UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


x			☒			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, 2024


o			☐			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~~ File Number: 0-22345

SHORE BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

Maryland

52-1974638

~~Maryland~~

~~52-1974638~~

(State or Other Jurisdiction of

~~(I.R.S. Employer~~

Incorporation or Organization)

(I.R.S. Employer Identification No.)

18 E. Dover Street, Easton, Maryland

21601

~~28969 Information Lane, Easton, Maryland~~

~~21601~~

(Address of Principal Executive Offices)

(Zip Code)

(410) 763-7800

Registrant’s Telephone Number, Including Area Code

~~N/A~~

Not applicable

(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 ☑x 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 ☑x 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

☐

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 ☐o No ☑

~~APPLICABLE ONLY TO CORPORATE ISSUERS~~

~~Indicate the~~x

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 3, 2024 was 33,210,522.

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

Contents

INDEX

~~INDEX~~


Table of Contents				Page

PART I — FINANCIAL INFORMATION		~~Page~~		3

Item 1 – Financial Statements				3
~~Part I. Financial Information~~		2

~~Item 1. Financial Statements~~	2

Consolidated Balance Sheets ~~–September 30, 2017~~at March 31, 2024 (unaudited) and December 31, ~~2016~~ 2023	2		3

Consolidated Statements of Income ~~-For~~ for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2024 and ~~2016~~2023 (unaudited)	3		4

Consolidated Statements of Comprehensive Income ~~-For~~for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2024 and ~~2016~~2023 (unaudited)	4		5

Consolidated Statements of Changes in Stockholders’ Equity ~~-For~~for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2024 and ~~2016~~2023 (unaudited)	5		6

Consolidated Statements of Cash Flows ~~-For~~for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2024 and ~~2016~~2023 (unaudited)	6		8

Notes to Consolidated Financial Statements (unaudited)	8		10

Item 2.2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations		36		40

Item 3.3 – Quantitative and Qualitative Disclosures about Market Risk	46		61

Item 4.4 – Controls and Procedures	46		61

PART II — OTHER INFORMATION				63

~~Part II. Other Information~~Item 1 – Legal Proceedings		47		63
Item 1A – Risk Factors				63
Item ~~1. Legal Proceedings~~		47

~~Item 1A. Risk Factors~~	47

~~Item 2.~~2 – Unregistered Sales of Equity Securities and Use of Proceeds	47		63

Item 3.3 – Defaults Upon Senior Securities	47		63

Item 4.4 – Mine Safety Disclosures	47		63
Item 5 – Other Information				63
Item ~~5. Other Information~~6 – Exhibits		47		64

~~Item 6. Exhibits~~SIGNATURES		47

~~Signatures~~65	47

~~Exhibit Index~~	48

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

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 BALANCE SHEETS


(In thousands, except share and per share data)	March 31, 2024		December 31, 2023
ASSETS	(Unaudited)
Cash and due from banks	$	43,079	$	63,172
Interest-bearing deposits with other banks	71,481		309,241
Cash and cash equivalents	114,560		372,413
Investment securities:
Available-for-sale, at fair value (amortized cost of $190,583 (2024) and $120,832 (2023))	179,496		110,521
Held to maturity, net of allowance for credit losses of $116 (2024) and $94 (2023) (fair value of $444,258 (2024) and $457,830 (2023))	503,822		513,188
Equity securities, at fair value	5,681		5,703
Restricted securities, at cost	17,863		17,900
Loans held for sale, at fair value	13,767		8,782

Loans held for investment ($9,684 (2024) and $9,944 (2023), at fair value)	4,648,725		4,641,010
Less: allowance for credit losses	(57,336)		(57,351)
Loans, net	4,591,389		4,583,659

Premises and equipment, net	83,084		82,386
Goodwill	63,266		63,266
Other intangible assets, net	45,515		48,090
Other real estate owned, net	179		179
Repossessed properties	1,845		—
Mortgage servicing rights, at fair value	5,821		5,926
Right-of-use assets	12,153		12,487
Cash surrender value on life insurance	102,321		101,704
Accrued interest receivable	19,541		19,217
Deferred income taxes	38,978		40,707
Other assets	26,423		24,790
TOTAL ASSETS	$	5,825,704	$	6,010,918

LIABILITIES
Deposits:
Noninterest-bearing	$	1,200,680	$	1,258,037
Interest-bearing	3,983,599		4,128,083
Total deposits	5,184,279		5,386,120

Guaranteed preferred beneficial interest in junior subordinated debentures ("TRUPS"), net	29,237		29,158
Subordinated debt, net	43,322		43,139
Total borrowings	72,559		72,297
Lease liabilities	12,552		12,857
Other liabilities	41,086		28,509
TOTAL LIABILITIES	5,310,476		5,499,783



STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share; shares authorized - 50,000,000; shares issued and outstanding - 33,210,522 (2024) and 33,161,532 (2023)	332		332
Additional paid in capital	356,464		356,007
Retained earnings	166,490		162,290
Accumulated other comprehensive loss	(8,058)		(7,494)
TOTAL STOCKHOLDERS' EQUITY	515,228		511,135
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	5,825,704	$	6,010,918

See accompanying notes to Consolidated Financial Statements.

Table of Contents

SHORE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)


	For Three Months Ended March 31,
(In thousands, except per share data)	2024		2023
INTEREST INCOME
Interest and fees on loans	$	65,754	$	30,828
Interest and dividends on taxable investment securities	4,419		4,064
Interest and dividends on tax-exempt investment securities	6		7

Interest on deposits with other banks	960		163
Total interest income	71,139		35,062

INTEREST EXPENSE
Interest on deposits	28,497		7,281
Interest on short-term borrowings	56		1,361
Interest on long-term borrowings	1,451		756
Total interest expense	30,004		9,398

NET INTEREST INCOME	41,135		25,664
Provision for credit losses	407		1,213

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES	40,728		24,451

NONINTEREST INCOME
Service charges on deposit accounts	1,507		1,213
Trust and investment fee income	734		432

Interchange credits	1,587		1,212
Mortgage-banking revenue	801		977
Title Company revenue	78		137

Other noninterest income	1,860		1,363
Total noninterest income	6,567		5,334

NONINTEREST EXPENSE
Salaries and wages	11,852		8,684
Employee benefits	4,097		2,921
Occupancy expense	2,416		1,619
Furniture and equipment expense	904		534
Data processing	2,867		1,798
Directors' fees	295		250
Amortization of other intangible assets	2,576		441
FDIC insurance premium expense	1,150		371
Other real estate owned expenses, net	—		(1)
Legal and professional fees	1,599		750
Fraud losses (1)	4,502		67
Merger-related expenses	—		691
Other noninterest expenses	4,440		2,768
Total noninterest expense	36,698		20,893
Income before income taxes	10,597		8,892
Income tax expense	2,413		2,435
NET INCOME	$	8,184	$	6,457

Basic and diluted net income per common share	$	0.25	$	0.32
Dividends paid per common share	$	0.12	$	0.12

(1)Fraud losses includes $4.3 million of credit card fraud losses for the quarter ended March 31, 2024.

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

For Three Months Ended

For Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016

INTEREST INCOME

Interest and fees on loans

$
11,771

$
9,398

$
31,762

$
27,476
Interest and dividends on investment securities:

Taxable

1,035

754

2,799

2,448
Tax-exempt

-

2

3

6
Interest on federal funds sold

-

1

-

6
Interest on deposits with other banks

131

81

269

211
Total interest income

12,937

10,236

34,833

30,147

INTEREST EXPENSE

Interest on deposits

607

574

1,656

1,852
Interest on short-term borrowings

4

4

18

11
Total interest expense

611

578

1,674

1,863

NET INTEREST INCOME

12,326

9,658

33,159

28,284
Provision for credit losses

345

605

1,746

1,430

NET INTEREST INCOME AFTER PROVISION

FOR CREDIT LOSSES

11,981

9,053

31,413

26,854

NONINTEREST INCOME

Service charges on deposit accounts

945

899

2,657

2,582
Trust and investment fee income

389

358

1,122

1,073
Gains on sales and calls of investment securities

5

30

5

31
Insurance agency commissions

2,088

2,054

6,939

6,754
Other noninterest income

998

666

2,688

2,149
Total noninterest income

4,425

4,007

13,411

12,589

NONINTEREST EXPENSE

Salaries and wages

5,203

4,346

14,508

13,245
Employee benefits

1,197

1,009

3,564

3,087
Occupancy expense

696

643

1,950

1,839
Furniture and equipment expense

286

245

803

728
Data processing

922

976

2,809

2,639
Directors' fees

99

120

281

355
Amortization of other intangible assets

115
��

33

203

99
FDIC insurance premium expense

189

104

398

654
Other real estate owned expense, net

136

2

299

75
Legal and professional

493

440

1,855

1,434
Other noninterest expenses

1,384

1,299

3,900

3,766
Total noninterest expense

10,720

9,217

30,570

27,921

INCOME BEFORE INCOME TAXES

5,686

3,843

14,254

11,522
Income tax expense

2,274

1,432

5,690

4,379

NET INCOME

$
3,412

$
2,411

$
8,564

$
7,143

Earnings per common share - Basic

$
0.27

$
0.19

$
0.68

$
0.56
Earnings per common share - Diluted

0.27

0.19

0.67

0.56
Dividends paid per common share

0.05

0.03

0.15

0.09

See accompanying notes to Consolidated Financial Statements.

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

For Three Months Ended

For Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016

Net Income

$
3,412

$
2,411

$
8,564

$
7,143

Other comprehensive (loss) income:

Investment securities:

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

(385)

617

1,555

2,628
Tax effect

155

(250)

(628)

(1,062)
Reclassification of (gains) recognized

in net income

(5)

(30)

(5)

(31)
Tax effect

2

12

2

13
Amortization of unrealized loss on securities transferred from

available-for-sale to held-to-maturity

8

-

23

-
Tax effect

(3)

-

(8)

-
Net of tax amount

(228)

349

939

1,548

Total other comprehensive (loss) income

(228)

349

939

1,548
Comprehensive income

$
3,184

$
2,760

$
9,503

$
8,691

Table of Contents

SHORE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)


	For Three Months Ended March 31,
(In thousands)	2024		2023

Net income	$	8,184	$	6,457

Other comprehensive income (loss):
Investment securities:
Unrealized holding gains (losses) on available-for-sale-securities	(776)		1,183
Tax effect	212		(323)
Total other comprehensive income (loss)	(564)		860
Comprehensive income	$	7,620	$	7,317

See accompanying notes to Consolidated Financial Statements.

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

Accumulated

Additional

Other

Total

Common

Paid in

Retained

Comprehensive

Stockholders'

Stock

Capital

Earnings

Income (Loss)

Equity

Balances, January 1, 2017

$
127

$
64,201

$
90,964

$
(993)

$
154,299

Net Income

-

-

8,564

-

8,564

Other comprehensive income

-

-

-

939

939

Stock-based compensation

-

748

-

-

748

Cash dividends declared

-

-

(1,902)

-

(1,902)

Balances, September 30, 2017

$
127

$
64,949

$
97,626

$
(54)

$
162,648

Balances, January 1, 2016

$
126

$
63,815

$
83,097

$
(71)

$
146,967

Net Income

-

-

7,143

-

7,143

Other comprehensive income

-

-

-

1,548

1,548

Common shares issued for employee stock-

based awards

-

53

-

-

53

Stock-based compensation

1

261

-

-

262

Cash dividends declared

-

-

(1,138)

-

(1,138)

Balances, September 30, 2016

$
127

$
64,129

$
89,102

$
1,477

$
154,835

Table of Contents

SHORE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)

For the Three Months Ended March 31, 2024 and 2023


(In thousands)	Common Stock		Additional Paid in Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Total Stockholders’ Equity
Balances, January 1, 2024	$	332	$	356,007	$	162,290	$	(7,494)	$	511,135
Net income	—		—		8,184		—		8,184
Other comprehensive loss	—		—		—		(564)		(564)
Common shares issued for employee stock purchase plan	—		103		—		—		103
Stock-based compensation	—		354		—		—		354
Cash dividends declared	—		—		(3,984)		—		(3,984)
Balances, March 31, 2024	$	332	$	356,464	$	166,490	$	(8,058)	$	515,228

Table of Contents

SHORE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited) - Continued


(In thousands)	Common Stock		Additional Paid in Capital		Retained Earnings		Accumulated Other Comprehensive (Loss) Income		Total Stockholders’ 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

See accompanying notes to Consolidated Financial Statements.

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

Table of Contents

SHORE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


	For Three Months Ended March 31,
(In thousands)	2024		2023

CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	8,184	$	6,457
Adjustments to reconcile net income to net cash provided by operating activities:
Net accretion of acquisition accounting estimates	(3,753)		(646)
Provision for credit losses	407		1,213
Depreciation and amortization	4,099		1,383
Net amortization of securities	43		249
Amortization of debt issuance costs	31		31

Gain on mortgage banking activities	(820)		(719)

Proceeds from sale of mortgage loans held for sale	22,737		21,947
Originations of loans held for sale	(27,257)		(20,710)
Stock-based compensation expense	354		155
Deferred income tax expense (benefit)	1,941		(126)

Loss on valuation adjustments on mortgage servicing rights	223		82
Valuation adjustments on premises transferred to held for sale	—		225
Gain on sales and valuation adjustments on other real estate owned	—		(3)
Fair value adjustments on loans held for investments, at fair value	210		(195)
Fair value adjustment on equity securities	61		(17)
Bank owned life insurance income	(592)		(364)
Net changes in:
Accrued interest receivable	(324)		1,291
Other assets	(1,508)		(1,408)
Accrued interest payable	(1,353)		320
Other liabilities	(296)		2,055
Net cash provided by operating activities	2,387		11,220

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and principal payments of investment securities available for sale	3,849		3,175

Proceeds from maturities and principal payments of investment securities held to maturity	9,215		10,017

Purchases of investment securities available for sale	(59,431)		—
Purchases of equity securities	(39)		(8)
Purchase of restricted securities	(5,973)		(11,421)
Net change in loans	(5,984)		(111,681)
Purchases of premises and equipment	(1,773)		(619)
Proceeds from sales of other real estate owned	—		21

Redemption of restricted securities	6,010		7,523
Purchases of bank owned life insurance	(25)		(129)



Net cash (used in) investing activities	$	(54,151)	$	(103,122)

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

$
-

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SHORE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - Continued


	For Three Months Ended March 31,
(In thousands)	2024		2023

CASH FLOWS FROM FINANCING ACTIVITIES:
Net changes in:
Noninterest-bearing deposits	$	(57,357)	$	(53,336)
Interest-bearing deposits	(144,851)		38,249
Short-term borrowings	—		91,500
Common stock dividends paid	(3,984)		(2,388)
Issuance of common stock	103		87
Net cash (used in) provided by financing activities	(206,089)		74,112
Net decrease in cash and cash equivalents	(257,853)		(17,790)
Cash and cash equivalents at beginning of period	372,413		55,499
Cash and cash equivalents at end of period	$	114,560	$	37,709

Supplemental cash flows information:
Interest paid	$	30,728	$	12,711
Income taxes paid	$	87	$	215
Recognition (remeasurement of) lease liabilities arising from right-of-use assets	$	71	$	(5)
Transfers from loans to repossessed properties	$	1,845	$	—
Unrealized (losses) gains on securities available for sale	$	(776)	$	1,183
Unsettled securities transaction	$	14,083	$	—
Transfer of premises to held for sale (included in other assets)	$	—	$	750

See accompanying notes to Consolidated Financial Statements.

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Shore Bancshares, Inc.

Notes to Consolidated Financial Statements

For the Three ~~and Nine~~ Months Ended ~~September 30, 2017~~March 31, 2024 and ~~2016~~

2023

(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, 2024, the consolidated results of income and comprehensive income for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2024 and ~~2016, and~~2023, changes in stockholders’ equity for the three months ended March 31, 2024 and 2023 and cash flows for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2024 and ~~2016,~~2023, have been included. All such adjustments ~~are~~were of a normal recurring nature. The amounts as of December 31, ~~2016~~2023 were derived from the ~~2016~~2023 audited financial statements. The results of operations for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2024 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.~~2023 ( the “2023 Annual Report”).. For purposes of comparability, certain immaterial reclassifications have been made to amounts previously reported to conform with the current period presentation.

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

~~Reclassification~~

During the period of September 30, 2017, management made an immaterial reclassification adjustment to goodwill and deferred income taxes for a transaction involving a stock-based acquisition of an insurance entity which occurred in 2007. This reclassification was deemed an immaterial correction of an error as it had no impact on total assets or earnings per share previously reported in the Consolidated Balance Sheets and Consolidated Statements of Income for any period but was necessary in order to properly reflect goodwill and deferred income taxes on the Company’s consolidated balance sheet.

~~Effective July 1, 2016, the Company’s two bank~~ subsidiaries, The Talbot Bank of Easton Maryland and CNB were consolidated into one bank known as Shore United Bank. In these notes to the consolidated financial statements and the management discussion and analysis section, the term “the Bank” refers to Shore United Bank, ~~unless the context requires stipulating results of the individual banks before the consolidation occurred.~~

N.A. (the “Bank”) and Mid-Maryland Title Company, Inc. (the “Title Company”).

Recent Accounting ~~Standards~~

Pronouncements

ASU ~~No. 2014-09,~~ ~~“Revenue from Contracts with Customers~~Update 2023-09 – In December 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023-09, “Income Taxes (Topic ~~606)”~~ ~~amendment requires entities~~740): Improvements to recognize revenue to depict the transfer of promised goods or services to customers in amounts that reflect the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective for periods beginning after December 15, 2016. ASU 2015-14, “~~Revenue from Contracts with Customers (Topic 606) Deferral of the Effective Date”~~– ASU 2015-14 amendments defer the effective date of Update 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. ASU 2016-08, ~~“Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations~~Income Tax Disclosures.” ~~– ASU 2016-08 amendments are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. ASU 2016-10,~~ ~~“Revenue from Contracts with Customers (Topic 606)~~: ~~Identifying Performance Obligations and Licensing”~~ – ASU 2016-10 amendments clarify that contractual provisions that, explicitly or implicitly, require an entity to transfer control of additional goods or services to a customer should be distinguished from contractual provisions that, explicitly or implicitly, define the attributes of a single promised license. Attributes of a promised license define the scope of a customer’s right to use or right to access an entity’s intellectual property and, therefore, do not define whether the entity satisfies its performance obligation at a point in time or over time and do not create an obligation for the entity to transfer any additional rights to use or access its intellectual property. Revenues from services provided by financial institutions that could be impacted by the new guidance includes credit card arrangements, trust and custody services and administration services for customer deposits accounts (e.g., ATM and wire transfer transactions). This update will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Adoption of the ASU is not expected to have a significant impact on the Company’s consolidated financial statements and related disclosures. The Company’s primary sources of revenue are derived from interest and dividends earned on loans, investment securities, and other financial instruments that are not within the scope of ASU 2014-09. The Company’s revenue recognition pattern for revenue streams within the scope of ASU 2014-09, including but not limited to service charges on deposit accounts and gains/losses on the sale of OREO, is not expected to change significantly from current practice. The standard permits the use of either the full retrospective or modified retrospective transition method. The Company is currently planning to use the modified retrospective transition method which requires

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~~require an entity to disclose specific categories in the rate reconciliation and provide additional information for ~~fiscal years after December 15, 2018, including interim periods within those fiscal years. Early application~~reconciling items that meet a quantitative threshold, which 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 beginninggreater than five percent of the ~~earliest comparative period presented in~~amount computed by multiplying pretax income by 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 expectentity’s applicable statutory rate, on 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,annual basis. Additionally, the amendments in this ~~update~~ASU require an entity to disclose the amount of income taxes paid (net of refunds received) disaggregated by federal, state, and foreign taxes and the amount of income taxes paid (net of refunds received) disaggregated by individual jurisdictions that are equal to or greater than five percent of total income taxes paid (net of refunds received). Lastly, the amendments in this ASU require an entity to disclose income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign and income tax expense (or benefit) from continuing operations disaggregated by federal, state, and foreign. This ASU is effective for annual periods beginning after December 15, ~~2016, and interim periods within those annual periods.~~2024. Early adoption is ~~permitted for any entity in any interim or annual period. If an entity early adopts the~~permitted. The amendments ~~in an interim period, any adjustments~~ should be ~~reflected as of~~applied on a prospective basis; however, retrospective application is permitted. The Company does not expect 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~~2023-09 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. 2016-13,~~ “Update 2023-07 – In November 2023, the Financial ~~Instruments-Credit Losses~~Accounting Standards Board (FASB) issued ASU 2023-07, “Segment Reporting (Topic ~~326)~~280): ~~Measurement of Credit Losses on Financial Instruments.~~Improvements to Reportable Segment Disclosures.” The amendments in this ASU ~~will replace~~are intended to improve reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses. This ASU requires disclosure of significant segment expenses that are regularly provided to the ~~incurred~~chief operating decision mark (CODM), an amount for other segment items by reportable segment and a description of its composition, all annual disclosures required by FASB ASU Topic 280 in interim periods as well, and the title and position of the CODM and how the CODM uses the reported measures. Additionally, this ASU requires that at least one of the reported segment profit and loss ~~impairment methodology~~measures should be the measure that is most consistent with the measurement principles used in ~~current GAAP~~an entity’s consolidated financial statements. Lastly, this ASU requires public business entities with a ~~methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information~~single reportable segment to inform credit loss estimates. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The use of forecasted information incorporates more timely information in the estimate of expected credit losses, which will be more decision useful to users of the financial statements. It is not expected that an entity will need to create an economic forecast over the entire contractual life of long-dated financial assets. Therefore, the amendments will allow an entity to revert to historical loss information that is reflective of the contractual term (considering the effect of prepayments) for periods that are beyond the time frame for which the entity is able to develop reasonable and supportable forecasts. The amendments retain many of the disclosureprovide all disclosures required by these amendments in ~~Accounting Standards Update No. 2010-20, Receivables (Topic 310):~~ ~~Disclosures about the Credit Quality of Financing Receivables~~this ASU and ~~the Allowance for Credit Losses,~~ ~~updated to reflect the change from an incurred loss methodology to an expected credit loss methodology. Credit losses on available-for-sale debt securities should be measured~~all existing segment disclosures in a manner similar to current GAAP. However, the amendments require that credit losses be presented as an allowance rather than a write-down. For public entities that are U.S. Securities and Exchange Commission (SEC) filers, the amendments areTopic 280. This ASU is effective for fiscal years beginning after December 15, ~~2019, including~~2023, and interim periods within ~~those fiscal years. All entities may adopt the amendments earlier~~

~~as of the~~ fiscal years beginning after December 15, ~~2018, including interim periods within those fiscal years.~~2024. Early adoptions permitted. The amendments should be applied retrospectively. The Company believes this ASU will have a significant impact on our consolidated financial statements and the method in which we calculate our credit losses, primarily on loans and held to maturity securities. At this time, the Company has established a project management team which is in the process 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~~expect 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 expected2023-07 to have a material impact on ~~the Company’s~~its consolidated financial statements.

