisition of three branches from~~ ~~NWBI~~ ~~which contributed $212.5 million~~ in total deposits ~~which had a balance~~consisted of ~~$199.9 million at September 30, 2017. Excluding the deposits acquired from the branch purchase, the Company experienced increases~~an increase in ~~noninterest-bearing~~interest-bearing deposits of ~~$50.6 million and interest-bearing checking deposits of $21.7~~$9.0 million, partially offset by ~~declines~~a decrease in noninterest bearing deposits of $1.6 million. The growth in interest-bearing deposits was represented by increases in savings and money market ~~and savings~~accounts of $9.2 million, time deposits greater than $100 thousand of ~~$22.6~~$3.4 million and other time deposits of ~~$40.8~~$2.2 million. These increases were partially offset by a decrease in checking accounts of $5.8 million.

Short-Term Borrowings

Short-term borrowings increased by $936 thousand, or 76.3%, to $2.2 million at ~~September 30, 2017 and~~March 31, 2020 when compared to December 31, 2016 were $1.5 million and $3.2 million, respectively. The decrease in short-term borrowings was the result of utilizing cash received in the branch acquisition to reduce these borrowings which tend to have higher rates than core deposits.2019. Short-term borrowings generally consist of securities sold under agreements to repurchase, which are issued in conjunction with cash management services for commercial depositors, overnight borrowings from correspondent banks and short-term advances from the Federal Home Loan Bank (the “FHLB”). Short-term advances are defined as those with original maturities of one year or less. At ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016,~~2019, short-term borrowings ~~included only~~consisted of repurchase agreements.

Long-Term Debt

The Company uses long-term borrowings to meet longer term liquidity needs, specifically to fund loan growth when liquidity from deposit growth is not sufficient. The Company had $15.0 million outstanding at March 31, 2020 and December 31, 2019. The $15.0 million in fixed rate long-term borrowings from the FHLB carries an interest rate of 2.82% and matured in April 2020.

Liquidity and Capital Resources

We derive liquidity through increased customer deposits, ~~maturities in~~non-reinvestment of the cash flow from the investment portfolio, loan repayments, borrowings and income from earning assets. As seen in the Consolidated Statements of Cash Flows in the Financial Statements, the net ~~decrease~~increase in cash and cash equivalents was ~~$32.0 million for the first nine months of 2017 compared to an increase in cash of~~ $1.3 million for the first ~~nine~~three months of ~~2016.~~2020 compared to a decrease of $8.4 million for the first three months of 2019. The ~~decrease~~increase in cash and cash equivalents in ~~2017~~2020 was mainly due to ~~receiving excess cash~~an increase in interest-bearing deposits and proceeds received from ~~the NWBI~~callable bonds, partially offset by increases in purchases of premises and equipment primarily related to a new branch ~~transaction which was used to purchase available-for-sale securities and paydown short-term borrowings.~~

opened in Ocean City, MD in March.

To the extent that deposits are not adequate to fund customer loan demand, liquidity needs can be met in the short-term ~~funds markets through~~fund markets. The Bank has arrangements with ~~correspondent banks. The Bank had~~other corresponding banks whereby it has $15 million available in federal funds lines of credit and a reverse repurchase agreement available ~~on a~~to meet any short-term ~~basis from correspondent banks at September 30, 2017 and December 31, 2016.~~needs which may not otherwise be funded by the Bank’s portfolio of readily marketable investments that can be converted to cash. The Bank is also a member of the FHLB, which provides another source of liquidity. Through the FHLB, the Bank had ~~credit availability~~collateral pledged of approximately ~~$222.0~~$300.2 million and ~~$205.1~~$270.1 million at ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016,~~2019, respectively. ~~These lines of credit are paid for monthly on a fee basis of 0.425%.~~ The Bank has

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pledged, under a blanket lien, all qualifying residential and commercial real estate loans under borrowing agreements with the FHLB. ~~Management is not aware of any demands, commitments, events or uncertainties that are likely to materially affect our future ability to maintain liquidity at satisfactory levels.~~

Total stockholders’ equity increased ~~$8.3~~$2.9 million to ~~$162.6~~$195.7 million at ~~September 30, 2017~~March 31, 2020 when compared to December 31, ~~2016~~2019 primarily due to current year’s ~~earnings.~~earnings and a change in accumulated other comprehensive income of $1.3 million, or 604.3%.

