UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended ~~September 30, 2021~~March 31, 2022

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

For the transition period from to

Commission file number 0-22345

SHORE BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

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

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

(410) 763-7800

Registrant’s Telephone Number, Including Area Code

N/A

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

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


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

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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



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

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

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

The number of shares outstanding of the registrant’s common stock as of ~~November 15, 2021~~May 10, 2022 was ~~19,805,801.~~19,843,379.

Table of Contents

INDEX

		Page

Part I. Financial Information		3

Item 1. Financial Statements		3

Consolidated Balance Sheets ~~– September 30, 2021~~–March 31, 2022 (unaudited) and December 31, ~~2020~~2021		3

Consolidated Statements of Income For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~ (unaudited)		4

Consolidated Statements of Comprehensive Income For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~ (unaudited)		5

Consolidated Statements of Changes in Stockholders’ Equity For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~ (unaudited)		6

Consolidated Statements of Cash Flows For the ~~nine~~three months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~ (unaudited)		87

Notes to Consolidated Financial Statements (unaudited)		98

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		3640

Item 3. Quantitative and Qualitative Disclosures about Market Risk		51

Item 4. Controls and Procedures		51

Part II. Other Information		52

Item 1. Legal Proceedings		52

Item 1A. Risk Factors		52

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		52

Item 3. Defaults Upon Senior Securities		5352

Item 4. Mine Safety Disclosures		5352

Item 5. Other Information		5352

Item 6. Exhibits		5453

Signatures		5554

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

SHORE BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

September 30,

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

2021

2020
ASSETS

(Unaudited)


Cash and due from banks

$
18,440

$
16,666
Interest-bearing deposits with other banks

292,412

170,251
Cash and cash equivalents

310,852

186,917
Investment securities:


Available-for-sale, at fair value

105,125

139,568
Held to maturity, at amortized cost - fair value of $247,835 (2021) and $65,828 (2020)

250,501

65,706
Equity securities, at fair value

1,384

1,395
Restricted securities

3,189

3,626

Loans

1,494,897

1,454,256
Less: allowance for credit losses

(15,525)

(13,888)
Loans, net

1,479,372

1,440,368

Premises and equipment, net

27,011

24,924
Goodwill

17,518

17,518
Other intangible assets, net

1,365

1,719
Other real estate owned, net

203

—
Right-of-use assets

5,512

4,795
Other assets

58,742

46,779
TOTAL ASSETS

$
2,260,774

$
1,933,315

LIABILITIES


Deposits:


Noninterest-bearing

$
554,902

$
509,091
Interest-bearing

1,463,163

1,191,614
Total deposits

2,018,065

1,700,705

Securities sold under retail repurchase agreements

3,501

1,050
Subordinated debt

24,521

24,429
Total borrowings

28,022

25,479

Lease liabilities

5,686

4,874
Other liabilities

7,394

7,238
TOTAL LIABILITIES

2,059,167

1,738,296


COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY

Common stock, par value $.01 per share; shares authorized - 35,000,000; shares issued and outstanding - 11,752,445 (2021) and 11,783,380 (2020)

118

118
Additional paid in capital

51,641

52,167
Retained earnings

149,620

141,205
Accumulated other comprehensive income

228

1,529
TOTAL STOCKHOLDERS' EQUITY

201,607

195,019
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$
2,260,774

$
1,933,315


	March 31,		December 31,
(In thousands, except share and per share data)	2022		2021
ASSETS	(unaudited)
Cash and due from banks	$	16,206	$	16,919
Interest-bearing deposits with other banks		554,770		566,694
Cash and cash equivalents		570,976		583,613
Investment securities:
Available-for-sale, at fair value		106,695		116,982
Held to maturity, at amortized cost - fair value of $390,541 (2022) and $401,524 (2021)		407,138		404,594
Equity securities, at fair value		1,305		1,372
Restricted securities, at cost		9,894		4,159

Loans held for sale, at fair value		12,906		37,749

Loans held for investment		2,181,106		2,119,175
Less: allowance for credit losses		(14,710)		(13,944)
Loans, net		2,166,396		2,105,231

Premises and equipment, net		52,049		51,624
Goodwill		63,281		63,421
Other intangible assets, net		7,018		7,535
Other real estate owned, net		561		532
Mortgage servicing rights, at fair value		5,113		4,087
Right-of-use assets		10,180		11,370
Other assets		80,985		67,867
TOTAL ASSETS	$	3,494,497	$	3,460,136

LIABILITIES
Deposits:
Noninterest-bearing	$	876,415	$	927,497
Interest-bearing		2,192,080		2,098,739
Total deposits		3,068,495		3,026,236

Securities sold under retail repurchase agreements		—		4,143
Advances from FHLB - long-term		10,094		10,135
Subordinated debt		42,840		42,762
Total borrowings		52,934		57,040

Lease liabilities		10,397		11,567
Other liabilities		10,807		14,600
TOTAL LIABILITIES		3,142,633		3,109,443

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share; shares authorized - 35,000,000; shares issued and outstanding - 19,843,379 (2022) and 19,807,533 (2021)		198		198
Additional paid in capital		200,640		200,473
Retained earnings		153,198		149,966
Accumulated other comprehensive (loss) income		(2,172)		56
TOTAL STOCKHOLDERS' EQUITY		351,864		350,693
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	3,494,497	$	3,460,136

See accompanying notes to Consolidated Financial Statements.

Table of Contents

SHORE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)


	For Three Months Ended				For Nine Months Ended				For Three Months Ended
	September 30,				September 30,				March 31,
(In thousands, except per share data)	2021		2020		2021		2020		2022		2021
INTEREST INCOME						��
Interest and fees on loans	$	15,484	$	14,139	$	44,231	$	41,879	$	22,085	$	14,366
Interest and dividends on investment securities:
Taxable		1,318		730		3,343		2,087
Interest and dividends on taxable investment securities										1,985		931
Interest on deposits with other banks		97		33		199		216		254		47
Total interest income		16,899		14,902		47,773		44,182		24,324		15,344

INTEREST EXPENSE
Interest on deposits		949		1,470		3,189		5,085		1,358		1,184
Interest on short-term borrowings		2		1		5		4		2		1
Interest on long-term borrowings		359		148		1,088		261		534		359
Total interest expense		1,310		1,619		4,282		5,350		1,894		1,544

NET INTEREST INCOME		15,589		13,283		43,491		38,832		22,430		13,800
Provision for credit losses		290		1,500		1,365		2,850		600		425

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES		15,299		11,783		42,126		35,982		21,830		13,375

NONINTEREST INCOME
Service charges on deposit accounts		805		647		2,162		2,057		1,359		674
Trust and investment fee income		477		381		1,359		1,119		514		407
Gains on sales and calls of investment securities		2		—		2		347
Interchange credits										1,038		869
Mortgage-banking revenue										1,867		—
Title Company revenue										323		—
Other noninterest income		1,625		1,553		4,846		4,179		945		607
Total noninterest income		2,909		2,581		8,369		7,702		6,046		2,557

NONINTEREST EXPENSE
Salaries and wages		5,091		4,143		13,495		10,569		9,562		4,142
Employee benefits		1,654		1,489		4,991		4,746		2,662		1,844
Occupancy expense		843		774		2,427		2,174		1,567		814
Furniture and equipment expense		449		294		1,168		858		429		307
Data processing		1,170		1,114		3,514		3,195		1,607		1,127
Directors' fees		147		132		450		386		190		149
Amortization of other intangible assets		107		125		353		407		517		126
FDIC insurance premium expense		245		132		653		347		343		185
Other real estate owned expenses, net		4		—		6		18		(6)		1
Legal and professional fees		428		447		1,592		1,634		637		516
Merger-related expenses		538		—		915		—		730		—
Other noninterest expenses		1,259		1,181		3,745		3,509		2,094		1,288
Total noninterest expense		11,935		9,831		33,309		27,843		20,332		10,499

Income before income taxes		6,273		4,533		17,186		15,841		7,544		5,433
Income tax expense		1,657		1,142		4,541		3,997		1,931		1,435

NET INCOME	$	4,616	$	3,391	$	12,645	$	11,844	$	5,613	$	3,998

Earnings per common share - Basic and diluted	$	0.39	$	0.27	$	1.08	$	0.95
Basic and diluted net income per common share									$	0.28	$	0.34

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

See accompanying notes to Consolidated Financial Statements.