ASU ~~No. 2017-09~~Update 2023-06 – In ~~May 2017,~~October 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023-06, “Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative.” This ASU incorporates certain U.S. Securities and Exchange Commission (SEC) disclosure requirements into the FASB ~~issued~~Accounting Standards Codification. The amendments in the ASU ~~No. 2017-09~~ ~~“Stock Compensation, Scope~~are expected to clarify or improve disclosure and presentation requirements of ~~Modification Accounting.”~~ ~~This ASU clarifies when changes~~a variety of Codification Topics, allow users to more easily compare entities subject 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 changesSEC’s existing disclosures with those entities that were not previously subject to the ~~terms~~requirements, and align the requirements in the Codification with the SEC’s regulations. For entities subject to the SEC’s existing disclosure requirements and for entities required to file or furnish financial statements with or to the SEC in preparation for the sale of ~~an award being accounted~~or for ~~as modifications, as~~purposes of issuing securities that are not subject to contractual restrictions on transfer, the ~~guidance~~effective date for each amendment will ~~allow companies to make certain non-substantive changes to awards without accounting~~be the date on which the SEC removes that related disclosure from its rules. For all other entities, the amendments will be effective two years later. However, if by June 30, 2027, the SEC has not removed the related disclosure from its regulations, the

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amendments will be removed from the Codification and not become effective for ~~them as modifications. It~~any entity. The Company does not ~~change~~expect the ~~accounting for modifications.~~adoption of 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~~2023-06 to have a material impact on ~~the Company’s~~its consolidated financial statements.

ASU Update 2023-05 – In August 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023-05, “Business Combinations – Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement.” This ASU applies to the formation of entities that meet the definition of a joint venture (or a corporate joint venture) as defined in the FASB Accounting Standards Codification Master Glossary. While joint ventures are defined in the Master Glossary, there has been no specific guidance in the Codification that applies to the formation accounting by a joint venture in its separate financial statements. The amendments in the ASU require that a joint venture apply a new basis of accounting upon formation. As a result, a newly formed joint venture, upon formation, would initially measure its assets and liabilities at fair value (with exceptions to fair value measurement that are consistent with the business combinations guidance). This ASU is effective on a prospective basis for all joint ventures with a formation date on or after January 1, 2025. Early adoption of ASU No. 2023-05 is permitted in any interim or annual period in which financial statements have not yet been issued (or made available for issuance). A joint venture that elects to early adopt may apply ASU No. 2023-05 either prospectively or retrospectively. The Company does not expect the adoption of ASU 2023-05 to have a material impact on its consolidated financial statements.

ASU Update 2023-03 – In July 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023-03, “Presentation of Financial Statements (Topic 205), Income Statement—Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation—Stock Compensation (Topic 718).” This ASU amends the FASB Accounting Standards Codification for SEC paragraphs pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280—General Revision of Regulation S-X: Income or Loss Applicable to Common Stock. ASU 2023-03 is effective upon addition to the FASB Codification. The Company does not expect the adoption of ASU 2023-03 to have a material impact on its consolidated financial statements.

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Note 2 – Business ~~Combination~~

~~Northwest Bank Branch Acquisition~~

Combinations

On ~~May 19, 2017,~~July 1, 2023 (the “Acquisition Date”), the ~~Bank purchased three branches from Northwest Bank (“NWBI”) located~~Company completed the acquisition of TCFC, a Maryland corporation, in ~~Arbutus, Elkridge,~~accordance with the definitive agreement that was entered into on December 14, 2022, by and ~~Owings Mills, Maryland. Pursuant to~~among the ~~transaction,~~Company and TCFC. The primary reasons for the ~~Bank acquired $122.9 million in loans and $212.5 million in deposits, as well as~~merger included: expansion of the branch ~~premises~~network and ~~equipment.~~commanding market share positions in attractive Maryland markets and a growing presence in Virginia and Delaware; attractive low-cost funding base; strong cultural alignment and a deep commitment to stockholders, customers, employees, and communities served by the Company and TCFC, meaningful value creation to shareholders; and increased trading liquidity for both companies and increased dividends for TCFC shareholders. In connection with ~~its purchase~~the completion of the ~~branches from Northwest,~~merger, former TCFC shareholders received 2.3287 shares of the ~~Bank received~~Company’s common stock. The value of the total transaction consideration was approximately $153.6 million. The consideration included the issuance of 13,201,693 shares of the Company’s common stock, which had a ~~cash payment from Northwest~~value of ~~$64.0 million,~~$11.56 per share, which was ~~net~~the closing price of ~~a premium paid~~the Company’s common stock on ~~deposits of $17.2 million.~~ ~~This acquisition provides~~June 30, 2023, the ~~Bank with the opportunity to enhance its footprint in Maryland by extending its branch network across the Eastern Shore~~last trading day prior to the ~~greater Baltimore area communities~~consummation of ~~Elkridge, Owings Mills~~the acquisition. Also included in the total consideration were cash in lieu of any fractional shares, converted share-based payment awards, and ~~Arbutus.~~

debt of TCFC that was effectively settled upon closing.

The ~~Company has~~acquisition of TCFC was accounted for ~~the branch purchases under~~as a business combination using the acquisition method of accounting ~~in accordance with FASB ASC topic 805, “Business Combinations,” whereby the~~and, accordingly, assets acquired, ~~assets~~liabilities assumed, and ~~liabilities were~~consideration paid are recorded ~~by the Bank~~ at ~~their~~ estimated fair values on the Acquisition Date. The provisional amount of bargain purchase gain as of ~~their~~the Acquisition Date was approximately $8.8 million. The exchange ratio was determined at the time of announcement of the merger between the Company and TCFC in December of 2022 when the stock price of the Company was much higher than at the legal merger date. The decline in the Company’s stock price was the primary driver in recording a bargain purchase gain on this transaction. The decline in stock price for the Company was comparable to other financial institutions similar to the Company leading up to the merger due to bank failures in the first quarter of 2023 and increases to overnight borrowing rates by the Fed which resulted in continued pressure on net interest margins. The Company will continue to keep the measurement of bargain purchase gain open for any additional adjustments to the fair value of certain accounts, for example loans, that may arise during the Company’s final review procedures of any updated information. If considered necessary, any subsequent adjustments to the fair value of assets acquired and liabilities assumed, identifiable intangible assets, or other purchase accounting adjustments will result in adjustments to bargain purchase gain within the first 12 months following the Acquisition Date. The bargain purchase gain is not included as taxable income for tax purposes.

As a result of the integration of operations of TCFC, it is not practicable to determine revenue or net income included in the Company’s consolidated operating results relating to TCFC since the Acquisition Date, as TCFC’s results cannot be separately identified. Comparative pro-forma financial statements for the prior year period were not presented, as adjustments to those statements would not be indicative of what would have occurred had the acquisition ~~date.~~taken place on January 1, 2022. In particular, adjustments that would have been necessary to be made to record the loans at fair value, the provision of credit losses or the core deposit intangible would not be practical to estimate.

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(Dollars in thousands)
Purchase Price Consideration:
Fair value of common shares issued (13,201,693 shares) based on Shore Bancshares, Inc. share price of $11.56			$	152,612
Effective settlement of pre-existing debt (1)			500
Cash consideration (cash in lieu for fractional shares)			5
Fair value of converted restricted stock units (2)			475
Total purchase price			$	153,592

Identifiable assets:
Cash and cash equivalents	$	25,377
Total securities	454,468

Loans, net	1,765,255
Premises and equipment, net	29,277

Core deposit intangible, net	48,648
Other assets	89,808
Total identifiable assets	$	2,412,833

Identifiable Liabilities
Deposits	$	2,131,141
Total debt	97,545
Other liabilities	21,739
Total identifiable liabilities	$	2,250,425

Provisional fair value of net assets acquired			$	162,408

Provisional bargain purchase gain			$	(8,816)

(1)The Company held $500,000 in subordinated debt of TCFC. The debt was effectively settled.

(2)Represents the number of TCFC restricted stock units outstanding and the equity exchange ratio, further multiplied by the price per share of the Company’s common stock of $11.56 and the estimated ratio of the completed service period relative to the total service period of the underlying awards.

The acquired assets and assumed liabilities of ~~the NWBI branches~~TCFC were measured at ~~estimated~~ fair ~~value.~~value as of the Acquisition Date. Management made significant estimates and exercised significant judgement in accounting for the acquisition of TCFC. The following is a brief description of the ~~NWBI branches. Management evaluated expected cash flows, prepayment speeds and estimated loss factors~~valuation methodologies used to ~~measure~~estimate the 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~~major categories of assets acquired and liabilities ~~assumed at their estimated~~assumed. The Company utilized a valuation specialist to assist with the determination of fair values for certain acquired assets and ~~the resulting goodwill of $15.3 million recorded from the acquisition:~~

~~(in thousands)~~

assumed liabilities.


~~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 expected to be deductible for tax purposes, pursuant to section 197 of the Internal Revenue Code.~~

~~Acquired loans~~

~~The following table outlines the contractually required payments receivable, cash flows we expect to receive, and the accretable yield for all NWBI loans as 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~~Acquisition Date with no carryover of the related allowance for ~~loan~~credit losses. ~~The Company only acquired loans which were deemed to be performing loans with no signs of credit deterioration.~~

The Company determined the net discounted value of cash flows on ~~approximately 864 performing~~gross loans totaling ~~$125.1 million.~~$1.9 billion, including 3,858 of Non-PCD loans and 323 PCD loans. The valuation took into consideration the loans’ underlying characteristics, including account types, remaining terms, annual interest rates, interest types, past delinquencies, timing of principal and interest payments, current market rates ~~loan-to-value ratios, loss exposures,~~ and remaining balances. ~~These performing loans were segregated into pools based on loan~~Valuations also considered default rates, loss severity estimates, and ~~payment type.~~estimates related to expected prepayments over the contractual lives of the loans. The effect of ~~this fair~~the valuation process was a total net ~~accretable~~ discount ~~adjustment of $2.3~~$120.9 million at the Acquisition Date.

The core deposit intangible was valued using an income approach focused on cost savings, which recognizes the cost savings represented by the expense of maintaining the core deposit base versus the cost of an alternative funding source. The valuation incorporates assumptions related to account retention, discount rates, deposit interest rates, deposit maintenance costs and alternative funding rates.

The fair value of premises acquired was based on recent third-party appraised values of the properties, with fair value adjustments made to both the buildings and any associated parcels of land. Acquired equipment was based on the remaining net book value of TCFC, which approximated fair value.

The fair value of noninterest bearing demand deposits, interest checking, money market and savings deposit accounts from TCFC were assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand. Certificates of deposit were valued at the present value of the certificates’ expected contractual payments discounted at market rates for certificates with similar terms.

The estimated fair value of the acquired portfolio of debt securities was based on quoted market prices and dealer quotes. Substantially all the acquired portfolio was sold following the acquisition.

The estimated fair value of short-term borrowings was determined to approximate their stated value. Subordinated debt and trust preferred debt were valued using a discounted cash flow approach incorporating a discount rate that considered market terms, maturities, and credit ratings.

Table of Contents

Note 3 – ~~Earnings Per Share~~

~~Basic~~Investment Securities

On January 1, 2023, the Company adopted ASC 326, which made changes to accounting for AFS 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 ACL to be recorded on HTM debt securities measured at amortized cost. All securities information presented as of March 31, 2024 and as of December 31, 2023 are in accordance with ASC 326.

The following table summarizes the activity in the ACL on HTM securities.


(Dollars in thousands)	Three Months Ended March 31, 2024		Three Months Ended March 31, 2023
Balance, beginning of period	$	94	$	—
Other debt securities, provision for credit losses	22		163
Balance, end of period	$	116	$	163

A provision for credit losses of $22,000 and $0.2 million was recorded for the three months ended March 31, 2024 and March 31, 2023, respectively.

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


(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Available-for-sale securities:
March 31, 2024
U.S. Treasury and government agencies	$	72,701	$	8	$	3,168	$	69,541
Mortgage-backed-residential	111,780		20		8,174		103,626
Other debt securities	6,102		322		95		6,329
Total	$	190,583	$	350	$	11,437	$	179,496

December 31, 2023
U.S. Treasury and government agencies	$	23,472	$	5	$	3,002	$	20,475
Mortgage-backed-residential	91,280		5		7,258		84,027
Other debt securities	6,080		59		120		6,019
Total	$	120,832	$	69	$	10,380	$	110,521

No AFS securities were sold during the three months ended March 31, 2024 and 2023.


(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Allowance for Credit Losses
Held-to-maturity securities:
March 31, 2024
U.S. Treasury and government agencies	$	143,215	$	—	$	11,172	$	132,043	$	—
Mortgage-backed-residential	348,754		—		47,343		301,411		—
States and political subdivisions	1,469		44		24		1,489		—
Other debt securities	10,500		—		1,185		9,315		116
Total	$	503,938	$	44	$	59,724	$	444,258	$	116

December 31, 2023
U.S. Treasury and government agencies	$	143,442	$	—	$	10,377	$	133,065	$	—
Mortgage-backed-residential	357,870		—		43,864		314,006		—
States and political subdivisions	1,470		57		19		1,508		—
Other debt securities	10,500		—		1,249		9,251		94
Total	$	513,282	$	57	$	55,509	$	457,830	$	94

Table of Contents

Equity securities with an aggregate fair value of $5.7 million at March 31, 2024 and $5.7 million at December 31, 2023 are presented separately on the balance sheet. The fair value adjustment recorded through earnings ~~per common share is calculated~~totaled gain of $61,000 for the three months ended March 31, 2024 and loss of $17,000 for the three months ended March 31, 2023, respectively.

Credit Quality Information

The Company monitors the credit quality of HTM securities through credit ratings provided by ~~dividing net income available to common stockholders~~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 ~~weighted average number~~rating agencies and market participants to be of ~~common shares outstanding during the period. Diluted earnings per common share is calculated by dividing net income available to common stockholders~~low credit risk. Conversely, securities rated below investment grade, which are labeled as speculative grade by the ~~weighted average number~~rating agencies, are considered to have distinctively higher credit risk than investment grade securities. There were no speculative grade HTM securities at March 31, 2024 or December 31, 2023. HTM securities that are not rated are agency mortgage-backed securities sponsored by U.S. government agencies, as well as direct obligations of ~~common shares outstanding during~~ the ~~period, adjusted~~agencies, with the remainder being sub-debt of other banks.

The following table shows the amortized cost of HTM securities based on their lowest publicly available credit rating as of March 31, 2024.


	March 31, 2024
	Investment Grade
(Dollars in thousands)	Aaa		Aa1		A3		Baa1		Baa2		NR		Total
U.S. Treasury and government agencies	$	139,543	$	—	$	—	$	—	$	—	$	3,672	$	143,215
Mortgage-backed-residential	348,754		—		—		—		—		—		348,754
States and political subdivisions	—		1,469		—		—		—		—		1,469
Other debt securities	—		—		4,000		4,000		500		2,000		10,500
Total held-to maturity securities	$	488,297	$	1,469	$	4,000	$	4,000	$	500	$	5,672	$	503,938

The following table shows the amortized cost of HTM securities based on their lowest publicly available credit rating as of December 31, 2023.


	December 31, 2023
	Investment Grade
(Dollars in thousands)	Aaa		Aa1		A3		Baa1		Baa2		NR		Total
U.S. Treasury and government agencies	$	140,761	$	—	$	—	$	—	$	—	$	2,681	$	143,442
Mortgage-backed securities	357,870		—		—		—		—		—		357,870
Obligations of states and political subdivisions	—		1,470		—		—		—		—		1,470
Other debt securities	—		—		4,000		4,000		500		2,000		10,500
Total held-to-maturity securities	$	498,631	$	1,470	$	4,000	$	4,000	$	500	$	4,681	$	513,282

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 March 31, 2024 and December 31, 2023.


	Less than 12 Months				More than 12 Months				Total
(Dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
March 31, 2024
Available-for-sale securities:
U.S. Treasury and government agencies	$	196	$	1	$	17,278	$	3,167	$	17,474	$	3,168
Mortgage-backed-residential	33,688		526		63,243		7,648		96,931		8,174
Other debt securities	—		—		1,913		95		1,913		95
Total	$	33,884	$	527	$	82,434	$	10,910	$	116,318	$	11,437

Table of Contents


	Less than 12 Months				More than 12 Months				Total
(Dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
December 31, 2023
Available-for-sale securities:
U.S. Treasury and government agencies	$	74	$	—	$	17,750	$	3,002	$	17,824	$	3,002
Mortgage-backed-residential	24,405		150		52,864		7,108		77,269		7,258
Other debt securities	—		—		1,890		120		1,890		120
Total	$	24,479	$	150	$	72,504	$	10,230	$	96,983	$	10,380

There were 115 AFS debt securities with a fair value below the amortized cost basis, totaling $11.4 million of aggregate fair value as of March 31, 2024. The Company concluded that a credit loss does not exist in its AFS securities portfolio as of March 31, 2024, 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 had generally high credit quality, (3) the Company intends to hold these investments in debt securities to maturity and it is more-likely-than-not the Company will not be required to sell these investments before a recovery of 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 U.S. government agencies or U.S. government sponsored enterprises. Collectively, these entities provide a guarantee, which is either explicitly or implicitly supported by the full faith and credit of the U.S. government, that investors in such mortgage-backed securities will receive timely principal and interest payments.

All HTM and AFS securities were current with no securities past due or on nonaccrual as of March 31, 2024.

The Company has securities which have been pledged as collateral for obligations to federal, state, and local government agencies, and other purpose as required or permitted by law, or sold under agreements to repurchase. At March 31, 2024, the ~~dilutive effect~~carrying value of ~~common stock equivalents (stock-based awards).~~ pledged AFS securities was $53.1 million and $195.8 million of pledged HTM securities. The comparable amounts for December 31, 2023 were $54.5 million and $185.9 million, respectively.

There were no obligations of states or political subdivisions with carrying values, as to any issuer, exceeding 10% of stockholders’ equity at March 31, 2024 or December 31, 2023.

The following table provides information ~~relating to~~on the ~~calculation~~amortized cost and estimated fair values of ~~earnings per common share:~~

investment securities by maturity date at March 31, 2024.

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
(Dollars in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	51,911	$	51,915	$	7,000	$	6,947
Due after one year through five years	16,189		15,075		129,497		121,031
Due after five years through ten years	42,049		39,399		39,125		35,652
Due after ten years	80,434		73,107		328,316		280,628
Total	$	190,583	$	179,496	$	503,938	$	444,258

~~There were no weighted average common stock equivalents excluded from the calculation~~

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

Table of ~~diluted earnings per share for the three and nine months ended September 30, 2017 and 2016.~~

Contents

Note 4 ~~– Investment Securities~~

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

Gross

Gross

Estimated

Amortized

Unrealized

Unrealized

Fair
(Dollars in thousands)

Cost

Gains

Losses

Value
Available-for-sale securities:

September 30, 2017

U.S. Government agencies

$
52,093

$
64

$
154

$
52,003
Mortgage-backed

160,645

660

580

160,725
Equity

662

-

-

662
Total

$
213,400

$
724

$
734

$
213,390

December 31, 2016

U.S. Government agencies

$
34,320

$
56

$
58

$
34,318
Mortgage-backed

130,490

263

1,809

128,944
Equity

652

-

12

640
Total

$
165,462

$
319

$
1,879

$
163,902

Held-to-maturity securities:

September 30, 2017

U.S. Government agencies

$
1,837

$
42

$
-

$
1,879
States and political subdivisions

1,404

61

-

1,465
Other debt securities (1)

3,000

107

-

3,107
Total

$
6,241

$
210

$
-

$
6,451

December 31, 2016

U.S. Government agencies

$
2,089

$
26

$
-

$
2,115
States and political subdivisions

1,615

76

-

1,691
Other debt securities (1)

3,000

-

-

3,000
Total

$
6,704

$
102

$
-

$
6,806

~~(1)~~

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

Less than

More than

12 Months

12 Months

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized
(Dollars in thousands)

Value

Losses

Value

Losses

Value

Losses
September 30, 2017

Available-for-sale securities:

U.S. Government agencies

$
40,819

$
150

$
2,998

$
4

$
43,817

$
154
Mortgage-backed

60,113

289

11,086

291

71,199

580
Total

$
100,932

$
439

$
14,084

$
295

$
115,016

$
734

Less than

More than

12 Months

12 Months

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized
(Dollars in thousands)

Value

Losses

Value

Losses

Value

Losses
December 31, 2016

Available-for-sale securities:

U.S. Government agencies

$
11,926

$
58

$
-

$
-

$
11,926

$
58
Mortgage-backed

100,237

1,546

9,208

263

109,445

1,809
Equity securities

640

12

-

-

640

12
Total

$
112,803

$
1,616

$
9,208

$
263

$
122,011

$
1,879

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

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

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.~~

~~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 1 – Summary of Significant Accounting Policies of the Company’s 2023 Annual Report.

The Company makes residential mortgage, commercial, and consumer loans to customers primarily in ~~Talbot~~Anne Arundel County, Baltimore County, Charles County, Calvert County, St Mary’s 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, Stafford County, Spotsylvania County and Fredericksburg City in Virginia. The following table provides information about the principal classes of the loan portfolio at ~~September 30, 2017~~March 31, 2024 and December 31, ~~2016.~~

2023.


