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~~June 30, ~~2017~~2022

OR

☐
	☐	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

SHORE BANCSHARES, ~~INC.~~INC.

(Exact name of registrant as specified in its charter)


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

~~28969 Information Lane,~~18 E. Dover Street, Easton, Maryland		21601
(Address of Principal Executive Offices)		(Zip Code)

(410) 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”, “smaller reporting company” and ~~“smaller reporting~~“emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☐		Accelerated filer	☑☐
Non-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 of the Act). Yes ☐ No ☑☒

~~APPLICABLE ONLY TO CORPORATE ISSUERS~~

~~Indicate the~~The number of shares outstanding of ~~each of~~ the ~~issuer’s classes of~~registrant’s common stock as of ~~the latest practicable date: 12,688,224 shares~~August 10, 2022 was 19,850,142.

Table of ~~common stock outstanding as of October 31, 2017.~~Contents

INDEX

		Page
	~~Page~~

Part I. Financial Information	2	3

Item 1. Financial Statements	2	3

Consolidated Balance Sheets ~~–September~~–June 30, ~~2017~~2022 (unaudited) and December 31, ~~2016~~2021	2	3

Consolidated Statements of Income ~~-For~~For the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2022 and ~~2016~~2021 (unaudited)	3	4

Consolidated Statements of Comprehensive Income ~~-For~~For the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2022 and ~~2016~~2021 (unaudited)	4	5

Consolidated Statements of Changes in Stockholders’ Equity ~~-For~~For the ~~nine~~three and six months ended ~~September~~June 30, ~~2017~~2022 and ~~2016~~2021 (unaudited)	5	6

Consolidated Statements of Cash Flows ~~-For~~For the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2022 and ~~2016~~2021 (unaudited)	6	7

Notes to Consolidated Financial Statements (unaudited)	8	9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	36	41

Item 3. Quantitative and Qualitative Disclosures about Market Risk	46	55

Item 4. Controls and Procedures	46	55

Part II. Other Information	47	56

Item 1. Legal Proceedings	47	56

Item 1A. Risk Factors	47	56

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	47	56

Item 3. Defaults Upon Senior Securities	47	56

Item 4. Mine Safety Disclosures	47	57

Item 5. Other Information	47	57

Item 6. Exhibits	47	58

Signatures	47

~~Exhibit Index~~	4859

1

2

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

SHORE BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS


	June 30,		December 31,
(In thousands, except share and per share data)	2022		2021
ASSETS	(unaudited)
Cash and due from banks	$	18,473	$	16,919
Interest-bearing deposits with other banks		384,536		566,694
Cash and cash equivalents		403,009		583,613
Investment securities:
Available-for-sale, at fair value		94,689		116,982
Held to maturity, at amortized cost - fair value of $415,435 (2022) and $401,524 (2021)		458,957		404,594
Equity securities, at fair value		1,271		1,372
Restricted securities, at cost		9,894		4,159

Loans held for sale, at fair value		7,306		37,749

Loans held for investment		2,264,579		2,119,175
Less: allowance for credit losses		(15,483)		(13,944)
Loans, net		2,249,096		2,105,231

Premises and equipment, net		52,244		51,624
Goodwill		63,281		63,421
Other intangible assets, net		6,507		7,535
Other real estate owned, net		197		532
Mortgage servicing rights, at fair value		5,228		4,087
Right-of-use assets		9,979		11,370
Cash surrender value on life insurance		58,437		47,935
Other assets		22,455		19,932
TOTAL ASSETS	$	3,442,550	$	3,460,136

LIABILITIES
Deposits:
Noninterest-bearing	$	889,122	$	927,497
Interest-bearing		2,125,209		2,098,739
Total deposits		3,014,331		3,026,236

Securities sold under retail repurchase agreements		—		4,143
Advances from FHLB - long-term		10,054		10,135
Subordinated debt		42,917		42,762
Total borrowings		52,971		57,040

Lease liabilities		10,216		11,567
Other liabilities		12,255		14,600
TOTAL LIABILITIES		3,089,773		3,109,443

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share; shares authorized - 35,000,000; shares issued and outstanding - 19,849,563 (2022) and 19,807,533 (2021)		198		198
Additional paid in capital		200,914		200,473
Retained earnings		158,316		149,966
Accumulated other comprehensive (loss) income		(6,651)		56
TOTAL STOCKHOLDERS' EQUITY		352,777		350,693
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	3,442,550	$	3,460,136

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.

3

Table of Contents

SHORE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)


	For Three Months Ended				For Six Months Ended
	June 30,				June 30,
(In thousands, except per share data)	2022		2021		2022		2021
INTEREST INCOME
Interest and fees on loans	$	23,452	$	14,381	$	45,537	$	28,747
Interest and dividends on taxable investment securities		2,392		1,095		4,377		2,025
Interest on deposits with other banks		826		55		1,080		102
Total interest income		26,670		15,531		50,994		30,874

INTEREST EXPENSE
Interest on deposits		1,511		1,056		2,869		2,240
Interest on short-term borrowings		—		2		2		3
Interest on long-term borrowings		541		370		1,075		729
Total interest expense		2,052		1,428		3,946		2,972

NET INTEREST INCOME		24,618		14,103		47,048		27,902
Provision for credit losses		200		650		800		1,075

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES		24,418		13,453		46,248		26,827

NONINTEREST INCOME
Service charges on deposit accounts		1,438		683		2,797		1,357
Trust and investment fee income		447		475		961		882
Interchange credits		1,253		1,036		2,291		1,906
Mortgage-banking revenue		1,096		—		2,963		—
Title Company revenue		426		—		749		—
Other noninterest income		1,173		709		2,118		1,315
Total noninterest income		5,833		2,903		11,879		5,460

NONINTEREST EXPENSE
Salaries and wages		8,898		4,262		18,460		8,404
Employee benefits		2,269		1,493		4,931		3,337
Occupancy expense		1,485		770		3,052		1,584
Furniture and equipment expense		411		412		840		719
Data processing		1,668		1,217		3,275		2,344
Directors' fees		210		154		400		303
Amortization of other intangible assets		511		120		1,028		246
FDIC insurance premium expense		429		223		772		408
Other real estate owned expenses, net		57		1		51		2
Legal and professional fees		811		648		1,448		1,164
Merger-related expenses		241		377		971		377
Other noninterest expenses		3,104		1,199		5,198		2,486
Total noninterest expense		20,094		10,876		40,426		21,374

Income before income taxes		10,157		5,480		17,701		10,913
Income tax expense		2,658		1,449		4,589		2,884

NET INCOME	$	7,499	$	4,031	$	13,112	$	8,029

Basic and diluted net income per common share	$	0.38	$	0.34	$	0.66	$	0.68

Dividends paid per common share	$	0.12	$	0.12	$	0.24	$	0.24

2

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

3

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

4

Table of Contents

SHORE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)


	For Three Months Ended				For Six Months Ended
	June 30,				June 30,
(In thousands)	2022		2021		2022		2021
Net income	$	7,499	$	4,031	$	13,112	$	8,029

Other comprehensive (loss):
Investment securities:
Unrealized holding (losses) on available-for-sale-securities		(6,161)		(194)		(9,226)		(1,269)
Tax effect		1,682		53		2,519		346

Total other comprehensive (loss)		(4,479)		(141)		(6,707)		(923)
Comprehensive income	$	3,020	$	3,890	$	6,405	$	7,106

See accompanying notes to Consolidated Financial Statements.

5

Table of Contents

SHORE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)

For the Three and Six Months Ended June 30, 2022 and 2021


							Accumulated
			Additional				Other		Total
	Common		Paid in		Retained		Comprehensive		Stockholders’
(In thousands)	Stock		Capital		Earnings		Income (loss)		Equity
Balances, January 1, 2022	$	198	$	200,473	$	149,966	$	56	$	350,693

Net income		—		—		5,613		—		5,613

Other comprehensive (loss)		—		—		—		(2,228)		(2,228)

Common shares issued for employee stock purchase plan		—		37		—		—		37

Stock-based compensation		—		130		—		—		130

Cash dividends declared		—		—		(2,381)		—		(2,381)

Balances, March 31, 2022	$	198	$	200,640	$	153,198	$	(2,172)	$	351,864

Net Income		—		—		7,499		—		7,499

Other comprehensive (loss)		—		—		—		(4,479)		(4,479)

Common shares issued for employee stock purchase plan		—		102		—		—		102

Stock-based compensation		—		172		—		—		172

Cash dividends declared		—		—		(2,381)		—		(2,381)

Balances, June 30, 2022	$	198	$	200,914	$	158,316	$	(6,651)	$	352,777


							Accumulated
			Additional				Other		Total
	Common		Paid in		Retained		Comprehensive		Stockholders’
(In thousands)	Stock		Capital		Earnings		Income		Equity
Balances, January 1, 2021	$	118	$	52,167	$	141,205	$	1,529	$	195,019

Net Income		—		—		3,998		—		3,998

Other comprehensive (loss)		—		—		—		(782)		(782)

Retirement of common stock		—		(819)		—		—		(819)

Stock-based compensation		—		97		—		—		97

Cash dividends declared		—		—		(1,409)		—		(1,409)

Balances, March 31, 2021	$	118	$	51,445	$	143,794	$	747	$	196,104

Net Income		—		—		4,031		—		4,031

Other comprehensive (loss)		—		—		—		(141)		(141)

Stock-based compensation		—		99		—		—		99

Cash dividends declared		—		—		(1,411)		—		(1,411)

Balances, June 30, 2021	$	118	$	51,544	$	146,414	$	606	$	198,682

See accompanying notes to Consolidated Financial Statements.

46

Table of Contents

SHORE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


	For Six Months Ended
	June 30,
(In thousands)	2022		2021

CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	13,112	$	8,029
Adjustments to reconcile net income to net cash provided by operating activities:
Net accretion of acquisition accounting estimates		(816)		(142)
Provision for credit losses		800		1,075
Depreciation and amortization		2,901		1,277
Net amortization of securities		781		687
Amortization of debt issuance costs		61		61
(Gain) on mortgage banking activities		(1,878)		—
Proceeds from sale of mortgage loans held for sale		104,005		—
Originations of loans held for sale		(72,301)		—
Stock-based compensation expense		302		196
Deferred income tax expense (benefit)		81		(578)
(Gains) on valuation adjustments on mortgage servicing rights		(478)		—
Losses on sales and valuation adjustments on other real estate owned		44		2
Fair value adjustment on equity securities		108		20
Bank owned life insurance income		(410)		(545)
Net changes in:
Accrued interest receivable		(368)		1,229
Other assets		304		(1,127)
Accrued interest payable		5		(90)
Other liabilities		(3,202)		446
Net cash provided by operating activities		43,051		10,540

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and principal payments of investment securities available for sale		12,778		23,862
Proceeds from maturities and principal payments of investment securities held to maturity		23,613		3,037
Purchases of securities held to maturity		(78,468)		(136,422)
Purchases of equity securities		(7)		(10)
Net (purchase) redemption of restricted securities		(5,735)		437
Net change in loans		(143,947)		(18,156)
Purchases of premises and equipment		(1,720)		(1,048)
Proceeds from sales of other real estate owned		394		—
Improvements to other real estate owned		(34)		—
Purchases of bank owned life insurance		(10,092)		(10,109)
Net cash (used in) investing activities		(203,218)		(138,409)

Net changes in:
Noninterest-bearing deposits		(38,375)		28,918
Interest-bearing deposits		26,704		151,004
Short-term borrowings		(4,143)		1,857
Common stock dividends paid		(4,762)		(2,820)
Retirement of common stock		—		(819)
Issuance of common stock		139		—
Net cash (used in) provided by financing activities		(20,437)		178,140
Net (decrease) increase in cash and cash equivalents		(180,604)		50,271
Cash and cash equivalents at beginning of period		583,613		186,917
Cash and cash equivalents at end of period	$	403,009	$	237,188

7

Table of Contents

SHORE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (CONTINUED)


Supplemental cash flows information:
Interest paid	$	4,101	$	3,046
Income taxes paid	$	2,261	$	2,441
Recognition (remeasurement of) lease liabilities arising from right-of-use assets	$	(678)	$	1,132
Transfers from loans to other real estate owned	$	69	$	205
Unrealized (loss) on securities available for sale	$	(9,226)	$	(1,269)

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

See accompanying notes to Consolidated Financial Statements.

5

8

6

Table of Contents

Shore Bancshares, Inc.

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~~Notes to Consolidated Financial ~~Statements.~~

7

~~Shore Bancshares, Inc.~~

~~Notes to~~ ~~Consolidated Financial~~ Statements

For the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2022 and ~~2016~~2021

(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~~June 30, ~~2017,~~2022, the consolidated results of income and comprehensive income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2022 and ~~2016, and~~2021, changes in stockholders’ equity for the three and six months ended June 30, 2022 and 2021 and cash flows for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2022 and ~~2016,~~2021, have been included. All such adjustments are of a normal recurring nature. The amounts as of December 31, ~~2016~~2021 were derived from the ~~2016~~2021 audited financial statements. The results of operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2022 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.~~2021. 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.~~

~~Reclassification~~

During the period of September 30, 2017, management made an immaterial reclassification adjustment to goodwill and deferred income taxes for a transaction involving a stock-based acquisition of an insurance entity which occurred in 2007. This reclassification was deemed an immaterial correction of an error as it had no impact on total assets or earnings per share previously reported in the Consolidated Balance Sheets and Consolidated Statements 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 financial statements and the management discussion and analysis section, the term “the Bank” refers to Shore United Bank, ~~unless the context requires stipulating results of the individual banks before the consolidation occurred.~~N.A. (the “Bank”).

Recent Accounting Standards and Other Authoritative Guidance

~~ASU No. 2014-09,~~ ~~“Revenue from Contracts with Customers (Topic 606)”~~ amendment requires entities to recognize revenue to depict the transfer of promised goods or services to customers in amounts that reflect the consideration 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 the effective date of Update 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as 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, and 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

8

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 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 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 “– In June 2016, the Financial ~~Instruments-Credit~~Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, ~~will replace~~among other things, require the ~~incurred loss impairment methodology in current GAAP with a methodology that reflects~~measurement of all 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 otherfor financial assets ~~not excluded from~~held at 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 toreporting date based on 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~~experience, current conditions, and reasonable and supportable forecasts. ~~The amendments retain many~~Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the ~~disclosure amendments in Accounting Standards Update No. 2010-20, Receivables (Topic 310):~~ ~~Disclosures about~~loss estimation techniques applied today will still be permitted, although the ~~Credit Quality of Financing Receivables and the Allowance for Credit Losses,~~ ~~updated~~inputs to those techniques will change to reflect the ~~change from an incurred loss methodology to an~~full amount of expected credit ~~loss methodology. Credit~~losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities ~~should be measured~~and purchased financial assets with credit deterioration. The FASB has issued multiple updates to ASU 2016-13 as codified in ~~a manner similar~~Topic 326, including ASU’s 2019-04, 2019-05, 2019-10, 2019-11, 2020-02, and 2020-03. These ASU’s have provided for various minor technical corrections and improvements to ~~current GAAP. However,~~ the ~~amendments require that credit losses be presented~~codification as ~~an allowance rather than a write-down. For public entities that are~~well as other transition matters. Smaller reporting companies who file with the U.S. Securities and Exchange Commission (SEC) ~~filers,~~and all other entities who do not file with the ~~amendments~~SEC are ~~effective~~required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, ~~2019, including interim periods within those fiscal years. All entities may adopt the amendments earlier~~

9

as 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.2022. 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 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,~~ ~~“Classification~~2022-02 – In March 2022, the (FASB) issued (ASU) No. 2022-02, “Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022-02 addresses areas identified by the FASB as

Table of ~~Certain Cash Receipts~~Contents

part of its post-implementation review of the credit losses standard (ASU 2016-13) that introduced the CECL model. The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted the CECL model and ~~Cash Payments."~~ ~~Current GAAP is unclear or does not include specific guidance on how~~enhance the disclosure requirements for loan refinancing’s and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to ~~classify certain transactions~~disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the statement of cash flows. 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 all of the amendments are adopted in 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 thevintage disclosures. 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~~applied prospectively, except for ~~as acquisitions (or disposals)~~the transition method related to the recognition and measurement of ~~assets or businesses. The amendments~~troubled debt restructurings (TDR), an entity has the option to apply a modified retrospective transition method, resulting in ~~this update are~~a cumulative-effect adjustment to retained earnings in the period of adoption. For entities that have adopted ASU 2016-13, ASU 2022-02 is effective for fiscal years beginning after December 15, ~~2017,~~2022, including interim periods within those fiscal years. ~~The guidance is not expected to have a significant impact on the Company’s financial positions, results of operations or disclosures.~~

~~ASU No. 2017-03 – In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-03, “~~Accounting Changes and Error Corrections (Topic 250) and Investments – Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings.” ~~The ASU adds an SEC paragraph to ASUs 2014-09, 2016-02, and 2016-13 which specifies the SEC staff view that a registrant should evaluate ASUs~~For entities that have not yet ~~been~~ adopted ~~to determine~~ASU 2016-13, the ~~appropriate disclosure about~~effective dates for ASU 2022-02 are the ~~potential material effects of those ASUs on~~same as 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 adoption of the ASUs will have on the financial statements. The ASU also conforms SEC guidance on accounting for tax benefits resulting from investments in affordable housing projects to the guidanceeffective dates in ASU ~~2014-01,~~ ~~Investments – Equity Method and Joint Ventures (Topic 323).~~ ~~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 interim periods within those fiscal years.~~2016-13. Early adoption is permitted ~~for goodwill impairment tests performed~~if an entity has adopted ASU 2016-13. An entity may elect to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. The Company is currently assessing the impact that ASU 2022-02 will have on ~~testing dates after January 1, 2017. The guidance~~its consolidated financial statements.

ASU No. 2022-03 - In June 2022, the (FASB) issued (ASU) No. 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions”. ASU 2022-03 clarifies that a contractual restriction on the sale of an equity security is not ~~expected to have a significant impact on the Company’s financial positions, results of operations or disclosures~~

~~ASU No. 2017-08 – In March 2017, the FASB issued 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~~considered part of the ~~instrument. This guidance shortens~~unit of account of the ~~amortization period of certain callable debt securities held at a premium to the earliest call date. This update~~equity security and, therefore, is not considered in measuring fair value. The ASU is effective for fiscal years, ~~and~~including interim periods within those fiscal years, beginning after December 15, ~~2018.~~2023. Early adoption is permitted. The Company does not expect the adoption of ASU ~~No. 2017-08 is not expected~~2022-03 to have a material impact on ~~the Company’s~~its consolidated financial statements.