Table of Contents

SHORE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)


	For Three Months Ended				For Nine Months Ended				For Three Months Ended
	September 30,				September 30,				March 31,
(In thousands)	2021		2020		2021		2020		2022		2021
Net income	$	4,616	$	3,391	$	12,645	$	11,844	$	5,613	$	3,998

Other comprehensive (loss) income:
Other comprehensive (loss):
Investment securities:
Unrealized holding (losses) gains on available-for-sale-securities		(520)		(141)		(1,789)		2,668
Unrealized holding (losses) on available-for-sale-securities										(3,065)		(1,075)
Tax effect		142		39		488		(723)		837		293

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

Amortization of unrealized loss on securities transferred from available-for-sale to held-to-maturity		—		3		—		15
Tax effect		—		(1)		—		(4)
Total other comprehensive (loss) income		(378)		(100)		(1,301)		1,697
Total other comprehensive (loss)										(2,228)		(782)
Comprehensive income	$	4,238	$	3,291	$	11,344	$	13,541	$	3,385	$	3,216

See accompanying notes to Consolidated Financial Statements.

Table of Contents

SHORE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)

For the Three Months Ended March 31, 2022 and ~~Nine months Ended September 30,~~ 2021 ~~and 2020~~


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

Net income		—		—		5,613		—		5,613

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

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

Stock-based compensation		—		130		—		—		130

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

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

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

Net Income

—

—

4,616

—

4,616

Other comprehensive (loss)

—

—

—

(378)

(378)

Stock-based compensation

—

91

—

—

91

Exercise of options, net of shares surrendered

—

6

—

—

6

Cash dividends declared

—

—

(1,410)

—

(1,410)

Balances, September 30, 2021

$
118

$
51,641

$
149,620

$
228

$
201,607

~~Table of Contents~~


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

Net Income		—		—		3,391		—		3,391		—		—		3,998		—		3,998

Other comprehensive (loss)		—		—		—		(100)		(100)		—		—		—		(782)		(782)

Retirement of common stock		(3)		(3,106)		—		—		(3,109)		—		(819)		—		—		(819)

Stock-based compensation		—		67		—		—		67		—		97		—		—		97

Cash dividends declared		—		—		(1,502)		—		(1,502)		—		—		(1,409)		—		(1,409)

Balances, September 30, 2020	$	122	$	58,090	$	138,765	$	1,904	$	198,881

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

See accompanying notes to Consolidated Financial Statements.

Table of Contents

SHORE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


	For Three Months Ended
	March 31,
(In thousands)	2022		2021

CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	5,613	$	3,998
Adjustments to reconcile net income to net cash provided by operating activities:
Net accretion of acquisition accounting estimates		(525)		(80)
Provision for credit losses		600		425
Depreciation and amortization		1,558		628
Net amortization of securities		454		307
Amortization of debt issuance costs		31		31
Gain on mortgage banking activities		(1,679)		—
Proceeds from sale of mortgage loans held for sale		66,560		—
Originations of loans held for sale		(41,165)		—
Stock-based compensation expense		130		97
Deferred income tax expense (benefit)		29		(485)
(Gains) on valuation adjustments on mortgage servicing rights		(554)		—
(Gains) on sales and valuation adjustments on other real estate owned		(9)		—
Fair value adjustment on equity securities		70		18
Bank owned life insurance income		(193)		(253)
Net changes in:
Accrued interest receivable		(545)		607
Other assets		(976)		(1,638)
Accrued interest payable		(323)		(385)
Other liabilities		(3,877)		626
Net cash provided by operating activities		25,199		3,896

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and principal payments of investment securities available for sale		7,049		14,173
Proceeds from maturities and principal payments of investment securities held to maturity		11,268		1,093
Purchases of securities held to maturity		(14,093)		(61,406)
Purchases of equity securities		(3)		(5)
Purchases of restricted securities		(5,735)		—
Net change in loans		(61,201)		(7,416)
Purchases of premises and equipment		(974)		(711)
Proceeds from sales of other real estate owned		83		—
Improvements to other real estate owned		(34)		—
Net redemption of restricted securities		—		437
Purchases of bank owned life insurance		(10,058)		(10,071)
Net cash (used in) investing activities		(73,698)		(63,906)

Net changes in:
Noninterest-bearing deposits		(51,082)		24,732
Interest-bearing deposits		93,431		75,224
Short-term borrowings		(4,143)		2,451
Common stock dividends paid		(2,381)		(1,409)
Retirement of common stock		—		(819)
Issuance of common stock		37		—
Net cash provided by financing activities		35,862		100,179
Net (decrease) increase in cash and cash equivalents		(12,637)		40,169
Cash and cash equivalents at beginning of period		583,613		186,917
Cash and cash equivalents at end of period	$	570,976	$	227,086

Table of Contents

SHORE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (CONTINUED)

For Nine Months Ended

September 30,
(In thousands)

2021

2020

CASH FLOWS FROM OPERATING ACTIVITIES:

Net Income

$
12,645

$
11,844
Adjustments to reconcile net income to net cash provided by operating activities:

Net accretion of acquisition accounting estimates

(182)

(307)
Provision for credit losses

1,365

2,850
Depreciation and amortization

1,937

1,793
Net amortization of securities

1,034

330
Amortization of debt issuance costs

92

10
Stock-based compensation expense

287

190
Deferred income tax (benefit)

(865)

(1,925)
(Gains) on sales and calls of securities

(2)

(347)
Losses on sales and disposals of premises and equipment

4

40
Losses on sales and valuation adjustments on other real estate owned

2

18
Fair value adjustment on equity securities

24

(34)
Bank owned life insurance income

(774)

(908)
Net changes in:

Accrued interest receivable

1,579

(3,930)
Other assets

(1,342)

(511)
Accrued interest payable

(446)

(11)
Other liabilities

218

471
Net cash provided by operating activities

15,576

9,573

CASH FLOWS FROM INVESTING ACTIVITIES:

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

31,975

33,272
Proceeds from sales and calls of investment securities available for sale

—

13,019
Purchases of investment securities available for sale

—

(60,500)
Proceeds from maturities and principal payments of investment securities held to maturity

29,046

205
Purchases of securities held to maturity

(214,199)

(11,589)
Purchases of equity securities

(13)

(20)
Net change in loans

(40,437)

(175,669)
Purchases of premises and equipment

(3,106)

(1,786)
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

(10,157)

—
Net cash (used in) investing activities

(206,454)

(202,484)

CASH FLOWS FROM FINANCING ACTIVITIES:

Net changes in:

Noninterest-bearing deposits

45,811

108,686
Interest-bearing deposits

271,594

144,186
Short-term borrowings

2,451

(207)
Long-term borrowings

—

(15,000)
Proceeds from the issuance of subordinated debt, net of issuance costs

—

24,389
Common stock dividends paid

(4,230)

(4,504)
Retirement of common stock

(819)

(3,109)
Repurchase of shares for tax withholding on exercised options and vested restricted stock

—

(39)
Stock options exercised, net of shares surrendered

6

—
Net cash provided by financing activities

314,813

254,402
Net increase in cash and cash equivalents

123,935

61,491
Cash and cash equivalents at beginning of period

186,917

94,971
Cash and cash equivalents at end of period

$
310,852

$
156,462

Supplemental cash flows information:

Interest paid

$
4,694

$
5,436
Income taxes paid

$
5,037

$
6,378
Lease liabilities arising from right-of-use assets

$
1,194

$
419
Unrealized (loss) gain on securities available for sale

$
(1,789)

$
2,321
Transfers from loans to other real estate owned

$
205

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

$
—

$
15


Interest paid
Income taxes paid	$	2,270	$	7
Recognition (remeasurement of) discount marks on PCI loans acquired		(140)		—
Lease liabilities arising from right-of-use assets	$	(728)	$	2,577
Transfers from loans to other real estate owned	$	69	$	—
Unrealized (loss) on securities available for sale	$	(3,065)	$	(1,075)

See accompanying notes to Consolidated Financial Statements.

