UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended ~~September 30, 2022~~March 31, 2023

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

For the transition period from to

Commission file number 0-22345

SHORE BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

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

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

(410) 763-7800

Registrant’s Telephone Number, Including Area Code

N/A

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

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


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

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

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



Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

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

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

The number of shares outstanding of the registrant’s common stock as of ~~November 10, 2022~~May 11, 2023 was ~~19,857,774.~~19,897,410.

Table of Contents

INDEX

		Page

Part I. Financial Information		3

Item 1. Financial Statements		3

Consolidated Balance Sheets – ~~September 30, 2022~~March 31, 2023 (unaudited) and December 31, ~~202~~20221		3

Consolidated Statements of Income For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ (unaudited)		4

Consolidated Statements of Comprehensive Income For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ (unaudited)		5

Consolidated Statements of Changes in Stockholders’ Equity For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ (unaudited)		6

Consolidated Statements of Cash Flows For the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ (unaudited)		87

Notes to Consolidated Financial Statements (unaudited)		109

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		4338

Item 3. Quantitative and Qualitative Disclosures about Market Risk		5749

Item 4. Controls and Procedures		5749

Part II. Other Information		5850

Item 1. Legal Proceedings		5850

Item 1A. Risk Factors		5850

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		5850

Item 3. Defaults Upon Senior Securities		5950

Item 4. Mine Safety Disclosures		5951

Item 5. Other Information		5951

Item 6. Exhibits		6052

Signatures		6153

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

SHORE BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS


	September 30,		December 31,		March 31,		December 31,
(In thousands, except share and per share data)	2022		2021		2023		2022
ASSETS	(unaudited)				(Unaudited)
Cash and due from banks	$	33,814	$	16,919	$	23,863	$	37,661
Interest-bearing deposits with other banks		129,492		566,694		13,846		17,838
Cash and cash equivalents		163,306		583,613		37,709		55,499
Investment securities:
Available-for-sale, at fair value		86,347		116,982
Held to maturity, at amortized cost - fair value of $501,145 (2022) and $401,524 (2021)		570,719		404,594
Available-for-sale, at fair value (amortized cost of $92,754 (2023) and $95,999 (2022))						81,525		83,587
Held to maturity, net of allowance for credit losses of $163 (2023) (fair value of $491,116 (2023) and $494,627 (2022))						549,096		559,455
Equity securities, at fair value		1,222		1,372		1,258		1,233
Restricted securities, at cost		9,894		4,159		15,067		11,169

Loans held for sale, at fair value		8,342		37,749		3,514		4,248

Loans held for investment		2,401,883		2,119,175
Loans held for investment ($9,526 (2023) and $8,437 (2022), at fair value)						2,668,681		2,556,107
Less: allowance for credit losses		(16,277)		(13,944)		(28,464)		(16,643)
Loans, net		2,385,606		2,105,231		2,640,217		2,539,464

Premises and equipment, net		52,252		51,624		50,516		51,488
Goodwill		63,281		63,421		63,266		63,266
Other intangible assets, net		6,007		7,535		5,106		5,547
Other real estate owned, net		197		532		179		197
Mortgage servicing rights, at fair value		5,321		4,087		5,310		5,275
Right-of-use assets		9,764		11,370		9,344		9,629
Cash surrender value on life insurance		58,768		47,935		59,711		59,218
Other assets		25,778		19,932		31,876		28,001
TOTAL ASSETS	$	3,446,804	$	3,460,136	$	3,553,694	$	3,477,276

LIABILITIES
Deposits:
Noninterest-bearing	$	893,808	$	927,497	$	808,679	$	862,015
Interest-bearing		2,121,504		2,098,739		2,185,883		2,147,769
Total deposits		3,015,312		3,026,236		2,994,562		3,009,784

Securities sold under retail repurchase agreements		—		4,143
Advances from FHLB - long-term		10,013		10,135
Advances from FHLB - short-term						131,500		40,000
Subordinated debt		42,995		42,762		43,150		43,072
Total borrowings		53,008		57,040		174,650		83,072

Lease liabilities		10,023		11,567		9,642		9,908
Other liabilities		11,240		14,600		13,202		10,227
TOTAL LIABILITIES		3,089,583		3,109,443		3,192,056		3,112,991

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share; shares authorized - 35,000,000; shares issued and outstanding - 19,849,563 (2022) and 19,807,533 (2021)		199		198
Common stock, par value $.01 per share; shares authorized - 35,000,000; shares issued and outstanding - 19,898,388 (2023) and 19,864,956 (2022)						199		199
Additional paid in capital		201,213		200,473		201,736		201,494
Retained earnings		165,590		149,966		167,864		171,613
Accumulated other comprehensive (loss) income		(9,781)		56
Accumulated other comprehensive loss						(8,161)		(9,021)
TOTAL STOCKHOLDERS' EQUITY		357,221		350,693		361,638		364,285
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	3,446,804	$	3,460,136	$	3,553,694	$	3,477,276

See accompanying notes to Consolidated Financial Statements.

Table of Contents

SHORE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)


	For Three Months Ended				For Nine Months Ended				For Three Months Ended
	September 30,				September 30,				March 31,
(In thousands, except per share data)	2022		2021		2022		2021		2023		2022
INTEREST INCOME
Interest and fees on loans	$	25,924	$	15,484	$	71,458	$	44,231	$	30,828	$	22,085
Interest and dividends on taxable investment securities		3,186		1,318		7,562		3,343		4,064		1,985
Interest and dividends on tax-exempt investment securities										7		—
Interest on deposits with other banks		1,466		97		2,546		199		163		254
Total interest income		30,576		16,899		81,566		47,773		35,062		24,324

INTEREST EXPENSE
Interest on deposits		2,561		949		5,429		3,189		7,281		1,358
Interest on short-term borrowings		—		2		2		5		1,361		2
Interest on long-term borrowings		700		359		1,776		1,088		756		534
Total interest expense		3,261		1,310		7,207		4,282		9,398		1,894

NET INTEREST INCOME		27,315		15,589		74,359		43,491		25,664		22,430
Provision for credit losses		675		290		1,475		1,365		1,213		600

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES		26,640		15,299		72,884		42,126		24,451		21,830

NONINTEREST INCOME
Service charges on deposit accounts		1,509		805		4,306		2,162		1,213		1,359
Trust and investment fee income		421		477		1,383		1,359		432		514
Gains on sales and calls of investment securities		—		2		—		2		—		—
Interchange credits		1,241		1,016		3,532		2,922		1,212		1,038
Mortgage-banking revenue		680		—		3,643		—		977		1,867
Title Company revenue		397		—		1,146		—		137		323
Other noninterest income		1,096		609		3,214		1,924		1,363		945
Total noninterest income		5,344		2,909		17,224		8,369		5,334		6,046

NONINTEREST EXPENSE
Salaries and wages		8,562		5,091		27,022		13,495		8,684		9,562
Employee benefits		2,191		1,654		7,122		4,991		2,921		2,662
Occupancy expense		1,496		843		4,548		2,427		1,619		1,567
Furniture and equipment expense		533		449		1,370		1,168		534		429
Data processing		1,759		1,170		5,034		3,514		1,798		1,607
Directors' fees		217		147		617		450		250		190
Amortization of other intangible assets		499		107		1,528		353		441		517
FDIC insurance premium expense		339		245		1,111		653		371		343
Other real estate owned expenses, net		1		4		52		6		(1)		(6)
Legal and professional fees		756		428		2,204		1,592		750		637
Merger-related expenses		159		538		1,130		915		691		730
Other noninterest expenses		2,387		1,259		7,585		3,745		2,835		2,094
Total noninterest expense		18,899		11,935		59,323		33,309		20,893		20,332

Income before income taxes		13,085		6,273		30,785		17,186		8,892		7,544
Income tax expense		3,427		1,657		8,016		4,541		2,435		1,931

NET INCOME	$	9,658	$	4,616	$	22,769	$	12,645	$	6,457	$	5,613

Basic and diluted net income per common share	$	0.49	$	0.39	$	1.15	$	1.08	$	0.32	$	0.28

Dividends paid per common share	$	0.12	$	0.12	$	0.36	$	0.36	$	0.12	$	0.12

See accompanying notes to Consolidated Financial Statements.

Table of Contents

SHORE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)


	For Three Months Ended				For Nine Months Ended				For Three Months Ended
	September 30,				September 30,				March 31,
(In thousands)	2022		2021		2022		2021		2023		2022
Net income	$	9,658	$	4,616	$	22,769	$	12,645	$	6,457	$	5,613

Other comprehensive (loss):
Other comprehensive income (loss):
Investment securities:
Unrealized holding (losses) on available-for-sale-securities		(4,307)		(520)		(13,533)		(1,789)
Unrealized holding gains/(losses) on available-for-sale-securities										1,183		(3,065)
Tax effect		1,177		142		3,696		488		(323)		837

Total other comprehensive (loss)		(3,130)		(378)		(9,837)		(1,301)
Total other comprehensive income (loss)										860		(2,228)
Comprehensive income	$	6,528	$	4,238	$	12,932	$	11,344	$	7,317	$	3,385

See accompanying notes to Consolidated Financial Statements.

Table of Contents

SHORE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)

For the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~

Accumulated

Additional

Other

Total

Common

Paid in

Retained

Comprehensive

Stockholders’
(In thousands)

Stock

Capital

Earnings

Income (loss)

Equity
Balances, January 1, 2022

$
198

$
200,473

$
149,966

$
56

$
350,693

Net income

—

—

5,613

—

5,613

Other comprehensive (loss)

—

—

—

(2,228)

(2,228)

Common shares issued for employee stock purchase plan

—

37

—

—

37

Stock-based compensation

—

130

—

—

130

Cash dividends declared

—

—

(2,381)

—

(2,381)

Balances, March 31, 2022

$
198

$
200,640

$
153,198

$
(2,172)

$
351,864

Net Income

—

—

7,499

—

7,499

Other comprehensive (loss)

—

—

—

(4,479)

(4,479)

Common shares issued for employee stock purchase plan

—

102

—

—

102

Stock-based compensation

—

172

—

—

172

Cash dividends declared

—

—

(2,381)

—

(2,381)

Balances, June 30, 2022

$
198

$
200,914

$
158,316

$
(6,651)

$
352,777

Net Income

—

—

9,658

—

9,658

Other comprehensive (loss)

—

—

—

(3,130)

(3,130)

Common shares issued for employee stock purchase plan

1

124

—

—

125

Stock-based compensation

—

175

—

—

175

Cash dividends declared

—

—

(2,384)

—

(2,384)

Balances, September 30, 2022

$
199

$
201,213

$
165,590

$
(9,781)

$
357,221

~~Table of Contents~~

~~SHORE BANCSHARES, INC.~~

~~CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)(CONTINUED)~~

~~For the Three and Nine Months Ended September 30, 2022 and 2021~~


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

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

Net income		—		—		6,457		—		6,457

Other comprehensive income		—		—		—		860		860

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

Stock-based compensation		—		155		—		—		155

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

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


							Accumulated										Accumulated
			Additional				Other		Total				Additional				Other		Total
	Common		Paid in		Retained		Comprehensive		Stockholders’		Common		Paid in		Retained		Comprehensive		Stockholders’
(In thousands)	Stock		Capital		Earnings		Income		Equity		Stock		Capital		Earnings		Income (Loss)		Equity
Balances, January 1, 2021	$	118	$	52,167	$	141,205	$	1,529	$	195,019
Balances, January 1, 2022											$	198	$	200,473	$	149,966	$	56	$	350,693

Net Income		—		—		3,998		—		3,998		—		—		5,613		—		5,613

Other comprehensive (loss)		—		—		—		(782)		(782)		—		—		—		(2,228)		(2,228)

Retirement of common stock		—		(819)		—		—		(819)
Common shares issued for employee stock purchase plan												—		37		—		—		37

Stock-based compensation		—		97		—		—		97		—		130		—		—		130

Cash dividends declared		—		—		(1,409)		—		(1,409)		—		—		(2,381)		—		(2,381)

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

Net Income		—		—		4,031		—		4,031

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

Stock-based compensation		—		99		—		—		99

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

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

Net Income		—		—		4,616		—		4,616

Other comprehensive (loss)		—		—		—		(378)		(378)

Stock-based compensation		—		91		—		—		91

Exercise of options, net of shares surrendered		—		6		—		—		6

Cash dividends declared		—		—		(1,410)		—		(1,410)

Balances, September 30, 2021	$	118	$	51,641	$	149,620	$	228	$	201,607
Balances, March 31, 2022											$	198	$	200,640	$	153,198	$	(2,172)	$	351,864

See accompanying notes to Consolidated Financial Statements.

Table of Contents

SHORE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


	For Nine Months Ended				For Three Months Ended
	September 30,				March 31,
(In thousands)	2022		2021		2023		2022

CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	22,769	$	12,645	$	6,457	$	5,613
Adjustments to reconcile net income to net cash provided by operating activities:
Net accretion of acquisition accounting estimates		(1,225)		(182)		(646)		(525)
Provision for credit losses		1,475		1,365		1,213		600
Depreciation and amortization		4,253		1,937		1,383		1,558
Net amortization of securities		1,121		1,034		249		454
Amortization of debt issuance costs		92		92		31		31
(Gain) on mortgage banking activities		(2,526)		—		(719)		(1,679)
Proceeds from sale of mortgage loans held for sale		128,595		—		21,947		66,560
Originations of loans held for sale		(98,020)		—		(20,710)		(41,165)
Stock-based compensation expense		477		287		155		130
Deferred income tax expense (benefit)		(723)		(865)		(126)		29
(Gains) on sales and calls of securities		—		(2)
(Gains) on valuation adjustments on mortgage servicing rights		(459)		—
Losses on sales and disposals of premises and equipment		—		4
(Gains) loss on valuation adjustments on mortgage servicing rights						82		(554)
Valuation adjustments on premises transferred to held for sale						225		—
Losses on sales and valuation adjustments on other real estate owned		44		2		(3)		(9)
Fair value adjustments on loans held for investments, at fair value						(195)		—
Fair value adjustment on equity securities		162		24		(17)		70
Bank owned life insurance income		(702)		(774)		(364)		(193)
Net changes in:
Accrued interest receivable		(721)		1,579		1,291		(545)
Other assets		(304)		(1,342)		(1,408)		(976)
Accrued interest payable		(217)		(446)		320		(323)
Other liabilities		(4,030)		218		2,055		(3,877)
Net cash provided by operating activities		50,061		15,576		11,220		25,199

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and principal payments of investment securities available for sale		16,719		31,975		3,175		7,049
Proceeds from maturities and principal payments of investment securities held to maturity		40,603		29,046		10,017		11,268
Purchases of securities held to maturity		(207,466)		(214,199)		—		(14,093)
Purchases of equity securities		(12)		(13)		(8)		(3)
Net (purchase) of restricted securities		(5,735)		—
Purchase of restricted securities						(11,421)		(5,735)
Net change in loans		(280,874)		(40,437)		(111,681)		(61,201)
Purchases of premises and equipment		(2,274)		(3,106)		(619)		(974)
Proceeds from sales of other real estate owned		394		—		21		83
Improvements to other real estate owned		(34)		—		—		(34)
Net redemption of restricted securities		—		437
Redemption of restricted securities						7,523		—
Purchases of bank owned life insurance		(10,131)		(10,157)		(129)		(10,058)
Net cash (used in) investing activities		(448,810)		(206,454)		(103,122)		(73,698)


CASH FLOWS FROM FINANCING ACTIVITIES:
Net changes in:
Noninterest-bearing deposits		(33,689)		45,811		(53,336)		(51,082)
Interest-bearing deposits		23,156		271,594		38,249		93,431
Short-term borrowings		(4,143)		2,451		91,500		(4,143)
Common stock dividends paid		(7,146)		(4,230)		(2,388)		(2,381)
Retirement of common stock		—		(819)
Issuance of common stock		264		6		87		37
Net cash (used in) provided by financing activities		(21,558)		314,813
Net (decrease) increase in cash and cash equivalents		(420,307)		123,935
Net cash provided by financing activities						74,112		35,862
Net (decrease) in cash and cash equivalents						(17,790)		(12,637)
Cash and cash equivalents at beginning of period		583,613		186,917		55,499		583,613
Cash and cash equivalents at end of period	$	163,306	$	310,852	$	37,709	$	570,976

Table of Contents

SHORE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (CONTINUED)

Supplemental cash flows information:

Interest paid

$
7,705

$
4,694
Income taxes paid

$
7,070

$
5,037
Recognition (remeasurement of) lease liabilities arising from right-of-use assets

$
(616)

$
1,194
Transfers from loans to other real estate owned

$
69

$
205
Unrealized (loss) on securities available for sale

$
(13,533)

$
(1,789)


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

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,~~March 31, 2023 and 2022 ~~and 2021~~

(Unaudited)

Note 1 – Basis of Presentation

The consolidated financial statements include the accounts of Shore Bancshares, Inc. and its subsidiaries with all significant intercompany transactions eliminated. The consolidated financial statements conform to accounting principles generally accepted in the United States of America (“GAAP”) and to prevailing practices within the banking industry. The accompanying interim financial statements are unaudited; however, in the opinion of management all adjustments necessary to present fairly the consolidated financial position at ~~September 30, 2022,~~March 31, 2023, the consolidated results of income and comprehensive income for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ changes in stockholders’ equity for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ and cash flows for the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ have been included. All such adjustments were of a normal recurring nature. The amounts as of December 31, ~~2021~~2022 were derived from the ~~2021~~2022 audited financial statements. The results of operations for the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 are not necessarily indicative of the results to be expected for any other interim period or for the full year. This Quarterly Report on Form 10-Q should be read in conjunction with the Annual Report of Shore Bancshares, Inc. on Form 10-K for the year ended December 31, ~~2021.~~2022. For purposes of comparability, certain immaterial reclassifications have been made to amounts previously reported to conform with the current period presentation.

When used in these notes, the term “the Company” refers to Shore Bancshares, Inc. and, unless the context requires otherwise, its consolidated subsidiaries, Shore United Bank, N.A. (the “Bank”) and Mid-Maryland Title Company, Inc. (the “Title Company”).

Pending Recent Accounting Standards ~~and Other Authoritative Guidance~~

ASU No. 2016-13 – In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The FASB has issued multiple updates to ASU 2016-13 as codified in Topic 326, including ASU’s 2019-04, 2019-05, 2019-10, 2019-11, 2020-02, and 2020-03. These ASU’s have provided for various minor technical corrections and improvements to the codification as well as other transition matters. Smaller reporting companies who file with the U.S. Securities and Exchange Commission (SEC) and all other entities who do not file with the SEC are required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022. At this time, the Company has established a project management team which meets periodically to discuss and assign roles and responsibilities, key tasks to complete, and a general timeline to be followed for implementation. The team has been working with an advisory consultant and has purchased a vendor model for implementation. Historical data has been collected and uploaded to the new model and the team is in the process of finalizing the methodologies that will be utilized. The team is currently running a parallel simulation to its current incurred loss model. The Company is continuing to evaluate the extent of the potential impact of this standard and continues to keep current on evolving interpretations and industry practices via webcasts, publications, conferences, and peer bank meetings. The Company has completed the external validation of the new model.