(Dollars in thousands)	September 30, 2017		December 31, 2016		(Dollars in thousands)		March 31, 2024					% of Total Loans					December 31, 2023					% of Total Loans
Construction	$	106,617	$	84,002	Construction		$	299,133		6.43			6.43		%			$	299,000		6.44		6.44	%
Residential real estate		387,722		325,768	Residential real estate		1,515,134			32.59			32.59		%			1,490,438			32.11		32.11	%

Commercial real estate
Commercial real estate
Commercial real estate		454,626		382,681		2,272,867			48.90		48.90		%			2,286,154				49.27		49.27	%
Commercial		91,799		72,435	Commercial		229,594			4.94			4.94		%			229,939			4.95		4.95	%
Consumer		6,483		6,639	Consumer		325,076			6.99			6.99		%			328,896			7.09		7.09	%
Credit Cards					Credit Cards		6,921					0.15		%			6,583					0.14	%
Total loans		1,047,247		871,525	Total loans		4,648,725			100.00			100.00		%			4,641,010			100.00		100.00	%
Allowance for credit losses		(9,295)		(8,726)
Allowance for credit losses on loans
Total loans, net	$	1,037,952	$	862,799
Total loans, net
Total loans, net

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~~$2.4 million and ~~discounts on acquired loans of $2.0~~$2.2 million at ~~September 30, 2017. Loans~~March 31, 2024 and December 31, 2023. At March 31, 2024 and December 31, 2023 included ~~deferred costs,~~in total loans were $1.6 billion and $1.6 billion in loans acquired as part of the acquisition of TCFC, effective July 1, 2023. These balances were presented net of ~~deferred fees, of $509 thousand~~the related discount which totaled $104.2 million and $108.4 million at March 31, 2024 and December 31, ~~2016. Interest income on~~2023, respectively. At March 31, 2024 and December 31, 2023, included in total loans ~~is accrued at the contractual rate based on the principal amount outstanding. fees charged~~were $289.0 million and ~~costs capitalized for originating~~$297.9 million in loans, ~~are being amortized substantially on the interest method over the term~~acquired as part of the ~~loan. A loan is placed on nonaccrual (i.e.~~acquisition of Severn Bancorp, Inc. (“Severn”), ~~interest income is no longer accrued) when it is specifically determined to be impaired or when principal or interest is delinquent~~effective October 31, 2021. These balances were presented net of the related discount which totaled $4.4 million and $4.7 million at March 31, 2024 and December 31, 2023, respectively.

At March 31, 2024, the Bank was servicing $371.1 million in loans for ~~90 days or more, unless~~ the ~~loan is well secured~~Federal National Mortgage Association and $117.8 million in ~~the process of collection. Any unpaid interest previously accrued on those~~ loans ~~is reversed from income.~~

~~Interest payments received~~for Freddie Mac.

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.

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.

~~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

~~The following tables provide information on impaired loans and any related allowance~~ by loan class as of ~~September 30, 2017~~March 31, 2024 and December 31, ~~2016.~~ 2023.


(Dollars in thousands)	Non-accrual with no allowance for credit loss		Non-accrual with an allowance for credit loss		Total Non-accruals
March 31, 2024
Nonaccrual loans:
Construction	$	—	$	476	$	476
Residential real estate	4		6,379		6,383

Commercial real estate	—		3,643		3,643
Commercial	1,209		147		1,356
Consumer	694		224		918

Total	$	1,907	$	10,869	$	12,776

Interest income	$	187	$	33	$	220

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(Dollars in thousands)	Non-accrual with no allowance for credit loss		Non-accrual with an allowance for credit loss		Total Non-accruals
December 31, 2023
Nonaccrual loans:
Construction	$	626	$	—	$	626
Residential real estate	5,865		480		6,345

Commercial real estate	4,364		—		4,364
Commercial	176		368		544
Consumer	216		689		905

Total	$	11,247	$	1,537	$	12,784

Interest income	$	399	$	53	$	452


(Dollars in thousands)	Non-accrual Delinquent Loans		Non-accrual Current Loans		Total Non-accruals
March 31, 2024
Nonaccrual loans:
Construction	$	210	$	266	$	476
Residential real estate	3,718		2,665		6,383

Commercial real estate	940		2,703		3,643
Commercial	51		1,305		1,356
Consumer	918		—		918

Total	$	5,837	$	6,939	$	12,776


(Dollars in thousands)	Non-accrual Delinquent Loans		Non-accrual Current Loans		Total Non-accruals
December 31, 2023
Nonaccrual loans:
Construction	$	221	$	405	$	626
Residential real estate	4,137		2,208		6,345

Commercial real estate	1,215		3,149		4,364
Commercial	28		516		544
Consumer	903		2		905

Total	$	6,504	$	6,280	$	12,784

The ~~difference between~~overall quality of the ~~unpaid principal balance~~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 ~~the recorded investment is the amount of partial charge-offs that 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

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

~~The following tables provide a roll-forward for troubled debt restructurings as of September 30, 2017~~nonperforming 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

~~The following tables provide information~~potential problem loans. Credit quality indicators are adjusted based on ~~loans that were modified and considered TDRs~~management’s judgment during the ~~nine months ended September 30, 2017~~quarterly review process.

Consumer credit cards are monitored based on a borrower payment history. Credit card loans are classified as performing 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~~are typically charged off no later than 180 days past due when, in the ~~nine months ended September 30, 2017, there was one new TDR and one previously recorded TDR which was modified. The new TDR consisted~~opinion of ~~a reduction in principal, whereas,~~management, the ~~previously recorded TDR consisted~~collection 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, a loan is considered in default when principal or interest is ~~past~~considered doubtful.

Loans subject to risk ratings 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 specific rating assigned considers customer history of earnings, cash flows, liquidity, leverage, capitalization, consistency of debt service coverage, the nature and extent of customer relationship and other relevant specific business factors such as the 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 ~~90 days~~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

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will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified substandard. The loans may have a delinquent history or combination of weak collateral, weak guarantor or operating losses. When a loan is assigned to this category the Bank may estimate a specific reserve in 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

$
-

~~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.

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~~provides information on loan risk ratings as of ~~September 30, 2017~~March 31, 2024 and gross write-offs during the three months ended March 31, 2024.


	Term Loans by Origination Year												Revolving Loans		Revolving Converted to Term Loans		Total
(Dollars in thousands)	Prior		2020		2021		2022		2023		2024
March 31, 2024
Construction
Pass	$	38,125	$	14,343	$	25,261	$	87,793	$	112,241	$	12,386	$	7,890	$	617	$	298,656
Substandard	62		—		—		415		—		—		—		—		477
Total	$	38,187	$	14,343	$	25,261	$	88,208	$	112,241	$	12,386	$	7,890	$	617	$	299,133
Gross Charge-offs	$	—	$	—	$	(12)	$	—	$	—	$	—	$	—	$	—	$	(12)

Residential real estate
Pass	$	370,852	$	102,832	$	250,832	$	400,047	$	238,040	$	23,294	$	107,384	$	12,880	$	1,506,161
Special Mention	403		552		498		—		—		—		182		—		1,635
Substandard	5,922		—		—		—		—		—		1,416		—		7,338
Total	$	377,177	$	103,384	$	251,330	$	400,047	$	238,040	$	23,294	$	108,982	$	12,880	$	1,515,134
Gross Charge-offs	$	(1)	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	(1)








Commercial real estate
Pass	$	843,547	$	306,361	$	418,343	$	428,863	$	211,540	$	23,024	$	15,782	$	—	$	2,247,460
Special Mention	11,383		—		5,474		4,418		—		—		166		—		21,441
Substandard	3,437		—		529		—		—		—		—		—		3,966
Total	$	858,367	$	306,361	$	424,346	$	433,281	$	211,540	$	23,024	$	15,948	$	—	$	2,272,867
Gross Charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Commercial
Pass	$	33,571	$	14,629	$	55,492	$	35,027	$	29,904	$	10,915	$	46,160	$	394	$	226,092
Special Mention	135		—		—		1,514		580		—		500		70		2,799
Substandard	402		—		—		—		—		—		301		—		703
Total	$	34,108	$	14,629	$	55,492	$	36,541	$	30,484	$	10,915	$	46,961	$	464	$	229,594
Gross Charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Consumer
Pass	$	1,355	$	12,829	$	71,502	$	136,759	$	82,331	$	17,387	$	677	$	—	$	322,840
Special Mention	—		—		—		—		1,317		—		—		—		1,317
Substandard	8		7		12		783		108		—		1		—		919
Total	$	1,363	$	12,836	$	71,514	$	137,542	$	83,756	$	17,387	$	678	$	—	$	325,076
Gross Charge-offs	$	(226)	$	—	$	(46)	$	(238)	$	—	$	(15)	$	—			$	(525)

Total
Pass	$	1,287,450	$	450,994	$	821,430	$	1,088,489	$	674,056	$	87,006	$	177,893	$	13,891	$	4,601,209
Special Mention	11,921		552		5,972		5,932		1,897		—		848		70		27,192
Substandard	9,831		7		541		1,198		108		—		1,718		—		13,403
Total loans by risk category	$	1,309,202	$	451,553	$	827,943	$	1,095,619	$	676,061	$	87,006	$	180,459	$	13,961	$	4,641,804

Total gross charge-offs	$	(227)	$	—	$	(58)	$	(238)	$	—	$	(15)	$	—	$	—	$	(538)

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	Term Loans by Origination Year												Revolving Loans		Revolving Converted to Term Loans		Total
(Dollars in thousands)	Prior		2020		2021		2022		2023		2024
March 31, 2024
Credit Cards
Performing	$	—	$	—	$	—	$	—	$	—	$	—	$	6,921	$	—	$	6,921

Total	$	—	$	—	$	—	$	—	$	—	$	—	$	6,921	$	—	$	6,921
Gross Charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	(116)	$	—	$	(116)

Total loans evaluated by performing status	$	—	$	—	$	—	$	—	$	—	$	—	$	6,921	$	—	$	6,921

Total gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	(116)	$	—	$	(116)

Total Recorded Investment	$	1,309,202	$	451,553	$	827,943	$	1,095,619	$	676,061	$	87,006	$	187,380	$	13,961	$	4,648,725

The following tables provides information on loan risk ratings as of December 31, ~~2016.~~

2023 and gross write-offs during twelve months ended December 31, 2023.

Term Loans by Origination Year

Revolving
loans

Revolving
converted to
term loans

Total

(Dollars in thousands)

December 31, 2023

Construction

Pass

Substandard

Total

Gross Charge-offs

Residential real estate

Pass

Special Mention

Substandard

Total

Gross Charge-offs

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 real estate

Pass

Special Mention

Substandard

Total

Gross Charge-offs

Commercial

90,680

660

459

91,799

Commercial

Pass

Special Mention

Substandard

Total

Gross Charge-offs

Consumer

6,483

Consumer

Pass

Special Mention

Substandard

Total

1,009,761

16,076

21,410

1,047,247

Gross Charge-offs

Special

(Dollars in thousands)

Pass/Performing

Mention

Substandard

Doubtful

Total
December 31, 2016

Construction

$
72,641

$
4,195

$
7,166

$
-

$
84,002
Residential real estate

312,242

6,646

6,880

-

325,768
Commercial real estate

363,461

10,939

8,281

-

382,681
Commercial

71,313

857

265

-

72,435
Consumer

6,540

-

99

-

6,639
Total

$
826,197

$
22,637

$
22,691

$
-

$
871,525

Table of Contents


Total
Pass	$	1,035,412	$	274,768	$	460,644	$	830,594	$	1,101,448	$	670,765	$	192,565	$	25,296	$	4,591,492
Special Mention	15,283		$	587	$	564	$	6,429	$	4,446	$	—	$	545	$	409	28,263
Substandard	8,478		2,136		5		634		1,685		—		1,688		46		14,672
Total loans by risk category	$	1,059,173	$	277,491	$	461,213	$	837,657	$	1,107,579	$	670,765	$	194,798	$	25,751	$	4,634,427

Total gross charge-offs	$	(1,035)	$	—	$	(830)	$	(17)	$	(8)	$	(4)	$	(126)	$	(242)	$	(2,262)

Credit Cards
Performing	$	—	$	—	$	—	$	—	$	—	$	—	$	6,583	$	—	$	6,583

Total	$	—	$	—	$	—	$	—	$	—	$	—	$	6,583	$	—	$	6,583
Gross Charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	(111)	$	—	$	(111)

Total loans evaluated by performing status	$	—	$	—	$	—	$	—	$	—	$	—	$	6,583	$	—	$	6,583

Total gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	(111)	$	—	$	(111)

Total Recorded Investment	$	1,059,173	$	277,491	$	461,213	$	837,657	$	1,107,579	$	670,765	$	201,381	$	25,751	$	4,641,010

The following tables provide information on the aging of the loan portfolio as of ~~September 30, 2017~~March 31, 2024 and December 31, ~~2016.~~

2023.


		Accruing
				30-59 days			60-89 days			Greater than			Total
			Accruing
(Dollars in thousands)	Current			past due			past due			90 days			past due			Nonaccrual			Total
September 30, 2017
(Dollars in thousands)
(Dollars in thousands)																						30‑59 days past due		60‑89 days past due		30-89 days past due and not accruing		90 days past due and still accruing		90 days past due and not accruing		Total past due		Current Accrual Loans (1)		Current Non Accrual Loans		Total
March 31, 2024
Construction
Construction
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
Commercial real estate
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
Credit Cards
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	%
Percent of total loans
Percent of total loans																						0.17	%	0.01	%	0.02	%	0.03	%	0.11	%	0.34	%	99.51	%	0.15	%	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
%
(1)Includes loans measured at fair value of $9.7 million at March 31, 2024.

Accruing
(Dollars in thousands) 30‑59 days past due 60‑89 days past due 30-89 days past due and not accruing 90 days past due and still accruing 90 days past due and not accruing Total past due Current Accrual Loans (1) Current Non accrual Loans Total
December 31, 2023
Construction $ 1,919 $ — $ — $ — $ 220 $ 2,139 $ 296,456 $ 405 $ 299,000
Residential real estate 2,420 271 1,469 108 2,668 6,936 1,481,294 2,208 1,490,438
Commercial real estate 16 — — — 1,222 1,238 2,281,767 3,149 2,286,154
Commercial 48 — — 488 28 564 228,859 516 229,939
Consumer 3,224 1,391 24 — 879 5,518 323,376 2 328,896
Credit cards $ 35 $ 36 $ — $ 142 $ — $ 213 $ 6,370 $ — $ 6,583
Total $ 7,662 $ 1,698 $ 1,493 $ 738 $ 5,017 $ 16,608 $ 4,618,122 $ 6,280 $ 4,641,010
Percent of total loans 0.17 % 0.04 % 0.03 % 0.02 % 0.11 % 0.37 % 99.50 % 0.13 % 100.00 %

(1)Includes loans measured at fair value of $9.9 million at December 31, 2023.

~~Management evaluates the adequacy~~

Table of ~~the allowance for credit losses at least quarterly and adjusts the provision for credit losses based on this analysis.~~ Contents

The following tables provide a summary of the activity in the ~~allowance for credit losses~~ACL allocated by loan class for the three months ended March 31, 2024 and ~~nine months ended September 30, 2017 and 2016.~~March 31, 2023. Allocation of a portion of the allowance to one loan class does not preclude its availability to absorb losses in other loan classes.

~~Management re-evaluated~~


(Dollars in thousands)	Beginning Balance		Charge-offs		Recoveries		Net (charge-offs) recoveries		Provisions		Ending Balance
For three months ended March 31, 2024
Construction	$	3,935	$	(12)	$	2	$	(10)	$	(367)	$	3,558
Residential real estate	21,949		(1)		2		1		(1,182)		20,768

Commercial real estate	20,975		—		—		—		275		21,250
Commercial	2,671		—		1		1		207		2,879
Consumer (1)	7,601		(525)		76		(449)		1,530		8,682
Credit Card	220		(116)		8		(108)		87		199
Total	$	57,351	$	(654)	$	89	$	(565)	$	550	$	57,336

(1)Gross charge-offs of consumer loans for the ~~allowance methodology~~three months ended March 31, 2024 included $0.2 million of demand deposit overdrafts.


(Dollars in thousands)	Beginning Balance		Impact of ASC326 Adoption		Charge-offs		Recoveries		Net (charge-offs) recoveries		Provisions		Ending Balance
For Three Months Ended March 31, 2023
Construction	$	2,973	$	1,222	$	—	$	3	$	3	$	(1,509)	$	2,689
Residential real estate	2,622		4,974		—		31		31		1,120		8,747

Commercial real estate	4,899		3,742		—		—		—		1,217		9,858
Commercial	1,652		401		(107)		53		(54)		(139)		1,860
Consumer	4,497		452		—		—		—		361		5,310

Total	$	16,643	$	10,791	$	(107)	$	87	$	(20)	$	1,050	$	28,464

The following table presents the amortized cost basis of collateral-dependent loans by loan portfolio segment.


	March 31, 2024
(Dollars in thousands)	Real Estate Collateral		Other Collateral		Total
Construction	$	477	$	—	$	477
Residential real estate	19,272		—		19,272

Commercial real estate	5,197		—		5,197
Commercial	—		733		733
Consumer	—		918		918
Total	$	24,946	$	1,651	$	26,597


	December 31, 2023
(Dollars in thousands)	Real Estate Collateral		Other Collateral		Total
Construction	$	662	$	—	$	662
Residential real estate	8,047		—		8,047

Commercial real estate	6,134		—		6,134
Commercial	—		1,106		1,106
Consumer	—		904		904
Total	$	14,843	$	2,010	$	16,853

The Company did not identify any significant changes in the extent to which collateral secures its collateral dependent loans, whether in the form of general deterioration or from other factors during the ~~third quarter~~period ended March 31, 2024.

Table of ~~2016, in connection with~~Contents

Loan Modifications to Borrowers Experiencing Financial Difficulty

Modifications to borrowers experiencing financial difficulty may include interest rate reduction, principal or interest forgiveness, forbearance, term extensions, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. The following illustrates the ~~consolidation of~~most common loan modifications by loan classes offered by the ~~two former bank subsidiaries. Prior~~Company that are required 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 comparedbe disclosed pursuant to the ~~fourth quarter~~requirements of ~~2016~~ASU 2022-02:


Loan Classes						Modification Types



Commercial Real Estate						Term extension greater than three months.
Commercial						Term extension greater than three months.

The following table presents the amortized cost basis of ~~$1.1~~loan modifications made to borrowers experiencing financial difficulty during three months ended March 31, 2024, and there were no modifications to loans for borrowers experiencing financial difficulty during the three months ended March 31, 2023.


(dollars in thousands)	Term Extension		Interest Rate Reduction		Payment Delay and Term Extension		Term Extension and Interest Rate Reduction		Payment Delay		Total		% of Total Portfolio Segment
March 31, 2024
Construction	$	—	$	—	$	—	$	—	$	—	$	—	—	%
Residential real estate	—		—		—		—		—		—		—	%
Residential rentals	—		—		—		—		—		—		—	%
Commercial real estate	117		—		—		—		—		117		0.01	%
Commercial	232		—		—		—		—		232		0.10	%
Consumer	—		—		—		—		—		—		—	%
Credit Cards	—		—		—		—		—		—		—	%
Total	$	349	$	—	$	—	$	—	$	—	$	349	0.01	%

The following table presents the financial effect of loan modifications made to borrowers experiencing financial difficulty during the three months ended March 31, 2024, and there were no modifications to loans for borrowers experiencing financial difficulty during the three months ended March 31, 2023.

(dollars in thousands)

Weighted-Average Months of Term Extension

March 31, 2024

Commercial real estate

12 months

Commercial

12 months

During the three months ended March 31, 2024 and March 31, 2023, there were no defaults on loan modifications made to borrowers experiencing financial difficulty.

Table of Contents

The following table present the aging analysis of loan modifications made to borrowers experiencing financial difficulty as of March 31, 2024, and there were no loan modifications made to borrowers experiencing financial difficulty at March 31, 2023.


	Accruing
(Dollars in thousands)	30‑59 days past due		60‑89 days past due		90 days past due and still accruing		90 days past due and not accruing		Total past due		Current Accrual		Current Non-Accrual		Total Recorded Investment
March 31, 2024
Construction	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential real estate	—		—		—		—		—		—		—		—

Commercial real estate	—		—		—		—		—		—		117		117
Commercial	—		—		—		—		—		—		232		232
Consumer	—		—		—		—		—		—		—		—
Credit Cards	—		—		—		—		—		—		—		—
Total	$	—	$	—	$	—	$	—	$	—	$	—	$	349	$	349

Foreclosure Proceedings

There were $0.2 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

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

~~Foreclosure Proceedings~~

~~Consumer~~consumer mortgage loans collateralized by residential real estate property that were in the process of foreclosure ~~totaled $620 thousand and $687 thousand~~ as of ~~September 30, 2017~~March 31, 2024 and $0.2 million as of December 31, ~~2016,~~2023, respectively. ~~At September 30, 2017, there~~There were 2no residential real estate properties ~~held~~included in the balance of other real estate owned ~~totaling $0, compared to 3 residential properties totaling $92 thousand~~(“OREO”) at ~~December~~March 31, ~~2016.~~

~~All TDRs were in compliance with their modified terms and there are no further commitments associated with these loans as of September 30, 2017~~2024 and December 31, ~~2016.~~

2023.

Table of Contents

Note 5 – Goodwill and Other Intangibles

The following table provides information on the significant components of goodwill and other acquired intangible assets at March 31, 2024 and December 31, 2023.


	March 31, 2024
(Dollars in thousands)	Gross Carrying Amount		Additions		Accumulated Impairment Charges		Accumulated Amortization		Net Carrying Amount		Weighted Average Remaining Life (in years)

Goodwill	$	65,476	$	—	$	(1,543)	$	(667)	$	63,266	0.0 years

Other intangible assets
Amortizable
Core deposit intangible	$	59,151	$	—	$	—	$	(13,636)	$	45,515	3.7 years
Total other intangible assets	$	59,151	$	—	$	—	$	(13,636)	$	45,515


	December 31, 2023
(Dollars in thousands)	Gross Carrying Amount		Additions		Accumulated Impairment Charges		Accumulated Amortization		Net Carrying Amount		Weighted Average Remaining Life (in years)

Goodwill	$	65,476	$	—	$	(1,543)	$	(667)	$	63,266	0.0 years

Other intangible assets
Amortizable
Core deposit intangible	$	10,503	48,648		$	—	$	(11,061)	$	48,090	3.7 years
Total other intangible assets	$	10,503	$	48,648	$	—	$	(11,061)	$	48,090

The aggregate amortization expense was $2.6 million for the three months ended March 31, 2024 and $0.4 million for the three months ended March 31, 2023.