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Shore Bancshares, Inc.

Notes to Consolidated Financial Statements

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For the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~

(Unaudited)

Note 1 – Basis of Presentation

The consolidated financial statements include the accounts of Shore Bancshares, Inc. and its ~~subsidiary~~subsidiaries with all significant intercompany transactions eliminated. The consolidated financial statements conform to accounting principles generally accepted in the United States of America (“GAAP”) and to prevailing practices within the banking industry. The accompanying interim financial statements are unaudited; however, in the opinion of management all adjustments necessary to present fairly the consolidated financial position at ~~September 30, 2021,~~March 31, 2022, the consolidated results of income and comprehensive income for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ changes in stockholders’ equity for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~ and cash flows for the ~~nine~~three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ have been included. All such adjustments are of a normal recurring nature. The amounts as of December 31, ~~2020~~2021 were derived from the ~~2020~~2021 audited financial statements. The results of operations for the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 are not necessarily indicative of the results to be expected for any other interim period or for the full year. This Quarterly Report on Form 10-Q should be read in conjunction with the Annual Report of Shore Bancshares, Inc. on Form 10-K for the year ended December 31, ~~2020.~~2021. For purposes of comparability, certain immaterial reclassifications have been made to amounts previously reported to conform with the current period presentation.

When used in these notes, the term “the Company” refers to Shore Bancshares, Inc. and, unless the context requires otherwise, its consolidated subsidiary, Shore United Bank (the “Bank”).

~~Risks and Uncertainties~~

Since the novel coronavirus ("COVID-19") was declared a pandemic in March 2020, COVID-19 has significantly affected our communities, customers, and operations. COVID-19 continues to have a significant impact in 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 term cannot be reasonably estimated at this time. Risks and uncertainties arising from the pandemic remain, primarily concerning the ability of customers to fulfill their financial obligations to the Company as well as potential operational disruptions and the ability of the Company to generate demand for its products and services. Accordingly, estimates used in the preparation of our financial statements may be subject to significant adjustments in future periods.

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. The FASB has issued multiple updates to ASU 2016-13 as codified in Topic 326, including ASU’s 2019-04, 2019-05, 2019-10, 2019-11, 2020-02, and 2020-03. These ASU’s have provided for various minor technical corrections and improvements to the codification as well as other transition matters. Smaller reporting companies who file with the U.S. Securities and Exchange Commission (SEC) and all other entities who do not file with the SEC are required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022. At this time, the Company has established a project management team which meets periodically

~~Table of Contents~~

to discuss and assign roles and responsibilities, key tasks to complete, and a general timeline to be followed for implementation. The team has been working with an advisory consultant and has purchased a vendor model for implementation. Historical data has been collected and uploaded to the new model and the team is in the process of finalizing the methodologies that will be utilized. The team is currently running a parallel simulation to its current incurred loss model. The Company is continuing to evaluate the extent of the potential impact of this standard and continues to keep current on evolving interpretations and industry practices via webcasts, publications, conferences, and peer bank meetings.

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. 2022-02 – In March 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2022-02, “Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022-02 addresses areas identified by the FASB as part of its post-implementation review of the credit losses standard (ASU 2016-13) that introduced the CECL model. The amendments eliminate the accounting guidance for

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troubled debt restructurings by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancing’s and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. The amendments in this ASU should be applied prospectively, except for the transition method related to the recognition and measurement of troubled debt restructurings (TDR), an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. For entities that have adopted ASU 2016-13, ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For entities that have not yet adopted ASU 2016-13, the effective dates for ASU 2022-02 are the same as the effective dates in ASU 2016-13. Early adoption is permitted if an entity has adopted ASU 2016-13. An entity may elect to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. The Company is currently assessing the impact that ASU 2022-02 will have on its consolidated financial statements.

ASU No. 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. Subsequently, in January 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2021-01 “Reference Rate Reform (Topic 848): Scope.” This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply ASU No. 2021-01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. An entity may elect to apply ASU No. 2021-01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. At present, the Bank has limited exposure to LIBOR based pricing. LIBOR based loans only comprise 2624 loans or ~~7.6%~~4.7% 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.

~~ASU No. 2020-06 -~~Note 2 – Business Combination

On October 31, 2021 (“Acquisition Date”), the Company completed the acquisition of Severn Bancorp, Inc. (“Severn”), a Maryland charted commercial bank, in accordance with the definitive agreement that was entered into on March 3, 2021, by and among the Company and Severn. The Company acquired Severn to access deposits and deploy excess capital into a high growth market, while also enhancing scale to drive efficiency and profitability. Additionally, this transaction creates a competitive position in the Columbia/Baltimore/Towson MSA, while filling in our current market footprint. In ~~August 2020,~~connection with the ~~Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-06 “Debt – Debt with Conversion~~completion of the merger, former Severn shareholders received 0.6207 shares of Shore common stock and ~~Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts~~$1.59 in ~~Entity’s Own Equity (Subtopic 815-40): Accounting~~cash for Convertible Instruments and Contracts in an Entity’s Own Equity.” The ASU simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify foreach share of Severn common stock. Based on the ~~derivative scope exception, which will permit more equity contracts to qualify for it. The ASU also simplifies the diluted earnings~~$18.48 per share ~~(EPS) calculation in certain areas. In addition,~~closing price of the amendment updates the disclosure requirements for convertible instruments to increase the information transparency. For public business entities, excluding smaller reporting companies, the amendments in the ASU are effective for fiscal years beginning after December 15,Company’s common stock on October 29, 2021 and ~~interim periods within those fiscal years. For all other entities,~~including the ~~standard will be effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted. The Bank does not expect~~fair value of options converted or cashed-out, the ~~adoption of ASU 2020-06 to have a material impact on its (consolidated) financial statements.~~

~~Table of Contents~~

ASU No. 2021-04 - In May 2021, the FASB issued ASU 2021-04, “Earnings Per Share (Topic 260), Debt - Modifications and 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 Certain Modifications or Exchanges of Freestanding Equity – Classified Written Call Options (a consensustotal transaction value was approximately $169.8 million. Upon completion of the ~~FASB Emerging Issues Task Force).” The ASU addresses how an issuer should account for modifications or an exchange~~acquisition, Shore shareholders owned approximately 59.6% of ~~freestanding written call options classified as equity that is not within~~ the ~~scope of another Topic. For both public~~combined company, and private companies, the ASU is effective for fiscal years beginning after December 15, 2021. Transition is prospective. Early adoption is permitted. The Company does not expect the adoption of ASU 2021-04 to have a material impact on its consolidated financial statements.former Severn shareholders owned approximately 40.4%.

~~ASU No. 2021-06 - In August~~As of October 31, 2021, ~~the FASB issued ASU 2021-06, “'Presentation of Financial Statements (Topic 205), Financial Services—Depository~~Severn, headquartered in Annapolis, MD, had more than $1.1 billion in assets and Lending (Topic 942), and Financial Services—Investment Companies (Topic 946): Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. This ASU incorporates recent SEC rule changes into the FASB Codification, including SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants”. The ASU is effective upon addition to the FASB Codification. The Company does not expect the adoption of ASU 2021-06 to have a material impact on its consolidated financial statements.

~~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.

operated 7 full-service community banking offices throughout Anne Arundel County, Maryland.

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The acquisition of Severn was accounted for as a business combination using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration paid are recorded at estimated fair values on the Acquisition Date. The provisional amount of goodwill recognized as of the Acquisition Date was approximately $45.9 million. The Company will continue to keep the measurement of goodwill open for any additional adjustments to the fair value of certain accounts, for example loans, that may arise during the Company’s final review procedures of any updated information. If considered necessary, any subsequent adjustments to the fair value of assets acquired and liabilities assumed, identifiable intangible assets, or other purchase accounting adjustments will result in adjustments to goodwill within the first 12 months following the Acquisition Date. The goodwill is not expected to be deductible for tax purposes.

