UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended ~~September 30, 2017~~March 31, 2023

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~~May 11, 2023 was 19,897,410.

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 30, 2017~~– March 31, 2023 (unaudited) and December 31, ~~2016~~2022	2	3

Consolidated Statements of Income ~~-For~~For the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2023 and ~~2016~~2022 (unaudited)	3	4

Consolidated Statements of Comprehensive Income ~~-For~~For the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2023 and ~~2016~~2022 (unaudited)	4	5

Consolidated Statements of Changes in Stockholders’ Equity ~~-For~~For the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2023 and ~~2016~~2022 (unaudited)	5	6

Consolidated Statements of Cash Flows ~~-For~~For the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2023 and ~~2016~~2022 (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	38

Item 3. Quantitative and Qualitative Disclosures about Market Risk	46	49

Item 4. Controls and Procedures	46	49

Part II. Other Information	47	50

Item 1. Legal Proceedings	47	50

Item 1A. Risk Factors	47	50

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

Item 3. Defaults Upon Senior Securities	47	50

Item 4. Mine Safety Disclosures	47	51

Item 5. Other Information	47	51

Item 6. Exhibits	47	52

Signatures	47

~~Exhibit Index~~	4853

1

2

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

SHORE BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS


	March 31,		December 31,
(In thousands, except share and per share data)	2023		2022
ASSETS	(Unaudited)
Cash and due from banks	$	23,863	$	37,661
Interest-bearing deposits with other banks		13,846		17,838
Cash and cash equivalents		37,709		55,499
Investment securities:
Available-for-sale, at fair value (amortized cost of $92,754 (2023) and $95,999 (2022))		81,525		83,587
Held to maturity, net of allowance for credit losses of $163 (2023) (fair value of $491,116 (2023) and $494,627 (2022))		549,096		559,455
Equity securities, at fair value		1,258		1,233
Restricted securities, at cost		15,067		11,169

Loans held for sale, at fair value		3,514		4,248

Loans held for investment ($9,526 (2023) and $8,437 (2022), at fair value)		2,668,681		2,556,107
Less: allowance for credit losses		(28,464)		(16,643)
Loans, net		2,640,217		2,539,464

Premises and equipment, net		50,516		51,488
Goodwill		63,266		63,266
Other intangible assets, net		5,106		5,547
Other real estate owned, net		179		197
Mortgage servicing rights, at fair value		5,310		5,275
Right-of-use assets		9,344		9,629
Cash surrender value on life insurance		59,711		59,218
Other assets		31,876		28,001
TOTAL ASSETS	$	3,553,694	$	3,477,276

LIABILITIES
Deposits:
Noninterest-bearing	$	808,679	$	862,015
Interest-bearing		2,185,883		2,147,769
Total deposits		2,994,562		3,009,784

Advances from FHLB - short-term		131,500		40,000
Subordinated debt		43,150		43,072
Total borrowings		174,650		83,072

Lease liabilities		9,642		9,908
Other liabilities		13,202		10,227
TOTAL LIABILITIES		3,192,056		3,112,991

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share; shares authorized - 35,000,000; shares issued and outstanding - 19,898,388 (2023) and 19,864,956 (2022)		199		199
Additional paid in capital		201,736		201,494
Retained earnings		167,864		171,613
Accumulated other comprehensive loss		(8,161)		(9,021)
TOTAL STOCKHOLDERS' EQUITY		361,638		364,285
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	3,553,694	$	3,477,276

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
	March 31,
(In thousands, except per share data)	2023		2022
INTEREST INCOME
Interest and fees on loans	$	30,828	$	22,085
Interest and dividends on taxable investment securities		4,064		1,985
Interest and dividends on tax-exempt investment securities		7		—
Interest on deposits with other banks		163		254
Total interest income		35,062		24,324

INTEREST EXPENSE
Interest on deposits		7,281		1,358
Interest on short-term borrowings		1,361		2
Interest on long-term borrowings		756		534
Total interest expense		9,398		1,894

NET INTEREST INCOME		25,664		22,430
Provision for credit losses		1,213		600

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES		24,451		21,830

NONINTEREST INCOME
Service charges on deposit accounts		1,213		1,359
Trust and investment fee income		432		514
Gains on sales and calls of investment securities		—		—
Interchange credits		1,212		1,038
Mortgage-banking revenue		977		1,867
Title Company revenue		137		323
Other noninterest income		1,363		945
Total noninterest income		5,334		6,046

NONINTEREST EXPENSE
Salaries and wages		8,684		9,562
Employee benefits		2,921		2,662
Occupancy expense		1,619		1,567
Furniture and equipment expense		534		429
Data processing		1,798		1,607
Directors' fees		250		190
Amortization of other intangible assets		441		517
FDIC insurance premium expense		371		343
Other real estate owned expenses, net		(1)		(6)
Legal and professional fees		750		637
Merger-related expenses		691		730
Other noninterest expenses		2,835		2,094
Total noninterest expense		20,893		20,332

Income before income taxes		8,892		7,544
Income tax expense		2,435		1,931

NET INCOME	$	6,457	$	5,613

Basic and diluted net income per common share	$	0.32	$	0.28

Dividends paid per common share	$	0.12	$	0.12

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.

4

Table of Contents

SHORE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

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


	For Three Months Ended
	March 31,
(In thousands)	2023		2022
Net income	$	6,457	$	5,613

Other comprehensive income (loss):
Investment securities:
Unrealized holding gains/(losses) on available-for-sale-securities		1,183		(3,065)
Tax effect		(323)		837
Total other comprehensive income (loss)		860		(2,228)
Comprehensive income	$	7,317	$	3,385

See accompanying notes to Consolidated Financial Statements.

5

Table of Contents

SHORE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)

For the Three Months Ended March 31, 2023 and 2022


							Accumulated
			Additional				Other		Total
	Common		Paid in		Retained		Comprehensive		Stockholders’
(In thousands)	Stock		Capital		Earnings		Loss		Equity
Balances, January 1, 2023	$	199	$	201,494	$	171,613	$	(9,021)	$	364,285

Cumulative effect adjustment due to the adoption of ASC 326, net of tax		—		—		(7,818)		—		(7,818)

Net income		—		—		6,457		—		6,457

Other comprehensive income		—		—		—		860		860

Common shares issued for employee stock purchase plan		—		87		—		—		87

Stock-based compensation		—		155		—		—		155

Cash dividends declared		—		—		(2,388)		—		(2,388)

Balances, March 31, 2023	$	199	$	201,736	$	167,864	$	(8,161)	$	361,638


							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

4

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.

6

Table of Contents

SHORE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


	For Three Months Ended
	March 31,
(In thousands)	2023		2022

CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	6,457	$	5,613
Adjustments to reconcile net income to net cash provided by operating activities:
Net accretion of acquisition accounting estimates		(646)		(525)
Provision for credit losses		1,213		600
Depreciation and amortization		1,383		1,558
Net amortization of securities		249		454
Amortization of debt issuance costs		31		31
(Gain) on mortgage banking activities		(719)		(1,679)
Proceeds from sale of mortgage loans held for sale		21,947		66,560
Originations of loans held for sale		(20,710)		(41,165)
Stock-based compensation expense		155		130
Deferred income tax expense (benefit)		(126)		29
(Gains) loss on valuation adjustments on mortgage servicing rights		82		(554)
Valuation adjustments on premises transferred to held for sale		225		—
Losses on sales and valuation adjustments on other real estate owned		(3)		(9)
Fair value adjustments on loans held for investments, at fair value		(195)		—
Fair value adjustment on equity securities		(17)		70
Bank owned life insurance income		(364)		(193)
Net changes in:
Accrued interest receivable		1,291		(545)
Other assets		(1,408)		(976)
Accrued interest payable		320		(323)
Other liabilities		2,055		(3,877)
Net cash provided by operating activities		11,220		25,199

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and principal payments of investment securities available for sale		3,175		7,049
Proceeds from maturities and principal payments of investment securities held to maturity		10,017		11,268
Purchases of securities held to maturity		—		(14,093)
Purchases of equity securities		(8)		(3)
Purchase of restricted securities		(11,421)		(5,735)
Net change in loans		(111,681)		(61,201)
Purchases of premises and equipment		(619)		(974)
Proceeds from sales of other real estate owned		21		83
Improvements to other real estate owned		—		(34)
Redemption of restricted securities		7,523		—
Purchases of bank owned life insurance		(129)		(10,058)
Net cash (used in) investing activities		(103,122)		(73,698)


CASH FLOWS FROM FINANCING ACTIVITIES:
Net changes in:
Noninterest-bearing deposits		(53,336)		(51,082)
Interest-bearing deposits		38,249		93,431
Short-term borrowings		91,500		(4,143)
Common stock dividends paid		(2,388)		(2,381)
Issuance of common stock		87		37
Net cash provided by financing activities		74,112		35,862
Net (decrease) in cash and cash equivalents		(17,790)		(12,637)
Cash and cash equivalents at beginning of period		55,499		583,613
Cash and cash equivalents at end of period	$	37,709	$	570,976

57

Table of Contents

SHORE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (CONTINUED)


Supplemental cash flows information:
Interest paid	$	12,711	$	2,270
Income taxes paid	$	215	$	—
Recognition (remeasurement of) lease liabilities arising from right-of-use assets	$	(5)	$	(728)
Transfer of premises to held for sale (included in other assets)	$	750	$	—
Transfers from loans to other real estate owned	$	—	$	69
Unrealized gain (loss) on securities available for sale	$	1,183	$	(3,065)

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

For Nine Months Ended

September 30,

2017

2016
CASH FLOWS FROM OPERATING ACTIVITIES:

Net Income

$
8,564

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

activities:

Net accretion of acquisition accounting estimates

(347)

-
Provision for credit losses

1,746

1,430
Depreciation and amortization

1,195

1,856
Net amortization of securities

612

(17)
Stock-based compensation expense

748

262
Deferred income tax expense

3,075

4,008
(Gains) on sales of securities

(5)

(31)
Losses on disposals of premises and equipment

2

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

(3)

125
Write-downs of other real estate owned

296

75
Net changes in:

Accrued interest receivable

(447)

(15)
Other assets

(2,236)

(1,602)
Accrued interest payable

(15)

(32)
Other liabilities

543

(272)
Net cash provided by operating activities

13,728

12,930

CASH FLOWS FROM INVESTING ACTIVITES:

Proceeds from maturities and principal payments of investment securities

available for sale

35,957

47,373
Proceeds from sales of securities available for sale

-

3,961
Purchases of investment securities available for sale

(84,495)

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

held to maturity

479

376
Net change in loans

(53,834)

(68,171)
Purchases of premises and equipment

(1,035)

(542)
Proceeds from sales of other real estate owned

470

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

64,045

-
Net cash used in investing activities

(38,413)

(25,691)

CASH FLOWS FROM FINANCING ACTIVITIES:

Net changes in:

Noninterest-bearing deposits

29,883

26,874
Interest-bearing deposits

(33,584)

(10,042)
Short-term borrowings

(1,734)

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

-

53
Common stock dividends paid

(1,902)

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

(7,337)

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

(32,022)

1,314
Cash and cash equivalents at beginning of period

75,938

73,811
Cash and cash equivalents at end of period

$
43,916

$
75,125

6

Supplemental cash flows information:

Interest paid

$
1,738

$
1,895
Income taxes paid

$
2,000

$
588
Transfers from loans to other real estate owned

$
95

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

$
1,550

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

available for sale to held to maturity

$
23

$
-

Branch purchase:

Tangible assets acquired (net of cash received)

$
129,188

$
-
Identifiable intangible assets acquired

$
3,954

$
-
Liabilities assumed

$
212,463

$
-

See accompanying notes to Consolidated Financial Statements.

Table of Contents

Shore Bancshares, Inc.

Notes to Consolidated Financial Statements

For the Three ~~and Nine~~ Months Ended ~~September 30, 2017~~March 31, 2023 and ~~2016~~2022

(Unaudited)

Note 1 -– Basis of Presentation

The consolidated financial statements include the accounts of Shore Bancshares, Inc. and its subsidiaries with all significant intercompany transactions eliminated. The consolidated financial statements conform to accounting principles generally accepted in the United States of America (“GAAP”) and to prevailing practices within the banking industry. The accompanying interim financial statements are unaudited; however, in the opinion of management all adjustments necessary to present fairly the consolidated financial position at ~~September 30, 2017,~~March 31, 2023, the consolidated results of income and comprehensive income for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2023 and ~~2016, and~~2022, changes in stockholders’ equity for the three months ended March 31, 2023 and 2022 and cash flows for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2023 and ~~2016,~~2022, have been included. All such adjustments ~~are~~were of a normal recurring nature. The amounts as of December 31, ~~2016~~2022 were derived from the ~~2016~~2022 audited financial statements. The results of operations for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2023 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.~~2022. 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~~N.A. (the “Bank”) and Mid-Maryland Title Company, Inc. (the “Title Company”).

Pending Recent Accounting Standards

ASU No. 2022-03 - In June 2022, the ~~context requires stipulating results~~(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 considered part of the ~~individual banks before the consolidation occurred.~~

~~Recent Accounting Standards~~

~~ASU No. 2014-09,~~ ~~“Revenue from Contracts with Customers (Topic 606)”~~ ~~amendment requires entities to recognize revenue to depict the transfer~~unit 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~~account 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 propertyequity security and, therefore, dois not ~~define whether the entity satisfies its performance obligation at a point~~considered 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 bemeasuring fair value. The ASU is effective for fiscal years, ~~and~~including 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.2023. Early adoption is ~~permitted for any entity in any interim or annual period. If an entity early adopts~~permitted. The Company does not expect 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~~2022-03 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~~its consolidated financial statements.

~~ASU No.~~Note 2 – Adoption of Accounting Standards

On January 1, 2023, the Company adopted Accounting Standards Updates (ASU) 2016-13 ~~“Financial Instruments-Credit~~“Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial ~~Instruments.~~Instruments,” ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses,” ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,” ASU 2019-05, “Financial Instruments – Credit Losses (Topic 326): Targeted Transition Relief,” ASU 2019-10, “Financial instruments – Credit losses (Topic 326), Derivatives and hedging (Topic 815), and Leases (Topic 842) – Effective dates,” ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses,” ASU 2020-02, “Financial Instruments – Credit Losses (Topic 326) and Leases (Topic 842),” ASU 2020-03, “Codification Improvements to Financial Instruments” and ASU 2022-02, “Financial Instruments – Credit Losses (Topic 326) – Troubled Debt Restructurings and Vintage Disclosures” (collectively, ASC 326). The ~~amendments in this ASU will replace~~significant impacts of adopting these standards and related updates to the Company’s accounting policies are discussed below.

ASC 326 requires entities to estimate an allowance for credit losses (ACL) on certain types of financial instruments measured at amortized cost using a current expected credit losses (CECL) methodology, replacing the incurred loss methodology from prior GAAP. It also applies to unfunded commitments to extend credit, including loan commitments, standby letters of credit, and other similar instruments. The impairment ~~methodology~~model for available-for-sale debt securities was modified and ASC 326 also provided for a simplified accounting model for purchased financial assets with credit

9

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deterioration since their origination. Additionally, the measurement principles for modifications of loans to borrowers experiencing financial difficulty were modified, including how the ACL is measured for such loans.