At March 31, 2024, estimated future remaining amortization for amortizing core deposit intangibles within the years ending December 31, is as follows:


(Dollars in thousands)	Amortization Expense
2024	$	7,204
2025	8,589
2026	7,398
2027	6,208
2028	5,060
Thereafter	11,056
Total amortizing intangible assets	$	45,515

Table of Contents

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, 2024			December 31, 2023
Lease liabilities	$	12,552		$	12,857
Right-of-use assets	$	12,153		$	12,487
Weighted average remaining lease term	10.72 years			10.88 years
Weighted average discount rate	3.24		%	3.24		%
Remaining lease term - min	0.14 years			0.39 years
Remaining lease term - max	17.43 years			17.68 years


	Three Months Ended March 31,
Lease cost (in thousands)	2024		2023
Operating lease cost	$	492	$	340

Total lease cost	$	492	$	340

Cash paid for amounts included in the measurement of lease liabilities	$	462	$	322

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


Lease payments due (in thousands)	As of March 31, 2024
Nine months ending December 31, 2024	$	1,347
2025	1,642
2026	1,600
2027	1,472
2028	1,419
Thereafter	7,261
Total undiscounted cash flows	$	14,741
Discount	2,189
Lease liabilities	$	12,552

Total gross rental income was $0.3 million and $0.4 million for the three months ended March 31, 2024 and 2023, respectively.

The following table presents our minimum future annual rental income on such leases as of March 31, 2024.


(In thousands)	As of March 31, 2024
Nine months ending December 31, 2024	$	635
2025	854
2026	876
2027	562
2028	578
Thereafter	2,438
Total	$	5,943

Table of Contents

Note 7 - Deposits

Deposits consist of the following categories as of the dates indicated:


(dollars in thousands)	March 31, 2024				December 31, 2023
	Balance		%		Balance		%
Noninterest-bearing demand	$	1,200,680	23.15	%	$	1,258,037	23.36	%
Interest-bearing:
Demand	1,101,954		21.26	%	1,165,546		21.64	%
Money market deposits	1,358,205		26.20	%	1,430,603		26.56	%
Savings	354,098		6.83	%	347,324		6.45	%
Certificates of deposit	1,169,342		22.56	%	1,184,610		21.99	%
Total interest-bearing	3,983,599		76.85	%	4,128,083		76.64	%

Total Deposits	$	5,184,279	100.00	%	$	5,386,120	100.00	%

At March 31, 2024, the scheduled contractual maturities of certificates of deposit are as follows:


(dollars in thousands)	March 31, 2024
Within one year	$	1,023,551
Year 2	111,651
Year 3	16,812
Year 4	11,048
Year 5	6,276
Thereafter	4
	$	1,169,342

The aggregate amount of certificates of deposit that met or exceeded the FDIC insurance limit of $250,000 at March 31, 2024 and December 31, 2023 was $371.0 million and $354.6 million, respectively.

Table of Contents

Note 8 - Borrowings

Long-term debt consisted of the following:


(dollars in thousands)	March 31, 2024		December 31, 2023		Issue Date	Stated Maturity Date	Earliest Call Date	Interest Rate




September 2030 Subordinated Debentures	$	25,000	$	25,000	2020	2030	2025	5.375% through September 2025, 3-month SOFR + 5.265% thereafter
October 2030 Subordinated Debentures	19,500		19,500		2020	2030	2025	4.75% through October 2025, 3-month SOFR + 4.58% thereafter
Total subordinated debentures	44,500		44,500

Severn Capital Trust I	20,619		20,619		2004	2035		3-month SOFR + 2.00%
Tri-County Capital Trust I	7,000		7,000		2004	2034		90-day SOFR + 2.60%
Tri-County Capital Trust II	5,000		5,000		2005	2035		90-day SOFR + 1.70%
Total trust preferred securities	32,619		32,619
Less net discount and unamortized issuance costs	(4,560)		(4,822)
Total long-term debt	$	72,559	$	72,297

At March 31, 2024, subordinated notes consisted of $25.0 million of long-term debt issued by the Company in August 2020, and $19.5 million of long-term debt assumed as a result of the merger with TCFC. The recorded balance of subordinated debt issued in 2021 and the assumed subordinated debt from TCFC, net of unamortized issuance costs and fair value discounts, respectively, were $24.8 million and $18.5 million, respectively.

The Company also assumed trust preferred securities in the aggregate of $32.6 million as a result of the merger with TCFC in the third quarter of 2023 and the acquisition of Severn in the fourth quarter of 2022. Trust preferred securities consisted of $20.6 million issued to Severn Capital Trust I, $7.0 million issued by Tri-County Capital Trust I and $5.0 million issued by Tri-County Capital Trust II. The recorded balance of the debt acquired from Severn at March 31, 2024 was $18.6 million, net of the unamortized fair value adjustment of $2.0 million. At March 31, 2024, the junior subordinated debt securities of Tri-County Capital Trust I and Tri-County Capital Trust II had a recorded balance of $6.4 million and $4.2 million, which are presented as net of the unamortized fair value adjustment of $0.6 million and $0.8 million, respectively.

The Company may periodically borrow from a correspondent federal funds line of credit arrangement, under a secured reverse repurchase agreement, or from the Federal Home Loan Bank (“FHLB”) to meet short-term liquidity needs. There were no outstanding borrowings from the Federal Home Loan Bank (“FHLB”) at March 31, 2024 and December 31, 2023. Further information on these obligations is provided in the Company’s 2023 Annual Report.

~~Note 6 – Goodwill and Other Intangibles~~

On May 19, 2017, the Bank acquired three branches located in Arbutus, Owings Mills and Elkridge, Maryland from NWBI. The purchase of these branches resulted in core deposit intangibles of $4.0 million and goodwill of $15.3 million.

~~The gross carrying amount 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

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

(Dollars in thousands)

2017

$
282
2018

442
2019

442
2020

395
2021

439
Thereafter

2,051
Total amortizing intangible assets

$
4,051

~~Note 7 – Other Assets~~

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

(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

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

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

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

~~Note 8 – Other Liabilities~~

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

(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 9 - 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~~401,868 shares remained available for grant at ~~September 30, 2017.~~

March 31, 2024.

The ~~following tables provide information on stock-based compensation expense~~Company assumed 3,977 shares of restricted stock and 90,783 of restricted stock units at a fair market value of $11.56 per share as a result of the merger with TCFC. The vesting period for the outstanding restricted stock grants is between three and five years. Restricted stock units and performance stock units vesting period is between one to three years. The recipients of the restricted stock units and ~~nine months ended September 30, 2017 and 2016.~~

performance stock units do not have any stockholder rights, including voting, dividend, or liquidation rights, with respect to the shares underlying awarded restricted stock units until the recipient becomes the record holder of those shares.

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

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

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

March 31, 2024.

Restricted Stock

Restricted Stock Units

Performance Stock Units

Number of Shares

Weighted Average Grant Date Fair Value

Number of Shares

Weighted Average Grant Date Fair Value

Number of Shares

Weighted Average Grant Date Fair Value

Nonvested at beginning of period

Nine Months Ended September 30, 2017

Weighted Average

Number of

Grant Date

Fair Value

Nonvested at beginning of period

17,066

11.46

Granted

21,470

16.69

Vested

(22,623)

13.66

Cancelled

Forfeited

Nonvested at end of period

15,913

12.49

The fair value of restricted stock awards that vested during the first ~~nine~~three months of ~~2017~~2024 and ~~2016~~2023 was ~~$309 thousand~~$0.3 million and ~~$204 thousand,~~$0.5 million, respectively.

~~Restricted~~ The fair value of restricted stock units ~~(RSUs)~~vested during the first three months of 2024 and 2023 was $0.4 million and zero.

Note 10 – Derivatives

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 upon permanent financing. 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.

~~During 2017, the Company entered into a long-term incentive program agreement with officers of the Company~~accrued expenses 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.

other liabilities, respectively.

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, 2024 and ~~2016.~~

December 31, 2023.

2017

2016
Dividend yield

0.84
%

0.73
%
Expected volatility

64.80
%

38.60
%
Risk-free interest rate

2.42
%

1.75
%
Expected contract life (in years)

10 years

10 years


	March 31, 2024				December 31, 2023
(Dollars in thousands)	Notional Amount		Estimated Fair Value		Notional Amount		Estimated Fair Value
Asset - IRLCs	$	15,188	$	233	$	6,785	$	110
Asset - TBA securities	4,750		10		1,000		2
Liability - IRLCs	198		1		—		—
Liability - TBA securities	19,750		108		18,000		176

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.

Note 1011 – Accumulated Other Comprehensive Income

(Loss)

The Company records unrealized holding gains (losses), net of tax, on investment securities ~~available for sale~~AFS 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, 2024 and ~~2016.~~

2023.


	Three Months Ended March 31, 2024		Three Months Ended March 31, 2023
(Dollars in thousands)	Net Unrealized (Losses)		Net Unrealized Gains And (Losses)
Beginning of period	$	(7,494)	$	(9,021)
Other comprehensive (loss) income, net of tax	(564)		860
End of period	$	(8,058)	$	(8,161)

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Note 12 – Regulatory Capital

Banks and bank holding companies are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Banks’ assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Banks’ capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain amounts and ratios (set forth in the table below) of Common Equity Tier 1, Tier 1 and total capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (leverage ratio). As of March 31, 2024 and December 31, 2023, management believes that the Company and the Bank met all capital adequacy requirements to which they were subject.

As of December 31, 2023, the most recent notification from our primary regulator categorized the Bank, as well capitalized under the regulatory framework for prompt corrective action. At March 31, 2024, there were no conditions or events since that notification that management believes would change the Bank’s classification. To be categorized as well capitalized, the Bank must maintain minimum common equity Tier 1, Tier 1 risk-based and total risk-based capital ratios, and Tier 1 leverage ratios, which are described below.

The minimum ratios for capital adequacy purposes are 7.00%, 8.50%, 10.50% and 4.00% for the common equity Tier 1, Tier 1 risk-based capital, total risk-based capital and leverage ratios, respectively which include a capital conservation buffer of 2.50% respectively. To be categorized as well capitalized, a bank must maintain minimum ratios of 6.50%, 8.00%, 10.00% and 5.00% for its common equity Tier 1, Tier 1 risk-based capital, total risk-based capital and leverage ratios, respectively.


Regulatory Capital and Ratios	Regulatory Minimum Ratio + CCB ( 1)	The Company						The Bank
(dollars in thousands)		March 31, 2024			December 31, 2023			March 31, 2024			December 31, 2023
Common equity		$	515,228		$	511,135		$	579,520		$	570,100
Goodwill(4)		(61,523)			(63,266)			(61,523)			(63,266)
Core deposit intangible (3)		(34,235)			(38,069)			(34,235)			(38,069)
DTAs that arise from net operating loss and tax credit carry forwards		(5,858)			(8,977)			(4,326)			(6,059)
AOCI losses		8,058			7,494			8,058			7,494
Common Equity Tier 1 Capital		421,670			408,317			487,494			470,200
TRUPs		29,237			29,158			—			—
Tier 1 Capital		450,907			437,475			487,494			470,200
Allowable reserve for credit losses and other Tier 2 adjustments		58,428			58,586			58,428			58,586
Subordinated notes		43,322			43,139			—			—
Tier 2 Capital		$	552,657		$	539,200		$	545,922		$	528,786

Risk-Weighted Assets ("RWA")		$	4,729,930		$	4,697,504		$	4,723,872		$	4,693,009
Average Assets ("AA")		$	5,684,150		$	5,649,116		$	5,679,282		$	5,644,930


Common Tier 1 Capital to RWA	7.00%	8.91		%	8.69		%	10.32		%	10.02		%
Tier 1 Capital to RWA	8.50%	9.53		%	9.31		%	10.32		%	10.02		%
Tier 2 Capital to RWA	10.50%	11.68		%	11.48		%	11.56		%	11.27		%
Tier 1 Capital to AA (Leverage) (2)	n/a	7.93		%	7.74		%	8.58		%	8.33		%

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
(1)The regulatory minimum capital ratio ("Min. Ratio") + the capital conservation buffer ("CCB").

(2)Tier 1 Capital to AA (Leverage) has no capital conservation buffer defined. The PCA well capitalized is defined as 5.00%.

(3)Core deposit intangible is net of deferred tax liability.

(4)Goodwill is net of deferred tax liability as of March 31, 2024.

Bank and holding company regulations impose certain restrictions on dividend payments by the Bank, as well as restricting extensions of credit and transfers of assets between the Bank and the Company.

At March 31, 2024, the Bank could pay dividends to the Company to the extent of its earnings so long as it maintained required capital ratios.

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Note 13 – Fair Value Measurements

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

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities on a recurring basis and to determine fair value disclosures. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring 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 AFS is based on quoted prices from an independent pricing service. The fair value measurements consider observable data that may include present value of future cash flows, prepayment assumptions, credit loss assumptions and other factors. The Company classifies its investments in U.S. Treasury securities, if any, as Level 1 in the fair value hierarchy, and it classifies its investments in U.S. Government agencies securities and mortgage-backed securities issued or guaranteed by U.S. Government sponsored entities as Level 2.

Equity Securities

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

Loans Held for Sale

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

Mortgage Servicing Rights

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

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

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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, 2024

MSRs (1)

5,821

Market Approach

Weighted average prepayment speed (PSA) (2)

147

IRLCs - net asset

232

Market Approach

Range of pull through rate

79% - 100%

Average pull through rate

96%

(Dollars in thousands)

Fair Value

Valuation Technique

Unobservable Input

Range

December 31, 2023

MSRs (1)

5,926

Market Approach

Weighted average prepayment speed (PSA) (2)

129

IRLCs - net asset

110

Market Approach

Range of pull through rate

78% - 100%

Average pull through rate

98%

(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, 2024.


(Dollars in thousands)	Three Months Ended March 31, 2024
Beginning balance	$	5,926
Servicing rights resulting from sales of loans	118
Valuation adjustment	(223)
Ending balance	$	5,821

The following table presents activity in the IRLCs - net asset for the three months ended March 31, 2024.


(Dollars in thousands)	Three Months Ended March 31, 2024
Beginning balance	$	110
Valuation adjustment	122
Ending balance	$	232

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 and private investors delivering the loans within 120 days of origination to maximize interest earnings. For a small percentage of our business, we enter into best efforts forward sales commitments with investors at the time we make an IRLC to a borrower. Once a loan has been closed and funded, the best efforts commitments convert to mandatory forward sales commitments. The mandatory commitments are derivatives, and we measure and report them at fair value. Fair value is based on the gain or loss that would occur if we were to pair-off the transaction with the investor at the measurement date. This is a Level 2 input. We have elected to measure and report best efforts commitments at fair value, when outstanding, using a valuation methodology similar to that used for mandatory commitments.

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.

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The following tables present the recorded amount of assets measured at fair value on a recurring basis at March 31, 2024 and December 31, 2023. No assets were transferred from one hierarchy level to another during the first three months of 2024 or 2023.


(Dollars in thousands)	Fair Value		Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
March 31, 2024
Assets:
Securities available for sale:
U.S. Government agencies	$	69,541	$	—	$	69,541	$	—
Mortgage-backed	103,626		—		103,626		—
Other debt securities	6,329		—		6,329		—
	179,496		—		179,496		—

Equity securities	5,681		—		5,681		—

TBA forward trades	10		—		10		—
Loans Held for Sale	13,767		—		13,767		—
Loans Held for Investment, at fair value	9,684		—		9,684		—
MSRs	5,821		—		—		5,821
IRLCs	233		—		—		233
Total assets at fair value	$	214,692	$	—	$	208,638	$	6,054

Liabilities:
IRLCs	$	1	$	—	$	—	$	1
TBA securities	108		—		108		—
Total liabilities at fair value	$	109	$	—	$	108	$	1


(Dollars in thousands)	Fair Value		Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2023
Assets:
Securities available for sale:
U.S. Government agencies	$	20,475	$	—	$	20,475	$	—
Mortgage-backed	84,027		—		84,027		—
Other debt securities	6,019		—		6,019		—
	110,521		—		110,521		—

Equity securities	5,703		—		5,703		—

TBA forward trades	2		—		2		—
Loans Held for Sale	8,782		—		8,782		—
Loans Held for Investment, at fair value	9,944		—		9,944		—
MSRs	5,926		—		—		5,926
IRLCs	110		—		—		110
Total assets at fair value	$	140,988	$	—	$	134,952	$	6,036

Liabilities:

TBA securities	$	176	$	—	$	176	$	—
Total liabilities at fair value	$	176	$	—	$	176	$	—

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

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Individually Evaluated Collateral-Dependent Loans

Loans for which repayment is substantially expected to be provided through the operation or sale of collateral are considered collateral dependent, and are valued based on the estimated fair value of the collateral, less estimated costs to sell at the reporting date, where applicable. Accordingly, collateral dependent loans are classified within Level 3 of the fair value hierarchy.

Other Real Estate Owned (Foreclosed Assets)

Foreclosed assets are adjusted for fair value upon transfer of loans to foreclosed assets establishing a new cost basis. Subsequently, foreclosed assets are carried at the lower of carrying value 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.

Repossessed Properties

The Company records repossessed assets at fair value on a nonrecurring basis. All repossessed properties are recorded at lower of the estimated fair value of the properties, less expected selling costs, or the carrying amount of the defaulted loans. From time to time, nonrecurring fair value adjustments are recorded to reflect partial write-downs based on current appraised value of property. The Company considers any valuation inputs related to repossessed properties to be Level 3 inputs.

The following tables set forth the Company’s financial and nonfinancial assets subject to fair value adjustments (impairment) on a nonrecurring basis at March 31, 2024 and December 31, 2023. Assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.


	Quantitative Information about Level 3 Fair Value Measurements
(Dollars in thousands)	Fair Value		Valuation Technique	Unobservable Input	Range	Weighted Average (1)
March 31, 2024
Nonrecurring measurements:
Individually evaluated collateral dependent loans	$	17	Appraisal of collateral(1)	Appraisal adjustment(2) Liquidation expense(2)	99% 10%	99% 10%

Other real estate owned	$	179	Appraisal of collateral(1)	Appraisal adjustment(2)	(0%) - (20%)	0%

Repossessed properties	$	1,845	Appraisal of collateral(1)	Appraisal adjustment(2)	12% - 13%	13%

Quantitative Information about Level 3 Fair Value Measurements

(Dollars in thousands)

Fair Value

Valuation Technique

Unobservable Input

Range

Weighted Average

December 31, 2023

Nonrecurring measurements:

Individually evaluated collateral dependent loan

633

Appraisal of collateral(1)

Appraisal adjustment(2)

Liquidation expense(2)

51%

10%

51%

10%

Other real estate owned

179

Appraisal of collateral(1)

Appraisal adjustment(2)

0% - 20%

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

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

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Note 14 – Fair Value of Financial Instruments

Financial instruments require disclosure of fair value information, whether or not recognized in the consolidated balance sheets, when it is practical to estimate the fair value. A financial instrument is defined as cash, evidence of an ownership interest in an entity or a contractual obligation which requires the exchange of cash. Certain items are specifically excluded from the financial instrument fair value disclosure requirements, including the Company’s common stock, OREO, premises and equipment and other assets and liabilities.

The carrying amounts and estimated fair values of the Company’s financial instruments are presented in the following table. Fair values for March 31, 2024 and December 31, 2023 were estimated using an exit price notion.


March 31, 2024	Carrying Amount		Fair Value		Fair Value Measurements
Description of Asset (dollars in thousands)					Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	114,560	$	114,560	$	114,560	$	—	$	—
Investment securities - AFS	179,496		179,496		—		179,496		—
Investment securities - HTM, net	503,822		444,258		—		444,258		—
Equity securities	5,681		5,681		—		5,681		—
Restricted securities	17,863		17,863		—		17,863		—
Loans held for sale	13,767		13,767		—		13,767		—
TBA derivatives trades	10		10		—		10		—
Cash surrender value on life insurance	102,321		102,321		—		102,321		—
Loans, at fair value	9,684		9,684		—		9,684		—
Loans, net	4,581,705		4,397,048		—		—		4,397,048
MSRs	5,821		5,821		—		—		5,821
IRLCs	233		233		—		—		233

Liabilities
Deposits:
Noninterest-bearing demand	$	1,200,680	$	1,200,680	$	—	$	1,200,680	$	—
Checking plus interest	1,101,954		1,101,954		—		1,101,954		—
Money Market	1,358,205		1,358,205		—		1,358,205		—
Savings	353,213		353,213		—		353,213		—
Club	885		885		—		885		—
Certificates of Deposit	1,169,342		1,168,144		—		1,168,144		—

Subordinated debt, net	43,322		42,498		—		42,498		—
TRUPS, net	29,237		28,049		—		28,049		—
TBA Securities	108		108		—		108		—
IRLCs	1		1		—		—		1

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December 31, 2023	Carrying Amount		Fair Value		Fair Value Measurements
Description of Asset (dollars in thousands)					Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	372,413	$	372,413	$	372,413	$	—	$	—
Investment securities - AFS	110,521		110,521		—		110,521		—
Investment securities - HTM	513,188		457,830		—		457,830		—
Equity securities	5,703		5,703		—		5,703		—
Restricted securities	17,900		17,900		—		17,900		—
Loans held for sale	8,782		8,782		—		8,782		—
TBA securities	2		2		—		2		—
Cash surrender value on life insurance	101,704		101,704		—		101,704		—
Loans, at fair value	9,944		9,944		—		9,944		—
Loans, net	4,573,715		4,477,468		—		—		4,477,468
MSRs	5,926		5,926		—		—		5,926
IRLCs	110		110		—		—		110

Liabilities
Deposits:
Noninterest-bearing demand	$	1,258,037	$	1,258,037	$	—	$	1,258,037	$	—
Checking plus interest	1,165,546		1,165,546		—		1,165,546		—
Money Market	1,430,603		1,430,603		—		1,430,603		—
Savings	347,324		347,324		—		347,324		—
Certificates of Deposit	1,184,610		1,184,447		—		1,184,447		—
Subordinated debt, net	43,139		42,579		—		42,579		—
TRUPS, net	29,158		28,266		—		28,266		—
TBA Securities	176		176		—		176		—

Note 15 – Commitments and Contingencies

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

The following table provides information on commitments outstanding at March 31, 2024 and December 31, 2023.


(Dollars in thousands)	March 31, 2024		December 31, 2023
Commitments to extend credit	$	694,646	$	613,266
Letters of credit	27,373		28,519
Total	$	722,019	$	641,785

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

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Company’s Consolidated Financial Statements if the Federal government takes actions against the Company. As of March 31, 2024, the Company had not accrued an amount for the potential impact of any such actions.

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

•Deposit and loan balances at March 31, 2024 were approximately $227.6 million, or 4.4% of total deposits, and $73.7 million, or 1.6% of total gross loans, respectively.