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

~~Table of Contents~~

ASU No. 2022-02 – In March 2022, the (FASB) issued (ASU) No. 2022-02, “Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022-02 addresses areas identified by the FASB as part of its post-implementation review of the credit losses standard (ASU 2016-13) that introduced the CECL model. The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancing’s and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. The amendments in this ASU should be applied prospectively, except for the transition method related to the recognition and measurement of troubled debt restructurings (TDR), an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. For entities that have adopted ASU 2016-13, ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For entities that have not yet adopted ASU 2016-13, the effective dates for ASU 2022-02 are the same as the effective dates in ASU 2016-13. Early adoption is permitted if an entity has adopted ASU 2016-13. An entity may elect to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. The Company is currently assessing the impact that ASU 2022-02 will have on its consolidated financial statements.

ASU No. 2022-03 - In June 2022, the (FASB) issued (ASU) No. 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions”. ASU 2022-03 clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The ASU is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2023. Early adoption is permitted. The Company does not expect the adoption of ASU 2022-03 to have a material impact on its consolidated financial statements.

~~ASU No. 2020-04~~Note 2 – ~~In March 2020, the (FASB) issued (ASU) No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation~~Adoption of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the London Inter-bank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. Subsequently, in January 2021, the (FASB) issued (ASU) No. 2021-01 “Reference Rate Reform (Topic 848): Scope.” This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply ASU No. 2021-01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. An entity may elect to apply ASU No. 2021-01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. At present, the Bank has limited exposure to LIBOR based pricing. LIBOR based loans only comprise 18 loans or 3.3% of the loan portfolio. The Bank is confident it can successfully negotiate a migration to the Secured Overnight Financing Rate (“SOFR”) between now and the implementation date. The Bank will notify customers within 120 days prior to migration to SOFR. The Bank acknowledges the replacement rate will be more volatile based on different countries migrating to different indexes and limited liquidity to support the rate. The Bank further acknowledges the volatility will be greatly influenced by the support provided by the Federal Reserve. Accounting Standards

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~~Note 2 – Business Combination~~

On ~~October 31, 2021 (“Acquisition Date”),~~January 1, 2023, the Company ~~completed the acquisition~~adopted Accounting Standards Updates (ASU) 2016-13 “Financial Instruments – Credit Losses (Topic 326): Measurement of ~~Severn Bancorp, Inc. (“Severn”)~~Credit Losses on Financial Instruments,” ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses,” ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,” ASU 2019-05, “Financial Instruments – Credit Losses (Topic 326): Targeted Transition Relief,” ASU 2019-10, “Financial instruments – Credit losses (Topic 326), ~~a Maryland charted commercial bank, in accordance with the definitive agreement that was entered into on March 3, 2021, by~~Derivatives and ~~among the Company~~hedging (Topic 815), and ~~Severn.~~Leases (Topic 842) – Effective dates,” ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses,” ASU 2020-02, “Financial Instruments – Credit Losses (Topic 326) and Leases (Topic 842),” ASU 2020-03, “Codification Improvements to Financial Instruments” and ASU 2022-02, “Financial Instruments – Credit Losses (Topic 326) – Troubled Debt Restructurings and Vintage Disclosures” (collectively, ASC 326). The ~~Company acquired Severn~~significant impacts of adopting these standards and related updates to access deposits and deploy excess capital into a high growth market, while also enhancing scale to drive efficiency and profitability. Additionally, this transaction creates a competitive position in the Columbia/Baltimore/Towson MSA, while filling in our current market footprint. In connection with the completion of the merger, former Severn shareholders received 0.6207 shares of Shore common stock and $1.59 in cash for each share of Severn common stock. Based on the $18.48 per share closing price of the Company’s common stock on October 29, 2021 and including the fair value of options converted or cashed-out, the total transaction value was approximately $169.8 million. Upon completion of the acquisition, Shore shareholders owned approximately 59.6% of the combined company, and former Severn shareholders owned approximately 40.4%.accounting policies are discussed below.

AsASC 326 requires entities to estimate an allowance for credit losses (ACL) on certain types of ~~October 31, 2021, Severn, headquartered in Annapolis, MD, had more than $1.1 billion in assets and operated 7 full-service community banking offices throughout Anne Arundel County, Maryland.~~

~~The acquisition of Severn was accounted for as~~financial instruments measured at amortized cost using a ~~business combination using~~current expected credit losses (CECL) methodology, replacing the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration paid were recorded at estimated fair values on the Acquisition Date. The provisional amount of goodwill recognized as of the Acquisition Date was approximately $45.9 million. The Company will continueincurred loss methodology from prior GAAP. It also applies to ~~keep the measurement of goodwill open for any additional adjustments~~unfunded commitments 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 goodwill within the first 12 months following the Acquisition Date. The goodwill is not expected to be deductible for tax purposes.

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

and other similar instruments. The impairment model for available-for-sale debt securities was modified and ASC 326 also provided for a simplified accounting model for purchased financial assets with credit

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~~The consideration paid~~deterioration since their origination. Additionally, the measurement principles for ~~Severn’s common equity and outstanding stock options and~~modifications of loans to borrowers experiencing financial difficulty were modified, including how the ~~provisional fair values of acquired identifiable assets and assumed identifiable liabilities were as follows:~~ACL is measured for such loans.

(In thousands, except per share data)

Purchase Price Consideration:

Fair value of common shares issued (8,053,088 shares) based on Shore Bancshares, Inc. share price of $18.48

$
148,821
Cash consideration

20,631
Cash paid for cash-out Severn stock options

310
Cash for fractional shares

3
Total purchase price

$
169,765

Identifiable assets:

Cash and cash equivalents

$
326,725
Total securities

146,292
Loans held for sale

9,613
Loans, net (1)

584,776
Premises and equipment, net

24,768
Other real estate owned

329
Core deposit intangible asset

6,550
Other assets (1)

20,304
Total identifiable assets

$
1,119,357

Identifiable liabilities:

Deposits

$
955,288
Total debt

28,341
Other liabilities

11,727
Total identifiable liabilities

$
995,356
Provisional fair value of net assets acquired including identifiable intangible assets

124,001
Provisional resulting goodwill (1)

$
45,764

~~(1)~~

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

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

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

The following table ~~details~~shows the ~~changes in fair value~~impact of ~~net assets acquired~~the Company's adoption of ASC 326 on loans, the allowance for credit losses, and ~~liabilities assumed from~~ the ~~amounts reported~~Company’s reserve for ~~the year ended December 31, 2021 (dollars in thousands).~~unfunded commitments:

Goodwill at December 31, 2021

$
45,904
Effect of adjustments to:

Loans, net

(192)
Other assets

52
Goodwill at September 30, 2022

$
45,764


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

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

The ~~adjustment~~following accounting policies have been updated in connection with the adoption of ASC 326 and apply to ~~goodwill made during~~periods beginning after December 31, 2022. Accounting policies applying to prior periods are described in the ~~first quarter of~~ 2022 ~~was related to the fair value of certain acquired loans, net of the related deferred tax impact which was determined to be higher than their acquisition date fair values.~~

~~Acquired loans~~

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

Contractually required payments receivable

$
46,833
Nonaccretable difference

(3,364)
Cash flows expected to be collected

43,469
Accretable yield

(5,667)
Fair value

$
37,802

Investments in Debt Securities

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

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

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

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

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

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

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

Loans Held for Investment

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

Loans acquired in a business combination are recorded at estimated fair value on the date of acquisition. In the case of loans that have experienced more than insignificant deterioration in credit quality since origination as of the acquisition date, ~~with no carryover~~the loan’s amortized cost basis is increased above estimated fair value by the amount of expected credit losses as of the ~~related~~acquisition date, and a corresponding allowance for credit losses is also recorded. Any remaining non-credit discount or premium for such purchased loans with credit deterioration (PCD loans) and any fair value discount or premium for non-PCD loans is accreted or amortized as an adjustment to yield over the estimated lives of the loans using the level-yield method.

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

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income. Loans greater than 90 days past due may remain on accrual status if management determines it has adequate collateral to cover the principal and interest. Interest payments received on nonaccrual loans are applied as a reduction of the loan principal balance unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. A loan may be returned to accrual status if the borrower has demonstrated a sustained period of repayment performance in accordance with the contractual terms of the loan and there is reasonable assurance the borrower will continue to make payments as agreed.

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

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

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

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

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

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

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

ACL on Loans Held for Investment

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

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

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

Cash flow projections and estimated expected losses on loans which share common risk characteristics are based in part on forecasts of the national unemployment rate that are reasonable and supportable over a twelve month period and incorporated into the estimate of expected credit losses using a statistical regression analysis. For periods beyond those for which reasonable and supportable forecasts are available, projections are based on a reversion of the national unemployment rate from the last forecast to a historical average level over the following twelve months.

Management’s estimate of the allowance for credit losses on loans that are collectively evaluated also includes a qualitative assessment of available information relevant to assessing collectability that is not captured in the quantitative loss estimation process. Factors considered by management include changes in general market, economic and business conditions; the nature and volume of the loan portfolio; the volume and severity of delinquencies and adversely classified loan balances and the value of underlying collateral; and other factors as deemed necessary and appropriate. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.

Reserve for Unfunded Commitments

The Company ~~determined~~records a reserve, reported in other liabilities, for expected credit losses on commitments to extend credit that are not unconditionally cancelable by the ~~net discounted value of cash flows~~Company. The reserve for unfunded commitments is measured based on ~~gross loans totaling $593.3 million, including 1,306 performing~~the principles utilized in estimating the allowance for credit losses on loans and 162 PCI loans. The valuation took into consideration the loans’ underlying characteristics, including account types, remaining terms, annual interest rates, interest types, past delinquencies, timing of principal and interest payments, current market rates, loan-to-loan value ratios, loss exposures, and remaining balances. These performing loans were segregated into pools based on loan and payment type. The effectan estimate of the ~~valuation process was a total net discount~~amount of ~~$8.7 million at acquisition.~~unfunded commitments expected to be advanced. Changes in the reserve for unfunded commitments are recorded through the provision for credit losses. During the three months ended March 31, 2023, the Company recorded no provision for credit losses associated with its unfunded commitments.

Note 3 – Earnings Per Share

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


	For the Three Months Ended				For the Nine Months Ended				For the Three Months Ended
	September 30,				September 30,				March 31,
(In thousands, except per share data)	2022		2021		2022		2021		2023		2022
Net Income	$	9,658	$	4,616	$	22,769	$	12,645	$	6,457	$	5,613
Weighted average shares outstanding - Basic		19,852		11,752		19,842		11,750
Weighted average shares outstanding - Basic and Diluted										19,886		19,828

Earnings per common share - Basic and Diluted	$	0.49	$	0.39	$	1.15	$	1.08	$	0.32	$	0.28

There were no weighted average common stock equivalents excluded from the calculation of diluted earnings per share for the three ~~and nine~~ months ~~September 30, 2021.~~March 31, 2022. There were no potentially dilutive shares outstanding during the three ~~and nine~~ months ended ~~September 30, 2022.~~March 31, 2023.

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Note 4 – Investment Securities

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

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


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

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

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


			Gross		Gross		Estimated				Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair		Amortized		Unrealized		Unrealized		Fair
(Dollars in thousands)	Cost		Gains		Losses		Value		Cost		Gains		Losses		Value
Available-for-sale securities:
September 30, 2022
March 31, 2023
U.S. Government agencies	$	22,065	$	8	$	3,759	$	18,314	$	21,587	$	5	$	3,283	$	18,309
Mortgage-backed		75,719		3		9,566		66,156		69,151		1		7,779		61,373
Other Debt securities		2,020		—		143		1,877
Other debt securities										2,016		—		173		1,843
Total	$	99,804	$	11	$	13,468	$	86,347	$	92,754	$	6	$	11,235	$	81,525

December 31, 2021
December 31, 2022
U.S. Government agencies	$	22,932	$	7	$	634	$	22,305	$	21,798	$	5	$	3,625	$	18,178
Mortgage-backed		91,948		1,318		629		92,637		72,183		2		8,666		63,519
Other Debt securities		2,026		14		—		2,040
Other debt securities										2,018		—		128		1,890
Total	$	116,906	$	1,339	$	1,263	$	116,982	$	95,999	$	7	$	12,419	$	83,587

No available for sale securities were sold during the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 and ~~2021.~~2022.

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Gross


Gross


Estimated

Amortized

Unrealized

Unrealized

Fair
(Dollars in thousands)

Cost

Gains

Losses

Value
Held-to-maturity securities:








September 30, 2022

U.S. Government agencies

$
148,207

$
—

$
13,861

$
134,346
Mortgage-backed

410,705

—

55,042

355,663
States and political subdivisions

807

—

24

783
Other debt securities

11,000

—

647

10,353
Total

$
570,719

$
—

$
69,574

$
501,145

December 31, 2021

U.S. Government agencies

$
87,072

$
20

$
1,231

$
85,861
Mortgage-backed

302,604

301

2,248

300,657
States and political subdivisions

400

2

—

402
Other debt securities

14,518

95

9

14,604
Total

$
404,594

$
418

$
3,488

$
401,524


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

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

Equity securities with an aggregate fair value of ~~$1.2~~$1.3 million at ~~September 30, 2022~~March 31, 2023 and ~~$1.4~~$1.2 million at December 31, ~~2021~~2022 are presented separately on the balance sheet. The fair value adjustment recorded through earnings totaled ~~$(145)~~$17 thousand for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 and ~~$(24)~~$(70) thousand for the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, respectively.

Credit Quality Information

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

The following ~~tables provide information about gross unrealized losses and fair value by length~~table shows the amortized cost of ~~time that the individual~~held-to-maturity securities ~~have been in a continuous unrealized loss position at September 30, 2022 and December~~based on their lowest publicly available credit rating as of March 31, ~~2021.~~2023.

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, 2022

Available-for-sale securities:

U.S. Government agencies

$
—

$
—

$
17,837

$
3,759

$
17,837

$
3,759
Mortgage-backed

28,663

1,809

37,083

7,757

65,746

9,566
Other debt securities

1,877

143

—

—

1,877

143
Total

$
30,540

$
1,952

$
54,920

$
11,516

$
85,460

$
13,468

Held-to-maturity securities:

U.S. Government agencies

$
4,861

$
762

$
129,485

$
13,099

$
134,346

$
13,861
Mortgage-backed

16,923

3,607

338,740

51,435

355,663

55,042
States and political subdivisions

—

—

783

24

783

24
Other debt securities

6,240

260

4,113

387

10,353

647
Total

$
28,024

$
4,629

$
473,121

$
64,945

$
501,145

$
69,574


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

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Less than

More than

12 Months

12 Months

Total


Fair

Unrealized

Fair

Unrealized

Fair

Unrealized
(Dollars in thousands)

Value

Losses

Value

Losses

Value

Losses
December 31, 2021

Available-for-sale securities:

U.S. Government agencies

$
1,561

$
1

$
17,368

$
633

$
18,929

$
634
Mortgage-backed

39,851

593

3,562

36

43,413

629
Total

$
41,412

$
594

$
20,930

$
669

$
62,342

$
1,263

Held-to-maturity securities:

U.S. Government agencies

$
64,268

$
1,005

$
11,719

$
226

$
75,987

$
1,231
Mortgage-backed

226,918

1,836

14,564

412

241,482

2,248
Other debt securities

491

9

—

—

491

9
Total

$
291,677

$
2,850

$
26,283

$
638

$
317,960

$
3,488

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, 2023 and December 31, 2022.

Less than

More than

12 Months

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

(Dollars in thousands)

Value

Losses

Value

Losses

Value

Losses

March 31, 2023

Available-for-sale securities:

U.S. Government agencies

1,060

16,833

3,277

17,893

3,283

Mortgage-backed

1,754

59,277

7,747

61,031

7,779

Other debt securities

—

1,843

173

1,843

173

Total

2,814

77,953

11,197

80,767

11,235

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 and are not related to credit concerns. Because the Company does not intend to sell these securities and it is not more likely than not that the Company will be required to sell these securities before recovery of their amortized cost basis, which may be at maturity for debt securities, the Company considers the unrealized losses to be temporary.


	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, 2022
Available-for-sale securities:
U.S. Government agencies	$	1,165	$	4	$	16,585	$	3,588	$	17,750	$	3,592
Mortgage-backed		29,125		2,409		34,167		6,290		63,292		8,699
Other debt securities		1,890		128		—		—		1,890		128
Total	$	32,180	$	2,541	$	50,752	$	9,878	$	82,932	$	12,419

Held-to-maturity securities:
U.S. Government agencies	$	67,332	$	2,786	$	67,163	$	10,815	$	134,495	$	13,601
Mortgage-backed		148,771		9,402		199,649		41,062		348,420		50,464
States and political subdivisions		780		28		—		—		780		28
Other debt securities		8,091		409		2,139		361		10,230		770
Total	$	224,974	$	12,625	$	268,951	$	52,238	$	493,925	$	64,863

There were one hundred ~~twelve~~fifteen available-for-sale debt securities ~~and~~ ~~one hundred ninety~~ ~~held-to-maturity securities in an unrealized loss position at September 30, 2022.~~

~~The following table provides information on~~with a fair value below the amortized cost basis, totaling $11.2 million of aggregate fair value as of March 31, 2023. The Company concluded that a credit loss does not exist in its available-for-sale securities portfolio as of March 31, 2023, and ~~estimated~~no impairment loss has been recognized based on the fact that (1) changes in fair ~~values~~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 ~~maturity date at September 30, 2022.~~either US government agencies or US government sponsored enterprises. Collectively, these entities provide a guarantee, which is either explicitly or implicitly supported by the full faith and credit of the US government, that investors in such mortgage-backed securities will receive timely principal and interest payments.

Available for sale

Held to maturity


Amortized



Amortized


(Dollars in thousands)

Cost

Fair Value

Cost

Fair Value
Due in one year or less

$
37

$
37

$
2,109

$
2,053
Due after one year through five years

5,220

5,009

91,463

86,186
Due after five years through ten years

46,385

41,112

92,329

83,352
Due after ten years

48,162

40,189

384,818

329,554
Total

$
99,804

$
86,347

$
570,719

$
501,145

~~The maturity dates~~All held-to-maturity and available for ~~debt~~sale securities ~~are determined using contractual maturity dates.~~were current with no securities past due or on nonaccrual as of March 31, 2023.

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


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

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 2 – Adoption of Accounting Standards and Note 1 of the Company’s Annual Report on Form 10-K. All loan information presented as of March 31, 2023 is in accordance with ASC 326. All loan information presented as of December 31, 2022, or a prior date is presented in accordance with previously applicable GAAP.

The Company makes residential mortgage, commercial and consumer loans to customers primarily in Anne Arundel County, ~~Baltimore City,~~ Baltimore County, Howard County, Kent County, Queen Anne’s County, Caroline County, Talbot County, Dorchester County and Worcester County in Maryland, Kent and Sussex County, Delaware and in Accomack County, Virginia. The following table provides information about the principal classes of the loan portfolio at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022.