The amendments of ASC 326, upon adoption, were applied on a modified retrospective basis, by recording an increase in ~~current GAAP~~the reported balance of loans and the allowance for credit losses on loans, an increase in the liability for credit losses on commitments to extend credit and reducing total equity of both the Company and the Bank. As a result of adopting ASC 326, the Company recorded a decrease to opening retained earnings, net of taxes, of approximately $7.8 million.

ASC 326 also replaced the Company’s previous accounting policies for purchased credit-impaired (PCI) loans and troubled-debt restructurings (TDRs). With the adoption of ASC 326, loans previously designated as PCI loans were designated as purchased loans with ~~a methodology~~credit deterioration (PCD loans). The Company adopted ASC 326 using the prospective transition approach for PCD loans that ~~reflects~~were previously identified as PCI and accounted for under ASC 310-30. On January 1, 2023, the Corporation’s PCD loans were adjusted to reflect the addition of expected credit losses to the amortized cost basis of the loans and ~~requires consideration~~a corresponding increase to the ACL. The remaining noncredit discount, which represents the difference between the adjusted amortized cost basis and the outstanding principal balance on PCD loans, will be accreted into interest income over the estimated remaining lives of the loans using the effective interest rate method. The evaluation of the ACL will include PCD loans together with other loans that share similar risk characteristics, rather than using the separate pools that were used under PCI accounting, unless the loans are specifically identified for individual evaluation under our CECL methodology. The adoption of ASC 326 also replaced previous TDR accounting guidance, and the evaluation of the ACL will include loans previously designated as TDRs together with other loans that share similar risk characteristics, unless the loans are specifically identified for individual evaluation under our CECL methodology.

The following table shows the impact of the Company's adoption of ASC 326 on loans, the allowance for credit losses, and the Company’s reserve for unfunded commitments:


	January 1, 2023
	As Reported Under		Pre-ASC 326
(Dollars in thousands)	ASC 326		Adoption		Change
Total Loans, gross	$	2,556,267	$	2,556,107	$	160
Allowance for credit losses		(27,434)		(16,643)		(10,791)
Total loans, net	$	2,528,833	$	2,539,464	$	(10,631)

Liabilities: Reserve for Unfunded Commitments	$	581	$	316	$	265

The following accounting policies have been updated in connection with the adoption of ASC 326 and apply to periods beginning after December 31, 2022. Accounting policies applying to prior periods are described in the 2022 Annual Report, as discussed above.

Investments in Debt Securities

Investments in debt securities are classified as either held to maturity, available for sale, or trading, based on management’s intent. Currently, the Company has classified its debt securities within the available for sale and held to maturity classifications. Debt securities purchased with the positive intent and ability to hold to maturity are classified as held to maturity and are recorded at amortized cost, net of any ACL. Debt securities not classified as held to maturity are classified as available for sale and are carried at estimated fair value with the corresponding unrealized gains and losses recognized in other comprehensive income (loss).

Gains or losses are recognized in net income on the trade date using the amortized cost of the specific security sold. Purchase premiums are recognized in interest income using the effective interest rate method over the period from purchase to maturity or, for callable securities, the earliest call date, and purchase discounts are recognized in the same manner from purchase to maturity.

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The Company has elected to exclude accrued interest receivable from the amortized cost basis and fair value of its held to maturity and available for sale debt securities and has included such accrued interest of $1.8 million at March 31, 2023 within the other assets line item of the Consolidated Balance Sheets.

The Company estimates an ACL for held to maturity debt securities on a collective basis by major security type and standard credit rating. Certain securities in our held to maturity securities portfolio are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses. With respect to these securities, we consider the risk of credit loss to be zero and, therefore, we do not record an ACL.

The estimate of an ACL on our held to maturity securities that are not guaranteed by the U.S. government considers historical credit loss information and severity of loss in the event of default and leverages external data. No ACL is recorded on accrued interest receivable and amounts written-off are reversed by an adjustment to interest income.

An ACL on held to maturity debt securities that do not share common risk characteristics with our collective portfolio are individually measured based on net realizable value, or the difference between the discounted value of the expected future cash flows and the recorded amortized cost basis of the security.

For debt securities available for sale, impairment is recognized in its entirety in net income if either (i) we intend to sell the security or (ii) it is more-likely-than-not that we will be required to sell the security before recovery of its amortized cost basis. If, however, the Company does not intend to sell the security and it is not more-likely-than-not that the Company will be required to sell the security before recovery, the Company evaluates unrealized losses to determine whether a decline in fair value below amortized cost basis is a result of a ~~broader range~~credit loss, which occurs when the amortized cost basis of the security exceeds the present value of the cash flows expected to be collected from the security, or other factors such as changes in market interest rates. If a credit loss exists, an allowance for credit losses is recorded that reflects the amount of the impairment related to credit losses, limited by the amount by which the specific security’s amortized cost basis exceeds its fair value. Changes in the allowance for credit losses are recorded in net income in the period of change and are included in provision for credit losses. Changes in the fair value of debt securities available for sale not resulting from credit losses are recorded in other comprehensive income (loss). The Company regularly reviews unrealized losses in its investments in securities and cash flows expected to be collected from impaired securities based on criteria including the extent to which market value is below amortized cost, the financial health of and specific prospects for the issuer, the Company’s intention with regard to holding the security to maturity and the likelihood that the Company would be required to sell the security before recovery.

Loans Held for Investment

The Company’s recorded investment in loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally is reported at the unpaid principal balances adjusted for charges-offs, unearned discounts, any deferred fees or costs on originated loans, and the allowance for credit losses. The Company has elected to exclude accrued interest receivable from the amortized cost basis of its loans held for investment and has included such accrued interest of $6.2 million at March 31, 2023 within the other assets line item of the Consolidated Balance Sheets. Interest on loans is recorded to interest income based on the contractual rates and the amount of outstanding principal of the loans. Loan fees and origination costs are deferred and the net amount is amortized as an adjustment of the related loan’s yield using the level-yield method.

Loans acquired in a business combination are recorded at estimated fair value on the date of acquisition. In the case of loans that have experienced more than insignificant deterioration in credit quality since origination as of the acquisition date, the loan’s amortized cost basis is increased above estimated fair value by the amount of expected credit losses as of the acquisition date, and a corresponding allowance for credit losses is also recorded. Any remaining non-credit discount or premium for such purchased loans with credit deterioration (PCD loans) and any fair value discount or premium for non-PCD loans is accreted or amortized as an adjustment to yield over the estimated lives of the loans using the level-yield method.

A loan’s past due status is based on the contractual due date of the most delinquent payment due. Loans are generally placed on nonaccrual status when the collection of principal or interest is 90 days or more past due, or earlier, if collection is uncertain. Any accrued interest receivable on loans placed on nonaccrual status is reversed by an adjustment to interest

11

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income. Loans greater than 90 days past due may remain on accrual status if management determines it has adequate collateral to cover the principal and interest. 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. A loan may be returned to accrual status if the borrower has demonstrated a sustained period of repayment performance in accordance with the contractual terms of the loan and there is reasonable assurance the borrower will continue to make payments as agreed.

In the ordinary course of business, the Company has entered into commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the Consolidated Balance Sheets when they are funded.

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

Construction loans – Construction loans are offered primarily to builders and individuals to finance the construction of 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 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.

ACL on Loans Held for Investment

An ACL is estimated on loans held for investment, excluding loans carried at fair value. The ACL on loans is established through charges to earnings in the form of a provision for credit losses. Loan losses are charged against the ACL for the difference between the carrying value of the loan and the estimated net realizable value or fair value of the collateral, if collateral dependent, when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance.

The allowance represents management’s current estimate of expected credit losses over the contractual term of loans held for investment, and is recorded at an amount that, in management’s judgment, reduces the recorded investment in loans to the net amount expected to be collected. No ACL is recorded on accrued interest receivable and amounts written-off are reversed by an adjustment to interest income. Management’s judgment in determining the level of the allowance is based

12

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on evaluations of historical loan losses, current conditions and reasonable and supportable ~~information~~forecasts relevant to ~~inform credit loss estimates.~~the collectability of loans. The ~~amendments affect~~methodology for estimating the amount reported in the ACL is the sum of two main components, an allowance assessed on a collective basis for pools of loans ~~debt securities, trade receivables,~~that share similar risk characteristics and an allowance assessed on individual loans that do not share similar risk characteristics with other loans. Loans that share common risk characteristics are evaluated collectively using a cash flow approach. The discounted cash flow approach used by the Company utilizes loan-level cash flow projections and pool-level assumptions. For loans that do not share risk characteristics with other loans, the ACL is measured based on the net ~~investments~~realizable value, that is, the difference between the discounted value of the expected future cash flows and the amortized cost basis of the loan. When a loan is collateral-dependent and the repayment is expected to be provided substantially through the operation or sale of the collateral, the ACL is measured as the difference between the amortized cost basis of the loan and the fair value of the collateral.

Cash flow projections and estimated expected losses on loans which share common risk characteristics are based in ~~leases, off-balance-sheet credit exposures, reinsurance receivables,~~part on forecasts of the national unemployment rate that are reasonable and any other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The use of forecasted information incorporates more timely information insupportable over a twelve month period and incorporated into the estimate of expected credit losses which will be more decision useful to users of the financial statements. It is not expected that an entity will need to create an economic forecast over the entire contractual life of long-dated financial assets. Therefore, the amendments will allow an entity to revert to historical loss information that is reflective of the contractual term (considering the effect of prepayments)using a statistical regression analysis. For periods beyond those for ~~periods that are beyond the time frame for~~ which ~~the entity is able to develop~~ reasonable and supportable ~~forecasts. The amendments retain many~~forecasts are available, projections are based on a reversion of the ~~disclosure amendments~~national unemployment rate from the last forecast to a historical average level over the following twelve months.

Management’s estimate of the allowance for credit losses on loans that are collectively evaluated also includes a qualitative assessment of available information relevant to assessing collectability that is not captured in ~~Accounting Standards Update No. 2010-20, Receivables (Topic 310):~~ ~~Disclosures about~~ the ~~Credit Quality~~quantitative loss estimation process. Factors considered by management include changes in general market, economic and business conditions; the nature and volume of ~~Financing Receivables~~the loan portfolio; the volume and severity of delinquencies and adversely classified loan balances and the ~~Allowance~~value of underlying collateral; and other factors as deemed necessary and appropriate. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.

Reserve for ~~Credit Losses,~~ ~~updated to reflect the change from an incurred loss methodology to an~~Unfunded Commitments

The Company records a reserve, reported in other liabilities, for expected credit ~~loss methodology. Credit~~ losses on ~~available-for-sale debt securities should be measured in a manner similar~~commitments to ~~current GAAP. However, the amendments require that~~extend credit ~~losses be presented as an allowance rather than a write-down. For public entities~~ that are ~~U.S. Securities and Exchange Commission (SEC) filers,~~not unconditionally cancelable by the ~~amendments are effective~~Company. The reserve for ~~fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. All entities may adopt~~unfunded commitments is measured based on the ~~amendments earlier~~

9

~~as of~~principles utilized in estimating 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 ourallowance for credit losses ~~primarily~~ on loans and ~~held to maturity securities. At this time, the Company has established a project management team which is in the process~~an estimate of ~~developing and understanding this pronouncement, evaluating the impact of this pronouncement and researching additional software resources that could assist with the implementation.~~

~~ASU No. 2016-15,~~ ~~“Classification of Certain Cash Receipts and Cash Payments."~~ Current GAAP is unclear or does not include specific guidance on how to classify certain transactions in the statement of cash flows. 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 the amendments in this ASU effective January 1, 2017. The adoption of ASU No. 2016-15 did not have a material impact on our consolidated financial statements.

~~ASU No. 2017-01 – In January 2017, FASB issued ASU No. 2017-01,~~ ~~Business Combinations (Topic 805)” Clarifying the Definition of a Business.~~ The ASU clarifies the definition of a business to assist with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in this update are effective for fiscal years beginning after December 15, 2017, including 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 that have not yet been adopted to determine the appropriate disclosure about the potential material effects of those ASUs on the financial statements when adopted. The guidance also specifies the SEC staff view on financial statement disclosures when the company does not know or cannot reasonably estimate the impact that 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 guidance 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. Early adoption is permitted for goodwill impairment tests performed on testing dates after January 1, 2017. The guidance 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 of the instrument. This guidance shortens the amortization period of certain callable debt securities held at a premium to the earliest call date. This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The adoption of ASU No. 2017-08 is not expected to have a material impact on the Company’s consolidated financial statements.

~~ASU No. 2017-09 – In May 2017, the FASB issued ASU No. 2017-09~~ ~~“Stock Compensation, Scope of Modification Accounting.”~~ This ASU clarifies when changes to the terms of conditions of a share-based payment award must be accounted for as modifications. Companies will apply the modification accounting guidance if the value, vesting conditions or classification of the award changes. The new guidance should reduce diversity in practice and result in fewer changes to the terms 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

~~Note 2 – Business Combination~~

~~Northwest Bank Branch Acquisition~~

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

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

The acquired assets and assumed liabilities of the NWBI branches were measured at estimated fair value. Management made significant estimates and exercised significant judgement in accounting for the acquisition of the NWBI branches. Management evaluated expected cash flows, prepayment speeds and estimated loss factors to measure fair values for loans. Deposits were valued based upon interest rates, original and remaining terms and maturities, as well as current rates for similar funds in the same markets. Premises were based on recent appraised values, whereas equipment was acquired based on the remaining book value from NWBI, which approximated fair value. Management engaged independent outside experts to provide the fair value estimates.

The following table provides the purchase price as of the acquisition date, the identifiable assets acquired and liabilities assumed at their estimated fair values, and the resulting goodwill of $15.3 million recorded from the acquisition:

~~(in thousands)~~


~~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~~unfunded commitments expected to be ~~deductible~~advanced. Changes in the reserve for ~~tax purposes, pursuant to section 197 of~~unfunded commitments are recorded through the ~~Internal Revenue Code.~~

11

~~Acquired loans~~

~~The following table outlines~~provision for credit losses. During the ~~contractually required payments receivable, cash flows we expect to receive, and~~three months ended March 31, 2023, the ~~accretable yield for all NWBI loans as of the acquisition date.~~

Contractually

Required

Cash Flows

Carrying Value

Payments

Expected To Be

Accretable FMV

of Loans

Receivable

Collected

Adjustments

Receivable

Performing loans acquired

$
125,131

125,131

2,269

$
122,862

~~The~~ Company recorded ~~all loans acquired at the estimated fair value on the purchase date~~no provision for credit losses associated 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.~~its unfunded commitments.

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

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
	March 31,
(In thousands, except per share data)	2023		2022
Net Income	$	6,457	$	5,613
Weighted average shares outstanding - Basic and Diluted		19,886		19,828

Earnings per common share - Basic and Diluted	$	0.32	$	0.28

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 no weighted average common stock equivalents excluded from the calculation of diluted earnings per share for the three ~~and nine~~months March 31, 2022. There were no potentially dilutive shares outstanding during the three months ended ~~September 30, 2017 and 2016.~~March 31, 2023.

13

Table of Contents

Note 4 – Investment Securities

On January 1, 2023, the Company adopted ASC 326, which made changes to accounting for available for sale debt securities whereby credit losses should be presented as an allowance, rather than as a write-down when management does not intend to sell and does not believe that it is more likely than not they will be required to sell prior to maturity. In addition, ASC 326 requires an allowance for credit losses to be recorded on held to maturity debt securities measured at amortized cost. All securities information presented as of March 31, 2023 is in accordance with ASC 326. All securities information presented as of December 31, 2022 or a prior date is presented in accordance with previously applicable GAAP. For further discussion on the Corporation’s accounting policies and policy elections related to the accounting standard update refer to Note 2.