•Interest and noninterest income for the three months ended March 31, 2024, were approximately $1.0 million and $0.3 million, respectively.

In the normal course of business, the Company 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 1116 – ~~Fair Value Measurements~~

~~Accounting guidance under GAAP defines fair value as~~Earnings Per Share

Basic earnings per common share is calculated by dividing net income available to common stockholders by the ~~exchange price that would be received for an asset or paid~~weighted average number of common shares outstanding during the period. Diluted earnings per common share is calculated by dividing net income available to ~~transfer a liability (an exit price) in~~common stockholders by the ~~principal or most advantageous market~~weighted average number of common shares outstanding during the period, adjusted for the asset or liability in an orderly transaction between market participants on the measurement date. This accounting guidance also establishes a fair value hierarchy, which requires an entity to maximize the usedilutive effect of ~~observable inputs and minimize the use of unobservable inputs when measuring fair value.~~

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

~~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.~~

~~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.

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

Significant

Other

Significant

Quoted

Observable

Unobservable

Prices

Inputs

Inputs
(Dollars in thousands)

Fair Value

(Level 1)

(Level 2)

(Level 3)
September 30, 2017

Securities available for sale:

U.S. Government agencies

$
52,003

$
-

$
52,003

$
-
Mortgage-backed

160,725

-

160,725

-
Equity

662

-

662

-
Total

$
213,390

$
-

$
213,390

$
-

Significant

Other

Significant

Quoted

Observable

Unobservable

Prices

Inputs

Inputs
(Dollars in thousands)

Fair Value

(Level 1)

(Level 2)

(Level 3)
December 31, 2016

Securities available for sale:

U.S. Government agencies

$
34,318

$
-

$
34,318

$
-
Mortgage-backed

128,944

-

128,944

-
Equity

640

-

640

-
Total

$
163,902

$
-

$
163,902

$
-

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

~~Impaired Loans~~

Loans are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loan impairment is measured using the present value of expected cash flows, the loan’s observable market price or the fair value of the collateral (less selling costs) if the loans are collateral dependent and these are considered Level 3 in the fair value hierarchy. Collateral may be real estate and/or business assets including equipment, inventory and/or accounts receivable. The value of business equipment, inventory and accounts receivable, discounted on management’s review and analysis. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and the client’s business. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the factors identified above. Valuation techniques are consistent with those techniques applied in prior periods.

~~Other Real Estate Owned (Foreclosed Assets)~~

Foreclosed assets are adjusted for fair value upon transfer of loans to foreclosed assets. Subsequently, foreclosed assets are carried at the lower of carrying value and 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.

~~The tables below present the recorded amount of assets measured at fair value on a nonrecurring basis at September 30, 2017 and December 31, 2016.~~

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

Fair Value

Valuation Technique

Unobservable Input

Range
September 30, 2017

Nonrecurring measurements:

Impaired loans

$
6,190

Appraisal of collateral
1

Appraisal adjustments
2

20% - 30%

Liquidation expense
2

5% - 10%

Other real estate owned

$
1,809

Appraisal of collateral
1

Appraisal adjustments
2

20% - 30%

Liquidation expense
2

5% - 10%

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

Fair Value

Valuation Technique

Unobservable Input

Range
December 31, 2016

Nonrecurring measurements:

Impaired loans

$
8,935

Appraisal of collateral
1

Appraisal adjustments
2

20% - 30%

Liquidation expense
2

5% - 10%

Other real estate owned

$
2,477

Appraisal of collateral
1

Appraisal adjustments
2

20% - 30%

Liquidation expense
2

5% - 10%

					~~(1)~~	~~Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various level III inputs which are not identifiable.~~
					~~(2)~~	Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

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

~~Cash and Cash Equivalents~~

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

~~Investment Securities Held to Maturity~~

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

~~Loans~~

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

~~Restricted Securities~~

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

~~Bank Owned Life Insurance~~

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

~~Deposits and Short-Term Borrowings~~

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

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

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

The following table provides information relating to the calculation of earnings per common share.


	Three Months Ended March 31,
(In thousands, except per share data)	2024		2023

Net Income	$	8,184	$	6,457

Average number of common shares outstanding	33,189		19,886
Dilutive effect of common stock equivalents	2		—
Average number of shares used to calculate diluted EPS	33,191		19,886

Anti-dilutive shares	1		—

Earnings per common share
Basic	$	0.25	$	0.32
Diluted	$	0.25	$	0.32

As of March 31, 2024 there were 1,000 and as of March 31, 2023 there were zero unvested common stock equivalents excluded from the calculation of diluted earnings per share as their effect would be anti-dilutive.

Note 17 – Revenue Recognition

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

Trust and Investment Fee Income

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Trust and investment fee income primarily comprise fees earned from the management and administration of trusts and other customer assets. The Company’s ~~financial~~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 ~~liabilities that~~the applicable fee rate. Payment is generally received a few days after month end through a direct charge to customers’ accounts. The Company does not earn performance-based incentives.

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

Title Company Revenue

Title Company revenue consists of revenue earned on performing title work for real estate transactions. The revenue is earned when the ~~balance sheets~~title work is performed. Payment for such performance obligations generally occurs at ~~their carrying amounts. The financial assets and liabilities have been segregated by their classification level in~~ the ~~fair value hierarchy.~~

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

~~Note 12 – Financial Instruments with Off-Balance Sheet Risk~~

Intime of the ~~normal course~~settlement of ~~business, to meet the financial needs~~a real estate transaction. As such settlement is generally within 90 days 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~~the title work, we recognize the revenue at the time of ~~credit~~the settlement.

All contract issuance costs are expensed as incurred. We had no contract assets or liabilities at March 31, 2024.

Other Noninterest Income

Other noninterest income consists of: fees, exchange, other service charges, safety deposit box rental fees, and other ~~commitments generally have fixed expiration dates~~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 Mastercard and 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 ~~termination clauses~~services. The Company’s performance obligation for fees, exchange, and ~~may require payment~~other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. The Company determined that rentals and renewals of safe deposit boxes will be recognized on a ~~fee. Because many~~monthly basis consistent with the duration 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.~~

performance obligation.

The following ~~table provides information~~presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three months ended March 31, 2024 and 2023.


	Three Months Ended March 31,
(Dollars in thousands)	2024		2023
Noninterest Income
In-scope of Topic 606:
Service charges on deposit accounts	$	1,507	$	1,213
Trust and investment fee income	734		432
Interchange income	1,587		1,212
Title Company revenue	78		137
Other noninterest income	803		794
Noninterest Income (in-scope of Topic 606)	4,709		3,788
Noninterest Income (out-of-scope of Topic 606)	1,858		1,546
Total Noninterest Income	$	6,567	$	5,334

Note 18 – Subsequent Events

On April 12, 2024 the Board of Directors determined that it is in the best interest of the Company to close two branches. Management is directed to close the Onley branch located in Onley, VA on ~~commitments outstanding at~~or about July 17, 2024 and to close the Westgate branch located in Annapolis, MD on or about September 30, ~~2017 and December 31, 2016.~~

2024.

(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 business segments: Community Banking and Insurance Products and Services. Through the Community Banking business, the Company provides services to consumers and small businesses in Maryland, Delaware and Virginia through its 21 branch network and

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Item 2 loan production offices. Community banking activities include small business services, retail brokerage, trust services and consumer banking products and services. Loan products available to consumers include mortgage, home equity, automobile, marine, and installment loans, credit cards and other secured and unsecured personal lines of credit. Small business lending includes commercial mortgages, real estate development loans, equipment and operating loans, as well as secured and unsecured lines of credit, credit cards, accounts receivable financing arrangements, and merchant card services.

Through the Insurance Products and Services business, the Company provides a full range of insurance products and services to businesses and consumers in the Company’s market areas. Products include property and casualty, life, marine, individual health and long-term care insurance. Pension and profit sharing plans and retirement plans for executives and employees are available to suit the needs of individual businesses.

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

Community

Insurance Products

Parent

Consolidated
(Dollars in thousands)

Banking

and Services

Company

Total
2017

Interest Income

$
34,761

$
(1)

$
73

$
34,833
Interest Expense

(1,674)

-

-

(1,674)
Provision for credit losses

(1,746)

-

-

(1,746)
Noninterest income

6,111

7,300

-

13,411
Noninterest expense

(18,651)

(6,035)

(5,884)

(30,570)
Net intersegment (expense) income

(5,500)

(84)

5,584

-
Income (loss) before taxes

13,301

1,180

(227)

14,254
Income tax (expense) benefit

(5,309)

(472)

91

(5,690)
Net Income (loss)

$
7,992

$
708

$
(136)

$
8,564

Total assets, September 30, 2017

$
1,359,930

$
9,909

$
6,289

$
1,376,127

2016

Interest Income

$
29,957

$
-

$
190

$
30,147
Interest Expense

(1,863)

-

-

(1,863)
Provision for credit losses

(1,430)

-

-

(1,430)
Noninterest income

5,749

6,840

-

12,589
Noninterest expense

(15,874)

(5,205)

(6,842)

(27,921)
Net intersegment (expense) income

(6,027)

(566)

6,593

-
Income (loss) before taxes

10,512

1,069

(59)

11,522
Income tax (expense) benefit

(3,973)

(424)

18

(4,379)
Net Income (loss)

$
6,539

$
645

$
(41)

$
7,143

Total assets, September 30, 2016

$
1,129,427

$
9,647

$
18,792

$
1,157,866

~~Item 2.~~– Management’s Discussion and Analysis (“MD&A”) 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~~Quarterly Report on Form 10Q are to Shore Bancshares, Inc. and its consolidated subsidiaries.

Forward-Looking Information

~~Portions of this~~

This Quarterly Report on Form 10-Q ~~contain~~contains forward-looking statements. The statements contained herein that are not historical facts are forward-looking statements ~~within~~(as defined by the ~~meaning of The~~ Private Securities Litigation Reform Act of ~~1995. Statements~~1995) based on management’s current expectations and beliefs concerning future developments and their potential effects on the Company. Such statements involve inherent risks and uncertainties, many of which are difficult to predict and are generally beyond the control of the Company. There can be no assurance that future developments affecting the Company will be the same as those anticipated by management. These statements are ~~not historical in nature, including statements that include the words “anticipate”, “estimate”, “should”, “expect”, “believe”, “intend”,~~evidenced by terms such as “anticipate,” “estimate,” “should,” “expect,” “believe,” “intend,” and similar ~~expressions, are expressions about our confidence, policies,~~expressions. Although these statements reflect management’s good faith beliefs and ~~strategies, the adequacy of capital levels, and liquidity and~~projections, they are not guarantees of future ~~performance. Such~~performance and they may not prove true. These projections involve risk and uncertainties that could cause actual results to differ materially from those addressed in the forward-looking ~~statements involve certain~~statements. While there is no assurance that any list of risks and uncertainties ~~including~~or risk factors is complete, below are certain factors which could cause actual results to differ materially from those contained or implied in the forward-looking statements:

•general economic conditions, ~~competition~~(including the interest rate environment, government economic and monetary policies, the strength of global financial markets and inflation/deflation and supply chain issues), whether national or regional, and conditions in the ~~geographic and business areas~~lending markets in which we ~~operate, inflation, fluctuations in interest rates, legislation,~~participate that may have an adverse effect on the demand for our loans and ~~governmental regulation. These risks~~other products, our credit quality and ~~uncertainties are described in detail~~related levels of nonperforming assets and loan losses, and the value and salability of the real estate that we own or that is the collateral for our loans;

•recent adverse developments in the ~~section~~banking industry highlighted by high-profile bank failures and the potential impact of such developments on customer confidence, liquidity, and regulatory responses to these developments;

•the Company’s ability to remediate the material weaknesses identified in the Company’s internal control over financial reporting;

•the effectiveness of the ~~periodic reports~~Company’s internal control over financial reporting and disclosure controls and procedures;

•cybersecurity threats and the cost of defending against them;

•results of examinations of us by our regulators, including the possibility that ~~Shore Bancshares, Inc. files with~~our regulators may, among other things, require us to increase our reserve for loan losses or to write-down assets;

•changing bank regulatory conditions, policies or programs, whether arising as new legislation or regulatory initiatives, which could lead to restrictions on activities of banks generally, or our subsidiary bank in particular, more restrictive regulatory capital requirements, increased costs, including deposit insurance premiums, regulation or prohibition of certain income producing activities or changes in the secondary market for loans and other products;

•changes in market rates and prices may adversely impact the value of securities, loans, deposits and other financial instruments and the interest rate sensitivity of our balance sheet;

•our liquidity requirements could be adversely affected by changes in our assets and liabilities;

•our ability to prudently manage our growth and execute our strategy;

•impairment of our goodwill and intangible assets;

•competitive factors among financial services organizations, including product and pricing pressures and our ability to attract, develop and retain qualified banking professionals;

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

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

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

•the effect of any change in federal government enforcement of federal laws affecting the cannabis industry;

•the effect of changes in accounting policies and practices, as may be adopted by the Financial Accounting Standards Board (the “FASB”), the Securities and Exchange Commission (the “SEC”) ~~entitled “Risk Factors” (see Item 1A of Part II of this report~~, the Public Company Accounting Oversight Board and ~~Item 1A of Part I~~other regulatory agencies;

•potential changes in federal policy and at regulatory agencies as a result of the upcoming 2024 presidential election;

•a deterioration of the credit rating for U.S. long-term sovereign debt, actions that the U.S. government may take to avoid exceeding the debt ceiling, and uncertainties surrounding the debt ceiling and the federal budget;

•the impact of recent or future changes in Federal Deposit Insurance Corporation (the “FDIC”) insurance assessment rate or the rules and regulations related to the calculation of the FDIC insurance assessment amount, including any special assessments;

•the effect of fiscal and governmental policies of the U.S. federal government;

•climate change, including the enhanced regulatory, compliance, credit and reputational risks and costs; and

•geopolitical conditions, including acts or threats of terrorism, actions taken by the United States or other governments in response to acts of terrorism, and/or military conflicts, including the war between Russian and Ukraine and the conflict in the Middle East, which could impact business and economic conditions in the United States and abroad.

Additional factors that could cause actual results to differ materially from those expressed in the forward-looking statements are discussed in the Company's Annual Report ~~of Shore Bancshares, Inc.~~ on Form 10-K for the year ended December 31, ~~2016 (the “2016~~2023 (the “2023 Annual Report”)~~). Actual results may differ materially from such forward-looking statements,~~ filed with SEC and ~~we assume no~~available at the SEC’s Internet site (http://www.sec.gov).

The Company specifically disclaims any obligation to update any factors or to publicly announce the result of revisions to any of the forward-looking statements included herein to reflect future events or developments.

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Critical Accounting Policies

The Company’s consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (“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 and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial 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 estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially different than originally reported.

The most significant accounting policies that the Company follows are presented in Note 1 to the Notes to Consolidated Financial Statement included in the 2023 Annual Report. These policies, along with the disclosures presented in the notes to the financial statements and in this MD&A, 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 for the allowance for credit losses (“ACL”) on loans, goodwill and bargain purchase gain, loans acquired in a business combination and income taxes 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 Loans

The Company adopted ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326)”, as amended, on January 1, 2023 and in accordance with ASC 326, has recorded an 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 ACL is 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 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 ACL on loans, and as a result, the related provision for credit losses, can materially affect financial results. Although the overall balance is determined based on specific portfolio segments and individually assessed assets, the entire balance is available to absorb credit losses for loans in the portfolio.

The determination of the appropriate level of ACL on loans inherently involves a high degree of subjectivity and requires the Company to make significant judgments concerning credit 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 unforeseen events, changes in asset-specific risk characteristics, and other economic factors, both within and outside the Company's control, may indicate the need for an increase or decrease in the ACL on loans. While management makes every effort to utilize the best information available in making its assessment of the ACL estimate, the estimation process is inherently challenging as potential changes in any ~~time except~~one factor or 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.

Goodwill and Bargain Purchase Gain

Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Determining fair value is subjective, requiring the use of estimates, assumptions and management judgment. Goodwill is tested at least annually for impairment, usually during the fourth quarter, or on an interim basis if circumstances dictate. Impairment testing requires a qualitative assessment or that the fair value of each of the Company’s reporting units be compared to the carrying amount of its net assets, including goodwill. If the fair value of a reporting unit is less than book value, an expense may be required to write down the related goodwill to record an impairment loss.

A bargain purchase gain represents the excess of the fair value of net assets acquired over the cost of an acquisition. Determining fair value is subjective, requiring the use of estimates, assumptions and management judgement. Bargain purchase gain is recorded within noninterest income in the period it was generated. An acquirer has a measurement period to finalize the accounting for a business combination which could adjust bargain purchase gain if material facts or circumstances arise.

Loans Acquired in a Business Combination

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

PCD loans are those for which there is more than insignificant evidence of credit deterioration since origination. When determining fair value, PCD loans are aggregated into pools based on common risk characteristics as of the date of acquisition such as loan type, date of origination, and evidence of credit quality deterioration such as internal risk grades and past due and nonaccrual status. At the acquisition date, the ACL is determined and added to the fair value of the loan to determine the new amortized cost basis. The difference between the new amortized cost basis and the unpaid principal balance is either a noncredit discount or premium that will be amortized or accredited into the interest income over the remaining life of the loan. Disposals of loans, which may include sale of loans to third parties, receipt of payments in full or in part from the borrower or foreclosure of the collateral, result in removal of the loan from the PCD loan portfolio at its carrying amount.

The Company accounts for purchased performing loans using the contractual cash flows method of recognizing discount accretion based on the acquired loans’ contractual cash flows. Purchased performing loans are recorded at fair value, including a credit discount. The fair value discount is accreted as an adjustment to yield over the estimated lives of the loans. Purchased performing loans do not have a more-than-insignificant deterioration in credit quality since origination and have an ACL established in a manner that is consistent with the Company originated loans. The allowance for PCD loans is

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determined based upon the Company’s methodology for estimating the allowance under CECL, and is recorded as an adjustment to the acquired loan balance on the date of acquisition. Additionally, upon the purchase or acquisition of non-PCD loans, the Company measures and records a reserve for credit losses based on the Company’s methodology for determining the allowance under CECL. The allowance for non-PCD loans is recorded through a charge to provision for credit losses in the period in which the loans were purchased or acquired.

Income Taxes

The Company and its subsidiaries file a consolidated federal income tax return. The Company accounts for income taxes using the liability method in accordance with required accounting guidance. Under this method, deferred tax assets and liabilities are determined by ~~law.~~

applying the applicable federal and state income tax rates to cumulative temporary differences. These temporary differences represent differences between financial statement carrying amounts and the corresponding tax bases of certain assets and liabilities. Deferred taxes result from such temporary differences.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. A valuation allowance, if needed, reduces deferred tax assets to the expected amount most likely to be realized. Realization of deferred tax assets is dependent on the generation of a sufficient level of future taxable income, recoverable taxes paid in prior years and tax planning strategies. The Company evaluates all positive and negative evidence before determining if a valuation allowance is deemed necessary regarding the realization of deferred tax assets.

The Company recognizes accrued interest and penalties as a component of tax expense.

The provision for income taxes includes the impact of reserve provisions and changes in the reserves that are considered appropriate as well as the related net interest and penalties. In addition, the Company is subject to the continuous examination of its income tax returns by the IRS and other tax authorities which may assert assessments against the Company. The Company regularly assesses the likelihood of adverse outcomes resulting from these examinations and assessments to determine the adequacy of its provision for income taxes. The Company remains subject to examination for tax years ending on or after December 31, 2020.

Introduction

The following ~~discussion and analysis~~MD&A 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~~2023 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”). The Bank operates ~~21 full service~~42 full-service branches in Baltimore County, Howard County, Kent County, Queen Anne’s County, Caroline County, Talbot County, ~~Caroline~~Dorchester County, Anne Arundel County, Charles County, St Mary's County, Calvert County and ~~Dorchester~~Worcester County in Maryland, Kent County and Sussex County in Delaware and Accomack County, Fredericksburg City, Stafford County and Spotsylvania County in Virginia. The Company through Wye Financial Partners, a department of the Bank, provides full-service investment and insurance solutions through our broker/dealer, LPL Financial. The Bank also offers wealth management solutions such as corporate trustee services and trust administration through Wye Trust, a division of the Bank. The Company also engages in ~~the insurance business~~title work for real estate transactions 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 areits wholly-owned ~~subsidiaries of Shore Bancshares,~~subsidiary, Mid-Maryland Title Company, Inc. ~~The Company engages in the trust services business through the trust department at Shore United Bank under the trade name Wye Financial & Trust.~~

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

Shore Bancshares, Inc. maintains an Internet site at www.shorebancshares.com on which it makes available free of charge its Annual Report on Form 10-K, 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 financial statements are prepared~~

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OVERVIEW

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

First Quarter 2024 Highlights:

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

•Stable Net Interest Margin - Net interest margin (“NIM”) remained relatively stable at 3.08% for the first quarter of 2024 from 3.09% for the fourth quarter of 2023. Excluding net accretion interest income of $3.6 million and $3.0 million for the same time periods, NIM decreased six basis points to 2.81% for the first quarter of 2024 from 2.87% for the fourth quarter of 2023.

•Deposit Costs -Decreases in ~~accordance~~rates on higher cost deposit relationships mitigated margin compression in the first quarter of 2024. For the month of March 2024, asset yields grew more quickly than funding costs which positively impacted the Company’s NIM and may position the Bank to see positive margin movement during the second quarter of 2024. As a result of decreased rates paid on some deposits and expected seasonal cash outflows in the first quarter of 2024, deposits decreased $201.8 million, or 3.7% to $5.2 billion at March 31, 2024 when compared to December 31, 2023. Liquidity remained relatively stable with ~~GAAP.~~the loan to deposit ratio modestly increasing from 86.2% at December 31, 2023 to 89.7% at March 31, 2024. The ~~financial information contained~~Bank had no brokered deposits or advances at March 31, 2024.

•Stable Credit Trends - The Company’s total nonperforming assets to total assets at March 31, 2024 was 0.28% compared to 0.23% at December 31, 2023. The Company’s credit quality metrics remain at historical lows with no signs of significant deterioration or systemic issues within its loan portfolios.