ASU No. ~~2017-09~~2020-04 – In ~~May 2017,~~March 2020, the ~~FASB~~(FASB) issued (ASU) No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the 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 criteria, that reference the London Inter-bank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. Subsequently, in January 2021, the (FASB) issued (ASU) No. ~~2017-09~~ ~~“Stock Compensation, Scope of Modification Accounting.~~2021-01 “Reference Rate Reform (Topic 848): Scope.” This ASU clarifies ~~when changes~~that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply ASU No. 2021-01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the ~~terms of conditions of a share-based payment award must~~date that financial statements are available to be ~~accounted for~~issued. An entity may elect to apply ASU No. 2021-01 to eligible hedging relationships existing as ~~modifications. Companies will apply the modification accounting guidance if the value, vesting conditions or classification~~ of the ~~award changes.~~beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. At present, the Bank has limited exposure to LIBOR based pricing. LIBOR based loans only comprise 19 loans or 3.9% of the loan portfolio. The ~~new guidance should reduce diversity in practice and result in fewer changes~~Bank is confident it can successfully negotiate a migration to the ~~terms~~Secured Overnight Financing Rate (“SOFR”) between now and the implementation date. The Bank will notify customers within 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.

10

Table of an award being accounted for as modifications, as the guidance will allow companies to make certain non-substantive changes to awards without accounting for them 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 on the Company’s consolidated financial statements.

10

Contents

Note 2 – Business Combination

~~Northwest Bank Branch Acquisition~~

On ~~May 19, 2017,~~October 31, 2021 (“Acquisition Date”), the ~~Bank purchased three branches from Northwest Bank~~Company completed the acquisition of Severn Bancorp, Inc. (“~~NWBI”~~Severn”) ~~located~~, a Maryland charted commercial bank, in ~~Arbutus, Elkridge,~~accordance with the definitive agreement that was entered into on March 3, 2021, by and ~~Owings Mills, Maryland. Pursuant~~among the Company and Severn. The Company acquired Severn to access deposits and deploy excess capital into a high growth market, while also enhancing scale to drive efficiency and profitability. Additionally, this transaction creates a competitive position in the ~~transaction, the Bank acquired $122.9 million~~Columbia/Baltimore/Towson MSA, while filling in ~~loans and $212.5 million in deposits, as well as the branch premises and equipment.~~our current market footprint. In connection with ~~its purchase~~the completion of the ~~branches from Northwest,~~merger, former Severn shareholders received 0.6207 shares of Shore common stock and $1.59 in cash for each share of Severn common stock. Based on the ~~Bank received a cash payment from Northwest~~$18.48 per share closing price of ~~$64.0 million, which~~the Company’s common stock on October 29, 2021 and including the fair value of options converted or cashed-out, the total transaction value was ~~net~~approximately $169.8 million. Upon completion of ~~a premium paid on deposits~~the acquisition, Shore shareholders owned approximately 59.6% of ~~$17.2 million.~~ ~~This acquisition provides~~ the ~~Bank with the opportunity to enhance its footprint~~combined company, and former Severn shareholders owned approximately 40.4%.

As of October 31, 2021, Severn, headquartered in ~~Maryland by extending its branch network across the Eastern Shore to the greater Baltimore area communities of Elkridge, Owings Mills~~Annapolis, MD, had more than $1.1 billion in assets and ~~Arbutus.~~operated 7 full-service community banking offices throughout Anne Arundel County, Maryland.

The ~~Company has~~acquisition of Severn was accounted for ~~the branch purchases under~~as a business combination using the acquisition method of accounting ~~in accordance with FASB ASC topic 805, “Business Combinations,” whereby the~~and, accordingly, assets acquired, ~~assets~~liabilities assumed, and ~~liabilities~~consideration paid were recorded ~~by the Bank~~ at ~~their~~ estimated fair values on the Acquisition Date. The provisional amount of goodwill recognized as of ~~their acquisition date.~~

the Acquisition Date was approximately $45.9 million. The ~~acquired assets and assumed liabilities~~Company will continue to keep the measurement of ~~the NWBI branches were measured at estimated fair value. Management made significant estimates and exercised significant judgement in accounting~~goodwill open for ~~the acquisition of the NWBI branches. Management evaluated expected cash flows, prepayment speeds and estimated loss factors~~any additional adjustments 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.~~

~~The following table provides~~of certain accounts, for example loans, that may arise during the ~~purchase price as~~Company’s final review procedures of any updated information. If considered necessary, any subsequent adjustments to the ~~acquisition date, the identifiable~~fair value of assets acquired and liabilities assumed, ~~at their estimated fair values, and~~identifiable intangible assets, or other purchase accounting adjustments will result in adjustments to goodwill within the ~~resulting~~first 12 months following the Acquisition Date. The goodwill ~~of $15.3 million recorded from the acquisition:~~

~~(in thousands)~~


~~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~~

~~The total amount of goodwill arising from this transaction of $15.3 million~~ is not expected to be deductible for tax ~~purposes, pursuant to section 197~~purposes.

As a result of the ~~Internal Revenue Code.~~integration of the operations of Severn, it is not practicable to determine revenue or net income included in the Company’s consolidated operating results relating to Severn since the date of acquisition, as Severn’s results cannot be separately identified. Comparative pro-forma financial statements for the prior year period were not presented, as adjustments to those statements would not be indicative of what would have occurred had the acquisition taken place on January 1, 2021. In particular, adjustments that would have been necessary to be made to record the loans at fair value, the provision of credit losses or the core deposit intangible would not be practical to estimate.

11

Table of Contents

The consideration paid for Severn’s common equity and outstanding stock options and the provisional fair values of acquired identifiable assets and assumed identifiable liabilities were as follows:


(In thousands, except per share data)
Purchase Price Consideration:
Fair value of common shares issued (8,053,088 shares) based on Shore Bancshares, Inc. share price of $18.48	$	148,821
Cash consideration		20,631
Cash paid for cash-out Severn stock options		310
Cash for fractional shares		3
Total purchase price	$	169,765

Identifiable assets:
Cash and cash equivalents	$	326,725
Total securities		146,292
Loans held for sale		9,613
Loans, net (1)		584,776
Premises and equipment, net		24,768
Other real estate owned		329
Core deposit intangible asset		6,550
Other assets (1)		20,304
Total identifiable assets	$	1,119,357

Identifiable liabilities:
Deposits	$	955,288
Total debt		28,341
Other liabilities		11,727
Total identifiable liabilities	$	995,356
Provisional fair value of net assets acquired including identifiable intangible assets		124,001
Provisional resulting goodwill (1)	$	45,764

(1)	Includes the effect of measurement period adjustments recorded in the first quarter of 2022 and reconciled in the table below.

The following table details the changes in fair value of net assets acquired and liabilities assumed from the amounts reported for the year ended December 31, 2021 (dollars in thousands).


Goodwill at December 31, 2021	$	45,904
Effect of adjustments to:
Loans, net		(192)
Other assets		52
Goodwill at June 30, 2022	$	45,764

The adjustment to goodwill made during the first quarter of 2022 was related to the fair value of certain acquired loans, net of the related deferred tax impact which was determined to be higher than their acquisition date fair values.

Acquired loans

The following table outlines the contractually required payments receivable, cash flows we ~~expect~~expected to receive, and the accretable yield for all ~~NWBI~~Severn purchased credit-impaired (PCI) loans as of the acquisition date.


Contractually required payments receivable	$	46,833
Nonaccretable difference		(3,364)
Cash flows expected to be collected		43,469
Accretable yield		(5,667)
Fair value	$	37,802

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

12

Table of Contents

The Company recorded all loans acquired at the estimated fair value on the ~~purchase~~acquisition 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~~gross loans totaling $593.3 million, including 1,306 performing loans ~~totaling $125.1 million.~~and 162 PCI loans. The valuation took into consideration the loans’ underlying characteristics, including account types, remaining terms, annual interest rates, interest types, past delinquencies, timing of principal and interest payments, current market rates, ~~loan-to-value~~loan-to-loan 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~~the valuation process was a total net ~~accretable~~ discount ~~adjustment~~ of ~~$2.3~~$8.7 million at acquisition.

12

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 Six Months Ended
	June 30,				June 30,
(In thousands, except per share data)	2022		2021		2022		2021
Net Income	$	7,499	$	4,031	$	13,112	$	8,029
Weighted average shares outstanding - Basic		19,847		11,752		19,838		11,749
Dilutive effect of common stock equivalents-options		—		2		—		1
Weighted average shares outstanding - Diluted		19,847		11,754		19,838		11,750

Earnings per common share - Basic and Diluted	$	0.38	$	0.34	$	0.66	$	0.68

For the Three Months Ended

For the Nine Months Ended

September 30,

September 30,
(In thousands, except per share data)

2017

2016

2017

2016

Net Income

$
3,412

$
2,411

$
8,564

$
7,143
Weighted average shares outstanding - Basic

12,687

12,661

12,679

12,648
Dilutive effect of common stock equivalents-options

21

-

21

-
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
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

There were no0 weighted average common stock equivalents excluded from the calculation of diluted earnings per share for the three and ~~nine~~six months June 30, 2021. There were 0 potentially dilutive shares outstanding during the three and six months ended ~~September~~June 30, ~~2017 and 2016.~~2022.

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
	Amortized		Unrealized		Unrealized		Fair
(Dollars in thousands)	Cost		Gains		Losses		Value
Available-for-sale securities:
June 30, 2022
U.S. Government agencies	$	22,238	$	9	$	2,760	$	19,487
Mortgage-backed		79,579		11		6,303		73,287
Other Debt securities		2,022		—		107		1,915
Total	$	103,839	$	20	$	9,170	$	94,689

December 31, 2021
U.S. Government agencies	$	22,932	$	7	$	634	$	22,305
Mortgage-backed		91,948		1,318		629		92,637
Other Debt securities		2,026		14		—		2,040
Total	$	116,906	$	1,339	$	1,263	$	116,982

NaN available for sale securities were sold during the three and six months ended June 30, 2022 and 2021.

Gross

Gross

Estimated

Amortized

Unrealized

Unrealized

Fair
(Dollars in thousands)

Cost

Gains

Losses

Value
Available-for-sale securities:

September 30, 2017

U.S. Government agencies

$
52,093

$
64

$
154

$
52,003
Mortgage-backed

160,645

660

580

160,725
Equity

662

-

-

662
Total

$
213,400

$
724

$
734

$
213,390

December 31, 2016

U.S. Government agencies

$
34,320

$
56

$
58

$
34,318
Mortgage-backed

130,490

263

1,809

128,944
Equity

652

-

12

640
Total

$
165,462

$
319

$
1,879

$
163,902

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.~~

13

Table of Contents


			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
(Dollars in thousands)	Cost		Gains		Losses		Value
Held-to-maturity securities:
June 30, 2022
U.S. Government agencies	$	104,847	$	—	$	8,254	$	96,593
Mortgage-backed		341,709		47		35,006		306,750
States and political subdivisions		400		—		—		400
Other debt securities		12,001		—		309		11,692
Total	$	458,957	$	47	$	43,569	$	415,435

December 31, 2021
U.S. Government agencies	$	87,072	$	20	$	1,231	$	85,861
Mortgage-backed		302,604		301		2,248		300,657
States and political subdivisions		400		2		—		402
Other debt securities		14,518		95		9		14,604
Total	$	404,594	$	418	$	3,488	$	401,524

Equity securities with an aggregate fair value of $1.3 million at June 30, 2022 and $1.4 million at December 31, 2021 are presented separately on the balance sheet. The fair value adjustment recorded through earnings totaled $(108) thousand for the six months ended June 30, 2022 and $(20) thousand for the six months ended June 30, 2021, 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~~June 30, ~~2017~~2022 and December 31, ~~2016.~~2021.

Less than

More than

12 Months

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

(Dollars in thousands)

Value

Losses

Value

Losses

Value

Losses

June 30, 2022

Available-for-sale securities:

U.S. Government agencies

$

2,097

$

155

$

15,395

$

2,605

$

17,492

$

2,760

Mortgage-backed

44,686

2,320

27,615

3,983

72,301

6,303

Other debt securities

1,915

107

—

1,915

107

Total

$

48,698

$

2,582

$

43,010

$

6,588

$

91,708

$

9,170

Held-to-maturity securities:

U.S. Government agencies

$

77,296

$

5,945

$

19,297

$

2,309

$

96,593

$

8,254

Mortgage-backed

258,844

29,538

32,690

5,468

291,534

35,006

Other debt securities

8,691

309

—

8,691

309

Total

$

344,831

$

35,792

$

51,987

$

7,777

$

396,818

$

43,569

Less than

More than

12 Months

12 Months

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized
(Dollars in thousands)

Value

Losses

Value

Losses

Value

Losses
September 30, 2017

Available-for-sale securities:

U.S. Government agencies

$
40,819

$
150

$
2,998

$
4

$
43,817

$
154
Mortgage-backed

60,113

289

11,086

291

71,199

580
Total

$
100,932

$
439

$
14,084

$
295

$
115,016

$
734

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:

U.S. Government agencies

$
11,926

$
58

$
-

$
-

$
11,926

$
58
Mortgage-backed

100,237

1,546

9,208

263

109,445

1,809
Equity securities

640

12

-

-

640

12
Total

$
112,803

$
1,616

$
9,208

$
263

$
122,011

$
1,879

14

Table of Contents


	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, 2021
Available-for-sale securities:
U.S. Government agencies	$	1,561	$	1	$	17,368	$	633	$	18,929	$	634
Mortgage-backed		39,851		593		3,562		36		43,413		629
Total	$	41,412	$	594	$	20,930	$	669	$	62,342	$	1,263

Held-to-maturity securities:
U.S. Government agencies	$	64,268	$	1,005	$	11,719	$	226	$	75,987	$	1,231
Mortgage-backed		226,918		1,836		14,564		412		241,482		2,248
Other debt securities		491		9		—		—		491		9
Total	$	291,677	$	2,850	$	26,283	$	638	$	317,960	$	3,488

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.~~purchase and are not related to credit concerns. 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,~~basis, which may be at maturity for debt securities, the Company considers the unrealized losses to be temporary.

There were one hundred five available-for-sale securities and one hundred sixty-four held-to-maturity securities in an unrealized loss position at June 30, 2022.

The following table provides information on the amortized cost and estimated fair values of investment securities by maturity date at ~~September~~June 30, ~~2017.~~2022.


	Available for sale				Held to maturity
	Amortized				Amortized
(Dollars in thousands)	Cost		Fair Value		Cost		Fair Value
Due in one year or less	$	34	$	33	$	4,415	$	4,396
Due after one year through five years		2,254		2,211		50,829		48,325
Due after five years through ten years		51,738		48,323		91,469		86,063
Due after ten years		49,813		44,122		312,244		276,651
Total	$	103,839	$	94,689	$	458,957	$	415,435

Available for sale

Held to maturity

Amortized

Estimated

Amortized

Estimated
(Dollars in thousands)

Cost

Fair Value

Cost

Fair Value
Due in one year or less

$
9,000

$
8,996

$
-

$
-
Due after one year through five years

40,973

40,831

902

946
Due after five years through ten years

34,242

34,241

3,502

3,626
Due after ten years

128,523

128,660

1,837

1,879

212,738

212,728

6,241

6,451
Equity securities

662

662

-

-
Total

$
213,400

$
213,390

$
6,241

$
6,451

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

14

15

Table of Contents

Note 5 – Loans and Allowance for Credit Losses

The Company makes residential mortgage, commercial and consumer loans to customers primarily in ~~Talbot~~Anne Arundel County, Baltimore City, Baltimore County, Howard County, Kent County, Queen Anne’s County, ~~Kent~~Caroline County, ~~Caroline~~Talbot County, Dorchester County ~~Baltimore County~~ and ~~Howard~~Worcester County in Maryland, Kent County, Delaware and in Accomack County, Virginia. The following table provides information about the principal classes of the loan portfolio at ~~September~~June 30, ~~2017~~2022 and December 31, ~~2016.~~2021.


(Dollars in thousands)	June 30, 2022		December 31, 2021
Construction	$	263,069	$	239,353
Residential real estate		695,421		654,769
Commercial real estate		953,090		896,229
Commercial		158,345		203,377
Consumer		194,654		125,447
Total loans		2,264,579		2,119,175
Allowance for credit losses		(15,483)		(13,944)
Total loans, net	$	2,249,096	$	2,105,231

(Dollars in thousands)

September 30, 2017

December 31, 2016
Construction

$
106,617

$
84,002
Residential real estate

387,722

325,768
Commercial real estate

454,626

382,681
Commercial

91,799

72,435
Consumer

6,483

6,639
Total loans

1,047,247

871,525
Allowance for credit losses

(9,295)

(8,726)
Total loans, net

$
1,037,952

$
862,799

Loans are stated at their principal amount outstanding net of any purchase ~~premiums,~~premiums/discounts, deferred fees and costs. ~~Loans included~~Included in loans were deferred costs, net of ~~deferred~~ fees, of ~~$632~~$846 thousand and $1.2 million at June 30, 2022 and December 31, 2021. At June 30, 2022 and December 31, 2021, included in total loans were $31.3 million and $39.9 million in loans, respectively, net of discounts on acquired loans of ~~$2.0~~$416 thousand and $516 thousand, respectively, as part of the Northwest Bancshares, Inc. branch acquisition in 2017. At June 30, 2022 and December 31, 2021, included in total loans were $451.5 million and $553.0 million in loans, acquired as part of the acquisition of Severn. These balances were presented net of the related discount which totaled $7.6 million and $8.4 million at ~~September~~June 30, ~~2017. Loans included deferred costs, net of deferred fees, of $509 thousand at~~2022 and December 31, ~~2016.~~2021, respectively. 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 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”)~~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

16

Table of Contents

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 Bank’s 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.

15

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.

During 2021 and 2020, the Company participated in the Small Business Administration’s Paycheck Protection Program (PPP). As of June 30, 2022, the Company held PPP loans with a total outstanding balance of $1.7 million, inclusive of loans issued pre-merger and those acquired from Severn, which are included in the commercial loan segment in the table above. As of December 31, 2021, the Company held PPP loans with a total outstanding balance of $27.6 million, of which $9.2 million was acquired from Severn, which are included in the commercial loan segment in the table above. The decrease is due to repayment and forgiveness received as of June 30, 2022. As compensation for originating the loans, the Company received lender processing fees from the SBA, which were deferred, along with the related loan origination costs. These net fees are being accreted to interest income over the remaining contractual lives of the loans. Upon forgiveness of a PPP loan and repayment by the SBA, which may be prior to the loan’s maturity, the remainder of any unrecognized net fees are recognized as interest income.

The following tables provide information about all loans acquired from Severn.


	June 30, 2022
	Acquired Loans -		Acquired Loans -
	Purchased		Purchased		Acquired Loans -
(Dollars in thousands)	Credit Impaired		Performing		Total
Outstanding principal balance	$	32,398	$	426,735	$	459,133
Carrying amount
Construction	$	681	$	53,864	$	54,545
Residential real estate		15,492		138,304		153,796
Commercial real estate		12,860		187,851		200,711
Commercial		239		41,451		41,690
Consumer		23		767		790
Total loans	$	29,295	$	422,237	$	451,532


	December 31, 2021
	Acquired Loans -		Acquired Loans -
	Purchased		Purchased		Acquired Loans -
(Dollars in thousands)	Credit Impaired		Performing		Total
Outstanding principal balance	$	36,943	$	524,474	$	561,417
Carrying amount
Construction	$	2,379	$	91,823	$	94,202
Residential real estate		17,326		167,580		184,906
Commercial real estate		13,594		202,819		216,413
Commercial		321		56,200		56,521
Consumer		30		921		951
Total loans	$	33,650	$	519,343	$	552,993

17

Table of Contents

The following table presents a summary of the change in the accretable yield on PCI loans acquired from Severn.


