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 June 30, ~~2020~~2021

☐	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” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☐	Accelerated filer	~~Accelerated~~☐
Non-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 August ~~7, 2020~~13, 2021 was ~~12,526,708.~~11,752,990.

Table of Contents

INDEX

		Page

Part I. Financial Information		3

Item 1. Financial Statements		3

Consolidated Balance Sheets – June 30, ~~2020~~2021 (unaudited) and December 31, ~~2019~~2020		3

Consolidated Statements of Income For the three and six months ended June 30, ~~2020~~2021 and ~~2019~~2020 (unaudited)		4

Consolidated Statements of Comprehensive Income For the three and six months ended June 30, ~~2020~~2021 and ~~2019~~2020 (unaudited)		65

Consolidated Statements of Changes in Stockholders’ Equity For the three and six months ended June 30, ~~2020~~2021 and ~~2019~~2020 (unaudited)		76

Consolidated Statements of Cash Flows For the ~~three and~~ six months ended June 30, ~~2020~~2021 and ~~2019~~2020 (unaudited)		87

Notes to Consolidated Financial Statements (unaudited)		98

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		3634

Item 3. Quantitative and Qualitative Disclosures about Market Risk		5148

Item 4. Controls and Procedures		5148

Part II. Other Information		5149

Item 1. Legal Proceedings		5149

Item 1A. Risk Factors		5149

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		5449

Item 3. Defaults Upon Senior Securities		5450

Item 4. Mine Safety Disclosures		5450

Item 5. Other Information		5450

Item 6. Exhibits		5451

Signatures		5652

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

SHORE BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

~~(Dollars in thousands, except per share amounts)~~

June 30,

December 31,
(In thousands, except share and per share data)

2020

2019
ASSETS

(Unaudited)


Cash and due from banks

$
24,585

$
18,465
Interest-bearing deposits with other banks

101,699

76,506
Cash and cash equivalents

126,284

94,971
Investment securities:


Available-for-sale, at fair value

86,020

122,791
Held to maturity, at amortized cost - fair value of $11,715 (2020) and $8,654 (2019)

11,710

8,786
Equity securities, at fair value

1,388

1,342
Restricted securities

3,626

4,190

Loans

1,407,249

1,248,654
Less: allowance for credit losses

(11,090)

(10,507)
Loans, net

1,396,159

1,238,147

Premises and equipment, net

24,668

23,821
Goodwill

17,518

17,518
Other intangible assets, net

1,970

2,252
Other real estate owned, net

38

74
Right-of-use assets

4,879

4,771
Other assets

45,264

40,572
TOTAL ASSETS

$
1,719,524

$
1,559,235

LIABILITIES


Deposits:


Noninterest-bearing

$
442,996

$
356,618
Interest-bearing

1,061,732

984,716
Total deposits

1,504,728

1,341,334

Short-term borrowings

1,064

1,226
Long-term borrowings

—

15,000
Lease liabilities

4,941

4,792
Other liabilities

8,657

4,081
TOTAL LIABILITIES

1,519,390

1,366,433

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY


Common stock, par value $.01 per share; shares authorized - 35,000,000; shares issued and outstanding - 12,525,667 (2020) and 12,500,372 (2019)

125

125
Additional paid in capital

61,129

61,045
Retained earnings

136,876

131,425
Accumulated other comprehensive income

2,004

207
TOTAL STOCKHOLDERS' EQUITY

200,134

192,802
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$
1,719,524

$
1,559,235


	June 30,		December 31,
(In thousands, except share and per share data)	2021		2020
ASSETS	(Unaudited)
Cash and due from banks	$	18,275	$	16,666
Interest-bearing deposits with other banks		218,913		170,251
Cash and cash equivalents		237,188		186,917
Investment securities:
Available-for-sale, at fair value		113,957		139,568
Held to maturity, at amortized cost - fair value of $197,991 (2021) and $65,828 (2020)		198,884		65,706
Equity securities, at fair value		1,384		1,395
Restricted securities		3,189		3,626

Loans		1,472,429		1,454,256
Less: allowance for credit losses		(15,088)		(13,888)
Loans, net		1,457,341		1,440,368

Premises and equipment, net		25,313		24,924
Goodwill		17,518		17,518
Other intangible assets, net		1,473		1,719
Other real estate owned, net		203		—
Right-of-use assets		5,616		4,795
Other assets		58,194		46,779
TOTAL ASSETS	$	2,120,260	$	1,933,315

LIABILITIES
Deposits:
Noninterest-bearing	$	538,009	$	509,091
Interest-bearing		1,342,573		1,191,614
Total deposits		1,880,582		1,700,705

Securities sold under retail repurchase agreements		2,907		1,050
Subordinated debt		24,490		24,429
Total borrowings		27,397		25,479

Lease liabilities		5,757		4,874
Other liabilities		7,842		7,238
TOTAL LIABILITIES		1,921,578		1,738,296

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share; shares authorized - 35,000,000; shares issued and outstanding - 11,751,859 (2021) and 11,783,380 (2020)		118		118
Additional paid in capital		51,544		52,167
Retained earnings		146,414		141,205
Accumulated other comprehensive income		606		1,529
TOTAL STOCKHOLDERS' EQUITY		198,682		195,019
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	2,120,260	$	1,933,315

See accompanying notes to Consolidated Financial Statements.

Table of Contents

SHORE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

~~(Dollars in thousands, except per share amounts)~~


	For Three Months Ended				For Six Months Ended				For Three Months Ended				For Six Months Ended
	June 30,				June 30,				June 30,				June 30,
(In thousands, except per share data)	2020		2019		2020		2019		2021		2020		2021		2020

INTEREST INCOME
Interest and fees on loans	$	13,945	$	13,749	$	27,740	$	27,248	$	14,381	$	13,945	$	28,747	$	27,740
Interest and dividends on investment securities:		—		—		—		—
Taxable		638		887		1,357		1,885		1,095		638		2,025		1,357
Interest on deposits with other banks		11		113		183		276		55		11		102		183
Total interest income		14,594		14,749		29,280		29,409		15,531		14,594		30,874		29,280

INTEREST EXPENSE
Interest on deposits		1,556		2,204		3,615		4,151		1,056		1,556		2,240		3,615
Interest on short-term borrowings		1		145		3		358		2		1		3		3
Interest on long-term borrowings		6		107		113		213		370		6		729		113
Total interest expense		1,563		2,456		3,731		4,722		1,428		1,563		2,972		3,731

NET INTEREST INCOME		13,031		12,293		25,549		24,687		14,103		13,031		27,902		25,549
Provision for credit losses		1,000		200		1,350		300		650		1,000		1,075		1,350

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES		12,031		12,093		24,199		24,387		13,453		12,031		26,827		24,199

NONINTEREST INCOME
Service charges on deposit accounts		544		1,028		1,410		1,962		683		544		1,357		1,410
Trust and investment fee income		363		385		738		757		475		363		882		738
Gains on sales and calls of investment securities		347		—		347		—		—		347		—		347
Other noninterest income		1,515		1,196		2,626		2,078		1,745		1,515		3,221		2,626
Total noninterest income		2,769		2,609		5,121		4,797		2,903		2,769		5,460		5,121

NONINTEREST EXPENSE
Salaries and wages		2,130		3,792		6,426		7,558		4,262		2,130		8,404		6,426
Employee benefits		1,535		1,068		3,257		2,322		1,493		1,535		3,337		3,257
Occupancy expense		702		668		1,400		1,359		770		702		1,584		1,400
Furniture and equipment expense		247		295		564		558		412		247		719		564
Data processing		1,037		919		2,081		1,829		1,217		1,037		2,344		2,081
Directors' fees		113		116		254		202		154		113		303		254
Amortization of other intangible assets		138		155		282		317		120		138		246		282
FDIC insurance premium expense		124		181		215		386		223		124		408		215
Other real estate owned expenses, net		—		60		18		293		1		—		2		18
Legal and professional fees		553		559		1,187		1,160		648		553		1,164		1,187
Merger-related expenses										377		—		377		—
Other noninterest expenses		1,084		1,172		2,328		2,344		1,199		1,084		2,486		2,328
Total noninterest expense		7,663		8,985		18,012		18,328		10,876		7,663		21,374		18,012

Income from continuing operations before income taxes		7,137		5,717		11,308		10,856
Income before income taxes										5,480		7,137		10,913		11,308
Income tax expense		1,802		1,489		2,855		2,800		1,449		1,802		2,884		2,855
Income from continuing operations		5,335		4,228		8,453		8,056

Loss from discontinued operations before income taxes		—		(4)		—		(103)
Income tax benefit		—		—		—		(25)
Loss from discontinued operations		—		(4)		—		(78)

NET INCOME	$	5,335	$	4,224	$	8,453	$	7,978	$	4,031	$	5,335	$	8,029	$	8,453

Earnings per common share - Basic and diluted									$	0.34	$	0.43	$	0.68	$	0.68

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

See accompanying notes to Consolidated Financial Statements.

Table of Contents

SHORE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) ~~(Continued)~~

~~(Dollars in thousands, except per share amounts)~~

Earnings per common share - Basic

Income from continuing operations

$
0.43

$
0.33

$
0.68

$
0.63

Loss from discontinued operations

—

—

—

(0.01)

Net income

$
0.43

$
0.33

$
0.68

$
0.62

Earnings per common share - Diluted

Income from continuing operations

$
0.43

$
0.33

$
0.68

$
0.63

Loss from discontinued operations

—

—

—

(0.01)

Net income

$
0.43

$
0.33

$
0.68

$
0.62

Dividends paid per common share

0.12

0.10

$
0.24

$
0.20


	For Three Months Ended				For Six Months Ended
	June 30,				June 30,
(In thousands)	2021		2020		2021		2020
Net income	$	4,031	$	5,335	$	8,029	$	8,453

Other comprehensive (loss) income:
Investment securities:
Unrealized holding (losses) gains on available-for-sale-securities		(194)		1,093		(1,269)		2,807
Tax effect		53		(292)		346		(760)

Reclassification of (gains) recognized in net income		—		(347)		—		(347)
Tax effect		—		88		—		88

Amortization of unrealized loss on securities transferred from available-for-sale to held-to-maturity		—		4		—		12
Tax effect		—		—		—		(3)
Total other comprehensive (loss) income		(141)		546		(923)		1,797
Comprehensive income	$	3,890	$	5,881	$	7,106	$	10,250

See accompanying notes to Consolidated Financial Statements.

Table of Contents

SHORE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF ~~COMPREHENSIVE INCOME (Unaudited)~~

~~(Dollars in thousands)~~

For Three Months Ended

For Six Months Ended

June 30,

June 30,

(Dollars in thousands)

2020

2019

2020

2019

Net income

$
5,335

$
4,224

$
8,453

$
7,978

Other comprehensive income:

Investment securities:

Unrealized holding gains on available-for-sale-securities

1,093

1,797

2,807

3,780

Tax effect

(292)

(492)

(760)

(1,033)

Reclassification of (gains) recognized in net income

(347)

—

(347)

—

Tax effect

88

—

88

—

Amortization of unrealized loss on securities transferred from available-for-sale to held-to-maturity

4

7

12

14

Tax effect

—

(1)

(3)

(4)

Total other comprehensive income

546

1,311

1,797

2,757

Comprehensive income

$
5,881

$
5,535

$
10,250

$
10,735

~~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 Six months Ended June 30, ~~2020~~2021 and ~~2019~~

~~(Dollars in thousands)~~2020

Accumulated

Additional

Other

Total

Common

Paid in

Retained

Comprehensive

Stockholders’


Stock

Capital

Earnings

Income

Equity
Balances, January 1, 2020

$
125

$
61,045

$
131,425

$
207

$
192,802

Net income

��
—

—

3,118

—

3,118

Other comprehensive income

—

—

—

1,251

1,251

Stock-based compensation

—

61

—

—

61

Vesting of restricted stock, net of shares surrendered

—

(39)

—

—

(39)

Cash dividends declared

—

—

(1,499)

—

(1,499)

Balances, March 31, 2020

$
125

$
61,067

$
133,044

$
1,458

$
195,694

Net Income

—

—

5,335

—

5,335

Other comprehensive income

—

—

—

546

546

Stock-based compensation

—

62

—

—

62

Cash dividends declared

—

—

(1,503)

—

(1,503)

Balances, June 30, 2020

$
125

$
61,129

$
136,876

$
2,004

$
200,134


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

Net income		—		—		3,998		—		3,998

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

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

Stock-based compensation		—		97		—		—		97

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

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

Net Income		—		—		4,031		—		4,031

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

Stock-based compensation		—		99		—		—		99

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

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

Accumulated

Additional

Other

Total

Common

Paid in

Retained

Comprehensive

Stockholders’

Stock

Capital

Earnings

(Loss)

Equity
Balances, January 1, 2019

$
127

$
65,434

$
120,574

$
(2,950)

$
183,185

Net Income

—

—

3,754

—

3,754

Other comprehensive income

—

—

—

1,446

1,446

Stock-based compensation

—

63

—

—

63

Exercise of options and vesting of restricted stock, net of shares surrendered

1

(89)

—

—

(88)

Cash dividends declared

—

—

(1,278)

—

(1,278)

Balances, March 31, 2019

$
128

$
65,408

$
123,050

$
(1,504)

$
187,082

Net Income

—

—

4,224

—

4,224

Other comprehensive income

—

—

—

1,311

1,311

Stock-based compensation

—

(32)

—

—

(32)

Cash dividends declared

—

—

(1,278)

—

(1,278)

Balances, June 30, 2019

$
128

$
65,376

$
125,996

$
(193)

$
191,307


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

Net Income		—		—		3,118		—		3,118

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

Stock-based compensation		—		61		—		—		61

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

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

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

Net Income		—		—		5,335		—		5,335

Other comprehensive income		—		—		—		546		546

Stock-based compensation		—		62		—		—		62

Cash dividends declared		—		—		(1,503)		—		(1,503)

Balances, June 30, 2020	$	125	$	61,129	$	136,876	$	2,004	$	200,134

See accompanying notes to Consolidated Financial Statements.

Table of Contents

SHORE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

~~(Dollars in thousands)~~

For Six Months Ended

June 30,

2020

2019
(Dollars in thousands)

CASH FLOWS FROM OPERATING ACTIVITIES:

$
8,453

$
7,978
Net Income

Adjustments to reconcile net income to net cash provided by operating activities:

Net accretion of acquisition accounting estimates

(172)

(262)
Provision for credit losses

1,350

300
Depreciation and amortization

1,225

1,198
Net amortization of securities

203

262
Stock-based compensation expense

123

31
Deferred income tax (benefit) expense

(1,598)

233
(Gains) on sales and calls of securities

(347)

—
Losses on sales and disposals of premises and equipment

40

—
Losses on sales and valuation adjustments on other real estate owned

18

287
Fair value adjustment on equity securities

(32)

(41)
Bank owned life insurance income

(647)

—
Net changes in:

Accrued interest receivable

(2,712)

(326)
Other assets

(455)

2,644
Accrued interest payable

(123)

(383)
Other liabilities

4,429

(7,485)
Net cash provided by operating activities

9,755

4,436

CASH FLOWS FROM INVESTING ACTIVITIES:

Proceeds from maturities and principal payments of investment securities available for sale

26,360

12,542
Proceeds from sales and calls of investment securities available for sale

13,019

—
Proceeds from maturities and principal payments of investment securities held to maturity

105

150
Purchases of securities held to maturity

(3,021)

—
Purchases of equity securities

(14)

(15)
Net change in loans

(159,251)

(45,130)
Purchases of premises and equipment

(1,476)

(545)
Proceeds from sales of premises and equipment

2

—
Proceeds from sales of other real estate owned

18

411
Net redemption of restricted securities

564

1,381
Net cash (used in) investing activities

(123,694)

(31,206)

CASH FLOWS FROM FINANCING ACTIVITIES:

Net changes in:

Noninterest-bearing deposits

86,378

16,450
Interest-bearing deposits

77,077

20,323
Short-term borrowings

(162)

(35,304)
Long-term borrowings

(15,000)

—
Common stock dividends paid

(3,002)

(2,556)
Repurchase of shares for tax withholding on exercised options and vested restricted stock

(39)

(88)
Net cash provided by (used in) financing activities

145,252

(1,175)
Net increase in cash and cash equivalents

31,313

(27,945)
Cash and cash equivalents at beginning of period

94,971

67,225
Cash and cash equivalents at end of period

$
126,284

$
39,280

Supplemental cash flows information:

Interest paid

$
3,914

$
5,219
Income taxes paid

$
174

$
9,669
Lease liabilities arising from right-of-use assets

$
419

$
3,877
Unrealized gain on securities available for sale

$
2,460

$
3,780
Amortization of unrealized loss on securities transferred from available for sale to held to maturity

$
12

$
14


	For Six Months Ended
	June 30,
(In thousands)	2021		2020

CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	8,029	$	8,453
Adjustments to reconcile net income to net cash provided by operating activities:
Net accretion of acquisition accounting estimates		(142)		(172)
Provision for credit losses		1,075		1,350
Depreciation and amortization		1,277		1,225
Net amortization of securities		687		203
Amortization of debt issuance costs		61		—
Stock-based compensation expense		196		123
Deferred income tax (benefit)		(578)		(1,598)
(Gains) on sales and calls of securities		—		(347)
Losses on sales and disposals of premises and equipment		—		40
Losses on sales and valuation adjustments on other real estate owned		2		18
Fair value adjustment on equity securities		20		(32)
Bank owned life insurance income		(545)		(647)
Net changes in:
Accrued interest receivable		1,229		(2,712)
Other assets		(1,127)		(455)
Accrued interest payable		(90)		(123)
Other liabilities		446		4,429
Net cash provided by operating activities		10,540		9,755

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and principal payments of investment securities available for sale		23,862		26,360
Proceeds from sales and calls of investment securities available for sale		—		13,019
Proceeds from maturities and principal payments of investment securities held to maturity		3,037		105
Purchases of securities held to maturity		(136,422)		(3,021)
Purchases of equity securities		(10)		(14)
Net change in loans		(18,156)		(159,251)
Purchases of premises and equipment		(1,048)		(1,476)
Proceeds from sales of premises and equipment		—		2
Proceeds from sales of other real estate owned		—		18
Net redemption of restricted securities		437		564
Purchases of bank owned life insurance		(10,109)		—
Net cash (used in) investing activities		(138,409)		(123,694)


CASH FLOWS FROM FINANCING ACTIVITIES:
Net changes in:
Noninterest-bearing deposits		28,918		86,378
Interest-bearing deposits		151,004		77,077
Short-term borrowings		1,857		(162)
Long-term borrowings		—		(15,000)
Common stock dividends paid		(2,820)		(3,002)
Retirement of common stock		(819)		—
Repurchase of shares for tax withholding on exercised options and vested restricted stock		—		(39)
Net cash provided by financing activities		178,140		145,252
Net increase in cash and cash equivalents		50,271		31,313
Cash and cash equivalents at beginning of period		186,917		94,971
Cash and cash equivalents at end of period	$	237,188	$	126,284

Supplemental cash flows information:
Interest paid	$	3,046	$	3,914
Income taxes paid	$	2,441	$	174
Lease liabilities arising from right-of-use assets	$	1,132	$	419
Unrealized (loss) gain on securities available for sale	$	(1,269)	$	2,460
Transfers from loans to other real estate owned	$	205	$	—
Amortization of unrealized loss on securities transferred from available for sale to held to maturity	$	—	$	12

See accompanying notes to Consolidated Financial Statements.

Table of Contents

Shore Bancshares, Inc.

Notes to Consolidated Financial Statements

For the Three and Six Months Ended June 30, ~~2020~~2021 and ~~2019~~2020

(Unaudited)

Note 1 – Basis of Presentation

The consolidated financial statements include the accounts of Shore Bancshares, Inc. and its subsidiary 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 June 30, ~~2020,~~2021, the consolidated results of income and comprehensive income for the three and six months ended June 30, ~~2020~~2021 and ~~2019,~~2020, changes in stockholders’ equity for the three and six months ended June 30, ~~2020~~2021 and ~~2019~~2020 and cash flows for the six months ended June 30, ~~2020~~2021 and ~~2019,~~2020, have been included. All such adjustments are of a normal recurring nature. The amounts as of December 31, ~~2019~~2020 were derived from the ~~2019~~2020 audited financial statements. The results of operations for the three and six months ended June 30, ~~2020~~2021 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, ~~2019.~~2020. 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 subsidiary, Shore United Bank (the “Bank”).