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

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


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

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

Identifiable liabilities:
Deposits	$	955,288
Total debt		28,341
Other liabilities		11,727
Total identifiable liabilities	$	995,356
Provisional fair value of net assets acquired including identifiable intangible assets		124,001
Provisional resulting goodwill ⁽¹⁾	$	45,763

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

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


Goodwill at December 31, 2021	$	45,904
Effect of adjustments to:
Loans, net		(192)
Other assets		51
Goodwill at March 31, 2022	$	45,763

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

Acquired loans

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


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

The Company recorded all loans acquired at the estimated fair value on the acquisition date with no carryover of the related allowance for loan losses.

The Company determined the net discounted value of cash flows on gross loans totaling $593.3 million, including 1,306 performing loans and 162 PCI loans. The valuation took into consideration the loans’ underlying characteristics, including account types, remaining terms, annual interest rates, interest types, past delinquencies, timing of principal and interest payments, current market rates, loan-to-loan value ratios, loss exposures, and remaining balances. These performing loans were segregated into pools based on loan and payment type. The effect of the valuation process was a total net discount of $8.7 million at acquisition.

Note 23 – Earnings Per Share

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


	For the Three Months Ended				For the Nine Months Ended				For the Three Months Ended
	September 30,				September 30,				March 31,
(In thousands, except per share data)	2021		2020		2021		2020		2022		2021
Net Income	$	4,616	$	3,391	$	12,645	$	11,844	$	5,613	$	3,998
Weighted average shares outstanding - Basic		11,752		12,483		11,750		12,507		19,828		11,745
Dilutive effect of common stock equivalents-options		—		1		—		2		—		2
Weighted average shares outstanding - Diluted		11,752		12,484		11,750		12,509		19,828		11,747

Earnings per common share - Basic and Diluted	$	0.39	$	0.27	$	1.08	$	0.95	$	0.28	$	0.34

There were 0 weighted average common stock equivalents excluded from the calculation of diluted earnings per share for the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 and ~~2020.~~2021.

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Note 34 – 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:
September 30, 2021
March 31, 2022
U.S. Government agencies	$	18,557	$	4	$	578	$	17,983	$	22,495	$	5	$	1,245	$	21,255
Mortgage-backed		86,254		1,634		746		87,142		85,165		381		2,104		83,442
Other Debt securities										2,024		—		26		1,998
Total	$	104,811	$	1,638	$	1,324	$	105,125	$	109,684	$	386	$	3,375	$	106,695

December 31, 2020
December 31, 2021
U.S. Government agencies	$	23,600	$	20	$	83	$	23,537	$	22,932	$	7	$	634	$	22,305
Mortgage-backed		113,865		2,234		68		116,031		91,948		1,318		629		92,637
Other Debt securities										2,026		14		—		2,040
Total	$	137,465	$	2,254	$	151	$	139,568	$	116,906	$	1,339	$	1,263	$	116,982

NaN available for sale securities were sold during the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021. ~~During~~


			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
(Dollars in thousands)	Cost		Gains		Losses		Value
Held-to-maturity securities:
March 31, 2022
U.S. Government agencies	$	86,490	$	—	$	3,472	$	83,018
Mortgage-backed		305,741		1		13,116		292,626
States and political subdivisions		400		1		—		401
Other debt securities		14,507		45		56		14,496
Total	$	407,138	$	47	$	16,644	$	390,541

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

Equity securities with an aggregate fair value of $1.3 million at March 31, 2022 and $1.4 million at December 31, 2021 are presented separately on the balance sheet. The fair value adjustment recorded through earnings totaled $(70) thousand for the three months ended ~~September 30, 2020, 0 available~~March 31, 2022 and $(18) thousand for ~~sale securities were sold. During~~ the ~~nine~~three months ended ~~September 30, 2020, the Company sold available for sale securities for proceeds of $13.0 million and recognized gross gains of $347 thousand.~~March 31, 2021, respectively.

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Gross

Gross

Estimated

Amortized

Unrealized

Unrealized

Fair
(Dollars in thousands)

Cost

Gains

Losses

Value
Held-to-maturity securities:








September 30, 2021

U.S. Government agencies

$
67,772

$
26

$
556

$
67,242
Mortgage-backed

169,802

36

2,302

167,536
States and political subdivisions

400

2

—

402
Other debt securities

12,527

133

5

12,655
Total

$
250,501

$
197

$
2,863

$
247,835

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 September 30, 2021 and December 31, 2020 are presented separately on the balance sheet. The fair value adjustment recorded through earnings totaled $(24) thousand for the nine months ended September 30, 2021 and $34 thousand for the nine months ended September 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 ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021.

Less than

More than

Less than

More than

12 Months

Total

12 Months

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

(Dollars in thousands)

Value

Losses

Value

Losses

Value

Losses

Value

Losses

Value

Losses

Value

Losses

September 30, 2021

March 31, 2022

Available-for-sale securities:

U.S. Government agencies

2,886

113

14,746

465

17,632

578

1,561

17,368

1,180

18,929

1,245

Mortgage-backed

37,837

723

3,947

41,784

746

39,851

490

3,562

1,614

43,413

2,104

Other debt securities

1,998

—

1,998

Total

40,723

836

18,693

488

59,416

1,324

43,410

581

20,930

2,794

64,340

3,375

Held-to-maturity securities:

U.S. Government agencies

61,371

556

—

61,371

556

62,586

2,157

20,432

1,315

83,018

3,472

Mortgage-backed

155,548

2,302

—

155,548

2,302

253,725

10,536

36,962

2,580

290,687

13,116

Other debt securities

495

—

495

4,943

—

4,943

Total

217,414

2,863

—

217,414

2,863

321,254

12,749

57,394

3,895

378,648

16,644

~~Table of Contents~~


	Less than				More than								Less than				More than
	12 Months				12 Months				Total				12 Months				12 Months				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(Dollars in thousands)	Value		Losses		Value		Losses		Value		Losses		Value		Losses		Value		Losses		Value		Losses
December 31, 2020
December 31, 2021
Available-for-sale securities:
U.S. Government agencies	$	14,919	$	82	$	236	$	1	$	15,155	$	83	$	1,561	$	1	$	17,368	$	633	$	18,929	$	634
Mortgage-backed		11,869		68		—		—		11,869		68		39,851		593		3,562		36		43,413		629
Total	$	26,788	$	150	$	236	$	1	$	27,024	$	151	$	41,412	$	594	$	20,930	$	669	$	62,342	$	1,263

Held-to-maturity securities:
U.S. Government agencies	$	6,646	$	43	$	—	$	—	$	6,646	$	43	$	64,268	$	1,005	$	11,719	$	226	$	75,987	$	1,231
Mortgage-backed		5,093		18		—		—		5,093		18		226,918		1,836		14,564		412		241,482		2,248
Other debt securities		498		2		—		—		498		2		491		9		—		—		491		9
Total	$	12,237	$	63	$	—	$	—	$	12,237	$	63	$	291,677	$	2,850	$	26,283	$	638	$	317,960	$	3,488

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

There were 19NaN available-for-sale securities and ~~NaN~~one hundred and fifty-three held-to-maturity securities in an unrealized loss position at ~~September 30, 2021.~~March 31, 2022.

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The following table provides information on the amortized cost and estimated fair values of investment securities by maturity date at ~~September 30, 2021.~~March 31, 2022.


	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	$	—	$	—	$	2,921	$	2,954	$	71	$	72	$	3,924	$	3,930
Due after one year through five years		799		825		9,982		9,959		2,137		2,149		22,537		22,016
Due after five years through ten years		51,665		52,410		55,874		55,560		55,374		54,351		91,202		88,810
Due after ten years		52,347		51,890		181,724		179,362		52,102		50,123		289,475		275,785
Total	$	104,811	$	105,125	$	250,501	$	247,835	$	109,684	$	106,695	$	407,138	$	390,541

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

Note 45 – Loans and Allowance for Credit Losses

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

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~~Howard~~ County in Maryland, Kent County, Delaware and in Accomack County, Virginia. The following table provides information about the principal classes of the loan portfolio at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021.