(Dollars in thousands)	September 30, 2022		December 31, 2021		March 31, 2023		December 31, 2022
Construction	$	230,119	$	239,353	$	250,447	$	246,319
Residential real estate		758,063		654,769		866,225		810,497
Commercial real estate		1,023,253		896,229		1,096,937		1,065,409
Commercial		160,430		203,377		140,312		147,856
Consumer		230,018		125,447		314,760		286,026
Total loans		2,401,883		2,119,175		2,668,681		2,556,107
Allowance for credit losses		(16,277)		(13,944)		(28,464)		(16,643)
Total loans, net	$	2,385,606	$	2,105,231	$	2,640,217	$	2,539,464

Loans are stated at their principal amount outstanding net of any purchase premiums/discounts, deferred fees and costs. Included in loans were deferred costs, net of fees, of ~~$967 thousand~~$1.7 million and ~~$1.2~~$1.4 million at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022. At ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, included in total loans were ~~$24.7~~$342.8 million and $39.9 million in loans, respectively, net of discounts on acquired loans of $332 thousand and $516 thousand, respectively, as part of the Northwest Bancshares, Inc. branch acquisition in 2017. At September 30, 2022 and December 31, 2021, included in total loans were $407.8 million and $553.0$372.2 million in loans, acquired as part of the acquisition of ~~Severn.~~Severn Bancorp, Inc. (“Severn”), effective October 31, 2021. These balances were presented net of the related discount which totaled ~~$7.3~~$6.0 million and ~~$8.4~~$6.7 million at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively. Interest income on loans is accrued at the contractual rate based on the principal amount outstanding. Fees charged and costs capitalized for originating loans are being amortized substantially on the interest method over the term of the loan. A loan is placed on nonaccrual (i.e., interest income is no longer accrued) when it is specifically determined to be impaired or when principal or interest is delinquent for 90 days or more, unless the loan is well secured and in the process of collection. Any unpaid interest previously accrued on those loans is reversed from income.

~~Interest payments received on nonaccrual~~At March 31, 2023, the Bank was servicing $349.8 million in loans ~~are applied as a reduction of~~for the ~~loan principal balance unless collectability of the principal amount is reasonably assured,~~Federal National Mortgage Association and $74.9 million 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.loans for Freddie Mac.

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 when due. An impaired loan may show deficiencies in the borrower’s overall financial condition, payment history, support available from financial guarantors and/or the fair market value of collateral. The impairment of a loan is measured at the present value of expected future cash flows using the loan’s effective interest rate, or at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. Generally, the Company measures impairment on such loans by reference to the fair value of the collateral. Once the amount of impairment has been determined, the uncollectible portion is charged off. Loan payments received on nonaccrual impaired loans are generally applied to the outstanding principal balance. In certain circumstances, income may be recognized on a cash basis. Generally, interest income is not recognized on impaired loans unless the likelihood of further loss is remote. The allowance for credit losses may include specific reserves related to impaired loans. Specific reserves remain until charge offs are made. Impaired loans do not include groups of smaller balance homogenous loans such as residential mortgage and consumer installment loans that are evaluated collectively for impairment. Reserves for probable credit losses related to these loans are based on historical loss ratios and are included in the formula portion of the allowance for credit losses.

A loan is considered a 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

Table of Contents

~~repay becomes evident.~~ The terms being offered are evaluated to determine if they are more liberal than those that would be indicated by policy or industry standards for similar, untroubled credits. In those situations where the terms or the interest rates are considered to be more favorable than industry standards or the Bank’s current underwriting guidelines 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 placedfollowing table provides information on nonaccrual ~~status, six consecutive months of timely payments are required prior to returning the~~loans by 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.

During 2021 and 2020, the Company participated in the Small Business Administration’s Paycheck Protection Program (PPP). As of September 30, 2022, the Company held PPP loans with a total outstanding balance of $291 thousand, inclusive of loans issued pre-merger and those acquired from Severn, which are included in the commercial loan segment in the table above. As of December 31, 2021, the Company held PPP loans with a total outstanding balance of $27.6 million, of which $9.2 million was acquired from Severn, which are included in the commercial loan segment in the table above. The decrease is due to repayment and forgiveness receivedclass as of September 30, 2022. As compensation for originating the loans, the Company received lender processing fees from the SBA, which were deferred, along with the related loan origination costs. These net fees are being accreted to interest income over the remaining contractual lives of the loans. Upon forgiveness of a PPP loan and repayment by the SBA, which may be prior to the loan’s maturity, the remainder of any unrecognized net fees are recognized as interest income.

~~The following tables provide information about all loans acquired from Severn.~~March 31, 2023.

September 30, 2022

Acquired Loans -

Acquired Loans -

Purchased

Purchased

Acquired Loans -
(Dollars in thousands)

Credit Impaired

Performing

Total
Outstanding principal balance

$
31,334

$
383,767

$
415,101
Carrying amount

Construction

$
665

$
27,883

$
28,548
Residential real estate

15,061

132,311

147,372
Commercial real estate

12,339

180,493

192,832
Commercial

197

38,140

38,337
Consumer

19

733

752
Total loans

$
28,281

$
379,560

$
407,841


	December 31, 2021						Nonaccrual		Nonaccrual		Loans past due
	Acquired Loans -		Acquired Loans -				with no		with an		90 days or more
	Purchased		Purchased		Acquired Loans -		allowance for		allowance for		and still
(Dollars in thousands)	Credit Impaired		Performing		Total		credit loss		credit loss		accruing
Outstanding principal balance	$	36,943	$	524,474	$	561,417
Carrying amount
March 31, 2023
Nonaccrual loans:
Construction	$	2,379	$	91,823	$	94,202	$	177	$	—	$	24
Residential real estate		17,326		167,580		184,906		1,477		12		218
Commercial real estate		13,594		202,819		216,413		—		—		369
Commercial		321		56,200		56,521		167		—		—
Consumer		30		921		951		37		24		—
Total loans	$	33,650	$	519,343	$	552,993
Total							$	1,858	$	36	$	611

Interest income							$	—	$	—	$	1

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

Ratings 1 thru 6 – Pass - Ratings 1 thru 6 have asset risks ranging from excellent-low to adequate. The 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 to economic conditions, less than adequate earnings performance or other factors which require the lending officer to direct more than normal attention to the credit. Financing alternatives may be limited and/or command higher risk interest rates. Special mention loan relationships are reviewed at least quarterly.

Rating 8 – Substandard - Substandard assets are assets that are inadequately protected by the sound worth or paying capacity of the borrower or of the collateral pledged. Substandard loans are the first adversely classified loans on the Bank's watchlist. These assets have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of 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 loss allowance analysis and/or place the loan on nonaccrual. These assets listed may include assets with histories of repossessions or some that are non-performing bankruptcies. These relationships will be reviewed at least quarterly.

Rating 9 – Doubtful - Doubtful assets have many of the same characteristics of substandard with the 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 required to be on nonaccrual. These relationships will be reviewed at least quarterly.

Rating 10 – Loss – Loss assets are uncollectible or of little value.

~~Table of Contents~~

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

For the Nine Months Ended
(Dollars in thousands)

September 30, 2022
Accretable yield, beginning of period

$
5,367
Accretion

(1,195)
Reclassification of nonaccretable difference due to improvement in expected cash flows

399
Other changes, net

287
Accretable yield, end of period

$
4,858

~~At September 30, 2022, the Bank was servicing $346.9 million in loans for the Federal National Mortgage Association and $74.5 million in loans for the Federal Home Loan Mortgage Corporation.~~

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

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.

~~Table of Contents~~

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

Residential

Commercial






(Dollars in thousands)

Construction

real estate

real estate

Commercial

Consumer

Total
September 30, 2022

Loans individually evaluated for impairment

$
415

$
4,146

$
2,271

$
193

$
28

$
7,053
Loans collectively evaluated for impairment

229,039

738,856

1,008,643

160,040

229,971

2,366,549
Acquired loans - PCI

665

15,061

12,339

197

19

28,281
Total loans

$
230,119

$
758,063

$
1,023,253

$
160,430

$
230,018

$
2,401,883

Allowance for credit losses allocated to:

Loans individually evaluated for impairment

$
—

$
150

$
—

$
—

$
—

$
150
Loans collectively evaluated for impairment

3,032

2,858

5,009

1,907

3,321

16,127
Acquired loans - PCI

—

—

—

—

—

—
Total allowance

$
3,032

$
3,008

$
5,009

$
1,907

$
3,321

$
16,277

Residential

Commercial






(Dollars in thousands)

Construction

real estate

real estate

Commercial

Consumer

Total
December 31, 2021

Loans individually evaluated for impairment

$
321

$
3,717

$
3,833

$
226

$
—

$
8,097
Loans collectively evaluated for impairment

236,653

633,726

878,802

202,830

125,417

2,077,428
Acquired loans - PCI

2,379

17,326

13,594

321

30

33,650
Total loans

$
239,353

$
654,769

$
896,229

$
203,377

$
125,447

$
2,119,175

Allowance for credit losses allocated to:

Loans individually evaluated for impairment

$
—

$
172

$
1

$
—

$
—

$
173
Loans collectively evaluated for impairment

2,454

2,686

4,597

2,070

1,964

13,771
Acquired loans - PCI

—

—

—

—

—

—
Total allowance

$
2,454

$
2,858

$
4,598

$
2,070

$
1,964

$
13,944

~~The allowance for loan losses was 0.68% of total loans and 0.84% when excluding PPP loans and acquired loans, at September 30, 2022 compared to 0.66% and 0.93% at December 31, 2021.~~

~~Table of Contents~~

The following tables provide information on impaired loans and any related allowance by loan class as of September 30, 2022 and December 31, 2021. The difference between the unpaid principal balance and the recorded investment is the amount of partial charge-offs that have been taken and interest paid on nonaccrual loans that has been applied to principal.

Recorded

Recorded




Unpaid

investment

investment

Quarter-to-date

Year-to-date

Interest

principal

with no

with an

Related

average recorded

average recorded

income
(Dollars in thousands)

balance

allowance

allowance

allowance

investment

investment

recognized
September 30, 2022

Impaired nonaccrual loans:

Construction

$
297

$
297

$
—

$
—

$
297

$
314

$
—
Residential real estate

1,374

1,268

15

—

1,639

1,534

—
Commercial real estate

159

150

—

—

466

704

—
Commercial

374

193

—

—

197

242

—
Consumer

29

28

—

—

40

48

—
Total

$
2,233

$
1,936

$
15

$
—

$
2,639

$
2,842

$
—

Impaired accruing TDRs:

Construction

$
14

$
14

$
—

$
—

$
14

$
18

$
1
Residential real estate

2,874

557

2,184

150

2,750

3,064

83
Commercial real estate

1,703

1,703

—

—

1,830

2,231

48
Commercial

—

—

—

—

—

—

—
Consumer

—

—

—

—

—

6

—
Total

$
4,591

$
2,274

$
2,184

$
150

$
4,594

$
5,319

$
132

Other impaired accruing loans:

Construction

$
104

$
104

$
—

$
—

$
304

$
190

$
6
Residential real estate

122

122

—

—

745

259

3
Commercial real estate

418

418

—

—

537

493

7
Commercial

—

—

—

—

13

7

1
Consumer

—

—

—

—

—

13

—
Total

$
644

$
644

$
—

$
—

$
1,599

$
962

$
17

Total impaired loans:

Construction

$
415

$
415

$
—

$
—

$
615

$
522

$
7
Residential real estate

4,370

1,947

2,199

150

5,134

4,857

86
Commercial real estate

2,280

2,271

—

—

2,833

3,428

55
Commercial

374

193

—

—

210

249

1
Consumer

29

28

—

—

40

67

—
Total

$
7,468

$
4,854

$
2,199

$
150

$
8,832

$
9,123

$
149

~~Table of Contents~~

Recorded

Recorded



September 30, 2021

Unpaid

investment

investment

Quarter-to-date

Year-to-date

Interest

principal

with no

with an

Related

average recorded

average recorded

income
(Dollars in thousands)

balance

allowance

allowance

allowance

investment

investment

recognized
December 31, 2021

Impaired nonaccrual loans:

Construction

$
297

$
297

$
—

$
—

$
297

$
297

$
—
Residential real estate

882

803

—

—

959

1,191

—
Commercial real estate

994

606

—

—

2,150

2,459

—
Commercial

380

216

—

—

230

241

—
Consumer

—

—

—

—

—

12

—
Total

$
2,553

$
1,922

$
—

$
—

$
3,636

$
4,200

$
—

Impaired accruing TDRs:

Construction

$
24

$
24

$
—

$
—

$
28

$
31

$
2
Residential real estate

2,965

475

2,361

172

2,871

3,252

118
Commercial real estate

2,807

2,352

455

1

2,913

2,994

67
Commercial

—

—

—

—

—

—

—
Consumer

—

—

—

—

—

—

—
Total

$
5,796

$
2,851

$
2,816

$
173

$
5,812

$
6,277

$
187

Other impaired accruing loans:

Construction

$
—

$
—

$
—

$
—

$
—

$
—

$
—
Residential real estate

78

78

—

—

328

513

7
Commercial real estate

420

420

—

—

421

470

10
Commercial

10

10

—

—

—

17

—
Consumer

—

—

—

—

—

—

—
Total

$
508

$
508

$
—

$
—

$
749

$
1,000

$
17

Total impaired loans:

Construction

$
321

$
321

$
—

$
—

$
325

$
328

$
2
Residential real estate

3,925

1,356

2,361

172

4,158

4,956

125
Commercial real estate

4,221

3,378

455

1

5,484

5,923

77
Commercial

390

226

—

—

230

258

—
Consumer

—

—

—

—

—

12

—
Total

$
8,857

$
5,281

$
2,816

$
173

$
10,197

$
11,477

$
204

Table of Contents

The following ~~tables provide a roll-forward for TDRs~~table provides information on loan risk ratings as of ~~September 30, 2022 and September 30, 2021.~~March 31, 2023.

1/1/2022











9/30/2022


TDR

New

Disbursements

Charge-

Reclassifications/

TDR

Related
(Dollars in thousands)

Balance

TDRs

(Payments)

offs

Transfer In/(Out)

Payoffs

Balance

Allowance
For the Nine Months Ended

September 30, 2022

Accruing TDRs

Construction

$
24

$
—

$
(10)

$
—

$
—

$
—

$
14

$
—
Residential real estate

2,836

—

(75)

—

(20)

—

2,741

150
Commercial real estate

2,807

—

(157)

—

—

(947)

1,703

—
Commercial

—

—

—

—

—

—

—

—
Consumer

—

—

—

—

—

—

—

—
Total

$
5,667

$
—

$
(242)

$
—

$
(20)

$
(947)

$
4,458

$
150

Nonaccrual TDRs

Construction

$
—

$
—

$
—

$
—

$
—

$
—

$
—

$
—
Residential real estate

—

—

(4)

—

20

—

16

—
Commercial real estate

—

—

—

—

—

—

—

—
Commercial

216

—

(32)

—

—

—

184

—
Consumer

—

—

—

—

—

—

—

—
Total

$
216

$
—

$
(36)

$
—

$
20

$
—

$
200

$
—

Total

$
5,883

$
—

$
(278)

$
—

$
—

$
(947)

$
4,658

$
150

1/1/2021











9/30/2021


TDR

New

Disbursements

Charge-

Reclassifications/

TDR

Related
(Dollars in thousands)

Balance

TDRs

(Payments)

offs

Transfer In/(Out)

Payoffs

Balance

Allowance
For the Nine Months Ended

September 30, 2021

Accruing TDRs

Construction

$
34

$
—

$
(7)

$
—

$
—

$
—

$
27

$
—
Residential real estate

3,845

—

(82)

—

—

(900)

2,863

84
Commercial real estate

3,118

—

(258)

—

—

—

2,860

—
Commercial

—

—

—

—

—

—

—

—
Consumer

—

—

—

—

—

—

—

—
Total

$
6,997

$
—

$
(347)

$
—

$
—

$
(900)

$
5,750

$
84

Nonaccrual TDRs

Construction

$
—

$
—

$
—

$
—

$
—

$
—

$
—

$
—
Residential real estate

—

—

—

—

—

—

—

—
Commercial real estate

—

—

—

—

—

—

—

—
Commercial

258

—

(31)

—

—

—

227

—
Consumer

—

—

—

—

—

—

—

—
Total

$
258

$
—

$
(31)

$
—

$
—

$
—

$
227

$
—

Total

$
7,255

$
—

$
(378)

$
—

$
—

$
(900)

$
5,977

$
84


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

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

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

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

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

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

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

2319

Table of Contents

~~There were no loans modified and considered to be TDRs during the three and nine months ended September 30, 2022 and September 30, 2021.~~

There were no TDRs which subsequently defaulted within 12 months of modification for the three and nine months ended September 30, 2022 and 2021. Generally, a loan is considered in default when principal or interest is past due 90 days or more, the loan is placed on nonaccrual, the loan is charged off, or there is a transfer to other real estate owned (OREO) or repossessed assets.

Management uses risk ratings as part of its monitoring of the credit quality in the Company’s loan portfolio. Loans that are identified as special mention, substandard or doubtful are adversely rated. These loans and the pass/watch loans are assigned higher qualitative factors than favorably rated loans in the calculation of the formula portion of the allowance for credit losses. At September 30, 2022, there were no ~~nonaccrual~~ ~~loans classified as special mention or doubtful and $2.0 million of nonaccrual loans were classified as substandard. Similarly, at December 31, 2021, there were no~~ ~~nonaccrual~~ ~~loans classified as special mention or doubtful and $2.0 million of nonaccrual loans were classified as substandard.~~

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

Special








(Dollars in thousands)

Pass/Performing

Pass/Watch

Mention

Substandard

Doubtful

PCI

Total
September 30, 2022

Construction

$
217,823

$
9,553

$
1,781

$
297

$
—

$
665

$
230,119
Residential real estate

708,215

32,488

969

1,330

—

15,061

758,063
Commercial real estate

882,561

125,246

2,538

569

—

12,339

1,023,253
Commercial

141,864

17,677

499

193

—

197

160,430
Consumer

229,776

193

2

28

—

19

230,018
Total

$
2,180,239

$
185,157

$
5,789

$
2,417

$
—

$
28,281

$
2,401,883

Special








(Dollars in thousands)

Pass/Performing

Pass/Watch

Mention

Substandard

Doubtful

PCI

Total
December 31, 2021

Construction

$
210,287

$
24,513

$
1,877

$
297

$
—

$
2,379

$
239,353
Residential real estate

596,694

38,309

1,539

901

—

17,326

654,769
Commercial real estate

724,561

151,209

4,535

2,330

—

13,594

896,229
Commercial

186,176

16,654

—

226

—

321

203,377
Consumer

125,200

215

—

2

—

30

125,447
Total

$
1,842,918

$
230,900

$
7,951

$
3,756

$
—

$
33,650

$
2,119,175

The following tables provide information on the aging of the loan portfolio as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022.

Accruing

30‑59 days

60‑89 days

90 days or more

Total

(Dollars in thousands)

Current (1)

past due

Nonaccrual

Total

March 31, 2023

Construction

249,446

731

824

177

250,447

Residential real estate

858,389

5,177

952

218

6,347

1,489

866,225

Commercial real estate

1,096,189

337

369

748

—

1,096,937

Commercial

140,096

—

167

140,312

Consumer

314,039

633

—

660

314,760

Total

2,658,159

6,923

1,094

611

8,628

1,894

2,668,681

Percent of total loans

99.6

0.3

—

0.3

0.1

100.0

(1)

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


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

(1)

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

The following tables provide a summary of the activity in the allowance for credit losses allocated by loan class for the three months ended March 31, 2023 and March 31, 2022. Allocation of a portion of the allowance to one loan class does not preclude its availability to absorb losses in other loan classes.