	For the Six Months Ended
(Dollars in thousands)	June 30, 2022
Accretable yield, beginning of period	$	5,367
Accretion		(788)
Reclassification of nonaccretable difference due to improvement in expected cash flows		325
Other changes, net		237
Accretable yield, end of period	$	5,141

At June 30, 2022, the Bank was servicing $341.8 million in loans for the Federal National Mortgage Association and $75.9 million in loans for the Federal Home Loan Mortgage Corporation.

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 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 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.

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.

16

18

Table of Contents

The following tables include impairment information relating to loans and the allowance for credit losses as of ~~September~~June 30, ~~2017~~2022 and December 31, ~~2016.~~2021.

Residential

Commercial

(Dollars in thousands)

Construction

real estate

Commercial

Consumer

Total

June 30, 2022

Loans individually evaluated for impairment

$

472

$

5,801

$

3,782

$

204

$

103

$

10,362

Loans collectively evaluated for impairment

261,916

674,128

936,448

157,902

194,528

2,224,922

Acquired loans - PCI

681

15,492

12,860

239

23

29,295

Total loans

$

263,069

$

695,421

$

953,090

$

158,345

$

194,654

$

2,264,579

Allowance for credit losses allocated to:

Loans individually evaluated for impairment

$

—

$

158

$

—

$

—

$

3

$

161

Loans collectively evaluated for impairment

3,345

2,620

4,441

1,681

3,235

15,322

Acquired loans - PCI

—

Total allowance

$

3,345

$

2,778

$

4,441

$

1,681

$

3,238

$

15,483

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, 2021
Loans individually evaluated for impairment	$	321	$	3,717	$	3,833	$	226	$	—	$	8,097
Loans collectively evaluated for impairment		236,653		633,726		878,802		202,830		125,417		2,077,428
Acquired loans - PCI		2,379		17,326		13,594		321		30		33,650
Total loans	$	239,353	$	654,769	$	896,229	$	203,377	$	125,447	$	2,119,175

Allowance for credit losses allocated to:
Loans individually evaluated for impairment	$	—	$	172	$	1	$	—	$	—	$	173
Loans collectively evaluated for impairment		2,454		2,686		4,597		2,070		1,964		13,771
Acquired loans - PCI		—		—		—		—		—		—
Total allowance	$	2,454	$	2,858	$	4,598	$	2,070	$	1,964	$	13,944

The allowance for loan losses was 0.68% of total loans and 0.89% when excluding PPP loans and acquired loans, at June 30, 2022 compared to 0.66% and 0.93% at December 31, 2021.

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

17

19

Table of Contents

The following tables provide information on impaired loans and any related allowance by loan class as of ~~September~~June 30, ~~2017~~2022 and December 31, ~~2016.~~2021. 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				Quarter-to-date		Year-to-date		Interest
	principal		with no		with an		Related		average recorded		average recorded		income
(Dollars in thousands)	balance		allowance		allowance		allowance		investment		investment		recognized
June 30, 2022
Impaired nonaccrual loans:
Construction	$	297	$	297	$	—	$	—	$	314	$	322	$	—
Residential real estate		941		840		18		—		1,487		1,482		—
Commercial real estate		540		539		—		—		740		823		—
Commercial		379		204		—		—		208		265		—
Consumer		47		47		—		—		31		52		—
Total	$	2,204	$	1,927	$	18	$	—	$	2,780	$	2,944	$	—

Impaired accruing TDRs:
Construction	$	17	$	17	$	—	$	—	$	18	$	20	$	—
Residential real estate		5,196		2,660		2,199		158		2,773		3,221		56
Commercial real estate		2,509		2,123		386		—		2,147		2,431		38
Commercial		—		—		—		—		—		—		—
Consumer		56		—		56		3		—		9		—
Total	$	7,778	$	4,800	$	2,641	$	161	$	4,938	$	5,681	$	94

Other impaired accruing loans:
Construction	$	158	$	158	$	—	$	—	$	265	$	133	$	3
Residential real estate		84		84		—		—		5		17		4
Commercial real estate		734		734		—		—		524		471		4
Commercial		—		—		—		—		—		4		1
Consumer		—		—		—		—		—		19		—
Total	$	976	$	976	$	—	$	—	$	794	$	644	$	12

Total impaired loans:
Construction	$	472	$	472	$	—	$	—	$	597	$	475	$	3
Residential real estate		6,221		3,584		2,217		158		4,265		4,720		60
Commercial real estate		3,783		3,396		386		—		3,411		3,725		42
Commercial		379		204		—		—		208		269		1
Consumer		103		47		56		3		31		80		—
Total	$	10,958	$	7,703	$	2,659	$	161	$	8,512	$	9,269	$	106

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

1820

Table of Contents



			Recorded		Recorded				June 30, 2022
	Unpaid		investment		investment				Quarter-to-date		Year-to-date		Interest
	principal		with no		with an		Related		average recorded		average recorded		income
(Dollars in thousands)	balance		allowance		allowance		allowance		investment		investment		recognized
December 31, 2021
Impaired nonaccrual loans:
Construction	$	297	$	297	$	—	$	—	$	297	$	297	$	—
Residential real estate		882		803		—		—		1,204		1,307		—
Commercial real estate		994		606		—		—		2,214		2,613		—
Commercial		380		216		—		—		241		246		—
Consumer		—		—		—		—		9		19		—
Total	$	2,553	$	1,922	$	—	$	—	$	3,965	$	4,482	$	—

Impaired accruing TDRs:
Construction	$	24	$	24	$	—	$	—	$	31	$	32	$	1
Residential real estate		2,965		475		2,361		172		3,354		3,442		89
Commercial real estate		2,807		2,352		455		1		3,005		3,035		46
Commercial		—		—		—		—		—		—		—
Consumer		—		—		—		—		—		—		—
Total	$	5,796	$	2,851	$	2,816	$	173	$	6,390	$	6,509	$	136

Other impaired accruing loans:
Construction	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential real estate		78		78		—		—		359		606		7
Commercial real estate		420		420		—		—		479		495		2
Commercial		10		10		—		—		—		25		—
Consumer		—		—		—		—		—		—		—
Total	$	508	$	508	$	—	$	—	$	838	$	1,126	$	9

Total impaired loans:
Construction	$	321	$	321	$	—	$	—	$	328	$	329	$	1
Residential real estate		3,925		1,356		2,361		172		4,917		5,355		96
Commercial real estate		4,221		3,378		455		1		5,698		6,143		48
Commercial		390		226		—		—		241		271		—
Consumer		—		—		—		—		9		19		—
Total	$	8,857	$	5,281	$	2,816	$	173	$	11,193	$	12,117	$	145

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

19

21

Table of Contents

The following tables provide a roll-forward for ~~troubled debt restructurings~~TDRs as of ~~September~~June 30, ~~2017~~2022 and ~~September~~June 30, ~~2016.~~2021.


	1/1/2022												6/30/2022
	TDR		New		Disbursements		Charge-		Reclassifications/				TDR		Related
(Dollars in thousands)	Balance		TDRs		(Payments)		offs		Transfer In/(Out)		Payoffs		Balance		Allowance
For the Six Months Ended
June 30, 2022
Accruing TDRs
Construction	$	24	$	—	$	(7)	$	—	$	—	$	—	$	17	$	—
Residential real estate		2,836		—		(51)		—		(20)		—		2,765		158
Commercial real estate		2,807		—		(134)		—		—		(561)		2,112		—
Commercial		—		—		—		—		—		—		—		—
Consumer		—		—		—		—		—		—		—		—
Total	$	5,667	$	—	$	(192)	$	—	$	(20)	$	(561)	$	4,894	$	158

Nonaccrual TDRs
Construction	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential real estate		—		—		(3)		—		20		—		17		—
Commercial real estate		—		—		—		—		—		—		—		—
Commercial		216		—		(21)		—		—		—		195		—
Consumer		—		—		—		—		—		—		—		—
Total	$	216	$	—	$	(24)	$	—	$	20	$	—	$	212	$	—

Total	$	5,883	$	—	$	(216)	$	—	$	—	$	(561)	$	5,106	$	158


	1/1/2021												6/30/2021
	TDR		New		Disbursements		Charge-		Reclassifications/				TDR		Related
(Dollars in thousands)	Balance		TDRs		(Payments)		offs		Transfer In/(Out)		Payoffs		Balance		Allowance
For the Six Months Ended
June 30, 2021
Accruing TDRs
Construction	$	34	$	—	$	(4)	$	—	$	—	$	—	$	30	$	—
Residential real estate		3,845		—		(57)		—		—		(459)		3,329		90
Commercial real estate		3,118		—		(139)		—		—		—		2,979		—
Commercial		—		—		—		—		—		—		—		—
Consumer		—		—		—		—		—		—		—		—
Total	$	6,997	$	—	$	(200)	$	—	$	—	$	(459)	$	6,338	$	90

Nonaccrual TDRs
Construction	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential real estate		—		—		—		—		—		—		—		—
Commercial real estate		—		—		—		—		—		—		—		—
Commercial		258		—		(21)		—		—		—		237		—
Consumer		—		—		—		—		—		—		—		—
Total	$	258	$	—	$	(21)	$	—	$	—	$	—	$	237	$	—

Total	$	7,255	$	—	$	(221)	$	—	$	—	$	(459)	$	6,575	$	90

1/1/2017

9/30/2017

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, 2017

Accruing TDRs

Construction

$
4,189

$
-

$
(22)

$
-

$
-

$
(134)

$
4,033

$
41
Residential real estate

3,875

-

(120)

(89)

1,411

(452)

4,625

228
Commercial real estate

4,936

-

(101)

-

-

-

4,835

35
Commercial

-

-

-

-

-

-

-

-
Consumer

-

-

-

-

-

-

-

-
Total

$
13,000

$
-

$
(243)

$
(89)

$
1,411

$
(586)

$
13,493

$
304

Nonaccrual TDRs

Construction

$
3,818

$
-

$
(882)

$
-

$
(108)

$
-

$
2,828

$
548
Residential real estate

1,603

-

(66)

-

(1,411)

-

126

23
Commercial real estate

83

-

-

-

-

-

83

-
Commercial

-

345

(4)

-

-

-

341

-
Consumer

-

-

-

-

-

-

-

-
Total

$
5,504

$
345

$
(952)

$
-

$
(1,519)

$
-

$
3,378

$
571

Total

$
18,504

$
345

$
(1,195)

$
(89)

$
(108)

$
(586)

$
16,871

$
875

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

20

22

Table of Contents

~~The following tables provide information on~~There were 0 loans ~~that were~~ modified and considered to be TDRs during the ~~nine~~three and six months ended ~~September~~June 30, ~~2017~~2022 and ~~September~~June 30, ~~2016.~~2021.

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 0 TDRs which subsequently defaulted within 12 months of modification for the ~~nine~~three and six months ended ~~September~~June 30, ~~2017, there was one new TDR~~2022 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.~~2021. 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~~other real estate owned (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

$
-

21

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~~June 30, ~~2017,~~2022, there were no 0 nonaccrual loans classified as special mention or doubtful and ~~$6.3~~$2.7 million of nonaccrual loans were ~~identified~~classified as substandard. Similarly, at December 31, ~~2016,~~2021, there were no 0 nonaccrual loans classified as special mention or doubtful and ~~$9.0~~$2.0 million of nonaccrual loans were ~~identified~~classified as substandard.

The following tables provide information on loan risk ratings as of ~~September~~June 30, ~~2017~~2022 and December 31, ~~2016.~~2021.

Special

(Dollars in thousands)

Pass/Performing

Pass/Watch

Mention

Substandard

Doubtful

PCI

Total

June 30, 2022

Construction

$

237,742

$

22,473

$

1,824

$

349

$

—

$

681

$

263,069

Residential real estate

643,626

34,220

988

1,095

—

15,492

695,421

Commercial real estate

822,320

114,236

1,461

2,213

—

12,860

953,090

Commercial

140,086

17,319

497

204

—

239

158,345

Consumer

194,375

208

—

48

—

23

194,654

Total

$

2,038,149

$

188,456

$

4,770

$

3,909

$

—

$

29,295

$

2,264,579


			Special

															Special
(Dollars in thousands)	Pass/Performing		Mention		Substandard		Doubtful		Total		Pass/Performing		Pass/Watch		Mention		Substandard		Doubtful		PCI		Total
September 30, 2017
December 31, 2021
Construction	$	97,304	$	3,127	$	6,186	$	-	$	106,617	$	210,287	$	24,513	$	1,877	$	297	$	—	$	2,379	$	239,353
Residential real estate		376,600		5,509		5,613		-		387,722		596,694		38,309		1,539		901		—		17,326		654,769
Commercial real estate		438,694		6,780		9,152		-		454,626		724,561		151,209		4,535		2,330		—		13,594		896,229
Commercial		90,680		660		459		-		91,799		186,176		16,654		—		226		—		321		203,377
Consumer		6,483		-		-		-		6,483		125,200		215		—		2		—		30		125,447
Total	$	1,009,761	$	16,076	$	21,410	$	-	$	1,047,247	$	1,842,918	$	230,900	$	7,951	$	3,756	$	—	$	33,650	$	2,119,175

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

The following tables provide information on the aging of the loan portfolio as of ~~September~~June 30, ~~2017~~2022 and December 31, ~~2016.~~2021.

Accruing

30‑59 days

60‑89 days

Greater than

Total

(Dollars in thousands)

Current

past due

90 days

past due

Nonaccrual

PCI

Total

June 30, 2022

Construction

$

261,432

$

450

$

—

$

209

$

659

$

297

$

681

$

263,069

Residential real estate

677,181

614

729

—

1,343

1,405

15,492

695,421

Commercial real estate

938,714

161

21

594

776

740

12,860

953,090

Commercial

157,862

—

40

—

40

204

239

158,345

Consumer

194,474

110

—

110

47

23

194,654

Total

$

2,229,663

$

1,335

$

790

$

803

$

2,928

$

2,693

$

29,295

$

2,264,579

Percent of total loans

98.5

%

0.1

%

—

%

—

%

0.1

%

0.1

%

1.3

%

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
September 30, 2017

Construction

$
103,606

$
58

$
-

$
-

$
58

$
2,953

$
106,617

Residential real estate

383,913

572

667

5

1,244

2,565

387,722

Commercial real estate

451,789

2,407

-

-

2,407

430

454,626

Commercial

91,225

202

31

-

233

341

91,799

Consumer

6,478

-

5

-

5

-

6,483

Total

$
1,037,011

$
3,239

$
703

$
5

$
3,947

$
6,289

$
1,047,247

Percent of total loans

99.0
%

0.3
%

0.1
%

-
%

0.4
%

0.6
%

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
%

2223

Table of Contents


	Accruing
				30‑59 days			60‑89 days			Greater than			Total
(Dollars in thousands)	Current			past due			past due			90 days			past due			Nonaccrual			PCI			Total
December 31, 2021
Construction	$	235,757		$	920		$	—		$	—		$	920		$	297		$	2,379		$	239,353
Residential real estate		635,166			1,371			25			78			1,474			803			17,326			654,769
Commercial real estate		881,350			259			—			420			679			606			13,594			896,229
Commercial		202,503			183			62			10			255			298			321			203,377
Consumer		125,130			287			—			—			287			—			30			125,447
Total	$	2,079,906		$	3,020		$	87		$	508		$	3,615		$	2,004		$	33,650		$	2,119,175
Percent of total loans		98.2	%		0.1	%		—	%		—	%		0.1	%		0.1	%		1.6	%		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~~ and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2022 and ~~2016.~~June 30, 2021. Allocation of a portion of the allowance to one loan class does not preclude its availability to absorb losses in other loan classes.

Residential

Commercial

(Dollars in thousands)

Construction

real estate

Commercial

Consumer

Total

For three months ended

June 30, 2022

Allowance for credit losses:

Beginning Balance

$

2,857

$

2,575

$

4,500

$

1,805

$

2,973

$

14,710

Charge-offs

—

(4)

(6)

(122)

(15)

(147)

Recoveries

4

73

555

72

16

720

Net (charge-offs) recoveries

4

69

549

(50)

1

573

Provision

484

134

(608)

(74)

264

200

Ending Balance

$

3,345

$

2,778

$

4,441

$

1,681

$

3,238

$

15,483


			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Total
For three months ended
June 30, 2021
Allowance for credit losses:
Beginning Balance	$	2,796	$	3,699	$	5,097	$	2,000	$	721	$	14,313

Charge-offs		—		—		—		(46)		—		(46)
Recoveries		5		57		64		44		1		171
Net (charge-offs) recoveries		5		57		64		(2)		1		125

Provision		(227)		56		439		(119)		501		650
Ending Balance	$	2,574	$	3,812	$	5,600	$	1,879	$	1,223	$	15,088

~~Management re-evaluated the allowance methodology during the third quarter~~

Residential

Commercial

(Dollars in thousands)

Construction

real estate

Commercial

Consumer

Total

For six months ended

June 30, 2022

Allowance for credit losses:

Beginning Balance

$

2,454

$

2,858

$

4,598

$

2,070

$

1,964

$

13,944

Charge-offs

—

(4)

(6)

(214)

(31)

(255)

Recoveries

7

119

705

140

23

994

Net (charge-offs) recoveries

7

115

699

(74)

(8)

739

Provision

884

(195)

(856)

(315)

1,282

800

Ending Balance

$

3,345

$

2,778

$

4,441

$

1,681

$

3,238

$

15,483

Table 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.Contents


			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Total
For six months ended
June 30, 2021
Allowance for credit losses:
Beginning Balance	$	2,022	$	3,699	$	5,426	$	2,089	$	652	$	13,888

Charge-offs		—		—		—		(107)		(4)		(111)
Recoveries		10		63		64		96		3		236
Net (charge-offs) recoveries		10		63		64		(11)		(1)		125

Provision		542		50		110		(199)		572		1,075
Ending Balance	$	2,574	$	3,812	$	5,600	$	1,879	$	1,223	$	15,088

Residential

Commercial

(Dollars in thousands)

Construction

real estate

real estate

Commercial

Consumer

Unallocated

Total
For three months ended

September 30, 2017

Allowance for credit losses:

Beginning Balance

$
2,349

$
2,096

$
2,802

$
1,652

$
233

$
-

$
9,132

Charge-offs

-

(70)

(100)

(99)

(18)

-

(287)
Recoveries

11

11

8

67

8

-

105
Net charge-offs

11

(59)

(92)

(32)

(10)

-

(182)

Provision

(119)

6

174

184

100

-

345
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 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

23

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

24

Foreclosure Proceedings

~~Consumer~~There were $81 thousand of consumer mortgage loans collateralized by residential real estate property that were in the process of foreclosure ~~totaled $620 thousand~~as of June 30, 2022 and ~~$687~~$311 thousand as of ~~September 30, 2017 and~~ December 31, ~~2016,~~2021, respectively. ~~At September 30, 2017, there were 2~~There was 1 residential ~~properties held~~real estate property included in the balance of other real estate owned totaling ~~$0, compared to 3~~$18 thousand at June 30, 2022 and 1 residential ~~properties~~real estate property totaling ~~$92~~$203 thousand at December 31, ~~2016.~~

2021.