CBLR

On September 17, 2019, the FDIC finalized a rule that introduces an optional simplified measure of capital adequacy for qualifying community banking organizations (i.e., the community bank leverage ratio (CBLR) framework), as required by the Economic Growth, Regulatory Relief and Consumer Protection Act. The CBLR framework is designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework.

On April 6, 2020, in a joint statement, the FDIC, Federal Reserve and the Office of Comptroller of the Currency (“OCC”), issued two interim final rules regarding temporary changes to the CBLR framework to implement provisions of the CARES Act. Under the interim final rules, the community bank leverage ratio will be reduced to 8 percent beginning in the second quarter and for the remainder of calendar year 2020, 8.5 percent for calendar year 2021, and 9 percent thereafter. In order to qualify for the CBLR framework, a community banking organization must have a tier 1 leverage ratio of greater than 8 percent, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations and will not be required to report or calculate risk-based capital.

The CBLR framework was available for banks to use in their March 31, 2020, Call Report. The Company did not opt into the CBLR framework.

Basel III

~~The~~Under final FRB and ~~the~~ FDIC approved ~~the final~~ rules implementing the Basel Committee on Banking ~~Supervision's (“BCBS”)~~Supervision’s capital guidelines for U.S. ~~banks. Under the final rules,~~banks minimum requirements increased for both the quantity and quality of capital held by the ~~Company.~~Bank. The ~~rules included a new common equity Tier 1~~Basel III capital standards substantially revised the risk based capital requirements applicable to ~~risk-weighted assets minimum ratio of 4.5%, raise~~bank holding companies and their depository institution subsidiaries, including the ~~minimum ratio~~definitions and the components of Tier 1 capital toand Total Capital, the method of evaluating risk-weighted assets, ~~from 4.0% to 6.0%, require~~institutions of a ~~minimum ratio of Total Capital to risk-weighted assets of 8.0%, and require a minimum Tier 1 leverage ratio of 4.0%. A new~~ capital conservation buffer, ~~comprised of common equity Tier 1~~and other matters affecting regulatory capital was also established above the regulatory minimum capital requirements. This capital conservation buffer became effective as of January 1, 2016 at 0.625% of risk-weighted assets and will increase each subsequent year by an additional 0.625% until reaching its final level of 2.5% on January 1, 2019.ratios. Strict eligibility criteria for regulatory capital instruments were also implemented under the ~~final~~ rules. ~~The final rules also revise the definition and calculation of Tier 1 capital, Total Capital, and risk-weighted assets.~~

The phase-in period for the final rules became effective for the ~~Company~~Bank on January 1, 2015, with full compliance with all of the final rules’ requirements phased in over a multi-year schedule, ~~to be~~which was fully ~~phased-in by~~phased in on January 1, 2019. As of ~~September 30, 2017,~~March 31, 2020, the ~~Company's~~Bank’s capital levels remained characterized as ~~"well-capitalized"~~“well-capitalized” under the new rules.

The following tables present the applicable capital ratios ~~for Shore Bancshares, Inc. and Shore United Bank~~ as of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016.~~

During the first quarter of 2017, Shore Bancshares, Inc. contributed $10.5 million in capital to its bank subsidiary, Shore United Bank, in preparation for the branch acquisition in the second quarter of 2017. Of the $10.5 million contributed, $10.2 million consisted of mortgage-backed securities and $300 thousand consisted of cash.

2019.