Accruing




30‑59 days

60‑89 days

Greater than

Total







(Dollars in thousands)

Current

past due

past due

90 days

past due

Nonaccrual

PCI

Total

September 30, 2022

Construction

$
229,053

$
—

$
—

$
104

$
104

$
297

$
665

$
230,119

Residential real estate

738,911

2,032

657

121

2,810

1,281

15,061

758,063

Commercial real estate

1,009,749

596

—

419

1,015

150

12,339

1,023,253

Commercial

159,674

80

286

—

366

193

197

160,430

Consumer

229,218

742

11

—

753

28

19

230,018

Total

$
2,366,605

$
3,450

$
954

$
644

$
5,048

$
1,949

$
28,281

$
2,401,883

Percent of total loans

98.6
%

0.1
%

—
%

—
%

0.1
%

0.1
%

1.2
%

100.0
%

Residential

Commercial

(Dollars in thousands)

Construction

real estate

Commercial

Consumer

Total

For three months ended

March 31, 2023

Allowance for credit losses:

Beginning Balance

2,973

2,622

4,899

1,652

4,497

16,643

Impact of ASC326 Adoption

1,222

4,974

3,742

401

452

10,791

Charge-offs (1)

—

(107)

—

(107)

Recoveries

—

Net (charge-offs) recoveries

—

(54)

—

(20)

Provision

(1,509)

1,120

1,217

(139)

361

1,050

Ending Balance

2,689

8,747

9,858

1,860

5,310

28,464

(1)

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

Table of Contents


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

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

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

There were no modifications to loans for borrowers experiencing financial difficulty (“BEFD”) during the three months ending March 31, 2023.

Foreclosure Proceedings

There were $39 thousand of consumer mortgage loans collateralized by residential real estate property that were in the process of foreclosure as of March 31, 2023 and $263 thousand as of December 31, 2022, respectively. There were no residential real estate properties included in the balance of other real estate owned at March 31, 2023 and 1 residential real estate property totaling $18 thousand at December 31, 2022.

Prior to the adoption of ASC 326

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


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

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


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

2421

Table of Contents

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


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

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

(1)

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

Table of Contents

Accruing




30‑59 days

60‑89 days

Greater than

Total





(Dollars in thousands)

Current

past due

past due

90 days

past due

Nonaccrual

PCI

Total

December 31, 2021

Construction

$
235,757

$
920

$
—

$
—

$
920

$
297

$
2,379

$
239,353

Residential real estate

635,166

1,371

25

78

1,474

803

17,326

654,769

Commercial real estate

881,350

259

—

420

679

606

13,594

896,229

Commercial

202,503

183

62

10

255

298

321

203,377

Consumer

125,130

287

—

—

287

—

30

125,447

Total

$
2,079,906

$
3,020

$
87

$
508

$
3,615

$
2,004

$
33,650

$
2,119,175

Percent of total loans

98.2
%

0.1
%

—
%

—
%

0.1
%

0.1
%

1.6
%

100.0
%

The following tables provide ~~a summary of the activity in the~~information on impaired loans and any related allowance ~~for credit losses allocated~~ by loan class ~~for~~as of December 31, 2022. The difference between the ~~three~~unpaid principal balance and ~~nine months ended September 30, 2022~~the recorded investment is the amount of partial charge-offs that have been taken and ~~September 30, 2021. Allocation of a portion of the allowance~~interest paid on nonaccrual loans that has been applied to ~~one loan class does not preclude its availability to absorb losses in other loan classes.~~principal.

Residential

Commercial






(Dollars in thousands)

Construction

real estate

real estate

Commercial

Consumer

Total
For three months ended

September 30, 2022

Allowance for credit losses:

Beginning Balance

$
3,345

$
2,778

$
4,441

$
1,681

$
3,238

$
15,483

Charge-offs

—

—

—

(202)

—

(202)
Recoveries

2

12

243

60

4

321
Net (charge-offs) recoveries

2

12

243

(142)

4

119

Provision

(315)

218

325

368

79

675
Ending Balance

$
3,032

$
3,008

$
5,009

$
1,907

$
3,321

$
16,277

Residential

Commercial






(Dollars in thousands)

Construction

real estate

real estate

Commercial

Consumer

Total
For three months ended

September 30, 2021

Allowance for credit losses:












Beginning Balance

$
2,574

$
3,812

$
5,600

$
1,879

$
1,223

$
15,088

Charge-offs

—

—

—

(55)

(1)

(56)
Recoveries

161

9

—

26

7

203
Net (charge-offs) recoveries

161

9

—

(29)

6

147

Provision

(114)

77

(73)

2

398

290
Ending Balance

$
2,621

$
3,898

$
5,527

$
1,852

$
1,627

$
15,525


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

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

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

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

Residential

Commercial






(Dollars in thousands)

Construction

real estate

real estate

Commercial

Consumer

Total
For nine months ended

September 30, 2022

Allowance for credit losses:

Beginning Balance

$
2,454

$
2,858

$
4,598

$
2,070

$
1,964

$
13,944

Charge-offs

—

(4)

(6)

(416)

(31)

(457)
Recoveries

9

131

948

200

27

1,315
Net (charge-offs) recoveries

9

127

942

(216)

(4)

858

Provision

569

23

(531)

53

1,361

1,475
Ending Balance

$
3,032

$
3,008

$
5,009

$
1,907

$
3,321

$
16,277

2523

Table of Contents

Residential

Commercial






(Dollars in thousands)

Construction

real estate

real estate

Commercial

Consumer

Total
For nine months ended

September 30, 2021

Allowance for credit losses:












Beginning Balance

$
2,022

$
3,699

$
5,426

$
2,089

$
652

$
13,888

Charge-offs

—

—

—

(162)

(5)

(167)
Recoveries

171

72

64

122

10

439
Net (charge-offs) recoveries

171

72

64

(40)

5

272

Provision

428

127

37

(197)

970

1,365
Ending Balance

$
2,621

$
3,898

$
5,527

$
1,852

$
1,627

$
15,525

~~Foreclosure Proceedings~~

There were ~~$81 thousand of consumer mortgage~~no loans ~~collateralized by residential real estate property that were in~~modified and considered to be TDRs during the ~~process of foreclosure as of September 30, 2022 and $311 thousand as of December~~three months ended March 31, 2021, respectively. There was 1 residential real estate property included in the balance of other real estate owned totaling $18 thousand at September 30, 2022 and 1 residential real estate property totaling $203 thousand at December 31, 2021.

2022. All accruing TDRs were in compliance with their modified terms. Both performing and non-performing TDRs had no further commitments associated with them as of ~~September 30, 2022 and~~ December 31, ~~2021.~~2022.

There were no TDRs which subsequently defaulted within 12 months of modification for the three months ended March 31, 2022. Generally, a loan is considered in default when principal or interest is past due 90 days or more, the loan is placed on nonaccrual, the loan is charged off, or there is a transfer to other real estate owned (OREO) or repossessed assets.

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


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

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

Note 6 – Leases

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

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

~~During 2021,~~The following tables present information about the Company acquired long-term branch leases and equipment due to the acquisition of Severn. These leases were reassessed by management as of the acquisition date of October 31, 2021, which included updating the incremental borrowing rates and remaining lease terms.Company’s leases:


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

2624

Table of Contents

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

(Dollars in thousands)

September 30, 2022

December 31, 2021

Lease liabilities

$
10,023

$
11,567

Right-of-use assets

$
9,764

$
11,370

Weighted average remaining lease term

12.64
years

13.61
years
Weighted average discount rate

2.49
%

2.48
%


	For the Three Months Ended				For the Nine Months Ended				For the Three Months Ended
Lease cost (in thousands)	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021		March 31, 2023		March 31, 2022
Operating lease cost	$	340	$	207	$	1,007	$	601	$	340	$	351
Short-term lease cost		—		—		—		—		—		—
Total lease cost	$	340	$	207	$	1,007	$	601	$	340	$	351

Cash paid for amounts included in the measurement of lease liabilities	$	318	$	174	$	939	$	505	$	322	$	327

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


	As of		As of
Lease payments due (in thousands)	September 30, 2022		March 31, 2023
Three months ending December 31, 2022	$	318
2023		1,178
Nine months ending December 31, 2023			$	909
2024		1,087		1,141
2025		881		917
2026		916		916
2027		849		849
Thereafter		6,584		6,584
Total undiscounted cash flows	$	11,813	$	11,316
Discount		1,790		1,674
Lease liabilities	$	10,023	$	9,642

Total gross rental income was ~~$202~~$393 thousand for the three months ended ~~September 30, 2022~~March 31, 2023 and ~~$728~~$272 thousand for the ~~nine~~three months ended ~~September 30,~~March 31, 2022.

The following table presents our minimum future annual rental income on such leases as of ~~September 30, 2022.~~March 31, 2023.


			As of
(In thousands)	September 30, 2022		March 31, 2023
Three months ending December 31, 2022	$	195
2023		792
Nine months ending December 31, 2023			$	655
2024		685		701
2025		703		719
2026		720		737
2027		402		418
Thereafter		1,536		1,554
Total	$	5,033	$	4,784

~~Table of Contents~~

Note 7 – Goodwill and Other Intangibles

The following table provides information on the significant components of goodwill and other acquired intangible assets at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022.

September 30, 2022

March 31, 2023

Weighted

Gross

Measurement

Accumulated

Net

Average

Gross

Measurement

Accumulated

Net

Average

Carrying

Period

Impairment

Accumulated

Carrying

Remaining Life

Carrying

Period

Impairment

Accumulated

Carrying

Remaining Life

(Dollars in thousands)

Amount

Adjustments

Charges

Amortization

Amount

(in years)

Amount

Adjustments

Charges

Amortization

Amount

(in years)

Goodwill

65,631

(140)

(1,543)

(667)

63,281

—

63,933

—

(667)

63,266

—

Other intangible assets

Amortizable

Core deposit intangible

10,504

—

(4,497)

6,007

2.7

10,504

—

(5,398)

5,106

2.5

Total other intangible assets

10,504

—

(4,497)

6,007

10,504

—

(5,398)

5,106

Table of Contents

December 31, 2021

Weighted

Gross

Accumulated

Net

Average

Carrying

Impairment

Accumulated

Carrying

Remaining Life
(Dollars in thousands)

Amount

Additions

Charges


Amortization


Amount

(in years)

Goodwill

$
19,728

$
45,903

$
(1,543)

$
(667)

$
63,421

—

Other intangible assets

Amortizable

Core deposit intangible

$
3,954

$
6,550

$
—

$
(2,969)

$
7,535

2.9
Total other intangible assets

$
3,954

$
6,550

$
—

$
(2,969)

$
7,535


December 31, 2022
											Weighted
	Gross		Measurement		Accumulated					Net	Average
	Carrying		Period		Impairment			Accumulated		Carrying	Remaining Life
(Dollars in thousands)	Amount		Adjustments		Charges			Amortization		Amount	(in years)

Goodwill	$	65,631	$	(155)	$	(1,543)	$	(667)	$	63,266	—

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

The aggregate amortization expense was ~~$1.5 million for the nine months ended September 30, 2022 and $353~~$441 thousand for the ~~nine~~three months ended ~~September 30, 2021.~~March 31, 2023 and $517 thousand for the three months ended March 31, 2022.

At ~~September 30, 2022,~~March 31, 2023, estimated future remaining amortization for amortizing intangibles within the years ending December 31, is as follows:


(Dollars in thousands)	Amortization Expense		Amortization Expense
2022	$	460
2023		1,682	$	1,241
2024		1,376		1,376
2025		1,070		1,070
2026		765		765
2027		459		459
Thereafter		195		195
Total amortizing intangible assets	$	6,007	$	5,106

~~Table of Contents~~

Note 8 – Other Assets

The Company had the following other assets at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022.

September 30,

December 31,

(Dollars in thousands)

2022

2021

Accrued interest receivable

$
7,440

$
6,719

Deferred income taxes

7,347

2,926

Prepaid expenses

3,132

2,865

Income taxes receivable

—

616

Other assets

7,859

6,806

Total

$
25,778

$
19,932


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

Note 9 - ~~Subordinated Debt~~Borrowings

~~On August 25, 2020, the Company entered into Subordinated Note Purchase Agreements with certain Purchasers pursuant to which the Company issued and sold~~At March 31, 2023, subordinated debt consisted of $25.0 million ~~in aggregate principal amount with an initial interest rate~~ of ~~5.375% Fixed-to-Floating Rate Subordinated Notes due September 1, 2030.~~

The Company has used the net proceeds of this offering for general corporate purposes, organic growth and to support the Bank’s regulatory capital ratios. The Notes were structured to qualify as Tier 2 capital for regulatory capital purposes and bear an initial interest rate of 5.375% until September 1, 2025, with interest during this period payable semi-annually in arrears. From and including September 1, 2025, to but excluding the maturity date or early redemption date, the interest rate will reset quarterly to an annual floating rate equal to three-month SOFR, plus 526.5 basis points, with interest during this period payable quarterly in arrears. The Notes are redeemablelong-term debt issued by the Company ~~at its option,~~ in ~~whole or~~August 2020 and $20.6 million of long-term debt acquired in ~~part, on or after September 1, 2025. Initial debt issuance costs were $611 thousand.~~the acquisition of Severn in 2021. The ~~debt~~recorded balance of ~~$24.6 million is presented~~subordinated debt issued in 2020, net of unamortized issuance costs ~~of $357 thousand~~was $24.7 million at ~~September 30,~~March 31, 2023 and December 31, 2022.

~~In conjunction with the acquisition of Severn, the Company assumed $20.6 million in junior subordinated debt securities (“2035 Debentures”).~~ The ~~2035 Debentures were issued and sold to Severn Capital Trust I (the “Trust”), of which 100%~~recorded balance of the common equity is owned by the Company. The Trust was formed for the purpose of issuing corporation-obligated mandatorily redeemable Capital Securities (“Capital Securities”) to third-party investors and using the proceedsdebt acquired from the sale of such Capital Securities to purchase the 2035 Debentures. The 2035 Debentures held by the Trust are the sole assets of the Trust. Distributions on the Capital Securities issued by the Trust are payable quarterly at a rate per annum equal to the interest rate being earned by the Trust on the 2035 Debentures. The Capital Securities are subject to mandatory redemption, in whole or in part, upon repayment of the 2035 Debentures. We have entered into an agreement which, taken collectively, fully and unconditionally guarantees the Capital Securities subject to the terms of the guarantee. The recorded balanceSevern was $18.4 million at ~~September 30, 2022~~March 31, 2023 and ~~$18.2 million~~ December 31, ~~2021,~~2022, which ~~included~~is presented net of the unamortized fair value ~~adjustments~~adjustment of ~~$2.2 million and~~ $2.4 million at both period ends. These obligations mature in 2030 and 2035, respectively. Further information on these obligations is provided in the Company’s 2022 Annual Report on Form 10-K.

Under the terms of the 2035 Debentures, the Company is permitted to defer the payment of interest on the 2035 Debentures for up to 20 consecutive quarterly periods, provided that no event of default has occurred

At March 31, 2023 and ~~is continuing. As of September 30,~~December 31, 2022, the Company ~~was current on all~~had short-term borrowings from the FHLB of $131.5 million and $40.0 million, respectively. The outstanding obligations at March 31, 2023 carried interest ~~due on the 2035 Debentures.~~

rates ranging from 4.57% to 5.07%.

2926

Table of Contents

Note 10 – Other Liabilities

The Company had the following other liabilities at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022.

(Dollars in thousands)

September 30, 2022

December 31, 2021

Accrued interest payable

$
475

$
692

Accrued salaries and wages

708

3,422

Accounts payable

269

2,745

Deferred compensation liability

5,362

4,660

Income taxes payable

1,312

—

Other liabilities

3,114

3,081

Total

$
11,240

$
14,600


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

Note 11 - Stock-Based Compensation

At the 2016 annual meeting, stockholders approved the Shore Bancshares, Inc. 2016 Stock and Incentive Plan (“2016 Equity Plan”), replacing the Shore Bancshares, Inc. 2006 Stock and Incentive Plan (“2006 Equity Plan”), which expired on that date. The Company may issue shares of common stock or grant other equity-based awards pursuant to the 2016 Equity Plan. Stock-based awards granted to date generally are time-based, vest in equal installments on each anniversary of the grant date and range over a one- to five-year period of time, and, in the case of stock options, expire 10 years from the grant date. As part of the 2016 Equity Plan, a performance equity incentive award program, known as the “Long-term incentive plan” allows participating officers of the Company to earn incentive awards of performance share/restricted stock units if certain pre-determined targets are achieved at the end of a three-year performance cycle. Stock-based compensation expense based on the grant date fair value is recognized ratably over the requisite service period for all awards and reflects forfeitures as they occur. The 2016 Equity Plan originally reserved 750,000 shares of common stock for grant, and ~~499,870~~472,320 shares remained available for grant at ~~September 30, 2022.~~March 31, 2023.

The following tables provide information on stock-based compensation expense for the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 and ~~2021.~~2022.


	For Three Months Ended				For the Nine Months Ended				For the Three Months Ended
	September 30,				September 30,				March 31,
(Dollars in thousands)	2022		2021		2022		2021		2023		2022
Stock-based compensation expense	$	175	$	91	$	477	$	287	$	155	$	130
Excess tax benefits (deficiencies) related to stock-based compensation		(2)		2		43		3
Excess tax benefits related to stock-based compensation										22		43


	September 30,						March 31,
(Dollars in thousands)	2022			2021			2023			2022
Unrecognized stock-based compensation expense	$	298		$	120		$	464		$	633
Weighted average period unrecognized expense is expected to be recognized		0.4	years		0.3	years		1.1	years		0.9	years

The following table summarizes restricted stock award activity for the Company under the 2016 Equity Plan for the ~~nine~~three months ended ~~September 30, 2022.~~March 31, 2023.


	Nine Months Ended September 30, 2022			2023
		Weighted Average			Weighted Average
	Number of	Grant Date		Number of	Grant Date
	Shares	Fair Value		Shares	Fair Value
Nonvested at beginning of period	29,425	$	15.57	36,860	$	20.15
Granted	34,184		20.48	27,550		17.49
Vested	(25,293)		13.43	(29,532)		20.23
Forfeited	—		—	—		—
Nonvested at end of period	38,316	$	20.09	34,878	$	17.95

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The fair value of restricted stock awards that vested during the first ~~nine~~three months of 2023 and 2022 ~~and 2021~~ was ~~$505~~$515 thousand and ~~$268~~$492 thousand, respectively.

There were no stock options granted during the nine months ended September 30, 2022 and September 30, 2021. All of the Company’s previously issued stock options that were outstanding on January 1, 2021 were either exercised or expired prior to December 31, 2021.

Note 12 – Derivatives

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

The following table provides information pertaining to the carrying amounts of our derivative financial instruments at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022.

September 30, 2022

December 31, 2021

March 31, 2023

December 31, 2022

Notional

Estimated

Notional

Estimated

Notional

Estimated

Notional

Estimated

(Dollars in thousands)

Amount

Fair Value

Amount

Fair Value

Amount

Fair Value

Amount

Fair Value

Asset - IRLCs

1,336

17,557

380

7,234

101

4,166

Asset - TBA securities

33,000

1,000

26,500

10,000

142

8,750

Liability - IRLCs

2,089

—

1,150

Liability - TBA securities

—

20,500

12,000

1,000

Note 13 – Accumulated Other Comprehensive Income (Loss)

The Company records unrealized holding gains (losses), net of tax, on investment securities available for sale as accumulated other comprehensive income (loss), a separate component of stockholders’ equity. The following table provides information on the changes in the component of accumulated other comprehensive income (loss) for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 and ~~2021.~~2022.




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

Balance, December 31, 2021	$	56	$	56
Other comprehensive (loss)		(9,837)		(2,228)
Balance, September 30, 2022	$	(9,781)

Balance, December 31, 2020	$	1,529
Other comprehensive (loss)		(1,300)
Reclassification of (gain) recognized		(1)
Balance, September 30, 2021	$	228
Balance, March 31, 2022			$	(2,172)

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Note 14 – 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

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

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

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

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

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

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

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

Investment Securities Available for Sale

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

Equity Securities

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.