The following table ~~provides~~summarizes the activity in the ACL on held-to-maturity securities:


	Three Months ended
(Dollars in thousands)	March 31, 2023
Balance, beginning of period	$	—
Other debt securities, provision for credit losses		163
Balance, end of period	$	163

The ACL for held-to-maturity securities was initially determined to be immaterial as of the date of adoption of ASC 326. Upon re-estimation in the current period, ACL was recorded based on the results of our calculation as of March 31, 2023.

The following 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:
March 31, 2023
U.S. Government agencies	$	21,587	$	5	$	3,283	$	18,309
Mortgage-backed		69,151		1		7,779		61,373
Other debt securities		2,016		—		173		1,843
Total	$	92,754	$	6	$	11,235	$	81,525

December 31, 2022
U.S. Government agencies	$	21,798	$	5	$	3,625	$	18,178
Mortgage-backed		72,183		2		8,666		63,519
Other debt securities		2,018		—		128		1,890
Total	$	95,999	$	7	$	12,419	$	83,587

No available for sale securities were sold during the three months ended March 31, 2023 and 2022.

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

14

Table of Contents

~~(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.~~


			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
(Dollars in thousands)	Cost		Gains		Losses		Value
Held-to-maturity securities:
March 31, 2023
U.S. Government agencies	$	146,699	$	—	$	11,815	$	134,884
Mortgage-backed		389,924		—		45,379		344,545
States and political subdivisions		1,473		54		13		1,514
Other debt securities		11,000		—		827		10,173
Total	$	549,096	$	54	$	58,034	$	491,116

December 31, 2022
U.S. Government agencies	$	148,097	$	—	$	13,601	$	134,496
Mortgage-backed		398,884		—		50,464		348,420
States and political subdivisions		1,474		35		28		1,481
Other debt securities		11,000		—		770		10,230
Total	$	559,455	$	35	$	64,863	$	494,627

Equity securities with an aggregate fair value of $1.3 million at March 31, 2023 and $1.2 million at December 31, 2022 are presented separately on the balance sheet. The fair value adjustment recorded through earnings totaled $17 thousand for the three months ended March 31, 2023 and $(70) thousand for the three months ended March 31, 2022, respectively.

Credit Quality Information

The Company monitors the credit quality of held-to-maturity securities through credit ratings provided by Standard & Poor’s Rating Services and Moody’s Investor Services. Credit ratings express opinions about the credit quality of a security, and are updated at each quarter end. Investment grade securities are rated BBB- or higher by S&P and Baa3 or higher by Moody’s and are generally considered by the rating agencies and market participants to be of low credit risk. Conversely, securities rated below investment grade, which are labeled as speculative grade by the rating agencies, are considered to have distinctively higher credit risk than investment grade securities. There were no speculative grade held-to-maturity securities at March 31, 2023 or December 31, 2022. Held-to-maturity securities that are not rated are agency mortgage-backed securities sponsored by US government agencies, as well as direct obligations of the agencies, with the remainder being sub-debt of other banks.

The following table shows the amortized cost of held-to-maturity securities based on their lowest publicly available credit rating as of March 31, 2023.


		March 31, 2023
		Investment Grade
(Dollars in thousands)		Aaa		Aa1		A3		Baa1		Baa2		Baa3		NR
U.S. Government agencies	$	137,358	$	—	$	—	$	—	$	—	$	—	$	9,341
Mortgage-backed		—		—		—		—		—		—		389,924
States and political subdivisions		—		1,473		—		—		—		—		—
Other debt securities		—		—		4,000		4,000		500		500		2,000
Total Held-to Maturity Securities	$	137,358	$	1,473	$	4,000	$	4,000	$	500	$	500	$	401,265

Table of Contents

The following tables provide information about gross unrealized losses and fair value by length of time that the individual securities have been in a continuous unrealized loss position at ~~September 30, 2017~~March 31, 2023 and December 31, ~~2016.~~2022.

Less than

More than

12 Months

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

(Dollars in thousands)

Value

Losses

Value

Losses

Value

Losses

March 31, 2023

Available-for-sale securities:

U.S. Government agencies

$

1,060

$

6

$

16,833

$

3,277

$

17,893

$

3,283

Mortgage-backed

1,754

32

59,277

7,747

61,031

7,779

Other debt securities

—

1,843

173

1,843

173

Total

$

2,814

$

38

$

77,953

$

11,197

$

80,767

$

11,235


	Less than				More than
	12 Months				12 Months				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized

													Less than				More than
													12 Months				12 Months				Total
													Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(Dollars in thousands)	Value		Losses		Value		Losses		Value		Losses		Value		Losses		Value		Losses		Value		Losses
September 30, 2017
December 31, 2022
Available-for-sale securities:
U.S. Government agencies	$	40,819	$	150	$	2,998	$	4	$	43,817	$	154	$	1,165	$	4	$	16,585	$	3,588	$	17,750	$	3,592
Mortgage-backed		60,113		289		11,086		291		71,199		580		29,125		2,409		34,167		6,290		63,292		8,699
Other debt securities														1,890		128		—		—		1,890		128
Total	$	100,932	$	439	$	14,084	$	295	$	115,016	$	734	$	32,180	$	2,541	$	50,752	$	9,878	$	82,932	$	12,419


	Less than				More than
	12 Months				12 Months				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(Dollars in thousands)	Value		Losses		Value		Losses		Value		Losses
December 31, 2016
Available-for-sale securities:

Held-to-maturity securities:
U.S. Government agencies	$	11,926	$	58	$	-	$	-	$	11,926	$	58	$	67,332	$	2,786	$	67,163	$	10,815	$	134,495	$	13,601
Mortgage-backed		100,237		1,546		9,208		263		109,445		1,809		148,771		9,402		199,649		41,062		348,420		50,464
Equity securities		640		12		-		-		640		12
States and political subdivisions														780		28		—		—		780		28
Other debt securities														8,091		409		2,139		361		10,230		770
Total	$	112,803	$	1,616	$	9,208	$	263	$	122,011	$	1,879	$	224,974	$	12,625	$	268,951	$	52,238	$	493,925	$	64,863

~~All~~There were one hundred fifteen available-for-sale debt securities with a fair value below the amortized cost basis, totaling $11.2 million of aggregate fair value as of March 31, 2023. The Company concluded that a credit loss does not exist in its available-for-sale securities portfolio as of March 31, 2023, and no impairment loss has been recognized based on the fact that (1) changes in fair value were caused primarily by fluctuations in interest rates, (2) securities with unrealized losses inhad generally high credit quality, (3) the ~~portfolio have modest duration risk, low credit risk, and minimal losses when compared~~Company intends to ~~total amortized cost. The unrealized losses on~~hold these investments in debt securities ~~that exist are the result of market changes in interest rates since original purchase. Because the Company does not intend~~ to ~~sell these securities~~maturity and it is ~~not more likely than not that~~more-likely-than-not the Company will not be required to sell these ~~securities~~investments before a recovery of ~~their amortized cost bases,~~its investment, and (4) issuers have continued to make timely payments of principal and interest. Additionally, the Company’s mortgage-back securities are issued by either US government agencies or US government sponsored enterprises. Collectively, these entities provide a guarantee, which ~~may be at maturity~~is either explicitly or implicitly supported by the full faith and credit of the US government, that investors in such mortgage-backed securities will receive timely principal and interest payments.

All held-to-maturity and available for ~~debt~~sale securities ~~the Company considers the unrealized losses to be temporary.~~were current with no securities past due or on nonaccrual as of March 31, 2023.

16

Table of Contents

The following table provides information on the amortized cost and estimated fair values of investment securities by maturity date at ~~September 30, 2017.~~March 31, 2023.


	Available for sale				Held to maturity
	Amortized				Amortized
(Dollars in thousands)	Cost		Fair Value		Cost		Fair Value
Due in one year or less	$	46	$	46	$	1,061	$	1,042
Due after one year through five years		7,004		6,733		118,384		111,443
Due after five years through ten years		40,359		36,068		65,244		59,798
Due after ten years		45,345		38,678		364,407		318,833
Total	$	92,754	$	81,525	$	549,096	$	491,116

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

Note 5 – Loans and Allowance for Credit Losses

On January 1, 2023, the Company adopted ASC 326. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables. For further discussion on the most significant accounting policies that the Company follows see Note 2 – Adoption of Accounting Standards and Note 1 of the Company’s Annual Report on Form 10-K. All loan information presented as of March 31, 2023 is in accordance with ASC 326. All loan information presented as of December 31, 2022, or a prior date is presented in accordance with previously applicable GAAP.

The Company makes residential mortgage, commercial and consumer loans to customers primarily in ~~Talbot~~Anne Arundel County, 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 and Sussex County, Delaware and in Accomack County, Virginia. The following table provides information about the principal classes of the loan portfolio at ~~September 30, 2017~~March 31, 2023 and December 31, ~~2016.~~2022.


(Dollars in thousands)	March 31, 2023		December 31, 2022
Construction	$	250,447	$	246,319
Residential real estate		866,225		810,497
Commercial real estate		1,096,937		1,065,409
Commercial		140,312		147,856
Consumer		314,760		286,026
Total loans		2,668,681		2,556,107
Allowance for credit losses		(28,464)		(16,643)
Total loans, net	$	2,640,217	$	2,539,464

(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 thousand~~$1.7 million and ~~discounts on acquired loans of $2.0~~$1.4 million at ~~September 30, 2017. Loans~~March 31, 2023 and December 31, 2022. At March 31, 2023 and December 31, 2022, included ~~deferred costs,~~in total loans were $342.8 million and $372.2 million in loans, acquired as part of the acquisition of Severn Bancorp, Inc. (“Severn”), effective October 31, 2021. These balances were presented net of ~~deferred fees, of $509 thousand~~the related discount which totaled $6.0 million and $6.7 million at March 31, 2023 and December 31, ~~2016. Interest income on~~2022, respectively.

At March 31, 2023, the Bank was servicing $349.8 million in loans ~~is accrued at~~for the ~~contractual rate based on the principal amount outstanding. fees charged~~Federal National Mortgage Association and ~~costs capitalized~~$74.9 million in loans for ~~originating loans are being amortized substantially on the interest method over the term~~Freddie Mac.

17

Table 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.Contents

~~Interest payments received~~The following table provides information 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. 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 on impaired loans is recognized on a cash basis, and payments are first applied against the principal balance outstanding (i.e., placing impaired loans on nonaccrual status). Generally, interest income is not recognized on impaired loans unless the likelihood of further loss is remote. The allowance for credit losses may include specific reserves related to impaired loans. Specific reserves remain until charge offs are made. Impaired loans do not include groups of smaller balance homogenous loans such as residential mortgage and consumer installment loans that are evaluated collectively for impairment. Reserves for probable credit losses related to these loans are based on historical loss ratios and are included in the formula portion of the allowance for credit losses. See additional discussion under the caption “Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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

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.

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

Construction loans – Construction loans generally finance the construction of residential real estate for builders and individuals for 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

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

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, 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

~~The following tables provide information on impaired loans and any related allowance~~ by loan class as of ~~September 30, 2017~~March 31, 2023.


	Nonaccrual		Nonaccrual		Loans past due
	with no		with an		90 days or more
	allowance for		allowance for		and still
(Dollars in thousands)	credit loss		credit loss		accruing
March 31, 2023
Nonaccrual loans:
Construction	$	177	$	—	$	24
Residential real estate		1,477		12		218
Commercial real estate		—		—		369
Commercial		167		—		—
Consumer		37		24		—
Total	$	1,858	$	36	$	611

Interest income	$	—	$	—	$	1

The overall quality of the Bank’s loan portfolio is primarily assessed using the Bank’s risk-grading scale. This review process is assisted by frequent internal reporting of loan production, loan quality, concentrations of credit, loan delinquencies and ~~December 31, 2016.~~nonperforming and potential problem loans. Credit quality indicators are adjusted based on management’s judgment during the quarterly review process. Loans are graded on a scale of one to ten.

Ratings 1 thru 6 – Pass - Ratings 1 thru 6 have asset risks ranging from excellent-low to adequate. The ~~difference between~~specific rating assigned considers customer history of earnings, cash flows, liquidity, leverage, capitalization, consistency of debt service coverage, the ~~unpaid principal balance~~nature and extent of customer relationship and other relevant specific business factors such as the ~~recorded investment is~~stability of the industry or market area, changes to management, litigation or unexpected events that could have an impact on risks.

Rating 7 – Special Mention - These credits have potential weaknesses due to economic conditions, less than adequate earnings performance or other factors which require the lending officer to direct more than normal attention to the credit. Financing alternatives may be limited and/or command higher risk interest rates. Special mention loan relationships are reviewed at least quarterly.

Rating 8 – Substandard - Substandard assets are assets that are inadequately protected by the sound worth or paying capacity of the borrower or of the collateral pledged. Substandard loans are the first adversely classified loans on the Bank's watchlist. These assets have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of ~~partial charge-offs that~~substandard assets, does not have ~~been taken.~~

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

18

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

to exist in individual assets classified substandard. The ~~following tables provide~~loans may have a ~~roll-forward for troubled debt restructurings as~~delinquent history or combination of ~~September 30, 2017 and September 30, 2016.~~

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

~~The following tables provide information on loans that were modified and considered TDRs during the nine months ended September 30, 2017 and September 30, 2016.~~

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 the nine months ended September 30, 2017, there was one new TDR 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. Generally,~~weak collateral, weak guarantor or operating losses. When a loan is ~~considered~~assigned to this category the Bank may estimate a specific reserve in ~~default when principal or interest is past due 90 days or more,~~ the loan ~~is charged off,~~ loss allowance analysis and/or ~~there is a transfer to OREO~~place the loan on nonaccrual. These assets listed may include assets with histories of repossessions or ~~repossessed assets.~~some that are non-performing bankruptcies. These relationships will be reviewed at least quarterly.

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~~Rating 9 – Doubtful - Doubtful assets have many of the ~~credit quality in~~same characteristics of substandard with the ~~Company’s loan portfolio. Loans~~exception that the Bank has determined that loss is not only possible but is probable. The amount of loss is not discernible due to factors such as merger, acquisition, or liquidation; a capital injection; a pledge of additional collateral; the sale of assets; or alternative refinancing plans. Credits receiving a doubtful classification are ~~identified as special mention, substandard~~required to be on nonaccrual. These relationships will be reviewed at least quarterly.

Rating 10 – Loss – Loss assets are uncollectible or ~~doubtful are adversely rated. They are assigned higher risk ratings than favorably rated loans in the calculation~~ of ~~the formula portion~~little value.

18

Table of the allowance for credit losses. At September 30, 2017, there were no nonaccrual loans classified as special mention or doubtful and $6.3 million of nonaccrual loans were identified as substandard. Similarly, at December 31, 2016, there were no nonaccrual loans classified as special mention or doubtful and $9.0 million of nonaccrual loans were identified as substandard.Contents

The following ~~tables provide~~table provides information on loan risk ratings as of ~~September 30, 2017 and December~~March 31, ~~2016.~~2023.