Tier 1

Common Equity

Tier 1

Total

leverage

Tier 1

risk-based

risk-based

September 30, 2017

ratio

ratio

capital ratio

capital ratio

Company

9.72
%

12.13
%

12.13
%

13.02
%
Shore United Bank

9.31
%

11.60
%

11.60
%

12.50
%

Tier 1

Common Equity

Tier 1

Total

leverage

Tier 1

risk-based

risk-based

December 31, 2016

ratio

ratio

capital ratio

capital ratio

Company

12.31
%

15.78
%

15.78
%

16.79
%
Shore United Bank

10.88
%

13.84
%

13.84
%

14.86
%

Tier 1

Common Equity

Tier 1

Total

leverage

Tier 1

risk-based

March 31, 2020

ratio

capital ratio

Shore United Bank

10.92

13.02

13.85

Tier 1

Common Equity

Tier 1

Total

leverage

Tier 1

risk-based

December 31, 2019

ratio

capital ratio

Shore United Bank

10.64

13.00

13.87

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Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Our primary market risk is interest rate fluctuation and management has procedures in place to evaluate and mitigate this risk. This risk and these procedures are discussed in Item 7 of Part II of the ~~2016~~2019 Annual Report under the caption “Market Risk Management and Interest Sensitivity”. Management believes that there have been no material changes in our market risks, the procedures used to evaluate and mitigate these risks, or our actual and simulated sensitivity positions since December 31, ~~2016.~~

2019.

Item 4. Controls and Procedures.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that Shore Bancshares, Inc. files under the Securities Exchange Act of 1934 with the SEC, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in those rules and forms, and that such information is accumulated and communicated to management, including Shore Bancshares, Inc.’s principal executive officer (“~~CEO”~~PEO”) and its principal ~~accounting~~financial officer (“~~PAO”~~PFO”), as appropriate, to allow for timely decisions regarding required disclosure. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

An evaluation of the effectiveness of these disclosure controls and procedures as of ~~September 30, 2017~~March 31, 2020 was carried out under the supervision and with the participation of management, including the ~~CEO~~PEO and the ~~PAO.~~PFO. Based on that evaluation, the Company’s management, including the ~~CEO~~PEO and the ~~PAO,~~PFO, has concluded that our disclosure controls and procedures are, in fact, effective at the reasonable assurance level at ~~September 30, 2017.~~

March 31, 2020.

There was no change in our internal control over financial reporting during the ~~third~~first quarter of ~~2017~~2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

From time to time the Company may become involved in legal proceedings. At the present time, there are no proceedings which the Company believes will have a material adverse impact on the financial condition or earnings of the Company.

Item 1A. Risk Factors

Thesection titled Risk Factors in Part I, Item 1A of our 2019 Form 10-K includes a discussion of the many risks and uncertainties we face, any one or more of which could have a material adverse effect on our business, results of operations, financial condition (including capital and liquidity), or prospects or the value of or return on an investment in the Company. The information presented below provides an update to, and should be read in conjunction with, the risk factors and other information contained in our 2019 Form 10-K.

The recent COVID-19 pandemic has led to periods of significant volatility in financial, commodities and other markets and could harm our business and results of operations.

In December 2019, COVID-19 was first reported in Wuhan, Hubei Province, China. Since then, COVID-19 infections have spread to additional countries including the United States. In March 2020, the World Health Organization declared

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COVID-19 to be a pandemic. Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the impact of the coronavirus pandemic on our business, and there is no guarantee that our efforts to address or mitigate the adverse impacts of the coronavirus will be effective. The impact to date has included periods of significant volatility in financial, commodities and other markets. This volatility, if it continues, could have an adverse impact on our customers and on our business, financial condition and results of operations as well as our growth strategy.

Our business is dependent upon the willingness and ability of our customers to conduct banking and other financial transactions. The spread of COVID-19 has caused and could continue to cause severe disruptions in the U.S. economy at large, and has resulted and may continue to result in disruptions to our customers’ businesses, and a decrease in consumer confidence and business generally. In addition, recent actions by US federal, state and local governments to address the pandemic, including travel bans, stay-at-home orders and school, business and entertainment venue closures, may have a significant adverse effect on our customers and the markets in which we conduct our business. The extent of impacts resulting from the coronavirus pandemic and other events beyond our control will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus pandemic and actions taken to contain the coronavirus or its impact, among others.