LHFS

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

MSRs

~~Table of Contents~~

~~MSRs~~

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

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

IRLCs

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

(Dollars in thousands)

Fair Value

Valuation Technique

Unobservable Input

Range

Fair Value

Valuation Technique

Unobservable Input

Range

September 30, 2022

March 31, 2023

MSRs (1)

5,321

Market Approach

Weighted average prepayment speed (PSA) (2)

121

5,310

Market Approach

Weighted average prepayment speed (PSA) (2)

121

IRLCs - net liability

(23)

Market Approach

Range of pull through rate

78% - 100%

IRLCs - asset

101

Market Approach

Range of pull through rate

82% - 100%

Average pull through rate

92%

Average pull through rate

92%

(Dollars in thousands)

Fair Value

Valuation Technique

Unobservable Input

Range

Fair Value

Valuation Technique

Unobservable Input

Range

December 31, 2021

December 31, 2022

MSRs (1)

4,087

Market Approach

Weighted average prepayment speed (PSA) (2)

156

5,275

Market Approach

Weighted average prepayment speed (PSA) (2)

121

IRLCs - asset

380

Market Approach

Range of pull through rate

77% - 100%

IRLCs - net asset

Market Approach

Range of pull through rate

78% - 100%

Average pull through rate

93%

Average pull through rate

92%

(1)

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

(2)

PSA = Public Securities Association Standard Prepayment Model

The following table presents activity in MSRs for the three ~~and nine~~ months ended ~~September 30, 2022.~~March 31, 2023.


	For the Three Months Ended		For the Nine Months Ended		For the Three Months Ended
(Dollars in thousands)	September 30, 2022		September 30, 2022		March 31, 2023
Beginning balance	$	5,228	$	4,087	$	5,275
Servicing rights resulting from sales of loans		113		777		117
Valuation adjustment		(20)		457		(82)
Ending balance	$	5,321	$	5,321	$	5,310

~~Table of Contents~~

The following table presents activity in the IRLCs for the three ~~and nine~~ months ended ~~September 30, 2022.~~March 31, 2023.


	For the Three Months Ended		For the Nine Months Ended		For the Three Months Ended
(Dollars in thousands)	September 30, 2022		September 30, 2022		March 31, 2023
Beginning balance	$	146	$	380	$	28
Valuation adjustment		(169)		(403)		73
Ending balance	$	(23)	$	(23)	$	101

Forward Contracts

To avoid interest rate risk, we hedge the open locked/closed position with TBA forward trades. On a regular basis, we allocate disbursed loans to mandatory commitments with government-sponsored enterprises (“GSE”) and private investors delivering the loans within 120 days of origination to maximize interest earnings. For a small percentage of our business, we enter into best efforts forward sales commitments with investors at the time we make an IRLC to a borrower. Once a loan has been closed and funded, the best efforts commitments convert to mandatory forward sales commitments. The mandatory commitments are derivatives, and we measure and report them at fair value. Fair value is based on the gain or

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

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

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


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

Equity securities		1,258		—		1,258		—

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

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

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

Significant

Other

Significant

Quoted

Observable

Unobservable

Prices

Inputs

Inputs
(Dollars in thousands)

Fair Value

(Level 1)

(Level 2)

(Level 3)
September 30, 2022








Assets:

Securities available for sale:








U.S. Government agencies

$
18,314

$
—

$
18,314

$
—
Mortgage-backed

66,156

—

66,156

—
Other Debt Securities

1,877

—

1,877

—

86,347

—

86,347

—

Equity securities

1,222

—

1,222

—

TBA securities

1,000

—

1,000

—
LHFS

8,342

—

8,342

—
MSRs

5,321

—

—

5,321
IRLCs

10

—

—

10

Total assets at fair value

$
102,242

$
—

$
96,911

$
5,331

Liabilities:

IRLCs

$
33

$
—

$
—

$
33

Total liabilities at fair value

$
33

$
—

$
—

$
33

~~Table of Contents~~


					Significant								Significant
					Other		Significant						Other		Significant
			Quoted		Observable		Unobservable				Quoted		Observable		Unobservable
			Prices		Inputs		Inputs				Prices		Inputs		Inputs
(Dollars in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)		Fair Value		(Level 1)		(Level 2)		(Level 3)
December 31, 2021
December 31, 2022
Assets:
Securities available for sale:
U.S. Government agencies	$	22,305	$	—	$	22,305	$	—	$	18,178	$	—	$	18,178	$	—
Mortgage-backed		92,637		—		92,637		—		63,519		—		63,519		—
Other Debt Securities		2,040		—		2,040		—
Other debt securities										1,890		—		1,890		—
		116,982		—		116,982		—		83,587		—		83,587		—

Equity securities		1,372		—		1,372		—		1,233		—		1,233		—


TBA securities		55		—		55		—		41		—		41		—
LHFS		37,749		—		37,749		—		4,248		—		4,248		—
LHFI, at fair value										8,437		—		8,437		—
MSRs		4,087		—		—		4,087		5,275		—		—		5,275
IRLCs		380		—		—		380		35		—		—		35

Total assets at fair value	$	160,625	$	—	$	156,158	$	4,467	$	102,856	$	—	$	97,546	$	5,310

Liabilities:
IRLCs									$	7	$	—	$	—	$	7
TBA securities	$	41	$	—	$	41	$	—		6		—		6		—

Total liabilities at fair value	$	41	$	—	$	41	$	—	$	13	$	—	$	6	$	7

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

~~Impaired~~Individually Evaluated Collateral-Dependent Loans

Loans for which repayment is substantially expected to be provided through the operation or sale of collateral are considered ~~impaired when,~~collateral dependent, and are valued based on ~~current information and events, it is probable that~~ the Company will be unable to collect all amounts according to the contractual terms of the loan agreement when due. Loan impairment is measured using the present value of expected cash flows, the loan’s observable market price or theestimated fair value of the collateral, ~~(less selling costs) if~~less estimated costs to sell at the reporting date, where applicable. Accordingly, collateral dependent loans are ~~collateral dependent and these are considered~~classified within Level 3 inof the fair value hierarchy. Collateral may be real estate and/or business assets including equipment, inventory and/or accounts receivable. The value of business equipment, inventory and accounts receivable, discounted on management’s review and analysis. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and the client’s business.

Impaired Loans

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

Other Real Estate Owned (Foreclosed Assets)

Foreclosed assets are adjusted for fair value upon transfer of loans to foreclosed assets 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.

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The following tables set forth the Company’s financial and nonfinancial assets subject to fair value adjustments (impairment) on a nonrecurring basis at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021, that are valued at the lower of cost or market.~~2022. Assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

Quantitative Information about Level 3 Fair Value Measurements

Weighted

(Dollars in thousands)

Fair Value

Valuation Technique

Unobservable Input

Range

Average (3)

Fair Value

Valuation Technique

Unobservable Input

Range

Average (1)

September 30, 2022

March 31, 2023

Nonrecurring measurements:

Impaired loans

617

Appraisal of collateral

(1)

Liquidation expense

(2)

10%

(10%)

Impaired loans

1,432

Discounted cash flow analysis

(1)

Discount rate

6% - 7.25%

(6%)

Individually evaluated collateral dependent loans

Appraisal of collateral

Liquidation expense

10%

Other real estate owned

197

Appraisal of collateral

(1)

Appraisal adjustments

(2)

0% - 20%

(2%)

179

Appraisal of collateral

Appraisal adjustments

0% - 20%

(0%)


	Quantitative Information about Level 3 Fair Value Measurements								Quantitative Information about Level 3 Fair Value Measurements
								Weighted						Weighted
(Dollars in thousands)	Fair Value		Valuation Technique		Unobservable Input		Range	Average (3)	Fair Value		Valuation Technique	Unobservable Input	Range	Average (1)
December 31, 2021
December 31, 2022
Nonrecurring measurements:

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

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

Other real estate owned	$	532	Appraisal of collateral	(1)	Appraisal adjustments	(2)	20% - 40%	(35%)	$	197	Appraisal of collateral	Appraisal adjustments	0% - 20%	(2%)

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

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

~~(3)~~Unobservable inputs were weighted by the relative fair value of the instruments.

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The carrying amounts and estimated fair values of the Company’s financial instruments are presented in the following table. Fair values for ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 were estimated using an exit price notion.


	September 30, 2022				December 31, 2021				March 31, 2023				December 31, 2022
			Estimated				Estimated				Estimated				Estimated
	Carrying		Fair		Carrying		Fair		Carrying		Fair		Carrying		Fair
(Dollars in thousands)	Amount		Value		Amount		Value		Amount		Value		Amount		Value
Financial assets
Level 1 inputs
Cash and cash equivalents	$	163,306	$	163,306	$	583,613	$	583,613	$	37,709	$	37,709	$	55,499	$	55,499

Level 2 inputs
Investment securities available for sale	$	86,347	$	86,347	$	116,982	$	116,982	$	81,525	$	81,525	$	83,587	$	83,587
Investment securities held to maturity		570,719		501,145		404,594		401,524		549,096		491,116		559,455		494,626
Equity securities		1,222		1,222		1,372		1,372		1,258		1,258		1,233		1,233
Restricted securities		9,894		9,894		4,159		4,159		15,067		15,067		11,169		11,169
LHFS		8,342		8,342		37,749		37,749		3,514		3,514		4,248		4,248
TBA securities		1,000		1,000		55		55		142		142		41		41
Cash surrender value on life insurance		58,768		58,768		47,935		47,935		59,711		59,711		59,218		59,218
Loans, at fair value										9,526		9,526		8,437		8,437

Level 3 inputs
Loans, net	$	2,385,606	$	2,299,283	$	2,105,231	$	2,106,373	$	2,630,691	$	2,417,124	$	2,531,027	$	2,431,808
MSRs		5,321		5,321		4,087		4,087		5,310		5,310		5,275		5,275
IRLCs		10		10		380		380		101		101		35		35

Financial liabilities
Level 2 inputs
Deposits:
Noninterest-bearing demand	$	893,808	$	893,808	$	927,497	$	927,497	$	808,679	$	808,679	$	862,015	$	862,015
Checking plus interest		649,929		649,929		524,143		524,143		726,070		726,070		694,101		694,101
Money market		721,987		721,987		889,099		889,099		675,751		675,751		709,132		709,132
Savings		320,189		320,189		225,546		225,546		295,002		295,002		319,814		319,814
Club		1,440		1,440		388		388		755		755		374		374
Certificates of deposit		427,959		412,214		459,563		461,135		488,305		478,065		424,348		410,455
Securities sold under retail repurchase agreement		—		—		4,143		4,143
Advances from FHLB - long-term		10,013		9,998		10,135		10,187
Advances from FHLB - short-term										131,500		131,496		40,000		40,002
Subordinated debt		42,995		40,817		42,762		44,876		43,150		40,079		43,072		41,193
TBA Securities		—		—		41		41		80		80		6		6

Level 3 inputs
IRLCs		33		33		—		—		—		—		7		7

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.

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The following table provides information on commitments outstanding at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022.


(Dollars in thousands)	September 30, 2022		December 31, 2021		March 31, 2023		December 31, 2022
Commitments to extend credit	$	414,723	$	421,088	$	408,789	$	406,353
Letters of credit		8,148		8,399		7,861		8,009
Total	$	422,871	$	429,487	$	416,650	$	414,362

The Bank has established a reserve for off balance sheet credit exposures. The reserve is established as losses are estimated to have occurred through a loss for off balance sheet credit exposures charged to earnings. Losses are charged against the allowance when management believes the required funding of these exposures is uncollectible. While this evaluation is completed on a regular basis, it is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The Company provides banking services to customers who do business in the cannabis industry. Prior to the second quarter of 2022, the Company restricted these businesses to include only those in the medical-use cannabis industry in the state of Maryland. During the second quarter of 2022, the Company expanded its cannabis banking program to include both medical and adult -use licensees in other states, with an initial offering of the Company’s existing Maryland customers with multi-state operations. While the Company is providing banking services to customers that are engaged in the growing, processing, and sales of cannabis in a manner that complies with applicable state law, such customers engaged in those activities currently violate Federal law. The Company may be deemed to be aiding and abetting illegal activities through the services that it provides to these customers. While we are not aware of any instance of a federally-insured financial institution being subject to such aiding and abetting liability, the strict enforcement of Federal laws regarding cannabis would likely result in the Company’s inability to continue to provide banking services to these customers and the Company could have legal action taken against it by the Federal government, including imprisonment and fines. There is an uncertainty of the potential impact to the Company’s Consolidated Financial Statements if the Federal government takes actions against the Company. As of ~~September 30, 2022,~~March 31, 2023, the Company had not accrued an amount for the potential impact of any such actions.

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

● Deposit and loan balances at ~~September 30, 2022~~March 31, 2023 were approximately ~~$24.2~~$144.6 million, or ~~0.8%~~4.8% of total deposits, and ~~$43.6~~$55.2 million, or ~~1.8%~~2.1% of total gross loans, respectively.

● Interest and noninterest income for the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, were approximately ~~$1.9~~$2.2 million and ~~$1.6 million, respectively~~$266 thousand, respectively.

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

~~Note 16 – Segment Reporting~~

We are in the business of providing financial services and subsequent to the acquisition of Severn in the fourth quarter of 2021 we operate in two business segments – community banking and mortgage-banking. Community banking is conducted through the Bank and involves delivering a broad range of financial services, including lending and deposit taking, to individuals and commercial enterprises. This segment also includes our treasury and administrative functions. Mortgage-banking is conducted through the residential mortgage division of the Bank and involves originating first and second-lien residential mortgages for sale in the secondary market.

~~Table of Contents~~

~~The following tables present certain information regarding our business segments for the three and nine months ended September 30, 2022.~~

Community

Consolidated
(Dollars in thousands)

Banking

Mortgage Banking

Total
For the Three Months Ended September 30, 2022






Interest Income

$
30,420

$
156

$
30,576
Interest Expense

3,250

11

3,261
Net interest income

27,170

145

27,315
Provision for credit losses

675

—

675
Net interest income after provision for credit losses

26,495

145

26,640
Noninterest income

4,664

680

5,344
Noninterest expense

18,184

715

18,899
Income (loss) before income taxes

12,975

110

13,085
Income tax expense (benefit)

3,398

29

3,427
Net income (loss)

$
9,577

$
81

$
9,658
Total assets, September 30, 2022

$
3,432,079

$
14,725

$
3,446,804

Community

Consolidated
(Dollars in thousands)

Banking

Mortgage Banking

Total
For the Nine Months Ended September 30, 2022






Interest Income

$
81,066

$
500

$
81,566
Interest Expense

7,177

30

7,207
Net interest income

73,889

470

74,359
Provision for credit losses

1,475

—

1,475
Net interest income after provision for credit losses

72,414

470

72,884
Noninterest income

13,581

3,643

17,224
Noninterest expense

55,535

3,788

59,323
Income before income taxes

30,460

325

30,785
Income tax expense

7,934

82

8,016
Net income

$
22,526

$
243

$
22,769
Total assets, September 30, 2022

$
3,432,079

$
14,725

$
3,446,804

Note 1716 – Revenue Recognition

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

Service Charges on Deposit Accounts

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

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

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Trust and Investment Fee Income

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

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

Title Company Revenue

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

All contract issuance costs are expensed as incurred. We had no contract assets or liabilities at ~~September 30, 2022.~~March 31, 2023.

Other Noninterest Income

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

The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 and ~~2021.~~2022.


	For the Three Months Ended				For the Nine Months Ended				For the Three Months Ended
	September 30,				September 30,				March 31,
(Dollars in thousands)	2022		2021		2022		2021		2023		2022
Noninterest Income
In-scope of Topic 606:
Service charges on deposit accounts	$	1,509	$	805	$	4,306	$	2,162	$	1,213	$	1,359
Trust and investment fee income		421		477		1,383		1,359		432		514
Interchange income		1,241		1,016		3,532		2,922		1,212		1,038
Title Company revenue		397		—		1,146		—		137		323
Other noninterest income		494		358		1,495		1,119		794		460
Noninterest Income (in-scope of Topic 606)		4,062		2,656		11,862		7,562		3,788		3,694
Noninterest Income (out-of-scope of Topic 606)		1,282		253		5,362		807		1,546		2,352
Total Noninterest Income	$	5,344	$	2,909	$	17,224	$	8,369	$	5,334	$	6,046

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~~Contract Balances~~

A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s noninterest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Consideration is often received immediately or shortly afterNote 17 – Pending Merger

On December 14, 2022, the Company ~~satisfies its performance obligation~~ and ~~revenue is recognized.~~ The ~~Company does not typically enter~~Community Financial Corporation (“TCFC”) entered into ~~long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of September 30, 2022, and December 31, 2021,~~a definitive agreement for the Company ~~did not have any significant contract balances.~~to acquire TCFC.

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

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

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

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

Forward-Looking Information

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

If one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this Quarterly Report on Form 10-Q and other reports and registration statements filed by us with the Securities and Exchange Commission (“SEC”). For information on the factors that could cause actual results to differ from the expectations stated in the forward- looking statements, see “Risk Factors” under Part I, Item 1A of our ~~2021~~2022 Form 10-K and other reports filed by us with the SEC.

Any forward-looking statement speaks only as of the date of this report, and we do not undertake any obligation to publicly update or review any forward-looking statement, whether because of new information, future developments or otherwise, except as required by law.

Introduction

The following discussion and analysis is intended as a review of significant factors affecting the Company’s financial condition and results of operations for the periods indicated. This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and related notes presented elsewhere in this report, as well as the audited consolidated financial statements and related notes included in the ~~2021~~2022 Annual Report.

Shore Bancshares, Inc. is the largest independent financial holding company headquartered on the Eastern Shore of Maryland. It is the parent company of Shore United Bank, N.A. The Bank operates 3031 full-service branches in ~~Baltimore City,~~ Baltimore County, Howard County, Kent County, Queen Anne’s County, Caroline County, Talbot County, Dorchester County, Anne Arundel County and Worcester County in Maryland, Kent County and Sussex County in Delaware and in Accomack County, Virginia. The Company engages in trust and wealth management services through Wye Financial Partners, a division of Shore United Bank, N.A. The Company also engages in title work for real estate transactions through Mid-MD Title.

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

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Shore Bancshares, Inc. maintains an Internet site at www.shorebancshares.com on which it makes available free of charge its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to the foregoing as soon as reasonably practicable after these reports are electronically filed with, or furnished to, the SEC.

Critical Accounting Policies

The Company’s consolidated financial statements are prepared in accordance with 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 of the ~~2021~~2022 Annual ~~Report.~~Report along with Note 2 of the current period interim financial information. These policies, along with the disclosures presented in the notes to the financial statements and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has determined that the accounting policies ~~with respect to the loans acquired in a business combination,~~ the allowance for credit losses on loans and goodwill are critical accounting policies. These policies are considered critical because they relate to accounting areas that require the most subjective or complex judgments, and, as such, could be most subject to revision as new information becomes available.