Risks and Uncertainties

~~The~~Since the novel coronavirus ~~(“COVID-19”~~("COVID-19") ~~spread rapidly across the world in the first quarter of 2020 and~~ was declared a pandemic ~~by the World Health Organization. The government and private sector responses to contain its spread began to significantly affect our operations~~ in March 2020, COVID-19 has significantly affected our communities, customers, and operations. COVID-19 continues to ~~do so. The pandemic will likely adversely affect our operations~~have a significant impact in ~~subsequent quarters, although such effects may vary significantly. The duration and~~2021, however, the extent of its effects are dependent upon multiple factors, such as the extent of distribution and efficacy of vaccines, COVID-19 variants, pandemic-related restrictions, and government response, among others. As a result, the ultimate effects of COVID-19 over the longer ~~terms~~term cannot be reasonably estimated at this time. ~~The risks~~Risks and uncertainties ~~resulting~~arising from the pandemic ~~most likely to affect our future earnings, cash flows and financial condition in future quarters~~remain, primarily ~~include~~concerning the ~~nature and duration~~ability of ~~the financial effects felt by our~~ customers ~~and the related impact on the customers' ability~~ to fulfill their financial obligations to the Company as well as potential operational disruptions and the ~~potential decline~~ability of ~~real estate values resulting from market disruption which may impair~~ the ~~recorded values of collateral-dependent loans. Further, these factors, in addition~~Company to ~~those pervasive to the industry~~generate demand for its products and ~~overall U.S. economy, may negatively impact the overall value of our Company in such a way that an impairment charge to the carrying value of goodwill is required.~~services. Accordingly, ~~significant~~ estimates used in the preparation of our financial statements ~~related to the allowance for credit losses and valuation of goodwill~~ may be subject to significant adjustments in future periods. ~~The greater the duration and severity of the pandemic the more likely that estimates will be materially impacted by its effects.~~

Recent Accounting Standards and Other Authoritative Guidance

ASU No. 2016-13 – In June 2016, the FASB issued 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. At the FASB’s October 16, 2019 meeting, the Board affirmed its decision to amend the effective date of this ASU for many companies. Public business entities that are SEC filers, excluding those meeting the smaller reporting company definition, ~~will retain~~retained the initial required implementation date of fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. All other entities will be

~~Table of Contents~~

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.

Table of Contents

The team is currently running a parallel simulation to its current incurred loss impairment model. The Company is continuing to evaluate the extent of the potential impact of this standard and continues to keep current on evolving interpretations and industry practices via webcasts, publications, conferences, and peer bank meetings.

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

ASU No. 2019-12 – In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes.” The ASU is expected to reduce cost and complexity related to the accounting for income taxes by removing specific exceptions to general principles in Topic 740 (eliminating the need for an organization to analyze whether certain exceptions apply in a given period) and improving financial statement preparers’ application of certain income tax-related guidance. This ASU is part of the FASB’s simplification initiative to make narrow-scope simplifications and improvements to accounting standards through a series of short-term projects. Forpublic business entities, the amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing the impact that ASU 2019-12 will have on its consolidated financial statements.

ASU No. 2020-01 – In January 2020, the FASB issued ASU 2020-01, “Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.” The ASU is based on a consensus of the Emerging Issues Task Force and is expected to increase comparability in accounting for these transactions. ASU 2016-01 made targeted improvements to accounting for financial instruments, including providing an entity the ability to measure certain equity securities without a readily determinable fair value at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Among other topics, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting. For public business entities, the amendments in the ASU are effective for fiscal years beginning after December 31, 2020, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of ASU 2020-01 to have a material impact on its consolidated financial statements.

ASU No. 2020-04 – In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the London Inter-bank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. At present, the Bank has limited exposure to LIBOR based pricing. LIBOR based loans only comprise 1426 loans or ~~2.6%~~7.6% 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.

~~On March 12, 2020,~~ASU No. 2021-04 - In May 2021, the ~~SEC finalized amendments to its “accelerated filer”~~FASB issued ASU 2021-04, “Earnings Per Share (Topic 260), Debt - Modifications and ~~“large accelerated filer” definitions. The amendments increase the threshold criteria~~Extinguishments (Subtopic 470-50), Compensation - Stock Compensation (Topic 718), and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for ~~meeting these filer classifications and are effective on April 27, 2020. Any~~

~~Table~~Certain Modifications or Exchanges of ~~Contents~~

changes in filer status are to be applied beginning with the filer’s first annual report filed with the SEC subsequent to the effective date. Prior to these changes, the Company was required to comply with section 404(b) of the Sarbanes Oxley Act concerning auditor attestation over internal control over financial reporting as an “accelerated filer” as it had more than $75 million in public float but less than $700 million at the end of the Company’s most recent second quarter. The rule change expands the category of “smaller reporting companies” to include entities with public float of less than $700 million and less than $100 million in annual revenues. The Company expects to meet this expanded category of small reporting company and will no longer be considered an accelerated filer after the 2020 Annual Report. If the Company’s annual revenues exceed $100 million, its category will change back to “accelerated filer”. The classifications of “accelerated filer” and “large accelerated filer” require a public company to obtain an auditor attestation concerning the effectiveness of internal control over financial reporting (“ICFR”) and include the opinion on ICFR in its annual report on Form 10-K. Smaller reporting companies also have additional time to file quarterly and annual financial statements. All public companies are required to obtain and file annual financial statement audits, as well as provide management’s assertion on effectiveness of internal control over financial reporting, but the external auditor attestation of internal control over financial reporting is not required for smaller reporting companies. As the Bank has total assets exceeding $1.0 billion, it remains subject to FDICIA, which requires an auditor attestation concerning internal controls over financial reporting. As such, other than the additional time provided to file quarterly and annual financial statements, this change does not significantly change the Company’s annual reporting and audit requirements.

In March 2020, (Revised in April 2020) various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (“the agencies”) issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by COVID-19. The interagency statement was effective immediately and impacted accounting for loan modifications. Under Accounting Standards Codification 310-40, “ReceivablesFreestanding Equity – Troubled Debt Restructurings by Creditors,” (“ASC 310-40”), a restructuring of debt constitutes a troubled debt restructuring (“TDR”) if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The agencies confirmed with the staffClassified Written Call Options (a consensus of the FASB Emerging Issues Task Force).” The ASU addresses how an issuer should account for modifications or an exchange of freestanding written call options classified as equity that ~~short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are~~is not ~~to be considered TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions~~within the scope of ~~repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at~~another Topic. For both public and private companies, the ~~time a modification program~~ASU is ~~implemented. As~~effective for fiscal years beginning after December 15, 2021. Transition is prospective. Early adoption is permitted. The Company does not expect the adoption of ~~June 30, 2020, the Company has offered payment deferrals for commercial and consumer customers for up to six months. The loan modifications offered to specific loan types are as follows:~~

●

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

●

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

●

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

●

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

●

~~Consumer loans~~ ~~– Borrowers are required to sign an amendment to the initial loan agreement at the time of deferral, which re-amortizes the loan and extends the maturity date based on the number of months deferred.~~

~~This interagency guidance is expected~~ASU 2021-04 to have a material impact on ~~the Company’s financial statements; however, this impact cannot be quantified at this time.~~

~~Table of Contents~~

~~Note 2 – Discontinued Operations~~

~~On December 31, 2018, the Company completed the sale of the specific assets and activities related to~~ its insurance agency, Avon-Dixon Agency, LLC (“Avon-Dixon”) to Avon-Dixon, an Alera Group Agency, LLC (“Alera”). Also, on this date the Company discontinued the operations of its premium finance company, Mubell Finance, LLC (“Mubell”). Together, Avon-Dixon and Mubell are referred to as the “Insurance Subsidiaries”. The Insurance Subsidiaries represented the Company’s insurance products and services segment, the activities of which related to originating, servicing and underwriting retail insurance policies. Certain other assets and liabilities to be sold or settled separately within one year, were classified as discontinued operations in the Company’s consolidated financial statements. ~~All of the remaining assets and liabilities of discontinued operations were settled prior to December 31, 2019.~~

There were 0 assets or liabilities of discontinued operations at June 30, 2020 or December 31, 2019. The following table presents the financial information of discontinued operations for the periods indicated:

For Six Months Ended

June 30,
($ in thousands)

2020

2019
Noninterest income

All other income

$
—

$
14
Total noninterest income

—

14
Noninterest expense

Salaries and wages

—

31
Employee benefits

—

7
Occupancy expense

—

18
Furniture and equipment

—

1
Legal and professional fees

—

64
Other noninterest expenses

—

(8)
Total noninterest expense

—

113
Loss from discontinued operations before income taxes

—

(99)
Income tax benefit

—

(25)
Loss from discontinued operations

$
—

$
(74)

Recent Accounting Developments

In December 2020, the Consolidated Appropriations Act of 2021 (“CAA”) was passed. Under Section 541 of the CAA, Congress extended or modified many of the relief programs first created by the CARES Act, including the PPP loan program and treatment of certain loan modifications related to the COVID-19 pandemic. The Bank participated in the second round of PPP lending under the CAA, which resulted in 959 PPP loans for approximately $67.3 million. In addition, 2 hospitality loans remained in the COVID-19 relief program under the CARES Act.

129

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Note 32 – Earnings Per Share

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


	For the Three Months Ended				For the Six Months Ended				For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,				June 30,				June 30,
(In thousands, except per share data)	2020		2019		2020		2019		2021		2020		2021		2020
Net income from continuing operations	$	5,335	$	4,228	$	8,453	$	8,056
Net loss from discontinued operations		-		(4)		-		(78)
Net Income	$	5,335	$	4,224	$	8,453	$	7,978	$	4,031	$	5,335	$	8,029	$	8,453
Weighted average shares outstanding - Basic		12,524		12,779		12,519		12,774		11,752		12,524		11,749		12,519
Dilutive effect of common stock equivalents-options		1		5		2		5		2		1		1		2
Weighted average shares outstanding - Diluted		12,525		12,784		12,521		12,779		11,754		12,525		11,750		12,521
							��
Basic earnings per common share
Income from continuing operations	$	0.43	$	0.33	$	0.68	$	0.63
Loss from discontinued operations		—		—		—		(0.01)
Net income	$	0.43	$	0.33	$	0.68	$	0.62

Diluted earnings per common share
Income from continuing operations	$	0.43	$	0.33	$	0.68	$	0.63
Loss from discontinued operations		—		—		—		(0.01)
Net income	$	0.43	$	0.33	$	0.68	$	0.62
Earnings per common share - Basic and Diluted									$	0.34	$	0.43	$	0.68	$	0.68

There were 0 weighted average common stock equivalents excluded from the calculation of diluted earnings per share for the three and six months ended June 30, ~~2020~~2021 and ~~2019.~~2020.

Note 43 – Investment Securities

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:
June 30, 2020
June 30, 2021
U.S. Government agencies	$	9,710	$	82	$	3	$	9,789	$	18,574	$	5	$	592	$	17,987
Mortgage-backed		73,551		2,681		1		76,231		94,549		1,908		487		95,970
Total	$	83,261	$	2,763	$	4	$	86,020	$	113,123	$	1,913	$	1,079	$	113,957

December 31, 2019
December 31, 2020
U.S. Government agencies	$	23,854	$	3	$	31	$	23,826	$	23,600	$	20	$	83	$	23,537
Mortgage-backed		98,638		574		247		98,965		113,865		2,234		68		116,031
Total	$	122,492	$	577	$	278	$	122,791	$	137,465	$	2,254	$	151	$	139,568

NaN available for sale securities were sold during the three and six months ended June 30, 2021. During the three and six months ended June 30, 2020, the Company sold available for sale securities for proceeds of $13.0 million and recognized gross gains of $347 thousand. ~~NaN available for sale securities were sold during the three and six months ended June 30, 2019.~~

1310

Table of Contents


			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
(Dollars in thousands)	Cost		Gains		Losses		Value
Held-to-maturity securities:
June 30, 2021
U.S. Government agencies	$	63,139	$	41	$	430	$	62,750
Mortgage-backed		116,305		157		869		115,593
States and political subdivisions		400		1		—		401
Other debt securities		19,040		222		15		19,247
Total	$	198,884	$	421	$	1,314	$	197,991

December 31, 2020
U.S. Government agencies	$	18,893	$	38	$	43	$	18,888
Mortgage-backed		27,347		7		18		27,336
States and political subdivisions		400		1		—		401
Other debt securities		19,066		139		2		19,203
Total	$	65,706	$	185	$	63	$	65,828

Equity securities with an aggregate fair value of $1.4 million at June 30, 2021 and December 31, 2020 are presented separately on the balance sheet. The fair value adjustment recorded through earnings totaled $(20) thousand for the six months ended June 30, 2021 and $32 thousand for the six months ended June 30, 2020, respectively.

The following tables provide information about gross unrealized losses and fair value by length of time that the individual securities have been in a continuous unrealized loss position at June 30, 2021 and December 31, 2020.


	Less than				More than
	12 Months				12 Months				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(Dollars in thousands)	Value		Losses		Value		Losses		Value		Losses
June 30, 2021
Available-for-sale securities:
U.S. Government agencies	$	17,409	$	591	$	221	$	1	$	17,630	$	592
Mortgage-backed		45,318		487		—		—		45,318		487
Total	$	62,727	$	1,078	$	221	$	1	$	62,948	$	1,079

Held-to-maturity securities:
U.S. Government agencies	$	36,696	$	430	$	—	$	—	$	36,696	$	430
Mortgage-backed		65,359		869		—		—		65,359		869
Other debt securities		3,985		15		—		—		3,985		15
Total	$	106,040	$	1,314	$	—	$	—	$	106,040	$	1,314

Table of Contents

Gross

Gross

Estimated

Amortized

Unrealized

Unrealized

Fair
(Dollars in thousands)

Cost

Gains

Losses

Value
Held-to-maturity securities:








June 30, 2020

U.S. Government agencies

$
1,292

$
35

$
—

$
1,327
States and political subdivisions

400

1

—

401
Other debt securities

10,018

12

43

9,987
Total

$
11,710

$
48

$
43

$
11,715

December 31, 2019

U.S. Government agencies

$
1,386

$
—

$
5

$
1,381
States and political subdivisions

400

1

—

401
Other debt securities

7,000

—

128

6,872
Total

$
8,786

$
1

$
133

$
8,654

Equity securities with an aggregate fair value of $1.4 million at June 30, 2020 and $1.3 million at December 31, 2019 are presented separately on the balance sheet. The fair value adjustment recorded through earnings totaled $32 thousand for the six months ended June 30, 2020 and $41 thousand for the six months ended June 30, 2019, respectively.

Less than

More than

12 Months

12 Months

Total


Fair

Unrealized

Fair

Unrealized

Fair

Unrealized
(Dollars in thousands)

Value

Losses

Value

Losses

Value

Losses
June 30, 2020

Available-for-sale securities:

U.S. Government agencies

$
—

$
—

$
402

$
3

$
402

$
3
Mortgage-backed

—

—

1,936

1

1,936

1
Total

$
—

$
—

$
2,338

$
4

$
2,338

$
4

Held-to-maturity securities:

Other debt securities

$
3,990

$
10

$
2,967

$
33

$
6,957

$
43
Total

$
3,990

$
10

$
2,967

$
33

$
6,957

$
43

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, 2019

Available-for-sale securities:

U.S. Government agencies

$
4,995

$
5

$
18,516

$
26

$
23,511

$
31
Mortgage-backed

12,180

27

22,282

220

34,462

247
Total

$
17,175

$
32

$
40,798

$
246

$
57,973

$
278

Held-to-maturity securities:

U.S. Government agencies

$
1,381

$
5

$
—

$
—

$
1,381

$
5
Other debt securities

3,905

95

2,967

33

6,872

128
Total

$
5,286

$
100

$
2,967

$
33

$
8,253

$
133


	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, 2020
Available-for-sale securities:
U.S. Government agencies	$	14,919	$	82	$	236	$	1	$	15,155	$	83
Mortgage-backed		11,869		68		—		—		11,869		68
Total	$	26,788	$	150	$	236	$	1	$	27,024	$	151

Held-to-maturity securities:
U.S. Government agencies	$	6,646	$	43	$	—	$	—	$	6,646	$	43
Mortgage-backed		5,093		18		—		—		5,093		18
Other debt securities		498		2		—		—		498		2
Total	$	12,237	$	63	$	—	$	—	$	12,237	$	63

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

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likely than not that the Company will be required to sell these securities before recovery of their amortized cost ~~bases,~~basis, which may be at maturity for debt securities, the Company considers the unrealized losses to be temporary.

There were 318 available-for-sale securities and 2NaN held-to-maturity ~~security~~securities in an unrealized loss position at June 30, ~~2020.~~2021.

The following table provides information on the amortized cost and estimated fair values of investment securities by maturity date at June 30, ~~2020.~~2021.


	Available for sale				Held to maturity				Available for sale				Held to maturity
	Amortized				Amortized				Amortized				Amortized
(Dollars in thousands)	Cost		Fair Value		Cost		Fair Value		Cost		Fair Value		Cost		Fair Value
Due in one year or less	$	9,002	$	9,080	$	—	$	—	$	—	$	—	$	2,529	$	2,574
Due after one year through five years		1,916		1,977		400		401		975		1,009		10,381		10,392
Due after five years through ten years		42,964		44,744		10,018		9,987		54,955		55,891		57,481		57,456
Due after ten years		29,379		30,219		1,292		1,327		57,193		57,057		128,493		127,569
Total	$	83,261	$	86,020	$	11,710	$	11,715	$	113,123	$	113,957	$	198,884	$	197,991

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

Note 54 – Loans and Allowance for Credit Losses

The Company makes residential mortgage, commercial and consumer loans to customers primarily in Talbot County, Queen Anne’s County, Kent County, Caroline County, Dorchester County, ~~Wicomico~~Worcester County, Baltimore County and

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Howard County in Maryland, Kent County, Delaware and Accomack County, Virginia. The following table provides information about the principal classes of the loan portfolio at June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.


(Dollars in thousands)	June 30, 2020		December 31, 2019		June 30, 2021		December 31, 2020
Construction	$	110,657	$	99,829	$	116,760	$	106,760
Residential real estate		430,436		442,506		449,867		443,542
Commercial real estate		626,339		586,562		655,252		661,232
Commercial		214,616		102,020		186,162		211,256
Consumer		25,201		17,737		64,388		31,466
Total loans		1,407,249		1,248,654		1,472,429		1,454,256
Allowance for credit losses		(11,090)		(10,507)		(15,088)		(13,888)
Total loans, net	$	1,396,159	$	1,238,147	$	1,457,341	$	1,440,368

Loans are stated at their principal amount outstanding net of any purchase premiums/discounts, deferred fees and costs. Loans included deferred ~~costs,~~fees, net of ~~deferred fees,~~costs, of ~~$470~~$549 thousand and discounts on acquired loans of ~~$912~~$625 thousand at June 30, ~~2020.~~2021. Loans included deferred costs, net of deferred fees, of ~~$1.8 million~~$622 thousand and discounts on acquired loans of ~~$1.1 million~~$754 thousand at December 31, ~~2019.~~2020. At June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, included in total loans were ~~$72.9~~$42.5 million and ~~$79.2~~$52.3 million in loans, respectively, acquired as part of the NWBI branch acquisition in 2017. 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 loans are applied as a reduction of the loan principal balance unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.

A loan is considered impaired if it is probable that the Company will not collect all principal and interest payments according to the loan’s contractual terms 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.

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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. ~~See additional discussion under the caption “Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.~~

A loan is considered a TDR if a borrower is experiencing financial difficulties and a creditor has granted a concession. Concessions may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules and other actions intended to minimize potential losses. Loans are identified to be restructured when signs of impairment arise such as borrower interest rate reduction request, slowness to pay, or when an inability to repay becomes evident. The terms being offered are evaluated to determine if they are more liberal than those that would be indicated by policy or industry standards for similar, untroubled credits. In those situations where the terms or the interest rates are considered to be more favorable than industry standards or the 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 placed on nonaccrual status, six consecutive months of timely payments are required prior to returning the loan to accrual status.