•Operational Efficiencies - Management continues to pursue opportunities to increase efficiencies and decrease expenses as a percentage of operating revenues. Following feasibility assessments, management decided to close two branches by the end of the third quarter. The Onley, VA branch should close on or about July 17, 2024 and the Westgate branch located in Annapolis, MD should close on or about September 30, 2024. Limited growth opportunities within the ~~financial statements is, to~~Eastern Shore of Virginia and a ~~significant extent, financial information that is based~~conscientious focus on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. Based on the valuation techniques used and the sensitivity of financial statement amountsprofitability led to the ~~methods, assumptions,~~decision to close the Onley branch. The Westgate branch has limited foot traffic and ~~estimates underlying those amounts, management has determined that~~is located less than a mile from another SUB branch within the accounting policies with respect to the allowance for credit losses, goodwill and other intangible assets, deferred tax assets, and fair value are critical accounting policies. These policies are considered critical because they relate to accounting areas that require the most subjective or complex judgments, and, as such, could be most subject to revision as new information becomes available.

~~Allowance for Credit Losses~~

~~The allowance for credit losses~~City of Annapolis. Customer disruption is ~~an estimate of the losses that may be sustained in the loan portfolio. The allowance is based on two basic principles of accounting: (i) Topic 450, “~~ ~~Contingencies~~ ”, of the Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”), which requires that 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. Although the economics of transactions would be the same, the timing of events that would impact the transactions could change.

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

Management has significant discretion in making the adjustments inherent in the determination of the provision and allowance for credit losses, including in connection with the valuation of collateral, the estimation of a borrower’s prospects of repayment, and the establishment of the allowance factors in the formula allowance and unallocated allowance components of the allowance.limited. These closures are estimated to cost $0.2 million. The ~~establishment of allowance factors~~Company is ~~a continuing exercise, based on management’s ongoing assessment of the totality of all factors, including, but not limited~~expected to delinquencies, loss history, trends in volume and terms of loans, effects of changes in lending policy, the experience and depth of management, national and local economic trends, concentrations of credit, the quality of the loan review system and the effect of external factors suchreduce four positions as competition and regulatory requirements, and their impact on the portfolio. Allowance factors may change from period to period, resulting in an increase or decrease in the amount of the provision or allowance, based on the same volume and classification of loans. Changes in allowance factors will have a direct impact on the amount of the provision, and a corresponding effect on net income. Errors in management’s perception and assessmentpart of these ~~factors and their impact on~~closings.

•Additionally, the ~~portfolio could result~~Company plans to reduce professional office space located in Easton, MD. By the ~~allowance not being adequate to cover losses in the portfolio, and may result in additional provisions or charge-offs.~~

~~Goodwill and Other Intangible Assets~~

~~Goodwill represents the excess~~end 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 tested at least annually for impairment, usually during the third quarter, ora newly renovated office building is expected to be put into service eliminating the need for two currently-occupied office buildings. In the second quarter, the Company expects to begin marketing for sale the two redundant office properties. Recent appraisals on ~~an interim basis if circumstances dictate. Intangible~~these properties exceed the Bank’s cost bases resulting in no impairment. At the present time, the two properties remain in service, are not listed for immediate sale, and are classified as active assets ~~that have finite lives are amortized over their estimated useful lives and also are subject~~on our balance sheet. Once these properties meet the accounting criteria they will be moved to ~~impairment testing. Impairment testing requires that the fair value~~held for sale.

Table of ~~each~~Contents

SUMMARY OF OPERATING RESULTS

A comparison of the ~~Company’s reporting units be compared to the carrying amount~~results 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 marketoperations for the ~~asset or liability in an orderly transaction between market participants on~~three months ended March 31, 2024 and March 31, 2023 is presented below.


	Unaudited (QTD)
	Three Months Ended March 31,
(Dollars in thousands)	2024		2023
OPERATING DATA
Interest income	$	71,139	$	35,062
Interest expenses	30,004		9,398
Net interest income (“NII”)	41,135		25,664
Provision for credit loses	407		1,213
NII after provision for credit losses	40,728		24,451
Noninterest income	6,567		5,334
Noninterest expenses	36,698		20,893
Income before income tax taxes	10,597		8,892
Income tax expense	2,413		2,435
Net income	$	8,184	$	6,457


	Unaudited (QTD)
	Three Months Ended March 31,
(Dollars in thousands, except per share amounts)	2024			2023
KEY OPERATING RATIOS
Return on average assets (“ROAA”)	0.57		%	0.75		%
Return on average equity (“ROAE”)	6.38			7.25
Return on average tangible equity (“ROATCE”) Non-GAAP (1)	13.39			10.09
Average total equity to average total assets	8.93			10.30
Interest rate spread	2.34			2.69
Net interest margin	3.08			3.18
Efficiency ratio (2)	76.93			67.40
Non-interest income to average assets	0.46			0.62
Non-interest expense to average assets	2.56			2.42
Net operating expense to average assets (3)	2.10			1.80

COMMON SHARE DATA
Basic and diluted net income per common share	$	0.25		$	0.32
Cash dividends paid per common share	$	0.12		$	0.12
Common dividend payout ratio	48.00		%	37.50		%

(1)ROATCE is computed by dividing net earnings applicable to common stockholders by average tangible common stockholders' equity. ROATCE is a non-GAAP measure and may not be comparable to similar non-GAAP measures used by other companies. Refer to Use of Non-GAAP Financial Measures for additional details.

(2)Efficiency ratio is noninterest expense divided by the ~~measurement date. In determining fair value,~~sum of net interest income and noninterest income.

(3)Net operating expense is the ~~Company is required to maximize the use~~sum of ~~observable inputs and minimize the use~~noninterest expense offset by noninterest income.

Table of ~~unobservable inputs, reducing subjectivity.~~

Contents

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

~~OVERVIEW~~

Summary of Financial Results

The Company reported net income ~~of $3.4 million~~ for the ~~third quarter~~three months ended March 31, 2024 of ~~2017,~~$8.2 million or $0.25 diluted ~~income~~earnings per ~~common~~ share ~~of $0.27,~~ compared to net income of ~~$2.4~~$6.5 million or diluted ~~income~~earnings per ~~common~~ share of ~~$0.19,~~$0.32 for the third quarter of 2016. For the second quarter of 2017, the Company reported net income of $2.4 million, or diluted income per common share of $0.19. When comparing the third quarter of 2017 to the third quarter of 2016, the primary reasonsthree months ended March 31, 2023. The Company’s ROAA, ROACE1 and ROATCE2 were 0.57%, 6.38% and 13.39%, respectively, 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 income 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 million, or diluted income per common share of $0.67,~~ended March 31, 2024 compared to ~~net income of $7.1 million, or diluted income per common share of $0.56,~~0.75%, 7.25% and 10.09%, respectively, for the ~~first nine~~three months of 2016. Earnings improved due to increases in net interest income of $4.9 million and noninterest income of $822 thousand, partially offset by increases in provision for credit losses of $316 thousand and noninterest expenses of $2.6 million, of which $977 thousand related to acquisition costs from the branch purchase.

~~RESULTS OF OPERATIONS~~

ended March 31, 2023.


	Three Months Ended March 31,
(Dollars in thousands)	2024		2023		$ Change		% Change
Interest and dividend income	$	71,139	$	35,062	$	36,077	102.89	%
Interest expenses	30,004		9,398		20,606		219.26	%
Net interest income	41,135		25,664		15,471		60.28	%
Provision for credit losses	407		1,213		(806)		(66.45)	%
Noninterest income	6,567		5,334		1,233		23.12	%
Noninterest expenses	36,698		20,893		15,805		75.65	%
Income before income taxes	10,597		8,892		1,705		19.17	%
Income tax expense	2,413		2,435		(22)		(0.90)	%
Net income	$	8,184	$	6,457	$	1,727	26.75	%

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~~$41.2 million for the ~~third~~first quarter of ~~2017~~2024 and ~~$9.7~~$25.7 million for the ~~third~~first quarter of ~~2016. Tax-equivalent net interest income was $11.0 million for the second quarter of 2017.~~2023. The increase in net interest income ~~for~~when compared to the first quarter of 2023 was primarily due to the increase in interest and fees on loans, interest on deposits from other banks, a decrease in interest on short term borrowings partially offset by the increase in interest on deposits and interest on long-term borrowings all significantly impacted by the merger of equals with TCFC in the third quarter of ~~2017~~2023.


	Three Months Ended March 31,
(Dollars in thousands)	2024		2023		$ Change		% Change
Interest and dividend income
Loans, including fees	$	65,754	$	30,828	$	34,926	113.29	%
Interest and dividends on investment securities	4,425		4,071		354		8.70	%
Interest on deposits with banks	960		163		797		488.96	%
Total Interest and Dividend Income	$	71,139	$	35,062	$	36,077	102.89	%

Interest Expenses
Deposits	$	28,497	$	7,281	$	21,216	291.39	%
Short-term borrowings	56		1,361		(1,305)		(95.89)	%
Long-term debt	1,451		756		695		91.93	%
Total Interest Expenses	$	30,004	$	9,398	$	20,606	219.26	%

Taxable-equivalent adjustment	$	79	$	40	$	39	97.50	%

Tax Equivalent Net Interest Income	$	41,214	$	25,704	$	15,510	60.34	%

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

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

Table of Contents

Average Balances and Yields

The following table sets forth average balances, average yields and costs, and certain other information for the periods indicated. Tax-equivalent adjustments were made. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances. The yields set forth below include the effects of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.


	Three Months Ended March 31,						Three Months Ended March 31,
	2024						2023
(Dollars in thousands)	Average Balance		Interest		Yield/ Rate		Average Balance		Interest		Yield/ Rate
Earning assets
Loans (1), (2), (3)
Residential real estate	$	1,361,636	$	18,492	5.46	%	$	881,799	$	10,507	4.83	%
Commercial real estate	2,722,600		38,604		5.70		1,279,923		15,173		4.81
Commercial	219,884		4,097		7.49		142,797		1,819		5.17
Consumer	329,118		4,272		5.22		297,528		3,274		4.46
State and political	1,473		16		4.37		978		9		3.73
Credit Cards	7,457		167		9.01		—		—		—
Other	13,015		183		5.66		8,619		84		3.91
Total Loans	4,655,183		65,831		5.69		2,611,644		30,866		4.79

Investment securities:
Taxable	654,663		4,419		2.70		653,527		4,064		2.49
Tax-exempt (1)	660		8		4.85		666		9		5.41

Interest-bearing deposits	77,276		960		5.00		13,849		163		4.77
Total earning assets	5,387,782		71,218		5.32	%	3,279,686		35,102		4.34	%
Cash and due from banks	49,499						28,602
Other assets	395,023						228,054
Allowance for credit losses	(57,480)						(30,006)
Total assets	$	5,774,824					$	3,506,336

Table of Contents


	Three Months Ended March 31,						Three Months Ended March 31,
	2024						2023
(Dollars in thousands)	Average Balance		Interest		Yield/ Rate		Average Balance		Interest		Yield/ Rate

Interest-bearing liabilities
Demand deposits	$	1,110,524	$	6,362	2.30	%	$	694,894	$	3,236	1.89	%
Money market and savings deposits	1,669,074		10,160		2.45		1,004,553		2,374		0.96
Brokered deposits	20,465		251		4.93		—		—		—
Certificates of deposit $100,000 or more	762,210		7,675		4.05		241,436		1,076		1.81
Other time deposits	417,362		4,049		3.90		207,403		595		1.16
Interest-bearing deposits (4)	3,979,635		28,497		2.88		2,148,286		7,281		1.37
Advances from FHLB - short-term	4,000		56		5.63		113,972		1,361		4.84

Subordinated debt and Guaranteed preferred beneficial interest in junior subordinated debentures ("TRUPS") (4)	72,418		1,451		8.06		43,108		756		7.11
Total interest-bearing liabilities	4,056,053		30,004		2.98	%	2,305,366		9,398		1.65	%
Noninterest-bearing deposits	1,163,023						820,162
Accrued expenses and other liabilities	39,772						19,634
Stockholders’ equity	515,976						361,174
Total liabilities and stockholders’ equity	$	5,774,824					$	3,506,336

Net interest income			$	41,214					$	25,704

Net interest spread					2.34	%					2.69	%
Net interest margin					3.08	%					3.18	%
Cost of Funds					2.31	%					1.22	%
Cost of Deposits					2.23	%					0.99	%
Cost of Debt					7.93	%					5.47	%

Tax-equivalent adjustment
Loans			$	77					$	38
Investment securities			2						2
Total			$	79					$	40

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

(2) Average loan balances include nonaccrual loans.

(3) Interest income on loans includes accreted loan fees, net of costs and accretion of discounts on acquired loans, which are included in the yield calculations. There were $4.2 million and $0.5 million of accretion interest on loans for the three months ended March 31, 2024 and 2023, respectively.

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

Table of Contents

The following table presents changes in interest income and interest expense for the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to (1) changes in volume (changes in volume multiplied by old rate) (2) changes in rate (changes in rate multiplied by old volume). Changes in rate-volume (changes in rate multiplied by the change in volume) have been allocated to changes due to volume.


Three Months Ended March 31, 2024 Compared to the Three Months Ended March 31, 2023
	Volume		Due to Rate		Total
Interest income:
Loan Portfolio
Residential real estate	$	6,517	$	1,468	$	7,985
Commercial real estate	20,456		2,975		23,431
Commercial	1,436		842		2,278
Consumer	410		588		998
State and political	5		2		7
Credit Cards	167		—		167
Other	62		37		99
Taxable investment securities	8		347		355
Tax-exempt investment securities	—		(1)		(1)

Interest-bearing deposits	788		9		797
Total interest income	$	29,848	$	6,267	$	36,116

Interest-bearing liabilities:
Interest-bearing demand deposits	$	2,381	$	745	$	3,126
Money market and savings deposits	4,045		3,741		7,786
Certificate of deposits	7,532		2,772		10,304

Advances from FHLB - Short-term	(1,540)		235		(1,305)

Subordinated debt	587		108		695
Total interest-bearing liabilities	$	13,005	$	7,601	$	20,606
Net change in net interest income	$	16,843	$	(1,334)	$	15,509

Fluctuations in net interest income can result from the combination of changes in the average balances of asset and liability categories and changes in interest rates. Interest rates earned and paid are affected by general economic conditions, particularly changes in market interest rates, and by competitive factors, government policies and actions of regulatory authorities.

Net interest income was $41.1 million for the first quarter of 2024, compared to $41.5 million for the fourth quarter of 2023 and $25.7 million for the first quarter of 2023. The decrease in net interest income when compared to the ~~third~~fourth quarter of ~~2016~~2023 was primarily due to ~~an increase in interest income of $2.7 million, or 26.1%, partially offset by an~~the increase 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~~$0.4 million or 12.9%, partially offset by an increase in interest expense of $62 thousand, or 11.3%. Net interest margin is tax-equivalent net interest income (annualized) divided by average earning assets. The net interest margin increased in the third quarter of 2017 to 3.79% when compared to both the third quarter of 2016 and the second quarter of 2017 of 3.54% and 3.73%, respectively.

~~Interest Income~~

On a tax-equivalent basis, interest income increased $2.7 million, or 26.1%, for the third quarter of 2017 when compared to the third quarter of 2016. The increase was primarily due to a $2.4 million, or 24.9%, increase in interest income and fees on loans. This increase was due to a $197.6 million, or 23.6% increase in the average balance of loans which primarily resultedresulting 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. 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.

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

~~Interest Expense~~

~~Interest expense increased $33 thousand, or 5.7%, when comparing the third quarter of 2017 to the third quarter of 2016. The increase in interest expense was due to~~ an increase in the average balance of ~~total~~ interest-bearing deposits of ~~$150.5 million, or 20.3%,~~$70.9 million. The increase when compared to the first quarter of 2023 was primarily due to the ~~result of the acquisition of interest-bearing~~increase in interest and fees on loans, interest on deposits from ~~NWBI amounting to $177.9 million~~other banks, a decrease in interest on short term borrowings partially offset by 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~~interest on deposits and interest on long-term borrowings all significantly impacted by 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%, allmerger of ~~which resulted~~equals with TCFC in ~~a lower cost of funding for~~ the third quarter of ~~2017 when compared~~2023.

The Company’s NIM decreased slightly to 3.08% for the ~~third~~first quarter of ~~2016.~~

~~Interest expense increased $62 thousand, or 11.3%, when comparing~~2024 from 3.09% for the ~~third~~fourth quarter of ~~2017 to the second quarter of 2017. The increase in interest expense was~~2023 primarily due to an increase in the ~~average balance~~overall mix of ~~total~~ interest-bearing deposits compared to non-interest-bearing deposits. Average interest-bearing deposits increased $70.9 million which resulted in a two basis point rate increase. In addition to the change in deposit mix, rates on money market and time deposits also increased, which were partly offset by lower rates on demand deposits. The Company’s NIM decreased to 3.08% for the first quarter of ~~$98.4 million, or 12.4%, primarily~~2024 from 3.18% for the ~~result~~first quarter of ~~a full~~2023. Comparing the first quarter ~~impact~~ of 2024 to the ~~deposits acquired~~first quarter of 2023, the Company’s interest-earning asset yields increased 98 basis points to 5.32% from ~~NWBI,~~4.34%, while the ~~average rate paid on interest-bearing deposits remained unchanged. Interest expense on short-term borrowings declined $7 thousand, or 63.6% which contributed to a 1bp decline in the overall~~ cost of funds ~~when comparing~~repriced at a faster pace resulting in an increase of 109 basis points to 2.31% from 1.22% for the ~~third quarter 2017 to the second quarter 2017.~~

same period.

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

~~The following table presents the distribution~~

See discussion of the ~~average consolidated balance sheets, interest income/expense,~~Bank’s PCL and ~~annualized yields earned and rates paid for the three months ended September 30, 2017 and 2016.~~

For Three Months Ended

For Three Months Ended

September 30, 2017

September 30, 2016

Average

Income(1)/

Yield/

Average

Income(1)/

Yield/
(Dollars in thousands)

Balance

Expense

Rate

Balance

Expense

Rate
Earning assets

Loans (2), (3)

$
1,034,553

$
11,830

4.54
%

$
836,955

$
9,469

4.50
%
Investment securities:

Taxable

218,675

1,035

1.89

190,265

754

1.59

Tax-exempt

-

-

-

210

3

5.30

Federal funds sold

-

-

-

511

1

0.37

Interest-bearing deposits

42,204

131

1.23

64,164

81

0.50

Total earning assets

1,295,432

12,996

3.98
%

1,092,105

10,308

3.75
%
Cash and due from banks

16,232

15,678

Other assets

75,611

52,836

Allowance for credit losses

(9,300)

(8,310)

Total assets

$
1,377,975

$
1,152,309

Interest-bearing liabilities

Demand deposits

$
224,180

132

0.23
%

$
199,116

58

0.12
%
Money market and savings deposits

378,711

113

0.12

268,183

86

0.13

Certificates of deposit $100,000 or more

123,538

154

0.50

125,265

192

0.61

Other time deposits

164,459

208

0.50

147,780

238

0.64

Interest-bearing deposits

890,888

607

0.27

740,344

574

0.31

Short-term borrowings

2,274

4

0.62

7,075

4

0.25

Total interest-bearing liabilities

893,162

611

0.27
%

747,419

578

0.31
%
Noninterest-bearing deposits

320,006

244,596

Other liabilities

5,256

6,309

Stockholders' equity

159,551

153,985

Total liabilities and stockholders' equity

$
1,377,975

$
1,152,309

Net interest spread

$
12,385

3.71
%

$
9,730

3.44
%
Net interest margin

3.79
%

3.54
%

Tax-equivalent adjustment

Loans

$
59

$
72

Investment securities

-

1

Total

$
59

$
73

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

~~Net Interest Income~~

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

~~Interest Income~~

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

~~in loans from NWBI~~asset quality discussion in the ~~second quarter~~analysis of ~~2017 and organic loan growth~~financial condition in this MD&A.

Table 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.

Contents

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.

Noninterest Income

Total noninterest income for the ~~third~~first quarter of ~~2017 increased $418 thousand, or 10.4%, when compared to~~2024 was $6.6 million, a decrease of $1.0 million from $7.5 million for the ~~third~~fourth quarter of ~~2016.~~2023 and an increase $1.2 million from $5.3 million for the first quarter of 2023. The decrease from the fourth quarter of 2023 was primarily due to other noninterest income, which included decreases in other fees on bank services and other loan fee income, decreases in mortgage banking revenue and trust and investment fee income. The increase from the ~~third~~first quarter of ~~2016~~2023 was primarily due to ~~higher service charges~~other noninterest income, which included increases in other loan fee income, gains on life insurance contracts and ~~fees on deposit accounts, higher~~an increase in credit card income, increases in trust and investment fee income ~~higher insurance agency commissions~~ and interchange credits all a ~~positive~~ result ~~on an insurance agency investment recorded in other income, partially offset by higher recognized gains on investment securities~~of the merger in the third quarter of ~~2016.~~ 2023.

Noninterest ~~income~~Expense

Total noninterest expense of $36.7 million for the first quarter of 2024 increased ~~$246 thousand, or 5.9%~~$3.0 million when compared to the ~~second~~fourth quarter of ~~2017 mainly due to service charges on deposit accounts for a full quarter on the deposits acquired in the branch purchase, higher insurance agency commissions~~2023 expense of $33.7 million and ~~an increase on an insurance agency investment included in other noninterest income.~~

~~Total noninterest income for the nine months ended September 30, 2017~~ increased ~~$822 thousand, or 6.5%,~~$15.8 million when compared to the ~~same period in 2016.~~first quarter of 2023 expense of $20.9 million. The increase ~~was~~ primarily due to increases in insurance agency commissions of $185 thousand and other noninterest income of $538 thousand which included higher fees on bank services of $241 thousand and positive earnings from ~~an insurance investment of $274 thousand.~~

~~Noninterest Expense~~

~~Total noninterest expense for~~ the ~~third~~fourth quarter of ~~2017 increased $1.5 million, or 16.3%, when compared to the third quarter of 2016. The increase in noninterest expenses for the third quarter of 2017 compared to the third quarter of 2016~~2023 was primarily due to ~~operating three additional branches, acquisition costs~~credit card fraud expense of $4.3 million, and ~~increases~~an increase in employee benefits ~~due to the higher insurance premiums paid for group insurance and higher~~of $0.7 million partially offset by decreases in salaries and wages ~~due to pay increases implemented in the first quarter~~expense of ~~2017. Total noninterest~~$1.0 million, merger-related expenses ~~increased $521 thousand, or 5.1%, when compared to the second quarter~~ of 2017. The increase was primarily due to a full quarter of operating three additional branches acquired in the second quarter of 2017. The branch purchase resulted in increases in salary and wages, employee benefits,$0.6 million, and FDIC insurance premium expense ~~which were partially offset by lower legal and professional fees which were elevated in~~of $0.6 million. The increase from the ~~second~~first quarter ~~due to the acquisition.~~

~~Total noninterest expense for the nine months ended September 30, 2017 increased $2.6 million, or 9.5%, when compared to the same period in 2016. The increase~~of 2023 was primarily due to ~~the branch purchase in the second quarter~~other noninterest expense, salaries, amortization of ~~2017 which resulted in acquisition costs of $977 thousand~~intangibles, employee benefits, data processing, and the ~~cost of operating those branches for four months. In addition, higher salaries/wages and employee benefits resulted~~credit card fraud expenses. Other than the credit card fraud expenses, all noninterest expenses categories were significantly impacted by the merger in ~~increased non-interest expenses which were partially offset by a decrease in FDIC insurance premiums.~~

~~Provision for Credit Losses~~

~~The provision for credit losses was $345 thousand for~~ the third quarter of 2017, $605 thousand for the third quarter of 2016 and $974 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 average loans was 0.16% for the first nine months of September 30, 2017 and 0.19% for the same period in 2016.