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~~June 30, ~~2017~~2022 and December 31, ~~2016.~~2021.

Note 6 – Leases

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

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

During 2021, the Company acquired long-term branch leases and equipment due to the acquisition of Severn. These leases were reassessed by management as of the acquisition date of October 31, 2021, which included updating the incremental borrowing rates and remaining lease terms.

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


(Dollars in thousands)	June 30, 2022			December 31, 2021
Lease liabilities	$	10,216		$	11,567
Right-of-use assets	$	9,979		$	11,370
Weighted average remaining lease term		12.96	years		13.61	years
Weighted average discount rate		2.51	%		2.48	%

25

Table of Contents


	For the Three Months Ended				For the Six Months Ended
Lease cost (in thousands)	June 30, 2022		June 30, 2021		June 30, 2022		June 30, 2021
Operating lease cost	$	332	$	208	$	666	$	395
Short-term lease cost		—		—		—		—
Total lease cost	$	332	$	208	$	666	$	395

Cash paid for amounts included in the measurement of lease liabilities	$	311	$	165	$	621	$	331

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)	June 30, 2022
Six months ending December 31, 2022	$	621
Twelve months ending December 31, 2023		1,147
Twelve months ending December 31, 2024		1,072
Twelve months ending December 31, 2025		881
Twelve months ending December 31, 2026		916
Twelve months ending December 31, 2027		849
Thereafter		6,584
Total undiscounted cash flows	$	12,070
Discount		1,854
Lease liabilities	$	10,216

Total gross rental income was $254 thousand for the three months ended June 30, 2022 and $526 thousand for the six months ended June 30, 2022.

The following table presents our minimum future annual rental income on such leases as of June 30, 2022.


(In thousands)	June 30, 2022
Six months ending December 31, 2022	$	396
2023		792
2024		685
2025		703
2026		720
Thereafter		1,938
Total	$	5,234

Note 67 – Goodwill and Other Intangibles

The following table provides information on the significant components of goodwill and other acquired intangible assets at June 30, 2022 and December 31, 2021.

~~On May 19, 2017, the Bank acquired three branches located in Arbutus, Owings Mills and Elkridge, Maryland from NWBI. The purchase~~

June 30, 2022

Weighted

Gross

Measurement

Accumulated

Net

Average

Carrying

Period

Impairment

Accumulated

Carrying

Remaining Life

(Dollars in thousands)

Amount

Adjustments

Charges

Amortization

Amount

(in years)

Goodwill

$

65,631

$

(140)

$

(1,543)

$

(667)

$

63,281

—

Other intangible assets

Amortizable

Core deposit intangible

$

10,504

$

—

$

—

$

(3,997)

$

6,507

2.7

Total other intangible assets

$

10,504

$

—

$

—

$

(3,997)

$

6,507

26

Table of ~~these branches resulted in core deposit intangibles of $4.0 million and goodwill of $15.3 million.~~Contents


December 31, 2021
											Weighted
	Gross				Accumulated					Net	Average
	Carrying				Impairment			Accumulated		Carrying	Remaining Life
(Dollars in thousands)	Amount		Additions		Charges			Amortization		Amount	(in years)

Goodwill	$	19,728	$	45,903	$	(1,543)	$	(667)	$	63,421	—

Other intangible assets
Amortizable
Core deposit intangible	$	3,954	$	6,550	$	—	$	(2,969)	$	7,535	2.9
Total other intangible assets	$	3,954	$	6,550	$	—	$	(2,969)	$	7,535

The ~~gross carrying amount~~aggregate amortization expense was $1.0 million for the six months ended June 30, 2022 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

25

$246 thousand for the six months ended June 30, 2021.

At ~~September 31, 2017,~~June 30, 2022, estimated future remaining amortization for amortizing intangibles within the years ending December 31, ~~was~~is as follows:


(Dollars in thousands)	Amortization Expense
2022	$	960
2023		1,682
2024		1,376
2025		1,070
2026		765
2027		459
Thereafter		195
Total amortizing intangible assets	$	6,507

(Dollars in thousands)

2017

$
282
2018

442
2019

442
2020

395
2021

439
Thereafter

2,051
Total amortizing intangible assets

$
4,051

Note 78 – Other Assets

The Company had the following other assets at ~~September~~June 30, ~~2017~~2022 and December 31, ~~2016.~~2021.


	June 30,		December 31,
(Dollars in thousands)	2022		2021
Accrued interest receivable	$	7,087	$	6,719
Deferred income taxes		5,366		2,926
Prepaid expenses		2,914		2,865
Income taxes receivable		—		616
Derivatives		568		435
Other assets		6,520		6,371
Total	$	22,455	$	19,932

(Dollars in thousands)

September 30, 2017

December 31, 2016
Nonmarketable investment securities

$
3,069

$
1,650
Accrued interest receivable

3,122

2,675
Deferred income taxes, net

2,628

7,040
Prepaid expenses

1,528

1,148
Cash surrender value on life insurance

671

2,589
Other assets

5,937

3,781
Total

$
16,955

$
18,883

26

Note 9 - Subordinated Debt

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

The ~~following table provides information~~Company has used the net proceeds of this offering for general corporate purposes, organic growth and to support the Bank’s regulatory capital ratios. The Notes were structured to qualify as Tier 2 capital for regulatory capital purposes and bear an initial interest rate of 5.375% until September 1, 2025, with interest during this period payable semi-annually in arrears. From and including September 1, 2025, to but excluding the maturity date or early redemption date, the interest

27

Table of Contents

rate will reset quarterly to an annual floating rate equal to three-month SOFR, plus 526.5 basis points, with interest during this period payable quarterly in arrears. The Notes are redeemable by the Company at its option, in whole or in part, on ~~significant components~~or after September 1, 2025. Initial debt issuance costs were $611 thousand. The debt balance of $24.6 million is presented net of unamortized issuance costs of $387 thousand at June 30, 2022.

In conjunction with the acquisition of Severn, the Company assumed $20.6 million in junior subordinated debt securities (“2035 Debentures”). The 2035 Debentures were issued and sold to Severn Capital Trust I (the “Trust”), of which 100% of the ~~Company’s deferred tax~~common equity is owned by the Company. The Trust was formed for the purpose of issuing corporation-obligated mandatorily redeemable Capital Securities (“Capital Securities”) to third-party investors and using the proceeds from the sale of such Capital Securities to purchase the 2035 Debentures. The 2035 Debentures held by the Trust are the sole assets of the Trust. Distributions on the Capital Securities issued by the Trust are payable quarterly at a rate per annum equal to the interest rate being earned by the Trust on the 2035 Debentures. The Capital Securities are subject to mandatory redemption, in whole or in part, upon repayment of the 2035 Debentures. We have entered into an agreement which, taken collectively, fully and ~~liabilities as~~unconditionally guarantees the Capital Securities subject to the terms of ~~September~~the guarantee. The recorded balance was $18.3 million at June 30, ~~2017~~2022 and $18.2 million December 31, ~~2016.~~2021, which included fair value adjustments of $2.3 million and $2.4 million, respectively.

September 30,

December 31,
(Dollars in thousands)

2017

2016
Deferred tax assets:

Allowance for credit losses

$
3,712

$
3,486
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
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

-
Other

982

1,192
Total deferred tax assets

6,325

9,971
Deferred tax liabilities:

Depreciation

159

239
Amortization on loans FMV adjustment

-

156
Purchase accounting adjustments

2,927

2,019
Deferred capital gain on branch sale

347

401
Other

264

116
Total deferred tax liabilities

3,697

2,931
Net deferred tax assets

$
2,628

$
7,040

~~The Company’s deferred tax assets consist~~Under the terms of ~~gross net operating loss carryovers~~the 2035 Debentures, the Company is permitted to defer the payment of interest on the 2035 Debentures for ~~state tax purposes~~up to 20 consecutive quarterly periods, provided that no event 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~~default has occurred and is continuing. As of June 30, 2022, the ~~year ended December 31, 2026 with limited amounts available through December 31, 2034.~~

~~No valuation allowance~~Company was current 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.~~interest due on the 2035 Debentures.

27

Note 810 – Other Liabilities

The Company had the following other liabilities at ~~September~~June 30, ~~2017~~2022 and December 31, ~~2016.~~2021.


(Dollars in thousands)	June 30, 2022		December 31, 2021
Accrued interest payable	$	697	$	692
Accrued salaries and wages		1,326		3,422
Accounts payable		186		2,745
Deferred compensation liability		5,176		4,660
Income taxes payable		1,819		—
Other liabilities		3,051		3,081
Total	$	12,255	$	14,600

(Dollars in thousands)

September 30, 2017

December 31, 2016
Accrued interest payable

$
59

$
74
Other accounts payable

4,146

2,461
Deferred compensation liability

1,197

1,444
Other liabilities

413

1,301
Total

$
5,815

$
5,280

Note 911 - 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-~~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~~500,449 shares remained available for grant at ~~September~~June 30, ~~2017.~~2022.

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Table of Contents

The following tables provide information on stock-based compensation expense for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2022 and ~~2016.~~2021.


	For Three Months Ended				For the Six Months Ended
	June 30,				June 30,
(Dollars in thousands)	2022		2021		2022		2021
Stock-based compensation expense	$	172	$	99	$	302	$	196
Excess tax benefits related to stock-based compensation		2		2		45		3

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


	June 30,
(Dollars in thousands)	2022			2021
Unrecognized stock-based compensation expense	$	461		$	230
Weighted average period unrecognized expense is expected to be recognized		0.7	years		0.6	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

28

The following table summarizes restricted stock award activity for the Company under the 2016 Equity Plan for the ~~nine~~six months ended ~~September~~June 30, ~~2017 and 2016.~~2022.


	Six Months Ended June 30, 2022
		Weighted Average
	Number of	Grant Date
	Shares	Fair Value
Nonvested at beginning of period	29,425	$	15.57
Granted	33,605		20.49
Vested	(25,293)		13.43
Forfeited	—		—
Nonvested at end of period	37,737	$	20.10

Nine Months Ended September 30, 2017

Weighted Average

Number of

Grant Date

Shares

Fair Value

Nonvested at beginning of period

17,066

$
11.46

Granted

21,470

16.69

Vested

(22,623)

13.66

Cancelled

-

-

Nonvested at end of period

15,913

$
12.49

The fair value of restricted stock awards that vested during the first ~~nine~~six months of ~~2017~~2022 and ~~2016~~2021 was ~~$309~~$505 thousand and ~~$204~~$236 thousand, respectively.

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 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 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 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 December 31, 2018. 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 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.

29

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 for the nine months ended September 30, 2017 and 2016.

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

Nine Months Ended September 30, 2017

Weighted Average

Number of

Grant Date

Shares

Exercise Price

Outstanding at beginning of period

62,086

$
8.29

Granted

1,202

10.99

Exercised

(859)

6.64

Expired/Cancelled

-

-

Outstanding at end of period

62,429

$
8.36

Exercisable at end of period

61,828

$
8.34

~~The weighted average fair value of~~There were 0 stock options granted during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2022 and ~~September~~June 30, ~~2016 was $10.99and $5.03, respectively.~~ 2021. All of the Company’s previously issued stock options that were outstanding on January 1, 2021 were either exercised or expired prior to December 31, 2021.

Note 12 – Derivatives

The Company ~~estimates~~maintains and accounts for derivatives, in the ~~fair value~~form of ~~options using the Black-Scholes valuation model with weighted average assumptions for dividend yield, expected volatility, risk-free~~ interest rate lock commitments (IRLCs) and ~~expected lives (in years).~~mandatory forward contracts, in accordance with the FASB guidance on accounting for derivative instruments and hedging activities. We recognize gains and losses through mortgage-banking revenue in the Consolidated Statements of Income.

IRLCs on mortgage loans that we intend to sell in the secondary market are considered derivatives. We are exposed to price risk from the time a mortgage loan is locked in until the time the loan is sold. The 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 between issuance of a loan commitment and closing and sale of the loan generally ranges from 14 days to 120 days, however, this period may be longer for construction to permanent loans that are originated with the ~~Company expects~~intent of selling in the ~~awards~~secondary market. For these IRLCs and our closed inventory in loans held for sale, we attempt to protect the Bank from changes in interest rates through the use of to be ~~outstanding based on historical experience with similar awards.~~ announced (TBA) securities, which are forward contracts, as well as, to a significantly lesser degree, loan level commitments in the form of best efforts and mandatory forward contracts. These assets and liabilities are included in the Consolidated Balance Sheets in other assets and accrued expenses and other liabilities, respectively.

29

Table of Contents

The following ~~weighted average assumptions were used as inputs~~table provides information pertaining to the ~~Black-Scholes valuation model for options granted in 2017~~carrying amounts of our derivative financial instruments at June 30, 2022 and ~~2016.~~December 31, 2021.

June 30, 2022

December 31, 2021

Notional

Estimated

Notional

Estimated

(Dollars in thousands)

Amount

Fair Value

Amount

Fair Value

Asset - IRLCs

$

10,098

$

146

$

17,557

$

380

Asset - TBA securities

27,231

422

26,500

55

Liability - TBA securities

14,500

220

20,500

41

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

At the end of the third quarter of 2017, the aggregate intrinsic value of the options outstanding under the 2016 Equity Plan was $517 thousand based on the $16.65 market value per share of the Company’s common stock at September 30, 2017. Similarly, the aggregate intrinsic value of the options exercisable was $514 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. At September 30, 2017, the weighted average remaining contract life of options outstanding was 6.4 years.

30

Note 1013 – Accumulated Other Comprehensive Income

(Loss)

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~~component of accumulated other comprehensive income (loss) for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2022 and ~~2016.~~2021.




	Unrealized
	gains (losses) on
	available for sale
(Dollars in thousands)	securities
Balance, December 31, 2021	$	56
Other comprehensive (loss)		(6,707)
Balance, June 30, 2022	$	(6,651)

Balance, December 31, 2020	$	1,529
Other comprehensive (loss)		(923)
Balance, June 30, 2021	$	606

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

Note 1114 – 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 and equity securities with readily determinable fair values 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.

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Table of Contents

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

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

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

Investment Securities Available for Sale

Fair value measurement for investment securities 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

31Fair 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.

LHFS

Loans held for sale (LHFS) are carried at fair value, which is determined based on Mark to Trade (MTT) for allocated/committed loans or Mark to Market (MTM) analysis for unallocated/uncommitted loans based on third-party pricing models (Level 2).

MSRs

The fair value of mortgage servicing rights (MSRs) is determined using a valuation model administered by a third party that calculates the present value of estimated future net servicing income (Level 3). The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds, discount rate, default rates, cost to service (including delinquency and foreclosure costs), escrow account earnings, contractual servicing fee income, and other ancillary income such as late fees. Management reviews all significant assumptions on a quarterly basis. Mortgage loan prepayment speed, a key assumption in the model, is the annual rate at which borrowers are forecasted to repay their mortgage loan principal. The discount rate used to determine the present value of estimated future net servicing income, another key assumption in the model, is an estimate of the required rate of return investors in the market would require for an asset with similar risk. Both assumptions can, and generally will, change as market conditions and interest rates change.

The significant unobservable inputs used in the fair value measurement of the reporting entity’s residential MSRs are prepayment speeds, probability of default, rate of return, and cost of servicing. Significant increases/decreases in any of those inputs in isolation would have resulted in a significantly lower/higher fair value measurement. Generally, a change in the assumption used for prepayment speeds would have been accompanied by a directionally similar change in the markets, i.e. the 10-Year Treasury, and in the probability of default.

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Table of Contents

IRLCs

We utilize a third-party specialist model to estimate the fair value of our IRLCs, which are valued based upon mortgage securities (TBA) prices less estimated costs to process and settle the loan. Fair value is adjusted for the estimated probability of the loan closing with the borrower (Level 3).


(Dollars in thousands)	Fair Value		Valuation Technique	Unobservable Input	Range
June 30, 2022
MSRs (1)	$	5,228	Market Approach	Weighted average prepayment speed (PSA) (2)	121

IRLCs - net asset	$	146	Market Approach	Range of pull through rate	78% - 100%
				Average pull through rate	92%


(Dollars in thousands)	Fair Value		Valuation Technique	Unobservable Input	Range
December 31, 2021
MSRs (1)	$	4,087	Market Approach	Weighted average prepayment speed (PSA) (2)	156

IRLCs - net asset	$	380	Market Approach	Range of pull through rate	77% - 100%
				Average pull through rate	93%

(1)

The weighted average was calculated with reference to the principal balance of the underlying mortgages.

(2)

PSA = Public Securities Association Standard Prepayment Model

The following table presents activity in MSRs for the three and six months ended June 30, 2022.


	For the Three Months Ended		For the Six Months Ended
(Dollars in thousands)	June 30, 2022		June 30, 2022
Beginning balance	$	5,113	$	4,087
Servicing rights resulting from sales of loans		192		664
Valuation adjustment		(77)		477
Ending balance	$	5,228	$	5,228

The following table presents activity in the IRLCs for the three and six months ended June 30, 2022.


	For the Three Months Ended		For the Six Months Ended
(Dollars in thousands)	June 30, 2022		June 30, 2022
Beginning balance	$	217	$	380
Valuation adjustment		(71)		(234)
Ending balance	$	146	$	146

Forward Contracts

To avoid interest rate risk, we hedge the open locked/closed position with TBA forward trades. On a regular basis, we allocate disbursed loans to mandatory commitments with government-sponsored enterprises (“GSE”) and private investors delivering the loans within 120 days of origination to maximize interest earnings. For a small percentage of our business, we enter into best efforts forward sales commitments with investors at the time we make an IRLC to a borrower. Once a loan has been closed and funded, the best efforts commitments convert to mandatory forward sales commitments. The mandatory commitments are derivatives, and we measure and report them at fair value. Fair value is based on the gain or loss that would occur if we were to pair-off the transaction with the investor at the measurement date. This is a level 2 input. We have elected to measure and report best efforts commitments at fair value, when outstanding, using a valuation methodology similar to that used for mandatory commitments.

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Table of Contents

Market assumptions utilized in the fair value measurement of the reporting entity’s residential mortgage derivatives, inclusive of IRLCs, Closed Loan Inventory, TBA derivative trades, and Mandatory Forwards may be subject to investor overlays that may result in a significantly lower fair value measurement. Generally such overlays are announced with advanced notice in order to include the risk adjuster, however there are times when announcements are mandated resulting in a lower fair value measurement. Additionally market assumptions such as spec pool payups may result in a significantly higher fair value measurement at time of loan allocation to specific trades.