Disruptions to our customers could result in increased risk of delinquencies, defaults, foreclosures and losses on our loans. The escalation of the pandemic may also negatively impact regional economic conditions for a period of time, resulting in declines in local loan demand, liquidity of loan guarantors, loan collateral (particularly in real estate), loan originations and deposit availability. If the global response to contain COVID-19 escalates or is unsuccessful, we could experience a material adverse effect on our business, financial condition, results of operations and cash flows.

The spread of the COVID-19 outbreak and the governmental responses may disrupt banking and other financial activity in the areas in which we operate and could potentially create widespread business continuity issues for us.

The outbreak of COVID-19 and the U.S. federal, state and local governmental responses may result in a disruption in the services we provide. We rely on our third-party vendors to conduct business and to process, record, and monitor transactions. If any of these vendors are unable to continue to provide us with these services or experience interruptions in their ability to provide us with these services, it could negatively impact our ability to serve our customers. Furthermore, the coronavirus pandemic could negatively impact the ability of our employees and customers to engage in banking and other financial transactions in the geographic areas in which we operate and could create widespread business continuity issues for us. We also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to infection, quarantine or other effects and restrictions of a COVID-19 outbreak in our market areas. Although we have business continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will be effective. If we are unable to promptly recover from such business disruptions, our business and financial conditions and results of operations would be adversely affected. We also may incur additional costs to remedy damages caused by such disruptions, which could adversely affect our financial condition and ~~operations~~results of operations.

Our participation in the SBA PPP loan program exposes us to risks related to noncompliance with the PPP, as well as litigation risk related to our administration of the PPP loan program, which could have a material adverse impact on our business, financial condition and results of operations.

The Company is a participating lender in the PPP, a loan program administered through the SBA, that was created to help eligible businesses, organizations and self-employed persons fund their operational costs during the COVID-19 pandemic. Under this program, the SBA guarantees 100% of the amounts loaned under the PPP. The PPP opened on April 3, 2020; however, because of the short window between the passing of the CARES Act and the opening of the PPP, there is some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes the Company to risks relating to noncompliance with the PPP. For instance, other financial institutions have experienced litigation related to their process and procedures used in processing applications for the PPP. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on our business, financial condition and results of operations. In addition, the Company may be exposed to credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced. If a deficiency is identified, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Company.

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Interest rate volatility stemming from COVID-19 could negatively affect our net interest income, lending activities, deposits and profitability.

Our net interest income, lending activities, deposits and profitability could be negatively affected by volatility in interest rates caused by uncertainties stemming from COVID-19. In March 2020, the Federal Reserve lowered the target range for the federal funds rate to a range from 0 to 0.25 percent, citing concerns about the impact of COVID-19 on markets and stress in the energy sector. A prolonged period of extremely volatile and unstable market conditions would likely increase our funding costs and negatively affect market risk mitigation strategies. Higher income volatility from changes in interest rates and spreads to benchmark indices could cause a loss of future net interest income and a decrease in current fair market values of our assets. Fluctuations in interest rates will impact both the level of income and expense recorded on most of our assets and liabilities and the market value of all interest-earning assets and interest-bearing liabilities, which in turn could have a material adverse effect on our net income, operating results, or financial condition.

We are subject ~~are discussed in detail in Item 1A of Part I~~to increasing credit risk as a result of the ~~2016 Annual Report. Management does~~COVID-19 pandemic, which could adversely impact our profitability.