(Dollars in thousands)	September 30, 2021		December 31, 2020		March 31, 2022		December 31, 2021
Construction	$	130,590	$	106,760	$	258,176	$	239,353
Residential real estate		460,890		443,542		653,800		654,769
Commercial real estate		663,894		661,232		928,116		896,229
Commercial		145,217		211,256		177,037		203,377
Consumer		94,306		31,466		163,977		125,447
Total loans		1,494,897		1,454,256		2,181,106		2,119,175
Allowance for credit losses		(15,525)		(13,888)		(14,710)		(13,944)
Total loans, net	$	1,479,372	$	1,440,368	$	2,166,396	$	2,105,231

Loans are stated at their principal amount outstanding net of any purchase premiums/discounts, deferred fees and costs. ~~Loans included~~Included in loans were deferred fees, net of costs, of ~~$376~~$795 thousand and $1.2 million at March 31, 2022 and December 31, 2021. At March 31, 2022 and December 31, 2021, included in total loans were $36.5 million and $39.9 million in loans, respectively, net of discounts on acquired loans of ~~$577 thousand at September 30, 2021. Loans included deferred costs, net of deferred fees, of $622~~$480 thousand and ~~discounts on acquired loans~~$516 thousand, respectively, as part of ~~$754 thousand at December~~the Northwest Bancshares, Inc. branch acquisition in 2017. At March 31, ~~2020. At September 30, 2021~~2022 and December 31, ~~2020,~~2021, included in total loans were ~~$40.5~~$506.5 million and ~~$52.3~~$553.0 million in loans, ~~respectively,~~ acquired as part of the ~~NWBI branch~~ acquisition ~~in 2017.~~of Severn. These balances were presented net of the related discount which totaled $8.0 million and $8.4 million at March 31, 2022 and December 31, 2021, respectively. Interest income on loans is accrued at the contractual rate based on the principal amount outstanding. Fees charged and costs capitalized for originating loans are being amortized substantially on the interest method over the term of the loan. A loan is placed on nonaccrual (i.e., interest income is no longer accrued) when it is specifically determined to be impaired or when principal or interest is delinquent for 90 days or more, unless the loan is well secured and in the process of collection. Any unpaid interest previously accrued on those loans is reversed from income.

Interest payments received on nonaccrual 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. The impairment of a loan is measured at the present value of expected future cash flows using the loan’s effective interest

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

A loan is considered a TDR if a borrower is experiencing financial difficulties and a creditor has granted a concession. Concessions may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules and other actions intended to minimize potential losses. Loans are identified to be restructured when signs of impairment arise such as borrower interest rate reduction request, slowness to pay, or when an inability to 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.

~~Table of Contents~~

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~~During 2021 and 2020, the Company ~~began its participation~~participated in the Small Business Administration’s Paycheck Protection Program ~~(“PPP”)~~(PPP). ~~The PPP commenced subsequent to the passage~~As 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,~~2022, the Company ~~funded 2,454~~held PPP loans ~~for~~with a ~~cumulative~~total outstanding balance of ~~$196.3 million.~~$14.9 million, inclusive of loans issued pre-merger and those acquired from Severn, which are included in the commercial loan segment in the table above. As of ~~September 30,~~December 31, 2021, the Company held PPP loans with a total outstanding balance of ~~$41.5~~$27.6 million, of which is$9.2 million was acquired from Severn, which are included in the commercial loan segment in the table above. The decrease is due to repayment and forgiveness received as of ~~September 30, 2021.~~March 31, 2022. As compensation for originating the loans, the Company received lender processing fees from the SBA, which were deferred, along with the related loan origination costs. These net fees are being accreted to interest income over the remaining contractual lives of the loans. Upon forgiveness of a PPP loan and repayment by the SBA, which may be prior to the loan’s maturity, the remainder of any unrecognized net fees are recognized as interest income.

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


	March 31, 2022
	Acquired Loans -		Acquired Loans -
	Purchased		Purchased		Acquired Loans -
(Dollars in thousands)	Credit Impaired		Performing		Total
Outstanding principal balance	$	35,603	$	478,949	$	514,552
Carrying amount
Construction	$	2,356	$	76,560	$	78,916
Residential real estate		16,603		152,793		169,396
Commercial real estate		13,207		197,264		210,471
Commercial		294		46,250		46,544
Consumer		27		1,184		1,211
Total loans	$	32,487	$	474,051	$	506,538


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

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


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

At March 31, 2022, the Bank was servicing $336.5 million in loans for the Federal National Mortgage Association and $75.9 million in loans for the Federal Home Loan Mortgage Corporation.

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

Construction loans – Construction loans 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

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repay the loan and potentially rising interest rates which can impact both the borrower’s ability to repay and the collateral value.

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

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

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

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

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

Residential

Commercial

(Dollars in thousands)

Construction

real estate

Commercial

Consumer

Total

March 31, 2022

Loans individually evaluated for impairment

345

4,345

3,365

241

8,311

Loans collectively evaluated for impairment

255,475

632,852

911,544

176,502

163,935

2,140,308

Acquired loans - PCI

2,356

16,603

13,207

294

32,487

Total loans

258,176

653,800

928,116

177,037

163,977

2,181,106

Allowance for credit losses allocated to:

Loans individually evaluated for impairment

—

166

—

169

Loans collectively evaluated for impairment

2,857

2,409

4,497

1,805

2,973

14,541

Acquired loans - PCI

—

Total allowance

2,857

2,575

4,500

1,805

2,973

14,710

1618

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			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Total
December 31, 2021
Loans individually evaluated for impairment	$	321	$	3,717	$	3,833	$	226	$	—	$	8,097
Loans collectively evaluated for impairment		236,653		633,726		878,802		202,830		125,417		2,077,428
Acquired loans - PCI		2,379		17,326		13,594		321		30		33,650
Total loans	$	239,353	$	654,769	$	896,229	$	203,377	$	125,447	$	2,119,175

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

The allowance for loan losses was 0.67% of total loans and 0.92% when excluding PPP loans and acquired loans, at March 31, 2022 compared to 0.66% and 0.93% at December 31, 2021.

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The following tables ~~include impairment~~provide information ~~relating to~~on impaired loans and ~~the~~any related allowance ~~for credit losses~~by loan class as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021. The difference between the unpaid principal balance and the recorded investment is the amount of partial charge-offs that have been taken and interest paid on nonaccrual loans that has been applied to principal.

Residential

Commercial






(Dollars in thousands)

Construction

real estate

real estate

Commercial

Consumer

Total
September 30, 2021

Loans individually evaluated for impairment

$
324

$
4,007

$
5,397

$
227

$
—

$
9,955
Loans collectively evaluated for impairment

130,266

456,883

658,497

144,990

94,306

1,484,942
Total loans

$
130,590

$
460,890

$
663,894

$
145,217

$
94,306

$
1,494,897

Allowance for credit losses allocated to:

Loans individually evaluated for impairment

$
—

$
84

$
—

$
—

$
—

$
84
Loans collectively evaluated for impairment

2,621

3,814

5,527

1,852

1,627

15,441
Total allowance

$
2,621

$
3,898

$
5,527

$
1,852

$
1,627

$
15,525

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



			Recorded		Recorded
	Unpaid		investment		investment				Quarter-to-date		Interest
	principal		with no		with an		Related		average recorded		income
(Dollars in thousands)	balance		allowance		allowance		allowance		investment		recognized
March 31, 2022
Impaired nonaccrual loans:
Construction	$	336	$	325	$	—	$	—	$	331	$	—
Residential real estate		1,797		1,526		20		—		1,476		—
Commercial real estate		753		747		—		—		906		—
Commercial		385		215		—		—		321		—
Consumer		15		15		—		—		74		—
Total	$	3,286	$	2,828	$	20	$	—	$	3,108	$	—

Impaired accruing TDRs:
Construction	$	20	$	20	$	—	$	—	$	22	$	—
Residential real estate		2,915		571		2,213		166		2,809		25
Commercial real estate		2,200		1,769		431		3		2,581		23
Commercial		—		—		—		—		—		—
Consumer		—		—		—		—		—		—
Total	$	5,135	$	2,360	$	2,644	$	169	$	5,412	$	48

Other impaired accruing loans:
Construction	$	—	$	—	$	—	$	—	$	—	$	—
Residential real estate		15		15		—		—		29		3
Commercial real estate		418		418		—		—		417		1
Commercial		26		26		—		—		9		—
Consumer		—		—		—		—		38		—
Total	$	459	$	459	$	—	$	—	$	493	$	4