The following tables ~~below~~ present the recorded amount of assets measured at fair value on a recurring basis at ~~September~~June 30, ~~2017~~2022 and December 31, ~~2016.~~2021. No assets were transferred from one hierarchy level to another during the first ~~nine~~six months of ~~2017~~2022 or ~~2016.~~2021.

Significant

Other

Significant

Quoted

Observable

Unobservable

Prices

Inputs

(Dollars in thousands)

Fair Value

(Level 1)

(Level 2)

(Level 3)

June 30, 2022

Assets:

Securities available for sale:

U.S. Government agencies

$

19,487

$

—

$

19,487

$

—

Mortgage-backed

73,287

—

73,287

—

Other Debt Securities

1,915

—

1,915

—

94,689

—

94,689

—

Equity securities

1,271

—

1,271

—

TBA securities

422

—

422

—

LHFS

7,306

—

7,306

—

MSRs

5,228

—

5,228

IRLCs

146

—

146

Total assets at fair value

$

109,062

$

—

$

103,688

$

5,374

Liabilities:

TBA securities

$

220

$

—

$

220

$

—

Total liabilities at fair value

$

220

$

—

$

220

$

—

Significant

Other

Significant

Quoted

Observable

Unobservable

Prices

Inputs

Inputs
(Dollars in thousands)

Fair Value

(Level 1)

(Level 2)

(Level 3)
September 30, 2017

Securities available for sale:

U.S. Government agencies

$
52,003

$
-

$
52,003

$
-
Mortgage-backed

160,725

-

160,725

-
Equity

662

-

662

-
Total

$
213,390

$
-

$
213,390

$
-

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

$
-

33

Table of Contents


					Significant
					Other		Significant
			Quoted		Observable		Unobservable
			Prices		Inputs		Inputs
(Dollars in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
December 31, 2021
Assets:
Securities available for sale:
U.S. Government agencies	$	22,305	$	—	$	22,305	$	—
Mortgage-backed		92,637		—		92,637		—
Other Debt Securities		2,040		—		2,040		—
		116,982		—		116,982		—

Equity securities		1,372		—		1,372		—


TBA securities		55		—		55		—
LHFS		37,749		—		37,749		—
MSRs		4,087		—		—		4,087
IRLCs		380		—		—		380

Total assets at fair value	$	160,625	$	—	$	156,158	$	4,467

Liabilities:
TBA securities	$	41	$	—	$	41	$	—

Total liabilities at fair value	$	41	$	—	$	41	$	—

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 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.

32

34

Table of Contents

The following tables ~~below present~~set forth the ~~recorded amount of~~Company’s financial and nonfinancial assets ~~measured at~~subject to fair value adjustments (impairment) on a nonrecurring basis at ~~September~~June 30, ~~2017~~2022 and December 31, ~~2016.~~

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

Fair Value

Valuation Technique

Unobservable Input

Range
September 30, 2017

Nonrecurring measurements:

Impaired loans

$
6,190

Appraisal of collateral
1

Appraisal adjustments
2

20% - 30%

Liquidation expense
2

5% - 10%

Other real estate owned

$
1,809

Appraisal of collateral
1

Appraisal adjustments
2

20% - 30%

Liquidation expense
2

5% - 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, 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.

~~The following information relates to the estimated fair values of financial assets and liabilities~~2021, that are ~~reported~~valued at the lower of cost or market. Assets are classified in their entirety based on the ~~Company’s consolidated balance sheets at their carrying amounts. The discussion below describes the methods and assumptions used~~lowest level of input that is significant to ~~estimate~~ the fair value ~~of each class of financial asset and liability for which it is practicable to estimate that value.~~measurement.


	Quantitative Information about Level 3 Fair Value Measurements
								Weighted
(Dollars in thousands)	Fair Value		Valuation Technique		Unobservable Input		Range	Average (3)
June 30, 2022
Nonrecurring measurements:

Impaired loans	$	618	Appraisal of collateral	(1)	Liquidation expense	(2)	10%	(10%)

Impaired loans	$	1,879	Discounted cash flow analysis	(1)	Discount rate		6% - 7.25%	(6%)

Other real estate owned	$	197	Appraisal of collateral	(1)	Appraisal adjustments	(2)	0% - 20%	(2%)

~~Cash and Cash Equivalents~~


	Quantitative Information about Level 3 Fair Value Measurements
								Weighted
(Dollars in thousands)	Fair Value		Valuation Technique		Unobservable Input		Range	Average (3)
December 31, 2021
Nonrecurring measurements:

Impaired loans	$	617	Appraisal of collateral	(1)	Liquidation expense	(2)	10%	(10%)

Impaired loans	$	2,026	Discounted cash flow analysis	(1)	Discount rate		4% - 7.25%	(6%)

Other real estate owned	$	532	Appraisal of collateral	(1)	Appraisal adjustments	(2)	20% - 40%	(35%)

~~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~~

(1)Fair value is ~~estimated using quoted prices~~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 ~~similar securities.~~

33

~~Loans~~

~~The fair values of categories of fixed rate loans,~~qualitative factors such as ~~commercial loans, residential real estate,~~economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other ~~consumer loans,~~appraisal adjustments are ~~estimated~~presented as a percent of the appraisal.

(3)Unobservable inputs were weighted 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~~relative fair value of ~~fixed-maturity certificates~~the instruments.

35

Table 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, theContents

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)~~amounts 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 are ~~reported~~presented in the ~~balance sheets at their carrying amounts. The financial assets~~following table. Fair values for June 30, 2022 and ~~liabilities have been segregated by their classification level in the fair value hierarchy.~~December 31, 2021 were estimated using an exit price notion.


	June 30, 2022				December 31, 2021
			Estimated				Estimated
	Carrying		Fair		Carrying		Fair
(Dollars in thousands)	Amount		Value		Amount		Value
Financial assets
Level 1 inputs
Cash and cash equivalents	$	403,009	$	403,009	$	583,613	$	583,613

Level 2 inputs
Investment securities available for sale	$	94,689	$	94,689	$	116,982	$	116,982
Investment securities held to maturity		458,957		415,435		404,594		401,524
Equity securities		1,271		1,271		1,372		1,372
Restricted securities		9,894		9,894		4,159		4,159
LHFS		7,306		7,306		37,749		37,749
TBA securities		422		422		55		55
Cash surrender value on life insurance		58,437		58,437		47,935		47,935

Level 3 inputs
Loans, net	$	2,249,096	$	2,206,033	$	2,105,231	$	2,106,373
MSRs		5,228		5,228		4,087		4,087
IRLCs		146		146		380		380

Financial liabilities
Level 2 inputs
Deposits:
Noninterest-bearing demand	$	889,122	$	889,122	$	927,497	$	927,497
Checking plus interest		642,223		642,223		524,143		524,143
Money market		714,511		714,511		889,099		889,099
Savings		320,463		320,463		225,546		225,546
Club		1,091		1,091		388		388
Certificates of deposit		446,921		447,349		459,563		461,135
Securities sold under retail repurchase agreement		—		—		4,143		4,143
Advances from FHLB - long-term		10,054		9,988		10,135		10,187
Subordinated debt		42,917		43,475		42,762		44,876
TBA Securities		220		220		41		41

September 30, 2017

December 31, 2016

Estimated

Estimated

Carrying

Fair

Carrying

Fair
(Dollars in thousands)

Amount

Value

Amount

Value
Financial assets

Level 1 inputs

Cash and cash equivalents

$
43,916

$
43,916

$
75,938

$
75,938

Level 2 inputs

Investment securities held to maturity

$
6,241

$
6,451

$
6,704

$
6,806
Restricted securities

3,069

3,069

1,650

1,650
Bank owned life insurance

107

107

105

105

Level 3 inputs

Loans, net

1,037,952

1,036,002

862,799

867,594

Financial liabilities

Level 2 inputs

Deposits:

Noninterest-bearing demand

$
326,020

$
326,020

$
261,575

$
261,575
Checking plus interest

227,973

227,973

203,724

203,724
Money market

221,589

221,589

181,871

181,871
Savings

154,180

154,180

90,051

90,051
Club

1,565

1,565

393

393
Certificates of deposit, $100,000 or more

113,618

112,271

120,602

119,914
Other time

161,250

158,320

139,273

135,940
Short-term borrowings

1,469

1,469

3,203

3,203

34

Note 15 – Commitments and Contingencies

~~Note 12 – 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~~June 30, ~~2017~~2022 and December 31, ~~2016.~~2021.


(Dollars in thousands)	June 30, 2022		December 31, 2021
Commitments to extend credit	$	404,294	$	421,088
Letters of credit		9,064		8,399
Total	$	413,358	$	429,487

The Bank has established a reserve for off balance sheet credit exposures. The reserve is established as losses are estimated to have occurred through a loss for off balance sheet credit exposures charged to earnings. Losses are charged against the

(Dollars in thousands)

September 30, 2017

December 31, 2016
Commitments to extend credit

$
220,271

$
178,233
Letters of credit

8,335

8,024
Total

$
228,606

$
186,257

36

Table of Contents

allowance when management believes the required funding of these exposures is uncollectible. While this evaluation is completed on a regular basis, it is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The Company provides banking services to customers who do business in the cannabis industry. Prior to the second quarter of 2022, the Company restricted these businesses to include only those in the medical-use cannabis industry in the state of Maryland. During the second quarter of 2022, the Company expanded its cannabis banking program to include both medical and adult -use licensees in other states, with an initial offering of the Company’s existing Maryland customers with multi-state operations. While the Company is providing banking services to customers that are engaged in the growing, processing, and sales of cannabis in a manner that complies with applicable state law, such customers engaged in those activities currently violate Federal law. The Company may be deemed to be aiding and abetting illegal activities through the services that it provides to these customers. While we are not aware of any instance of a federally-insured financial institution being subject to such aiding and abetting liability, the strict enforcement of Feral laws regarding cannabis would likely result in the Company’s inability to continue to provide banking services to these customers and the Company could have legal action taken against it by the Federal government, including imprisonment and fines. There is an uncertainty of the potential impact to the Company’s Consolidated Financial Statements if the Federal government takes actions against the Company. As of June 30, 2022, the Company had not accrued an amount for the potential impact of any such actions.

Following is a summary of the level of business activities with our cannabis industry customers:

● Deposit and loan balances at June 30, 2022 were approximately $27.0 million, or 0.9% of total deposits, and$42.3 million, or 1.9% of total gross loans, respectively.

● Interest and noninterest income for the six months ended June 30, 2022, were approximately $1.2 million and $1.0 million, respectively

In the normal course of business, the Company and the Bank may become involved in litigation arising from banking, financial, and other activities. Management, after consultation with legal counsel, does not anticipate that the future liability, if any, arising out of current proceedings will have a material effect on the Company’s financial condition, operating results, or liquidity.

Note 1316 – Segment Reporting

~~The Company operates two primary~~We are in the business ~~segments: Community Banking~~of providing financial services and ~~Insurance Products~~subsequent to the acquisition of Severn in the fourth quarter of 2021 we operate in 2 business segments – community banking 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.mortgage-banking. Community banking ~~activities include small business services, retail brokerage, trust services~~is conducted through the Bank and consumer banking products and services. Loan products available to consumers include mortgage, home equity, automobile, marine, and installment loans, credit cards and other secured and unsecured personal lines of credit. Small business lending includes commercial mortgages, real estate development loans, equipment and operating loans, as well as secured and unsecured lines of credit, credit cards, accounts receivable financing arrangements, and merchant card services.

~~Through the Insurance Products and Services business, the Company provides~~involves delivering a ~~full~~broad range of ~~insurance products~~financial services, including lending and ~~services~~deposit taking, to ~~businesses~~individuals and ~~consumers~~commercial enterprises. This segment also includes our treasury and administrative functions. Mortgage-banking is conducted through the residential mortgage division of the Bank and involves originating first and second-lien residential mortgages for sale 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 for executives and employees are available to suit the needssecondary market.

37

Table of ~~individual businesses.~~

35

Contents

The following ~~table includes selected financial~~tables present certain information byregarding our business segments for the ~~first nine~~three and six months ended June 30, 2022.


	Community				Consolidated
(Dollars in thousands)	Banking		Mortgage Banking		Total
For the Three Months Ended June 30, 2022
Interest Income	$	26,478	$	192	$	26,670
Interest Expense		2,043		9		2,052
Net interest income		24,435		183		24,618
Provision for credit losses		200		—		200
Net interest income after provision for credit losses		24,235		183		24,418
Noninterest income		4,737		1,096		5,833
Noninterest expense		19,006		1,088		20,094
Income (loss) before income taxes		9,966		191		10,157
Income tax expense (benefit)		2,608		50		2,658
Net income (loss)	$	7,358	$	141	$	7,499
Total assets, June 30, 2022	$	3,429,420	$	13,130	$	3,442,550


	Community				Consolidated
(Dollars in thousands)	Banking		Mortgage Banking		Total
For the Six Months Ended June 30, 2022
Interest Income	$	50,650	$	344	$	50,994
Interest Expense		3,927		19		3,946
Net interest income		46,723		325		47,048
Provision for credit losses		800		—		800
Net interest income after provision for credit losses		45,923		325		46,248
Noninterest income		8,916		2,963		11,879
Noninterest expense		37,352		3,074		40,426
Income before income taxes		17,487		214		17,701
Income tax expense		4,536		53		4,589
Net income	$	12,951	$	161	$	13,112
Total assets, June 30, 2022	$	3,429,420	$	13,130	$	3,442,550

Note 17 – Revenue Recognition

Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. Topic 606 is applicable to noninterest revenue streams such as trust and asset management income, deposit related fees, interchange fees and merchant income. Noninterest revenue streams in-scope of ~~2017~~Topic 606 are discussed below.

Service Charges on Deposit Accounts

Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business and ~~2016.~~public checking accounts), monthly service fees, check orders, and other deposit account related fees. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided.

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

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

Trust and Investment Fee Income

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Table of Contents

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.

Title Company Revenue

Title Company revenue consists of revenue earned on performing title work for real estate transactions. The revenue is earned when the title work is performed. Payment for such performance obligations generally occurs at the time of the settlement of a real estate transaction. As such settlement is generally within 90 days of the performance of the title work, we recognize the revenue at the time of the settlement.

All contract issuance costs are expensed as incurred. We had no contract assets or liabilities at June 30, 2022.

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, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three and six months ended June 30, 2022 and 2021.


	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
(Dollars in thousands)	2022		2021		2022		2021
Noninterest Income
In-scope of Topic 606:
Service charges on deposit accounts	$	1,438	$	683	$	2,797	$	1,357
Trust and investment fee income		447		475		961		882
Interchange income		1,253		1,036		2,291		1,906
Title Company revenue		426		—		749		—
Other noninterest income		582		456		1,042		760
Noninterest Income (in-scope of Topic 606)		4,146		2,650		7,840		4,905
Noninterest Income (out-of-scope of Topic 606)		1,687		253		4,039		555
Total Noninterest Income	$	5,833	$	2,903	$	11,879	$	5,460

39

Table of Contents

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 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 June 30, 2022, and December 31, 2021, the Company did not have any significant contract balances.

Note 18 – Subsequent Event

On July 6, 2022, the Company announced a new stock repurchase program. Under the new stock repurchase program, the Company is authorized to repurchase up to $5.0 million of the Company’s Common Stock, representing approximately 1.4% of its issued and outstanding Common Stock based on the closing price of the Company’s Common Stock on July 5, 2022. The program may be limited or terminated at any time without prior notice. The program will expire on March 31, 2023.

40

Table of Contents

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.

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.

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 ~~contain forward-looking~~and other reports and registration 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 section of the periodic reports that Shore Bancshares, Inc. filesfiled by us with the Securities and Exchange Commission ~~(the “SEC”~~(“SEC”) ~~entitled~~. For information on the factors that could cause actual results to differ from the expectations stated in the forward- looking statements, see “Risk Factors” ~~(see~~under Part I, Item 1A of ~~Part II~~our 2021 Form 10-K and other reports filed by us with the SEC.

Any forward-looking statement speaks only as of the 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.

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~~2021 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.~~Bank, N.A. The Bank operates ~~21 full service~~30 full-service branches in Baltimore City, Baltimore County, Howard County, Kent County, Queen Anne’s County, Caroline County, Talbot County, ~~Caroline~~Dorchester County, Anne Arundel County and ~~Dorchester~~Worcester County in Maryland, Kent County, Delaware and in 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.~~

N.A. The Company also engages in title work for real estate transactions through Mid-MD Title.

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

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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, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to the foregoing as soon as reasonably practicable after these reports are electronically filed with, or furnished to, the SEC.

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.~~2021 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 loans acquired in a business combination, allowance for credit losses ~~goodwill~~ and ~~other intangible assets, deferred tax assets, and fair value~~goodwill 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.

Loans Acquired in a Business Combination

Acquired loans are classified as either (i) purchase credit-impaired (“PCI”) loans or (ii) purchased performing loans and are recorded at fair value on the date of acquisition.

PCI loans are those for which there is evidence of credit deterioration since origination and for which it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments. When determining fair value, PCI loans are aggregated into pools of loans based on common risk characteristics as of the date of acquisition such as loan type, date of origination, and evidence of credit quality deterioration such as internal risk grades and past due and nonaccrual status. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the “nonaccretable difference.” Any excess of cash flows expected at acquisition over the estimated fair value is referred to as the “accretable yield” and is recognized as interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows.

On a quarterly basis, we evaluate our estimate of cash flows expected to be collected on PCI loans. Estimates of cash flows for PCI loans require significant judgment. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses resulting in an increase to the allowance for loan losses. Subsequent significant increases in cash flows may result in a reversal of post-acquisition provision for loan losses or a transfer from nonaccretable difference to accretable yield that increases interest income over the remaining life of the loan, or pool(s) of loans. Disposals of loans, which may include sale of loans to third parties, receipt of payments in full or in part from the borrower or foreclosure of the collateral, result in removal of the loan from the PCI loan portfolio at its carrying amount.

PCI loans are not classified as nonperforming by the Company at the time they are acquired, regardless of whether they had been classified as nonperforming by the previous holder of such loans, and they will not be classified as nonperforming so long as, at quarterly re-estimation periods, we believe we will fully collect the new carrying value of the pools of loans.

The Company accounts for purchased performing loans using the contractual cash flows method of recognizing discount accretion based on the acquired loans’ contractual cash flows. Purchased performing loans are recorded at fair value, including a credit discount. The fair value discount is accreted as an adjustment to yield over the estimated lives of the

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loans. There is no allowance for loan losses established at the acquisition date for purchased performing loans. A provision for loan losses may be required for any deterioration in these loans in future periods.

Allowance for Credit Losses

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.

37

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 and other factors, 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 2021 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.~~Allowance for Credit Losses sections below.

Goodwill ~~and Other Intangible Assets~~

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. 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 June 30, 2022, the Company ~~is required to maximize the use of observable inputs~~had a banking and ~~minimize the use of unobservable inputs, reducing subjectivity.~~

38

mortgage reporting unit.