2023.

Income Taxes

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

The Company reported income tax expense of ~~$2.3~~$2.4 million for the first quarter of 2024, and ~~$1.4~~income tax expense of $2.4 million ~~respectively, while~~for the first quarter of 2023. The effective tax rate for the first quarter of 2024 was 22.8% and 27.4% for the first quarter of 2023. The decrease in the effective tax rate was ~~40.0% and 37.3%, respectively. The increase in~~due to a re-assessment of year-end 2023 tax ~~rates for~~deductions during the ~~third~~first quarter of ~~2017 when compared~~2024 which presented favorable differences. Due to the ~~same period~~timing of the re-assessment, the differences were recorded in ~~2016~~the first quarter of 2024 to reduce significant tax return to provision adjustments when the 2023 tax return is filed and to properly calculate the effective tax rate. The Company’s estimated effective tax rate applied to net deferred tax assets of $39.0 million at March 31, 2024 was ~~due~~27.52%. The Bank's deferred taxes are recorded at 26.00%. As of March 31, 2024 the Company recorded $23.2 million and $39.2 million of gross federal and state net operating loss carryovers (“NOL’s”). These NOL’s will offset future taxable income to ~~higher pretax income. Income taxes for~~ the ~~nine months ended September 30, 2017 increased $1.3~~Company.

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ANALYSIS OF FINANCIAL CONDITION

Balance Sheet Summary

Total assets were $5.8 billion at March 31, 2024, a decrease of $185.2 million or ~~29.9%~~3.1%, 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~~$6.0 billion ~~at September 30, 2017 and $871.5 million~~ at December 31, ~~2016, an increase of $175.5 million, or 20.2%.~~2023. The ~~significant increase~~aggregate decrease 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. We do not engage in foreign or subprime lending activities. See Note 4, “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 defined as a combination of construction and commercial real estate loans. Construction loans were $106.6 million, or 10.2% of total loans, at September 30, 2017, higher than the $84.0 million, or 9.6% of total loans at December 31, 2016. Commercial real estate loans were $454.6 million, or 43.4% of total loans, at September 30, 2017, compared to $382.7 million, or 43.9% of total loans at December 31, 2016.

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

100% or more of an institution’s total risk-based capital; or (2) total commercial real estate loans representing 300% or more of the institution’s total risk-based capital and the institution’s commercial real estate loan portfolio 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, non-owner-occupied commercial real estate loans (including construction, land and land development loans) represented 269.9% of total risk based capital. At such time, construction, land and land development loans represented 79.4% of total risk based capital.

The commercial real estate portfolio has increased 95.3% 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 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 may adversely affect shareholder returns.

~~Allowance for Credit Losses~~

We have established an allowance for credit losses, which is increased by provisions charged against earnings and recoveries of previously charged-off debts and is decreased by current period 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 thousand for the third quarter of 2017 and $349 thousand for the third quarter of 2016. Management remains focused on its efforts to dispose of problem loans and to prudently charge-off nonperforming assets 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 and 1.00% for both December 31, 2016 and September 30, 2016. ~~The decrease in such ratio at September 30, 2017 was due to the performing loans acquired in the~~ ~~NWBI~~ ~~transaction with no associated allowance since they were recorded at fair value.~~ The allowance for credit losses as a percentage of period-end loans, excluding the acquired loans from NWBI was 1.00% at September 30, 2017. 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.

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

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 million at September 30, 2017 from $11.5 million at December 31, 2016,~~ primarily due to decreases in ~~nonaccrual loans~~cash and cash equivalents of ~~$2.7~~$257.9 million and ~~other real estate owned~~investment securities held to maturity (“HTM”) of ~~$668 thousand. Accruing TDRs increased $493 thousand to $13.5~~$9.4 million ~~at September 30, 2017 from $13.0~~partially offset by an increase in investment securities available for sale (“AFS”) of $69.0 million ~~at December 31, 2016. This increase was primarily due to a significant nonaccrual TDR being upgraded to an accruing TDR during the third quarter~~and loans held for investment of ~~2017.~~$7.7 million. The ratio of ~~nonaccrual~~the ACL on loans to total loans decreased ~~to 0.60% at September 30, 2017~~ from ~~1.03%~~1.24% at December 31, ~~2016 which was primarily~~2023 to 1.23% at March 31, 2024.

Cash and Cash Equivalents

Cash and cash equivalents totaled $114.6 million at March 31, 2024, compared to $372.4 million at December 31, 2023. Total cash and cash equivalents fluctuate due to transactions in process and other liquidity demands. Management believes liquidity needs are satisfied by the ~~acquired performing loans from NWBI. Excluding~~current balance of cash and cash equivalents, readily available access to traditional and wholesale funding sources, and the ~~acquired loans from NWBI~~portions of the ~~ratio of nonaccrual loans to total loans decreased to 0.68% at September 30, 2017.~~

~~The Company continues to focus on the resolution of its nonperforming~~investment and problem loans. 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. The reduction of nonperforming and problem loans is and will continue to be a high priority for the Company.

loan portfolios that mature within one year.

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

(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~~includes debt and equity securities. Securities are classified as either AFS or HTM. AFS investment securities ~~that are either available for sale or held to maturity. Investment securities available for sale~~ are stated at estimated fair value based on ~~quoted~~market 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~~HTM category are stated at cost adjusted for amortization of premiums and accretion of ~~discounts.~~discounts and the ACL. We have the intent and ~~current~~ ability to hold such securities until maturity. At ~~September 30, 2017 and December~~March 31, ~~2016, 97%~~2024, 26.3% of the portfolio of debt securities was classified as ~~available for sale~~AFS and 3%73.7% was classified as ~~held~~HTM, compared to ~~maturity. With the exception of municipal securities, our general practice is to classify all newly-purchased securities as available for sale.~~17.7% and 82.3% respectively, at December 31, 2023. See Note 3 ~~- Investment Securities,~~– “Investment Securities”, in the Notes to Consolidated Financial Statements for additional details on the composition of our investment portfolio.

Investment securities, including restricted stock and equity securities, totaled ~~$219.6~~$707.0 million at ~~September 30, 2017,~~March 31, 2024, a ~~$49.0~~$59.6 million, or ~~28.7%~~9.2%, increase ~~since~~compared to $647.4 million at December 31, ~~2016. The increase was due~~2023.

At March 31, 2024, AFS securities, carried at fair value, totaled $179.5 million compared to ~~utilizing the net cash received from the NWBI branch acquisition to purchase available-for-sale securities.~~$110.5 million at December 31, 2023. At ~~the end~~March 31, 2024, AFS securities consisted of ~~September 2017, 75.3% of the securities available for sale were~~57.7% mortgage-backed, ~~and 24.4% were~~38.7% U.S. Government agencies and 3.5% corporate bonds, compared to ~~78.7%~~76.0%, 18.5% and ~~20.9%~~5.5%, respectively, at year-end ~~2016. Our investments in~~2023.

At March 31, 2024, HTM securities, carried at amortized cost, totaled $503.9 million compared to $513.3 million at December 31, 2023. At March 31, 2024, HTM securities consisted of 69.2% mortgage-backed, 28.4% U.S. Government agencies, 2.1% other debt securities, ~~are~~and 0.3% states and political subdivisions, compared to 69.7%, 27.9%, 2.0% and 0.3%, respectively, at year-end 2023.

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

~~Deposits~~

~~Total deposits~~

Loans

Loans Held for Sale

The Bank originates residential mortgage loans for sale on the secondary market, which are recorded at ~~September 30, 2017~~fair value. At March 31, 2024 and December 31, 2023, the fair value of loans held for sale amounted to $13.8 million and $8.8 million, respectively. The Bank makes certain representations to purchasers in the sale of the mortgage loans related to loan ownership, loan compliance and legality, and accurate documentation. If a loan is found to be out of compliance with any of the representations subsequent to the date of purchase, the Bank may be required to repurchase the loan or indemnify the purchaser.

Table of Contents

Loans Held for Investment

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


(Dollars in thousands)	March 31, 2024		%		December 31, 2023		%		$ Change		% Change
Construction	$	299,133	6.43	%	$	299,000	6.44	%	$	133	0.04	%
Residential real estate	1,515,134		32.59	%	1,490,438		32.11	%	24,696		1.66	%

Commercial real estate	2,272,867		48.90	%	2,286,154		49.27	%	(13,287)		(0.58)	%
Commercial	229,594		4.94	%	229,939		4.95	%	(345)		(0.15)	%
Consumer	325,076		6.99	%	328,896		7.09	%	(3,820)		(1.16)	%
Credit Cards	6,921		0.15	%	6,583		0.14	%	338		5.13	%
Total loans	4,648,725		100.00	%	4,641,010		100.00	%	7,715		0.17	%
Allowance for credit losses on loans	(57,336)				(57,351)				15		(0.03)	%
Total loans, net	$	4,591,389			$	4,583,659			$	7,730	0.17	%

Our loan portfolio has a commercial real estate loan (“CRE”) concentration, which is generally defined as a combination of certain construction and CRE loans. The federal banking regulators have issued guidance for those institutions which are deemed to have concentrations in CRE lending. Pursuant to the supervisory criteria contained in the guidance for identifying institutions with a potential CRE concentration risk, institutions which have (1) total reported loans for construction, land development, and other land acquisitions which represent 100% or more of an institution’s total risk-based capital; or (2) total non-owner occupied CRE loans representing 300% or more of the institution’s total risk-based capital and the institution’s non-owner occupied CRE loan portfolio (including construction) has increased 50% or more during the prior 36 months are identified as having potential CRE concentration risk. Institutions which are deemed to have concentrations in CRE estate lending are expected to employ heightened levels of risk management with respect to their CRE portfolios, and may be required to hold higher levels of capital. The Bank has a concentration in CRE loans, and has experienced significant growth in its CRE portfolio in recent years and was further impacted with its acquisition of CBTC in the third quarter of 2023. Non-owner occupied CRE loans as a percentage of the Bank’s Tier 1 Capital + ACL at March 31, 2024 and December 31, 2023 were ~~$1.2~~$2.0 billion or 370.0% and $2.0 billion or 382.6%, respectively. Construction loans as a ~~$208.7~~percentage of the Bank’s Tier 1 Capital + ACL at March 31, 2024 and December 31, 2023 were $299.1 million or ~~20.9%~~54.9% and $299.0 million or 56.7%, ~~increase~~respectively.

The CRE portfolio (including construction) has increased significantly in the past two years. Management has extensive experience in CRE lending, and has implemented and continues to maintain heightened risk management procedures, as well as strong underwriting criteria with respect to its CRE portfolio. Monitoring practices include stress testing analysis to evaluate changes in collateral values and to cash flows from interest rate increases and declines in net operating income. We may be required to maintain higher levels of capital as a result of our CRE concentrations, which could require us to obtain additional capital or be required to sell/participate portions of loans, which may adversely affect stockholder returns.

Non-Owner Occupied CRE Loans


	March 31, 2024
(dollars in thousands)	Amount		Average Loan Size		% of Non-Owner Occupied CRE Loans		% of Total Portfolio Loans, Gross
Loan Type:
Retail	$	454,347	$	2,113	22.5	%	9.7	%
Office/Office Condo	375,143		1,443		18.6	%	8.0	%
Multi-Family (5+ Units)	265,709		2,233		13.2	%	5.7	%
Industrial/Warehouse	217,890		1,492		10.8	%	4.7	%
Other (1)	702,900		688		34.9	%	15.1	%
Total non-owner occupied CRE loans (2)	$	2,015,989	$	1,145	100.0	%	43.2	%
Total Portfolio loans, gross (3)	$	4,662,492

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

(2)The balances for our non-owner occupied CRE portfolio as of March 31, 2024, as presented in this table, coincide with our internal evaluation of risk for the purpose of monitoring loan concentrations in accordance with internal and regulatory guidelines. Within the non-owner occupied balances presented in this table, the Company has included certain loans secured by multi-family residential properties and other investor owned 1-4 family residential properties that are reported in the residential real estate caption in other areas of this report. As such, the total balance of loans presented in this table when added to the balance of the table presented below detailing owner occupied CRE may not reconcile to the CRE caption included in other tables and footnotes.

(3)Includes loans held for sale of $13.8 million.

Table of Contents

Owner-Occupied CRE Loans


	March 31, 2024
(dollars in thousands)	Amount		Average Loan Size		% of Owner-Occupied CRE Loans		% of Total Portfolio Loans, Gross
Loan Type:
Office/Office Condo	$	140,839	$	514	18.6	%	3.0	%
Industrial/Warehouse	111,599		631		14.7	%	2.4	%
Church	71,106		936		9.4	%	1.5	%
Retail	61,411		558		8.1	%	1.3	%
Other(1)	373,353		1,023		49.2	%	8.0	%
Total owner-occupied CRE loans	$	758,308	$	757	100.0	%	16.2	%
Total Portfolio loans, gross (2)	$	4,662,492

(1)Other owner-occupied CRE loans include restaurant loans of $61.0 million, marine/boat slips of $59.9 million, fire/CMS building loans of $41.6 million and other loans of $210.9 million..

(2)Includes loans held for sale of $13.8 million.

Office CRE Portfolio

The Bank's office CRE loan portfolio, which includes owner-occupied and non-owner-occupied CRE loans, was $516.0 million or 11.1% of total loans of $4.6 billion at March 31, 2024. The Bank’s office CRE loan portfolio included $137.7 million or 26.7% of the total with medical tenants and $73.3 million or 14.2% of the total with government or government contractor tenants. There were 513 loans in the office CRE portfolio with an average and median loan size of $1.0 million and $0.4 million, respectively. Loan to Value ("LTV") estimates are less than 70% for $395.8 million or 76.7% of the office CRE portfolio and less than 80% for $490.4 million or 95.0% of the office CRE portfolio.

The Bank had 19 office CRE loans totaling $172.0 million that were greater than $5.0 million at March 31, 2024, compared to ~~the level~~24 office CRE loans totaling $189.8 million at December 31, ~~2016.~~ 2023. The decrease in this portfolio segment was the result of normal amortization and two large loan payoffs in the quarter. For the office CRE portfolio, at March 31, 2024, the average loan debt-service coverage ratio was 1.7x and average LTV was 57.6%. Of the office CRE portfolio balance, 73% is secured by properties in rural or suburban areas with limited exposure to metropolitan cities and 92% are secured by properties with five stories or less. Of the office CRE loans, $5.8 million will mature and $5.1 million will reprice prior to December 31, 2024. Of the office CRE loans, $2.2 million are special mention or substandard.

Table of Contents

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


(dollars in thousands,)	March 31, 2024			December 31, 2023
ASSET QUALITY
Total portfolio loans	$	4,648,725		$	4,641,010
Classified Assets (1)	15,427			14,851
Allowance for credit losses on loans	(57,336)			(57,351)

Past due loans - 30 to 89 days	8,339			10,853
Accruing past due loans >= 90 days	1,560			738
Total past due (delinquency) loans	9,899			11,591

Non-accrual loans	12,776			12,784
Accruing borrowers experiencing financial difficulty ("BEFD") modifications (2)	—			153
Other real estate owned (OREO) and Repossessed Property	2,024			179
Non-accrual loans, OREO, Repossessed Property and BEFD modifications	14,800			13,116

ASSET QUALITY RATIOS
Classified assets to total assets (1)	0.26		%	0.25		%
Classified assets to risk-based capital (1)	2.79		%	2.75		%
Allowance for credit losses on loans to total portfolio loans	1.23		%	1.24		%
Allowance for credit losses on loans to non-accrual loans	448.78		%	448.62		%
Past due loans - 30 to 89 days to total portfolio loans	0.18		%	0.23		%
Past due loans >=90 days and non-accrual to total loans	0.31		%	0.29		%
Total past due (delinquency) and non-accrual to total portfolio loans	0.49		%	0.53		%
Non-accrual loans to total portfolio loans	0.27		%	0.28		%
Non-accrual loans and BEFD modifications to total loans	0.27		%	0.28		%
Non-accrual loans OREO and repossessed property to total assets	0.25		%	0.22		%
Non-accrual loans OREO and repossessed property to total portfolio loans, OREO and repossessed property	0.32		%	0.28		%
Non-accrual loans, OREO, repossessed property and BEFD modifications to total assets	0.25		%	0.22		%

(1)Classified assets are substandard loans and OREO and other repossessed property. Classified assets do not include special mention loans.

(2)BEFD modification loans include both non-accrual and accruing performing loans. All BEFD modification loans are included in the calculation of asset quality financial ratios. Non-accrual BEFD modification loans are included in the non-accrual balance and accruing BEFD modification loans are included in the accruing BEFD modification balance.

Allowance for Credit Losses on Loans

The ACL was $57.3 million at March 31, 2024, $57.4 million at December 31, 2023 and $28.5 million at March 31, 2023. There were net charge-offs of $0.6 million for the first quarter of 2024, compared to net charge-offs of $0.5 million for the fourth quarter of 2023 and net charge-offs of $20,000 for the first quarter of 2023. The ratio of annualized net charge-offs to average loans was 0.05% for the first quarter of 2024, compared to annualized net charge-offs of 0.04% for the fourth quarter of 2024 and annualized net recoveries of 0.00% for the first quarter of 2023. Management remains focused on its efforts to dispose of problem loans and to prudently charge-off nonperforming loans to enable the Company to maintain overall credit quality. The ACL on loans as a percentage of period-end loans was 1.23% at March 31, 2024 and 1.24% at December 31, 2023.

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


	For the Three Months Ended
	March 31, 2024						March 31, 2023
(Dollars in thousands)	Net (Charge-offs) Recoveries		Average Balance (1)		%		Net (Charge-offs) Recoveries		Average Balance (1)		%
Construction	$	(10)	$	292,803	0.01	%	$	3	$	248,286	—	%
Residential real estate	1		1,512,805		-	%	31		835,683		(0.02)	%
Commercial real estate	—		2,279,899		-	%	—		1,079,490		—	%
Commercial	1		230,844		-	%	(54)		141,838		0.15	%
Consumer	(449)		325,258		0.56	%	—		301,261		—	%
Credit Cards	(108)		4,196		10.35	%	—		—		—	%
	$	(565)	$	4,645,805	0.05	%	$	(20)	$	2,606,558	—	%
Allowance for credit losses	—		(57,336)		-	%	—		(28,464)		—	%
Total net charge-off and average loans	$	(565)	$	4,588,469	0.05	%	$	(20)	$	2,578,094	-	%

____________________________________

(1)Excludes Loans Held for Sale

Nonperforming Assets

Classified assets increased $0.6 million to $15.4 million or 0.26% of total assets at March 31, 2024 from $14.9 million or 0.25% of total assets at December 31, 2023. Classified assets are substandard loans, repossessed properties and OREO. The increase was primarily due to the ~~result~~repossessed properties of $1.8 million and offset by decrease of $1.3 million in substandard loans.

As shown in the following table, nonperforming assets were $16.4 million or 0.28% of total assets at March 31, 2024 compared to $13.7 million or 0.23% of total assets at December 31, 2023. The balance of nonperforming assets increased primarily due to an increase in repossessed properties of $1.8 million and an increase of $0.8 million in loans 90 days past due and still accruing.

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


(Dollars in thousands)	March 31, 2024			December 31, 2023
Nonperforming assets
Nonaccrual loans	$	12,776		$	12,784
Total loans 90 days or more past due and still accruing	1,560			738
Other real estate owned and repossessed property	2,024			179
Total nonperforming assets	$	16,360		$	13,701

As a percent of total loans:
Nonaccrual loans	0.27		%	0.28		%

As a percent of total loans, other real estate owned and repossessed property:
Nonperforming assets	0.35		%	0.30		%

As a percent of total assets:
Nonaccrual loans	0.22		%	0.21		%
Nonperforming assets	0.28		%	0.23		%

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Deposits

The following is a breakdown of the ~~acquisition of three branches from~~ ~~NWBI~~ ~~which contributed $212.5 million~~Company’s deposit portfolio at March 31, 2024 and December 31, 2023:


(dollars in thousands)	March 31, 2024				December 31, 2023
	Balance		%		Balance		%		$ Change		% Change
Noninterest-bearing demand	$	1,200,680	23.15	%	$	1,258,037	23.36	%	$	(57,357)	(4.60)	%
Interest-bearing:
Demand	1,101,954		21.26	%	1,165,546		21.64	%	(63,592)		(5.50)	%
Money market deposits	1,358,205		26.20	%	1,430,603		26.56	%	(72,398)		(5.10)	%
Savings	354,098		6.83	%	347,324		6.45	%	6,774		2.00	%
Certificates of deposit	1,169,342		22.56	%	1,184,610		21.99	%	(15,268)		(1.30)	%
Total interest-bearing	3,983,599		76.85	%	4,128,083		76.64	%	(144,484)		(3.50)	%

Total Deposits	$	5,184,279	100.00	%	$	5,386,120	100.00	%	$	(201,841)	(3.70)	%

Total deposits decreased $0.2 billion, or 3.7% to $5.2 billion at March 31, 2024 when compared to December 31, 2023. The decrease in total deposits ~~which had~~was primarily due to a ~~balance of $199.9 million at September 30, 2017. Excluding the deposits acquired from the branch purchase, the Company experienced increases~~decrease in ~~noninterest-bearing~~time deposits of ~~$50.6~~$15.3 million, ~~and interest-bearing checking~~demand deposits of ~~$21.7~~$63.6 million, ~~partially offset by declines in~~ money market and savings of $65.6 million, and noninterest-bearing deposits of ~~$22.6~~$57.4 million. The decrease in deposits is attributable seasonal municipal runoff and MRB deposits.