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

In April 2020, the Company began its participation in the Paycheck Protection Program (“PPP”). The PPP commenced subsequent to the passage of the Coronavirus Aid, Relief and Economic Security (“CARES”) Act in March 2020, and was later expanded by the Paycheck Protection Program and Health Care Enhancement Act of April 2020. The PPP was designed to provide U.S. small businesses with cash-flow assistance during the COVID-19 pandemic through loans that are fully guaranteed by the Small Business Administration (“SBA”) which may be forgiven upon satisfaction of certain criteria. In December 2020, the Consolidated Appropriations Act of 2021 (“CAA”) was passed. Under Section 541 of the CAA, Congress extended or modified many of the relief programs first created by the CARES Act, including the PPP loan program and treatment of certain loan modifications related to the COVID-19 pandemic. This extension of PPP lending expired on May 31, 2021. Under both the CARES and CAA, the Company funded 2,454 loans for a cumulative balance of $196.0 million. As of June 30, 2021, the Company held PPP loans with a total outstanding balance of $86.8 million, which is included in the commercial loan segment in the table above. The decrease is due to repayment and forgiveness received as of June 30, 2021. 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.

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.

1614

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

The following tables include impairment information relating to loans and the allowance for credit losses as of June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.


			Residential		Commercial										Residential		Commercial		��
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Total		Construction		real estate		real estate		Commercial		Consumer		Total
June 30, 2020
June 30, 2021
Loans individually evaluated for impairment	$	335	$	7,775	$	10,884	$	571	$	—	$	19,565	$	327	$	4,898	$	5,575	$	237	$	—	$	11,037
Loans collectively evaluated for impairment		110,322		422,661		615,455		214,045		25,201		1,387,684		116,433		444,969		649,677		185,925		64,388		1,461,392
Total loans	$	110,657	$	430,436	$	626,339	$	214,616	$	25,201	$	1,407,249	$	116,760	$	449,867	$	655,252	$	186,162	$	64,388	$	1,472,429

Allowance for credit losses allocated to:
Loans individually evaluated for impairment	$	—	$	265	$	81	$	—	$	—	$	346	$	—	$	90	$	—	$	—	$	—	$	90
Loans collectively evaluated for impairment		1,497		2,374		4,016		2,355		502		10,744		2,574		3,722		5,600		1,879		1,223		14,998
Total allowance	$	1,497	$	2,639	$	4,097	$	2,355	$	502	$	11,090	$	2,574	$	3,812	$	5,600	$	1,879	$	1,223	$	15,088

Residential

Commercial






(Dollars in thousands)

Construction

real estate

real estate

Commercial

Consumer

Total
December 31, 2019

Loans individually evaluated for impairment

$
41

$
7,072

$
12,006

$
298

$
—

$
19,417
Loans collectively evaluated for impairment

99,788

435,434

574,556

101,722

17,737

1,229,237
Total loans

$
99,829

$
442,506

$
586,562

$
102,020

$
17,737

$
1,248,654

Allowance for credit losses allocated to:

Loans individually evaluated for impairment

$
—

$
395

$
580

$
—

$
—

$
975
Loans collectively evaluated for impairment

1,576

2,106

3,452

1,929

469

9,532
Total allowance

$
1,576

$
2,501

$
4,032

$
1,929

$
469

$
10,507

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

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of the net charge-off ratios used in the historical loss analysis and the historical loss rates are applied to all pools of loans accounted for under ASC 450. Additionally, the historical look-back periods for retail loan pools were adjusted to four years in the new model as compared to two years under the prior in-house model. While there were some variances between loan pools when comparing the two models, the Company's ending recorded allowance and provision for loan losses during the first and second quarter of 2020 were not materially impacted as a result of the transition.

The following tables provide information on impaired loans and any related allowance by loan class as of June 30, 2020 and December 31, 2019. 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



June 30, 2020

Unpaid

investment

investment

Quarter-to-date

Year-to-date

Interest

principal

with no

with an

Related

average recorded

average recorded

recorded
(Dollars in thousands)

balance

allowance

allowance

allowance

investment

investment

investment
June 30, 2020

Impaired nonaccrual loans:

Construction

$
297

$
297

$
—

$
—

$
297

$
198

$
—
Residential real estate

4,250

2,474

1,342

75

3,555

3,213

—
Commercial real estate

8,016

6,921

67

67

6,853

7,103

—
Commercial

679

548

—

—

551

466

—
Consumer

—

—

—

—

—

—

—
Total

$
13,242

$
10,240

$
1,409

$
142

$
11,256

$
10,980

$
—

Impaired accruing TDRs:

Construction

$
38

$
38

$
—

$
—

$
38

$
38

$
1
Residential real estate

3,905

1,199

2,706

190

3,912

3,967

79
Commercial real estate

3,369

2,712

657

14

3,373

3,390

47
Commercial

—

—

—

—

—

—

—
Consumer

—

—

—

—

—

—

—
Total

$
7,312

$
3,949

$
3,363

$
204

$
7,323

$
7,395

$
127

Other impaired accruing loans:

Construction

$
—

$
—

$
—

$
—

$
—

$
49

$
—
Residential real estate

54

54

—

—

179

394

1
Commercial real estate

527

527

—

—

1,053

867

3
Commercial

23

23

—

—

6

5

—
Consumer

—

—

—

—

16

9

—
Total

$
604

$
604

$
—

$
—

$
1,254

$
1,324

$
4

Total impaired loans:

Construction

$
335

$
335

$
—

$
—

$
335

$
285

$
1
Residential real estate

8,209

3,727

4,048

265

7,646

7,574

80
Commercial real estate

11,912

10,160

724

81

11,279

11,360

50
Commercial

702

571

—

—

557

471

—
Consumer

—

—

—

—

16

9

—
Total

$
21,158

$
14,793

$
4,772

$
346

$
19,833

$
19,699

$
131


			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Total
December 31, 2020
Loans individually evaluated for impairment	$	331	$	5,722	$	6,917	$	258	$	28	$	13,256
Loans collectively evaluated for impairment		106,429		437,820		654,315		210,998		31,438		1,441,000
Total loans	$	106,760	$	443,542	$	661,232	$	211,256	$	31,466	$	1,454,256

Allowance for credit losses allocated to:
Loans individually evaluated for impairment	$	—	$	135	$	78	$	—	$	—	$	213
Loans collectively evaluated for impairment		2,022		3,564		5,348		2,089		652		13,675
Total allowance	$	2,022	$	3,699	$	5,426	$	2,089	$	652	$	13,888

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Recorded

Recorded



June 30, 2019

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, 2019

Impaired nonaccrual loans:

Construction

$
—

$
—

$
—

$
—

$
1,515

$
2,153

$
—
Residential real estate

2,660

678

1,797

215

2,730

3,034

—
Commercial real estate

8,242

5,680

2,137

561

9,613

9,466

—
Commercial

421

298

—

—

314

319

—
Consumer

—

—

—

—

—

—

—
Total

$
11,323

$
6,656

$
3,934

$
776

$
14,172

$
14,972

$
—

Impaired accruing TDRs:

Construction

$
41

$
41

$
—

$
—

$
47

$
48

$
8
Residential real estate

4,041

2,583

1,458

180

4,219

4,263

81
Commercial real estate

3,419

2,748

671

19

3,516

3,533

66
Commercial

—

—

—

—

—

—

—
Consumer

—

—

—

—

—

—

—
Total

$
7,501

$
5,372

$
2,129

$
199

$
7,782

$
7,844

$
155

Other impaired accruing loans:

Construction

$
—

$
—

$
—

$
—

$
—

$
—

$
—
Residential real estate

556

556

—

—

88

95

—
Commercial real estate

770

770

—

—

531

266

2
Commercial

—

—

—

—

11

10

—
Consumer

—

—

—

—

7

5

—
Total

$
1,326

$
1,326

$
—

$
—

$
637

$
376

$
2

Total impaired loans:

Construction

$
41

$
41

$
—

$
—

$
1,562

$
2,201

$
8
Residential real estate

7,257

3,817

3,255

395

7,037

7,392

81
Commercial real estate

12,431

9,198

2,808

580

13,660

13,265

68
Commercial

421

298

—

—

325

329

—
Consumer

—

—

—

—

7

5

—
Total

$
20,150

$
13,354

$
6,063

$
975

$
22,591

$
23,192

$
157

The following tables provide information on impaired loans and any related allowance by loan class as of June 30, 2021 and December 31, 2020. 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		recorded
(Dollars in thousands)	balance		allowance		allowance		allowance		investment		investment		investment
June 30, 2021
Impaired nonaccrual loans:
Construction	$	297	$	297	$	—	$	—	$	297	$	297	$	—
Residential real estate		1,318		1,239		—		—		1,204		1,307		—
Commercial real estate		2,562		2,174		—		—		2,214		2,613		—
Commercial		391		237		—		—		241		246		—
Consumer		—		—		—		—		9		19		—
Total	$	4,568	$	3,947	$	—	$	—	$	3,965	$	4,482	$	—

Impaired accruing TDRs:
Construction	$	30	$	30	$	—	$	—	$	31	$	32	$	1
Residential real estate		3,329		2,209		1,120		90		3,354		3,442		89
Commercial real estate		2,979		2,979		—		—		3,005		3,035		46
Commercial		—		—		—		—		—		—		—
Consumer		—		—		—		—		—		—		—
Total	$	6,338	$	5,218	$	1,120	$	90	$	6,390	$	6,509	$	136

Other impaired accruing loans:
Construction	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential real estate		330		330		—		—		359		606		7
Commercial real estate		422		422		—		—		479		495		2
Commercial		—		—		—		—		—		25		—
Consumer		—		—		—		—		—		—		—
Total	$	752	$	752	$	—	$	—	$	838	$	1,126	$	9

Total impaired loans:
Construction	$	327	$	327	$	—	$	—	$	328	$	329	$	1
Residential real estate		4,977		3,778		1,120		90		4,917		5,355		96
Commercial real estate		5,963		5,575		—		—		5,698		6,143		48
Commercial		391		237		—		—		241		271		—
Consumer		—		—		—		—		9		19		—
Total	$	11,658	$	9,917	$	1,120	$	90	$	11,193	$	12,117	$	145

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			Recorded		Recorded				June 30, 2020
	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, 2020
Impaired nonaccrual loans:
Construction	$	297	$	297	$	—	$	—	$	297	$	198	$	—
Residential real estate		1,665		1,585		—		—		3,555		3,213		—
Commercial real estate		4,288		3,220		67		67		6,853		7,103		—
Commercial		401		258		—		—		551		466		—
Consumer		28		28		—		—		—		—		—
Total	$	6,679	$	5,388	$	67	$	67	$	11,256	$	10,980	$	—

Impaired accruing TDRs:
Construction	$	34	$	34	$	—	$	—	$	38	$	38	$	1
Residential real estate		3,845		2,617		1,228		135		3,912		3,967		79
Commercial real estate		3,118		2,479		639		11		3,373		3,390		47
Commercial		—		—		—		—		—		—		—
Consumer		—		—		—		—		—		—		—
Total	$	6,997	$	5,130	$	1,867	$	146	$	7,323	$	7,395	$	127

Other impaired accruing loans:
Construction	$	—	$	—	$	—	$	—	$	—	$	49	$	—
Residential real estate		292		292		—		—		179		394		1
Commercial real estate		512		512		—		—		1,053		867		3
Commercial		—		—		—		—		6		5		—
Consumer		—		—		—		—		16		9		—
Total	$	804	$	804	$	—	$	—	$	1,254	$	1,324	$	4

Total impaired loans:
Construction	$	331	$	331	$	—	$	—	$	335	$	285	$	1
Residential real estate		5,802		4,494		1,228		135		7,646		7,574		80
Commercial real estate		7,918		6,211		706		78		11,279		11,360		50
Commercial		401		258		—		—		557		471		—
Consumer		28		28		—		—		16		9		—
Total	$	14,480	$	11,322	$	1,934	$	213	$	19,833	$	19,699	$	131

Table of Contents

The following tables provide a roll-forward for TDRs as of June 30, ~~2020~~2021 and June 30, ~~2019.~~2020.


	1/1/2020												6/30/2020				1/1/2021												6/30/2021
	TDR		New		Disbursements		Charge-		Reclassifications/				TDR		Related		TDR		New		Disbursements		Charge-		Reclassifications/				TDR		Related
(Dollars in thousands)	Balance		TDRs		(Payments)		offs		Transfer In/(Out)		Payoffs		Balance		Allowance		Balance		TDRs		(Payments)		offs		Transfer In/(Out)		Payoffs		Balance		Allowance
For six months ended
June 30, 2020
June 30, 2021
Accruing TDRs
Construction	$	41	$	—	$	(3)	$	—	$	—	$	—	$	38	$	—	$	34	$	—	$	(4)	$	—	$	—	$	—	$	30	$	—
Residential real estate		4,041		—		(53)		—		—		(83)		3,905		190		3,845		—		(57)		—		—		(459)		3,329		90
Commercial real estate		3,419		—		(50)		—		—		—		3,369		14		3,118		—		(139)		—		—		—		2,979		—
Commercial		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Consumer		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Total	$	7,501	$	—	$	(106)	$	—	$	—	$	(83)	$	7,312	$	204	$	6,997	$	—	$	(200)	$	—	$	—	$	(459)	$	6,338	$	90

Nonaccrual TDRs
Construction	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential real estate		1,393		—		(51)		—		—		—		1,342		75		—		—		—		—		—		—		—		—
Commercial real estate		—		1,506		(373)		—		—		—		1,133		—		—		—		—		—		—		—		—		—
Commercial		299		—		(19)		—		—		—		280		—		258		—		(21)		—		—		—		237		—
Consumer		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Total	$	1,692	$	1,506	$	(443)	$	—	$	—	$	—	$	2,755	$	75	$	258	$	—	$	(21)	$	—	$	—	$	—	$	237	$	—

Total	$	9,193	$	1,506	$	(549)	$	—	$	—	$	(83)	$	10,067	$	279	$	7,255	$	—	$	(221)	$	—	$	—	$	(459)	$	6,575	$	90


	1/1/2019												6/30/2019				1/1/2020												6/30/2020
	TDR		New		Disbursements		Charge-		Reclassifications/				TDR		Related		TDR		New		Disbursements		Charge-		Reclassifications/				TDR		Related
(Dollars in thousands)	Balance		TDRs		(Payments)		offs		Transfer In/(Out)		Payoffs		Balance		Allowance		Balance		TDRs		(Payments)		offs		Transfer In/(Out)		Payoffs		Balance		Allowance
For six months ended
June 30, 2019
June 30, 2020
Accruing TDRs
Construction	$	51	$	—	$	(6)	$	—	$	—	$	—	$	45	$	—	$	41	$	—	$	(3)	$	—	$	—	$	—	$	38	$	—
Residential real estate		4,454		—		(45)		—		—		(197)		4,212		230		4,041		—		(53)		—		—		(83)		3,905		190
Commercial real estate		4,158		—		(647)		—		—		—		3,511		25		3,419		—		(50)		—		—		—		3,369		14
Commercial		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Consumer		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Total	$	8,663	$	—	$	(698)	$	—	$	—	$	(197)	$	7,768	$	255	$	7,501	$	—	$	(106)	$	—	$	—	$	(83)	$	7,312	$	204

Nonaccrual TDRs
Construction	$	2,798	$	—	$	(1,346)	$	(3)	$	—	$	—	$	1,449	$	152	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential real estate		—		—		—		—		—		—		—		—		1,393		—		(51)		—		—		—		1,342		75
Commercial real estate		—		—		—		—		—		—		—		—		—		1,506		(373)		—		—		—		1,133		—
Commercial		320		—		(9)		—		—		—		311		7		299		—		(19)		—		—		—		280		—
Consumer		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Total	$	3,118	$	—	$	(1,355)	$	(3)	$	—	$	—	$	1,760	$	159	$	1,692	$	1,506	$	(443)	$	—	$	—	$	—	$	2,755	$	75

Total	$	11,781	$	—	$	(2,053)	$	(3)	$	—	$	(197)	$	9,528	$	414	$	9,193	$	1,506	$	(549)	$	—	$	—	$	(83)	$	10,067	$	279

2018

Table of Contents

There were no0 loans modified and considered to be TDRs during the three months ended June 30, ~~2020~~2021 and ~~2019.~~June 30, 2020. The following tables provide information on loans that were modified and considered to be TDRs during the six months ended June 30, ~~2020~~2021 and June 30, ~~2019.~~2020.


		Premodification		Postmodification					Premodification		Postmodification
		outstanding		outstanding					outstanding		outstanding
	Number of	recorded		recorded		Related		Number of	recorded		recorded		Related
(Dollars in thousands)	contracts	investment		investment		allowance		contracts	investment		investment		allowance
TDRs:
For six months ended
June 30, 2021
Construction								—	$	—	$	—	$	—
Residential real estate								—		—		—		—
Commercial real estate								—		—		—		—
Commercial								—		—		—		—
Consumer								—		—		—		—
Total								—	$	—	$	—	$	—

For six months ended
June 30, 2020
Construction	—	$	—	$	—	$	—	—	$	—	$	—	$	—
Residential real estate	—		—		—		—	—		—		—		—
Commercial real estate	1		1,535		1,162		—	1		1,535		1,506		—
Commercial	—		—		—		—	—		—		—		—
Consumer	—		—		—		—	—		—		—		—
Total	1	$	1,535	$	1,162	$	—	1	$	1,535	$	1,506	$	—

For six months ended
June 30, 2019
Construction	—	$	—	$	—	$	—
Residential real estate	—		—		—		—
Commercial real estate	—		—		—		—
Commercial	—		—		—		—
Consumer	—		—		—		—
Total	—	$	—	$	—	$	—

AsSince the beginning of the pandemic and through June 30, ~~2020,~~2021, the Company had executed principal and/or interest deferrals on outstanding loan balances of $221.1 ~~million.~~million, of which only $9.5 million, or 0.65% of the total portfolio, remained on deferral as of June 30, 2021. These deferrals ~~were no more than six months in duration and were for loans not more than 30 days past due as of December 31, 2019. As such, they~~ were not considered TDRs based on the relief provisions of the CARES Act and CAA or recent interagency regulatory guidance.

There were 0 TDRs which subsequently defaulted within 12 months of modification for the three and six months ended June 30, ~~2020~~2021 and ~~2019.~~2020. Generally, a loan is considered in default when principal or interest is past due 90 days or more, the loan is placed on nonaccrual, the loan is charged off, or there is a transfer to OREO or repossessed assets.

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 June 30, 2021, there were 0 nonaccrual loans classified as special mention or doubtful and $3.9 million of nonaccrual loans were classified as substandard. Similarly, at December 31, 2020, there were 0 nonaccrual loans classified as special mention or doubtful and ~~$11.6 million of nonaccrual loans were classified as substandard. Similarly, at December 31, 2019, there were 0 nonaccrual loans classified as special mention or doubtful and $10.6~~$5.5 million of nonaccrual loans were classified as substandard.

2119

Table of Contents

The following tables provide information on loan risk ratings as of June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.

Special

(Dollars in thousands)

Pass/Performing

Pass/Watch

Mention

Substandard

Doubtful

Total

Pass/Performing

Pass/Watch

Mention

Substandard

Doubtful

Total

June 30, 2020

June 30, 2021

Construction

91,746

16,551

2,063

297

—

110,657

87,587

26,923

1,953

297

—

116,760

Residential real estate

392,692

29,518

3,845

4,381

—

430,436

411,746

34,370

2,221

1,530

—

449,867

Commercial real estate

488,095

120,113

6,303

11,828

—

626,339

495,840

149,825

2,925

6,662

—

655,252

Commercial

184,908

26,023

3,105

580

—

214,616

167,089

18,133

689

251

—

186,162

Consumer

24,864

332

—

25,201

64,220

166

—

64,388

Total

1,182,305

192,537

15,316

17,091

—

1,407,249

1,226,482

229,417

7,788

8,742

—

1,472,429


					Special												Special
(Dollars in thousands)	Pass/Performing		Pass/Watch		Mention		Substandard		Doubtful		Total		Pass/Performing		Pass/Watch		Mention		Substandard		Doubtful		Total
December 31, 2019
December 31, 2020
Construction	$	84,357	$	13,068	$	2,404	$	—	$	—	$	99,829	$	81,926	$	22,547	$	1,990	$	297	$	—	$	106,760
Residential real estate		404,500		29,223		5,549		3,234		—		442,506		401,494		36,759		2,946		2,343		—		443,542
Commercial real estate		455,388		115,190		4,822		11,162		—		586,562		514,524		133,892		3,504		9,312		—		661,232
Commercial		80,816		20,130		746		328		—		102,020		182,166		25,870		2,948		272		—		211,256
Consumer		17,347		383		2		5		—		17,737		31,221		215		—		30		—		31,466
Total	$	1,042,408	$	177,994	$	13,523	$	14,729	$	—	$	1,248,654	$	1,211,331	$	219,283	$	11,388	$	12,254	$	—	$	1,454,256

The following tables provide information on the aging of the loan portfolio as of June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.