OVERVIEW

The Company reported net income of ~~$3.4~~$7.5 million for the ~~third~~second quarter of ~~2017,~~2022, or diluted income per common share of ~~$0.27,~~$0.38, compared to net income of ~~$2.4~~$4.0 million, or diluted income per common share of ~~$0.19,~~$0.34, for ~~the third quarter of 2016. For~~ the second quarter of ~~2017,~~2021. For the first quarter of 2022, the Company reported net income of ~~$2.4~~$5.6 million, or diluted income per common share of ~~$0.19.~~$0.28. Net income, excluding merger related expenses, for the second quarter of 2022 was $7.7 million or $0.39 per diluted common share, compared to net income, excluding merger related expenses, of $6.2 million or $0.31 per diluted common share for the first quarter of 2022. When comparing net income, excluding merger related expenses, for the ~~third~~second quarter of ~~2017~~2022 to the ~~third~~second quarter of ~~2016, the primary reasons for improved~~2021, net income ~~were~~increased $3.3 million, primarily due to increases in net interest income of ~~$2.7~~$10.5 million and noninterest income of ~~$418 thousand and a reduction in provision for credit losses of $260 thousand,~~$2.9 million, partially offset by an increase in noninterest expenses of ~~$1.5 million.~~$9.4 million resulting from the acquisition of Severn Bank (“Severn”) in November 2021. When comparing ~~the third quarter of 2017 to~~ the second quarter of ~~2017,~~2022 to the ~~higher~~first quarter of 2022, net income, ~~was primarily attributable~~excluding merger related expenses, increased $1.5 million, due to increases in net interest income of ~~$1.4~~$2.2 million ~~noninterest income of $246 thousand,~~ and a ~~reduction in~~lower provision ~~for~~of credit losses of ~~$629 thousand, partially offset by an increase in noninterest~~$400 thousand. Merger-related expenses ~~of $521 thousand. These increases~~ were ~~a direct result of operating the three branches acquired from NWBI~~recorded 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~~2022 and the ~~result~~first quarter of ~~one borrowing relationship.~~2022 of $241 thousand and $730 thousand, respectively.

For the first ~~nine~~six months of ~~2017,~~2022, the Company reported net income of ~~$8.6~~$13.1 million, or diluted income per common share of ~~$0.67,~~$0.66, compared to net income of ~~$7.1~~$8.0 million, or diluted income per common share of ~~$0.56,~~$0.68, for the first ~~nine~~six months of ~~2016. Earnings improved~~2021. When comparing net income for the first six months of 2022 to the first six months of 2021, the increase in net income was primarily due to ~~increases~~an increase in net interest income of ~~$4.9~~$19.1 million and noninterest income of ~~$822 thousand,~~$6.4 million. These improvements to income were partially offset by ~~increases~~an increase in ~~provision for credit losses~~noninterest expense of ~~$316 thousand and noninterest expenses of $2.6~~$19.1 million ~~of which $977 thousand related to acquisition costs~~resulting from the ~~branch purchase.~~ Severn merger.

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 ~~$12.4~~$24.7 million for the ~~third~~second quarter

43

Table of ~~2017~~Contents

of 2022 and ~~$9.7 million for the third quarter of 2016. Tax-equivalent net interest income was $11.0~~$14.1 million for the second quarter of ~~2017.~~2021. Tax-equivalent net interest income was $22.5 million for the first quarter of 2022. The increase in net interest income ~~for~~when comparing the ~~third~~second quarter of 2017 when compared to the third quarter of 2016 was primarily due to an increase in interest income of $2.7 million, or 26.1%, partially offset by an increase in interest expense of $33 thousand, or 6.1%. The increase in net interest income compared2022 to the second quarter of ~~2017~~2021 and the first quarter of 2022, was due to increases in interest and fees on loans and income from taxable investment securities, partially offset by increases in interest expense on interest-bearing deposits and subordinated debt primarily due to ~~an increase in interest income~~the acquisition of ~~$1.5 million, or 12.9%, partially offset by an increase in interest expense of $62 thousand, or 11.3%.~~Severn. Net interest margin is tax-equivalent net interest income (annualized) divided by average earning assets. The net interest margin ~~increased in the third quarter of 2017 to 3.79% when compared to both the third quarter of 2016 and~~for the second quarter of ~~2017~~2022 was 3.10% which was an increase of ~~3.54%~~19bps when compared to 2.91% for the second quarter of 2021 and ~~3.73%, respectively.~~an increase of 32bps when compared to 2.78% for the first quarter of 2022. The improvement in net interest margin in the second quarter of 2022 when compared to the second quarter of 2021 and the first quarter of 2022 was due to higher average loan balances, accretion income from purchased loans and higher rates paid on lower yielding assets.

Interest Income

On a tax-equivalent basis, interest income increased ~~$2.7~~$11.1 million, or ~~26.1%~~71.6%, for the ~~third~~second quarter of ~~2017~~2022 when compared to the ~~third~~second quarter of ~~2016.~~2021. The ~~increase~~improvement to interest income was ~~primarily due to a $2.4 million, or 24.9%,~~the result of increases in interest and fees on loans, income from investment securities and higher rates paid on interest-bearing deposits with other banks. The primary driver for the increase in interest income ~~and fees~~ on ~~loans. This increase~~loans was ~~due to a $197.6~~the higher average volume of loans of $772.5 million, ~~or 23.6% increase~~significantly impacted by the acquisition of Severn in the ~~average balance of loans which primarily resulted from the purchase of $122.9 million in loans from NWBI in the second~~fourth quarter of ~~2017 and organic loan growth of $70.2 million. The~~2021 coupled with a higher average yield on loans increased 4 bps, which increased from 4.50% to 4.54%, 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 in the~~25bps. The average balance of taxable investment securities ~~which was partially funded by the excess cash received from the branch purchase.~~

increased $260.1 million, providing $1.3 million of additional income.

On a tax-equivalent basis, interest income increased ~~$1.5~~$2.3 million, or ~~12.9%~~9.6%, for the ~~third~~second quarter of ~~2017~~2022 when compared to the ~~second~~first quarter of ~~2017.~~2022. The increase was primarily ~~due to~~ a ~~$1.3 million, or 12.7%, increase in interest income and fees on loans. This increase was due to a $81.5 million, or 8.6% increase~~result of growth in the average balance in loans of ~~loans due to the full quarter impact of the loans acquired from NWBI. The average yield on loans increased 12 bps, which increased from 4.42% to 4.54%~~$81.4 million, or 3.8%. 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.~~

securities increased $15.2 million, or 2.9%, and the average yield increased 26bps, which provided $407 thousand of additional income.

Interest Expense

Interest expense increased ~~$33~~$624 thousand, or ~~5.7%~~43.7%, when comparing the ~~third~~second quarter of ~~2017~~2022 to the ~~third~~second quarter of ~~2016.~~2021. The increase in interest expense from the second quarter of 2021 was the result of increases in expenses on interest-bearing deposits of $455 thousand and both long-term advances from FHLB and subordinated debt for a combined $171 thousand all of which were significantly impacted by the acquisition of Severn in the 4^th quarter of 2021.

Interest expense increased $158 thousand, or 8.3%, when comparing the second quarter of 2022 to the first quarter of 2022 primarily due to an increase in ~~the average balance of total~~interest expense on deposits. The rates paid on interest-bearing deposits ~~of $150.5 million, or 20.3%, primarily the result of the acquisition of interest-bearing deposits from NWBI amounting~~increased slightly to ~~$177.9 million~~29bps in the second quarter of ~~2017, which had a balance of $186.0 million at September 30, 2017. Despite~~2022 from 26 bps in the significant increase in average interest-bearing deposits, the rates paid on these deposits declined 4 bps. The average balance on noninterest-bearing deposits increased $75.4 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 thirdfirst quarter of ~~2017 when compared to the third quarter~~2022.

44

Table 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.

39

Contents

The following ~~table presents~~tables present the distribution of the average consolidated balance sheets, interest income/expense, and annualized yields earned and rates paid for the three months ended ~~September~~June 30, ~~2017~~2022 and ~~2016.~~2021.


	For Three Months Ended						For Three Months Ended
	June 30, 2022						June 30, 2021
	Average		Income(1)/		Yield/		Average		Income(1)/		Yield/
(Dollars in thousands)	Balance		Expense		Rate		Balance		Expense		Rate
Earning assets
Loans (2), (3)	$	2,217,139	$	23,490	4.25	%	$	1,444,684	$	14,419	4.00	%
Investment securities:
Taxable		546,252		2,392	1.75			286,121		1,095	1.53
Interest-bearing deposits		426,535		826	0.78			218,704		55	0.10
Total earning assets		3,189,926		26,708	3.36	%		1,949,509		15,569	3.20	%
Cash and due from banks		26,162						16,908
Other assets		218,353						109,457
Allowance for credit losses		(15,273)						(14,660)
Total assets	$	3,419,168					$	2,061,214

Interest-bearing liabilities
Demand deposits	$	644,881		354	0.22	%	$	405,473		132	0.13	%
Money market and savings deposits		1,019,295		522	0.21			605,202		251	0.17
Certificates of deposit $100,000 or more		234,325		337	0.58			135,376		350	1.04
Other time deposits		221,714		298	0.54			143,821		323	0.90
Interest-bearing deposits		2,120,215		1,511	0.29			1,289,872		1,056	0.33
Securities sold under retail repurchase agreements and short-term FHLB advances		—		—	—			3,123		2	0.26
Advances from FHLB - long-term		10,075		15	0.60			—		—	—
Subordinated debt		42,876		527	4.93			24,474		370	6.06
Total interest-bearing liabilities		2,173,166		2,053	0.38	%		1,317,469		1,428	0.43	%
Noninterest-bearing deposits		872,883						532,276
Other liabilities		19,927						13,937
Stockholders’ equity		353,192						197,532
Total liabilities and stockholders’ equity	$	3,419,168					$	2,061,214

Net interest spread			$	24,655	2.98	%			$	14,141	2.77	%
Net interest margin					3.10	%					2.91	%

Tax-equivalent adjustment
Loans			$	38					$	38
Total			$	38					$	38

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

exclusive of nondeductible interest expense.

(2)	Average loan balances include nonaccrual loans.

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

For Three Months Ended

For Three 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)

$
1,034,553

$
11,830

4.54
%

$
836,955

$
9,469

4.50
%
Investment securities:

Taxable

218,675

1,035

1.89

190,265

754

1.59

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

Total earning assets

1,295,432

12,996

3.98
%

1,092,105

10,308

3.75
%
Cash and due from banks

16,232

15,678

Other assets

75,611

52,836

Allowance for credit losses

(9,300)

(8,310)

Total assets

$
1,377,975

$
1,152,309

Interest-bearing liabilities

Demand deposits

$
224,180

132

0.23
%

$
199,116

58

0.12
%
Money market and savings deposits

378,711

113

0.12

268,183

86

0.13

Certificates of deposit $100,000 or more

123,538

154

0.50

125,265

192

0.61

Other time deposits

164,459

208

0.50

147,780

238

0.64

Interest-bearing deposits

890,888

607

0.27

740,344

574

0.31

Short-term borrowings

2,274

4

0.62

7,075

4

0.25

Total interest-bearing liabilities

893,162

611

0.27
%

747,419

578

0.31
%
Noninterest-bearing deposits

320,006

244,596

Other liabilities

5,256

6,309

Stockholders' equity

159,551

153,985

Total liabilities and stockholders' equity

$
1,377,975

$
1,152,309

Net interest spread

$
12,385

3.71
%

$
9,730

3.44
%
Net interest margin

3.79
%

3.54
%

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~~$19.1 million, or ~~17.3%~~68.4%, during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2022 compared to the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2021. The ~~increase in~~higher net interest income was ~~primarily~~ due to an increase in interest income of ~~$4.7~~$20.1 million, or ~~15.6%~~65.0%, specifically increased interest and ~~a decrease~~fees on loans of $16.8 million, or 58.3%, primarily due to an increase in the average loan balance of $740.5 million, or 51.1%, coupled with accretion income from acquired loans of $1.5 million for the six months of 2022. Taxable investment securities and interest on deposits with other banks increased $2.4 million and $978 thousand, respectively. The increase in interest expense was the result of ~~$189~~an increase in the average balance on interest bearing deposits of $860.6 million, or 68.1%, despite the rates paid on the deposits declining 9bps. Interest on long term borrowings increased by $346 thousand ~~or 10.1%. These positive variances,~~due to the acquisition of long-term advances from the FHLB and junior subordinated debt acquired as part of the Severn acquisition. This resulted in ~~an improved~~a net interest margin of ~~3.75%~~2.94% for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2022 compared to ~~3.54%~~2.96% for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2021.

Interest Income

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Table of Contents

On a tax-equivalent basis, interest income increased ~~$4.7~~$20.1 million, or ~~15.6%~~65.0%, for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2022 when compared to the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2021. The increase was primarily due to ~~a $4.3~~higher interest and fees on loans of $16.8 million, or ~~15.7%~~58.3%, and taxable investment securities of $2.4 million, or 116.1%. The increase in interest ~~income~~ and fees on ~~loans. This increase~~loans was due to a ~~$144.9 million, or 17.9% increase in the~~higher average balance of loans ~~resulting from~~of $740.5 million, or 51.1%, primarily due to the ~~purchase~~acquisition of ~~$122.9 million~~

40

~~in loans from NWBI~~Severn in the ~~second~~4^th quarter of ~~2017 and organic loan growth of $59.2 million.~~2021. The ~~average yield on loans declined 8 bps, which decreased from 4.54% to 4.46%. In addition,~~increase in interest ~~and dividends~~ on taxable investment securities was due to a higher average balance in these securities of $281.5 million, or 109.5%.

Interest Expense

Interest expense increased ~~$350~~$974 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%~~32.8%, when comparing the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2022 to the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2021. The ~~decrease~~increase in interest expense was ~~due to decreases~~the result of an increase in ~~the average rate paid on~~ interest-bearing deposits of ~~6bps and the average balance in short-term borrowings of $2.4~~$860.6 million, or ~~37.3%. The average balance of total interest-bearing deposits~~68.1%, despite the rates paid on these accounts declining 9bps. Interest on long-term borrowings increased ~~$68.7 million, or 9.3% when comparing the first nine months of 2017~~by $346 thousand due to ~~the first nine months of 2016, primarily the result of~~ the acquisition of ~~deposits from NWBI~~long-term advances with the FHLB and junior subordinated debt acquired as part of ~~$212.5 million in~~ the ~~second quarter~~Severn acquisition.

46

Table of ~~2017.~~Contents

The following ~~table presents~~tables present the distribution of the average consolidated balance sheets, interest income/expense, and annualized yields earned and rates paid for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2022 and ~~2016.~~2021.


	For Six Months Ended						For Six Months Ended
	June 30, 2022						June 30, 2021
	Average		Income(1)/		Yield/		Average		Income(1)/		Yield/
(Dollars in thousands)	Balance		Expense		Rate		Balance		Expense		Rate
Earning assets
Loans (2), (3)	$	2,188,236	$	45,614	4.20	%	$	1,447,767	$	28,821	4.01	%
Investment securities:
Taxable		538,676		4,377	1.64			257,130		2,025	1.59
Interest-bearing deposits		506,224		1,080	0.43			204,048		102	0.10
Total earning assets		3,233,136		51,071	3.19	%		1,908,945		30,948	3.27	%
Cash and due from banks		5,569						18,070
Other assets		224,219						106,251
Allowance for credit losses		(14,759)						(14,448)
Total assets	$	3,448,165					$	2,018,818

Interest-bearing liabilities
Demand deposits	$	617,461		582	0.19	%	$	421,816		288	0.14	%
Money market and savings deposits		1,048,634		1,120	0.22			565,341		481	0.17
Certificates of deposit $100,000 or more		260,312		623	0.48			133,073		756	1.14
Other time deposits		198,828		544	0.55			144,367		715	1.00
Interest-bearing deposits		2,125,235		2,869	0.27			1,264,597		2,240	0.36
Securities sold under retail repurchase agreements and federal funds purchased		1,377		2	0.29			2,683		3	0.23
Advances from FHLB - long-term		10,096		29	0.58			—		—	—
Subordinated debt		42,840		1,046	4.92			24,459		729	6.01
Total interest-bearing liabilities		2,179,548		3,946	0.37	%		1,291,739		2,972	0.46	%
Noninterest-bearing deposits		893,282						518,030
Other liabilities		22,233						12,383
Stockholders’ equity		353,102						196,666
Total liabilities and stockholders’ equity	$	3,448,165					$	2,018,818

Net interest spread			$	47,125	2.82	%			$	27,976	2.81	%
Net interest margin					2.94	%					2.96	%

Tax-equivalent adjustment
Loans			$	77					$	74
Total			$	77					$	74

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

(2)	Average loan balances include nonaccrual loans.

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

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.

41

Noninterest Income

Total noninterest income for the ~~third~~second quarter of ~~2017~~2022 increased ~~$418 thousand,~~$2.9 million, or ~~10.4%~~100.9%, ~~when compared to the third quarter of 2016.~~The increase from the third quarter of 2016 was due to higher service charges and fees on deposit accounts, higher trust and investment income, higher insurance agency commissions and a positive result on an insurance agency investment recorded in other income, partially offset by higher recognized gains on investment securities in the third quarter of 2016. Noninterest income increased $246 thousand, or 5.9% when compared to the second quarter of ~~2017 mainly due to~~2021. The increase from the second quarter of 2021 was across all noninterest income categories but was largely the result of the addition of Severn in the fourth quarter of 2021 which drove mortgage banking revenue of $1.1 million and Mid-Maryland Title Company revenue of $426 thousand, service charges on deposit accounts ~~for~~of $755 thousand and interchange fees of $217 thousand. Noninterest income decreased $213 thousand, or 3.5%, when compared to the first quarter of 2022 primarily due to a ~~full quarter on~~decrease in revenue from the ~~deposits acquired~~mortgage division of $771 thousand, partially offset by increases in interchange fees of $215 thousand, and higher revenue from the ~~branch purchase, higher insurance agency commissions and an increase on an insurance agency investment included in other noninterest income.~~Mid-Maryland Title Company of $103 thousand.

Total noninterest income for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2022 increased ~~$822 thousand,~~$6.4 million, or ~~6.5%~~117.6%, when compared to the same period in ~~2016.~~2021. The increase ~~was~~ in noninterest income primarily consisted of revenue associated with the mortgage division, service charges on deposit related fees, title company revenue and other noninterest income. The increases in

47

Table of Contents

other noninterest income were primarily due to increases in ~~insurance agency commissions of $185 thousand~~rental income and other ~~noninterest~~loan fee income 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 Severn acquisition.