															Revolving
	Term Loans by Origination Year												Revolving		converted to
(Dollars in thousands)	Prior		2019		2020		2021		2022		2023		loans		term loans		Total
March 31, 2023
Construction
Pass	$	28,379	$	7,814	$	16,531	$	67,810	$	108,670	$	20,197	$	786	$	—	$	250,187
Substandard		236		—		—		24		—		—		—		—		260
Total	$	28,615	$	7,814	$	16,531	$	67,834	$	108,670	$	20,197	$	786	$	—	$	250,447
Gross Charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Residential real estate
Pass	$	226,659	$	38,023	$	75,277	$	175,925	$	222,994	$	53,436	$	70,635	$	—	$	862,949
Special Mention		932		—				—		—		—		256		—		1,188
Substandard		1,964		—		—		—		—		—		124		—		2,088
Total	$	229,555	$	38,023	$	75,277	$	175,925	$	222,994	$	53,436	$	71,015	$	—	$	866,225
Gross Charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Commercial real estate
Pass	$	389,646	$	106,316	$	155,585	$	173,010	$	208,815	$	49,380	$	10,047	$	28	$	1,092,827
Special Mention		1,762		142		—		1,535		—		—		—		—		3,439
Substandard		671		—		—		—		—		—		—		—		671
Total	$	392,079	$	106,458	$	155,585	$	174,545	$	208,815	$	49,380	$	10,047	$	28	$	1,096,937
Gross Charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Commercial
Pass	$	18,465	$	4,291	$	11,125	$	35,137	$	17,833	$	1,211	$	50,327	$	1,287	$	139,676
Special Mention		—		—		—		469		—		—		—		—		469
Substandard		167		—		—		—		—		—		—		—		167
Total	$	18,632	$	4,291	$	11,125	$	35,606	$	17,833	$	1,211	$	50,327	$	1,287	$	140,312
Gross Charge-offs	$	—	$	—	$	—	$	—	$	—	$	(107)	$	—	$	—	$	(107)

Consumer
Pass	$	1,060	$	1,825	$	19,104	$	94,357	$	163,213	$	34,468	$	671	$	—	$	314,698
Special Mention		—		—		—		—		—		—		2		—		2
Substandard		—		27		—		10		23		—		—		—		60
Total	$	1,060	$	1,852	$	19,104	$	94,367	$	163,236	$	34,468	$	673	$	—	$	314,760
Gross Charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Total loans by risk category	$	669,941	$	158,438	$	277,622	$	548,277	$	721,548	$	158,692	$	132,848	$	1,315	$	2,668,681

Total gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	(107)	$	—	$	—	$	(107)

Special

(Dollars in thousands)

Pass/Performing

Mention

Substandard

Doubtful

Total
September 30, 2017

Construction

$
97,304

$
3,127

$
6,186

$
-

$
106,617
Residential real estate

376,600

5,509

5,613

-

387,722
Commercial real estate

438,694

6,780

9,152

-

454,626
Commercial

90,680

660

459

-

91,799
Consumer

6,483

-

-

-

6,483
Total

$
1,009,761

$
16,076

$
21,410

$
-

$
1,047,247

19

Table of Contents

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 30, 2017~~March 31, 2023 and December 31, ~~2016.~~2022.

Accruing

30‑59 days

60‑89 days

90 days or more

Total

(Dollars in thousands)

Current (1)

past due

Nonaccrual

Total

March 31, 2023

Construction

$

249,446

$

731

$

69

$

24

$

824

$

177

$

250,447

Residential real estate

858,389

5,177

952

218

6,347

1,489

866,225

Commercial real estate

1,096,189

337

42

369

748

—

1,096,937

Commercial

140,096

45

4

—

49

167

140,312

Consumer

314,039

633

27

—

660

61

314,760

Total

$

2,658,159

$

6,923

$

1,094

$

611

$

8,628

$

1,894

$

2,668,681

Percent of total loans

99.6

%

0.3

%

—

%

—

%

0.3

%

0.1

%

100.0

%

(1)

Includes loans measured at fair value of $9.5 million at March 31, 2023.


	Accruing
				30‑59 days			60‑89 days			90 days or more			Total
(Dollars in thousands)	Current (1)			past due			past due			past due			past due			Nonaccrual			PCI			Total
December 31, 2022
Construction	$	239,990		$	4,343		$	1,015		$	24		$	5,382		$	297		$	650		$	246,319
Residential real estate		787,070			6,214			891			1,107			8,212			1,259			13,956			810,497
Commercial real estate		1,052,314			369			—			710			1,079			150			11,866			1,065,409
Commercial		147,511			15			—			—			15			174			156			147,856
Consumer		285,750			223			11			—			234			28			14			286,026
Total	$	2,512,635		$	11,164		$	1,917		$	1,841		$	14,922		$	1,908		$	26,642		$	2,556,107
Percent of total loans		98.3	%		0.4	%		0.1	%		0.1	%		0.6	%		0.1	%		1.0	%		100.0	%

(1)

Includes loans measured at fair value of $8.4 million at December 31, 2022.

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
%

22

~~Management evaluates the adequacy of the allowance for credit losses at least quarterly and adjusts the provision for credit losses based on this analysis.~~ The following tables provide a summary of the activity in the allowance for credit losses allocated by loan class for the three months ended March 31, 2023 and ~~nine months ended September 30, 2017 and 2016.~~March 31, 2022. 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

March 31, 2023

Allowance for credit losses:

Beginning Balance

$

2,973

$

2,622

$

4,899

$

1,652

$

4,497

$

16,643

Impact of ASC326 Adoption

1,222

4,974

3,742

401

452

10,791

Charge-offs (1)

—

(107)

—

(107)

Recoveries

3

31

—

53

—

87

Net (charge-offs) recoveries

3

31

—

(54)

—

(20)

Provision

(1,509)

1,120

1,217

(139)

361

1,050

Ending Balance

$

2,689

$

8,747

$

9,858

$

1,860

$

5,310

$

28,464

(1)

Gross charge-offs of commercial loans for the three months ended March 31, 2023 included $107 of demand deposit overdrafts.

Table of Contents


			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Total
For three months ended
March 31, 2022
Allowance for credit losses:
Beginning Balance	$	2,454	$	2,858	$	4,598	$	2,070	$	1,964	$	13,944

Charge-offs		—		—		—		(92)		(16)		(108)
Recoveries		3		46		150		68		7		274
Net (charge-offs) recoveries		3		46		150		(24)		(9)		166

Provision		400		(329)		(248)		(241)		1,018		600
Ending Balance	$	2,857	$	2,575	$	4,500	$	1,805	$	2,973	$	14,710

~~Management re-evaluated the allowance methodology~~There were no modifications to loans for borrowers experiencing financial difficulty (“BEFD”) during the ~~third quarter~~three months ending March 31, 2023.

Foreclosure Proceedings

There were $39 thousand of 2016, in connection with the consolidation of the two former bank subsidiaries. Prior to consolidation, each bank subsidiary applied a separate allowance methodology based on their respective loan portfolios. The revised methodology incorporates both previous methodologies to align with a consolidated loan portfolio. In addition, beginning in January of 2017, the allowance methodology was expanded to require the allocation of general reserves to pass/watch loans. This change resulted in an increase in allowance for the first quarter of 2017 when compared to the fourth quarter of 2016 of $1.1 million, which was partially offset by a reduction in specific reserves of $850 thousand.

Residential

Commercial

(Dollars in thousands)

Construction

real estate

real estate

Commercial

Consumer

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~~consumer mortgage loans collateralized by residential real estate property that were in the process of foreclosure ~~totaled $620 thousand~~as of March 31, 2023 and ~~$687~~$263 thousand as of ~~September 30, 2017 and~~ December 31, ~~2016,~~2022, respectively. ~~At September 30, 2017, there~~There were 2no residential real estate properties ~~held~~included in the balance of other real estate owned at March 31, 2023 and 1 residential real estate property totaling ~~$0, compared to 3 residential properties totaling $92~~$18 thousand at December 31, ~~2016.~~ 2022.

Prior to the adoption of ASC 326

The following table provides information about all loans acquired from Severn as of December 31, 2022.


	December 31, 2022
	Acquired Loans -		Acquired Loans -
	Purchased		Purchased		Acquired Loans -
(Dollars in thousands)	Credit Impaired		Performing		Total
Outstanding principal balance	$	29,620	$	349,262	$	378,882
Carrying amount
Construction	$	650	$	18,761	$	19,411
Residential real estate		13,956		116,118		130,074
Commercial real estate		11,866		174,278		186,144
Commercial		156		35,687		35,843
Consumer		14		697		711
Total loans	$	26,642	$	345,541	$	372,183

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


	For the Three Months Ended
(Dollars in thousands)	March 31, 2022
Accretable yield, beginning of period	$	5,367
Accretion		(394)
Reclassification of nonaccretable difference due to improvement in expected cash flows		—
Other changes, net		—
Accretable yield, end of period	$	4,973

21

Table of Contents

The following tables include impairment information relating to loans and the allowance for credit losses as of December 31, 2022.


			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Total
December 31, 2022
Loans individually evaluated for impairment	$	331	$	5,081	$	2,540	$	174	$	28	$	8,154
Loans collectively evaluated for impairment		236,901		791,460		1,051,003		147,526		285,984		2,512,874
Acquired loans - PCI		650		13,956		11,866		156		14		26,642
Total loans (1)	$	237,882	$	810,497	$	1,065,409	$	147,856	$	286,026	$	2,547,670

Allowance for credit losses allocated to:
Loans individually evaluated for impairment	$	—	$	127	$	—	$	—	$	—	$	127
Loans collectively evaluated for impairment		2,973		2,495		4,899		1,652		4,497		16,516
Total allowance	$	2,973	$	2,622	$	4,899	$	1,652	$	4,497	$	16,643

(1)

Excludes loans measured at fair value of $8.4 million at December 31, 2022.

22

Table of Contents

The following tables provide information on impaired loans and any related allowance by loan class as of December 31, 2022. The difference between the unpaid principal balance and the recorded investment is the amount of partial charge-offs that have been taken and interest paid on nonaccrual loans that has been applied to principal.


			Recorded		Recorded				March 31, 2022
	Unpaid		investment		investment				Year-to-date		Interest
	principal		with no		with an		Related		average recorded		income
(Dollars in thousands)	balance		allowance		allowance		allowance		investment		recognized
December 31, 2022
Impaired nonaccrual loans:
Construction	$	297	$	297	$	—	$	—	$	331	$	—
Residential real estate		1,363		1,259		—		—		1,476		—
Commercial real estate		159		150		—		—		906		—
Commercial		359		174		—		—		321		—
Consumer		29		28		—		—		74		—
Total	$	2,207	$	1,908	$	—	$	—	$	3,108	$	—

Impaired accruing TDRs:
Construction	$	10	$	10	$	—	$	—	$	22	$	—
Residential real estate		2,849		1,176		1,539		127		2,809		25
Commercial real estate		1,680		1,680		—		—		2,581		23
Commercial		—		—		—		—		—		—
Consumer		—		—		—		—		—		—
Total	$	4,539	$	2,866	$	1,539	$	127	$	5,412	$	48

Other impaired accruing loans:
Construction	$	24	$	24	$	—	$	—	$	—	$	—
Residential real estate		1,107		1,107		—		—		29		3
Commercial real estate		710		710		—		—		417		1
Commercial		—		—		—		—		9		—
Consumer		—		—		—		—		38		—
Total	$	1,841	$	1,841	$	—	$	—	$	493	$	4

Total impaired loans:
Construction	$	331	$	331	$	—	$	—	$	353	$	—
Residential real estate		5,319		3,542		1,539		127		4,314		28
Commercial real estate		2,549		2,540		—		—		3,904		24
Commercial		359		174		—		—		330		—
Consumer		29		28		—		—		112		—
Total	$	8,587	$	6,615	$	1,539	$	127	$	9,013	$	52

23

Table of Contents

There were no loans modified and considered to be TDRs during the three months ended March 31, 2022. All accruing TDRs were in compliance with their modified ~~terms~~terms. Both performing and ~~there are~~non-performing TDRs had no further commitments associated with ~~these loans~~them as of ~~September 30, 2017 and~~ December 31, ~~2016.~~2022.

There were no TDRs which subsequently defaulted within 12 months of modification for the three months ended March 31, 2022. 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 other real estate owned (OREO) or repossessed assets.

The following tables provide information on loan risk ratings as of December 31, 2022.


					Special
(Dollars in thousands)	Pass/Performing (1)		Pass		Mention		Substandard		Doubtful		PCI		Total
December 31, 2022
Construction	$	231,160	$	14,212	$	—	$	297	$	—	$	650	$	246,319
Residential real estate		761,405		32,467		1,239		1,430		—		13,956		810,497
Commercial real estate		929,501		121,711		1,814		517		—		11,866		1,065,409
Commercial		131,084		15,958		484		174		—		156		147,856
Consumer		285,786		196		2		28		—		14		286,026
Total	$	2,338,936	$	184,544	$	3,539	$	2,446	$	—	$	26,642	$	2,556,107

(1) Includes loans measured at fair value of $8.4 million at December 31, 2022.

Note 6 – Leases

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

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

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


(Dollars in thousands)	March 31, 2023			December 31, 2022
Lease liabilities	$	9,642		$	9,908
Right-of-use assets	$	9,344		$	9,629
Weighted average remaining lease term		12.46	years		12.55	years
Weighted average discount rate		2.54	%		2.50	%

24

Table of Contents


	For the Three Months Ended
Lease cost (in thousands)	March 31, 2023		March 31, 2022
Operating lease cost	$	340	$	351
Short-term lease cost		—		—
Total lease cost	$	340	$	351

Cash paid for amounts included in the measurement of lease liabilities	$	322	$	327

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


	As of
Lease payments due (in thousands)	March 31, 2023
Nine months ending December 31, 2023	$	909
2024		1,141
2025		917
2026		916
2027		849
Thereafter		6,584
Total undiscounted cash flows	$	11,316
Discount		1,674
Lease liabilities	$	9,642

Total gross rental income was $393 thousand for the three months ended March 31, 2023 and $272 thousand for the three months ended March 31, 2022.

The following table presents our minimum future annual rental income on such leases as of March 31, 2023.


	As of
(In thousands)	March 31, 2023
Nine months ending December 31, 2023	$	655
2024		701
2025		719
2026		737
2027		418
Thereafter		1,554
Total	$	4,784

Note 67 – Goodwill and Other Intangibles

The following table provides information on the significant components of goodwill and other acquired intangible assets at March 31, 2023 and December 31, 2022.

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

March 31, 2023

Weighted

Gross

Measurement

Accumulated

Net

Average

Carrying

Period

Impairment

Accumulated

Carrying

Remaining Life

(Dollars in thousands)

Amount

Adjustments

Charges

Amortization

Amount

(in years)

Goodwill

$

63,933

$

—

$

—

$

(667)

$

63,266

—

Other intangible assets

Amortizable

Core deposit intangible

$

10,504

$

—

$

—

$

(5,398)

$

5,106

2.5

Total other intangible assets

$

10,504

$

—

$

—

$

(5,398)

$

5,106

25

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


December 31, 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	$	(155)	$	(1,543)	$	(667)	$	63,266	—

Other intangible assets
Amortizable
Core deposit intangible	$	10,504	$	—	$	—	$	(4,957)	$	5,547	2.6
Total other intangible assets	$	10,504	$	—	$	—	$	(4,957)	$	5,547

The ~~gross carrying amount~~aggregate amortization expense was $441 thousand for the three months ended March 31, 2023 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

$517 thousand for the three months ended March 31, 2022.