Accruing

30‑59 days

60‑89 days

Greater than

Total

30‑59 days

60‑89 days

Greater than

Total

(Dollars in thousands)

Current

past due

90 days

past due

Nonaccrual

Total

Current

past due

90 days

past due

Nonaccrual

Total

June 30, 2020

June 30, 2021

Construction

110,259

101

—

101

297

110,657

116,433

—

297

116,760

Residential real estate

425,440

663

463

1,180

3,816

430,436

447,705

593

—

330

923

1,239

449,867

Commercial real estate

618,524

—

300

527

827

6,988

626,339

652,484

172

—

422

594

2,174

655,252

Commercial

213,919

121

—

149

548

214,616

185,748

141

—

177

237

186,162

Consumer

25,134

—

25,201

64,262

126

—

126

—

64,388

Total

1,393,276

900

820

604

2,324

11,649

1,407,249

1,466,632

927

171

752

1,850

3,947

1,472,429

Percent of total loans

99.0

0.1

—

0.2

0.8

100.0

99.5

0.1

—

0.1

0.2

0.3

100.0


	Accruing																					Accruing
				30‑59 days			60‑89 days			Greater than			Total												30‑59 days			60‑89 days			Greater than			Total
(Dollars in thousands)	Current			past due			past due			90 days			past due			Nonaccrual			Total			Current			past due			past due			90 days			past due			Nonaccrual			Total
December 31, 2019
December 31, 2020
Construction	$	99,234		$	595		$	—		$	—		$	595		$	—		$	99,829		$	106,463		$	—		$	—		$	—		$	—		$	297		$	106,760
Residential real estate		435,671			3,021			783			556			4,360			2,475			442,506			440,210			517			938			292			1,747			1,585			443,542
Commercial real estate		577,015			743			217			770			1,730			7,817			586,562			657,066			367			—			512			879			3,287			661,232
Commercial		101,476			246			—			—			246			298			102,020			210,704			226			68			—			294			258			211,256
Consumer		17,680			57			—			—			57			—			17,737			31,318			119			1			—			120			28			31,466
Total	$	1,231,076		$	4,662		$	1,000		$	1,326		$	6,988		$	10,590		$	1,248,654		$	1,445,761		$	1,229		$	1,007		$	804		$	3,040		$	5,455		$	1,454,256
Percent of total loans		98.6	%		0.4	%		0.1	%		0.1	%		0.6	%		0.8	%		100.0	%		99.3	%		0.1	%		0.1	%		0.1	%		0.3	%		0.4	%		100.0	%

2220

Table of Contents

The following tables provide a summary of the activity in the allowance for credit losses allocated by loan class for the three and six months ended June 30, ~~2020~~2021 and June 30, ~~2019.~~2020. Allocation of a portion of the allowance to one loan class does not preclude its availability to absorb losses in other loan classes.


			Residential		Commercial										Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Total		Construction		real estate		real estate		Commercial		Consumer		Total
For three months ended
June 30, 2020
June 30, 2021
Allowance for credit losses:
Beginning Balance	$	1,128	$	2,482	$	3,965	$	2,263	$	540	$	10,378	$	2,796	$	3,699	$	5,097	$	2,000	$	721	$	14,313

Charge-offs		—		—		(331)		(37)		—		(368)		—		—		—		(46)		—		(46)
Recoveries		5		4		—		61		10		80		5		57		64		44		1		171
Net charge-offs		5		4		(331)		24		10		(288)
Net (charge-offs) recoveries														5		57		64		(2)		1		125

Provision		364		153		463		68		(48)		1,000		(227)		56		439		(119)		501		650
Ending Balance	$	1,497	$	2,639	$	4,097	$	2,355	$	502	$	11,090	$	2,574	$	3,812	$	5,600	$	1,879	$	1,223	$	15,088


			Residential		Commercial										Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Total		Construction		real estate		real estate		Commercial		Consumer		Total
For three months ended
June 30, 2019
June 30, 2020
Allowance for credit losses:
Beginning Balance	$	2,657	$	2,433	$	3,057	$	2,009	$	262	$	10,418	$	1,128	$	2,482	$	3,965	$	2,263	$	540	$	10,378

Charge-offs		(3)		(300)		—		(81)		(23)		(407)		—		—		(331)		(37)		—		(368)
Recoveries		4		3		8		77		2		94		5		4		—		61		10		80
Net charge-offs		1		(297)		8		(4)		(21)		(313)
Net (charge-offs) recoveries														5		4		(331)		24		10		(288)

Provision		(215)		19		302		52		42		200		364		153		463		68		(48)		1,000
Ending Balance	$	2,443	$	2,155	$	3,367	$	2,057	$	283	$	10,305	$	1,497	$	2,639	$	4,097	$	2,355	$	502	$	11,090

~~Table of Contents~~

Residential

Commercial






(Dollars in thousands)

Construction

real estate

real estate

Commercial

Consumer

Total
For six months ended

June 30, 2020

Allowance for credit losses:

Beginning Balance

$
1,576

$
2,501

$
4,032

$
1,929

$
469

$
10,507

Charge-offs

—

(191)

(601)

(119)

(7)

(918)
Recoveries

8

7

—

124

12

151
Net charge-offs

8

(184)

(601)

5

5

(767)

Provision

(87)

322

666

421

28

1,350
Ending Balance

$
1,497

$
2,639

$
4,097

$
2,355

$
502

$
11,090

Residential

Commercial






(Dollars in thousands)

Construction

real estate

real estate

Commercial

Consumer

Total
For six months ended

June 30, 2019

Allowance for credit losses:












Beginning Balance

$
2,662

$
2,353

$
3,077

$
1,949

$
302

$
10,343

Charge-offs

(3)

(423)

—

(162)

(29)

(617)
Recoveries

7

11

107

152

2

279
Net charge-offs

4

(412)

107

(10)

(27)

(338)

Provision

(223)

214

183

118

8

300
Ending Balance

$
2,443

$
2,155

$
3,367

$
2,057

$
283

$
10,305

~~Foreclosure Proceedings~~

Consumer mortgage loans collateralized by residential real estate property that were in the process of foreclosure totaled $23 thousand as of June 30, 2020 and December 31, 2019, respectively. There were 0 residential real estate properties included in the balance of other real estate owned at June 30, 2020 and December 31, 2019.

~~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 June 30, 2020 and December 31, 2019.~~

~~Note 6 – Leases~~

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

~~Table of Contents~~

~~the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs and any incentives received from the lessor.~~

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

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

(Dollars in thousands)

June 30, 2020

December 31, 2019

Lease liabilities

$
4,941

$
4,792

Right-of-use assets

$
4,879

$
4,771

Weighted average remaining lease term

10.94
years

11.76
years
Weighted average discount rate

2.93
%

3.13
%

For the three months ended

For the six months ended
Lease cost (in thousands)

June 30, 2020

June 30, 2020
Operating lease cost

$
177

$
358
Short-term lease cost

—

—
Total lease cost

$
177

$
358

Cash paid for amounts included in the measurement of lease liabilities

$
167

$
330

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

As of
Lease payments due (in thousands)

June 30, 2020
Nine months ending December 31, 2020

332
Twelve months ending December 31, 2021

$
647
Twelve months ending December 31, 2022

634
Twelve months ending December 31, 2023

618
Twelve months ending December 31, 2024

562
Twelve months ending December 31, 2025

465
Thereafter

2,956
Total undiscounted cash flows

$
6,214
Discount

1,273
Lease liabilities

$
4,941

2521

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Residential

Commercial

(Dollars in thousands)

Construction

real estate

Commercial

Consumer

Total

For six months ended

June 30, 2021

Allowance for credit losses:

Beginning Balance

2,022

3,699

5,426

2,089

652

13,888

Charge-offs

—

(107)

(4)

(111)

Recoveries

236

Net (charge-offs) recoveries

(11)

(1)

125

Provision

542

110

(199)

572

1,075

Ending Balance

2,574

3,812

5,600

1,879

1,223

15,088


			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Total
For six months ended
June 30, 2020
Allowance for credit losses:
Beginning Balance	$	1,576	$	2,501	$	4,032	$	1,929	$	469	$	10,507

Charge-offs		—		(191)		(601)		(119)		(7)		(918)
Recoveries		8		7		—		124		12		151
Net (charge-offs) recoveries		8		(184)		(601)		5		5		(767)

Provision		(87)		322		666		421		28		1,350
Ending Balance	$	1,497	$	2,639	$	4,097	$	2,355	$	502	$	11,090

Foreclosure Proceedings

There were 0 consumer mortgage loans collateralized by residential real estate property that were in the process of foreclosure as of June 30, 2021 and December 31, 2020, respectively. There was 1 residential real estate property included in the balance of other real estate owned totaling $203 thousand at June 30, 2021 and $0 at December 31, 2020.

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 June 30, 2021 and December 31, 2020.

Note 5 – 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 the second quarter of 2021, one of the Company’s long-term branch leases was reassessed by management and it was determined that it was not reasonably certain that the options to renew would be exercised after the initial lease term of 10 years. This resulted in a shorter lease term and a reduction of the lease liability and right-to-use assets as compared to the first quarter of 2021 when the lease was initially placed into service.

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


(Dollars in thousands)	June 30, 2021			December 31, 2020
Lease liabilities	$	5,757		$	4,874
Right-of-use assets	$	5,616		$	4,795
Weighted average remaining lease term		10.08	years		10.49	years
Weighted average discount rate		2.84	%		2.89	%


	For the Three Months Ended				For the Six Months Ended
Lease cost (in thousands)	June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020
Operating lease cost	$	208	$	177	$	395	$	358
Short-term lease cost		—		—		—		—
Total lease cost	$	208	$	177	$	395	$	358

Cash paid for amounts included in the measurement of lease liabilities	$	165	$	167	$	331	$	330

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


	As of
Lease payments due (in thousands)	June 30, 2021
Six months ending December 31, 2021	$	366
Twelve months ending December 31, 2022		742
Twelve months ending December 31, 2023		753
Twelve months ending December 31, 2024		707
Twelve months ending December 31, 2025		620
Twelve months ending December 31, 2026		566
Thereafter		3,308
Total undiscounted cash flows	$	7,062
Discount		1,305
Lease liabilities	$	5,757

Note 76 – Goodwill and Other Intangibles

~~Due to the COVID-19 pandemic and its impact on market conditions, the~~The Company ~~performed a qualitative assessment~~concluded there was no impairment of goodwill ~~as of June 30,~~during its annual fourth quarter assessment in 2020. ~~As a result of management’s qualitative~~Following the fourth quarter evaluation, ~~of relevant~~management evaluated the events and circumstances ~~at June 30, 2020,~~that could indicate that goodwill may be impaired and concluded that an interim test was not necessary. The Company will continue to monitor the impact of COVID-19 on the Company ~~concluded that it was not more likely than not that fair value was less than carrying value. Changes~~as well as the financial markets in evaluating the economic environment, operations, or other adverse events could result in future impairment charges which could have a material adverse impact on the Company's operating results. The following table provides information on the significant componentsnecessity of ~~goodwill and other acquired intangible assets at June 30, 2020 and December 31, 2019.~~interim testing during 2021.

June 30, 2020

Weighted

Gross

Accumulated

Net

Average

Carrying

Impairment

Accumulated

Carrying

Remaining Life
(Dollars in thousands)

Amount

Charges

Amortization

Amount

(in years)

Goodwill

$
19,728

$
(1,543)

$
(667)

$
17,518

—

Other intangible assets

Amortizable

Core deposit intangible

$
3,954

$
—

$
(1,984)

$
1,970

5.0
Total other intangible assets

$
3,954

$
—

$
(1,984)

$
1,970

December 31, 2019

Weighted

Gross

Accumulated

Net

Average

Carrying

Impairment

Accumulated

Carrying

Remaining Life
(Dollars in thousands)

Amount

Charges


Amortization

Amount

(in years)

Goodwill

$
19,728

$
(1,543)

$
(667)

$
17,518

—

Other intangible assets

Amortizable

Core deposit intangible

$
3,954

$
—

$
(1,702)

$
2,252

5.7
Total other intangible assets

$
3,954

$
—

$
(1,702)

$
2,252

~~The aggregate amortization expense included in continuing operations was $282 thousand for the six months ended June 30, 2020 and $317 thousand for the six months ended June 30, 2019.~~

~~At June 30, 2020, estimated future remaining amortization for amortizing intangibles within the years ending December 31, is as follows:~~

(Dollars in thousands)

Amortization
Expense
2020

$
252
2021

461
2022

389
2023

317
2024

246
2025

174
Thereafter

131
Total amortizing intangible assets

$
1,970

2623

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The following table provides information on the significant components of goodwill and other acquired intangible assets at June 30, 2021 and December 31, 2020.

June 30, 2021

Weighted

Gross

Accumulated

Net

Average

Carrying

Impairment

Accumulated

Carrying

Remaining Life

(Dollars in thousands)

Amount

Charges

Amortization

Amount

(in years)

Goodwill

19,728

(1,543)

(667)

17,518

—

Other intangible assets

Amortizable

Core deposit intangible

3,954

—

(2,481)

1,473

3.8

Total other intangible assets

3,954

—

(2,481)

1,473


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

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

Other intangible assets
Amortizable
Core deposit intangible	$	3,954	$	—	$	(2,235)	$	1,719		4.7
Total other intangible assets	$	3,954	$	—	$	(2,235)	$	1,719

The aggregate amortization expense was $246 thousand for the six months ended June 30, 2021 and $282 thousand for the six months ended June 30, 2020.

At June 30, 2021, estimated future remaining amortization for amortizing intangibles within the years ending December 31, is as follows:


(Dollars in thousands)	Amortization Expense
2021	$	216
2022		389
2023		317
2024		246
2025		174
2026		102
Thereafter		29
Total amortizing intangible assets	$	1,473

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Note 87 – Other Assets

The Company had the following other assets at June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.


					June 30,		December 31,
(Dollars in thousands)	2020		2019		2021		2020
Accrued interest receivable	$	6,167	$	3,455	$	5,387	$	6,616
Deferred income taxes		3,677		2,754		5,367		4,442
Prepaid expenses		1,366		1,157		1,535		1,472
Cash surrender value on life insurance		30,430		29,770		41,672		31,018
Income taxes receivable		—		175		—		156
Other assets		3,624		3,261		4,233		3,075
Total	$	45,264	$	40,572	$	58,194	$	46,779

The following table provides information on significant components of the Company’s deferred tax assets and liabilities as of June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.


	June 30,		December 31,		June 30,		December 31,
(Dollars in thousands)	2020		2019		2021		2020
Deferred tax assets:
Allowance for credit losses	$	3,005	$	2,850	$	4,040	$	3,721
Write-downs of other real estate owned		2		9		12		12
Nonaccrual loan interest		443		353		297		367
Unrealized losses on available-for-sale securities transferred to held to maturity		1		4
Other		2,192		735		2,650		2,152
Total deferred tax assets		5,643		3,951		6,999		6,252
Less valuation allowance		(95)		(63)		(271)		(169)
Deferred tax assets net of valuation allowance		5,548		3,888
Deferred tax assets, net of valuation allowance						6,728		6,083
Deferred tax liabilities:
Depreciation		172		198		166		177
Acquisition accounting adjustments		615		508		683		580
Deferred capital gain on branch sale		190		194		184		187
Unrealized gains on available-for-sale securities		746		74		220		567
Other		148		160		108		130
Total deferred tax liabilities		1,871		1,134		1,361		1,641
Net deferred tax assets	$	3,677	$	2,754	$	5,367	$	4,442

Note 8 - Subordinated Debt

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

The Company has and continues to use 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 redeemable by the Company at its option, in whole or in part, on or after September 1, 2025. Initial debt issuance costs were $611 thousand. The debt balance of $24.5 million is presented net of unamortized issuance costs of $510 thousand at June 30, 2021.

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Note 9 – Other Liabilities

The Company had the following other liabilities at June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.


(Dollars in thousands)	June 30, 2020		December 31, 2019		June 30, 2021		December 31, 2020
Accrued interest payable	$	207	$	330	$	557	$	647
Deferred compensation liability		2,120		1,401		3,669		2,905
Income taxes payable		4,279		—		1,007		—
Other liabilities		2,051		2,350		2,609		3,686
Total	$	8,657	$	4,081	$	7,842	$	7,238

Note 10 - 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

~~Table of Contents~~

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 ~~614,298~~583,831 shares remained available for grant at June 30, ~~2020.~~2021.

The following tables provide information on stock-based compensation expense for the three and six months ended June 30, ~~2020~~2021 and ~~2019.~~2020.


	For Three Months Ended				For Six Months Ended				For Three Months Ended				For Six Months Ended
	June 30,				June 30,				June 30,				June 30,
(Dollars in thousands)	2020		2019		2020		2019		2021		2020		2021		2020
Stock-based compensation expense	$	62	$	(32)	$	123	$	31	$	99	$	62	$	196	$	123
Excess tax benefits related to stock-based compensation		7		3		14		3		2		7		3		14


	June 30,						June 30,
(Dollars in thousands)	2020			2019			2021			2020
Unrecognized stock-based compensation expense	$	198		$	150		$	230		$	198
Weighted average period unrecognized expense is expected to be recognized		0.7	years		0.1	years		0.6	years		0.7	years

The following table summarizes restricted stock award activity for the Company under the 2016 Equity Plan for the six months ended June 30, ~~2020.~~2021.


	Six Months Ended June 30, 2020			Six Months Ended June 30, 2021
		Weighted Average			Weighted Average
	Number of	Grant Date		Number of	Grant Date
	Shares	Fair Value		Shares	Fair Value
Nonvested at beginning of period	15,702	$	15.36	24,505	$	13.78
Granted	22,166		14.11	24,583		13.34
Vested	(15,702)		15.36	(16,999)		13.93
Forfeited	(902)		16.25	—		—
Nonvested at end of period	21,264	$	14.11	32,089	$	13.29

The fair value of restricted stock awards that vested during the first six months of 2021 and 2020 was $236 thousand and ~~2019 was~~ $254 ~~and $0~~ thousand, respectively.

Restricted stock units (“RSUs”) are similar to restricted stock, except the recipient does not receive the stock immediately, but instead receives it upon the terms and conditions of the Company’s long-term incentive plans which are subject to performance milestones achieved at the end of a three-year period. Each RSU cliff vests at the end of the three-year period and entitles the recipient to receive 1 share of common stock on a specified issuance date. The recipient does not have any stockholder rights, including voting rights, with respect to the shares underlying awarded RSUs until the recipient becomes the holder of those shares.

During 2017, the Company entered into a long-term incentive plan agreement with officers of the Company and its subsidiaries to award RSUs based on a performance metric to be achieved as of December 31, 2019. Based on the results for the year ended December 31, 2019, 6,451 shares were vested.

2826

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The following table summarizes stock option activity for the Company under the 2016 Equity Plan for the six months ended June 30, 2021.


	Six Months Ended June 30, 2021
		Weighted Average
	Number of	Grant Date
	Shares	Exercise Price
Outstanding at beginning of period	2,709	$	6.64
Granted	—		—
Exercised	—		—
Expired/Cancelled	—		—
Outstanding at end of period	2,709	$	6.64

Exercisable at end of period	2,709	$	6.64

There were 0 stock options granted during the three and six months ended June 30, 2021 and June 30, 2020.

At the end of the second quarter of 2021, the aggregate intrinsic value of the options outstanding under the 2016 Equity Plan was $27 thousand based on the $16.75 market value per share of the Company’s common stock at June 30, 2021. Similarly, the aggregate intrinsic value of the options exercisable was $27 thousand at June 30, 2021. At June 30, 2021, the weighted average remaining contract life of options outstanding and exercisable was 9 months.