Total impaired loans:
Construction	$	356	$	345	$	—	$	—	$	353	$	—
Residential real estate		4,727		2,112		2,233		166		4,314		28
Commercial real estate		3,371		2,934		431		3		3,904		24
Commercial		411		241		—		—		330		—
Consumer		15		15		—		—		112		—
Total	$	8,880	$	5,647	$	2,664	$	169	$	9,013	$	52

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The following tables provide information on impaired loans and any related allowance by loan class as of September 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												Recorded		Recorded				March 31, 2021
	Unpaid		investment		investment				Quarter-to-date		Year-to-date		Interest		Unpaid		investment		investment				Quarter-to-date		Interest
	principal		with no		with an		Related		average recorded		average recorded		recorded		principal		with no		with an		Related		average recorded		income
(Dollars in thousands)	balance		allowance		allowance		allowance		investment		investment		investment		balance		allowance		allowance		allowance		investment		recognized
September 30, 2021
December 31, 2021
Impaired nonaccrual loans:																				��
Construction	$	297	$	297	$	—	$	—	$	297	$	297	$	—	$	297	$	297	$	—	$	—	$	297	$	—
Residential real estate		899		817		—		—		959		1,191		—		882		803		—		—		1,411		—
Commercial real estate		2,504		2,116		—		—		2,150		2,459		—		994		606		—		—		3,012		—
Commercial		385		227		—		—		230		241		—		380		216		—		—		251		—
Consumer		—		—		—		—		—		12		—		—		—		—		—		28		—
Total	$	4,085	$	3,457	$	—	$	—	$	3,636	$	4,200	$	—	$	2,553	$	1,922	$	—	$	—	$	4,999	$	—

Impaired accruing TDRs:
Construction	$	27	$	27	$	—	$	—	$	28	$	31	$	2	$	24	$	24	$	—	$	—	$	33	$	—
Residential real estate		2,863		1,754		1,109		84		2,871		3,252		118		2,965		475		2,361		172		3,530		40
Commercial real estate		2,860		2,860		—		—		2,913		2,994		67		2,807		2,352		455		1		3,065		23
Commercial		—		—		—		—		—		—		—		—		—		—		—		—		—
Consumer		—		—		—		—		—		—		—		—		—		—		—		—		—
Total	$	5,750	$	4,641	$	1,109	$	84	$	5,812	$	6,277	$	187	$	5,796	$	2,851	$	2,816	$	173	$	6,628	$	63

Other impaired accruing loans:
Construction	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential real estate		327		327		—		—		328		513		7		78		78		—		—		853		5
Commercial real estate		421		421		—		—		421		470		10		420		420		—		—		510		1
Commercial		—		—		—		—		—		17		—		10		10		—		—		50		—
Consumer		—		—		—		—		—		—		—		—		—		—		—		—		—
Total	$	748	$	748	$	—	$	—	$	749	$	1,000	$	17	$	508	$	508	$	—	$	—	$	1,413	$	6

Total impaired loans:
Construction	$	324	$	324	$	—	$	—	$	325	$	328	$	2	$	321	$	321	$	—	$	—	$	330	$	—
Residential real estate		4,089		2,898		1,109		84		4,158		4,956		125		3,925		1,356		2,361		172		5,794		45
Commercial real estate		5,785		5,397		—		—		5,484		5,923		77		4,221		3,378		455		1		6,587		24
Commercial		385		227		—		—		230		258		—		390		226		—		—		301		—
Consumer		—		—		—		—		—		12		—		—		—		—		—		28		—
Total	$	10,583	$	8,846	$	1,109	$	84	$	10,197	$	11,477	$	204	$	8,857	$	5,281	$	2,816	$	173	$	13,040	$	69

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Recorded

Recorded



September 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

$
231

$
—
Residential real estate

1,665

1,585

—

—

2,306

2,910

—
Commercial real estate

4,288

3,220

67

67
��

4,498

6,235

—
Commercial

401

258

—

—

355

429

—
Consumer

28

28

—

—

9

3

—
Total

$
6,679

$
5,388

$
67

$
67

$
7,465

$
9,808

$
—

Impaired accruing TDRs:

Construction

$
34

$
34

$
—

$
—

$
37

$
38

$
2
Residential real estate

3,845

2,617

1,228

135

3,886

3,940

120
Commercial real estate

3,118

2,479

639

11

3,357

3,379

70
Commercial

—

—

—

—

—

—

—
Consumer

—

—

—

—

—

—

—
Total

$
6,997

$
5,130

$
1,867

$
146

$
7,280

$
7,357

$
192

Other impaired accruing loans:

Construction

$
—

$
—

$
—

$
—

$
—

$
33

$
—
Residential real estate

292

292

—

—

389

393

1
Commercial real estate

512

512

—

—

830

854

3
Commercial

—

—

—

—

42

18

—
Consumer

—

—

—

—

19

12

—
Total

$
804

$
804

$
—

$
—

$
1,280

$
1,310

$
4

Total impaired loans:

Construction

$
331

$
331

$
—

$
—

$
334

$
302

$
2
Residential real estate

5,802

4,494

1,228

135

6,581

7,243

121
Commercial real estate

7,918

6,211

706

78

8,685

10,468

73
Commercial

401

258

—

—

397

447

—
Consumer

28

28

—

—

28

15

—
Total

$
14,480

$
11,322

$
1,934

$
213

$
16,025

$
18,475

$
196

~~Table of Contents~~

The following tables provide a roll-forward for TDRs as of ~~September 30, 2021~~March 31, 2022 and ~~September 30, 2020.~~March 31, 2021.

																												��
	1/1/2021												9/30/2021				1/1/2022												3/31/2022
	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 nine months ended
September 30, 2021
For three months ended
March 31, 2022
Accruing TDRs
Construction	$	34	$	—	$	(7)	$	—	$	—	$	—	$	27	$	—	$	24	$	—	$	(4)	$	—	$	—	$	—	$	20	$	—
Residential real estate		3,845		—		(82)		—		—		(900)		2,863		84		2,836		—		(32)		—		(20)		—		2,784		166
Commercial real estate		3,118		—		(258)		—		—		—		2,860		—		2,807		—		(46)		—		—		(561)		2,200		3
Commercial		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Consumer		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Total	$	6,997	$	—	$	(347)	$	—	$	—	$	(900)	$	5,750	$	84	$	5,667	$	—	$	(82)	$	—	$	(20)	$	(561)	$	5,004	$	169

Nonaccrual TDRs
Construction	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential real estate		—		—		—		—		—		—		—		—		—		—		—		—		20		—		20		—
Commercial real estate		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Commercial		258		—		(31)		—		—		—		227		—		216		—		(11)		—		—		—		205		—
Consumer		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Total	$	258	$	—	$	(31)	$	—	$	—	$	—	$	227	$	—	$	216	$	—	$	(11)	$	—	$	20	$	—	$	225	$	—

Total	$	7,255	$	—	$	(378)	$	—	$	—	$	(900)	$	5,977	$	84	$	5,883	$	—	$	(93)	$	—	$	—	$	(561)	$	5,229	$	169


	1/1/2020												9/30/2020				1/1/2021												3/31/2021
	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 nine months ended
September 30, 2020
For three months ended
March 31, 2021
Accruing TDRs
Construction	$	41	$	—	$	(5)	$	—	$	—	$	—	$	36	$	—	$	34	$	—	$	(2)	$	—	$	—	$	—	$	32	$	—
Residential real estate		4,041		—		(80)		—		—		(83)		3,878		142		3,845		—		(29)		—		—		(435)		3,381		95
Commercial real estate		3,419		—		(66)		—		—		—		3,353		14		3,118		—		(75)		—		—		—		3,043		—
Commercial		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Consumer		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Total	$	7,501	$	—	$	(151)	$	—	$	—	$	(83)	$	7,267	$	156	$	6,997	$	—	$	(106)	$	—	$	—	$	(435)	$	6,456	$	95

Nonaccrual TDRs
Construction	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential real estate		1,393		—		(51)		—		—		(1,342)		—		—		—		—		—		—		—		—		—		—
Commercial real estate		—		1,506		(401)		—		—		—		1,105		—		—		—		—		—		—		—		—		—
Commercial		299		—		(30)		—		—		—		269		—		258		—		(10)		—		—		—		248		—
Consumer		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Total	$	1,692	$	1,506	$	(482)	$	—	$	—	$	(1,342)	$	1,374	$	—	$	258	$	—	$	(10)	$	—	$	—	$	—	$	248	$	—

Total	$	9,193	$	1,506	$	(633)	$	—	$	—	$	(1,425)	$	8,641	$	156	$	7,255	$	—	$	(116)	$	—	$	—	$	(435)	$	6,704	$	95

~~Table of Contents~~

There were 0 loans modified and considered to be TDRs during the three months ended September 30, 2021 and September 30, 2020. The following tables provide information on loans that were modified and considered to be TDRs during the nine months ended September 30, 2021 and September 30, 2020.