Noninterest Expense

Total noninterest expense for the ~~third~~second quarter of ~~2017~~2022, excluding merger-related expenses, increased ~~$1.5~~$9.4 million, or 16.3%, when compared to the third quarter of 2016. The increase in noninterest expenses for the third quarter of 2017 compared to the third quarter of 2016 was primarily due to operating three additional branches, acquisition costs and increases in employee benefits due to the higher insurance premiums paid for group insurance and higher salaries and wages due to pay increases implemented in the first quarter of 2017. Total noninterest expenses increased $521 thousand, or 5.1%89.1%, when compared to the second quarter of ~~2017.~~2021 and increased $251 thousand, or 1.2%, when compared to the first quarter of 2022. The increase in noninterest expense when compared to the second quarter of 2021 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~~salaries and wages, employee related benefits, ~~and FDIC insurance premium~~occupancy expense, ~~which were partially offset by lower~~data processing, amortization of intangible assets and legal and professional fees, which were ~~elevated~~all significantly impacted by adding Severn branches and its operations. The increase in noninterest expense when compared to the ~~second~~first quarter of 2022 was primarily due to ~~the acquisition.~~increases in fee and loan servicing expenses as well as derivatives expense.

Total noninterest expense for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2022, excluding merger-related expenses, increased ~~$2.6~~$18.5 million, or ~~9.5%~~87.9%, when compared to the same period in ~~2016.~~2021. The increase was primarily a result of higher salaries, employee benefits, occupancy expense, other intangibles, data processing costs, other noninterest expenses, and FDIC insurance premiums due to ~~the branch purchase~~significant increases in ~~the second quarter of 2017 which resulted in acquisition costs of $977 thousand~~new and existing customers and the ~~cost~~acquisition 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.Severn.

Provision for Credit Losses

The provision for credit losses was ~~$345 thousand for the third quarter of 2017, $605 thousand for the third quarter of 2016 and $974~~$200 thousand for the second quarter of ~~2017.~~2022, $650 thousand for the second quarter of 2021 and $600 thousand for the first quarter of 2022. The ~~lower level of~~decrease in the provision for credit losses ~~when comparing the third quarter of 2017 to both the third quarter of 2016 and~~during the second quarter of ~~2017~~ 2022 as compared to the prior quarters was ~~driven by~~primarily attributable to significant net recoveries. The ratio of the allowance for credit losses to period-end loans was 0.68% at June 30, 2022, 0.67% at March 31, 2022 and 1.02% at June 30, 2021. Excluding PPP loans and acquired loans, the ratio of the allowance for credit losses to period-end loans was 0.89% at June 30, 2022, slightly lower ~~charge-offs~~than the 0.92% at March 31, 2022 and lower than the 1.12% at June 30, 2021. The decline in the percentage of the allowance from the second quarter of 2021 was primarily the result of improved credit ~~quality.~~quality, including lower historical loss experience as well as lower pandemic related qualitative reserves. The Company reported net recoveries in the second quarter of 2022 of $573 thousand, compared to net recoveries of $125 thousand for the second quarter of 2021 and net recoveries of $166 thousand for the first quarter of 2022.Management continually evaluates the adequacy of the allowance for credit losses as changes in the environment and within the portfolio become known.

The provision for credit losses for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2022 and ~~2016~~2021 was ~~$1.7 million~~$800 thousand and ~~$1.4~~$1.1 million, respectively, while net ~~charge-offs~~recoveries were ~~$1.2 million~~$739 thousand and ~~$1.1 million,~~$125 thousand, respectively. The ~~increase~~decrease in provision for credit losses ~~primarily occurred~~was the result of significant recoveries in the ~~second quarter~~first six months of ~~2017 due~~2022 and overall improved credit quality. The ratio of allowance to total loans increased from 0.66% at December 31, 2021, to 0.68% at June 30, 2022. Excluding PPP and acquired loans, the ~~partial charge-off~~ratio of ~~a negotiated restructured commercial loan.~~the allowance for credit losses to period-end loans was 0.89% at June 30, 2022, lower than the 0.93% at December 31, 2021. The primary drivers for the decrease in the percentage of allowance for credit losses to total loans were significant originations within the construction and consumer loan portfolios and the acquisition of Severn. The ratio of annualized net ~~charge-offs~~recoveries to average loans was ~~0.16%~~0.07% for the first ~~nine months~~half of ~~September 30, 2017 and 0.19%~~2022, compared to annualized net recoveries to average loans of 0.03% for the ~~same period in 2016.~~first half of 2021. Management will continue to evaluate the adequacy of the allowance for credit losses as more economic data becomes available and as changes within the Company’s portfolio are known.

Income Taxes

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

The Company reported income tax expense of ~~$2.3~~$2.7 million ~~and~~for the second quarter of 2022, $1.4 million ~~respectively, while~~for the second quarter of 2021 and $1.9 million for the first quarter of 2022. Income tax expense increased when compared to both the second quarter of 2021 and first quarter of 2022 due to higher pre-tax earnings. The effective tax rate for the second quarter of 2022 was 26.2%, 25.6% for the first quarter of 2022, and 26.4% for the second quarter of 2021. Income tax expense was $4.6 million for the six months ended June 30, 2022, and $2.9 million for the six months ended June 30, 2021. The effective tax rate was ~~40.0% and 37.3%, respectively. The increase in tax rates~~25.9% for the ~~third quarter of 2017 when compared to the same period in 2016 was due to higher pretax income. Income taxes~~six months ended June 30,2022, and 26.4% for the ~~nine~~six months ended ~~September~~June 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~~2021.

48

Table of ~~$2.7 million which increased tax rates from 38.0% in the prior period to 39.9% for the 2017 period.~~ Contents

ANALYSIS OF FINANCIAL CONDITION

Loans Held for Sale

We originate residential mortgage loans for sale on the secondary market, which we have elected to carry at fair value. At June 30, 2022 and December 31, 2021, the fair value of loans held for sale amounted to $7.3 million and $37.7 million, respectively.

When we sell mortgage loans we make certain representations to the purchaser related to loan ownership, loan compliance and legality, and accurate documentation, among other things. If a loan is found to be out of compliance with any of the representations subsequent to the date of purchase, we may be required to repurchase the loan or indemnify the purchaser.

Loans Held for Investment

The following tables represent the composition of the Company’s loan portfolio at June 30, 2022 and December 31, 2021.


	June 30, 2022
			Loans acquired from
(Dollars in thousands)	Legacy Loans		Severn acquisition		Total Loans
Construction	$	208,524	$	54,545	$	263,069
Residential real estate		541,625		153,796		695,421
Commercial real estate		752,379		200,711		953,090
Commercial		114,916		41,690		156,606
Consumer		193,864		790		194,654
Total loans excluding PPP loans		1,811,308		451,532		2,262,840
PPP loans		1,421		318		1,739
Total loans	$	1,812,729	$	451,850	$	2,264,579
Allowance for credit losses						(15,483)
Total loans, net					$	2,249,096


	December 31, 2021
			Loans acquired from
(Dollars in thousands)	Legacy Loans		Severn acquisition		Total Loans
Construction	$	145,151	$	94,202	$	239,353
Residential real estate		469,863		184,906		654,769
Commercial real estate		679,816		216,413		896,229
Commercial		128,485		47,332		175,817
Consumer		124,496		951		125,447
Total loans excluding PPP loans		1,547,811		543,804		2,091,615
PPP loans		18,371		9,189		27,560
Total loans	$	1,566,182	$	552,993	$	2,119,175
Allowance for credit losses						(13,944)
Total loans, net					$	2,105,231

The acquisition of Severn added $584.6 million in total loans as of October 31, 2021, of which $451.8 million in total loans remained outstanding as of June 30, 2022. Excluding these loans and legacy PPP loans, total legacy loans increased $263.5 million, or 17.0%, when compared to December 31, 2021. At June 30, 2022 and December 31, 2021, PPP loans accounted for $1.4 million and $18.4 million of total legacy loans, respectively. Most of our loans, excluding PPP loans, are secured by real estate and are classified as construction, residential or commercial real estate loans. The increase in legacy loans, excluding PPP loans, was comprised of increases in consumer loans of $69.4 million, or 55.7%, construction loans of $63.4 million, or 43.7%, commercial real estate loans of $72.6 million, or 10.7%, residential real estate loans of $71.8 million, or 15.3%, partially offset by a decrease in commercial loans of $13.6 million, or 10.6%, at June 30, 2022 compared to December 31, 2021. At June 30, 2022, the legacy loan portfolio, excluding PPP loans, was comprised of 41.5% commercial real estate, 29.9% residential real estate, 11.5% construction, 10.7% consumer and 6.3% commercial. That compares to 43.9%, 30.4%, 9.4%, 8.0% and 8.3, respectively, at December 31, 2021. Outstanding PPP loans totaled ~~$1.0 billion~~$1.7 million at ~~September~~June 30, ~~2017~~2022 and ~~$871.5~~$27.6 million at December 31, ~~2016, an increase~~2021, a decrease of ~~$175.5~~$25.8 million or ~~20.2%~~93.7%. The ~~significant increase~~ decrease

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Table of Contents

was primarily due to forgiveness on first and second round PPP loans acquired from NWBI of $122.9 million, which had a balance of $116.5 million at September 30, 2017. Excluding the 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, residential real estate of $18.6 millionoriginated in 2020 and commercial of $18.6 million. Loans included deferred costs, net of deferred fees, of $632 thousand and discounts on acquired loans of $2.0 million at September 30, 2017. Loans included deferred costs, net of deferred fees, of $509 thousand at December 31, 2016.2021. 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~~$263.1 million, or ~~10.2%~~11.6% of total loans, at ~~September~~June 30, ~~2017, higher than the $84.0~~2022 and $239.4 million, or ~~9.6%~~11.3% of total loans, at December 31, ~~2016.~~2021. Commercial real estate loans were ~~$454.6~~$953.1 million, or ~~43.4%~~42.1% of total loans, at ~~September~~June 30, ~~2017,~~2022, compared to ~~$382.7~~$896.2 million, or ~~43.9%~~42.3% of total loans, at December 31, ~~2016.~~2021.

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

42

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~~June 30, ~~2017,~~2022, non-owner-occupied commercial real estate loans (including construction, land and land development loans) represented ~~269.9%~~292.2% of total ~~risk based~~risk-based capital. At such time, construction, land and land development loans represented ~~79.4%~~80.4% of total ~~risk based~~risk-based capital.

The commercial real estate portfolio (including construction) has increased ~~95.3%~~103.5% 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.

~~Net charge-offs~~The allowance for credit losses was $15.5 million at June 30, 2022, $13.9 million at December 31, 2021 and $15.1 million at June 30, 2021. There were ~~$182~~net recoveries of $573 thousand for the ~~third~~second quarter of ~~2017 and $349~~2022, compared to net recoveries of $166 thousand for the ~~third~~first quarter of ~~2016.~~2022 and net recoveries of $125 thousand for the second quarter of 2021. The ratio of annualized net recoveries to average loans was 0.10% for the second quarter of 2022, compared to annualized net recoveries of 0.03% for the first quarter of 2022 and annualized net recoveries of 0.03% for the second quarter of 2021. 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~~0.68% at June 30, ~~2017~~2022 and ~~1.00% for both~~0.66% at December 31, ~~2016~~2021. Excluding PPP loans and ~~September 30, 2016.~~ ~~The decrease in such~~acquired loans from Severn and Northwest, the ratio ~~at September 30, 2017 was due to~~of 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~~to period-end loans was 0.89% at June 30, 2022, lower than the 0.93% at December 31, 2021. The decrease in the percentage of ~~period-end~~the allowance to total loans, excluding ~~the~~PPP

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Table of Contents

loans and acquired loans, ~~from NWBI~~at June 30, 2022 compared to December 31, 2021, was ~~1.00% at September 30, 2017.~~primarily the result of improved credit quality, including lower historical loss experience as well as lower pandemic related qualitative factors. Management currently believes that the provision for credit losses and the resulting allowance were adequate to provide for probable losses inherent in our loan portfolio at ~~September~~June 30, ~~2017.~~2022.

43

The following ~~table presents~~tables present a summary of the activity in the allowance for credit losses at or for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2022 and ~~2016.~~2021.


	For the Three Months Ended
	June 30, 2022						June 30, 2021
					Percentage of net						Percentage of net
					charge-offs (recoveries)						charge-offs (recoveries)
					(annualized) to						(annualized) to
					average loans						average loans
			Net (charge-offs)		outstanding				Net (charge-offs)		outstanding
(Dollars in thousands)	Average balances		recoveries		during the year		Average balances		recoveries		during the year
Construction	$	253,742	$	4	(0.01)	%	$	116,760	$	5	(0.02)	%
Residential real estate		670,999		69	(0.04)			449,867		57	(0.05)
Commercial real estate		932,782		549	(0.24)			627,507		64	(0.04)
Commercial		164,944		(50)	0.12			186,162		(2)	-
Consumer		177,531		1	-			64,388		1	(0.01)
Total	$	2,199,998	$	573	(0.10)	%	$	1,444,684	$	125	(0.03)	%


Allowance for credit losses at period end as a percentage of total period end loans ⁽¹⁾	0.68	%	1.02	%
Allowance for credit losses at period end as a percentage of total period end loans ⁽²⁾	0.89	%	1.12	%
Allowance for credit losses at period end as a percentage of average loans ⁽³⁾	0.70	%	1.04	%
Allowance for credit losses at period end as a percentage of period end nonaccrual loans	574.94	%	382.27	%

(1)

At June 30, 2022 and June 30, 2021, these ratios included all loans held for investment, including PPP loans of $1.7 million and $86.8 million, respectively.

(2)

At June 30, 2022 and June 30, 2021, these ratios exclude PPP loans, acquired loans and the associated purchase discount mark on the acquired loans from both Severn and Northwest.

(3)

At June 30, 2022 and June 30, 2021, these ratios included all loans held for investment, including PPP loans of $7.6 million and $116.9 million, respectively.

At or for Three Months

At or for Nine Months

Ended September 30,

Ended September 30,

(Dollars in thousands)

2017

2016

2017

2016

Allowance balance - beginning of period

$
9,132

$
8,358

$
8,726

$
8,316

Charge-offs:

Construction

-

(9)

(54)

(263)

Residential real estate

(70)

(407)

(393)

(525)

Commercial real estate

(100)

-

(100)

(503)

Commercial

(99)

(139)

(870)

(264)

Consumer

(18)

(13)

(33)

(23)

Total

(287)

(568)

(1,450)

(1,578)

Recoveries:

Construction

11

8

27

24

Residential real estate

11

121

32

188

Commercial real estate

8

10

27

20

Commercial

67

79

167

201

Consumer

8

1

20

13

Totals

105

219

273

446

Net charge-offs

(182)

(349)

(1,177)

(1,132)

Provision for credit losses

345

605

1,746

1,430

Allowance balance - end of period

$
9,295

$
8,614

$
9,295

$
8,614

Average loans outstanding during the period

$
1,034,553

$
836,955

$
956,694

$
811,747

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%

51

Table of Contents


	June 30, 2022						June 30, 2021
					Percentage of net						Percentage of net
					charge-offs (recoveries)						charge-offs (recoveries)
					(annualized) to						(annualized) to
					average loans						average loans
			Net (charge-offs)		outstanding				Net (charge-offs)		outstanding
(Dollars in thousands)	Average balances		recoveries		during the year		Average balances		recoveries		during the year
Construction	$	253,156	$	7	(0.01)	%	$	116,366	$	10	(0.02)	%
Residential real estate		658,108		115	(0.04)			449,759		63	(0.03)
Commercial real estate		917,956		699	(0.15)			628,995		64	(0.02)
Commercial		169,525		(74)	0.09			202,543		(11)	0.01
Consumer		169,298		(8)	0.01			50,105		(1)	-
Total	$	2,168,043	$	739	(0.07)	%	$	1,447,767	$	125	(0.03)	%


Allowance for credit losses at period end as a percentage of total period end loans ⁽¹⁾	0.68	%	1.02	%
Allowance for credit losses at period end as a percentage of total period end loans ⁽²⁾	0.89	%	1.12	%
Allowance for credit losses at period end as a percentage of average loans ⁽³⁾	0.71	%	1.04	%
Allowance for credit losses at period end as a percentage of period end nonaccrual loans	574.94	%	382.27	%

(1)

At June 30, 2022 and June 30, 2021, these ratios included all loans held for investment, including PPP loans of $1.7 million and $86.8 million, respectively.

(2)

At June 30, 2022 and June 30, 2021, these ratios exclude PPP loans, acquired loans and the associated purchase discount mark on the acquired loans from both Severn and Northwest.

(3)

At June 30, 2022 and June 30, 2021, these ratios included all loans held for investment, including PPP loans of $13.0 million and $124.3 million, respectively.

Nonperforming Assets and Accruing TDRs

As shown in the following table, nonperforming assets ~~decreased $3.4~~were $3.7 million ~~to $8.1~~and $3.0 million at ~~September~~June 30, ~~2017 from $11.5 million at~~2022 and December 31, ~~2016,~~2021, respectively. The balance of nonperforming assets increased primarily due to ~~decreases~~an increase in nonaccrual loans of ~~$2.7 million and other~~$689 thousand, or 34.4% primarily due to the acquisition of Severn. Accruing troubled debt restructurings (“TDRs”) decreased $773 thousand, or 13.6%, over the same time period.Other real estate owned ~~of $668 thousand. Accruing TDRs increased $493~~properties decreased to $197 thousand ~~to $13.5 million~~ at ~~September~~June 30, ~~2017~~2022 from ~~$13.0 million~~$532 thousand at December 31, ~~2016. This increase was primarily due to a significant nonaccrual TDR being upgraded to an accruing TDR during the third quarter of 2017.~~ 2021.The ratio of nonaccrual loans and accruing TDRs to total loans ~~decreased~~ratio at June 30, 2022 was 0.34% compared to ~~0.60% at September 30, 2017 from 1.03%~~0.36% 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.~~

2021.

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.

44

52

Table of Contents

The following table summarizes our nonperforming assets and accruing TDRs at ~~September~~June 30, ~~2017~~2022 and December 31, ~~2016.~~2021.


(Dollars in thousands)	June 30, 2022			December 31, 2021
Nonperforming assets
Nonaccrual loans	$	2,693		$	2,004
Total loans 90 days or more past due and still accruing		803			508
Other real estate owned		197			532
Total nonperforming assets	$	3,693		$	3,044

Total accruing TDRs	$	4,894		$	5,667

As a percent of total loans:
Nonaccrual loans		0.12	%		0.09	%
Accruing TDRs		0.22	%		0.27	%
Nonaccrual loans and accruing TDRs		0.34	%		0.36	%

As a percent of total loans and other real estate owned:
Nonperforming assets		0.16	%		0.14	%
Nonperforming assets and accruing TDRs		0.38	%		0.41	%

As a percent of total assets:
Nonaccrual loans		0.08	%		0.06	%
Nonperforming assets		0.11	%		0.09	%
Accruing TDRs		0.14	%		0.16	%
Nonperforming assets and accruing TDRs		0.25	%		0.25	%

(Dollars in thousands)

September 30, 2017

December 31, 2016
Nonperforming assets

Nonaccrual loans

Construction

$
2,953

$
3,818

Residential real estate

2,565

3,903

Commercial real estate

430

1,152

Commercial

341

-

Consumer

-

99

Total nonaccrual loans

6,289

8,972

Loans 90 days or more past due and still accruing

Construction

-

-

Residential real estate

5

-

Commercial real estate

-

-

Commercial

-

10

Consumer

-

10

Total loans 90 days or more past due and still accruing

5

20

Other real estate owned

1,809

2,477

Total nonperforming assets

$
8,103

$
11,469

Accruing TDRs

Construction

$
4,033

$
4,189

Residential real estate

4,625

3,875

Commercial real estate

4,835

4,936

Commercial

-

-

Consumer

-

-

Total accruing TDRs

$
13,493

$
13,000

Total nonperforming assets and accruing TDRs

$
21,596

$
24,469

As a percent of total loans:

Nonaccrual loans

0.60
%

1.03
%
Accruing TDRs

1.29
%

1.49
%
Nonaccrual loans and accruing TDRs

1.89
%

2.52
%

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

Nonperforming assets

0.77
%

1.31
%
Nonperforming assets and accruing TDRs

2.06
%

2.80
%

As a percent of total assets:

Nonaccrual loans

0.46
%

0.77
%
Nonperforming assets

0.59
%

0.99
%
Accruing TDRs

0.98
%

1.12
%
Nonperforming assets and accruing TDRs

1.57
%

2.11
%

Investment Securities

The investment portfolio is comprised of ~~securities that~~debt and equity securities. Securities are classified as 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.