At ~~September~~March 31, ~~2017,~~2023, estimated future remaining amortization for amortizing intangibles within the years ending December 31, ~~was~~is as follows:


(Dollars in thousands)	Amortization Expense
2023	$	1,241
2024		1,376
2025		1,070
2026		765
2027		459
Thereafter		195
Total amortizing intangible assets	$	5,106

(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 30, 2017~~March 31, 2023 and December 31, ~~2016.~~2022.


	March 31,		December 31,
(Dollars in thousands)	2023		2022
Accrued interest receivable	$	8,218	$	9,384
Deferred income taxes		10,436		7,357
Prepaid expenses		3,223		2,680
Income taxes receivable		—		74
Other assets		9,999		8,506
Total	$	31,876	$	28,001

(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

Note 9 - Borrowings

26

At March 31, 2023, subordinated debt consisted of $25.0 million of long-term debt issued by the Company in August 2020 and $20.6 million of long-term debt acquired in the acquisition of Severn in 2021. The ~~following table provides information on significant components~~recorded balance of ~~the Company’s deferred tax assets and liabilities as~~subordinated debt issued in 2020, net of ~~September 30, 2017~~unamortized issuance costs was $24.7 million at March 31, 2023 and December 31, ~~2016.~~

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

2022. The ~~Company’s deferred tax assets consist~~recorded balance of ~~gross net operating loss carryovers for state tax purposes of $15.7~~the debt acquired from Severn was $18.4 million ~~that will be used to offset taxable income in future periods. The Company’s state net operating loss carryovers will begin to expire in the year ended December~~at March 31, ~~2026 with limited amounts available through December 31, 2034.~~

~~No valuation allowance on these deferred tax assets was recorded at September 30, 2017~~2023 and December 31, ~~2016 as management believes it~~2022, which is ~~more likely than not that all deferred tax assets will be realized.~~presented net of the unamortized fair value adjustment of $2.4 million at both period ends. These obligations mature in 2030 and 2035, respectively. Further information on these obligations is provided in the Company’s 2022 Annual Report on Form 10-K.

At March 31, 2023 and December 31, 2022, the Company had short-term borrowings from the FHLB of $131.5 million and $40.0 million, respectively. The outstanding obligations at March 31, 2023 carried interest rates ranging from 4.57% to 5.07%.

27

26

Table of Contents

Note 810 – Other Liabilities

The Company had the following other liabilities at ~~September 30, 2017~~March 31, 2023 and December 31, ~~2016.~~2022.


(Dollars in thousands)	March 31, 2023		December 31, 2022
Accrued interest payable	$	1,309	$	989
Accrued salaries and wages		710		1,360
Accounts payable		191		353
Deferred compensation liability		6,160		5,679
Income taxes payable		2,811		—
Other liabilities		2,021		1,846
Total	$	13,202	$	10,227

(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~~472,320 shares remained available for grant at ~~September 30, 2017.~~

March 31, 2023.

The following tables provide information on stock-based compensation expense for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2023 and ~~2016.~~2022.

For Three Months Ended

For Nine Months Ended

September 30,

September 30,
(Dollars in thousands)

2017

2016

2017

2016
Stock-based compensation expense

$
158

$
85

$
748

$
262
Excess tax benefits related to stock-based

compensation

15

12

26

25


	March 31,
(Dollars in thousands)	2023			2022
Unrecognized stock-based compensation expense	$	464		$	633
Weighted average period unrecognized expense is expected to be recognized		1.1	years		0.9	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~~three months ended ~~September 30, 2017 and 2016.~~March 31, 2023.


	2023
		Weighted Average
	Number of	Grant Date
	Shares	Fair Value
Nonvested at beginning of period	36,860	$	20.15
Granted	27,550		17.49
Vested	(29,532)		20.23
Forfeited	—		—
Nonvested at end of period	34,878	$	17.95

27

Table of Contents

The fair value of restricted stock awards that vested during the first ~~nine~~three months of ~~2017~~2023 and ~~2016~~2022 was ~~$309~~$515 thousand and ~~$204~~$492 thousand, respectively.

Note 12 – Derivatives

~~Restricted stock units (RSUs)~~The Company maintains and accounts for derivatives, in the form of interest rate lock commitments (IRLCs) and mandatory forward contracts, in accordance with the FASB guidance on accounting for derivative instruments and hedging activities. We recognize gains and losses through mortgage-banking revenue in the Consolidated Statements of Income.

IRLCs on mortgage loans that we intend to sell in the secondary market are ~~similar~~considered derivatives. We are exposed to ~~restricted stock, except~~price risk from the ~~recipient does not receive~~time a mortgage loan is locked in until the ~~stock immediately, but instead receives it upon~~time the ~~terms~~loan is sold. The period of time between issuance of a loan commitment and ~~conditions~~closing and sale of the ~~Company’s long-term incentive plans~~loan generally ranges from 14 days to 120 days, however, this period may be longer for construction to permanent loans that are originated with the intent of selling in the secondary market. For these IRLCs and our closed inventory in loans held for sale, we attempt to protect the Bank from changes in interest rates through the use of to be announced (TBA) securities, which are ~~subject~~forward contracts, as well as, to ~~performance milestones achieved at~~a significantly lesser degree, loan level commitments in the ~~end~~form of ~~a three-year period. Each RSU cliff vests at~~best efforts and mandatory forward contracts. These assets and liabilities are included in the ~~end of the three-year period~~Consolidated Balance Sheets in other assets 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.accrued expenses and other liabilities, respectively.

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 stock options granted during the nine months ended September 30, 2017 and September 30, 2016 was $10.99~~and $5.03, respectively. The Company estimates the fair value of options using the Black-Scholes valuation model with weighted average assumptions for dividend yield, expected volatility, risk-free interest rate and expected lives (in years). The expected dividend yield is calculated by dividing the total expected annual dividend payout by the average stock price. The expected volatility is based on historical volatility of the underlying securities. The risk-free interest rate is based on the Federal Reserve Bank’s constant maturities daily interest rate in effect at grant date. The expected contract life of the options represents the period of time that the Company expects the awards to be outstanding based on historical experience with similar awards. The following weighted average assumptions were used as inputsprovides information pertaining to the ~~Black-Scholes valuation model for options granted in 2017~~carrying amounts of our derivative financial instruments at March 31, 2023 and ~~2016.~~December 31, 2022.

March 31, 2023

December 31, 2022

Notional

Estimated

Notional

Estimated

(Dollars in thousands)

Amount

Fair Value

Amount

Fair Value

Asset - IRLCs

$

7,234

$

101

$

4,166

$

35

Asset - TBA securities

10,000

142

8,750

41

Liability - IRLCs

—

1,150

7

Liability - TBA securities

12,000

80

1,000

6

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~~three months ended ~~September 30, 2017~~March 31, 2023 and ~~2016.~~2022.


	Unrealized
	gains (losses) on
	available for sale
(Dollars in thousands)	securities
Balance, December 31, 2022	$	(9,021)
Other comprehensive income		860
Balance, March 31, 2023	$	(8,161)

Balance, December 31, 2021	$	56
Other comprehensive (loss)		(2,228)
Balance, March 31, 2022	$	(2,172)

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

28

Table of Contents

hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

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

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

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

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

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

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

Investment Securities Available for Sale

Fair value measurement for investment securities 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.

29

Table of Contents

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.

IRLCs

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


(Dollars in thousands)	Fair Value		Valuation Technique	Unobservable Input	Range
March 31, 2023
MSRs (1)	$	5,310	Market Approach	Weighted average prepayment speed (PSA) (2)	121

IRLCs - asset	$	101	Market Approach	Range of pull through rate	82% - 100%
				Average pull through rate	92%


(Dollars in thousands)	Fair Value		Valuation Technique	Unobservable Input	Range
December 31, 2022
MSRs (1)	$	5,275	Market Approach	Weighted average prepayment speed (PSA) (2)	121

IRLCs - net asset	$	28	Market Approach	Range of pull through rate	78% - 100%
				Average pull through rate	92%

(1)

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

(2)

PSA = Public Securities Association Standard Prepayment Model

The following table presents activity in MSRs for the three months ended March 31, 2023.


	For the Three Months Ended
(Dollars in thousands)	March 31, 2023
Beginning balance	$	5,275
Servicing rights resulting from sales of loans		117
Valuation adjustment		(82)
Ending balance	$	5,310

The following table presents activity in the IRLCs for the three months ended March 31, 2023.


	For the Three Months Ended
(Dollars in thousands)	March 31, 2023
Beginning balance	$	28
Valuation adjustment		73
Ending balance	$	101

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

30

Table of Contents

loss that would occur if we were to pair-off the transaction with the investor at the measurement date. This is a level 2 input. We have elected to measure and report best efforts commitments at fair value, when outstanding, using a valuation methodology similar to that used for mandatory commitments.

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

The following tables ~~below~~ present the recorded amount of assets measured at fair value on a recurring basis at ~~September 30, 2017~~March 31, 2023 and December 31, ~~2016.~~2022. No assets were transferred from one hierarchy level to another during the first ~~nine~~three months of ~~2017~~2023 or ~~2016.~~2022.


					Significant
					Other		Significant
			Quoted		Observable		Unobservable
			Prices		Inputs		Inputs
(Dollars in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
March 31, 2023
Assets:
Securities available for sale:
U.S. Government agencies	$	18,309	$	—	$	18,309	$	—
Mortgage-backed		61,373		—		61,373		—
Other debt securities		1,843		—		1,843		—
		81,525		—		81,525		—

Equity securities		1,258		—		1,258		—

TBA securities		142		—		142		—
LHFS		3,514		—		3,514		—
LHFI, at fair value		9,526		—		9,526		—
MSRs		5,310		—		—		5,310
IRLCs		101		—		—		101
Total assets at fair value	$	101,376	$	—	$	95,965	$	5,411

Liabilities:
TBA securities	$	80	$	—	$	80	$	—
Total liabilities at fair value	$	80	$	—	$	80	$	—

31

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, 2022
Assets:
Securities available for sale:
U.S. Government agencies	$	18,178	$	—	$	18,178	$	—
Mortgage-backed		63,519		—		63,519		—
Other debt securities		1,890		—		1,890		—
		83,587		—		83,587		—

Equity securities		1,233		—		1,233		—

TBA securities		41		—		41		—
LHFS		4,248		—		4,248		—
LHFI, at fair value		8,437		—		8,437		—
MSRs		5,275		—		—		5,275
IRLCs		35		—		—		35
Total assets at fair value	$	102,856	$	—	$	97,546	$	5,310

Liabilities:
IRLCs	$	7	$	—	$	—	$	7
TBA securities		6		—		6		—
Total liabilities at fair value	$	13	$	—	$	6	$	7

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

~~Impaired~~Individually Evaluated Collateral-Dependent Loans

Loans for which repayment is substantially expected to be provided through the operation or sale of collateral are considered ~~impaired when,~~collateral dependent, and are valued 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. Loan impairment is measured using the present value of expected cash flows, the loan’s observable market price or theestimated fair value of the collateral, ~~(less selling costs) if~~less estimated costs to sell at the reporting date, where applicable. Accordingly, collateral dependent loans are ~~collateral dependent and these are considered~~classified within Level 3 inof 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

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

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 30, 2017~~March 31, 2023 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~~2022. Assets are classified in their entirety based on the lowest level of input that is significant to the estimated fair values of financial assets and liabilities that are reported in the Company’s consolidated balance sheets at their carrying amounts. The discussion below describes the methods and assumptions used to estimate the fair value ~~of each class of financial asset and liability for which it is practicable to estimate that value.~~measurement.


	Quantitative Information about Level 3 Fair Value Measurements
						Weighted
(Dollars in thousands)	Fair Value		Valuation Technique	Unobservable Input	Range	Average (1)
March 31, 2023
Nonrecurring measurements:

Individually evaluated collateral dependent loans	$	23	Appraisal of collateral	Liquidation expense	10%	10%

Other real estate owned	$	179	Appraisal of collateral	Appraisal adjustments	0% - 20%	(0%)


	Quantitative Information about Level 3 Fair Value Measurements
						Weighted
(Dollars in thousands)	Fair Value		Valuation Technique	Unobservable Input	Range	Average (1)
December 31, 2022
Nonrecurring measurements:

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

~~Cash and Cash Equivalents~~

~~Cash equivalents include interest-bearing deposits with other banks and federal funds sold. For these short-term instruments,~~

(1)Unobservable inputs were weighted by the ~~carrying amount is a reasonable estimate of fair value.~~

~~Investment Securities Held to Maturity~~

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

33

~~Loans~~

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

~~Restricted Securities~~

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

~~Bank Owned Life Insurance~~

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

~~Deposits and Short-Term Borrowings~~

~~The fair values of demand deposits, savings accounts, and certain money market deposits are the amounts payable on demand at the reporting date. The~~relative fair value of ~~fixed-maturity certificates~~the instruments.

33

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 March 31, 2023 and ~~liabilities have been segregated by their classification level in the fair value hierarchy.~~December 31, 2022 were estimated using an exit price notion.


	March 31, 2023				December 31, 2022
			Estimated				Estimated
	Carrying		Fair		Carrying		Fair
(Dollars in thousands)	Amount		Value		Amount		Value
Financial assets
Level 1 inputs
Cash and cash equivalents	$	37,709	$	37,709	$	55,499	$	55,499

Level 2 inputs
Investment securities available for sale	$	81,525	$	81,525	$	83,587	$	83,587
Investment securities held to maturity		549,096		491,116		559,455		494,626
Equity securities		1,258		1,258		1,233		1,233
Restricted securities		15,067		15,067		11,169		11,169
LHFS		3,514		3,514		4,248		4,248
TBA securities		142		142		41		41
Cash surrender value on life insurance		59,711		59,711		59,218		59,218
Loans, at fair value		9,526		9,526		8,437		8,437

Level 3 inputs
Loans, net	$	2,630,691	$	2,417,124	$	2,531,027	$	2,431,808
MSRs		5,310		5,310		5,275		5,275
IRLCs		101		101		35		35

Financial liabilities
Level 2 inputs
Deposits:
Noninterest-bearing demand	$	808,679	$	808,679	$	862,015	$	862,015
Checking plus interest		726,070		726,070		694,101		694,101
Money market		675,751		675,751		709,132		709,132
Savings		295,002		295,002		319,814		319,814
Club		755		755		374		374
Certificates of deposit		488,305		478,065		424,348		410,455
Advances from FHLB - short-term		131,500		131,496		40,000		40,002
Subordinated debt		43,150		40,079		43,072		41,193
TBA Securities		80		80		6		6

Level 3 inputs
IRLCs		—		—		7		7

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.

34

Table of Contents

The following table provides information on commitments outstanding at ~~September 30, 2017~~March 31, 2023 and December 31, ~~2016.~~2022.


(Dollars in thousands)	March 31, 2023		December 31, 2022
Commitments to extend credit	$	408,789	$	406,353
Letters of credit		7,861		8,009
Total	$	416,650	$	414,362

(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

~~Note 13 – Segment Reporting~~

The Company ~~operates two primary~~provides banking services to customers who do business ~~segments: Community Banking~~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 ~~Insurance Products~~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 ~~Services. Through~~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 ~~Community Banking~~services that it provides to these customers. While we are not aware of any instance of a federally-insured financial institution being subject to such aiding and abetting liability, the strict enforcement of Federal laws regarding cannabis would likely result in the Company’s inability to continue to provide banking services to these customers and the Company could have legal action taken against it by the Federal government, including imprisonment and fines. There is an uncertainty of the potential impact to the Company’s Consolidated Financial Statements if the Federal government takes actions against the Company. As of March 31, 2023, the Company had not accrued an amount for the potential impact of any such actions.