~~Loans Acquired in a Business Combination~~

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

~~PCI~~The Company adopted ASU No. 2026-13, “Financial Instruments – Credit Losses (Topic 326)”, as amended, on January 1, 2023 and in accordance with ASC 326, has recorded an allowance for credit losses (“ACL”) on loans carried at amortized cost. The ACL represents management’s best estimate of expected lifetime credit losses within the Company's loan portfolio as of the balance sheet date. The allowance for credit losses is established through a provision for credit losses and is increased by recoveries of loans previously charged off. Loan losses are ~~those for which there is evidence of credit deterioration since origination and for which it is probable at~~charged against the ~~date of acquisition~~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 ~~contractually required principal~~of which may undergo frequent and ~~interest payments. When determining fair value, PCI loans are aggregated into~~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 one factor or input may occur at different rates and/or impact pools of loans ~~based on common risk characteristics as of the date of acquisition~~in different ways. Further, changes in factors and inputs may also be directionally inconsistent, such ~~as loan type, date of origination, and evidence of credit quality~~that improvement in one factor may offset deterioration such as internal risk grades and past due and nonaccrual status. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the “nonaccretable difference.” Any excess of cash flows expected at acquisition over the estimated fair value is referred to as the “accretable yield” and is recognized as interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows.in others.

OnThe Company’s management reviews the adequacy of the ACL on loans on at least a quarterly ~~basis, we evaluate our estimate~~basis. Refer to Note 2, “Adoption of cash flows expected to be collected on PCI loans. Estimates of cash flows for PCI loans require significant judgment. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses resulting in an increase to the allowance for loan losses. Subsequent significant increases in cash flows may result in a reversal of post-acquisition provision for loan losses or a transfer from nonaccretable difference to accretable yield that increases interest income over the remaining lifeAccounting Standards”, of the ~~loan, or pool(s) of loans. Disposals of loans, which may include sale of loans to third parties, receipt of payments in full or in part from~~interim consolidated financial information for additional detail concerning the ~~borrower or foreclosure~~determination of the ~~collateral, result in removal of the loan from the PCI loan portfolio at its carrying amount.~~

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

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

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

~~Allowance for Credit Losses~~

The allowance for credit losses represents management’s estimate of credit losses inherent in the loan portfolio as of the balance sheet date. Determining the amount of the allowance for credit losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of similar loans based on historical loss experience, and consideration of current economic trends and conditions and other factors, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the consolidated balance sheets. Note 1 to the 2021 Annual Report describes the methodology used to determine the allowance for credit losses. A discussion of the allowance determination and factors driving changes in the amount of the allowance for credit losses is included in the Provision for Credit Losses and Allowance for Credit Losses sections below.

Goodwill

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. ~~As of September 30, 2022, the Company had a banking and mortgage reporting unit.~~

OVERVIEW

The Company reported net income of ~~$9.7~~$6.5 million for the ~~third~~first quarter of ~~2022,~~2023, or diluted income per common share of ~~$0.49,~~$0.32, compared to net income of ~~$4.6~~$5.6 million, or diluted income per common share of ~~$0.39,~~$0.28, for the ~~third~~first quarter of ~~2021.~~2022. For the ~~second~~fourth quarter of 2022, the Company reported net income of ~~$7.5~~$8.4 million, or diluted income per common share of ~~$0.38.~~$0.42. Net income, excluding merger related expenses, for the ~~third~~first quarter of ~~2022~~2023 was ~~$9.8~~$7.0 million or ~~$0.49~~$0.35 per diluted common share, compared to net income, excluding merger related expenses, of ~~$7.7~~$9.1 million or ~~$0.39~~$0.46 per diluted common share for the ~~second~~fourth quarter of 2022 and net income, excluding merger-related expenses, of $6.2 million or $0.31per diluted common share for the first quarter of 2022. When comparing net income, excluding merger related expenses, for the ~~third~~first quarter of 2023 to the first quarter of 2022, ~~to the third quarter of 2021,~~ net income increased ~~$4.7 million,~~$803 thousand, primarily due to increases in net interest income of ~~$11.7 million and noninterest income of $2.4~~$3.2 million, partially offset by ~~an increase~~a decrease in noninterest ~~expenses~~income of ~~$7.3 million primarily resulting from the acquisition~~$712 thousand, coupled with increases in both noninterest expense of ~~Severn Bank (“Severn”) in November 2021.~~$600 thousand and provision for credit losses of $613 thousand. When comparing the ~~third~~first quarter of ~~2022~~2023 to the ~~second~~fourth quarter of 2022, net income, excluding merger related expenses, ~~increased $2.1~~decreased $2.2 million, due to ~~increases~~decreases in net interest income of ~~$2.7~~$1.3 million and ~~a decrease~~noninterest income of $528 thousand, coupled with increases in in noninterest expense of ~~$1.1 million partially offset by a decrease in in noninterest income~~$169 thousand and provision for credit losses of ~~$489~~$763 thousand. Merger-related expenses recorded for the ~~third~~first quarter of ~~2022~~2023 and the ~~second~~fourth quarter of 2022 were ~~$159~~$691 thousand and ~~$241~~$967 thousand, respectively.

For the first nine months of 2022, the Company reported net income of $22.8 million, or diluted income per common share of $1.15, compared to net income of $12.6 million, or diluted income per common share of $1.08, for the first nine months of 2021. When comparing net income for the first nine months of 2022 to the first nine months of 2021, the increase in net income was primarily due to an increase in net interest income of $30.9 million and noninterest income of $8.9 million. These improvements to income were partially offset by an increase in noninterest expense of $26.0 million resulting primarily from the Severn merger.

RESULTS OF OPERATIONS

Net Interest Income

Tax-equivalent net interest income is net interest income adjusted for the tax-favored status of income from certain loans and investments. As shown in the table below, tax-equivalent net interest income was ~~$27.4~~$25.7 million for the ~~third~~first quarter

~~Table~~ of ~~Contents~~

~~of 2022~~2023 and ~~$15.6~~$22.5 million for the ~~third~~first quarter of ~~2021.~~2022. Tax-equivalent net interest income was ~~$24.7~~$26.9 million for the ~~second~~fourth quarter of 2022. The increase in net interest income when comparing the ~~third~~first quarter of ~~2022~~2023 to the ~~third~~first quarter of ~~2021 and the second quarter of~~ 2022 ~~was~~ due to increases in interest and fees on loans and income from taxable investment securities, partially offset by increases in interest expense on interest-bearing deposits and ~~subordinated debt primarily due to the acquisition of Severn.~~FHLB short-term borrowings. Net interest margin is tax-equivalent net interest income (annualized) divided by average earning assets. The net interest margin for the ~~third~~first quarter of ~~2022~~2023 was ~~3.38%~~3.18% which was an increase of ~~39bps~~42bps when compared to ~~2.99%~~2.76% for the ~~third~~first quarter of ~~2021~~2022 and ~~an increase~~a decrease of ~~28bps~~17bps when compared to ~~3.10%~~3.35% for the ~~second~~fourth quarter of 2022. The improvement in net interest margin in the ~~third~~first quarter of ~~2022~~2023 when compared to the ~~third quarter of 2021 and the second~~first quarter of 2022 was primarily due to significantly higher volume of interest earning assets as well as improved yields on such interest earning assets. The decrease in net interest margin when compared to the fourth quarter of 2022 was primarily due to the increase in the average ~~loan balances, accretion income from purchased loans~~balance of FHLB short-term borrowings of $106.6 million and ~~higher rates paid on lower yielding assets.~~an increases rate of 98bps, resulting in $1.3 million in interest expense.

Interest Income

On a tax-equivalent basis, interest income increased ~~$13.7~~$10.7 million, or ~~80.8%~~44.1%, for the ~~third~~first quarter of ~~2022~~2023 when compared to the ~~third~~first quarter of ~~2021.~~2022. The improvement to interest income was the result of increases in interest and fees on loans and income from investment ~~securities and higher yields on interest-bearing deposits with other banks.~~securities. The primary driver for the increase in interest income on loans was the higher average volume of loans of ~~$840.0~~$475.9 million ~~significantly impacted by the acquisition of Severn in the fourth quarter of 2021~~ coupled with ~~a higher~~an increase in the average yield of ~~29bps.~~59bps. The average balance of taxable investment securities increased ~~$284.2~~$122.5 million, providing ~~$1.9~~$2.1 million of additional income.

Table of Contents

On a tax-equivalent basis, interest income increased ~~$3.9~~$2.8 million, or ~~14.6%~~8.6%, for the ~~third~~first quarter of ~~2022~~2023 when compared to the ~~second~~fourth quarter of 2022. The primary driver for the increase ~~was primarily a result of~~in interest income growth in the average balance ~~in loans~~ of ~~$110.1~~$144.3 million, or ~~5.0%. In addition, the average balance of taxable investment securities increased $72.1 million, or 13.2%, and the~~5.8% coupled with a higher average yield ~~increased 31bps, which provided $793 thousand~~ of ~~additional income.~~34bps.

Interest Expense

Interest expense increased ~~$2.0~~$7.5 million, or ~~148.9%~~396.1%, when comparing the ~~third~~first quarter of ~~2022~~2023 to the ~~third~~first quarter of ~~2021.~~2022. The increase in interest expense from the ~~third~~first quarter of ~~2021~~2022 was the result of increases in expenses on interest-bearing deposits of ~~$1.6~~$5.9 million and ~~both long-term advances from~~ FHLB ~~and subordinated debt for~~short-term borrowings of $1.4 million, primarily a ~~combined $341 thousand, all~~result of ~~which were significantly impacted by the acquisition of Severn~~an increase in the 4^th ~~quarter~~average balance of ~~2021.~~FHLB short term borrowings of $114.0 million.

Interest expense increased ~~$1.2~~$4.1 million, or ~~58.8%~~76.1%, when comparing the ~~third~~first quarter of ~~2022~~2023 to the ~~second~~fourth quarter of 2022 primarily due to ~~an increase in interest expense on deposits. The increase in the interest expense comparing the third quarter of 2022 to the second quarter of 2022 was primarily due to~~ increases in ~~average balances of money market and savings accounts and interest-bearing checking accounts. The~~ rates paid on interest-bearing liabilities. These interest-bearing liabilities included increases in interest bearing deposits ~~increased to 48bps in the third quarter~~ of ~~2022 from 29 bps in the second quarter~~52bps and FHLB short-term borrowings of ~~2022.~~

98bps.

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The following tables present the distribution of the average consolidated balance sheets, interest income/expense, and annualized yields earned and rates paid for the three months ended ~~September 30, 2022~~March 31, 2023 and ~~2021.~~2022.

For Three Months Ended

For Three Months Ended

September 30, 2022

September 30, 2021


Average

Income(1)/

Yield/

Average

Income(1)/

Yield/

(Dollars in thousands)

Balance

Expense

Rate

Balance

Expense

Rate

Earning assets













Loans (2), (3)

$
2,327,279

$
25,960

4.43
%
$
1,487,281

$
15,518

4.14
%

Investment securities:











Taxable

618,378

3,186

2.06

334,205

1,318

1.58

Interest-bearing deposits

264,576

1,466

2.20

250,019

97

0.15

Total earning assets

3,210,233

30,612

3.78
%

2,071,505

16,933

3.24
%

Cash and due from banks

31,724





19,453





Other assets

218,163





108,989





Allowance for credit losses

(15,755)





(15,499)





Total assets

$
3,444,365





$
2,184,448





Interest-bearing liabilities













Demand deposits

$
646,399

1,071

0.66
%
$
462,950

165

0.14
%

Money market and savings deposits

1,034,580

907

0.35

644,330

295

0.18

Certificates of deposit $100,000 or more

222,697

308

0.55

136,059

243

0.71

Other time deposits

215,014

275

0.51

142,777

246

0.68

Interest-bearing deposits

2,118,690

2,561

0.48

1,386,116

949

0.27

Securities sold under retail repurchase agreements and short-term FHLB advances

—

—

—

2,718

2

0.29

Advances from FHLB - long-term

10,035

16

0.63

—

—

—

Subordinated debt

42,953

684

6.33

24,504

359

5.81

Total interest-bearing liabilities

2,171,678

3,261

0.60
%

1,413,338

1,310

0.37
%

Noninterest-bearing deposits

893,968





557,109





Other liabilities

21,336





13,120





Stockholders’ equity

357,383





200,881





Total liabilities and stockholders’ equity

$
3,444,365





$
2,184,448





Net interest spread



$
27,351

3.18
%



$
15,623

2.87
%

Net interest margin





3.38
%





2.99
%

Tax-equivalent adjustment

Loans

$
36

$
34

Total

$
36

$
34

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

~~exclusive of nondeductible interest expense.~~

~~(2)~~

~~Average loan balances include nonaccrual loans.~~

~~(3)~~

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

~~Net Interest Income~~

Tax-equivalent net interest income increased $30.9 million, or 70.8%, during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. The higher net interest income was due to an increase in interest income of $33.8 million, or 70.6%, specifically increased interest and fees on loans of $27.2 million, or 61.4%, primarily due to an increase in the average loan balance of $774.0 million, or 53.0%, coupled with accretion income from acquired loans of $2.1 million for the nine months of 2022. Taxable investment securities and interest on deposits with other banks increased $4.2 million and $2.3 million, respectively. The increase in interest expense was the result of an increase in the average balance on interest bearing deposits of $819.8 million, or 62.8%. Interest on long term borrowings increased by $688 thousand due to the acquisition of long-term advances from the FHLB and junior subordinated debt acquired as part of the Severn acquisition. This resulted in a net interest margin of 3.09% for the nine months ended September 30, 2022 compared to 2.97% for the nine months ended September 30, 2021.

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~~Interest Income~~

On a tax-equivalent basis, interest income increased $33.8 million, or 70.6%, for the nine months ended September 30, 2022 when compared to the nine months ended September 30, 2021. The increase was primarily due to higher interest and fees on loans of $27.2 million, or 61.4%, and taxable investment securities of $4.2 million, or 126.2%. The increase in interest and fees on loans was due to a higher average balance of loans of $774.0 million, or 53.0%, primarily due to the acquisition of Severn in the 4^th quarter of 2021 as well as organic growth during the year. The increase in interest on taxable investment securities was due to a higher average balance in these securities of $282.4 million, or 99.8%.

~~Interest Expense~~

Interest expense increased $2.9 million, or 68.3%, when comparing the nine months ended September 30, 2022 to the nine months ended September 30, 2021. The increase in interest expense was the result of an increase in average interest-bearing deposits of $819.8 million, or 62.8%. Interest on long-term borrowings increased by $688 thousand due to the acquisition of long-term advances with the FHLB and junior subordinated debt acquired as part of the Severn acquisition.

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


													For Three Months Ended						For Three Months Ended
	For Nine Months Ended						For Nine Months Ended						March 31, 2023						March 31, 2022
	September 30, 2022						September 30, 2021						2020
	Average		Income(1)/		Yield/		Average		Income(1)/		Yield/		Average		Income(1)/		Yield/		Average		Income(1)/		Yield/
(Dollars in thousands)	Balance		Expense		Rate		Balance		Expense		Rate		Balance		Expense		Rate		Balance		Expense		Rate
Earning assets
Loans (2), (3)	$	2,235,092	$	71,575	4.28	%	$	1,461,083	$	44,339	4.06	%	$	2,611,644	$	30,866	4.79	%	$	2,135,734	$	22,124	4.20	%
Investment securities:
Taxable		565,535		7,562	1.79			283,104		3,343	1.58			653,527		4,064	2.49			531,017		1,985	1.49
Tax-exempt														666		9	5.41			—		—	—
Interest-bearing deposits		424,790		2,546	0.80			219,540		199	0.12			13,849		163	4.77			586,798		254	0.18
Total earning assets		3,225,417		81,683	3.39	%		1,963,727		47,881	3.26	%		3,279,686		35,102	4.34	%		3,253,549		24,363	3.01	%
Cash and due from banks		14,383						18,536						28,602						(15,253)
Other assets		222,236						107,174						228,054						253,424
Allowance for credit losses		(15,095)						(14,802)						(30,006)						(14,239)
Total assets	$	3,446,941					$	2,074,635					$	3,506,336					$	3,477,481

Interest-bearing liabilities
Demand deposits	$	627,213		1,652	0.35	%	$	435,678		453	0.14	%	$	694,894		3,236	1.89	%	$	589,737		228	0.16	%
Money market and savings deposits		1,046,230		2,027	0.26			591,959		777	0.18			1,004,553		2,374	0.96			1,075,791		598	0.23
Certificates of deposit $100,000 or more		247,635		931	0.50			134,080		998	1.00			241,436		1,076	1.81			286,587		286	0.40
Other time deposits		204,283		819	0.54			143,832		961	0.89			207,403		595	1.16			175,683		246	0.57
Interest-bearing deposits		2,125,361		5,429	0.34			1,305,549		3,189	0.33			2,148,286		7,281	1.37			2,127,798		1,358	0.26
Securities sold under retail repurchase agreements and federal funds purchased		913		2	0.29			2,695		5	0.25			—		—	—			2,770		2	0.29
Advances from FHLB - short-term														113,972		1,361	4.84			—		—	—
Advances from FHLB - long-term		10,075		45	0.60			—		—	—			—		—	—			10,116		14	0.57
Subordinated debt		42,878		1,731	5.40			24,474		1,088	5.94			43,108		756	7.11			42,804		520	4.93
Total interest-bearing liabilities		2,179,227		7,207	0.44	%		1,332,718		4,282	0.43	%		2,305,366		9,398	1.65	%		2,183,488		1,894	0.35	%
Noninterest-bearing deposits		891,233						531,199						820,162						916,415
Other liabilities		21,932						12,631						19,634						24,567
Stockholders’ equity		354,549						198,087						361,174						353,011
Total liabilities and stockholders’ equity	$	3,446,941					$	2,074,635					$	3,506,336					$	3,477,481

Net interest spread			$	74,476	2.95	%			$	43,599	2.83	%			$	25,704	2.69	%			$	22,469	2.66	%
Net interest margin					3.09	%					2.97	%					3.18	%					2.76	%

Tax-equivalent adjustment
Loans			$	117					$	108					$	38					$	39
Investment securities																2						—
Total			$	117					$	108					$	40					$	39

(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.

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Noninterest Income

Total noninterest income for the ~~third~~first quarter of ~~2022 increased $2.4 million,~~2023 decreased $712 thousand, or ~~83.7%~~11.8%, when compared to the ~~third~~first quarter of ~~2021.~~2022. The ~~increase~~decrease from the ~~third~~first quarter of ~~2021~~2022 was ~~largely~~primarily due to decreases in revenue associated with the ~~result~~mortgage division of ~~the addition~~$890 thousand, revenue from Mid-Maryland Title Company, Inc. of ~~Severn in the fourth quarter of 2021 which contributed in part to increases in~~$186 thousand and service charges on deposit accounts of ~~$704~~$146 thousand partially offset by increases in interchange credits of $174 thousand, and ~~added mortgage-banking revenue~~other fees on bank services of ~~$680 thousand and title revenue from Mid-Maryland Title Company of $397 in the third quarter of 2022.~~$336 thousand. Noninterest income decreased ~~$489~~$528 thousand, or ~~8.4%~~9.0%, when compared to the ~~second~~fourth quarter of 2022 primarily due to a decrease in revenue associated with the mortgage division of ~~$416~~$590 thousand and ~~other bank fee income of $132 thousand, partially offset by increases~~ in service charges on deposit accounts ~~$71~~$133 thousand.

~~Total noninterest income for the nine months ended September 30, 2022, increased $8.9 million, or 105.8%, when compared to the same period in 2021. The increase~~ Declines in noninterest income ~~primarily consisted of revenue associated with~~from the mortgage division ~~service charges~~are primarily attributable to the general rise in interest rates that continue to put pressure on ~~deposit related fees, title company revenue~~the mortgage market, resulting in declines in home loan sales and ~~other noninterest income. The~~

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~~increases in other noninterest income were primarily due to increases in rental income and other~~home loan ~~fee income as a result of the Severn acquisition.~~refinances.