Total estimated uninsured deposits were $1.0 billion or 18.9% of total deposits at March 31, 2024 and $1.0 billion or 19.5% of total deposits at December 31, 2023. At March 31, 2024, there were $155.4 million included in uninsured deposits that the Bank secured using the market value of pledged collateral. The Bank's uninsured deposits, excluding the market value of pledged collateral, at March 31, 2024 were $825.9 million or 15.9% of total deposits.

The Company does not consider reciprocal deposits to be brokered as reciprocal deposits are used to maximize FDIC insurance available to our customers. During 2018, revisions to the Federal Deposit Insurance Act determined that reciprocal deposits are core deposits and ~~time~~are not considered brokered deposits unless they exceed 20% of ~~$40.8 million.~~

~~Short-Term Borrowings~~

~~Short-term borrowings~~the Bank’s total liabilities of $5.2 billion. Reciprocal deposits were $1.2 billion at ~~September 30, 2017~~March 31, 2024 compared to $1.3 billion at December 31, 2023. Reciprocal deposits as a percentage of the Bank’s liabilities at March 31, 2024 and December 31, ~~2016~~2023 were ~~$1.5~~23.1% and 24%, respectively. For call reporting purposes, there were $161.5 million and ~~$3.2~~$204.8 million ~~respectively.~~ reciprocal deposits that were considered brokered at March 31, 2024 and December 31, 2023.

The ~~decrease~~Bank is required to monitor large deposit relationships and concentration risks in accordance with regulatory guidance. This includes monitoring deposit concentrations and maintaining fund management policies and strategies that take into account potentially volatile concentrations and significant deposits that mature simultaneously. Regulatory guidance defines a large depositor as a customer or entity that owns or controls 2% or more of the Bank’s total deposits. At March 31, 2024, the Bank hadthree local municipal customer deposit relationships that exceeded 2% of total deposits, totaling $403.7 million which represented 7.8% of total deposits of $5.2 billion. At December 31, 2023, there were four customer deposit relationships that exceeded 2% of total deposits, totaling $598.5 million which represented 11.1% of total deposits of $5.4 billion.

Wholesale Funding - Short-Term Borrowings and Brokered Deposits

The Company had no short-term borrowings ~~was the result~~as of ~~utilizing cash received in the branch acquisition~~March 31, 2024, and reduced brokered deposits of $44.5 million to ~~reduce these~~zero. Other short-term borrowings ~~which tend to have higher rates than core deposits. Short-term borrowings generally~~may 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, 2024 and December 31, ~~2016, short-term~~2023, 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 Federal Home Loan Bank (“FHLB”) to meet longer term liquidity needs, specifically to fund loan growth when liquidity from deposit growth is not sufficient. There were no long-term borrowings from the FHLB outstanding at March 31, 2024 and December 31, 2023.

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.

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As a result of the merger with Severn Bancorp, Inc., effective October 31, 2021, the Company acquired Junior Subordinated Debt Securities due in 2035 which had an outstanding principal balance of $20.6 million. The debt balance of $18.6 million at March 31, 2024 and $18.6 million at December 31, 2023 was presented net of fair value adjustments of $2.0 million and $2.0 million, respectively.

Additionally, as a result of the TCFC merger, the Company acquired Junior Subordinated Debt Securities which had an outstanding principal balance of $12.0 million. The debt balance of $10.6 million at March 31, 2024 was presented net of a fair value adjustment of $1.4 million. In addition, the Company acquired 4.75% fixed-to-floating rate subordinated notes with a carrying value of $19.5 million at March 31, 2024. The notes balance of $18.5 million at March 31, 2024 was presented net of fair value adjustment of $1.0 million.

Stockholders’ Equity


(Dollars in thousands)	March 31, 2024		December 31, 2023		$ Change		% Change
Common Stock at par of $0.01	$	332	$	332	$	—	—	%
Additional paid in capital	356,464		356,007		457		0.13	%
Retained earnings	166,490		162,290		4,200		2.59	%
Accumulated other comprehensive loss	(8,058)		(7,494)		(564)		7.53	%
Total Stockholders' Equity	$	515,228	$	511,135	$	4,093	0.80	%

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

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Liquidity and Capital Resources

Liquidity is our ability to meet cash demands as they arise. Cash needs may come from loan demand, deposit withdrawals or acquisition opportunities. Potential obligations resulting from the issuance of standby letters of credit and commitments to fund future borrowings to our loan customers are other factors affecting our liquidity needs. Many of these obligations and commitments are expected to expire without being drawn upon; therefore, the total commitment amounts do not necessarily represent future cash requirements affecting our liquidity position.

The Company’s principal sources of liquidity are cash on hand and dividends received from the Bank. The Bank’s most liquid assets are cash, cash equivalents and federal funds sold. The levels of such assets are dependent on the Bank’s operating, financing and investment activities at any given time. The variations in levels of cash and cash equivalents are influenced by deposit flows and anticipated future deposit flows. Customer deposits are considered the primary source of funds supporting the Bank’s lending and investment activities.

Based on management’s going concern evaluation, we believe that there are no conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s or the Bank’s ability to continue as a going concern, within one year of the date of the issuance of the financial statements.

The Bank’s principal sources of funds for investment and operations are net income, deposits, sales of loans, borrowings, principal and interest payments on loans, principal and interest received on investment securities and proceeds from the maturity and sale of investment securities. The Bank’s principal funding commitments are for the origination or purchase of loans, the purchase of securities and the payment of maturing deposits.

The Bank’s most liquid assets are cash, cash equivalents and federal funds sold. The levels of such assets are dependent on the Bank’s operating, financing and investment activities at any given time. The variations in levels of cash and cash equivalents are influenced by deposit flows and anticipated future deposit flows.

Liquidity is provided by access to funding sources, which include core depositors and brokered deposits. Other sources of funds include our ability to borrow, such as purchasing federal funds from correspondent banks, sales of securities under agreements to repurchase and advances from the FHLB of Atlanta. The Bank uses wholesale funding (brokered deposits and other sources of funds) to supplement funding when loan growth exceeds core deposit growth and for asset-liability management purposes.

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~~$257.9 million for the first ~~nine~~three months of ~~2017~~2024 compared to ~~an increase in cash~~a decrease of ~~$1.3~~$17.8 million for the first ~~nine~~three months of ~~2016.~~2023. The decrease in cash and cash equivalents in ~~2017~~the first quarter of 2024 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.~~

decrease of $144.9 million in interest-bearing deposits.

To the extent that deposits are not adequate to fund customer loan demand, liquidity needs can be met in the short-term ~~funds markets through~~fund markets. The Bank has arrangements with other correspondent ~~banks. The Bank had $15~~banks whereby it has $45.0 million available in federal funds lines of credit and a reverse repurchase agreement available ~~on a~~to meet any short-term ~~basis from~~needs which may not otherwise be funded by the Bank’s portfolio of readily marketable investments that can be converted to cash. At March 31, 2024, the Bank had approximately $1.2 billion of available liquidity including: $114.6 million in cash and cash equivalents, $321.0 million in unpledged securities, $782.2 million in secured borrowing capacity at the FHLB of Atlanta and the other correspondent banks ~~at September 30, 2017 and December 31, 2016.~~of $66.1 million. The Bank is ~~also~~ a member of the FHLB of Atlanta, which provides another source of liquidity. Through the FHLB of Atlanta, the Bank had ~~credit availability~~available lendable collateral of approximately ~~$222.0~~$782.2 million and ~~$205.1~~$745.1 million at ~~September 30, 2017~~March 31, 2024 and December 31, ~~2016,~~2023, 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~~FHLB of ~~any demands, commitments, events or uncertainties~~Atlanta.

The Bank and the Company are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are ~~likely~~also subject to ~~materially affect our future ability~~qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank and the Company to maintain ~~liquidity at satisfactory levels.~~

~~Total stockholders’ equity increased $8.3 million to $162.6 million at September 30, 2017 when compared to December 31, 2016 primarily due to current year’s earnings.~~

~~Basel III~~

~~The FRB and the FDIC approved the final rules implementing the Basel Committee on Banking Supervision's (“BCBS”) capital guidelines for U.S. banks. Under the final rules,~~ minimum requirements increased for both the quantity and quality of capital held by the Company. The rules included a new common equity Tier 1 capital to risk-weighted assets 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 12.50%. 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~~requirements at March 31, 2024.

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

prompt corrective action regulations. 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, 2024 and December 31, ~~2016.~~

~~During the first quarter of 2017, Shore Bancshares, Inc. contributed $10.5 million in capital~~2023.


March 31, 2024	Tier 1 leverage ratio		Common Equity Tier 1 ratio		Tier 1 risk-based capital ratio		Total risk-based capital ratio
Shore Bancshares, Inc.	7.93	%	8.91	%	9.53	%	11.68	%
Shore United Bank	8.58	%	10.32	%	10.32	%	11.56	%


December 31, 2023	Tier 1 leverage ratio		Common Equity Tier 1 ratio		Tier 1 risk-based capital ratio		Total risk-based capital ratio
Shore Bancshares, Inc.	7.74	%	8.69	%	9.31	%	11.48	%
Shore United Bank	8.33	%	10.02	%	10.02	%	11.27	%

For information on risks relating to ~~its bank subsidiary, Shore United Bank, in preparation for the branch acquisition~~liquidity, see Item 1A. "Risk Factors - Liquidity Risk,” as presented in the ~~second quarter~~Company's 2023 Annual Report.

Table of ~~2017. Of~~Contents

USE OF NON-GAAP FINANCIAL MEASURES

Statements in the ~~$10.5 million contributed, $10.2 million consisted~~MD&A include non-GAAP financial measures and should be read along with the accompanying tables, which provide a reconciliation of ~~mortgage-backed securities~~non-GAAP financial measures to GAAP financial measures. The Company’s management uses these non-GAAP financial measures and ~~$300 thousand consisted~~believes that non-GAAP financial measures provide additional useful information that allows readers to evaluate the ongoing performance of ~~cash.~~

the Company. Non-GAAP financial measures should not be considered as an alternative to any measure of performance or financial condition as promulgated under GAAP, and investors should consider the Company’s performance and financial condition as reported under GAAP and all other relevant information when assessing the performance or financial condition of the Company. Non-GAAP financial measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for analysis of the results or financial condition as reported under GAAP. See Non-GAAP reconciliation schedules that immediately follow:

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
%
RECONCILIATION OF NON-GAAP MEASURES (UNAUDITED)

Reconciliation of GAAP total assets, common equity, common equity to assets and book value to non-GAAP tangible assets, tangible common equity, tangible common equity to tangible assets and tangible book value.

This Quarterly Report on Form 10-Q, including the accompanying financial statement tables, contains financial information determined by methods other than in accordance with GAAP. This financial information includes certain performance measures, which exclude intangible assets. These non-GAAP measures are included because the Company believes they may provide useful supplemental information for evaluating the underlying performance trends of the Company.


(dollars in thousands, except per share amounts)	March 31, 2024			December 31, 2023			March 31, 2023
Total assets	$	5,825,704		$	6,010,918		$	3,553,694
Less: intangible assets
Goodwill	63,266			63,266			63,266
Core deposit intangibles	45,515			48,090			5,106
Total intangible assets	108,781			111,356			68,372
Tangible assets	$	5,716,923		$	5,899,562		$	3,485,322

Total common equity	$	515,228		$	511,135		$	361,638
Less: intangible assets	108,781			111,356			68,372
Tangible common equity	$	406,447		$	399,779		$	293,266

Common shares outstanding at end of period	33,210,522			33,161,532			19,898,388

Common equity to assets	8.84		%	8.50		%	10.18		%
Tangible common equity to tangible assets	7.11		%	6.78		%	8.41		%

Common book value per share	$	15.51		$	15.41		$	18.17
Tangible common book value per share	$	12.24		$	12.06		$	14.74

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Return on Average Common Equity (“ROACE”)

The ROACE is a financial ratio that measures the profitability of a company in relation to the average stockholders' equity. This financial metric is expressed in the form of a percentage which is equal to net income after tax divided by the average stockholders' equity for a specific period of time.


	Three Months Ended March 31,
(dollars in thousands, except per share amounts)	2024			2023

Net income (as reported)	$	8,184		$	6,457

ROACE	6.38		%	7.25		%

Average Equity	$	515,976		$	361,174

Return on Average Tangible Common Equity (“ROATCE”)

ROATCE is computed by dividing net earnings applicable to common stockholders by average tangible common shareholders' equity. Management believes that ROATCE is meaningful because it measures the performance of a business consistently, whether acquired or internally developed. ROATCE is a non-GAAP measure and may not be comparable to similar non-GAAP measures used by other companies.


	Three Months Ended March 31,
(dollars in thousands, except per share amounts)	2024			2023

Net income (as reported)	$	8,184		$	6,457
Merger and acquisition costs (net of tax)	—			502
Core deposit intangible amortization (net of tax)	1,989			320
Net earnings applicable to common stockholders	$	10,173		$	7,279

ROATCE	10.08		%	10.09		%

Average equity	$	515,976		$	361,174
Less: Average goodwill and core deposit intangible	(110,167)			(68,607)
Average Tangible Common Equity	$	405,809		$	292,567

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Item 3.3 – 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, Item 7A of the ~~2016~~2023 Annual Report under the caption ~~“Market Risk~~“Quantitative and Qualitative Disclosures About Market Risk. Management ~~and Interest Sensitivity”. Management believes~~recognizes that ~~there~~recent increases in interest rates have ~~been no material changes in our~~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.~~

2023.

Item 4.4 – 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.~~the Company 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, 2024 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, has~~PFO, concluded that our disclosure controls and procedures ~~are, in fact,~~were not effective at the reasonable assurance level at ~~September 30, 2017.~~

~~There was no change~~March 31, 2024 due to the material weakness in ~~our~~the Company’s internal control over financial reporting described below.

Material Weaknesses in Internal Control Over Financial Reporting

Management assessed the Company’s system of internal control over financial reporting as of March 31, 2024. This assessment was conducted based on the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission “Internal Control – Integrated Framework (2013).” Based on this assessment, management has concluded that the Company’s internal control over financial reporting was not effective as of March 31, 2024 due to the material weaknesses identified below.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

Management identified a material weakness caused by improperly designed preventative controls and insufficient monitoring controls of the online credit card account opening process, which resulted in a material fraud loss during the quarter-ended March 31, 2024.

Management identified a previously disclosed material weakness associated with ineffective input review controls relating to specific aspects of the Company’s ACL model and a previously disclosed material weakness in relation to deferred income taxes discussed in Part II, Item 9A of the 2023 Annual Report. Management’s assessment concluded that the deferred income tax material weakness had been fully remediated as of March 31, 2024. Management continues to follow its remediation plan with respect to the review of controls related to the allowance for credit losses.

Remediation Plan to Address the Material Weaknesses

Management, with the oversight of the Audit Committee, is actively engaged in remediating the material weaknesses in internal control over financial reporting that existed as of March 31, 2024. In response to the material weaknesses identified above, the Company is in the process of implementing changes to its internal control over financial reporting.

Specifically in relation to the material weakness identified related to the online credit card account opening process, remediation began immediately upon detection on April 1, 2024, by completely closing the online application portal and suspending the opening of all new credit card accounts using the automated online account opening application hosted by the Company’s third party credit card processor. The Company reviewed all accounts opened on or after February 1, 2024, and closed those deemed to be fraudulent including all accounts/cards opened on or after March 28, 2024, to ensure no additional loss to the Bank.

The Company is evaluating whether to sell and exit the credit card issuer program or to retain the portfolio and outsource the management of the opening of new accounts and ongoing transaction monitoring to an experienced third-party. In the event that the Company continues

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the credit card program, it will need to establish controls to address and mitigate this material weakness. We expect that the remediation of the online credit card account opening material weakness will be completed prior to the end of 2024.

Specifically in relation to the allowance for credit losses, management has continued to follow the remediation plan outlined in the 2023 Annual Report. This plan includes compiling a detailed inventory of significant inputs to the allowance for credit losses calculation and, reevaluating the relevant SOX control design and operation to ensure all significant inputs to the allowance for credit losses calculation are recorded timely and accurately. In addition, management expects to conduct a detailed data audit to effectively ensure the completeness and accuracy of select inputs to the allowance for credit losses calculation. We expect that the allowance for credit losses material weakness will be fully remediated prior to the end of 2024.

Management will consider the material weaknesses remediated once the applicable controls have operated for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

Changes in Internal Control Over Financial Reporting

Except as described above, there were no additional changes in the Company’s internal control over financial reporting (as such term is defined by Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the first quarter of ~~2017~~2024 that has materially affected, or is reasonably likely to materially affect, ~~our~~the Company’s internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1. 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.~~ 1A – Risk Factors

~~The risks~~

There have been no material changes to the risk factors as previously disclosed under Item 1A in our 2023 Annual Report and ~~uncertainties~~those referenced in other reports on file with the SEC, other than those set forth below:

We have identified material weaknesses in our internal controls, and cannot provide assurances that these weaknesses will be effectively remediated or that additional material weaknesses will not occur in the future.

If our internal control over financial reporting or our disclosure controls and procedures are not effective, we may not be able to ~~which~~accurately report our financial ~~condition~~results, which may cause investors to lose confidence in the Company’s reported financial information and ~~operations are subject are~~may lead to a decline in our stock price.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act and for evaluating and reporting on that system of internal control. Management identified control deficiencies related to the Bank’s online credit card activation system which delayed the detection and mitigation of fraudulent credit card account openings, along with a previously disclosed material weakness associated with ineffective input review controls relating to specific aspects of the Company’s ACL model discussed in ~~detail in~~Part II, Item ~~1A of Part I~~9A of the ~~2016~~Company’s 2023 Annual Report. ~~Management does~~Accordingly, management determined that these control deficiencies constituted material weaknesses and, as a result, has concluded that as of March 31, 2024, our internal control over financial reporting was not ~~believe~~effective based on the criteria in Internal Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

While our management is taking steps to remediate the material weaknesses, we cannot provide any assurance that such remedial measures, or any other remedial measures we take, will be effective. In the future, we may identify additional material ~~changes~~weaknesses or otherwise fail to maintain an effective system of internal control over financial reporting or adequate disclosure controls and procedures, which may result in material errors in our ~~risk factors have occurred since they were last disclosed~~financial statements or cause us to fail to meet our period reporting obligations. If we fail to remediate these material weaknesses or otherwise fail to establish and maintain effective control over financial reporting, it may adversely affect our ability to accurately and timely report our financial results in the future, may adversely affect investor confidence, our ~~2016 Annual Report.~~

reputation and our ability to raise additional capital, cause the market price of our stock to decline, expose us to sanctions or investigations by the SEC or other regulatory authorities, or impact our results of operations.

Item 2.2 – Unregistered Sales of E~~quity~~Equity Securities and Use of Proceeds

~~None.~~

There were no repurchases or unregistered sales of the Company’s common stock, par value $0.01 per share, during the quarter-to-date period ended March 31, 2024.

Item 3.3 – Defaults Upon Senior Securities

None

Item 4.4 – Mine Safety Disclosures

Not ~~Applicable~~

applicable

Item 5. 5 – Other Information

~~None~~

Rule 10b5-1 Trading Plans

During the quarter ended March 31, 2024, no officer or director of the Company adopted or terminated any contract, instruction, or written plan for the purchase or sale of securities of the Company’s common stock that is intended to satisfy the affirmative defense conditions of Securities Exchange Act Rule 10b5-1(c) or any non-Rule 10b5-1 trading arrangement as defined in 17 CFR § 229.408(c).

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Item 6.E6 – Exhibits.


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 of the Amendment of Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed on July 3, 2023).
3.1(iii)						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(iv)						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						Second Amended and Restated By-Laws, dated July 1, 2023 (incorporated by reference to Exhibit 3.2 of the Company’s Form 8-K filed on July 3, 2023).
4.1						Description of Registrant’s Securities (incorporated by reference to Exhibit 4.1 to the Company’s Form 10-K filed March 1 5 , 202 4 ).
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).

Table of Contents~~xhibits.~~

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

SIGNATURES

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

SHORE BANCSHARES, INC.

Date: May 9, 2024

By:

/s/ James M. Burke

~~Date: November 9, 2017~~

~~By:~~

~~/s/ Lloyd L. Beatty, Jr.~~

James M. Burke

~~Lloyd L. Beatty, Jr.~~

President & Chief Executive Officer

(Principal Executive Officer)

Date: May 9, 2024

By:

/s/ Todd L. Capitani

~~Date: November 9, 2017~~

~~By:~~

~~/s/ Edward C. Allen~~

Todd L. Capitani

~~Edward C. Allen~~

~~Senior~~Executive Vice President & Chief Financial Officer

(Principal Financial Officer)

~~EXHIBIT INDEX~~


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

~~10.1~~		Amended and Restated Employment Agreement, dated October 31, 2017, between Shore Bancshares, Inc. and 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)~~


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


			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


	Less than				More than
	12 Months				12 Months				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(Dollars in thousands)	Value		Losses		Value		Losses		Value		Losses
September 30, 2017
Available-for-sale securities:
U.S. Government agencies	$	40,819	$	150	$	2,998	$	4	$	43,817	$	154
Mortgage-backed		60,113		289		11,086		291		71,199		580
Total	$	100,932	$	439	$	14,084	$	295	$	115,016	$	734


	Less than				More than
	12 Months				12 Months				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(Dollars in thousands)	Value		Losses		Value		Losses		Value		Losses
December 31, 2016
Available-for-sale securities:
U.S. Government agencies	$	11,926	$	58	$	-	$	-	$	11,926	$	58
Mortgage-backed		100,237		1,546		9,208		263		109,445		1,809
Equity securities		640		12		-		-		640		12
Total	$	112,803	$	1,616	$	9,208	$	263	$	122,011	$	1,879


			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


				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	$	-


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


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


	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


	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


	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


					Significant
					Other		Significant
			Quoted		Observable		Unobservable
			Prices		Inputs		Inputs
(Dollars in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
September 30, 2017
Securities available for sale:
U.S. Government agencies	$	52,003	$	-	$	52,003	$	-
Mortgage-backed		160,725		-		160,725		-
Equity		662		-		662		-
Total	$	213,390	$	-	$	213,390	$	-

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


	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%


	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	%