Premodification

Postmodification


outstanding

outstanding

Number of

recorded

recorded

Related
(Dollars in thousands)

contracts

investment

investment

allowance
TDRs:

For nine months ended

September 30, 2021

Construction

—

$
—

$
—

$
—
Residential real estate

—

—

—

—
Commercial real estate

—

—

—

—
Commercial

—

—

—

—
Consumer

—

—

—

—
Total

—

$
—

$
—

$
—

For nine months ended

September 30, 2020

Construction

—

$
—

$
—

$
—
Residential real estate

—

—

—

—
Commercial real estate

1

1,535

1,506

—
Commercial

—

—

—

—
Consumer

—

—

—

—
Total

1

$
1,535

$
1,506

$
—

Since the beginning of the pandemic and through September 30, 2021, the Company had executed principal and/or interest deferrals on outstanding loan balances of $221.1 million. As of September 30, 2021, the Company had no COVID related deferrals remaining. These deferrals 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 nine months ended September 30, 2021 and 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 September 30, 2021, there were 0 nonaccrual loans classified as special mention or doubtful and $3.5 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 $5.5 million of nonaccrual loans were classified as substandard.

2122

Table of Contents

There were 0 loans modified and considered to be TDRs during the three months ended March 31, 2022 and March 31, 2021.

There were 0 TDRs which subsequently defaulted within 12 months of modification for the three months ended March 31, 2022 and 2021. Generally, a loan is considered in default when principal or interest is past due 90 days or more, the loan is placed on nonaccrual, the loan is charged off, or there is a transfer to other real estate owned (OREO) or repossessed assets.

Management uses risk ratings as part of its monitoring of the credit quality in the Company’s loan portfolio. Loans that are identified as special mention, substandard or doubtful are adversely rated. These loans and the pass/watch loans are assigned higher qualitative factors than favorably rated loans in the calculation of the formula portion of the allowance for credit losses. At March 31, 2022, there were 0 nonaccrual loans classified as special mention or doubtful and $2.8 million of nonaccrual loans were classified as substandard. Similarly, at December 31, 2021, there were 0 nonaccrual loans classified as special mention or doubtful and $2.0 million of nonaccrual loans were classified as substandard.

The following tables provide information on loan risk ratings as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021.

Special

(Dollars in thousands)

Pass/Performing

Pass/Watch

Mention

Substandard

Doubtful

Total

Pass/Performing

Pass/Watch

Mention

Substandard

Doubtful

PCI

Total

September 30, 2021

March 31, 2022

Construction

101,708

26,670

1,915

297

—

130,590

232,417

21,175

1,866

362

—

2,356

258,176

Residential real estate

423,355

34,664

1,767

1,104

—

460,890

598,246

36,529

985

1,437

—

16,603

653,800

Commercial real estate

514,583

137,759

4,985

6,567

—

663,894

763,772

147,357

1,485

2,295

—

13,207

928,116

Commercial

127,807

16,885

286

239

—

145,217

160,951

15,577

—

215

—

294

177,037

Consumer

94,143

161

—

94,306

163,722

211

—

163,977

Total

1,261,596

216,139

8,953

8,209

—

1,494,897

1,919,108

220,849

4,336

4,326

—

32,487

2,181,106


					Special												Special
(Dollars in thousands)	Pass/Performing		Pass/Watch		Mention		Substandard		Doubtful		Total		Pass/Performing		Pass/Watch		Mention		Substandard		Doubtful		PCI		Total
December 31, 2020
December 31, 2021
Construction	$	81,926	$	22,547	$	1,990	$	297	$	—	$	106,760	$	210,287	$	24,513	$	1,877	$	297	$	—	$	2,379	$	239,353
Residential real estate		401,494		36,759		2,946		2,343		—		443,542		596,694		38,309		1,539		901		—		17,326		654,769
Commercial real estate		514,524		133,892		3,504		9,312		—		661,232		724,561		151,209		4,535		2,330		—		13,594		896,229
Commercial		182,166		25,870		2,948		272		—		211,256		186,176		16,654		—		226		—		321		203,377
Consumer		31,221		215		—		30		—		31,466		125,200		215		—		2		—		30		125,447
Total	$	1,211,331	$	219,283	$	11,388	$	12,254	$	—	$	1,454,256	$	1,842,918	$	230,900	$	7,951	$	3,756	$	—	$	33,650	$	2,119,175

The following tables provide information on the aging of the loan portfolio as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021.

Accruing




30‑59 days

60‑89 days

Greater than

Total





(Dollars in thousands)

Current

past due

past due

90 days

past due

Nonaccrual

Total

September 30, 2021

Construction

$
130,266

$
—

$
27

$
—

$
27

$
297

$
130,590

Residential real estate

458,790

530

425

327

1,282

818

460,890

Commercial real estate

661,208

149

—

421

570

2,116

663,894

Commercial

144,979

—

12

—

12

226

145,217

Consumer

94,170

105

31

—

136

—

94,306

Total

$
1,489,413

$
784

$
495

$
748

$
2,027

$
3,457

$
1,494,897

Percent of total loans

99.6
%

0.1
%

—
%

0.1
%

0.2
%

0.2
%

100.0
%

Accruing




30‑59 days

60‑89 days

Greater than

Total



(Dollars in thousands)

Current

past due

past due

90 days

past due

Nonaccrual

Total

December 31, 2020

Construction

$
106,463

$
—

$
—

$
—

$
—

$
297

$
106,760

Residential real estate

440,210

517

938

292

1,747

1,585

443,542

Commercial real estate

657,066

367

—

512

879

3,287

661,232

Commercial

210,704

226

68

—

294

258

211,256

Consumer

31,318

119

1

—

120

28

31,466

Total

$
1,445,761

$
1,229

$
1,007

$
804

$
3,040

$
5,455

$
1,454,256

Percent of total loans

99.3
%

0.1
%

0.1
%

0.1
%

0.3
%

0.4
%

100.0
%

~~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 nine months ended September 30, 2021 and September 30, 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






(Dollars in thousands)

Construction

real estate

real estate

Commercial

Consumer

Total
For three months ended

September 30, 2021

Allowance for credit losses:

Beginning Balance

$
2,574

$
3,812

$
5,600

$
1,879

$
1,223

$
15,088

Charge-offs

—

—

—

(55)

(1)

(56)
Recoveries

161

9

—

26

7

203
Net (charge-offs) recoveries

161

9

—

(29)

6

147

Provision

(114)

77

(73)

2

398

290
Ending Balance

$
2,621

$
3,898

$
5,527

$
1,852

$
1,627

$
15,525

Residential

Commercial






(Dollars in thousands)

Construction

real estate

real estate

Commercial

Consumer

Total
For three months ended

September 30, 2020

Allowance for credit losses:












Beginning Balance

$
1,497

$
2,639

$
4,097

$
2,355

$
502

$
11,090

Charge-offs

—

(10)

(1)

(89)

(1)

(101)
Recoveries

5

199

1

81

2

288
Net (charge-offs) recoveries

5

189

—

(8)

1

187

Provision

56

456

1,002

(126)