Our business depends on our ability to successfully measure and manage credit risk. As a commercial lender, we are exposed to the risk that the principal of, or interest on, a loan will not ~~believe~~be paid timely or at all or that the value of any ~~material~~collateral supporting a loan will be insufficient to cover our outstanding exposure. In addition, we are exposed to risks with respect to the risks resulting from changes in ~~our risk factors have occurred since they were last disclosed~~economic and industry conditions and risks inherent in dealing with individual loans and borrowers. As the overall economic climate in the U.S., generally, and in our ~~2016 Annual Report.~~market areas specifically, experiences material disruption due to the COVID-19 pandemic, our borrowers may experience difficulties in repaying their loans and governmental actions may provide payment relief to borrowers affected by COVID-19 and preclude our ability to initiate foreclosure proceedings in certain circumstances and, as a result, the collateral we hold may decrease in value or become illiquid, and the level of our nonperforming loans, charge-offs and delinquencies could rise and require significant additional provisions for credit losses. Additional factors related to the credit quality of certain commercial real estate and multifamily residential loans include the duration of state and local moratoriums on evictions for non-payment of rent or other fees. The payment on these loans that are secured by income producing properties are typically dependent on the successful operation of the related real estate property and may subject us to risks from adverse conditions in the real estate market or the general economy.

We are actively working to support our borrowers to mitigate the impact of the COVID-19 pandemic on them and on our loan portfolio, including through loan modifications that defer payments for those who experienced a hardship as a result of the COVID-19 pandemic. Although recent regulatory guidance provides that such loan modifications are exempt from the calculation and reporting of TDRs and loan delinquencies, we cannot predict whether such loan modifications may ultimately have an adverse impact on our profitability in future periods. Our inability to successfully manage the increased credit risk caused by the COVID-19 pandemic could have a material adverse effect on our business, financial condition and results of operations.

We may incur impairments to goodwill or other intangibles as a result of the economic volatility resulting from the COVID-19 pandemic, which could adversely affect our financial condition, results of operations and stock price.

As of March 31, 2020, we had $17.5 million recorded as goodwill. We evaluate our goodwill for impairment at least annually. Although we conducted an impairment assessment of goodwill and intangibles in the first quarter of 2020 and the impairment evaluation did not identify any impairment in the first quarter of 2020, there can be no assurances that prolonged significant negative economic trends resulting from the COVID-19 pandemic, including the lack of recovery in the market price of our common stock, or reduced estimates of future cash flows or disruptions to our business, will not result in impairments to goodwill or other intangibles, such as our core deposit intangibles. If our analysis results in impairment to goodwill or other intangibles, we would be required to record an impairment charge to earnings in our financial statements during the period in which such impairment is determined to exist. Any such change could have a material adverse effect on our financial condition, results of operations and stock price.

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Unpredictable future developments related to or resulting from the COVID-19 pandemic could materially and adversely affect our business and results of operations.

Because there have been no comparable recent global pandemics that resulted in a similar global impact, we do not yet know the full extent of the COVID-19 pandemic’s effects on our business, operations, or the global economy as a whole. Any future development will be highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the effectiveness of our work from home arrangements, third party providers’ ability to support our operation, and any actions taken by governmental authorities and other third parties in response to the pandemic. We are continuing to monitor the COVID-19 pandemic and related risks, although the rapid development and fluidity of the situation precludes any specific prediction as to its ultimate impact on us. However, if the pandemic continues to spread or otherwise results in a continuation or worsening of the current economic and commercial environments, our business, financial condition, results of operations and cash flows as well as our regulatory capital and liquidity ratios could be materially adversely affected and many of the risks described in our 2019 Form 10-K will be heightened.

Item 2. Unregistered Sales of E~~quity~~Equity Securities and Use of Proceeds

~~None.~~

On April 24, 2019 the Corporation’s Board of Directors approved a stock repurchase program. Under the stock repurchase program, the Corporation is authorized to repurchase up to $10 million, or approximately 5%, of its common stock for 2019 and 2020. The program may be limited or terminated at any time without prior notice. During the three months ended March 31, 2020, the Corporation had no repurchases. The Company has suspended all share buybacks of the Company’s common stock until further notice.

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not Applicable

Item 5. Other Information

None

Item 6.E Exhibits.~~xhibits.~~

The exhibits filed or furnished with this quarterly report are shown on the Exhibit List that follows the signatures to this report, which list is incorporated herein by reference.