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~~June 30, ~~2017 and December 31, 2016, 97%~~2022, 18.6% of the portfolio of debt securities was classified as available for sale and 3%81.4% 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.~~22.6% and 77.4% respectively, at December 31, 2021. 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.

45

Investment securities including restricted stock totaled ~~$219.6~~$564.8 million at ~~September~~June 30, ~~2017,~~2022, a ~~$49.0~~$37.7 million, or ~~28.7%~~7.15%, increase since December 31, ~~2016.~~2021. The increase was primarily due to ~~utilizing the net cash received~~purchases of held to maturity securities of $78.5 million, purchases of restricted securities of $5.7 million and purchases of equity securities of $7 thousand partially offset by proceeds from ~~the NWBI branch acquisition~~maturities and principal repayments of available for sale securities of $12.8 million and held to ~~purchase available-for-sale securities.~~maturity securities of $23.6 million. At ~~the end of September 2017, 75.3%~~June 30, 2022, 77.4% of the securities available for sale were mortgage-backed, ~~and 24.4%~~20.6% were U.S. Government agencies and 2.0% were corporate bonds, compared to ~~78.7%~~79.2%, 19.1% and ~~20.9%~~1.7%, respectively, at year-end ~~2016.~~2021. At June 30, 2022, 73.8% of the securities held to maturity were mortgage-backed, 23.3% were U.S. Government agencies, 2.8% were subordinated debt instruments and less than 1% were community reinvestment bonds, compared to 74.8%, 21.4%, 3.6% and less than 1%, respectively, at year-end 2021. Our investments in mortgage-backed securities are issued or guaranteed by U.S. Government agencies or government-sponsored agencies. The decline in fair values on available for sale securities in the first quarter of 2022 was the result of the recent increases in interest rates and are not indicative of any credit concerns due to the Company holding high quality securities.

53

Table of Contents

Deposits

Total deposits at ~~September~~June 30, ~~2017 were $1.2~~2022 amounted to $3.01 billion, a ~~$208.7~~decrease of $11.9 million, or ~~20.9%~~less than 1%, ~~increase~~ when compared to the level at December 31, ~~2016.~~ 2021. The ~~increase was primarily the result of the acquisition of three branches from~~ ~~NWBI~~ ~~which contributed $212.5 million~~decrease in total deposits ~~which had~~consisted of a balance of $199.9 million at September 30, 2017. Excluding the deposits acquired from the branch purchase, the Company experienced increases in noninterest-bearing deposits of $50.6 million and interest-bearing checking deposits of $21.7 million, partially offset by declinesdecrease in money market and savings accounts of $79.7 million, $38.4 million in noninterest bearing deposits ~~of $22.6~~and $11.9 million ~~and~~in time deposits partially offset by an increase in interest bearing checking accounts of ~~$40.8~~$118.1 million.

Short-Term Borrowings

~~Short-term borrowings at September 30, 2017 and December 31, 2016 were $1.5 million and $3.2 million, respectively.~~ The ~~decrease in~~Company had no short-term borrowings ~~was the result~~as of ~~utilizing cash received in the branch acquisition~~June 30, 2022, compared to ~~reduce these~~short-term borrowings ~~which tend to have higher rates than core deposits. Short-term borrowings generally consist~~consisting of securities sold under agreements to repurchase ~~which~~of $4.1 million at December 31, 2021. Securities sold under agreements to repurchase are issued in conjunction with cash management services for commercial ~~depositors,~~depositors. Other short-term borrowings may consist of overnight ~~borrowings~~borrowing from correspondent banks ~~and short-term~~or advances from the ~~Federal Home Loan Bank (the “FHLB”).~~FHLB. Short-term advances are defined as those with original maturities of one year or less. At ~~September~~June 30, ~~2017~~2022 and December 31, ~~2016,~~2021, the Company had no outstanding short-term advances with the FHLB.

Long-Term Debt

The Company occasionally borrows from the FHLB to meet longer term liquidity needs, specifically to fund loan growth when liquidity from deposit growth is not sufficient. The acquisition of Severn added $10.1 million in long-term FHLB borrowings, ~~included only repurchase agreements.~~which carried an interest rate of 2.19%, and a maturity date of October 2022. The balance of this debt was $10.1 million at both June 30, 2022 and December 31, 2021.

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

As a result of the Severn merger, the Company acquired Junior Subordinated Debt Securities due in 2035 (“2035 Debentures”) which had an outstanding principal balance of $20.6 million. The debt balance of $18.3 million at June 30, 2022 and $18.2 million at December 31, 2021 is presented net of a fair value adjustment of $2.3 million and $2.4 million, respectively.

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 in cash and cash equivalents was ~~$32.0~~$180.6 million for the first ~~nine~~six months of ~~2017~~2022 compared to an increase ~~in cash~~ of ~~$1.3~~$50.3 million for the first ~~nine~~six months of ~~2016.~~2021. The decrease in cash and cash equivalents in ~~2017~~2022 was mainly due to ~~receiving excess cash from the NWBI branch transaction which was used~~funding net loan growth of $143.9 million and purchases of securities held to ~~purchase available-for-sale securities and paydown short-term borrowings.~~

maturity of $78.5 million.

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 other correspondent ~~banks. The Bank had~~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~~$290.0 million and ~~$205.1~~$363.7 million at ~~September~~June 30, ~~2017~~2022 and December 31, ~~2016,~~2021, respectively. ~~These lines of credit are paid for monthly on a fee basis of 0.425%.~~ The Bank has 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~~$2.1 million, or less than 1%, to ~~$162.6~~$352.8 million at ~~September~~June 30, ~~2017~~2022 when compared to December 31, ~~2016~~2021 primarily due to the current year’s ~~earnings.~~retained earnings, partially offset by an increase in unrealized losses

54

~~Basel III~~Table of Contents

of $6.7 million (net of tax) on available for sale securities and dividends paid which are recorded in accumulated other comprehensive income (loss).

The ~~FRB~~Bank and Company are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company’s financial statements. Under capital adequacy guidelines and the ~~FDIC approved~~regulatory framework for prompt corrective action, the ~~final rules implementing the Basel Committee on Banking Supervision's (“BCBS”)~~Bank must meet specific capital guidelines ~~for U.S. banks. Under the final rules, minimum requirements increased for both the quantity~~that involve quantitative measures of its assets, liabilities, and ~~quality of~~certain off-balance sheet items as calculated under regulatory accounting practices. The capital ~~held~~amounts and classifications are also subject to qualitative judgments by the ~~Company. The rules included~~regulators about components, risk weightings, and other factors.

In July 2013, federal bank regulatory agencies issued a ~~new common equity Tier 1~~final rule that revised their risk-based capital torequirements and the method for calculating risk-weighted assets ~~minimum ratio~~to make them consistent with certain standards that were developed by Basel III and certain provisions of ~~4.5%, raise~~ the ~~minimum ratio of Tier 1 capital~~Dodd-Frank Act. The final rule currently applies to ~~risk-weighted assets from 4.0% to 6.0%, require a minimum ratio of Total Capital to risk-weighted~~all depository institutions and bank holding companies and savings and loan holding companies with total consolidated assets of ~~8.0%,~~more than $3 billion. The Company had total consolidated assets of more than $3 billion as of December 31, 2021, due to the acquisition of Severn in the fourth quarter of 2021. As such, the Company was required to comply with the consolidated capital requirements for the first quarterly report date following the effective date of the business combination as its total assets exceeded $3 billion.

Quantitative measures established by regulation to ensure capital adequacy require the Bank and ~~require a~~Company to maintain minimum ~~Tier 1 leverage ratio of 4.0%. A new capital conservation buffer, comprised~~ratios of common equity Tier 1, Tier 1, and total capital ~~was also established above the regulatory minimum capital requirements. This capital conservation buffer became effective~~ as a percentage 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~~off-balance sheet exposures, adjusted for risk weights ranging from 0% to 1,250%. The Bank and Company are also required to maintain capital at a minimum level ~~of 2.5%~~based on ~~January 1, 2019. Strict eligibility criteria for regulatory capital instruments were also implemented under~~quarterly average assets, which is known as 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 on January 1, 2015, with full compliance with all of the final rules’ requirements phased in over a multi-year schedule, to be fully phased-in by January 1, 2019. As of September 30, 2017, the Company's capital levels remained characterized as "well-capitalized" under the new rules.

46

leverage ratio.

The following tables present the applicable capital ratios ~~for Shore Bancshares, Inc. and Shore United Bank~~ as of ~~September~~June 30, ~~2017~~2022 and December 31, ~~2016.~~2021.


	Tier 1			Common Equity			Tier 1			Total
	leverage			Tier 1			risk-based			risk-based
June 30, 2022	ratio			ratio			capital ratio			capital ratio
Shore Bancshares, Inc.		8.65	%		12.22	%		12.22	%	14.70	%
Shore United Bank		9.45	%		13.39	%		13.39	%	14.05	%

	Tier 1			Common Equity			Tier 1			Total
	leverage			Tier 1			risk-based			risk-based
December 31, 2021	ratio			ratio			capital ratio			capital ratio
Shore Bancshares, Inc.		9.43	%		12.76	%		12.76	%	15.36	%
Shore United Bank		9.48	%		13.90	%		13.90	%	14.55	%

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.

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
%

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~~2021 Annual Report under the caption “Market Risk Management and Interest Sensitivity”. Management ~~believes~~recognizes that ~~there have been no material changes~~recent increases in ~~our~~interest rates has had an impact on the Company’s market ~~risks, the~~risk. The procedures used to evaluate and mitigate these risks orremain unchanged and we continue to monitor our actual and simulated sensitivity positions since December 31, ~~2016.~~2021.

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, as amended (“Exchange Act”) 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

55

Table of Contents

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~~June 30, ~~2017~~2022 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~~June 30, ~~2017.~~

2022.

There was no change in our internal control over financial reporting during the ~~third~~second quarter of ~~2017~~2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

47

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

The section titled Risk Factors in Part I, Item 1A of our 2021 Form 10-K includes a discussion of the many risks and uncertainties towe face, any one or more of which could have a material adverse effect on our business, results of operations, financial condition (including capital and ~~operations are subject are discussed~~liquidity), or prospects or the value of or return on an investment in ~~detail in Item 1A of Part I of~~ the ~~2016 Annual Report.~~Company. Management does not believe that any material changes in our risk factors have occurred since they were last disclosed in our ~~2016~~2021 Annual Report.

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

~~None.~~There were no unregistered sales of the Company’s common stock, par value $0.01 per share (“Common Stock”), during the year to date period ended June 30, 2022.

On July 6, 2022, the Company announced a new stock repurchase program. Under the new stock repurchase program, the Company is authorized to repurchase up to $5.0 million of the Company's Common Stock, representing approximately 1.4% of its issued and outstanding Common Stock based on the closing price of the Company’s Common Stock on July 5, 2022. The program may be limited or terminated at any time without prior notice. The program will expire on March 31, 2023.

The newly approved stock repurchase program follows the Company’s prior stock repurchase program, which was approved on November 24, 2020, and authorized the repurchase of up to $5.0 million of Common Stock. In connection with the prior stock repurchase program, which concluded in the fourth quarter of 2021, the Company purchased an aggregate of 310,004 shares of its Common Stock for aggregate cash consideration of $4.4 million.

Item 3. Defaults Upon Senior Securities

None

56

Table of Contents

Item 4. Mine Safety Disclosures

Not Applicable

Item 5. Other Information

None

57

Table of Contents

Item 6.E Exhibits.

~~xhibits.~~

Exhibit Number		Description

3.1(i)		Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed on December 14, 2000).

3.1(ii)		Articles Supplementary relating to the Fixed Rate Cumulative Perpetual Preferred Stock Series A (incorporated by reference to Exhibit 4.1 of the Company’s Form 8-K filed on January 13, 2009).

3.1(iii)		Articles Supplementary relating to the reclassification of the Fixed Rate Cumulative Perpetual Preferred Stock Series A, as common stock (incorporated by reference to Exhibit 3.1(i) of the Company’s Form 8-K filed on June 17, 2009).

3.2		Amended and Restated By-Laws (incorporated by reference to Exhibit 3.2 of the Company’s Form 10-K for the year ended December 31, 2020).

4.1		Description of Registrant’s Securities (incorporated by reference to Exhibit 4.1 to the Company’s Form 10-K filed March 13, 2020).

4.2		Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 of the Company’s Form S-3 filed on June 25, 2010).

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		Inline Interactive Data File

101.INS		Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)

101.SCH		Inline XBRL Taxonomy Extension Schema (filed herewith)

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

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

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

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

104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

~~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.~~

58

Table of Contents

SIGNATURES

~~SIGNATURES~~

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: ~~November 9, 2017~~August 15, 2022	By:	/s/ Lloyd L. Beatty, Jr.
		Lloyd L. Beatty, Jr.
		President & Chief Executive Officer
		(Principal Executive Officer)

Date: ~~November 9, 2017~~August 15, 2022	By:	/s/ Edward C. Allen
		Edward C. Allen
		~~Senior~~Executive Vice President & Chief Financial Officer
		(Principal ~~Financial~~Accounting Officer)

48

59

~~EXHIBIT INDEX~~


~~Exhibit~~
~~Number~~		~~Description~~

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

~~10.2~~		~~Employment Agreement, dated October 31, 2017, between Shore Bancshares, Inc. and Donna J. Stevens (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on November 1, 2017)~~

~~10.3~~		~~Employment Agreement, dated October 31, 2017, between Shore United Bank and Patrick M. Bilbrough (incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K filed on November 1, 2017)~~

~~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)~~

49


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


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	$	-


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

Net Income	$	3,412	$	2,411	$	8,564	$	7,143
Weighted average shares outstanding - Basic		12,687		12,661		12,679		12,648
Dilutive effect of common stock equivalents-options		21		-		21		-
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
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


	Available for sale				Held to maturity
	Amortized		Estimated		Amortized		Estimated
(Dollars in thousands)	Cost		Fair Value		Cost		Fair Value
Due in one year or less	$	9,000	$	8,996	$	-	$	-
Due after one year through five years		40,973		40,831		902		946
Due after five years through ten years		34,242		34,241		3,502		3,626
Due after ten years		128,523		128,660		1,837		1,879
		212,738		212,728		6,241		6,451
Equity securities		662		662		-		-
Total	$	213,400	$	213,390	$	6,241	$	6,451


(Dollars in thousands)	September 30, 2017		December 31, 2016
Construction	$	106,617	$	84,002
Residential real estate		387,722		325,768
Commercial real estate		454,626		382,681
Commercial		91,799		72,435
Consumer		6,483		6,639
Total loans		1,047,247		871,525
Allowance for credit losses		(9,295)		(8,726)
Total loans, net	$	1,037,952	$	862,799


				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


									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


	1/1/2017												9/30/2017
	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, 2017
Accruing TDRs
Construction	$	4,189	$	-	$	(22)	$	-	$	-	$	(134)	$	4,033	$	41
Residential real estate		3,875		-		(120)		(89)		1,411		(452)		4,625		228
Commercial real estate		4,936		-		(101)		-		-		-		4,835		35
Commercial		-		-		-		-		-		-		-		-
Consumer		-		-		-		-		-		-		-		-
Total	$	13,000	$	-	$	(243)	$	(89)	$	1,411	$	(586)	$	13,493	$	304

Nonaccrual TDRs
Construction	$	3,818	$	-	$	(882)	$	-	$	(108)	$	-	$	2,828	$	548
Residential real estate		1,603		-		(66)		-		(1,411)		-		126		23
Commercial real estate		83		-		-		-		-		-		83		-
Commercial		-		345		(4)		-		-		-		341		-
Consumer		-		-		-		-		-		-		-		-
Total	$	5,504	$	345	$	(952)	$	-	$	(1,519)	$	-	$	3,378	$	571

Total	$	18,504	$	345	$	(1,195)	$	(89)	$	(108)	$	(586)	$	16,871	$	875


	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


		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	$	-


		Accruing
				30-59 days			60-89 days			Greater than			Total
(Dollars in thousands)	Current			past due			past due			90 days			past due			Nonaccrual			Total
September 30, 2017
Construction	$	103,606		$	58		$	-		$	-		$	58		$	2,953		$	106,617
Residential real estate		383,913			572			667			5			1,244			2,565			387,722
Commercial real estate		451,789			2,407			-			-			2,407			430			454,626
Commercial		91,225			202			31			-			233			341			91,799
Consumer		6,478			-			5			-			5			-			6,483
Total	$	1,037,011		$	3,239		$	703		$	5		$	3,947		$	6,289		$	1,047,247
Percent of total loans		99.0	%		0.3	%		0.1	%		-	%		0.4	%		0.6	%		100.0	%


(Dollars in thousands)
2017	$	282
2018		442
2019		442
2020		395
2021		439
Thereafter		2,051
Total amortizing intangible assets	$	4,051


	Nine Months Ended September 30, 2017
		Weighted Average
	Number of	Grant Date
	Shares	Fair Value
Nonvested at beginning of period	17,066	$	11.46
Granted	21,470		16.69
Vested	(22,623)		13.66
Cancelled	-		-
Nonvested at end of period	15,913	$	12.49


	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



			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


	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


	At or for Three Months				At or for Nine Months
	Ended September 30,				Ended September 30,
(Dollars in thousands)		2017	2016		2017		2016
Allowance balance - beginning of period	$	9,132	$	8,358	$	8,726	$	8,316
Charge-offs:
Construction		-		(9)		(54)		(263)
Residential real estate		(70)		(407)		(393)		(525)
Commercial real estate		(100)		-		(100)		(503)
Commercial		(99)		(139)		(870)		(264)
Consumer		(18)		(13)		(33)		(23)
Total		(287)		(568)		(1,450)		(1,578)

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

Average loans outstanding during the period	$	1,034,553	$	836,955	$	956,694	$	811,747
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%