Noninterest Expense

Total noninterest expense for the ~~third~~first quarter of ~~2022,~~2023, excluding merger-related expenses, increased ~~$7.3 million,~~$600 thousand, or ~~64.4%~~3.1%, when compared to the ~~third~~first quarter of ~~2021~~2022 and ~~decreased $1.1 million,~~increased $169 thousand, or ~~5.5%~~less than 1.0%, when compared to the ~~second~~fourth quarter of 2022. The increase in noninterest expense when compared to the ~~third~~first quarter of ~~2021~~2022 was primarily due to ~~increases in salaries and wages,~~other noninterest expenses, employee related benefits, ~~occupancy expense,~~ data processing, ~~amortization of intangible assets and~~ legal and professional fees ~~which were all significantly impacted~~and furniture and equipment expense partially offset by ~~adding Severn branches and its operations.~~decreases in salary expense due to deferred salaries based on loan originations in the first quarter of 2023. The ~~decrease~~increase in noninterest expense when compared to the ~~second~~fourth quarter of 2022 was primarily due to ~~increased deferrals of direct loan origination costs for salaries and~~increases in employee benefits ~~associated with the elevated level of~~and legal and professional fees offset by decreases in salaries due to an increase in deferred salaries based on loan originations ~~during~~in the fourth quarter ~~as well as various cost savings related to the merger with Severn.~~

Total noninterest expense for the nine months ended September 30, 2022, excluding merger-related expenses, increased $25.8 million, or 79.6%, when compared to the same period in 2021. The increase was primarily a result of higher salaries, employee benefits, occupancy expense, other intangibles, data processing costs, other noninterest expenses, and FDIC insurance premiums due to significant increases in new and existing customers and the acquisition of Severn.2022.

Provision for Credit Losses

The provision for credit losses was ~~$675~~$1.2 million for the first quarter of 2023, $600 thousand for the ~~third~~first quarter of 2022 ~~$290~~and $450 thousand for the ~~third quarter of 2021 and $200 thousand for the second~~fourth quarter of 2022. The increase in the provision for credit losses during the ~~third~~first quarter of 2022 as compared to the prior quarters was primarily ~~attributable to significant~~a result of new loan ~~growth.~~growth of $112.6 million. The ratio of the allowance for credit losses to period-end loans was ~~0.68%~~1.07% at ~~September 30, 2022, 0.68%~~March 31, 2023, 0.65% at ~~June 30,~~December 31, 2022 and ~~1.04%~~0.67% at September 30, 2021. Excluding PPP loans and acquired loans, the ratio of the allowance for credit losses to period-end loans was 0.84% at September 30, 2022, slightly lower than the 0.89% at June 30, 2022 and lower than the 1.07% at September 30, 2021. The decline in the percentage of the allowance from the third quarter of 2021 was primarily the result of lower historical loss experience as well as lower pandemic related qualitative reserves.March 31, 2022. The Company reported net ~~recoveries~~charge offs in the ~~third~~first quarter of ~~2022~~2023 of ~~$119~~$20 thousand, compared to net recoveries of ~~$147~~$166 thousand for the ~~third~~first quarter of ~~2021~~2022 and net ~~recoveries~~charge offs of ~~$573~~$84 thousand for the ~~second~~fourth quarter of 2022. Management continually evaluates the adequacy of the allowance for credit losses as changes in the economic environment and within the portfolio become known.

The provision for ~~credit losses for~~ the ~~nine~~three months ended ~~September 30, 2022 and 2021~~March 31, 2023 was ~~$1.5~~comprised of $1.05 million and $1.4 million, respectively, while net recoveries were $858 thousand and $272 thousand, respectively. The increase in provision for credit losses was the result of an increase in loans held for investment in the first nine months of 2022 of $283 million comparedrelated to $41 million for the first nine months of 2021. The ratio of allowance to total loans increased from 0.66% at December 31, 2021, to 0.68% at September 30, 2022. Excluding PPP and acquired loans, the ratio of the allowance for credit losses ~~to period-end~~on loans ~~was 0.84% at September 30, 2022, lower than the 0.93% at December 31, 2021. The primary drivers~~and $163 thousand for the decrease in the percentage of allowance for credit losses to total loans were due to lower historical loss experience and reduced pandemic relative qualitative factors. The ratio of annualized net recoveries to average loans was (0.05%) for the first nine months of 2022, compared to annualized net recoveries to average loans of (0.02%) for the first nine months of 2021. Management will continue to evaluate the adequacy of the allowance for credit losses ~~as more economic data becomes available and as changes within the Company’s portfolio are known.~~on held to maturity securities.

Income Taxes

The Company reported income tax expense of ~~$3.4~~$2.4 million for the ~~third~~first quarter of 2023, $1.9 million for the first quarter of 2022 ~~$1.7~~and $2.9 million for the ~~third quarter of 2021 and $2.7 million for the second~~fourth quarter of 2022. Income tax expense increased when compared to ~~both~~ the ~~third quarter of 2021 and second~~first quarter of 2022 due to higher pre-tax earnings and decreased compared to the fourth quarter of 2022 due to lower pre-tax earnings. The effective tax rate for the ~~third~~first quarter of ~~2022~~2023 was ~~26.2%~~27.4%, ~~26.2%~~26.0% for the ~~second~~fourth quarter of 2022, and ~~26.4%~~25.6% for the ~~third~~first quarter of ~~2021. Income tax expense was $8.0 million for the nine months ended September 30, 2022, and $4.5 million for the nine months ended September 30,~~

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~~2021.~~2022. The higher effective tax rate in the first quarter of 2023 was ~~26.0% for~~ the ~~nine months ended September 30, 2022, and 26.4% for the nine months ended September 30, 2021.~~result of non-deductible merger related expenses.

ANALYSIS OF FINANCIAL CONDITION

Loans Held for Sale

We originate residential mortgage loans for sale on the secondary market, which we have elected to carry at fair value. At ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the fair value of loans held for sale amounted to ~~$8.3~~$3.5 million and ~~$37.7~~$4.2 million, respectively.

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

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Loans Held for Investment

The following tables represent the composition of the Company’s loan portfolio at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022.

September 30, 2022

March 31, 2023

Loans acquired from

(Dollars in thousands)

Legacy Loans

Severn acquisition

Total Loans

Legacy Loans

Severn acquisition

Total Loans

Construction

201,571

28,548

230,119

237,395

13,052

250,447

Residential real estate

610,691

147,372

758,063

748,892

117,333

866,225

Commercial real estate

830,421

192,832

1,023,253

919,950

176,987

1,096,937

Commercial

121,843

38,296

160,139

105,427

34,718

140,145

Consumer

229,266

752

230,018

314,094

666

314,760

Total loans excluding PPP loans

1,993,792

407,800

2,401,592

2,325,758

342,756

2,668,514

PPP loans

250

291

167

—

167

Total loans

1,994,042

407,841

2,401,883

2,325,925

342,756

2,668,681

Allowance for credit losses

(16,277)

(28,464)

Total loans, net

2,385,606

2,640,217


	December 31, 2021						December 31, 2022
			Loans acquired from						Loans acquired from
(Dollars in thousands)	Legacy Loans		Severn acquisition		Total Loans		Legacy Loans		Severn acquisition		Total Loans
Construction	$	145,151	$	94,202	$	239,353	$	226,908	$	19,411	$	246,319
Residential real estate		469,863		184,906		654,769		680,423		130,074		810,497
Commercial real estate		679,816		216,413		896,229		879,265		186,144		1,065,409
Commercial		128,485		47,332		175,817		111,826		35,843		147,669
Consumer		124,496		951		125,447		285,315		711		286,026
Total loans excluding PPP loans		1,547,811		543,804		2,091,615		2,183,737		372,183		2,555,920
PPP loans		18,371		9,189		27,560		187		—		187
Total loans	$	1,566,182	$	552,993	$	2,119,175	$	2,183,924	$	372,183	$	2,556,107
Allowance for credit losses						(13,944)						(16,643)
Total loans, net					$	2,105,231					$	2,539,464

The acquisition of Severn added $584.6 million in total loans as of October 31, 2021, of which ~~$407.8~~$342.8 million in total loans remained outstanding as of ~~September 30, 2022.~~March 31, 2023. Excluding these loans and legacy PPP loans, total legacy loans increased ~~$445.9~~$142.0 million, or ~~28.8%~~6.5%, when compared to December 31, ~~2021.~~2022. At ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, PPP loans accounted for ~~$250~~$167 thousand and ~~$18.4 million~~$187 thousand of total legacy loans, respectively. Most of our loans, excluding PPP loans, are secured by real estate and are classified as construction, residential or commercial real estate loans. The increase in legacy loans, excluding PPP loans, was comprised of increases in ~~consumer loans of $104.8~~

~~million, or 84.2%, construction loans of $56.4 million, or 38.9%,~~ residential real estate loans of ~~$140.8~~$68.5 million, or ~~30.0%~~10.1%, ~~and~~consumer loans of $28.8 million, or 10.1%, commercial real estate loans of ~~$150.6~~$40.7 million or ~~22.2%~~4.6%, construction loans of $10.5 million, or 4.6%, partially offset by a decrease in commercial loans of ~~$6.7~~

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$6.4 million, or ~~5.2%~~5.7%, at ~~September 30, 2022~~March 31, 2023 compared to December 31, ~~2021.~~2022. At ~~September 30, 2022,~~March 31, 2023, the legacy loan portfolio, excluding PPP loans, was comprised of ~~41.7%~~39.6% commercial real estate, ~~30.6%~~32.2% residential real estate, ~~11.5%~~13.5% consumer, ~~10.1%~~10.2% construction and ~~6.1%~~4.5% commercial. That compares to ~~43.9%~~40.3%, ~~30.4%~~31.2%, ~~8.0%~~13.1%, ~~9.4%~~10.4% and ~~8.3,~~5.1%, respectively, at December 31, 2021. Outstanding PPP loans totaled $291 thousand at September 30, 2022 and $27.6 million at December 31, 2021, a decrease of $27.3 million or 98.9%. The decrease was primarily due to forgiveness on first and second round PPP loans originated in 2020 and 2021.2022. We do not engage in foreign or subprime lending activities. See Note 5, “Loans and Allowance for Credit Losses”, in the Notes to Consolidated Financial Statements and below under the caption “Allowance for Credit Losses” for additional information.

Our loan portfolio has a commercial real estate loan concentration, which is generally defined as a combination of certain construction and commercial real estate loans. Construction loans were ~~$230.1~~$250.4 million, or 9.4% of total loans, at March 31, 2023 and $246.3 million, or 9.6% of total loans, at ~~September 30, 2022 and $239.4 million,~~December 31, 2022. Commercial real estate loans were $1.10 billion, or ~~11.3%~~41.1% of total loans, at March 31, 2023, compared to $1.07 billion, or 41.7% of total loans, at December 31, ~~2021. Commercial real estate loans were $1.02 billion, or 42.6% of total loans, at September 30, 2022, compared to $896.2 million, or 42.3% of total loans, at December 31, 2021.~~2022.

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

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land development, and other land acquisitions which represent 100% or more of an institution’s total risk-based capital; or (2) total non-owner occupied commercial real estate loans representing 300% or more of the institution’s total risk-based capital and the institution’s non-owner occupied commercial real estate loan portfolio (including construction) has increased 50% or more during the prior 36 months are identified as having potential commercial real estate concentration risk. Institutions which are deemed to have concentrations in commercial real estate lending are expected to employ heightened levels of risk management with respect to their commercial real estate portfolios, and may be required to hold higher levels of capital. The Company, like many community banks, has a concentration in commercial real estate loans, and the Company has experienced significant growth in its commercial real estate portfolio in recent years. At ~~September 30, 2022,~~March 31, 2023, non-owner-occupied commercial real estate loans (including construction, land and land development loans) represented ~~288.8%~~290.9% of total risk-based capital. At such time, construction, land and land development loans represented ~~67.3%~~69.3% of total risk-based capital.

The commercial real estate portfolio (including construction) has increased ~~110.8%~~108.0% during the prior 36 months. Management has extensive experience in commercial real estate lending, and has implemented and continues to maintain heightened risk management procedures, as well as strong underwriting criteria with respect to its commercial real estate portfolio. Monitoring practices include periodic stress testing analysis to evaluate changes to cash flows, owing to interest rate increases and declines in net operating income. We may be required to maintain higher levels of capital as a result of our commercial real estate concentrations, which could require us to obtain additional capital or be required to sell/participate portions of loans, which may adversely affect shareholder returns.

Allowance for Credit Losses on Loans

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

The allowance for credit losses was ~~$16.3~~$28.5 million at ~~September 30, 2022, $13.9~~March 31, 2023, $16.6 million at December 31, ~~2021~~2022 and ~~$15.5~~$14.7 million at ~~September 30, 2021.~~March 31, 2022. There were net ~~recoveries~~charge-offs of ~~$119~~$20 thousand for the ~~third~~first quarter of 2022, compared to net ~~recoveries~~charge-offs of ~~$573~~$84 thousand for the ~~second~~fourth quarter of 2022 and net recoveries of ~~$147~~$166 thousand for the ~~third~~first quarter of ~~2021.~~2022. The ratio of annualized net ~~recoveries~~charge-offs to average loans was ~~0.02%~~0.00% for the ~~third~~first quarter of ~~2022,~~2023, compared to

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annualized net ~~recoveries~~charge-offs of ~~0.10%~~0.01% for the ~~second~~fourth quarter of 2022 and annualized net recoveries of ~~0.04%~~0.03% for the ~~third~~first quarter of ~~2021.~~2022. Management remains focused on its efforts to dispose of problem loans and to prudently charge-off nonperforming loans to enable the Company to continue to improve its overall credit quality. The allowance for credit losses as a percentage of period-end loans was ~~0.68%~~1.07% at ~~September 30, 2022~~March 31, 2023 and ~~0.66%~~0.65% at December 31, 2021. Excluding PPP loans and acquired loans from Severn and Northwest, the ratio of the allowance for credit losses to period-end loans was 0.84% at September 30, 2022, lower than the 0.93% at December 31, 2021. The decrease in the percentage of the allowance to total loans, excluding PPP loans and acquired loans, at September 30, 2022 compared to December 31, 2021, was primarily the result of improved credit quality, including lower historical loss experience as well as lower pandemic related qualitative factors. Management currently believes that the provision for credit losses and the resulting allowance were adequate to provide for probable losses inherent in our loan portfolio at September 30, 2022.

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The following tables present a summary of the activity in the allowance for credit losses at or for the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 and ~~2021.~~2022.


	For the Three Months Ended
	September 30, 2022						September 30, 2021						March 31, 2023						March 31, 2022
					Percentage of net						Percentage of net						Percentage of net						Percentage of net
					charge-offs (recoveries)						charge-offs (recoveries)						charge-offs (recoveries)						charge-offs (recoveries)
					(annualized) to						(annualized) to						(annualized) to						(annualized) to
					average loans						average loans						average loans						average loans
			Net (charge-offs)		outstanding				Net (charge-offs)		outstanding				Net (charge-offs)		outstanding				Net (charge-offs)		outstanding
(Dollars in thousands)	Average balances		recoveries		during the year		Average balances		recoveries		during the year		Average balances		recoveries		during the year		Average balances		recoveries		during the year
Construction	$	239,120	$	2	-	%	$	130,590	$	161	(0.49)	%	$	248,286	$	3	-	%	$	254,560	$	3	-	%
Residential real estate		730,738		12	(0.01)			460,890		9	(0.01)			835,683		31	(0.02)			650,224		46	(0.03)
Commercial real estate		980,174		243	(0.10)			656,278		—	-			1,079,490		—	-			893,158		150	(0.07)
Commercial		150,143		(142)	0.38			145,217		(29)	0.08			141,838		(54)	0.15			175,510		(24)	0.06
Consumer		213,984		4	(0.01)			94,306		6	(0.03)			301,261		—	-			162,282		(9)	0.02
Total	$	2,314,159	$	119	(0.02)	%	$	1,487,281	$	147	(0.04)	%	$	2,606,558	$	(20)	-	%	$	2,135,734	$	166	(0.03)	%


Allowance for credit losses at period end as a percentage of total period end loans ⁽¹⁾	0.68	%	1.04	%	1.07	%	0.67	%
Allowance for credit losses at period end as a percentage of total period end loans ⁽²⁾	0.84	%	1.10	%	1.07	%	0.92	%
Allowance for credit losses at period end as a percentage of average loans ⁽³⁾	0.70	%	1.04	%	1.09	%	0.69	%
Allowance for credit losses at period end as a percentage of period end nonaccrual loans	833.86	%	449.09	%	1,502.85	%	516.50	%

(1)

At ~~September 30,~~March 31, 2023 and March 31, 2022, ~~and September 30, 2021,~~ these ratios included all loans held for investment, including PPP loans of ~~$291~~$167 thousand and ~~$41.5~~$14.9 million, respectively.

(2)

~~At September 30, 2022 and September 30, 2021, these ratios exclude~~For 2023, this ratio excludes only PPP loans ~~acquired~~given the Company’s adoption of the CECL standard. For periods in 2022, this ratio excludes PPP loans and ~~the associated purchase discount mark on the~~loans acquired ~~loans from both~~in the Severn and ~~Northwest.~~Northwest acquisition.

(3)

At ~~September 30,~~March 31, 2023 and March 31, 2022, ~~and September 30, 2021,~~ these ratios included all loans held for investment, including average PPP loans of ~~$749~~$176 thousand and ~~$63.9 million, respectively.~~

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For the Nine Months Ended

September 30, 2022

September 30, 2021

Percentage of net

Percentage of net

charge-offs (recoveries)

charge-offs (recoveries)

(annualized) to

(annualized) to

average loans

average loans

Net (charge-offs)

outstanding

Net (charge-offs)

outstanding
(Dollars in thousands)

Average balances

recoveries

during the year

Average balances

recoveries

during the year
Construction

$
251,150

$
9

-
%

$
121,107

$
171

(0.19)
%
Residential real estate

680,107

127

(0.02)

453,469

72

(0.02)

Commercial real estate

938,892

942

(0.13)

638,234

64

(0.01)

Commercial

165,692

(216)

0.17

183,434

(40)

0.03

Consumer

181,443

(4)

-

64,839

5

(0.01)

Total

$
2,217,284

$
858

(0.05)
%

$
1,461,083

$
272

(0.02)
%

Allowance for credit losses at period end as a percentage of total period end loans ⁽¹⁾

0.68
%

1.04
%
Allowance for credit losses at period end as a percentage of total period end loans ⁽²⁾

0.84
%

1.10
%
Allowance for credit losses at period end as a percentage of average loans ⁽³⁾

0.73
%

1.06
%
Allowance for credit losses at period end as a percentage of period end nonaccrual loans

833.86
%

449.09
%

~~(1)~~

~~At September 30, 2022 and September 30, 2021, these ratios included all loans held for investment, including PPP loans of $291 thousand and $41.5 million, respectively.~~

~~(2)~~

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

~~(3)~~

~~At September 30, 2022 and September 30, 2021, these ratios included all loans held for investment, including average PPP loans of $8.9 million and $103.9~~$18.9 million, respectively.

Nonperforming Assets ~~and Accruing TDRs~~

As shown in the following table, nonperforming assets were ~~$3.0~~$2.7 million at ~~both September 30, 2022~~March 31, 2023 and $3.9 million at December 31, ~~2021.~~2022. The balance of nonperforming asset ~~changes from September 30, 2022~~decreased primarily due to ~~December 31, 2021 were an increase~~a decrease in total loans 90 days or more past due and still accruing of ~~$323 thousand offset by a decrease in other real estate owned of $335 thousand and nonaccrual assets of $52 thousand. Accruing troubled debt restructurings (“TDRs”) decreased~~ $1.2 million, or ~~21.3%, over the same time period.Other real estate owned properties decreased to $197 thousand at September 30, 2022 from $532 thousand at December 31, 2021.The ratio of nonaccrual loans and accruing TDRs to total loans ratio at September 30, 2022 was 0.27% compared to 0.36% at December 31, 2021.~~66.8%.