~~SIGNATURES~~

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~~Pursuant to the requirements of the Securities Exchange Act of~~ EXHIBIT INDEX~~1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.~~


	~~SHORE BANCSHARES, INC.~~

~~Date: November 9, 2017~~	~~By:~~	~~/s/ Lloyd L. Beatty, Jr.~~
		~~Lloyd L. Beatty, Jr.~~
		~~President & Chief Executive Officer~~
		~~(Principal Executive Officer)~~

~~Date: November 9, 2017~~	~~By:~~	~~/s/ Edward C. Allen~~
		~~Edward C. Allen~~
		~~Senior Vice President & Chief Financial Officer~~
		~~(Principal Financial Officer)~~

~~EXHIBIT INDEX~~


Exhibit
Number		Description

10.1		~~Amended and Restated Employment Agreement, dated October 31, 2017, between Shore Bancshares, Inc. and~~Supplemental Executive Retirement Plan for Lloyd L. Beatty, Jr. ~~(incorporated~~(Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on ~~November 1, 2017)~~July 25, 2019).

10.2		~~Employment Agreement, dated October 31, 2017, between Shore Bancshares, Inc. and Donna J. Stevens (incorporated~~Supplemental Executive Retirement Plan for Edward C. Allen (Incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on ~~November 1, 2017)~~July 25, 2019).

10.3		~~Employment Agreement, dated October 31, 2017, between Shore United Bank and Patrick M. Bilbrough (incorporated~~Supplemental Executive Retirement Plan for Donna J. Stevens (Incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K filed on ~~November 1, 2017)~~July 25, 2019).

~~10.4~~		~~Change in Control Agreement, dated October 31, 2017, between Shore United Bank and Edward C. Allen (incorporated by reference to Exhibit 10.4 to the Company’s Form 8-K filed on November 1, 2017)~~

~~10.5~~		Change in Control Agreement, dated October 31, 2017, between The Avon-Dixon Agency, LLC and Richard C. Trippe (incorporated by reference to Exhibit 10.5 to the Company’s Form 8-K filed on November 1, 2017)

31.1		Certifications of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act (filed herewith).

31.2		Certifications of the Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act (filed herewith).

32		Certification pursuant to Section 906 of the Sarbanes-Oxley Act (furnished herewith).

101		Interactive Data File

101.INS		XBRL Instance Document (filed herewith)

101.SCH		XBRL Taxonomy Extension Schema (filed herewith)

101.CAL		XBRL Taxonomy Extension Calculation Linkbase (filed herewith)

101.DEF		XBRL Taxonomy Extension Definition Linkbase (filed herewith)

101.LAB		XBRL Taxonomy Extension Label Linkbase (filed herewith)

101.PRE		XBRL Taxonomy Extension Presentation Linkbase (filed herewith)

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49SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	SHORE BANCSHARES, INC.

Date: May 11, 2020	By:	/s/ Lloyd L. Beatty, Jr.
		Lloyd L. Beatty, Jr.
		President & Chief Executive Officer
		(Principal Executive Officer)

Date: May 11, 2020	By:	/s/ Edward C. Allen
		Edward C. Allen
		Executive Vice President & Chief Financial Officer
		(Principal Accounting Officer)


SHORE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands, except per share amounts)

	For Three Months Ended					For Nine Months Ended
	September 30,					September 30,
	2017			2016		2017		2016

INTEREST INCOME
Interest and fees on loans	$	11,771		$	9,398	$	31,762	$	27,476
Interest and dividends on investment securities:
Taxable		1,035			754		2,799		2,448
Tax-exempt		-			2		3		6
Interest on federal funds sold		-			1		-		6
Interest on deposits with other banks		131			81		269		211
Total interest income		12,937			10,236		34,833		30,147

INTEREST EXPENSE
Interest on deposits		607			574		1,656		1,852
Interest on short-term borrowings		4			4		18		11
Total interest expense		611			578		1,674		1,863

NET INTEREST INCOME		12,326			9,658		33,159		28,284
Provision for credit losses		345			605		1,746		1,430

NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES		11,981			9,053		31,413		26,854

NONINTEREST INCOME
Service charges on deposit accounts		945			899		2,657		2,582
Trust and investment fee income		389			358		1,122		1,073
Gains on sales and calls of investment securities		5			30		5		31
Insurance agency commissions		2,088			2,054		6,939		6,754
Other noninterest income		998			666		2,688		2,149
Total noninterest income		4,425			4,007		13,411		12,589