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

● Deposit and loan balances at March 31, 2023 were approximately $144.6 million, or 4.8% of total deposits, and $55.2 million, or 2.1% of total gross loans, respectively.

● Interest and noninterest income for the three months ended March 31, 2023, were approximately $2.2 million and $266 thousand, respectively.

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

Note 16 – Revenue Recognition

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

Service Charges on Deposit Accounts

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

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

35

Table of Contents

Trust and Investment Fee Income

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

Optional services ~~to consumers~~such as real estate sales and ~~small businesses in Maryland, Delaware and Virginia through its 21 branch network and 2 loan production offices. Community banking activities include small business~~tax return preparation services ~~retail brokerage, trust services and consumer banking products and services. Loan products~~are also available to ~~consumers include mortgage, home equity, automobile, marine,~~existing trust and ~~installment loans,~~asset management customers. The Company’s performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point in time (i.e., as incurred). Payment is received shortly after services are rendered.

Title Company Revenue

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

All contract issuance costs are expensed as incurred. We had no contract assets or liabilities at March 31, 2023.

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 ~~secured~~services. The Company’s performance obligation for fees, exchange, and ~~unsecured personal lines of credit. Small business lending includes commercial mortgages, real estate development loans, equipment~~other service charges are largely satisfied, and ~~operating loans, as well as secured and unsecured lines of credit, credit cards, accounts receivable financing arrangements, and merchant card services.~~

~~Through~~related revenue recognized, when the ~~Insurance Products and Services business, the Company provides a full range of insurance products and~~ services ~~to businesses and consumers~~are rendered or upon completion. Payment is typically received immediately or in the ~~Company’s market areas. Products include property~~following month. Safe deposit box rental fees are charged to the customer on an annual basis and ~~casualty, life, marine, individual health~~recognized upon receipt of payment. The Company determined that rentals and ~~long-term care insurance. Pension and profit sharing plans and retirement plans for executives and employees are available to suit~~renewals of safe deposit boxes will be recognized on a monthly basis consistent with the ~~needs~~duration of ~~individual businesses.~~

35

the performance obligation.

The following ~~table includes selected financial information~~presents noninterest income, segregated by ~~business segments~~revenue streams in-scope and out-of-scope of Topic 606, for the ~~first nine~~three months ended March 31, 2023 and 2022.


	For the Three Months Ended
	March 31,
(Dollars in thousands)	2023		2022
Noninterest Income
In-scope of Topic 606:
Service charges on deposit accounts	$	1,213	$	1,359
Trust and investment fee income		432		514
Interchange income		1,212		1,038
Title Company revenue		137		323
Other noninterest income		794		460
Noninterest Income (in-scope of Topic 606)		3,788		3,694
Noninterest Income (out-of-scope of Topic 606)		1,546		2,352
Total Noninterest Income	$	5,334	$	6,046

36

Table of ~~2017~~Contents

Note 17 – Pending Merger

On December 14, 2022, the Company and ~~2016.~~The Community Financial Corporation (“TCFC”) entered into a definitive agreement for the Company to acquire TCFC.

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

Under the terms of the agreement, TCFC shareholders will have the right to receive 2.3287 shares of Shore common stock and cash in lieu of any fractional shares of Shore common stock. Upon closing, shareholders of Shore will own approximately 60% of the combined company and shareholders of TCFC will own approximately 40% of the combined company. The transaction is subject to satisfaction of customary closing conditions, including approval from Shore and TCFC shareholders. Shore and TCFC have received all required regulatory approvals and waivers. The transaction is expected to close late in the second quarter or early in the third quarter of 2023.

As of December 31, 2022, TCFC had more than $2.4 billion in assets and operated ten full-service offices in Maryland and two full-service offices in Virginia.

36

37

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 2022 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~~2022 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~~31 full-service branches in 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 and Sussex County in 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”.

38

Table of Contents

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.~~2022 Annual Report along with Note 2 of the current period interim financial information. These policies, along with the disclosures presented in the notes to the financial statements and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has determined that the accounting policies ~~with respect to~~ the allowance for credit losses ~~goodwill~~on loans 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.

Allowance for Credit Losses on Losses

The Company adopted ASU No. 2026-13, “Financial Instruments – Credit Losses (Topic 326)”, as amended, on January 1, 2023 and in accordance with ASC 326, has recorded an allowance for credit losses (“ACL”) on loans carried at amortized cost. The ACL represents management’s best estimate of expected lifetime credit losses within the Company's loan portfolio as of the balance sheet date. The allowance for credit losses is ~~an estimate~~established through a provision for credit losses and is increased by recoveries of loans previously charged off. Loan losses are charged against the allowance when management's assessments confirm that the Company will not collect the full amortized cost basis of a loan. The calculation of expected credit losses is determined using cash flow methodology, and includes considerations of historical experience, current conditions, and reasonable and supportable economic forecasts that may affect collection of the ~~losses that may be sustained~~recorded balances. The Company assesses an ACL to groups of loans which share similar risk characteristics or on an individual basis, as deemed appropriate. Changes in the ~~loan portfolio. The allowance is based~~ACL on ~~two basic principles of accounting: (i) Topic 450, “~~ ~~Contingencies~~ ~~”, of~~loans, and as a result, the ~~Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”), which requires that~~related provision for credit losses, ~~be accrued when they are probable 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.can materially affect financial results. 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~~overall balance is determined based on ~~estimates that can~~specific portfolio segments and ~~do change when~~individually assessed assets, the ~~actual events occur. The specific allowance~~entire balance is ~~established against impaired~~available to absorb credit losses for 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.portfolio.

~~Management has significant discretion in making the adjustments inherent in the~~The determination of the ~~provision~~appropriate level of ACL on loans inherently involves a high degree of subjectivity and ~~allowance for~~requires the Company to make significant judgments concerning credit ~~losses,~~risks and trends using quantitative and qualitative information, as well as reasonable and supportable forecasts of future economic conditions, all of which may undergo frequent and significant changes. Changes in conditions, including in connection with the valuation of collateral, the estimation of a borrower’s prospects of repayment, and the establishment of the allowance 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 ofunforeseen events, changes in ~~lending policy,~~asset-specific risk characteristics, and other economic factors, both within and outside the ~~experience and depth of management, national and local economic trends, concentrations of credit,~~Company's control, may indicate 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 inneed for an increase or decrease in the ~~amount~~ACL on loans. While management makes every effort to utilize the best information available in making its assessment of the ~~provision~~ACL estimate, the estimation process is inherently challenging as potential changes in any one factor or ~~allowance, based on~~input may occur at different rates and/or impact pools of loans in different ways. Further, changes in factors and inputs may also be directionally inconsistent, such that improvement in one factor may offset deterioration in others.

The Company’s management reviews the ~~same volume and classification of loans. Changes in allowance factors will have a direct impact on the amount~~adequacy of the ~~provision, and~~ACL on loans on at least a ~~corresponding effect~~quarterly basis. Refer to Note 2, “Adoption of Accounting Standards”, of the interim consolidated financial information for additional detail concerning the determination of the ACL on ~~net income. Errors in management’s perception and assessment~~loans.

39

Table of ~~these factors and their impact on the portfolio could result in the allowance not being adequate to cover losses in the portfolio, and may result in additional provisions or charge-offs.~~Contents

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, the Company is required to maximize the use of observable inputs and minimize the use of unobservable inputs, reducing subjectivity.

38

OVERVIEW

The Company reported net income of ~~$3.4~~$6.5 million for the ~~third~~first quarter of ~~2017,~~2023, or diluted income per common share of ~~$0.27,~~$0.32, compared to net income of ~~$2.4~~$5.6 million, or diluted income per common share of ~~$0.19,~~$0.28, for the ~~third~~first quarter of ~~2016.~~2022. For the ~~second~~fourth quarter of ~~2017,~~2022, the Company reported net income of ~~$2.4~~$8.4 million, or diluted income per common share of ~~$0.19. When comparing~~$0.42. Net income, excluding merger related expenses, for the ~~third~~first quarter of 2017 to the third quarter of 2016, the primary reasons for improved net income were increases in net interest income of $2.7 million, noninterest income of $418 thousand and a reduction in provision for credit losses of $260 thousand, partially offset by an increase in noninterest expenses of $1.5 million. When comparing the third quarter of 2017 to the second quarter of 2017, the higher net income2023 was primarily attributable to increases in net interest income of $1.4 million, noninterest income of $246 thousand, and a reduction in provision for credit losses of $629 thousand, partially offset by an increase in noninterest expenses of $521 thousand. These increases were a direct result of operating the three branches acquired from NWBI for a full quarter. The reduction in provision for credit losses was due to a large charge-off in the second quarter of 2017 which was the result of one borrowing relationship.

~~For the first nine months of 2017, the Company reported net income of $8.6~~$7.0 million or $0.35 per diluted ~~income per~~ common share, ~~of $0.67,~~ compared to net income, excluding merger related expenses, of ~~$7.1~~$9.1 million or $0.46 per diluted ~~income per~~ common share for the fourth quarter of ~~$0.56,~~2022 and net income, excluding merger-related expenses, of $6.2 million or $0.31per diluted common share for the first ~~nine months~~quarter of ~~2016. Earnings improved~~2022. When comparing net income, excluding merger related expenses, for the first quarter of 2023 to the first quarter of 2022, net income increased $803 thousand, primarily due to increases in net interest income of ~~$4.9~~$3.2 million, partially offset by a decrease in noninterest income of $712 thousand, coupled with increases in both noninterest expense of $600 thousand and provision for credit losses of $613 thousand. When comparing the first quarter of 2023 to the fourth quarter of 2022, net income, excluding merger related expenses, decreased $2.2 million, due to decreases in net interest income of $1.3 million and noninterest income of ~~$822~~$528 thousand, ~~partially offset by~~coupled with increases in in noninterest expense of $169 thousand and provision for credit losses of ~~$316~~$763 thousand. Merger-related expenses recorded for the first quarter of 2023 and the fourth quarter of 2022 were $691 thousand and ~~noninterest expenses of $2.6 million, of which $977~~$967 thousand, ~~related to acquisition costs from the branch purchase.~~respectively.

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~~$25.7 million for the ~~third~~first quarter of ~~2017~~2023 and ~~$9.7~~$22.5 million for the ~~third~~first quarter of ~~2016.~~2022. Tax-equivalent net interest income was ~~$11.0~~$26.9 million for the ~~second~~fourth quarter of ~~2017.~~2022. The increase in net interest income ~~for~~when comparing the ~~third~~first quarter of ~~2017 when compared~~2023 to the ~~third~~first quarter of ~~2016 was primarily~~2022 due to ~~an increase~~increases in interest and fees on loans and income ~~of $2.7 million, or 26.1%,~~from taxable investment securities, partially offset by ~~an increase~~increases in interest expense of $33 thousand, or 6.1%. The increase in net interest income compared to the second quarter of 2017 was primarily due to an increase in interest income of $1.5 million, or 12.9%, partially offset by an increase in interest expense of $62 thousand, or 11.3%.on interest-bearing deposits and FHLB short-term borrowings. Net interest margin is tax-equivalent net interest income (annualized) divided by average earning assets. The net interest margin ~~increased in~~for the ~~third~~first quarter of ~~2017 to 3.79%~~2023 was 3.18% which was an increase of 42bps when compared to ~~both~~2.76% for the ~~third~~first quarter of ~~2016~~2022 and a decrease of 17bps when compared to 3.35% for the ~~second~~fourth quarter of ~~2017~~2022. The improvement in net interest margin in the first quarter of ~~3.54%~~2023 when compared to the first quarter of 2022 was primarily due to significantly higher volume of interest earning assets as well as improved yields on such interest earning assets. The decrease in net interest margin when compared to the fourth quarter of 2022 was primarily due to the increase in the average balance of FHLB short-term borrowings of $106.6 million and ~~3.73%, respectively.~~an increases rate of 98bps, resulting in $1.3 million in interest expense.

Interest Income

On a tax-equivalent basis, interest income increased ~~$2.7~~$10.7 million, or ~~26.1%~~44.1%, for the ~~third~~first quarter of ~~2017~~2023 when compared to the ~~third~~first quarter of ~~2016.~~2022. 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 and income from investment securities. 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 $475.9 million ~~or 23.6%~~coupled with an increase in the average ~~balance~~yield of ~~loans which primarily resulted from the purchase of $122.9 million in loans from NWBI in the second quarter of 2017 and organic loan growth of $70.2 million.~~59bps. The 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 average balance of taxable investment securities ~~which was partially funded by the excess cash received from the branch purchase.~~ increased $122.5 million, providing $2.1 million of additional income.

40

Table of Contents

On a tax-equivalent basis, interest income increased ~~$1.5~~$2.8 million, or ~~12.9%~~8.6%, for the ~~third~~first quarter of ~~2017~~2023 when compared to the ~~second~~fourth quarter of ~~2017.~~2022. The ~~increase was primarily due to a $1.3 million, or 12.7%,~~primary driver for the increase in interest income ~~and fees on loans. This increase was due to a $81.5 million, or 8.6% increase~~growth in the average balance of ~~loans due to the full quarter impact of the loans acquired from NWBI. The~~$144.3 million, or 5.8% coupled with a higher average yield ~~on loans increased 12 bps, which increased from 4.42% to 4.54%. In addition, interest and dividends on taxable investment securities increased $97 thousand, or 104%, during the third quarter~~ of ~~2017 compared to the linked quarter, primarily the result of a $20.5 million, or 10.4% increase in the average balance of taxable investment securities.~~

34bps.

Interest Expense

Interest expense increased ~~$33 thousand,~~$7.5 million, or ~~5.7%~~396.1%, when comparing the ~~third~~first quarter of ~~2017~~2023 to the ~~third~~first quarter of ~~2016.~~2022. The increase in interest expense from the first quarter of 2022 was ~~due to~~the result of increases in expenses on interest-bearing deposits of $5.9 million and FHLB short-term borrowings of $1.4 million, primarily a result of an increase in the average balance of ~~total interest-bearing deposits~~FHLB short term borrowings of $150.5 million, or 20.3%, primarily the result of the acquisition of interest-bearing deposits from NWBI amounting to $177.9 million in the second quarter of 2017, which had a balance of $186.0 million at September 30, 2017. Despite 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 third quarter of 2017 when compared to the third quarter of 2016.$114.0 million.

Interest expense increased ~~$62 thousand,~~$4.1 million, or ~~11.3%~~76.1%, when comparing the ~~third~~first quarter of ~~2017~~2023 to the ~~second~~fourth quarter of ~~2017. The increase in interest expense was~~2022 primarily due to ~~an increase~~increases 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~~rates paid on interest-bearing liabilities. These interest-bearing liabilities included increases in interest bearing deposits ~~remained unchanged. Interest expense on~~of 52bps and FHLB 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.~~98bps.

39

41

Table of 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 30, 2017~~March 31, 2023 and ~~2016.~~2022.