~~The following table summarizes restricted stock units activity at the end of the performance cycle for the Company under the 2016 Equity Plan for the six months ended June 30, 2020.~~

Six Months Ended June 30, 2020

Weighted Average

Number of

Grant Date

Shares

Fair Value
Outstanding at beginning of period

6,451

$
16.57
Granted

—

—
Vested

(6,451)

16.57
Forfeited

—

—
Outstanding at end of period

—

$
—

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

~~The following table summarizes stock option activity for the Company under the 2016 Equity Plan for the six months ended June 30, 2020.~~

Six Months Ended June 30, 2020

Weighted Average

Number of

Grant Date

Shares

Exercise Price
Outstanding at beginning of period

11,671

$
9.25
Granted

—

—
Exercised

—

—
Expired/Cancelled

—

—
Outstanding at end of period

11,671

$
9.25

Exercisable at end of period

11,671

$
9.25

~~There were 0 stock options granted during the three and six months ended June 30, 2020 and June 30, 2019.~~

At the end of the second quarter of 2020, the aggregate intrinsic value of the options outstanding under the 2016 Equity Plan was $22 thousand based on the $11.09 market value per share of the Company’s common stock at June 30, 2020. Similarly, the aggregate intrinsic value of the options exercisable was $22 thousand at June 30, 2020. At June 30, 2020, the weighted average remaining contract life of options outstanding and exercisable was 4.3 years.

~~Table of Contents~~

Note 11 – Accumulated Other Comprehensive Income

The Company records unrealized holding gains (losses), net of tax, on investment securities available for sale as accumulated other comprehensive income (loss), a separate component of stockholders’ equity. The following table provides information on the changes in the components of accumulated other comprehensive income (loss) for the six months ended June 30, ~~2020~~2021 and ~~2019.~~2020.


			Unrealized gains						Unrealized gains
			(losses) on securities						(losses) on securities
	Unrealized		transferred from		Accumulated		Unrealized		transferred from		Accumulated
	gains (losses) on		Available-for-sale		other		gains (losses) on		Available-for-sale		other
	available for sale		to		comprehensive		available for sale		to		comprehensive
(Dollars in thousands)	securities		Held-to-maturity		income (loss)		securities		Held-to-maturity		income (loss)
Balance, December 31, 2020							$	1,529	$	—	$	1,529
Other comprehensive loss								(923)		—		(923)
Balance, June 30, 2021							$	606	$	—	$	606

Balance, December 31, 2019	$	218	$	(11)	$	207	$	218	$	(11)	$	207
Other comprehensive income before reclassifications		2,047		9		2,056
Reclassification of gains recognized		(259)		—		(259)
Balance, June 30, 2020	$	2,006	$	(2)	$	2,004

Balance, December 31, 2018	$	(2,918)	$	(32)	$	(2,950)
Other comprehensive income		2,747		10		2,757		2,047		9		2,056
Balances, June 30, 2019	$	(171)	$	(22)	$	(193)
Reclassification of (gain) recognized								(259)		—		(259)
Balances, June 30, 2020							$	2,006	$	(2)	$	2,004

Note 12 – Fair Value Measurements

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

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available for sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as

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impaired loans, loans held for sale and other real estate owned (foreclosed assets). These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

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

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

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

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

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

~~Table of Contents~~

Investment Securities Available for Sale

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

Equity Securities

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

The tables below present the recorded amount of assets measured at fair value on a recurring basis at June 30, ~~2020~~2021 and December 31, ~~2019.~~2020. NaN assets were transferred from one hierarchy level to another during the first six months of ~~2020~~2021 or ~~2019.~~2020.

Significant

Other

Significant

Other

Significant

Quoted

Observable

Unobservable

Quoted

Observable

Unobservable

Prices

Inputs

Prices

Inputs

(Dollars in thousands)

Fair Value

(Level 1)

(Level 2)

(Level 3)

Fair Value

(Level 1)

(Level 2)

(Level 3)

June 30, 2020

June 30, 2021

Securities available for sale:

U.S. Government agencies

9,789

—

9,789

—

17,987

—

17,987

—

Mortgage-backed

76,231

—

76,231

—

95,970

—

95,970

—

86,020

—

86,020

—

113,957

—

113,957

—

Equity

1,388

—

1,388

—

1,384

—

1,384

—

Total

87,408

—

87,408

—

115,341

—

115,341

—

Significant

Other

Significant

Quoted

Observable

Unobservable

Prices

Inputs

Inputs
(Dollars in thousands)

Fair Value

(Level 1)

(Level 2)

(Level 3)
December 31, 2019








Securities available for sale:








U.S. Government agencies

$
23,826

$
—

$
23,826

$
—
Mortgage-backed

98,965

—

98,965

—

122,791

—

122,791

—

Equity

1,342

—

1,342

—
Total

$
124,133

$
—

$
124,133

$
—

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					Significant
					Other		Significant
			Quoted		Observable		Unobservable
			Prices		Inputs		Inputs
(Dollars in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
December 31, 2020
Securities available for sale:
U.S. Government agencies	$	23,537	$	—	$	23,537	$	—
Mortgage-backed		116,031		—		116,031		—
		139,568		—		139,568		—

Equity		1,395		—		1,395		—
Total	$	140,963	$	—	$	140,963	$	—

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

Impaired Loans

Loans are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts 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 the fair value of the collateral (less selling costs) if the loans are collateral dependent and these are considered Level 3 in the fair value

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

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

Other Real Estate Owned (Foreclosed Assets)

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

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

Quantitative Information about Level 3 Fair Value Measurements

Weighted
(Dollars in thousands)

Fair Value

Valuation Technique

Unobservable Input

Range

Average (3)
June 30, 2020










Nonrecurring measurements:











Impaired loans

$
1,877

Appraisal of collateral
(1)
Liquidation expense
(2)
10%

(10%)

Impaired loans

$
2,549

Discounted cash flow analysis
(1)
Discount rate

4% - 7.25%

(6%)

Other real estate owned

$
38

Appraisal of collateral
(1)
Appraisal adjustments
(2)
0% - 19%

(19%)

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Quantitative Information about Level 3 Fair Value Measurements

(Dollars in thousands)

Fair Value

Valuation Technique

Unobservable Input

Range
December 31, 2019







Nonrecurring measurements:







Impaired loans

$
2,489

Appraisal of collateral
(1)
Liquidation expense
(2)
10%

Impaired loans

$
2,599

Discounted cash flow analysis
(1)
Discount rate

4% - 7.25%

Other real estate owned

$
74

Appraisal of collateral
(1)
Appraisal adjustments
(2)
0% - 31%





Liquidation expense
(2)
10%

The following tables set forth the Company’s financial and nonfinancial assets subject to fair value adjustments (impairment) on a nonrecurring basis at June 30, 2021 and December 31, 2020, that are valued at the lower of cost or market. Assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.


	Quantitative Information about Level 3 Fair Value Measurements
								Weighted
(Dollars in thousands)	Fair Value		Valuation Technique		Unobservable Input		Range	Average (3)
June 30, 2021
Nonrecurring measurements:

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

Impaired loans	$	413	Discounted cash flow analysis	(1)	Discount rate		4% - 7.25%	(6%)

Other real estate owned	$	203	Appraisal of collateral	(1)	Appraisal adjustments	(2)	0% - 19%	(1%)


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

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

Impaired loans	$	1,110	Discounted cash flow analysis	(1)	Discount rate		6% - 7.25%	(6%)

(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 not carried at fair value on the Company’s Consolidated Balance Sheets are presented in the following table. Fair values for June 30, ~~2020~~2021 and December 31, ~~2019~~2020 were estimated using an exit price notion.


	June 30, 2020				December 31, 2019				June 30, 2021				December 31, 2020
			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	$	126,284	$	126,284	$	94,971	$	94,971	$	237,188	$	237,188	$	186,917	$	186,917

Level 2 inputs
Investment securities held to maturity	$	11,710	$	11,715	$	8,786	$	8,654	$	198,884	$	197,991	$	65,706	$	65,828
Restricted securities		3,626		3,626		4,190		4,190		3,189		3,189		3,626		3,626
Cash surrender value on life insurance		30,430		30,430		29,782		29,782		41,672		41,672		31,018		31,018

Level 3 inputs
Loans, net	$	1,396,159	$	1,394,326	$	1,238,147	$	1,242,867	$	1,457,341	$	1,458,057	$	1,440,368	$	1,436,292

Financial liabilities
Level 2 inputs
Deposits:
Noninterest-bearing demand	$	442,996	$	442,996	$	356,618	$	356,618	$	538,009	$	538,009	$	509,091	$	509,091
Checking plus interest		344,940		344,940		302,227		302,227		443,919		443,919		446,243		446,243
Money market		274,783		274,783		262,050		262,050		406,009		406,009		292,974		292,974
Savings		163,320		163,320		143,322		143,322		215,063		215,063		177,524		177,524
Club		1,155		1,155		387		387		1,138		1,138		392		392
Certificates of deposit, $100,000 or more		129,467		132,577		127,600		128,167		134,670		136,059		129,623		131,271
Other time		148,067		152,358		149,130		149,209		141,774		142,534		144,858		146,137
Short-term borrowings		1,064		1,064		1,226		1,226
Long-term borrowings		—		—		15,000		15,040
Securities sold under retail repurchase agreement										2,907		2,907		1,050		1,050
Subordinated debt										24,490		26,871		24,429		25,745

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Note 13 – Financial Instruments with Off-Balance Sheet Risk

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

The following table provides information on commitments outstanding at June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.


(Dollars in thousands)	June 30, 2020		December 31, 2019		June 30, 2021		December 31, 2020
Commitments to extend credit	$	252,572	$	211,652	$	291,141	$	248,607
Letters of credit		7,019		7,691		7,386		7,944
Total	$	259,591	$	219,343	$	298,527	$	256,551

Note 14 – Revenue Recognition

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

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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.

Trust and Investment Fee Income

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

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

Other Noninterest Income

Other noninterest income consists of: fees, exchange, other service charges, safety deposit box rental fees, and other miscellaneous revenue streams. Fees and other service charges are primarily comprised of debit and credit card income, ATM fees, merchant services income, and other service charges. Debit and credit card income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Merchant services income mainly represents fees charged to merchants to

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process their debit and credit card transactions, in addition to account management fees. Other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services. The Company’s performance obligation for fees, exchange, and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. The Company determined that rentals and renewals of safe deposit boxes will be recognized on a monthly basis consistent with the duration of the performance obligation.

The following presents noninterest income from continuing operations, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three and six months ended June 30, ~~2020~~2021 and ~~2019.~~2020.


	For Three Months Ended				For Six Months Ended				For Three Months Ended				For Six Months Ended
	June 30,				June 30,				June 30,				June 30,
(Dollars in thousands)	2020		2019		2020		2019		2021		2020		2021		2020
Noninterest Income
In-scope of Topic 606:
Service charges on deposit accounts	$	544	$	1,028	$	1,410	$	1,962	$	683	$	544	$	1,357	$	1,410
Trust and investment fee income		363		385		738		757		475		363		882		738
Interchange income		708		689		1,361		1,276		1,036		708		1,906		1,361
Other noninterest income		407		457		686		710		456		407		760		686
Noninterest Income (in-scope of Topic 606)		2,022		2,559		4,195		4,705		2,650		2,022		4,905		4,195
Noninterest Income (out-of-scope of Topic 606)		747		50		926		92		253		747		555		926
Total Noninterest Income	$	2,769	$	2,609	$	5,121	$	4,797	$	2,903	$	2,769	$	5,460	$	5,121

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Contract Balances

A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s noninterest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of June 30, ~~2020,~~2021, and December 31, ~~2019,~~2020, the Company did not have any significant contract balances.

Note 15 – Proposed Merger

On March 3, 2021, the Company and Severn Bancorp, Inc. (“Severn”) entered into a definitive agreement for the Company to acquire the Maryland-based Severn.

This transaction will create the third largest community bank headquartered in Maryland. One of the primary reasons for the proposed acquisition of Severn was the ability to access and deploy excess capital and deposits into a high growth market, while also enhancing scale to drive efficiency and profitability. Additionally, this transaction will create a competitive position in the Columbia/Baltimore/Towson MSA, while filling in our current market footprint.

Under the terms of the agreement, Severn shareholders will receive 0.6207 shares of Shore common stock and $1.59 in cash for each share of Severn common stock. Upon closing, Shore shareholders will own approximately 59.6% of the combined Company and Severn shareholders will own approximately 40.4% of the combined Company. The transaction is still subject to satisfaction of customary closing conditions, including regulatory approvals and shareholder approval from Shore and Severn shareholders. The transaction is expected to close in the fourth quarter of 2021.

As of June 30, 2021, Severn had more than $1.1 billion in assets and operated 7 full-service community banking offices throughout Anne Arundel County, Maryland.

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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 subsidiary.

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.

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

If one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this Quarterly Report on Form 10-Q and other reports and registration statements filed by us with the 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 ~~2019~~2020 Form 10-K ~~in addition to Part II, Item 1A - Risk Factors of this Quarterly Report on Form 10-Q~~ and other reports as filed 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.

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Introduction

The following discussion and analysis is intended as a review of significant factors affecting the Company’s financial condition and results of operations for the periods indicated. This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and related notes presented elsewhere in this report, as well as the audited consolidated financial statements and related notes included in the ~~2019~~2020 Annual Report.

Shore Bancshares, Inc. is the largest independent financial holding company headquartered on the Eastern Shore of Maryland. It is the parent company of Shore United Bank. The Bank operates 22 full-service branches in Baltimore County, Howard County, Kent County, Queen Anne’s County, Talbot County, Caroline County, Dorchester County and ~~Wicomico~~Worcester County in Maryland, Kent County, Delaware and Accomack County, Virginia. The Company engages in trust and wealth management services through Wye Financial Partners, a division of Shore United Bank.

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

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

COVID-19 Pandemic

The ~~recent~~ outbreak of COVID-19 ~~which was declared a pandemic by the World Health Organization on March 11, 2020,~~ has led to adverse impacts on economic conditions and created uncertainty in financial markets. Correspondingly, in early March 2020, the Company began preparing for potential disruptions and government limitations of activity in the markets in which we serve. Our team activated our Business Continuity Program and was able to quickly execute on multiple initiatives to adjust our operations to protect the health and safety of our employees and clients. Since the beginning of the crisis, we have been in close contact with our clients, assessing the level of impact on their businesses, and providing relief programs according to each client’s specific situation and qualifications. We have also enhanced awareness of digital banking offerings, expanded services at our drive ~~thru~~through locations, and allowed customers to make appointments in the branch for critical services. The Company’s branches remain open and have taken steps to comply with various government directives regarding “social distancing,” as well as, enhanced cleaning and disinfecting of all surface areas to protect its clients and employees.

Small Business Administration’s Paycheck Protection Program

We established our process for participating in the Small Business Administration’s Paycheck Protection Program (“PPP”) that enabled our clients to utilize this valuable resource beginning in April 2020. Loans under the PPP are designed to provide assistance for small businesses during the COVID-19 pandemic to help meet the costs associated with payroll, mortgage interest, rent and utilities. These loans are guaranteed by the SBA and forgiveness of the ~~loan,~~loans, by the SBA, is granted to the borrower if the borrower uses at least 60% of the funds to cover payroll costs and benefits. Forgiveness is also based on the small business maintaining or quickly rehiring their employees and maintaining salary levels for their employees. Loans under the PPP do not require any collateral or personal guarantees, as such, these loans are included in the Company’s commercial loans segment. ~~Through~~The first round of PPP lending resulted in 1,495 loans for $129.0 million, of which 1,037 loans have been forgiven or paid down in the amount of $102.3 million as of June 30, ~~2020, our team has~~2021. The second round of PPP lending which began in 2021, resulted in 959 loans for $67.3 million, of which 223 loans have been ~~able to process 1,427~~forgiven or paid down in the amount of $7.2 million. As of June 30, 2021, the Company had 1,195 PPP loans ~~for approximately $123.0~~totaling $86.8 million inthat were outstanding, inclusive of loans issued during both the first and second rounds of the ~~program, which~~PPP. This has allowed us to further strengthen and deepen our client relationships, while positively impacting thousands of individuals. We are also closely monitoring the credit quality of the loan portfolio and monitor lines of credit draws for deviation from normal activity to improve loan performance and reduce credit risk.

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Short-term Modifications for Borrowers

In keeping with regulatory guidance to work with borrowers during this unprecedented situation and as outlined in Section 4013 of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and the Consolidated Appropriations Act of 2021 (“CAA”), the Company is providing modifications where appropriate, including interest only payments or payment deferrals for clients that could be adversely affected by

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the COVID-19 pandemic. Section 4013 of the CARES Act ~~also~~and CAA addressed COVID-19 related modifications and specified that such modifications made on loans that were current as of December 31, 2019 are not TDRs. In accordance with interagency guidance issued in April 2020 ~~these~~and December 2020, short-term modifications made to ~~a borrower~~borrowers affected by the COVID-19 pandemic and governmental shutdown orders, such as payment deferrals, fee waivers and extensions of repayment terms, do not need to be identified as TDRs if the loans were current at the time a modification plan was implemented. AsSince the beginning of the pandemic and through June 30, 2021, the Company had executed principal and/or interest deferrals on outstanding loan balances of $221.1 million, of which only $9.5 million, or 0.65% of the total portfolio, remained on deferral as of June 30, 2020, we had deferred payments of principal and/or interest on a short-term basis for commercial and residential loans with an aggregate balance of $221.1 million, or 15.7% of the total loan portfolio.2021.


							Loan Balances Modified Due to COVID-19 Through July 31, 2020
									Loans Modified		Loans										Loans
									to Interest		Modified to								Loans Modified		Modified to
	Total Loan		Total Loans		Total Loan		Total		Only Payments		Payment		Percentage		Total Loan		Total Loans		to Interest		Payment		Percentage
	Balance as of		Modified as of		Balance as of		Loans		(6 months		Deferral		of Loans		Balance as of		Modified as of		Only Payments		Deferral		of Loans
(Dollars in thousands)	June 30, 2020		June 30, 2020		July 31, 2020		Modified		or less)		(3 months)		Modified		June 30, 2021		June 30, 2021		(6 months or less)		(3 months)		Modified
Hospitality Industry	$	112,531	$	80,431	$	112,514	$	84,200	$	14,998	$	69,202	74.83	%	$	108,823	$	9,526	$	9,526	$	-	8.75	%
Non-owner occupied Retail Stores		92,755		55,995		103,464		25,031		3,251		21,780	24.19			139,580		-		-		-	—
Non-owner occupied Restaurants		8,442		3,215		8,499		3,192		-		3,192	37.56			6,255		-		-		-	—
Owner-occupied Retail Stores		17,758		2,628		15,248		1,363		160		1,203	8.94			13,741		-		-		-	—
Owner-occupied Restaurants		7,102		2,079		6,862		2,162		221		1,941	31.50			16,276		-		-		-	—
Oil & Gas Industry		-		-		-		-		-		-	—			-		-		-		-	—
Other Commercial Loans		762,970		66,767		752,201		45,560		16,431		29,129	6.06			754,139		-		-		-	—
Total Commercial Loans		1,001,558		211,115		998,788		161,508		35,061		126,447	16.17			1,038,814		9,526		9,526		-	0.92

Residential 1-4 family Personal		234,096		-		230,800		-		-		-	—			222,713		-		-		-	—
Residential 1-4 family Rentals		95,223		9,989		95,461		7,771		1,195		6,576	8.14			107,939		-		-		-	—
Home Equity Loans		50,555		-		51,947		-		-		-	—			43,809		-		-		-	—
Total Residential Real Estate Loans		379,874		9,989		378,208		7,771		1,195		6,576	2.05			374,461		-		-		-	—

Consumer Loans		26,877		-		27,792		373		-		373	1.34			62,823		-		-		-	—
Mortgage Warehouse Loans		-		-		-		-		-		-	—			-		-		-		-	—
Credit Card, Overdrafts and Other		(1,060)		-		(789)		-		-		-	—			(3,669)		-		-		-	—
TOTAL LOANS	$	1,407,249	$	221,104	$	1,403,999	$	169,652	$	36,256	$	133,396	12.08	%	$	1,472,429	$	9,526	$	9,526	$	-	0.65	%

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Liquidity

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

Share Repurchases

~~We have suspended~~

At the present time all share ~~buybacks~~repurchases have been suspended due to the current status of our merger with Severn. Once the ~~Company’s common~~merger is consummated, the Company intends to resume its current share buyback program in which $546 thousand remains available. The Board of directors and management will re-evaluate the need for an additional stock ~~until further notice.~~repurchase program once the current plan is exhausted or expires.