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

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The following table summarizes our nonperforming assets ~~and accruing TDRs~~ at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022.


(Dollars in thousands)	September 30, 2022			December 31, 2021			March 31, 2023			December 31, 2022
Nonperforming assets
Nonaccrual loans	$	1,949		$	2,004		$	1,894		$	1,908
Total loans 90 days or more past due and still accruing		644			508			611			1,841
Other real estate owned		197			532			179			197
Total nonperforming assets	$	2,790		$	3,044		$	2,684		$	3,946

Total accruing TDRs	$	4,458		$	5,667

As a percent of total loans:
Nonaccrual loans		0.08	%		0.09	%		0.07	%		0.07	%
Accruing TDRs		0.19	%		0.27	%
Nonaccrual loans and accruing TDRs		0.27	%		0.36	%

As a percent of total loans and other real estate owned:
Nonperforming assets		0.12	%		0.14	%		0.10	%		0.15	%
Nonperforming assets and accruing TDRs		0.30	%		0.41	%

As a percent of total assets:
Nonaccrual loans		0.06	%		0.06	%		0.05	%		0.05	%
Nonperforming assets		0.08	%		0.09	%		0.08	%		0.11	%
Accruing TDRs		0.13	%		0.16	%
Nonperforming assets and accruing TDRs		0.21	%		0.25	%

Investment Securities

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

Investment securities in the held to maturity category are stated at cost adjusted for amortization of premiums and accretion of ~~discounts.~~discounts and the allowance for credit losses. We have the intent and ability to hold such securities until maturity. At ~~September 30, 2022, 14.7%~~March 31, 2023, 14.2% of the portfolio of debt securities was classified as available for sale and ~~85.3%~~85.8% was classified as held to maturity, compared to ~~22.6%~~14.5% and ~~77.4%~~85.5% respectively, at December 31, ~~2021.~~2022. See Note 43 – “Investment Securities”, in the Notes to Consolidated Financial Statements for additional details on the composition of our investment portfolio.

Investment securities, including restricted stock, totaled ~~$668.2~~$647.0 million at ~~September 30, 2022, a $141.1~~March 31, 2023, an $8.5 million, or ~~26.8%~~1.3%, ~~increase~~decrease since December 31, 2021. The increase was primarily due to purchases of held to maturity securities of $207.5 million, purchases of restricted securities of $5.7 million and purchases of equity securities of $12 thousand partially offset by proceeds from maturities and principal repayments of available for sale securities of $16.7 million and held to maturity securities of $40.6 million.2022. At ~~September 30, 2022, 76.6%~~March 31, 2023, 75.3% of the securities available for sale were mortgage-backed, ~~21.2%~~22.5% were U.S. Government agencies and ~~2.2%~~2.3% were corporate bonds, compared to ~~79.2%~~76.0%, ~~19.1%~~21.7% and ~~1.7%~~2.3%, respectively, at year-end ~~2021.~~2022. At ~~September 30, 2022, 71.0%~~March 31, 2023, 70.2% of the securities held to maturity were mortgage-backed, ~~26.8%~~27.5% were U.S. Government agencies, 2.1% were subordinated debt instruments and less than 1% were community reinvestment bonds, compared to ~~74.8%~~70.4%, ~~21.4%~~27.2%, ~~3.6%~~2.1% and less than 1%, respectively, at year-end ~~2021.~~2022. Our investments in mortgage-backed securities are issued or guaranteed by U.S. Government agencies or government-sponsored agencies. The decline in fair values on available for sale securities in the third quarter of 2022 was the result of the recent increases in interest rates and are not indicative of any credit concerns due to the Company holding high quality securities.

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Deposits

Total deposits at ~~September 30, 2022~~March 31, 2023 amounted to ~~$3.02~~$2.99 billion, a decrease of ~~$10.9~~$15.2 million, or less than 1%, when compared to the level at December 31, ~~2021.~~2022. The decrease in total deposits consisted of a decrease in money market and savings accounts of ~~$72.5~~$58.2 million ~~$33.7~~and $53.3 million in noninterest bearing deposits ~~and $30.6 million~~partially offset by an increase in time deposits ~~partially offset by~~of $64.2 million and an increase in interest bearing checking accounts of ~~$125.8~~$32.0 million.

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

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Short-Term Borrowings

The Company had no$131.5 million of short-term borrowings consisting of short-term advances with the FHLB as of ~~September 30, 2022,~~March 31, 2023, compared to short-term borrowings consisting of ~~securities sold under agreements to repurchase~~advances with the FHLB of ~~$4.1~~$40.0 million at December 31, ~~2021. Securities sold under agreements~~2022. This increase was due to ~~repurchase are issued~~funding needs as a result of the decrease in ~~conjunction with cash management services for commercial depositors.~~deposits and the increase in loans. Other short-term borrowings may consist of overnight borrowing from correspondent banks or ~~advances from the FHLB.~~securities sold under agreements to repurchase, primarily with commercial depositors. Short-term advances are defined as those with original maturities of one year or less. At ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the Company had no ~~outstanding short-term advances with the FHLB.~~securities sold under agreements to repurchase or overnight borrowings from correspondent banks.

Long-Term Debt

The Company occasionally borrows from the FHLB to meet longer term liquidity needs, specifically to fund loan growth when liquidity from deposit growth is not sufficient. ~~The acquisition of Severn added $10.1 million in~~There were no long-term borrowings from the FHLB ~~borrowings, which carried an interest rate of 2.19%. The balance of this debt was $10.0 million and $10.1 million~~outstanding at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021 respectively. The long-term FHLB borrowings were paid off in October of~~ 2022.

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

As a result of the Severn merger, the Company acquired Junior Subordinated Debt Securities due in 2035 ~~(“2035 Debentures”)~~ which had an outstanding principal balance of $20.6 million. The debt balance of $18.4 million at ~~September 30, 2022~~March 31, 2023 and ~~$18.2 million at~~ December 31, ~~2021 wasthe~~2022 was presented net of a fair value adjustment of $2.2 ~~million and $2.4 million, respectively.~~million.

Liquidity and Capital Resources

We derive liquidity through increased customer deposits, non-reinvestment of the cash flow from the investment portfolio, loan repayments, borrowings and income from earning assets. As seen in the Consolidated Statements of Cash Flows in the Financial Statements, the net decrease in cash and cash equivalents was ~~$420.3~~$17.8 million for the first ~~nine~~three months of ~~2022~~2023 compared to ~~an increase~~a decrease of ~~$123.9~~$12.6 million for the first ~~nine~~three months of ~~2021.~~2022. The decrease in cash and cash equivalents in ~~2022~~2023 was mainly due to funding net loan growth of ~~$280.9 million and purchases of securities held to maturity of $207.5~~$111.8 million.

To the extent that deposits are not adequate to fund customer loan demand, liquidity needs can be met in the short-term fund markets. The Bank has arrangements with other correspondent banks whereby it has $15 million available in federal funds lines of credit and a reverse repurchase agreement available to meet any short-term needs which may not otherwise be funded by the Bank’s portfolio of readily marketable investments that can be converted to cash. The Bank is also a member of the FHLB, which provides another source of liquidity. Through the FHLB, the Bank had collateral pledged of approximately ~~$298.7~~$283.5 million and ~~$363.7~~$298.9 million at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively. The Bank has pledged, under a blanket lien, all qualifying residential and commercial real estate loans under borrowing agreements with the FHLB.

Total stockholders’ equity ~~increased $6.5~~decreased $2.6 million, or ~~1.9%~~less than 1%, to ~~$357.2~~$361.6 million at ~~September 30, 2022~~March 31, 2023 when compared to December 31, ~~2021~~2022 primarily due to ~~the current year’s retained earnings,~~a Day 1 CECL adjustment of ($7.8) million, partially offset by ~~an increase~~current year earnings of $6.5 million and a decrease in unrealized losses

~~Table of Contents~~

~~of $9.8 million (net of tax)~~ on available for sale securities ~~and dividends paid which are recorded in accumulated other comprehensive income (loss).~~of $860 thousand.

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 also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

In July 2013, federal bank regulatory agencies issued a final rule that revised their risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with certain standards that were developed by Basel III and certain provisions48

Table of the Dodd-Frank Act. The final rule currently applies to all depository institutions and bank holding companies and savings and loan holding companies with total consolidated assets of more than $3 billion. The Company had total consolidated assets of more than $3 billion as of December 31, 2021, due to the acquisition of Severn in the fourth quarter of 2021. As such, the Company was required to comply with the consolidated capital requirements for the first quarterly report date following the effective date of the business combination as its total assets exceeded $3 billion.Contents

Quantitative measures established by regulation to ensure capital adequacy require the Bank and the Company to maintain minimum ratios of common equity Tier 1, Tier 1, and total capital as a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 1,250%. The Bank and Company are also required to maintain capital at a minimum level based on quarterly average assets, which is known as the leverage ratio. The Bank and the Company were ~~well capitalized~~deemed “well capitalized” under applicable regulatory capital requirements at ~~September 30, 222.~~March 31, 2023.

The following tables present the applicable capital ratios for the Company and the Bank as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022.

Tier 1

Common Equity

Tier 1

Total

leverage

Tier 1

risk-based

risk-based

September 30, 2022

ratio

ratio

capital ratio

capital ratio

Shore Bancshares, Inc.

9.36
%

11.95
%

12.69
%
14.34
%
Shore United Bank

9.59
%

13.05
%

13.05
%
13.71
%

Tier 1

Common Equity

Tier 1

Total

leverage

Tier 1

risk-based

risk-based

December 31, 2021

ratio

ratio

capital ratio

capital ratio

Shore Bancshares, Inc.

9.43
%

12.76
%

12.76
%
15.36
%
Shore United Bank

9.48
%

13.90
%

13.90
%
14.55
%


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

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Our primary market risk is interest rate fluctuation and management has procedures in place to evaluate and mitigate this risk. This risk and these procedures are discussed in Item 7 of Part II of the ~~2021~~2022 Annual Report under the caption “Market Risk Management and Interest Sensitivity”. Management recognizes that recent increases in interest rates has had an impact on the Company’s market risk. The procedures used to evaluate and mitigate these risks remain unchanged and we continue to monitor our actual and simulated sensitivity positions since December 31, ~~2021.~~2022.

Item 4. Controls and Procedures.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that Shore Bancshares, Inc. files under the Securities Exchange Act of 1934, as amended (“Exchange Act”) with the SEC, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods

~~Table of Contents~~

specified in those rules and forms, and that such information is accumulated and communicated to management, including Shore Bancshares, Inc.’s principal executive officer (“PEO”) and its principal financial officer (“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, 2022~~March 31, 2023 was carried out under the supervision and with the participation of management, including the PEO and the PFO. Based on that evaluation, the Company’s management, including the PEO and the PFO, has concluded that our disclosure controls and procedures are, in fact, effective at the reasonable assurance level at ~~September 30, 2022.~~March 31, 2023.

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

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adoption of these new accounting standards, the Company modified certain internal controls and designed and implemented certain new internal controls over the measurement of the allowance for credit losses and related disclosures, primarily related to the modeling of expected credit losses on loans. There ~~was~~were no ~~change~~other changes in ~~our~~the Company’s internal control over financial reporting during the ~~third quarter of 2022~~three months ended March 31, 2023 that ~~has~~have materially affected, or isare reasonably likely to materially affect, ~~our~~the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

~~The section titled Risk Factors in Part I,~~

Other than the additional risk factor referenced below, there are no material changes to the risk factors as previously disclosed under Item 1A ofin our ~~2021 Form 10-K includes a discussion of~~Annual Report for the ~~many risks~~year ended December 31, 2022 and ~~uncertainties we face, any one or more of which~~those referenced in other reports on file with the SEC.

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

The recent high-profile bank failures involving Silicon Valley Bank, Signature Bank, and First Republic Bank have generated significant market volatility among publicly traded bank holding companies and, in particular, regional banks. These market developments have negatively impacted customer confidence in the safety and soundness of regional banks. As a result, customers may choose to maintain deposits with larger financial institutions or invest in higher yielding short-term fixed income securities, all of which could materially adversely impact our ~~business,~~liquidity, cost of funding, loan funding capacity, net interest margin, capital and results of ~~operations, financial condition (including capital~~operations. In connection with high-profile bank failures, uncertainty and ~~liquidity), or prospects or the value of or return on an investment~~concern has been, and may in the ~~Company. Management does not believe~~future be further, compounded by advances in technology that ~~any material changes~~increase the speed at which deposits can be moved, as well as the speed and reach of media attention, including social media, and its ability to disseminate concerns or rumors, in each case potentially exacerbating liquidity concerns. While the Department of the Treasury, the Federal Reserve, and the FDIC have made statements ensuring that depositors of recently failed banks would have access to their deposits, including uninsured deposit accounts, there is no guarantee that such actions will be successful in restoring customer confidence in regional banks and the bank system more broadly. In addition, the banking operating environment and public trading prices of banking institutions can be highly correlated, in particular during times of stress, which could materially and adversely impact the trading prices of our ~~risk factors have occurred since they were last disclosed in~~common stock and potentially our ~~2021 Annual Report.~~results of operations.

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

There were no unregistered sales of the Company’s common stock, par value $0.01 per share (“Common Stock”), during the ~~year to date~~year-to-date period ended ~~September 30, 2022.~~March 31, 2023.

On July 6, 2022, the Company announced a new stock repurchase program. Under the new stock repurchase program, the Company is authorized to repurchase up to $5.0 million of the Company's Common Stock, representing approximately 1.4% of its issued and outstanding Common Stock based on the closing price of the Company’s Common Stock on July 5, 2022. The program may be limited or terminated at any time without prior notice. There were no purchases of the Company’s Common Stock during the ~~third~~first quarter of ~~2022.~~2023. The program ~~will expire~~expired on March 31, 2023.

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

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Item 3. Defaults Upon Senior Securities

None

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Item 4. Mine Safety Disclosures

Not Applicable

Item 5. Other Information

None

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Item 6. 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 Supplementary relating to the Fixed Rate Cumulative Perpetual Preferred Stock Series A (incorporated by reference to Exhibit 4.1 of the Company’s Form 8-K filed on January 13, 2009).

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

3.2		Amended and Restated By-Laws (incorporated by reference to Exhibit 3.2 of the Company’s Form 10-K ~~for the year ended December~~filed on March 31, ~~2020)~~2022).

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

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

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

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

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

101		Inline Interactive Data File

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

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

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

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

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

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

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

6052

Table of Contents

SIGNATURES

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


	SHORE BANCSHARES, INC.

Date: ~~November 14, 2022~~May 15, 2023	By:	/s/ Lloyd L. Beatty, Jr.
		Lloyd L. Beatty, Jr.
		President & Chief Executive Officer
		(Principal Executive Officer)

Date: ~~November 14, 2022~~May 15, 2023	By:	/s/ ~~Edward C. Allen~~Vance Adkins
		~~Edward C. Allen~~Vance Adkins
		Executive Vice President & Chief Financial Officer
		(Principal Accounting Officer)

6153


Supplemental cash flows information:
Interest paid	$	7,705	$	4,694
Income taxes paid	$	7,070	$	5,037
Recognition (remeasurement of) lease liabilities arising from right-of-use assets	$	(616)	$	1,194
Transfers from loans to other real estate owned	$	69	$	205
Unrealized (loss) on securities available for sale	$	(13,533)	$	(1,789)


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

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

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


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


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


	1/1/2022												9/30/2022
	TDR		New		Disbursements		Charge-		Reclassifications/				TDR		Related
(Dollars in thousands)	Balance		TDRs		(Payments)		offs		Transfer In/(Out)		Payoffs		Balance		Allowance
For the Nine Months Ended
September 30, 2022
Accruing TDRs
Construction	$	24	$	—	$	(10)	$	—	$	—	$	—	$	14	$	—
Residential real estate		2,836		—		(75)		—		(20)		—		2,741		150
Commercial real estate		2,807		—		(157)		—		—		(947)		1,703		—
Commercial		—		—		—		—		—		—		—		—
Consumer		—		—		—		—		—		—		—		—
Total	$	5,667	$	—	$	(242)	$	—	$	(20)	$	(947)	$	4,458	$	150

Nonaccrual TDRs
Construction	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential real estate		—		—		(4)		—		20		—		16		—
Commercial real estate		—		—		—		—		—		—		—		—
Commercial		216		—		(32)		—		—		—		184		—
Consumer		—		—		—		—		—		—		—		—
Total	$	216	$	—	$	(36)	$	—	$	20	$	—	$	200	$	—

Total	$	5,883	$	—	$	(278)	$	—	$	—	$	(947)	$	4,658	$	150


	1/1/2021												9/30/2021
	TDR		New		Disbursements		Charge-		Reclassifications/				TDR		Related
(Dollars in thousands)	Balance		TDRs		(Payments)		offs		Transfer In/(Out)		Payoffs		Balance		Allowance
For the Nine Months Ended
September 30, 2021
Accruing TDRs
Construction	$	34	$	—	$	(7)	$	—	$	—	$	—	$	27	$	—
Residential real estate		3,845		—		(82)		—		—		(900)		2,863		84
Commercial real estate		3,118		—		(258)		—		—		—		2,860		—
Commercial		—		—		—		—		—		—		—		—
Consumer		—		—		—		—		—		—		—		—
Total	$	6,997	$	—	$	(347)	$	—	$	—	$	(900)	$	5,750	$	84

Nonaccrual TDRs
Construction	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential real estate		—		—		—		—		—		—		—		—
Commercial real estate		—		—		—		—		—		—		—		—
Commercial		258		—		(31)		—		—		—		227		—
Consumer		—		—		—		—		—		—		—		—
Total	$	258	$	—	$	(31)	$	—	$	—	$	—	$	227	$	—

Total	$	7,255	$	—	$	(378)	$	—	$	—	$	(900)	$	5,977	$	84


					Special
(Dollars in thousands)	Pass/Performing		Pass/Watch		Mention		Substandard		Doubtful		PCI		Total
December 31, 2021
Construction	$	210,287	$	24,513	$	1,877	$	297	$	—	$	2,379	$	239,353
Residential real estate		596,694		38,309		1,539		901		—		17,326		654,769
Commercial real estate		724,561		151,209		4,535		2,330		—		13,594		896,229
Commercial		186,176		16,654		—		226		—		321		203,377
Consumer		125,200		215		—		2		—		30		125,447
Total	$	1,842,918	$	230,900	$	7,951	$	3,756	$	—	$	33,650	$	2,119,175


	Community				Consolidated
(Dollars in thousands)	Banking		Mortgage Banking		Total
For the Three Months Ended September 30, 2022
Interest Income	$	30,420	$	156	$	30,576
Interest Expense		3,250		11		3,261
Net interest income		27,170		145		27,315
Provision for credit losses		675		—		675
Net interest income after provision for credit losses		26,495		145		26,640
Noninterest income		4,664		680		5,344
Noninterest expense		18,184		715		18,899
Income (loss) before income taxes		12,975		110		13,085
Income tax expense (benefit)		3,398		29		3,427
Net income (loss)	$	9,577	$	81	$	9,658
Total assets, September 30, 2022	$	3,432,079	$	14,725	$	3,446,804