NONINTEREST EXPENSE
Salaries and wages		5,203			4,346		14,508		13,245
Employee benefits		1,197			1,009		3,564		3,087
Occupancy expense		696			643		1,950		1,839
Furniture and equipment expense		286			245		803		728
Data processing		922			976		2,809		2,639
Directors' fees		99			120		281		355
Amortization of other intangible assets		115	��		33		203		99
FDIC insurance premium expense		189			104		398		654
Other real estate owned expense, net		136			2		299		75
Legal and professional		493			440		1,855		1,434
Other noninterest expenses		1,384			1,299		3,900		3,766
Total noninterest expense		10,720			9,217		30,570		27,921

INCOME BEFORE INCOME TAXES		5,686			3,843		14,254		11,522
Income tax expense		2,274			1,432		5,690		4,379

NET INCOME	$	3,412		$	2,411	$	8,564	$	7,143

Earnings per common share - Basic	$	0.27		$	0.19	$	0.68	$	0.56
Earnings per common share - Diluted		0.27			0.19		0.67		0.56
Dividends paid per common share		0.05			0.03		0.15		0.09


SHORE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
For the Nine Months Ended September 30, 2017 and 2016
(Dollars in thousands)

							Accumulated
			Additional				Other		Total
	Common		Paid in		Retained		Comprehensive		Stockholders'
	Stock		Capital		Earnings		Income (Loss)		Equity

Balances, January 1, 2017	$	127	$	64,201	$	90,964	$	(993)	$	154,299

Net Income		-		-		8,564		-		8,564

Other comprehensive income		-		-		-		939		939

Stock-based compensation		-		748		-		-		748

Cash dividends declared		-		-		(1,902)		-		(1,902)

Balances, September 30, 2017	$	127	$	64,949	$	97,626	$	(54)	$	162,648

Balances, January 1, 2016	$	126	$	63,815	$	83,097	$	(71)	$	146,967

Net Income		-		-		7,143		-		7,143

Other comprehensive income		-		-		-		1,548		1,548

Common shares issued for employee stock-
based awards		-		53		-		-		53

Stock-based compensation		1		261		-		-		262

Cash dividends declared		-		-		(1,138)		-		(1,138)

Balances, September 30, 2016	$	127	$	64,129	$	89,102	$	1,477	$	154,835

Supplemental cash flows information:
Interest paid	$	1,738	$	1,895
Income taxes paid	$	2,000	$	588
Transfers from loans to other real estate owned	$	95	$	1,599
Change in unrealized gains on securities available for sale	$	1,550	$	2,596
Amortization of unrealized loss on securities transferred from
available for sale to held to maturity	$	23	$	-

Branch purchase:
Tangible assets acquired (net of cash received)	$	129,188	$	-
Identifiable intangible assets acquired	$	3,954	$	-
Liabilities assumed	$	212,463	$	-


				Recorded		Recorded			Quarter-to-		Year-to-date
	Unpaid			investment		investment			date average		average		Interest
	principal			with no		with an	Related		recorded		recorded		income
(Dollars in thousands)	balance			allowance		allowance	allowance		investment		investment		recognized
September 30, 2017
Impaired nonaccrual loans:
Construction	$	3,035	$	125	$	2,828	$	548	$	2,890	$	3,253	$	-
Residential real estate		2,736		2,439		126		23		2,840		3,573		-
Commercial real estate		1,075		430		-		-		489		627		-
Commercial		425		341		-		-		344		153		-
Consumer		-		-		-		-		-		55		-
Total	$	7,271	$	3,335	$	2,954	$	571	$	6,563	$	7,661	$	-

Impaired accruing TDRs:
Construction	$	4,033	$	3,098	$	935	$	41	$	4,034	$	4,086	$	82
Residential real estate		4,625		2,190		2,435		228		3,691		3,620		117
Commercial real estate		4,835		4,094		741		35		4,841		4,872		145
Commercial		-		-		-		-		-		-		-
Consumer		-		-		-		-		-		-		-
Total	$	13,493	$	9,382	$	4,111	$	304	$	12,566	$	12,578	$	344