Dividends and Capital

We currently expect to maintain our quarterly cash dividend based on our strong capital position. At June 30, ~~2020,~~2021, the Bank exceeded all the capital requirements to which it was subject, and based on the most recent notification from its primary federal regulator is considered to be well-capitalized. There are no conditions or events since that notification that management believes would change the Bank’s classification. We are closely monitoring our capital position and

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are taking appropriate steps to ensure our level of capital remains strong. Our capital, while significant, may deteriorate in future periods due to the impact of the pandemic and limit our ability to pay dividends.

Critical Accounting Policies

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 ~~2019~~2020 Annual Report. These policies, along with the disclosures presented in the notes to the financial statements and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has determined that the accounting policies with respect to the allowance for credit losses and goodwill and other intangible assets 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.

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 ~~2019~~2020 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 represents the excess of the cost of an acquisition over the fair value of the net assets acquired. ~~Other intangible assets represent purchased assets that also lack physical substance but can be distinguished from goodwill because of~~

~~Table of Contents~~

contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset or liability. Goodwill and other intangible assets are required to be recorded at fair value at inception. 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. ~~Intangible assets that have finite lives are amortized over their estimated useful lives and also are subject to impairment testing.~~ Impairment testing requires a qualitative assessment or that the fair value of each of the Company’s reporting units be compared to the carrying amount of its net assets, including goodwill. 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 June 30, ~~2020,~~2021, the Company had only one banking reporting unit.

OVERVIEW

The Company reported net income of ~~$5.3~~$4.0 million for the second quarter of ~~2020,~~2021, or diluted income per common share of $0.34, compared to net income of $5.3 million, or diluted income per common share of $0.43, ~~compared to~~for the second quarter of 2020. For the first quarter of 2021, the Company reported net income of ~~$4.2~~$4.0 million, or diluted income per common share of ~~$0.33, for the second quarter of 2019. For the first quarter of 2020, the Company reported net income of $3.1 million, or diluted income per common share of $0.25.~~$0.34. When comparing net income for the second quarter of ~~2020~~2021 to the second quarter of ~~2019,~~2020, the ~~increase~~decrease was due to salary and wages being deferred in the second quarter of 2020 due to the originations of the first round of PPP loans. Despite these salary and wage deferrals, net interest income increased when compared to the second quarter of 2020 by $1.1 million, while a ~~decrease in~~reduced provision for credit losses of $350 thousand and higher noninterest ~~expense~~income of ~~$1.3 million, coupled~~$134 thousand had a positive impact on net income. When comparing the second quarter of 2021 to the first quarter of 2021, the net income was essentially unchanged, from period to period with ~~increases in~~offsetting variances related to higher net interest income of ~~$738~~$303 thousand and noninterest income of ~~$160~~$346 thousand, partially offset by an increase in the provision for credit losses of ~~$800~~$225 thousand and noninterest expense of $377 thousand. ~~When comparing net income from continuing operations for~~ Merger-related expenses of $377 thousand were recorded in

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the second quarter of ~~2020~~2021, which had an impact on the profitability of the quarter when compared to the ~~first quarter of 2020, the increase was primarily due to a decrease in noninterest expenses of $2.7 million. In addition, net interest income~~linked and ~~noninterest income increased $513 thousand and $417 thousand, respectively, partially offset by an increase in the provision for credit losses of $650 thousand.~~ previous quarters.

For the first six months of ~~2020,~~2021, the Company reported net income of ~~$8.5~~$8.0 million, or diluted income per common share of $0.68, compared to net income of ~~$8.0~~$8.5 million, or diluted income per common share of ~~$0.62,~~$0.68, for the first six months of ~~2019.~~2020. When comparing net income ~~from continuing operations~~ for the first six months of ~~2020~~2021 to the first six months of ~~2019,~~2020, the ~~improved results were~~decrease in net income was primarily due to ~~increases~~the deferral of salaries and wages as previously mentioned above, as well as an increase in almost all noninterest expense line items for a total of $3.4 million, partially offset by improvements in net interest income of ~~$862 thousand and~~$2.4 million, noninterest income of ~~$324~~$339 thousand ~~coupled with~~and a ~~decrease in noninterest expense of $316 thousand, partially offset by an increase in the~~reduced provision for credit losses of ~~$1.1 million.~~$275 thousand. The reason for the similar diluted income per share for both periods despite the lower net income in 2021, was due to buybacks of the Company’s common stock, resulting in fewer outstanding shares period over period.

~~Table of Contents~~

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 $14.1 million for the second quarter of 2021 and $13.1 million for the second quarter of ~~2020 and $12.3 million for the second quarter of 2019.~~2020. Tax-equivalent net interest income was ~~$12.6~~$13.8 million for the first quarter of ~~2020.~~2021. The increase in net interest income ~~for~~when comparing the second quarter of 2021 to the second quarter of 2020, ~~when compared to~~was the ~~second quarter~~result of ~~2019 was due to lower~~higher interest ~~expenses on interest bearing deposits of $648 thousand, or 29.4%~~ and ~~short and long-term borrowings of $245 thousand, or 92.2%. In addition, interest~~fees on loans ~~increased $192 thousand, or 1.4%. These improvements to net interest~~and income ~~were partially offset by decreases in interest income on~~from taxable investment securities, ~~of $249 thousand, or 28.1%, and interest-bearing deposits~~coupled with ~~other banks of $102 thousand, or 90.3%.~~a decrease in interest expense. Net interest income increased for the second quarter of ~~2020~~2021 when compared to the first quarter of ~~2020~~2021 due to lower interest expenses on interest bearing deposits of $503 thousand, or 24.4%, and short and long-term borrowings of $102 thousand, or 93.6%. In addition, interest on loans increased $151 thousand, or 1.1%. These improvements to net interestan increase in income ~~were partially offset by decreases in interest income on~~from taxable investment securities ~~of $81 thousand, or 11.3%,~~ and ~~interest-bearing deposits with other banks of $161 thousand, or 93.6%.~~a decrease in interest expense. Net interest margin is tax-equivalent net interest income (annualized) divided by average earning assets. The net interest margin for the second quarter of ~~2020~~2021 was ~~3.41%~~2.91%, which was a decrease of ~~13 basis points (bps)~~50bps when compared to ~~3.54%~~3.41% for the second quarter of ~~2019~~2020 and a decrease of ~~7bps~~9bps when compared to ~~3.48%~~3.00% for the first quarter of ~~2020.~~2021. The decline in net interest margin in the second quarter of 2021 when compared to the first quarter of 2021 and the second quarter of 2020, was significantly impacted by excess liquidity and the decrease in yields of taxable investment securities. Without excess liquidity of $100 million, the margin for the second quarter of 2021 would have been 3.07%.

Interest Income

On a tax-equivalent basis, interest income ~~decreased $159~~increased $938 thousand, or ~~1.1%~~6.4%, for the second quarter of ~~2020~~2021 when compared to the second quarter of ~~2019.~~2020. The ~~decrease~~increase was ~~due to a decrease~~the result of higher interest and fees on loans and income from investment securities. The primary driver for the increase in interest income on loans was the higher average volume of loans of $70.4 million, which included PPP lending. The average balance of ~~taxable~~ investment securities increased $178.2 million, providing $457 thousand of ~~$52.0 million, or 32.5% due to the proceeds being utilized to fund loan growth between the periods, coupled with~~additional income, despite a decrease in the average yield ~~on interest-bearing deposits with other banks~~ of 240bps. The average balance of loans increased $153.1 million, or 12.5%, between the comparable periods and the average yield on loans decreased 44bps, which were the direct result of adding 1,427 PPP loans with an average yield of 2.36%.84bps.

On a tax-equivalent basis, interest income ~~decreased $90~~increased $189 thousand, or ~~less than 1%~~1.2%, for the second quarter of ~~2020~~2021 when compared to the first quarter of ~~2020.~~2021. The ~~decrease~~increase was primarily ~~due to decreases in the average rate paid on interest-bearing deposits with other banks of 113bps, as well as,~~ a ~~decrease in the average balance~~result of taxable investment securities ~~of $21.5 million, or 16.6%, partially offset by an increase in the average balance of loans of $110.9 million, or 8.8% due to the influx of PPP loans processed~~which were purchased during the second quarter of ~~2020.~~2021, resulting in a higher average balance in these securities of $58.3 million.

Interest Expense

Interest expense decreased ~~$893~~$135 thousand, or ~~36.4%~~8.6%, when comparing the second quarter of ~~2020~~2021 to the second quarter of 2019. The decrease was a direct result of lower interest expenses paid on interest-bearing deposits of $648 thousand, and short and long-term borrowings of $245 thousand. The average balance of short and long-term borrowings decreased $33.7 million, or 92.2%, while the average rate paid on interest-bearing deposits decreased 37bps, partially offset by an increase in the average balance of interest-bearing deposits of $112.4 million, or 12.6%. The average balance of noninterest-bearing deposits increased $80.7 million, or 23.8% between the comparable quarters.

~~Interest expense decreased $605 thousand, or 27.9%, when comparing the second quarter of 2020 to the first~~ quarter of 2020. The decrease in interest expense from the second quarter of 2020 was ~~mainly due to~~ a result of the decrease in the average rate paid on interest-bearing deposits of ~~23bps. The~~29bps.This decrease in ~~rates paid on interest-bearing deposits~~interest expense was partially offset by ~~an increase~~the issuance of subordinated debt in the ~~average balance~~third quarter of ~~$32.3 million,~~2020 which added $370 thousand of additional expense for the second quarter of 2021.

Interest expense decreased $116 thousand, or ~~3.3%. The average balance of noninterest-bearing deposits increased $67.6 million, or 19.2%~~7.5%, when ~~compared~~comparing the second quarter of 2021 to the first quarter of ~~2020.~~2021. The decrease in interest expense on deposits was due to a 6bps decline in the average rate paid on interest-bearing deposits, specifically time deposits that matured and renewed during the second quarter of 2021.

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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 June 30, ~~2020~~2021 and ~~2019.~~2020.


	For Three Months Ended						For Three Months Ended						For Three Months Ended						For Three Months Ended
	June 30, 2020						June 30, 2019						June 30, 2021						June 30, 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)	$	1,374,324	$	13,982	4.09	%	$	1,221,215	$	13,790	4.53	%	$	1,444,684	$	14,419	4.00	%	$	1,374,324	$	13,982	4.09	%
Investment securities:
Taxable		107,908		638	2.37			159,878		887	2.22			286,121		1,095	1.53			107,908		638	2.37
Interest-bearing deposits		57,713		11	0.07			18,325		113	2.47			218,704		55	0.10			57,713		11	0.07
Total earning assets		1,539,945		14,631	3.82	%		1,399,418		14,790	4.24	%		1,949,509		15,569	3.20	%		1,539,945		14,631	3.82	%
Cash and due from banks		18,167						17,225						16,908						18,167
Other assets		90,981						61,906						109,457						90,981
Allowance for credit losses		(10,706)						(10,456)						(14,660)						(10,706)
Total assets	$	1,638,387					$	1,468,093					$	2,061,214					$	1,638,387

Interest-bearing liabilities
Demand deposits	$	298,568		145	0.20	%	$	234,775		382	0.65	%	$	405,473		132	0.13	%	$	298,568		145	0.20	%
Money market and savings deposits		426,963		246	0.23			385,272		803	0.84			605,202		251	0.17			426,963		246	0.23
Brokered Deposits		—		—	—			20,866		131	2.52
Certificates of deposit $100,000 or more		130,582		586	1.81			107,549		413	1.54			135,376		350	1.04			130,582		586	1.81
Other time deposits		150,675		579	1.54			145,900		475	1.31			143,821		323	0.90			150,675		579	1.54
Interest-bearing deposits		1,006,788		1,556	0.62			894,362		2,204	0.99			1,289,872		1,056	0.33			1,006,788		1,556	0.62
Short-term borrowings		2,030		1	0.20			21,557		145	2.70
Long-term debt		824		6	2.93			15,000		107	2.86
Securities sold under retail repurchase agreements and short-term FHLB advances														3,123		2	0.26			2,030		1	0.20
Advances from FHLB - long-term														—		—	—			824		6	2.93
Subordinated debt														24,474		370	6.06			—		—	—
Total interest-bearing liabilities		1,009,642		1,563	0.62	%		930,919		2,456	1.06	%		1,317,469		1,428	0.43	%		1,009,642		1,563	0.62	%
Noninterest-bearing deposits		420,275						339,589						532,276						420,275
Other liabilities		9,628						8,484						13,937						9,628
Stockholders’ equity		198,842						189,101						197,532						198,842
Total liabilities and stockholders’ equity	$	1,638,387					$	1,468,093					$	2,061,214					$	1,638,387

Net interest spread			$	13,068	3.20	%			$	12,334	3.18	%			$	14,141	2.77	%			$	13,068	3.20	%
Net interest margin					3.41	%					3.54	%					2.91	%					3.41	%

Tax-equivalent adjustment
Loans			$	37					$	41					$	38					$	37
Total			$	37					$	41					$	38					$	37

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

(2)	Average loan balances include nonaccrual loans.

(3)	Interest income on loans includes ~~amortized~~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 ~~$860 thousand,~~$2.4 million, or ~~3.5%~~9.2%, during the six months ended June 30, ~~2020~~2021 compared to the six months ended June 30, ~~2019.~~2020. The ~~increase in~~higher net interest income was due to an increase in interest income of $1.6 million, or 5.4% and a decrease in interest expenses on interest-bearing deposits of ~~$535 thousand,~~$1.4 million, or ~~12.9% and short and long-term borrowings of $455 thousand, or 79.7%~~38.0%. ~~In addition,~~Despite the ~~average yield~~improved results, compression in the margin was due to lower yields on earning assets, ~~decreased 31bps.~~specifically taxable investment securities of 71bps and interest-bearing deposits with the Fed of 54bps. This resulted in a net interest margin of 2.96% for the six months ended June 30, 2021 compared to 3.45% for the six months ended June 30, ~~2020 compared to 3.57% for the six months ended June 30, 2019.~~2020.

Interest Income

On a tax-equivalent basis, interest income ~~decreased $130 thousand,~~increased $1.6 million, or ~~less than 1%~~5.4%, for the six months ended June 30, ~~2020~~2021 when compared to the six months ended June 30, ~~2019.~~2020. The ~~decrease~~increase was primarily due to ~~a decline in the average balance~~higher interest and fees on loans of $1.0 million, or 3.6% and taxable investment securities of ~~$43.8 million,~~$668 thousand, or ~~26.9%,~~49.2%. The increase in interest and ~~the lower yield~~fees on ~~interest-bearing deposits with other banks of 178bps. The average balance of loans increased $107.3 million, or 8.9%, while the average yield declined~~

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~~31bps, in part~~loans was due to ~~the funding~~a higher average balance of ~~1,348~~loans of $128.9 million, or 9.8%, which included PPP loans ~~during~~which have a lower yield than more traditional loans, resulting in a lower overall yield of 23bps. The increase in interest on taxable investment securities was due to a higher average balance in these securities of $138.5 million, or 116.7%, despite the ~~second quarter of 2020 which had an~~decline in the average yield of ~~2.36%.~~such securities of 71bps.

Interest Expense

Interest expense decreased ~~$990~~$760 thousand, or ~~21.0%~~20.4%, when comparing the six months ended June 30, ~~2020~~2021 to the six months ended June 30, ~~2019.~~2020. The decrease in interest expense was due to a decline in the rates paid on interest-bearing deposits of ~~21bps~~37bps and the ~~decline in the average balance on short and~~elimination of long-term ~~borrowings of $32.7 million, or 77.4%.~~advances from FHLB. These ~~decreases~~improvements were partially offset by ~~an increase~~the addition of subordinated debt, issued in the ~~average balance~~third quarter of ~~noninterest-bearing deposits~~2020, which added $729 thousand in interest expense for the first six months of ~~$51.1 million, or 15.3%.~~2021.

The following tables present the distribution of the average consolidated balance sheets, interest income/expense, and annualized yields earned and rates paid for the six months ended June 30, ~~2020~~2021 and ~~2019.~~2020.

For Six Months Ended

For Six Months Ended

June 30, 2020

June 30, 2019


Average

Income(1)/

Yield/

Average

Income(1)/

Yield/

(Dollars in thousands)

Balance

Expense

Rate

Balance

Expense

Rate

Earning assets













Loans (2), (3)

$
1,318,883

$
27,813

4.24
%
$
1,211,618

$
27,323

4.55
%
Investment securities:













Taxable

118,659

1,357

2.30

162,429

1,885

2.34

Interest-bearing deposits

57,685

183

0.64

23,039

276

2.42

Total earning assets

1,495,227

29,353

3.95
%

1,397,086

29,484

4.26
%
Cash and due from banks

18,020





17,211





Other assets

90,068





60,340





Allowance for credit losses

(10,626)





(10,423)





Total assets

$
1,592,689





$
1,464,214





Interest-bearing liabilities













Demand deposits

$
291,372

540

0.37
%
$
237,271

741

0.63
%
Money market and savings deposits

418,608

712

0.34

384,508

1,610

0.84

Brokered Deposits

—

—

—

21,470

260

2.44

Certificates of deposit $100,000 or more

129,995

1,183

1.83

103,067

714

1.40

Other time deposits

150,659

1,180

1.58

143,226

826

1.16

Interest-bearing deposits

990,634

3,615

0.73

889,542

4,151

0.94

Short-term borrowings

1,632

3

0.37

27,239

358

2.65

Long-term debt

7,912

113

2.87

15,000

213

2.86

Total interest-bearing liabilities

1,000,178

3,731

0.75
%

931,781

4,722

1.02
%
Noninterest-bearing deposits

386,478





335,334





Other liabilities

9,446





10,051





Stockholders’ equity

196,587





187,048





Total liabilities and stockholders’ equity

$
1,592,689





$
1,464,214





Net interest spread



$
25,622

3.20
%



$
24,762

3.24
%
Net interest margin





3.45
%





3.57
%

Tax-equivalent adjustment

Loans

$
73

$
75

Total

$
73

$
75


	For Six Months Ended						For Six Months Ended
	June 30, 2021						June 30, 2020
	Average		Income(1)/		Yield/		Average		Income(1)/		Yield/
(Dollars in thousands)	Balance		Expense		Rate		Balance		Expense		Rate
Earning assets
Loans (2), (3)	$	1,447,767	$	28,821	4.01	%	$	1,318,883	$	27,813	4.24	%
Investment securities:
Taxable		257,130		2,025	1.59			118,659		1,357	2.30
Interest-bearing deposits		204,048		102	0.10			57,685		183	0.64
Total earning assets		1,908,945		30,948	3.27	%		1,495,227		29,353	3.95	%
Cash and due from banks		18,070						18,020
Other assets		106,251						90,068
Allowance for credit losses		(14,448)						(10,626)
Total assets	$	2,018,818					$	1,592,689

Interest-bearing liabilities
Demand deposits	$	421,816		288	0.14	%	$	291,372		540	0.37	%
Money market and savings deposits		565,341		481	0.17			418,608		712	0.34
Brokered Deposits		—		—	—			—		—	—
Certificates of deposit $100,000 or more		133,073		756	1.14			129,995		1,183	1.83
Other time deposits		144,367		715	1.00			150,659		1,180	1.58
Interest-bearing deposits		1,264,597		2,240	0.36			990,634		3,615	0.73
Securities sold under retail repurchase agreements and federal funds purchased		2,683		3	0.23			1,632		3	0.37
Advances from FHLB - short-term		—		—	—			—		—	—
Advances from FHLB - long-term		—		—	—			7,912		113	2.87
Subordinated debt		24,459		729	6.01			—		—	—
Total interest-bearing liabilities		1,291,739		2,972	0.46	%		1,000,178		3,731	0.75	%
Noninterest-bearing deposits		518,030						386,478
Other liabilities		12,383						9,446
Stockholders’ equity		196,666						196,587
Total liabilities and stockholders’ equity	$	2,018,818					$	1,592,689

Net interest spread			$	27,976	2.81	%			$	25,622	3.20	%
Net interest margin					2.96	%					3.45	%

Tax-equivalent adjustment
Loans			$	74					$	73
Total			$	74					$	73

(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 second quarter of ~~2020~~2021 increased ~~$160~~$134 thousand, or ~~6.1%~~4.8%, when compared to the second quarter of ~~2019.~~2020. The increase from the second quarter of ~~2019~~2020 was ~~mainly~~ due to ~~additional income from BOLI purchased late in 2019 and~~higher deposit related fees, other bank service charges and ~~loan fees,~~trust and investment fee income, partially offset by ~~lower service charges~~the absence of gains on ~~deposit accounts.~~sale of investment securities. Noninterest income increased ~~$417~~$346 thousand, or ~~17.7%~~13.5%, when compared to the first quarter of ~~2020~~2021 primarily due to ~~sales of available for sale investment securities at a gain of $347 thousand, other bank~~higher deposit related fees and service and loan fees of $211 thousand and a gain on directors life insurance of $86 thousand, partially offset by a decrease in service charges on deposit accounts of $322 thousand which was significantly impacted by decreased consumer spending.charges.