	For Three Months Ended						For Three Months Ended
	March 31, 2023						March 31, 2022
	2020
	Average		Income(1)/		Yield/		Average		Income(1)/		Yield/
(Dollars in thousands)	Balance		Expense		Rate		Balance		Expense		Rate
Earning assets
Loans (2), (3)	$	2,611,644	$	30,866	4.79	%	$	2,135,734	$	22,124	4.20	%
Investment securities:
Taxable		653,527		4,064	2.49			531,017		1,985	1.49
Tax-exempt		666		9	5.41			—		—	—
Interest-bearing deposits		13,849		163	4.77			586,798		254	0.18
Total earning assets		3,279,686		35,102	4.34	%		3,253,549		24,363	3.01	%
Cash and due from banks		28,602						(15,253)
Other assets		228,054						253,424
Allowance for credit losses		(30,006)						(14,239)
Total assets	$	3,506,336					$	3,477,481

Interest-bearing liabilities
Demand deposits	$	694,894		3,236	1.89	%	$	589,737		228	0.16	%
Money market and savings deposits		1,004,553		2,374	0.96			1,075,791		598	0.23
Certificates of deposit $100,000 or more		241,436		1,076	1.81			286,587		286	0.40
Other time deposits		207,403		595	1.16			175,683		246	0.57
Interest-bearing deposits		2,148,286		7,281	1.37			2,127,798		1,358	0.26
Securities sold under retail repurchase agreements and federal funds purchased		—		—	—			2,770		2	0.29
Advances from FHLB - short-term		113,972		1,361	4.84			—		—	—
Advances from FHLB - long-term		—		—	—			10,116		14	0.57
Subordinated debt		43,108		756	7.11			42,804		520	4.93
Total interest-bearing liabilities		2,305,366		9,398	1.65	%		2,183,488		1,894	0.35	%
Noninterest-bearing deposits		820,162						916,415
Other liabilities		19,634						24,567
Stockholders’ equity		361,174						353,011
Total liabilities and stockholders’ equity	$	3,506,336					$	3,477,481

Net interest spread			$	25,704	2.69	%			$	22,469	2.66	%
Net interest margin					3.18	%					2.76	%

Tax-equivalent adjustment
Loans			$	38					$	39
Investment securities				2						—
Total			$	40					$	39

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.

(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.

~~Net Interest Income~~42

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

~~Interest Income~~

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

40

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

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

~~Interest Expense~~

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

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

For Nine Months Ended

For Nine Months Ended

September 30, 2017

September 30, 2016

Average

Income(1)/

Yield/

Average

Income(1)/

Yield/
(Dollars in thousands)

Balance

Expense

Rate

Balance

Expense

Rate
Earning assets

Loans (2), (3)

$
956,694

$
31,941

4.46
%

$
811,747

$
27,608

4.54
%
Investment securities:

Taxable

198,383

2,799

1.88

203,016

2,448

1.61

Tax-exempt

116

5

5.41

210

8

5.30

Federal funds sold

-

-

-

2,347

6

0.34

Interest-bearing deposits

34,506

269

1.04

55,837

211

0.50

Total earning assets

1,189,699

35,014

3.93
%

1,073,157

30,281

3.77
%
Cash and due from banks

14,988

15,554

Other assets

61,537

54,850

Allowance for credit losses

(9,072)

(8,459)

Total assets

$
1,257,152

$
1,135,102

Interest-bearing liabilities

Demand deposits

$
206,033

279

0.18
%

$
192,803

173

0.12
%
Money market and savings deposits

325,660

300

0.12

262,818

258

0.13

Certificates of deposit $100,000 or more

121,508

467

0.51

129,060

647

0.67

Other time deposits

151,179

610

0.54

151,032

774

0.68

Interest-bearing deposits

804,380

1,656

0.28

735,713

1,852

0.34

Short-term borrowings

3,997

18

0.59

6,372

11

0.24

Total interest-bearing liabilities

808,377

1,674

0.28
%

742,085

1,863

0.34
%
Noninterest-bearing deposits

285,324

235,448

Other liabilities

5,109

6,131

Stockholders' equity

158,342

151,438

Total liabilities and stockholders' equity

$
1,257,152

$
1,135,102

Net interest spread

$
33,340

3.65
%

$
28,418

3.43
%
Net interest margin

3.75
%

3.54
%

Tax-equivalent adjustment

Loans

$
179

$
132

Investment securities

2

2

Total

$
181

$
134

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

41

Noninterest Income

Total noninterest income for the ~~third~~first quarter of ~~2017 increased $418~~2023 decreased $712 thousand, or ~~10.4%~~11.8%, when compared to the ~~third~~first quarter of ~~2016.~~2022. The ~~increase~~decrease from the ~~third~~first quarter of ~~2016~~2022 was primarily due to ~~higher service charges~~decreases in revenue associated with the mortgage division of $890 thousand, revenue from Mid-Maryland Title Company, Inc. of $186 thousand 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 service charges on deposit accounts ~~for a full quarter~~of $146 thousand partially offset by increases in interchange credits of $174 thousand, and other fees on ~~the deposits acquired in the branch purchase, higher insurance agency commissions and an increase on an insurance agency investment included in other noninterest income.~~

~~Total noninterest~~bank services of $336 thousand. Noninterest income ~~for the nine months ended September 30, 2017 increased $822~~decreased $528 thousand, or ~~6.5%~~9.0%, when compared to the ~~same period in 2016. The increase was~~ fourth quarter of 2022 primarily due to ~~increases~~a decrease in ~~insurance agency commissions~~revenue associated with the mortgage division of ~~$185~~$590 thousand and ~~other~~in service charges on deposit accounts $133 thousand. Declines in noninterest income ~~of $538 thousand which included higher fees~~from the mortgage division are primarily attributable to the general rise in interest rates that continue to put pressure on ~~bank services of $241 thousand~~the mortgage market, resulting in declines in home loan sales and ~~positive earnings from an insurance investment of $274 thousand.~~ home loan refinances.

Noninterest Expense

Total noninterest expense for the ~~third~~first quarter of ~~2017~~2023, excluding merger-related expenses, increased ~~$1.5 million,~~$600 thousand, or ~~16.3%~~3.1%, when compared to the ~~third~~first quarter of ~~2016.~~2022 and increased $169 thousand, or less than 1.0%, when compared to the fourth quarter of 2022. The increase in noninterest ~~expenses for the third quarter of 2017~~expense when compared to the ~~third~~first quarter of ~~2016~~2022 was primarily due to ~~operating three additional branches, acquisition costs~~other noninterest expenses, employee related benefits, data processing, legal and ~~increases~~professional fees and furniture and equipment expense partially offset by decreases in ~~employee benefits~~salary expense due to ~~the higher insurance premiums paid for group insurance and higher~~deferred salaries ~~and wages due to pay increases implemented~~based on loan originations in the first quarter of ~~2017. Total~~2023. The increase in noninterest ~~expenses~~expense when compared to the fourth quarter of 2022 was primarily due to increases in employee benefits and legal and professional fees offset by decreases in salaries due to an increase in deferred salaries based on loan originations in the fourth quarter of 2022.

Provision for Credit Losses

The provision for credit losses was $1.2 million for the first quarter of 2023, $600 thousand for the first quarter of 2022 and $450 thousand for the fourth quarter of 2022. The increase in the provision for credit losses during the first quarter of 2022 as compared to the prior quarters was primarily a result of new loan growth of $112.6 million. The ratio of the allowance for credit losses to period-end loans was 1.07% at March 31, 2023, 0.65% at December 31, 2022 and 0.67% at March 31, 2022. The Company reported net charge offs in the first quarter of 2023 of $20 thousand, compared to net recoveries of $166 thousand for the first quarter of 2022 and net charge offs of $84 thousand for the fourth quarter of 2022.Management continually evaluates the adequacy of the allowance for credit losses as changes in the economic environment and within the portfolio become known. The provision for the three months ended March 31, 2023 was comprised of $1.05 million related to the allowance for credit losses on loans and $163 thousand for the allowance for credit losses on held to maturity securities.

Income Taxes

The Company reported income tax expense of $2.4 million for the first quarter of 2023, $1.9 million for the first quarter of 2022 and $2.9 million for the fourth quarter of 2022. Income tax expense increased ~~$521 thousand,~~when compared to the first quarter of 2022 due to higher pre-tax earnings and decreased compared to the fourth quarter of 2022 due to lower pre-tax earnings. The effective tax rate for the first quarter of 2023 was 27.4%, 26.0% for the fourth quarter of 2022, and 25.6% for the first quarter of 2022. The higher effective tax rate in the first quarter of 2023 was the result of non-deductible merger related expenses.

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 March 31, 2023 and December 31, 2022, the fair value of loans held for sale amounted to $3.5 million and $4.2 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 ~~5.1%~~indemnify the purchaser.

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Loans Held for Investment

The following tables represent the composition of the Company’s loan portfolio at March 31, 2023 and December 31, 2022.


	March 31, 2023
			Loans acquired from
(Dollars in thousands)	Legacy Loans		Severn acquisition		Total Loans
Construction	$	237,395	$	13,052	$	250,447
Residential real estate		748,892		117,333		866,225
Commercial real estate		919,950		176,987		1,096,937
Commercial		105,427		34,718		140,145
Consumer		314,094		666		314,760
Total loans excluding PPP loans		2,325,758		342,756		2,668,514
PPP loans		167		—		167
Total loans	$	2,325,925	$	342,756	$	2,668,681
Allowance for credit losses						(28,464)
Total loans, net					$	2,640,217


	December 31, 2022
			Loans acquired from
(Dollars in thousands)	Legacy Loans		Severn acquisition		Total Loans
Construction	$	226,908	$	19,411	$	246,319
Residential real estate		680,423		130,074		810,497
Commercial real estate		879,265		186,144		1,065,409
Commercial		111,826		35,843		147,669
Consumer		285,315		711		286,026
Total loans excluding PPP loans		2,183,737		372,183		2,555,920
PPP loans		187		—		187
Total loans	$	2,183,924	$	372,183	$	2,556,107
Allowance for credit losses						(16,643)
Total loans, net					$	2,539,464

The acquisition of Severn added $584.6 million in total loans as of October 31, 2021, of which $342.8 million in total loans remained outstanding as of March 31, 2023. Excluding these loans and legacy PPP loans, total legacy loans increased $142.0 million, or 6.5%, when compared to ~~the second quarter~~December 31, 2022. At March 31, 2023 and December 31, 2022, PPP loans accounted for $167 thousand and $187 thousand of ~~2017.~~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 ~~primarily due to a full quarter~~comprised of ~~operating three additional branches acquired in the second quarter of 2017. The branch purchase resulted in~~ increases in salary and wages, employee benefits, and FDIC insurance premium expense, which were partially offset by lower legal and professional fees which were elevated in the second quarter due to the acquisition.

~~Total noninterest expense for the nine months ended September 30, 2017 increased $2.6~~residential real estate loans of $68.5 million, or ~~9.5%~~10.1%, ~~when compared to the same period in 2016. The increase was primarily due to the branch purchase in the second quarter~~consumer loans of ~~2017 which resulted in acquisition costs~~$28.8 million, or 10.1%, commercial real estate loans of ~~$977 thousand and the cost~~$40.7 million or 4.6%, construction loans of ~~operating those branches for four months. In addition, higher salaries/wages and employee benefits resulted in increased non-interest expenses which were~~$10.5 million, or 4.6%, partially offset by a decrease in ~~FDIC insurance premiums.~~

~~Provision for Credit Losses~~

~~The provision for credit losses was $345 thousand for~~commercial loans of $6.4 million, or 5.7%, at March 31, 2023 compared to December 31, 2022. At March 31, 2023, the third quarter of 2017, $605 thousand for the third quarter of 2016 and $974 thousand for the second quarter of 2017. The lower level of provision for credit losses when comparing the third quarter of 2017 to both the third quarter of 2016 and the second quarter of 2017 ~~was driven by lower charge-offs and improved credit quality.~~The provision for credit losses for the nine months ended September 30, 2017 and 2016 was $1.7 million and $1.4 million, respectively, while net charge-offs were $1.2 million and $1.1 million, respectively. The increase in provision for credit losses primarily occurred in the second quarter of 2017 due to the partial charge-off of a negotiated restructured commercial loan. The ratio of annualized net charge-offs to averagelegacy loan portfolio, excluding PPP loans, was ~~0.16% for the first nine months~~comprised of ~~September 30, 2017~~39.6% commercial real estate, 32.2% residential real estate, 13.5% consumer, 10.2% construction and ~~0.19% for the same period in 2016.~~

~~Income Taxes~~

~~For the third quarter of 2017~~4.5% commercial. That compares to 40.3%, 31.2%, 13.1%, 10.4% and ~~2016, the Company reported income tax expense of $2.3 million and $1.4 million,~~5.1%, respectively, while the effective tax rate was 40.0% and 37.3%, respectively. The increase in tax rates for the third quarter of 2017 when compared to the same period in 2016 was due to higher pretax income. Income taxes for the nine months ended September 30, 2017 increased $1.3 million, or 29.9%, when compared to the same period in 2016. The increase was primarily due higher taxable income of $2.7 million which increased tax rates from 38.0% in the prior period to 39.9% for the 2017 period.

~~ANALYSIS OF FINANCIAL CONDITION~~

~~Loans~~

~~Loans totaled $1.0 billion at September 30, 2017 and $871.5 million~~ at December 31, 2016, an increase of $175.5 million, or 20.2%. The significant increase was primarily due to 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 million 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, 2016.2022. 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~~$250.4 million, or ~~10.2%~~9.4% of total loans, at ~~September 30, 2017, higher than the $84.0~~March 31, 2023 and $246.3 million, or 9.6% of total loans, at December 31, ~~2016.~~2022. Commercial real estate loans were ~~$454.6 million,~~$1.10 billion, or ~~43.4%~~41.1% of total loans, at ~~September 30, 2017,~~March 31, 2023, compared to ~~$382.7 million,~~$1.07 billion, or ~~43.9%~~41.7% of total loans, at December 31, ~~2016.~~2022.

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,

44

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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 30, 2017,~~March 31, 2023, non-owner-occupied commercial real estate loans (including construction, land and land development loans) represented ~~269.9%~~290.9% of total ~~risk based~~risk-based capital. At such time, construction, land and land development loans represented ~~79.4%~~69.3% of total ~~risk based~~risk-based capital.

The commercial real estate portfolio (including construction) has increased ~~95.3%~~108.0% 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 on Loans

~~We have established an~~

The allowance for credit losses ~~which is increased by provisions charged against earnings~~was $28.5 million at March 31, 2023, $16.6 million at December 31, 2022 and ~~recoveries of previously charged-off debts and is decreased by current period~~$14.7 million at March 31, 2022. There were net charge-offs of uncollectible debts. 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 were $182~~$20 thousand for the ~~third~~first quarter of ~~2017 and $349~~2022, compared to net charge-offs of $84 thousand for the ~~third~~fourth quarter of ~~2016.~~2022 and net recoveries of $166 thousand for the first quarter of 2022. The ratio of annualized net charge-offs to average loans was 0.00% for the first quarter of 2023, compared to annualized net charge-offs of 0.01% for the fourth quarter of 2022 and annualized net recoveries of 0.03% for the first quarter of 2022. Management remains focused on its efforts to dispose of problem loans and to prudently charge-off nonperforming ~~assets~~loans to enable the Company to continue to improve its overall credit quality. The allowance for credit losses as a percentage of period-end loans was ~~0.89% as of September 30, 2017~~1.07% at March 31, 2023 and ~~1.00% for both~~0.65% at December 31, ~~2016 and September 30, 2016.~~ ~~The decrease in such ratio at September 30, 2017 was due to the performing loans acquired in the~~ ~~NWBI~~ ~~transaction with no associated allowance since they were recorded at fair value.~~ ~~The allowance for credit losses as a percentage~~2022.