Total impaired loans:
Construction	$	7,068	$	3,223	$	3,763	$	589	$	6,924	$	7,339	$	82
Residential real estate		7,361		4,629		2,561		251		6,531		7,193		117
Commercial real estate		5,910		4,524		741		35		5,330		5,499		145
Commercial		425		341		-		-		344		153		-
Consumer		-		-		-		-		-		55		-
Total	$	20,764	$	12,717	$	7,065	$	875	$	19,129	$	20,239	$	344


	1/1/2016												9/30/2016
	TDR		New		Disbursements		Charge		Reclassifications/				TDR		Related
(Dollars in thousands)	Balance		TDRs		(Payments)		offs		Transfer In/(Out)		Payoffs		Balance		Allowance
For nine months ended
September 30, 2016
Accruing TDRs
Construction	$	4,069	$	-	$	130	$	-	$	-	$	-	$	4,199	$	21
Residential real estate		5,686		565		(375)		-		(1,595)		(179)		4,102		154
Commercial real estate		5,740		495		(689)		(117)		(458)		-		4,971		89
Commercial		-		-		-		-		-		-		-		-
Consumer		-		-		-		-		-		-		-		-
Total	$	15,495	$	1,060	$	(934)	$	(117)	$	(2,053)	$	(179)	$	13,272	$	264

Nonaccrual TDRs
Construction	$	4,960	$	2,570	$	(2,012)	$	(263)	$	-	$	-	$	5,255	$	810
Residential real estate		445		-		(294)		-		1,595		-		1,746		25
Commercial real estate		-		-		-		(258)		458		-		200		112
Commercial		-		-		-		-		-		-		-		-
Consumer		23		-		(23)		-		-		-		-		-
Total	$	5,428	$	2,570	$	(2,329)	$	(521)	$	2,053	$	-	$	7,201	$	947

Total	$	20,923	$	3,630	$	(3,263)	$	(638)	$	-	$	(179)	$	20,473	$	1,211


	2017		2016
Dividend yield	0.84	%	0.73	%
Expected volatility	64.80	%	38.60	%
Risk-free interest rate	2.42	%	1.75	%
Expected contract life (in years)	10 years		10 years


	Community		Insurance Products		Parent		Consolidated
(Dollars in thousands)	Banking		and Services		Company		Total
2017
Interest Income	$	34,761	$	(1)	$	73	$	34,833
Interest Expense		(1,674)		-		-		(1,674)
Provision for credit losses		(1,746)		-		-		(1,746)
Noninterest income		6,111		7,300		-		13,411
Noninterest expense		(18,651)		(6,035)		(5,884)		(30,570)
Net intersegment (expense) income		(5,500)		(84)		5,584		-
Income (loss) before taxes		13,301		1,180		(227)		14,254
Income tax (expense) benefit		(5,309)		(472)		91		(5,690)
Net Income (loss)	$	7,992	$	708	$	(136)	$	8,564

Total assets, September 30, 2017	$	1,359,930	$	9,909	$	6,289	$	1,376,127

2016
Interest Income	$	29,957	$	-	$	190	$	30,147
Interest Expense		(1,863)		-		-		(1,863)
Provision for credit losses		(1,430)		-		-		(1,430)
Noninterest income		5,749		6,840		-		12,589
Noninterest expense		(15,874)		(5,205)		(6,842)		(27,921)
Net intersegment (expense) income		(6,027)		(566)		6,593		-
Income (loss) before taxes		10,512		1,069		(59)		11,522
Income tax (expense) benefit		(3,973)		(424)		18		(4,379)
Net Income (loss)	$	6,539	$	645	$	(41)	$	7,143

Total assets, September 30, 2016	$	1,129,427	$	9,647	$	18,792	$	1,157,866

(Dollars in thousands)

Stock-based compensation expense

Excess tax benefits related to stock-based compensation