Total noninterest income ~~from continuing operations~~ for the six months ended June 30, ~~2020~~2021 increased ~~$324~~$339 thousand, or ~~6.8%~~6.6%, when compared to the same period in ~~2019.~~2020. The increase in noninterest income primarily consisted of increases in ~~BOLI~~deposit related fees, other bank service charges and trust and investment fee income, partially offset by the absence of gains on ~~sales~~sale of ~~available for sale securities~~investment securities. The increases in deposit related fees and other bank ~~services, partially offset by a decrease in~~ service charges ~~on deposit accounts.~~were mostly due to the local government-imposed shutdowns in 2020 and a return to a more normalized local economy and consumer demand for products and services in 2021.

Noninterest Expense

Total noninterest expense ~~from continuing operations~~ for the second quarter of ~~2020 decreased $1.3~~2021 increased $3.2 million, or ~~14.7%~~41.9%, when compared to the second quarter of ~~2019~~2020 and ~~decreased $2.7 million,~~increased $377 thousand, or ~~26.0%~~3.6%, when compared to the first quarter of ~~2020.~~2021. The ~~decrease~~increase in noninterest expenses when compared to the second quarter of 2020 was primarily driven by salary and wages being deferred in the second quarter of 2020, the result of originating first round PPP loans. Absent the increased deferrals of salaries and wages related to the first round of PPP, increases in furniture and fixtures, data processing, FDIC insurance and merger-related expenses resulted in the overall increase in noninterest expenses. The significant growth in new and existing customer accounts accounted for the increase in data processing costs and FDIC insurance premiums. The increase in noninterest expense when compared to the ~~second~~first quarter of ~~2019~~2021 was primarily due to merger-related expenses, salaries and wages, furniture and fixtures and legal and professional fees, partially offset by lower employee benefit costs due to lower payroll taxes and medical claims. The increase in salaries and wages was mainly attributed to the deferral of costs associated with originating the second round of PPP loans in the first quarter of ~~2020 was primarily~~2021. The increase in ~~salaries~~furniture and ~~wages, due~~fixtures when compared to the origination of PPP loans which resulted in heightened loan origination costs being deferred for the period. These loan origination costs were deferred at origination along with the related origination fees. The net fees of $2.6 million have and will continue to be accreted to interest income as a yield adjustment over the lives of the related PPP loans, which for most was 24 months at the time of origination. The recognition of these deferred fees and costs as a component of interest income will be accelerated upon forgiveness or repayment of the PPP loans. As previously stated, the Company processed 1,427 PPP loans duringboth the second quarter of 2020 and ~~does not anticipate additional originations at this volume resulting in additional reductions~~the first quarter of ~~salaries and wages expense in future quarters.~~2021 was due to an on-going branch renovation.

Total noninterest expense ~~from continuing operations~~ for the six months ended June 30, ~~2020 decreased $316 thousand,~~2021 increased $3.4 million, or ~~1.7%~~18.7%, when compared to the same period in ~~2019.~~2020. The ~~decrease~~increase was amainly the result of ~~lower~~the absence of the deferral in salaries and wages due to ~~FASB 91 deferrals, lower~~PPP loan originations in 2020, higher data processing costs, FDIC insurance premiums and ~~other real estate owned expenses, partially offset by higher employee benefit~~occupancy costs. The ~~deferred~~higher occupancy costs are associated with a new branch lease in Ocean City, Maryland which will open in 2022. In addition, the Company recorded merger-related expenses of $377 thousand for ~~salaries and wages are being recognized over~~ the ~~lives~~first six months of 2021 due to the ~~related loans as previously mentioned.~~pending acquisition of Severn.

Provision for Credit Losses

The provision for credit losses was $650 thousand for the second quarter of 2021, $1.0 million for the second quarter of 2020 ~~$200 thousand for the second quarter of 2019~~ and ~~$350~~$425 thousand for the first quarter of ~~2020.~~2021. The ratio of the allowance for credit losses to period-end loans was ~~0.79%~~1.02% at June 30, ~~2020.~~2021, 0.95% at December 31, 2020 and 0.98% at March 31, 2021. Excluding PPP loans, the ratio of the allowance for credit losses to period-end loans was ~~0.86%~~1.09% at June 30, ~~2020,~~2021, higher than both the ~~0.83%~~1.04% at ~~June 30, 2019~~December 31, 2020 and the ~~0.81%~~1.07% at March 31, ~~2020.~~2021. The primary drivers of the increased percentage of the allowance to total loans, excluding ~~the guaranteed~~ PPP loans, ~~and the increase in provision for loan losses~~ as compared to ~~both the prior periods~~December 31, 2020 and March 31, 2021, were ~~increases~~significant loan originations in ~~qualitative factors and, in particular, elevated unemployment statistics and the impact of the COVID-19 pandemic. Net charge-offs were $288 thousand for~~ the second quarter of ~~2020, compared to $313 thousand for~~2021, specifically within the construction and consumer loan portfolios, which require a higher level of allowance than the PPP loans which were forgiven during the second quarter of ~~2019~~2021, coupled with pandemic related qualitative factors which have remained elevated due to uncertainty and ~~$479~~associated risks with the COVID-19 virus/variants and lagging vaccination rates. The Company reported net recoveries in the second quarter of 2021 of $125 thousand, compared to net recoveries of $61 thousand for the fourth quarter of 2020 and no net charge offs or recoveries for the first quarter of ~~2020. The charge-offs in the second quarter related to continued workout efforts on nonperforming assets.~~2021.

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The provision for credit losses for the six months ended June 30, 2021 and 2020 was $1.1 million and ~~2019 was~~ $1.4 million, ~~and $300~~respectively, while net recoveries were $125 thousand ~~respectively, while~~and net charge-offs were $767 thousand, ~~and $338 thousand,~~ respectively. The ~~increase~~decrease in provision for credit losses was the result of ~~higher~~lower charge-offs in ~~2020, qualitative factors related to economic conditions~~2021 and ~~the COVID-19 pandemic.~~overall improved credit quality. The ratio of allowance to total loans ~~decreased over the first six months of the year~~increased from ~~0.84%~~0.95% at December 31, ~~2019~~2020, to ~~0.79%~~1.02% at June 30, ~~2020. As previously discussed, this~~2021. Excluding PPP loans, the ratio ~~decreased as a result~~ of the ~~PPP loans’ inclusion~~allowance for credit losses to period-end loans was 1.09% at June 30, 2021, higher than the 1.04% at December 31, 2020. The primary drivers for the increase in the ~~balance~~percentage of ~~total loans. Additionally, a reduction in specific reserves~~allowance for ~~certain credits through charge-offs during the six months ended June 30, 2020 reduced the allowance~~credit losses to total loans ~~ratio. The general reserve component~~were significant originations within the construction and consumer loan portfolios, which require a higher level of

~~Table~~ allowance than the PPP loans that were forgiven during the second quarter of ~~Contents~~

~~the allowance to legacy, non-impaired and non-PPP loans increased from 0.75% at December 31, 2019 to 0.89% at June 30, 2020, primarily resulting from increased~~2021, as well as continued elevated pandemic related qualitative ~~allocations related to the COVID-19 pandemic.~~ factors.The ratio of annualized net ~~charge-offs~~recoveries to average loans was 0.03% for the first half of 2021, compared to annualized net charge-offs of 0.12% for the first half of ~~2020 and 0.06% for the first half of 2019.~~2020. Management will continue to evaluate the adequacy of the allowance for credit losses as more economic data becomes available and as changes within the Company’s portfolio are known.

Income Taxes

The Company reported income tax expense ~~from continuing operations~~ of $1.4 million for the second quarter of 2021, $1.8 million for the second quarter of 2020 ~~$1.5 million for the second quarter of 2019~~ and ~~$1.1~~$1.4 million for the first quarter of ~~2020.~~2021. Income tax expense ~~increased~~decreased when compared to the second quarter of ~~2019~~2020 due to lower pre-tax earnings and stayed flat when compared to the first quarter of ~~2020 due to higher pre-tax earnings. The effective tax rate on continuing operations for the second and first quarter of 2020 was 25.2%.~~2021. The effective tax rate for the first and second quarter of ~~2019~~2021 was ~~26.0%.~~26.4% and was 25.2% for the second quarter of 2020. Income ~~taxes from continuing operations~~tax expense for the six months ended June 30, ~~2020 as compared to~~2021 and the six months ended June 30, ~~2019 increased $55 thousand or 2.0%, due to an increase in net income.~~2020 remained flat at $2.9 million.

ANALYSIS OF FINANCIAL CONDITION

Loans

Loans totaled ~~$1.407~~$1.472 billion at June 30, ~~2020~~2021 and ~~$1.249~~$1.454 billion at December 31, ~~2019,~~2020, an increase of ~~$158.6~~$18.2 million, or ~~12.7%~~1.2%. Excluding PPP loans, the increase in total loans was $68.6 million, or 4.7%, due to significant loan growth late in the second quarter of 2021. The increase ~~was primarily due to the origination of 1,427~~in loans, excluding PPP loans, ~~totaling $123.0 million. Organic growth for the first six months~~was comprised of ~~2020 was $35.6~~increases in consumer loans of $32.9 million, ~~which consisted~~or 104.6%, commercial loans of $10.9 million, or 5.2%, construction loans of $10.0 million, or 9.4%, and residential real estate loans of $6.3 million, or 1.4%. These increases were partially offset by a decrease in commercial real estate loans of ~~$39.8~~$6.0 million, ~~construction~~or less than 1%. Construction loans included deferred fees, net of deferred costs, of $549 thousand and discounts on acquired loans of $10.8 million and consumer loans of $7.5 million, partially offset by decreases in residential real estate loans of $12.1 million and commercial loans, excluding PPP loans, of $10.4 million. Loans included$625 thousand at June 30, 2021, compared to deferred costs, net of deferred fees, of ~~$470~~$622 thousand and discounts on acquired loans of ~~$912~~$754 thousand at December 31, 2020. Outstanding PPP loans totaled $86.8 million at June 30, ~~2020, compared to $1.8~~2021 and $122.8 million ~~and $1.1 million, respectively,~~ at December 31, ~~2019.~~2020, a decrease of $36.0 million or 29.3%. The decrease was primarily due to forgiveness on first round PPP loans originated in 2020, partially offset by the origination of second round PPP loans in 2021. We do not engage in foreign or subprime lending activities. See Note 5,4, “Loans and Allowance for Credit Losses”, in the Notes to Consolidated Financial Statements and below under the caption “Allowance for Credit Losses” for additional information.

Our loan portfolio has a commercial real estate loan concentration, which is generally defined as a combination of certain construction and commercial real estate loans. Construction loans were ~~$110.7~~$116.8 million, or 7.9% of total loans, at June 30, ~~2020~~2021 and ~~$99.8~~$106.8 million, or ~~8.0%~~7.3% of total loans, at December 31, ~~2019.~~2020. Commercial real estate loans were ~~$626.3~~$655.3 million, or 44.5% of total loans, at June 30, ~~2020,~~2021, compared to ~~$586.6~~$661.2 million, or ~~47.0%~~45.5% of total loans, at December 31, ~~2019.~~2020.

The federal banking regulators have issued guidance for those institutions which are deemed to have concentrations in commercial real estate lending. Pursuant to the supervisory criteria contained in the guidance for identifying institutions with a potential commercial real estate concentration risk, institutions which have (1) total reported loans for construction, land development, and other land acquisitions which represent 100% or more of an institution’s total risk-based capital; or (2) total non-owner occupied commercial real estate loans representing 300% or more of the institution’s total risk-based capital and the institution’s non-owner occupied commercial real estate loan portfolio (including construction) has increased 50% or more during the prior 36 months are identified as having potential commercial real estate concentration risk. Institutions which are deemed to have concentrations in commercial real estate lending are expected to employ heightened levels of risk management with respect to their commercial real estate portfolios, and may be required to hold higher levels of capital. The Company, like many community banks, has a concentration in commercial real estate loans,

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and the Company has experienced significant growth in its commercial real estate portfolio in recent years. At June 30, ~~2020,~~2021, non-owner-occupied commercial real estate loans (including construction, land and land development loans) represented ~~291.0%~~302.3% of total risk-based capital. At such time, construction, land and land development loans represented ~~60.2%~~56.8% of total risk-based capital.

The commercial real estate portfolio (including construction) has increased ~~48.3%~~41.7% 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

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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

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 ~~$11.1~~$15.1 million at June 30, ~~2020, $10.3~~2021, $13.9 million at ~~June 30,~~December 31, 2020 and ~~$10.4~~$14.3 million at March 31, ~~2020. Net charge offs for the second quarter~~2021. There were net recoveries of ~~2020 were $288 thousand, compared to $313~~$125 thousand for the second quarter of ~~2019~~2021, compared to net recoveries of $61 thousand for the fourth quarter of 2020 and ~~$479 thousand~~no net charge offs or recoveries for the first quarter of ~~2020.~~2021. The ratio of annualized net ~~charge-offs~~recoveries to average loans was ~~0.08%~~0.03% for the second quarter of ~~2020,~~2021, compared to ~~0.10%~~annualized net recoveries of 0.02% for the ~~second~~fourth quarter of ~~2019~~2020 and ~~0.15%~~0% for the first quarter of 2020. Net charge-offs were $767 thousand for the six months ended June 30, 2020, compared to $338 thousand for the six months ended June 30, 2019. The ratio of net charge-offs to average loans was 0.12% and 0.06% for the six months ended June 30, 2020 and June 30, 2019, respectively.2021.

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 ~~0.79%~~1.02% at June 30, ~~2020, 0.83% at June 30, 2019~~2021 and ~~0.84%~~0.95% at December 31, ~~2019.~~2020. Excluding PPP loans, the ratio of the allowance for credit losses to period-end loans ~~was 0.86%~~as 1.09% at June 30, ~~2020,~~2021, higher than ~~both~~ the ~~0.83% and 0.84%~~1.04% at ~~June 30, 2019 and~~ December 31, ~~2019.~~2020. The increase in the percentage of the allowance to total loans at June 30, ~~2020,~~2021, compared to ~~June 30, 2019 and~~ December 31, ~~2019,~~2020, was primarily due to ~~increases~~significant loan growth in ~~qualitative factors, and in particular, elevated unemployment statistics,~~ the ~~impact~~second quarter of ~~COVID-19 pandemic.~~2021 as previously discussed. 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 June 30, 2020. However, management will continue to evaluate the adequacy of the allowance for credit losses as more economic data becomes available and as the impact of the COVID 19 pandemic on the Company’s portfolio becomes known. Increases in unemployment, declines in consumer confidence, and a reluctance on the part of businesses to invest in and expand their operations, among other things, may result in additional weakness in economic conditions, place financial strain on our borrowers and ultimately impact the credit quality of our loan portfolio. As a result, we may experience increases in the level of past due, nonaccrual and classified loans, as well as higher net charge-offs. Deterioration in credit quality in conjunction with weakness in current and expected economic conditions, may require us to record additional provisions for credit losses in excess of historical levels.2021.

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The following ~~table presents~~tables present a summary of the activity in the allowance for credit losses at or for the three and six months ended June 30, ~~2020~~2021 and ~~2019.~~2020.

															��
													For the Three Months Ended June 30,
													2021				2020
															Percentage of net				Percentage of net
															charge-offs (recoveries)				charge-offs (recoveries)
															(annualized) to				(annualized) to
	At or for Three Months Ended						At or for Six Months Ended								average loans				average loans
	June 30,						June 30,						Net (charge-offs)		outstanding		Net (charge-offs)		outstanding
(Dollars in thousands)	2020			2019			2020			2019			recoveries		during the year		recoveries		during the year
Allowance balance - beginning of period	$	10,378		$	10,418		$	10,507		$	10,343

Charge-offs:
Construction		—			(3)			—			(3)		$	5	(0.02)	%	$	5	(0.02)	%
Residential real estate		—			(300)			(191)			(423)			57	(0.05)			4	-
Commercial real estate		(331)			—			(601)			—			64	(0.04)			(331)	0.21
Commercial		(37)			(81)			(119)			(162)			(2)	-			24	(0.04)
Consumer		—			(23)			(7)			(29)			1	(0.01)			10	(0.16)
Total		(368)			(407)			(918)			(617)		$	125	(0.03)	%	$	(288)	0.08	%
Recoveries:
Construction		5			4			8			7
Residential real estate		4			3			7			11
Commercial real estate		—			8			—			107
Commercial		61			77			124			152
Consumer		10			2			12			2
Totals		80			94			151			279
Net charge-offs		(288)			(313)			(767)			(338)
Provision for credit losses		1,000			200			1,350			300
Allowance balance - end of period	$	11,090		$	10,305		$	11,090		$	10,305

Average loans outstanding during the period	$	1,374,324		$	1,221,215		$	1,318,883		$	1,211,618		$	1,444,684			$	1,374,324
Net charge-offs (annualized) as a percentage of average loans outstanding during the period		0.08	%		0.10	%		0.12	%		0.06	%
Allowance for credit losses at period end as a percentage of total period end loans ⁽¹⁾		0.79	%		0.83	%		0.79	%		0.83	%			1.02	%			0.79	%
Allowance for credit losses at period end as a percentage of average loans		0.81	%		0.84	%		0.84	%		0.85	%

Allowance for credit losses at period end as a percentage of average loans ⁽²⁾															1.04	%			0.81	%
Allowance for credit losses at period end as a percentage of period end nonaccrual loans															382.27	%			95.20	%

(1)

At June 30, ~~2020,~~2021, the loan balances used to calculate the ratio ~~includes~~include PPP loans of ~~$123.0~~$86.8 million. ~~Without~~Excluding PPP loans, the ratio is 1.09%. At June 30, 2020, the loan balances used to calculate the ratio included PPP loans of $122.9 million. Excluding PPP loans, the ratio is 0.86%.

(2)

At June 30, 2021, the quarter-to-date average loan balances used to calculate the ratio include PPP loans of $116.9 million. Excluding PPP loans, the ratio is 1.14%. At June 30, 2020, the quarter-to-date average loan balances used to calculate the ratio included PPP loans of $90.2 million. Excluding PPP loans, the ratio is 0.86%.

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	For the Six Months Ended June 30,
	2021				2020
			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)	recoveries		during the year		recoveries		during the year
Construction	$	10	(0.02)	%	$	8	(0.01)	%
Residential real estate		63	(0.03)			(184)	0.09
Commercial real estate		64	(0.02)			(601)	0.20
Commercial		(11)	0.01			5	(0.01)
Consumer		(1)	-			5	(0.04)
Total	$	125	(0.03)	%	$	(767)	0.12	%

Average loans outstanding during the period	$	1,447,767			$	1,318,883
Allowance for credit losses at period end as a percentage of total period end loans ⁽¹⁾			1.02	%			0.79	%
Allowance for credit losses at period end as a percentage of average loans ⁽²⁾			1.04	%			0.84	%
Allowance for credit losses at period end as a percentage of period end nonaccrual loans			382.27	%			95.20	%

(1)

At June 30, 2021, the loan balances used to calculate the ratio include PPP loans of $86.8 million. Excluding PPP loans, the ratio is 1.09%. At June 30, 2020, the loan balances used to calculate the ratio included PPP loans of $122.9 million. Excluding PPP loans, the ratio is 0.86%.

(2)

At June 30, 2021, the year-to-date average loan balances used to calculate the ratio include PPP loans of $124.3 million. Excluding PPP loans, the ratio is 1.14%. At June 30, 2020, the year-to-date average loan balances used to calculate the ratio included PPP loans of $45.1 million. Excluding PPP loans, the ratio is 0.87%.