45

Table of period-end loans, excluding the acquired loans from NWBI was 1.00% at September 30, 2017. Management 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 30, 2017.

43

Contents

The following ~~table presents~~tables present a summary of the activity in the allowance for credit losses at or for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2023 and ~~2016.~~2022.


	March 31, 2023						March 31, 2022
					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	$	248,286	$	3	-	%	$	254,560	$	3	-	%
Residential real estate		835,683		31	(0.02)			650,224		46	(0.03)
Commercial real estate		1,079,490		—	-			893,158		150	(0.07)
Commercial		141,838		(54)	0.15			175,510		(24)	0.06
Consumer		301,261		—	-			162,282		(9)	0.02
Total	$	2,606,558	$	(20)	-	%	$	2,135,734	$	166	(0.03)	%


Allowance for credit losses at period end as a percentage of total period end loans ⁽¹⁾	1.07	%	0.67	%
Allowance for credit losses at period end as a percentage of total period end loans ⁽²⁾	1.07	%	0.92	%
Allowance for credit losses at period end as a percentage of average loans ⁽³⁾	1.09	%	0.69	%
Allowance for credit losses at period end as a percentage of period end nonaccrual loans	1,502.85	%	516.50	%

(1)

At March 31, 2023 and March 31, 2022, these ratios included all loans held for investment, including PPP loans of $167 thousand and $14.9 million, respectively.

(2)

For 2023, this ratio excludes only PPP loans given the Company’s adoption of the CECL standard. For periods in 2022, this ratio excludes PPP loans and loans acquired in the Severn and Northwest acquisition.

(3)

At March 31, 2023 and March 31, 2022, these ratios included all loans held for investment, including average PPP loans of $176 thousand and $18.9 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%

Nonperforming Assets ~~and Accruing TDRs~~

As shown in the following table, nonperforming assets ~~decreased $3.4 million to $8.1~~were $2.7 million at ~~September 30, 2017 from $11.5~~March 31, 2023 and $3.9 million at December 31, ~~2016, primarily due to decreases in nonaccrual loans~~2022. The balance of ~~$2.7 million and other real estate owned of $668 thousand. Accruing TDRs increased $493 thousand to $13.5 million at September 30, 2017 from $13.0 million at December 31, 2016. This increase was~~nonperforming asset decreased primarily due to a ~~significant nonaccrual TDR being upgraded to an accruing TDR during the third quarter of 2017. The ratio of nonaccrual loans to~~decrease in total loans ~~decreased to 0.60% at September 30, 2017 from 1.03% at December 31, 2016 which was primarily~~90 days or more past due ~~to the acquired performing loans from NWBI. Excluding the acquired loans from NWBI the ratio~~and still accruing of ~~nonaccrual loans to total loans decreased to 0.68% at September 30, 2017.~~

$1.2 million, or 66.8%.

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

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46

Table of Contents

The following table summarizes our nonperforming assets ~~and accruing TDRs~~ at ~~September 30, 2017~~March 31, 2023 and December 31, ~~2016.~~2022.


(Dollars in thousands)	March 31, 2023			December 31, 2022
Nonperforming assets
Nonaccrual loans	$	1,894		$	1,908
Total loans 90 days or more past due and still accruing		611			1,841
Other real estate owned		179			197
Total nonperforming assets	$	2,684		$	3,946

As a percent of total loans:
Nonaccrual loans		0.07	%		0.07	%

As a percent of total loans and other real estate owned:
Nonperforming assets		0.10	%		0.15	%

As a percent of total assets:
Nonaccrual loans		0.05	%		0.05	%
Nonperforming assets		0.08	%		0.11	%

(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.~~discounts and the allowance for credit losses. We have the intent and ~~current~~ ability to hold such securities until maturity. At ~~September 30, 2017 and December~~March 31, ~~2016, 97%~~2023, 14.2% of the portfolio of debt securities was classified as available for sale and 3%85.8% 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.~~14.5% and 85.5% respectively, at December 31, 2022. See Note 3 ~~- Investment Securities,~~– “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~~$647.0 million at ~~September 30, 2017, a $49.0~~March 31, 2023, an $8.5 million, or ~~28.7%~~1.3%, ~~increase~~decrease since December 31, ~~2016. The increase was due to utilizing the net cash received from the NWBI branch acquisition to purchase available-for-sale securities.~~2022. At ~~the end of September 2017,~~March 31, 2023, 75.3% of the securities available for sale were mortgage-backed, ~~and 24.4%~~22.5% were U.S. Government agencies and 2.3% were corporate bonds, compared to ~~78.7%~~76.0%, 21.7% and ~~20.9%~~2.3%, respectively, at year-end ~~2016.~~2022. At March 31, 2023, 70.2% of the securities held to maturity were mortgage-backed, 27.5% were U.S. Government agencies, 2.1% were subordinated debt instruments and less than 1% were community reinvestment bonds, compared to 70.4%, 27.2%, 2.1% and less than 1%, respectively, at year-end 2022. Our investments in mortgage-backed securities are issued or guaranteed by U.S. Government agencies or government-sponsored agencies.

Deposits

Total deposits at ~~September 30, 2017 were $1.2~~March 31, 2023 amounted to $2.99 billion, a ~~$208.7~~decrease of $15.2 million, or ~~20.9%~~less than 1%, ~~increase~~ when compared to the level at December 31, ~~2016.~~ 2022. 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 ~~deposits~~accounts of ~~$22.6~~$58.2 million and $53.3 million in noninterest bearing deposits partially offset by an increase in time deposits of ~~$40.8~~$64.2 million and an increase in interest bearing checking accounts of $32.0 million.

Total estimated uninsured deposits amounted to $839.4 million and $871.5 million at March 31, 2023 and December 31, 2022, respectively.

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Table of Contents

Short-Term Borrowings

~~Short-term~~The Company had $131.5 million of short-term borrowings consisting of short-term advances with the FHLB as of March 31, 2023, compared to short-term borrowings consisting of advances with the FHLB of $40.0 million at ~~September 30, 2017 and~~ December 31, ~~2016 were $1.5 million and $3.2 million, respectively. The~~2022. This increase was due to funding needs as a result of the decrease in deposits and the increase in loans. Other short-term borrowings ~~was the result~~may consist of ~~utilizing cash received in the branch acquisition to reduce these borrowings which tend to have higher rates than core deposits. Short-term borrowings generally consist of~~overnight borrowing from correspondent banks or securities sold under agreements to repurchase, ~~which are issued in conjunction~~primarily with ~~cash management services for~~ commercial ~~depositors, overnight borrowings from correspondent banks and short-term advances from the Federal Home Loan Bank (the “FHLB”).~~depositors. Short-term advances are defined as those with original maturities of one year or less. At ~~September 30, 2017~~March 31, 2023 and December 31, ~~2016, short-term~~2022, the Company had no securities sold under agreements to repurchase or overnight borrowings ~~included only repurchase agreements.~~from correspondent banks.

Long-Term Debt

The Company occasionally borrows from the FHLB to meet longer term liquidity needs, specifically to fund loan growth when liquidity from deposit growth is not sufficient. There were no long-term borrowings from the FHLB outstanding at March 31, 2023 and December 31, 2022.

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

As a result of the Severn merger, the Company acquired Junior Subordinated Debt Securities due in 2035 which had an outstanding principal balance of $20.6 million. The debt balance of $18.4 million at March 31, 2023 and December 31, 2022 was presented net of a fair value adjustment of $2.2 million.

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~~$17.8 million for the first ~~nine~~three months of ~~2017~~2023 compared to ~~an increase in cash~~a decrease of ~~$1.3~~$12.6 million for the first ~~nine~~three months of ~~2016.~~2022. The decrease in cash and cash equivalents in ~~2017~~2023 was mainly due to ~~receiving excess cash from the NWBI branch transaction which was used to purchase available-for-sale securities and paydown short-term borrowings.~~

funding net loan growth of $111.8 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~~$283.5 million and ~~$205.1~~$298.9 million at ~~September 30, 2017~~March 31, 2023 and December 31, ~~2016,~~2022, 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~~decreased $2.6 million, or less than 1%, to ~~$162.6~~$361.6 million at ~~September 30, 2017~~March 31, 2023 when compared to December 31, ~~2016~~2022 primarily due to a Day 1 CECL adjustment of ($7.8) million, partially offset by current ~~year’s earnings.~~

~~Basel III~~year earnings of $6.5 million and a decrease in unrealized losses on available for sale securities of $860 thousand.

The ~~FRB~~Bank and the ~~FDIC approved~~Company are subject to various regulatory capital requirements administered by the ~~final rules implementing~~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 ~~Basel Committee on Banking Supervision's (“BCBS”)~~Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the 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 a new common equity Tier 1~~regulators about components, risk weightings, and other factors.

48

Table of Contents

Quantitative measures established by regulation to ensure capital adequacy require the Bank and the Company to ~~risk-weighted assets~~maintain minimum ratio of 4.5%, raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0%, require a minimum ratio of Total Capital to risk-weighted assets of 8.0%, and require a minimum Tier 1 leverage ratio of 4.0%. A new capital conservation buffer, comprisedratios 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~~quarterly average assets, which is known as the leverage ratio. The Bank and the Company were deemed “well capitalized” under applicable regulatory capital ~~instruments were also implemented under the final rules. The final rules also revise the definition and calculation of Tier 1 capital, Total Capital, and risk-weighted assets.~~

~~The phase-in period for the final rules became effective for the Company 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

at March 31, 2023.

The following tables present the applicable capital ratios for ~~Shore Bancshares, Inc.~~the Company and ~~Shore United~~the Bank as of ~~September 30, 2017~~March 31, 2023 and December 31, ~~2016.~~2022.


	Tier 1			Common Equity			Tier 1			Total
	leverage			Tier 1			risk-based			risk-based
March 31, 2023	ratio			ratio			capital ratio			capital ratio
Shore Bancshares, Inc.		9.26	%		11.17	%		11.85	%	13.85	%
Shore United Bank		9.64	%		12.30	%		12.30	%	13.38	%

	Tier 1			Common Equity			Tier 1			Total
	leverage			Tier 1			risk-based			risk-based
December 31, 2022	ratio			ratio			capital ratio			capital ratio
Shore Bancshares, Inc.		9.52	%		11.62	%		12.33	%	13.91	%
Shore United Bank		9.92	%		12.82	%		12.82	%	13.47	%

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~~2022 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.~~2022.

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 allow for timely decisions regarding required disclosure. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

An evaluation of the effectiveness of these disclosure controls and procedures as of ~~September 30, 2017~~March 31, 2023 was carried out under the supervision and with the participation of management, including the ~~CEO~~PEO and the ~~PAO.~~PFO. Based on that evaluation, the Company’s management, including the ~~CEO~~PEO and the ~~PAO,~~PFO, has concluded that our disclosure controls and procedures are, in fact, effective at the reasonable assurance level at ~~September 30, 2017.~~March 31, 2023.

The Company adopted Financial Accounting Standards Board Accounting Standards Update 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” and related updates, as described further in Note 2 to the consolidated interim financial statements, effective January 1, 2023. Related to the

49

Table of Contents

adoption of these new accounting standards, the Company modified certain internal controls and designed and implemented certain new internal controls over the measurement of the allowance for credit losses and related disclosures, primarily related to the modeling of expected credit losses on loans. There ~~was~~were no ~~change~~other changes in ~~our~~the Company’s internal control over financial reporting during the ~~third quarter of 2017~~three months ended March 31, 2023 that ~~has~~have materially affected, or isare reasonably likely to materially affect, ~~our~~the Company’s 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

Other than the additional risk factor referenced below, there are no material changes to the risk factors as previously disclosed under Item 1A in our Annual Report for the year ended December 31, 2022 and those referenced in other reports on file with the SEC.

Adverse developments affecting the banking industry, and resulting media coverage, have eroded customer confidence in the banking system and could have a material effect on the Company’s operations and/or stock price.

The ~~risks~~recent high-profile bank failures involving Silicon Valley Bank, Signature Bank, and ~~uncertainties~~First Republic Bank have generated significant market volatility among publicly traded bank holding companies and, in particular, regional banks. These market developments have negatively impacted customer confidence in the safety and soundness of regional banks. As a result, customers may choose to maintain deposits with larger financial institutions or invest in higher yielding short-term fixed income securities, all of which could materially adversely impact our ~~financial condition~~liquidity, cost of funding, loan funding capacity, net interest margin, capital and ~~operations are subject are discussed~~results of operations. In connection with high-profile bank failures, uncertainty and concern has been, and may in ~~detail~~the future be further, compounded by advances in ~~Item 1A~~technology that increase the speed at which deposits can be moved, as well as the speed and reach of ~~Part I~~media attention, including social media, and its ability to disseminate concerns or rumors, in each case potentially exacerbating liquidity concerns. While the Department of the ~~2016 Annual Report. Management does not believe~~Treasury, the Federal Reserve, and the FDIC have made statements ensuring that ~~any material changes~~depositors of recently failed banks would have access to their deposits, including uninsured deposit accounts, there is no guarantee that such actions will be successful in restoring customer confidence in regional banks and the bank system more broadly. In addition, the banking operating environment and public trading prices of banking institutions can be highly correlated, in particular during times of stress, which could materially and adversely impact the trading prices of our ~~risk factors have occurred since they were last disclosed in~~common stock and potentially our ~~2016 Annual Report.~~results of operations.

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 March 31, 2023.

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. There were no purchases of the Company’s Common Stock during the first quarter of 2023. The program expired on March 31, 2023.

Item 3. Defaults Upon Senior Securities

None

50

Table of Contents

Item 4. Mine Safety Disclosures

Not Applicable

Item 5. Other Information

None

51

Table of Contents

Item 6.E Exhibits.

~~xhibits.~~

Exhibit Number		Description

2.1		Agreement and Plan of Merger, dated as of December 14, 2022, between Shore Bancshares, Inc. and The Community Financial Corporation (incorporated by reference to Exhibit 2.1 of the Company’s Form 8-K filed on December 14, 2022)

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 filed on March 31, 2022).

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.~~

52

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~~May 15, 2023	By:	/s/ Lloyd L. Beatty, Jr.
		Lloyd L. Beatty, Jr.
		President & Chief Executive Officer
		(Principal Executive Officer)

Date: ~~November 9, 2017~~May 15, 2023	By:	/s/ ~~Edward C. Allen~~Vance Adkins
		~~Edward C. Allen~~Vance Adkins
		~~Senior~~Executive Vice President & Chief Financial Officer
		(Principal ~~Financial~~Accounting Officer)

48

53

~~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


				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	$	-


			Special
(Dollars in thousands)	Pass/Performing		Mention		Substandard		Doubtful		Total
September 30, 2017
Construction	$	97,304	$	3,127	$	6,186	$	-	$	106,617
Residential real estate		376,600		5,509		5,613		-		387,722
Commercial real estate		438,694		6,780		9,152		-		454,626
Commercial		90,680		660		459		-		91,799
Consumer		6,483		-		-		-		6,483
Total	$	1,009,761	$	16,076	$	21,410	$	-	$	1,047,247


		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%

For the Three Months Ended

(Dollars in thousands)

Stock-based compensation expense

Excess tax benefits related to stock-based compensation