Nonperforming Assets and Accruing TDRs

As shown in the following table, nonperforming assets ~~increased $301 thousand to $12.3~~were $4.9 million and $6.3 million at June 30, ~~2020 from $12.0 million at~~2021 and December 31, ~~2019,~~2020, respectively. The balance of nonperforming assets decreased primarily due to ~~an increase~~a decline in nonaccrual loans of ~~$1.1~~$1.5 million, or ~~10.0%, partially offset by a decrease in loans 90 days past due and still accruing of $722~~27.6%. Accruing troubled debt restructurings (“TDRs”) decreased $659 thousand, or ~~54.4%. Accruing TDRs decreased $189~~9.4%, over the same time period.Other real estate owned properties increased to $203 thousand ~~to $7.3 million at June 30, 2020~~ from ~~$7.5 million~~$0 at December 31, 2019. Additionally, other real estate owned decreased $36 thousand, or 48.6%, when compared to December 31, 2019. The increase in nonaccrual loans was due to one loan relationship with a residential real estate customer with nonaccrual loans amounting to $1.1 million, which the Bank has been monitoring for several quarters. The decrease in accruing TDRs was due to normal payments. 2020.The ratio of nonaccrual loans and accruing TDRs to total loans decreased ~~10 bps~~ to ~~1.35%~~0.70% at June 30, ~~2020~~2021 from ~~1.45%~~0.86% at December 31, ~~2019.~~2020.

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 June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.


(Dollars in thousands)	June 30, 2020			December 31, 2019			June 30, 2021			December 31, 2020
Nonperforming assets
Nonaccrual loans							$	3,947		$	5,455
Construction	$	297		$	—
Residential real estate		3,816			2,475
Commercial real estate		6,988			7,817
Commercial		548			298
Consumer		—			—
Total nonaccrual loans		11,649			10,590
Loans 90 days or more past due and still accruing
Construction		—			—
Residential real estate		54			556
Commercial real estate		527			770
Commercial		—			—
Consumer		23			—
Total loans 90 days or more past due and still accruing		604			1,326			752			804
Other real estate owned		38			74			203			—
Total nonperforming assets	$	12,291		$	11,990		$	4,902		$	6,259

Accruing TDRs
Construction	$	38		$	41
Residential real estate		3,905			4,041
Commercial real estate		3,369			3,419
Commercial		—			—
Consumer		—			—
Total accruing TDRs	$	7,312		$	7,501		$	6,338		$	6,997

As a percent of total loans:
Nonaccrual loans		0.83	%		0.85	%		0.27	%		0.38	%
Accruing TDRs		0.52	%		0.60	%		0.43	%		0.48	%
Nonaccrual loans and accruing TDRs		1.35	%		1.45	%		0.70	%		0.86	%

As a percent of total loans and other real estate owned:
Nonperforming assets		0.87	%		0.96	%		0.33	%		0.43	%
Nonperforming assets and accruing TDRs		1.39	%		1.56	%		0.76	%		0.91	%

As a percent of total assets:
Nonaccrual loans		0.68	%		0.68	%		0.19	%		0.28	%
Nonperforming assets		0.71	%		0.77	%		0.23	%		0.32	%
Accruing TDRs		0.43	%		0.48	%		0.30	%		0.36	%
Nonperforming assets and accruing TDRs		1.13	%		1.25	%		0.53	%		0.69	%

Investment Securities

The investment portfolio is comprised of debt and equity securities. Debt 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.

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Investment securities in the held to maturity category are stated at cost adjusted for amortization of premiums and accretion of discounts. We have the intent and current ability to hold such securities until maturity. At June 30, ~~2020, 88.0%~~2021, 36.5% of the portfolio of debt securities was classified as available for sale and ~~12.0%~~63.5% was classified as held to maturity, compared to ~~93.5%~~68.0% and ~~6.5%~~32.0% respectively, at December 31, ~~2019.~~2020. 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 ~~$102.7~~$317.4 million at June 30, ~~2020,~~2021, a ~~$34.4~~$107.1 million, or ~~25.1%~~50.9%, ~~decrease~~increase since December 31, ~~2019.~~2020. The ~~decrease~~increase was primarily due to ~~agency bonds being called during~~ the ~~first quarter~~purchases of ~~2020~~held to maturity securities of $136.4 million, partially offset by proceeds from maturities and ~~the sale~~sales of available for sale securities of $23.9 million, during 2021. Due to the excess liquidity experienced in 2020 and 2021, the ~~second quarter~~Company strategically purchased short duration held to maturity securities and subordinated debt of ~~2020. The~~other banks which earn significantly higher average yields than interest-bearing deposits with other banks. As loan demand begins to strengthen, the Company will redeploy proceeds ~~were primarily redeployed~~from maturities and paydowns, as well as excess liquidity to fund loan ~~growth during the six months ended June 30, 2020.~~growth. At June 30, ~~2020, 88.6%~~2021, 84.2% of the securities available for sale were mortgage-backed and ~~11.4%~~15.8% were U.S. Government agencies, compared to ~~80.6%~~83.1% and ~~19.4%~~16.9%, respectively, at year-end ~~2019.~~2020. At June 30, 2021, 58.4% of the securities held to maturity were mortgage-backed, 31.7% were U.S. Government agencies and 9.9% were other debt securities, compared to 41.5%, 28.7% and 29.2%, respectively, at year-end 2020. Our investments in mortgage-backed securities are issued or guaranteed by U.S. Government agencies or government-sponsored agencies.

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Deposits

Total deposits at June 30, ~~2020~~2021 amounted to ~~$1.50~~$1.88 billion, an increase of ~~$163.4~~$179.9 million, or ~~12.2%~~10.6%, when compared to the level at December 31, ~~2019.~~2020. The increase in total deposits consisted of increases in noninterest-bearing deposits of $86.4 million and interest-bearing deposits of $77.0 million. The growth in interest-bearing deposits was represented by increases in interest-bearing checking accounts of $42.7 million, savingsthe following categories: Savings and money market accounts of ~~$32.7~~$150.6 million, noninterest-bearing deposits of $28.9 million and other time deposits ~~greater than $100 thousand~~ of ~~$1.9~~$2.7 million, partially offset by a decrease in ~~other time deposits~~checking accounts of ~~$295 thousand.~~ $2.3 million. The significant movement within deposit accounts continues to be impacted by direct government stimulus payments to our customers and new account openings.

Short-Term Borrowings

Short-term borrowings ~~decreased by $162 thousand, or 13.2%, to $1.1 million at June 30, 2020 when compared to December 31, 2019. Short-term borrowings generally consist~~consisted of securities sold under agreements to repurchase, which increased by $1.9 million, or 176.9%, to $2.9 million at June 30, 2021 when compared to December 31, 2020. Securities sold under agreements to repurchase are issued in conjunction with cash management services for commercial ~~depositors,~~depositors. Other short-term borrowings may consist of overnight ~~borrowings~~borrowing from correspondent banks ~~and short-term~~or advances from the ~~Federal Home Loan Bank (the “FHLB”).~~FHLB. Short-term advances are defined as those with original maturities of one year or less. At June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, the Company had no outstanding short-term ~~borrowings consisted of repurchase agreements.~~or long-term advances with FHLB.

Long-Term Debt

The Company uses long-term borrowings to meet longer term liquidity needs, specifically to fund loan growth when liquidity from deposit growth is not sufficient. ~~The~~On August 25, 2020, the Company ~~had no long-term borrowings at June 30, 2020, due~~entered into Subordinated Note Purchase Agreements with certain Purchasers pursuant to ~~a payoff of $15.0~~which the Company issued and sold $25.0 million in ~~April of 2020. The~~aggregate principal amount ~~of outstanding long-term borrowings at December 31, 2019 was $15.0 million, which carried~~with an initial interest rate of ~~2.82%.~~5.375% Fixed-to-Floating Rate Subordinated Notes due September 1, 2030.

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 increase in cash and cash equivalents was $50.3 million for the first six months of 2021 compared to an increase of $31.3 million for the first six months of ~~2020 compared to a decrease of $27.9 million for the first six months of 2019.~~2020. The increase in cash and cash equivalents in ~~2020~~2021 was mainly due to the significant increase in deposits, the direct result of ~~PPP loan proceeds deposited to~~new account openings, government stimulus and ~~remaining~~significant increases in ~~these accounts as of June 30, 2020.~~municipal accounts. The Company expects these funds to be utilized over the coming ~~weeks and~~ months, which may ~~or may not~~ result in ~~a decline in~~ deposit balances. Additionally, the increase in cash and cash equivalents was the result of bonds being called in the first quarter of 2020 and the sale of available for sale securities in the second quarter of 2020. The Company anticipates using these proceeds to purchase additional investment securities and fund loan growth.balance fluctuations.

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 ~~corresponding~~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

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member of the FHLB, which provides another source of liquidity. Through the FHLB, the Bank had collateral pledged of approximately ~~$293.4~~$298.9 million and ~~$270.1~~$316.7 million at June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, 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 ~~$7.3~~$3.7 million to ~~$200.1~~$198.7 million at June 30, ~~2020~~2021 when compared to December 31, ~~2019~~2020 primarily due to the current year’s retained earnings, partially offset by dividends paid during the first six months of 2021 and ~~a positive~~the change in fair value of available-for-sale securities recorded in accumulated other comprehensive ~~income of $1.8 million, or 868.1%.~~income.

CBLR

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

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

The ~~CBLR framework was available for banks~~Company has not opted-in to ~~use in their March 31, 2020 Call Report. The Bank did not opt into~~ the CBLR ~~framework in the first or second quarter of 2020.~~framework.

Basel III

Under final Federal Reserve and FDIC approved rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. banks minimum requirements increased for both the quantity and quality of capital held by the Bank. The Basel III capital standards substantially revised the risk based capital requirements applicable to bank holding companies and their depository institution subsidiaries, including the definitions and the components of Tier 1 capital and Total Capital, the method of evaluating risk-weighted assets, institutions of a capital conservation buffer, and other matters affecting regulatory capital ratios. Strict eligibility criteria for regulatory capital instruments were also implemented under the rules.

The phase-in period for the final rules became effective for the Bank on January 1, 2015, with full compliance with all of the final rules’ requirements phased in over a multi-year schedule, which was fully phased in on January 1, 2019. As of June 30, ~~2020,~~2021, the Bank’s capital levels remained characterized as ~~“well-capitalized”~~“well-capitalized�� under the ~~new~~ rules.

The following tables present the applicable capital ratios as of June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.

Tier 1

Common Equity

Tier 1

Total

Tier 1

Common Equity

Tier 1

Total

leverage

Tier 1

risk-based

leverage

Tier 1

risk-based

June 30, 2020

ratio

capital ratio

June 30, 2021

ratio

capital ratio

Shore United Bank

10.66

13.26

14.14

9.32

13.15

14.21

Tier 1

Common Equity

Tier 1

Total

Tier 1

Common Equity

Tier 1

Total

leverage

Tier 1

risk-based

leverage

Tier 1

risk-based

December 31, 2019

ratio

capital ratio

December 31, 2020

ratio

capital ratio

Shore United Bank

10.64

13.00

13.87

9.73

13.21

14.25

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Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Our primary market risk is interest rate fluctuation and management has procedures in place to evaluate and mitigate this risk. This risk and these procedures are discussed in Item 7 of Part II of the ~~2019~~2020 Annual Report under the caption “Market Risk Management and Interest Sensitivity”. Management believes that there have been no material changes in our market risks, the procedures used to evaluate and mitigate these risks, or our actual and simulated sensitivity positions since December 31, ~~2019.~~2020.

Item 4. Controls and Procedures.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that Shore Bancshares, Inc. files under the Securities Exchange Act of 1934, as amended (“Exchange Act”) with the SEC, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in those rules and forms, and that such information is accumulated and communicated to management, including Shore Bancshares, Inc.’s principal executive officer (“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

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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 June 30, ~~2020~~2021 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 June 30, ~~2020.~~2021.

There was no change in our internal control over financial reporting during the second quarter of ~~2020~~2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

The section titled Risk Factors in Part I, Item 1A of our ~~2019~~2020 Form 10-K includes a discussion of the many risks and uncertainties we face, any one or more of which could have a material adverse effect on our business, results of operations, financial condition (including capital and liquidity), or prospects or the value of or return on an investment in the Company. ~~The information presented below provides an update to, and should be read~~Management does not believe that any material changes in ~~conjunction with, the~~our risk factors ~~and other information contained~~have occurred since they were last disclosed in our ~~2019 Form 10-K.~~

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

~~In December 2019, COVID-19 was first reported in Wuhan, Hubei Province, China. Since then, COVID-19 infections have spread to additional countries including the United States. In March~~ 2020 the World Health Organization declared COVID-19 to be a pandemic. Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the impact of the coronavirus pandemic on our business, and there is no guarantee that our efforts to address or mitigate the adverse impacts of the coronavirus will be effective. The impact to date has included periods of significant volatility in financial, commodities and other markets. This volatility has had and, if it continues, could continue to have an adverse impact on our customers and on our business, financial condition and results of operations as well as our growth strategy.

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

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

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

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

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

The Company is a participating lender in the PPP, a loan program administered through the SBA, that was created to help eligible businesses, organizations and self-employed persons fund their operational costs during the COVID-19 pandemic. Under this program, the SBA guarantees 100% of the amounts loaned under the PPP. The PPP opened on April 3, 2020; however, because of the short window between the passing of the CARES Act and the opening of the PPP, there is some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes the Company to risks relating to noncompliance with the PPP. For instance, other financial institutions have experienced litigation related to their process

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and procedures used in processing applications for the PPP. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on our business, financial condition and results of operations. In addition, the Company may be exposed to credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced. If a deficiency is identified, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Company.

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

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

~~We are subject to increasing credit risk as a result of the COVID-19 pandemic, which could adversely impact our profitability.~~

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

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

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

As of June 30, 2020, we had approximately $17.5 million recorded as goodwill. We evaluate our goodwill for impairment at least annually. Although we conducted an impairment assessment of goodwill and intangibles in the first and second quarter of 2020 and the impairment evaluation did not identify any impairment in either quarter of 2020, there can be no assurances that prolonged significant negative economic trends resulting from the COVID-19 pandemic, including the lack of recovery in the market price of our common stock, or reduced estimates of future cash flows or disruptions to our

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business, will not result in impairments to goodwill or other intangibles, such as our core deposit intangibles. If our analysis results in impairment to goodwill or other intangibles, we would be required to record an impairment charge to earnings in our financial statements during the period in which such impairment is determined to exist. Any such change could have a material adverse effect on our financial condition, results of operations and stock price.

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

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

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

On ~~April~~November 24, ~~2019~~2020, the ~~Corporation’s Board of Directors approved~~Company announced a stock repurchase ~~program. Under~~program which was approved by the ~~stock repurchase program, the Corporation is~~Board and authorized management to repurchase up to ~~$10~~$5.0 million ~~or approximately 5%,~~ of ~~its~~the Company’s common ~~stock for 2019 and 2020. The program may be limited or terminated at any time without prior notice. During the three months ended June 30, 2020, the Corporation had~~stock. There were no ~~repurchases. The Company has suspended all share buybacks~~purchases of the Company’s common stock ~~until further notice.~~during the second quarter of 2021.The stock repurchase program is currently suspended due to the recent announcement of our merger with Severn.

The following table provides information with respect to purchases made by or on behalf of us or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange Act) of our common stock during the second quarter of ~~2020.~~2021.

Total Number of

Maximum Dollar Value

Stock Repurchase Plan $5.0 million (2020-2021)

Total Number of

Maximum Dollar Value

Total Number

Average Price

Shares Purchased as Part

Of Shares that May Yet Be

Total Number

Average Price

Shares Purchased as Part

Of Shares that May Yet Be

Of Shares

Paid Per

of the Publicly Announced

Purchased Under the

Of Shares

Paid Per

of the Publicly Announced

Purchased Under the

Period

Purchased

Share

Plans or Programs

Purchased

Share

Plans or Programs

April 1, 2020 to April 30, 2020

—

5,551,624

May 1, 2020 to May 31, 2020

—

5,551,624

June 1, 2020 to June 30, 2020

—

5,551,624

April 1, 2021 to April 30, 2021

—

541,973

May 1, 2021 to May 31, 2021

—

541,973

June 1, 2021 to June 30, 2021

—

541,973

Total

—

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Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not Applicable

Item 5. Other Information

None

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Item 6. Exhibits.

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Exhibit Number		Description

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

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

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

~~3.2(i)~~3.2		Amended and ~~Restate~~Restated By-Laws (incorporated by reference to Exhibit ~~3.2(i)~~3.2 of the Company’s Form 10-K for the year ended December 31, ~~2010)~~2020).

~~3.2(ii)~~4.1		~~First Amendment to Amended and Restate By-Laws~~Description of Registrant’s Securities (incorporated by reference to Exhibit ~~3.2(ii) of~~4.1 to the Company’s Form 10-K ~~for the year ended December 31, 2010)~~filed March 13, 2020).

~~3.2(iii)~~4.2		~~Second Amendment to Amended and Restate By-Laws~~Form of Common Stock Certificate (incorporated by reference to Exhibit ~~3.2(iii)~~4.1 of the Company’s Form ~~10-K for the year ended December 31, 2010).~~

~~3.2(iv)~~		~~Third Amendment to Amended and Restate By-Laws (incorporated by reference to Exhibit 3.2(iv) of the Company’s Form 10-K for the year ended December 3,~~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).

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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: August ~~7, 2020~~13, 2021	By:	/s/ Lloyd L. Beatty, Jr.
		Lloyd L. Beatty, Jr.
		President & Chief Executive Officer
		(Principal Executive Officer)

Date: August ~~7, 2020~~13, 2021	By:	/s/ Edward C. Allen
		Edward C. Allen
		Executive Vice President & Chief Financial Officer
		(Principal Accounting Officer)

5652


	June 30,		December 31,
(In thousands, except share and per share data)	2020		2019
ASSETS		(Unaudited)
Cash and due from banks	$	24,585	$	18,465
Interest-bearing deposits with other banks		101,699		76,506
Cash and cash equivalents		126,284		94,971
Investment securities:
Available-for-sale, at fair value		86,020		122,791
Held to maturity, at amortized cost - fair value of $11,715 (2020) and $8,654 (2019)		11,710		8,786
Equity securities, at fair value		1,388		1,342
Restricted securities		3,626		4,190

Loans		1,407,249		1,248,654
Less: allowance for credit losses		(11,090)		(10,507)
Loans, net		1,396,159		1,238,147

Premises and equipment, net		24,668		23,821
Goodwill		17,518		17,518
Other intangible assets, net		1,970		2,252
Other real estate owned, net		38		74
Right-of-use assets		4,879		4,771
Other assets		45,264		40,572
TOTAL ASSETS	$	1,719,524	$	1,559,235

LIABILITIES
Deposits:
Noninterest-bearing	$	442,996	$	356,618
Interest-bearing		1,061,732		984,716
Total deposits		1,504,728		1,341,334

Short-term borrowings		1,064		1,226
Long-term borrowings		—		15,000
Lease liabilities		4,941		4,792
Other liabilities		8,657		4,081
TOTAL LIABILITIES		1,519,390		1,366,433

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share; shares authorized - 35,000,000; shares issued and outstanding - 12,525,667 (2020) and 12,500,372 (2019)		125		125
Additional paid in capital		61,129		61,045
Retained earnings		136,876		131,425
Accumulated other comprehensive income		2,004		207
TOTAL STOCKHOLDERS' EQUITY		200,134		192,802
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	1,719,524	$	1,559,235


Earnings per common share - Basic
Income from continuing operations	$	0.43	$	0.33	$	0.68	$	0.63
Loss from discontinued operations		—		—		—		(0.01)
Net income	$	0.43	$	0.33	$	0.68	$	0.62
Earnings per common share - Diluted
Income from continuing operations	$	0.43	$	0.33	$	0.68	$	0.63
Loss from discontinued operations		—		—		—		(0.01)
Net income	$	0.43	$	0.33	$	0.68	$	0.62

Dividends paid per common share		0.12		0.10	$	0.24	$	0.20


	For Six Months Ended
	June 30,
($ in thousands)	2020		2019
Noninterest income
All other income	$	—	$	14
Total noninterest income		—		14
Noninterest expense
Salaries and wages		—		31
Employee benefits		—		7
Occupancy expense		—		18
Furniture and equipment		—		1
Legal and professional fees		—		64
Other noninterest expenses		—		(8)
Total noninterest expense		—		113
Loss from discontinued operations before income taxes		—		(99)
Income tax benefit		—		(25)
Loss from discontinued operations	$	—	$	(74)