112

1,500
Ending Balance

$
1,558

$
3,284

$
5,099

$
2,221

$
615

$
12,777


	Accruing
				30‑59 days			60‑89 days			Greater than			Total
(Dollars in thousands)	Current			past due			past due			90 days			past due			Nonaccrual			PCI			Total
March 31, 2022
Construction	$	254,773		$	722		$	—		$	—		$	722		$	325		$	2,356		$	258,176
Residential real estate		632,387			3,201			48			15			3,264			1,546			16,603			653,800
Commercial real estate		913,723			21			—			418			439			747			13,207			928,116
Commercial		176,498			4			—			26			30			215			294			177,037
Consumer		163,736			199			—			—			199			15			27			163,977
Total	$	2,141,117		$	4,147		$	48		$	459		$	4,654		$	2,848		$	32,487		$	2,181,106
Percent of total loans		98.2	%		0.2	%		—	%		—	%		0.2	%		0.1	%		1.5	%		100.0	%

Table of Contents

Residential

Commercial






(Dollars in thousands)

Construction

real estate

real estate

Commercial

Consumer

Total
For nine months ended

September 30, 2021

Allowance for credit losses:

Beginning Balance

$
2,022

$
3,699

$
5,426

$
2,089

$
652

$
13,888

Charge-offs

—

—

—

(162)

(5)

(167)
Recoveries

171

72

64

122

10

439
Net (charge-offs) recoveries

171

72

64

(40)

5

272

Provision

428

127

37

(197)

970

1,365
Ending Balance

$
2,621

$
3,898

$
5,527

$
1,852

$
1,627

$
15,525


	Accruing
				30‑59 days			60‑89 days			Greater than			Total
(Dollars in thousands)	Current			past due			past due			90 days			past due			Nonaccrual			PCI			Total
December 31, 2021
Construction	$	235,757		$	920		$	—		$	—		$	920		$	297		$	2,379		$	239,353
Residential real estate		635,166			1,371			25			78			1,474			803			17,326			654,769
Commercial real estate		881,350			259			—			420			679			606			13,594			896,229
Commercial		202,503			183			62			10			255			298			321			203,377
Consumer		125,130			287			—			—			287			—			30			125,447
Total	$	2,079,906		$	3,020		$	87		$	508		$	3,615		$	2,004		$	33,650		$	2,119,175
Percent of total loans		98.2	%		0.1	%		0.0	%		0.0	%		0.1	%		0.1	%		1.6	%		100.0	%

Residential

Commercial






(Dollars in thousands)

Construction

real estate

real estate

Commercial

Consumer

Total
For nine months ended

September 30, 2020

Allowance for credit losses:












Beginning Balance

$
1,576

$
2,501

$
4,032

$
1,929

$
469

$
10,507

Charge-offs

—

(201)

(601)

(208)

(8)

(1,018)
Recoveries

13

206

—

205

14

438
Net (charge-offs) recoveries

13

5

(601)

(3)

6

(580)

Provision

(31)

778

1,668

295

140

2,850
Ending Balance

$
1,558

$
3,284

$
5,099

$
2,221

$
615

$
12,777

The following tables provide a summary of the activity in the allowance for credit losses allocated by loan class for the three months ended March 31, 2022 and March 31, 2021. Allocation of a portion of the allowance to one loan class does not preclude its availability to absorb losses in other loan classes.

Residential

Commercial

(Dollars in thousands)

Construction

real estate

Commercial

Consumer

Total

For three months ended

March 31, 2022

Allowance for credit losses:

Beginning Balance

2,454

2,858

4,598

2,070

1,964

13,944

Charge-offs

—

(92)

(16)

(108)

Recoveries

��

150

274

Net (charge-offs) recoveries

150

(24)

(9)

166

Provision

400

(329)

(248)

(241)

1,018

600

Ending Balance

2,857

2,575

4,500

1,805

2,973

14,710


			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Total
For three months ended
March 31, 2021
Allowance for credit losses:
Beginning Balance	$	2,022	$	3,699	$	5,426	$	2,089	$	652	$	13,888

Charge-offs		—		—		—		(61)		(4)		(65)
Recoveries		5		6		—		52		2		65
Net (charge-offs) recoveries		5		6		—		(9)		(2)		—

Provision		769		(6)		(329)		(80)		71		425
Ending Balance	$	2,796	$	3,699	$	5,097	$	2,000	$	721	$	14,313

Foreclosure Proceedings

There were 0$297 thousand of consumer mortgage loans collateralized by residential real estate property that were in the process of foreclosure as of ~~September 30, 2021~~March 31, 2022 and $311 thousand as of December 31, ~~2020,~~2021, respectively. There ~~was 1~~were 2 residential real estate ~~property~~properties included in the balance of other real estate owned totaling $198 thousand at March 31, 2022 and 1 residential real estate property totaling $203 thousand at ~~September 30, 2021 and $0 at~~ December 31, ~~2020.~~2021.

All accruing TDRs were in compliance with their modified terms. Both performing and non-performing TDRs had no further commitments associated with them as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021.

Table of Contents

Note 56 – Leases

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

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

During 2021, the ~~second quarter of 2021, one of the Company’s~~Company acquired long-term branch leases ~~was~~and equipment due to the acquisition of Severn. These leases were 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~~as of the acquisition date of October 31, 2021, which included updating the incremental borrowing rates and remaining lease ~~liability~~terms.

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


(Dollars in thousands)	March 31, 2022			December 31, 2021
Lease liabilities	$	10,397		$	11,567
Right-of-use assets	$	10,180		$	11,370
Weighted average remaining lease term		13.00	years		13.61	years
Weighted average discount rate		2.49	%		2.48	%


	For the Three Months Ended
Lease cost (in thousands)	March 31, 2022		March 31, 2021
Operating lease cost	$	351	$	188
Short-term lease cost		—		—
Total lease cost	$	351	$	188

Cash paid for amounts included in the measurement of lease liabilities	$	327	$	167

A maturity analysis of operating lease liabilities and ~~right-to-use assets as compared~~reconciliation of the undiscounted cash flows to the ~~first quarter~~total of ~~2021 when~~operating lease liabilities is as follows:


	As of
Lease payments due (in thousands)	March 31, 2022
Nine months ending December 31, 2022	$	923
Twelve months ending December 31, 2023		1,131
Twelve months ending December 31, 2024		1,054
Twelve months ending December 31, 2025		872
Twelve months ending December 31, 2026		916
Twelve months ending December 31, 2027		849
Thereafter		6,584
Total undiscounted cash flows	$	12,329
Discount		1,932
Lease liabilities	$	10,397

Total gross rental income was $272 thousand for the ~~lease was initially placed into service.~~ three months ended March 31, 2022.

2425

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


(In thousands)	March 31, 2022
Nine months ending December 31, 2022	$	642
2023		792
2024		685
2025		703
2026		720
Thereafter		1,938
Total	$	5,480

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

(Dollars in thousands)

September 30, 2021

December 31, 2020

Lease liabilities

$
5,686

$
4,874

Right-of-use assets

$
5,512

$
4,795

Weighted average remaining lease term

9.85
years

10.49
years
Weighted average discount rate

2.83
%

2.89
%

For the Three Months Ended

For the Nine Months Ended
Lease cost (in thousands)

September 30, 2021

September 30, 2020

September 30, 2021

September 30, 2020
Operating lease cost

$
207

$
177

$
601

$
534
Short-term lease cost

—

—

—

—
Total lease cost

$
207

$
177

$
601

$
534

Cash paid for amounts included in the measurement of lease liabilities

$
174

$
168

$
505

$
498

~~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)

September 30, 2021
Three months ending December 31, 2021

$
192
Twelve months ending December 31, 2022

772
Twelve months ending December 31, 2023

740
Twelve months ending December 31, 2024

709
Twelve months ending December 31, 2025

573
Twelve months ending December 31, 2026

568
Thereafter

3,033
Total undiscounted cash flows

$
6,587
Discount

901
Lease liabilities

$
5,686

Note 67 – Goodwill and Other Intangibles

The Company concluded there was no impairment of goodwill during its annual fourth quarter assessment in 2020. Following the fourth quarter evaluation, management evaluated the events and circumstances 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 as well as the financial markets in evaluating the necessity of interim testing during 2021.

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The following table provides information on the significant components of goodwill and other acquired intangible assets at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021.

September 30, 2021

March 31, 2022

Weighted

Gross

Accumulated

Net

Average

Gross

Measurement

Accumulated

Net

Average

Carrying

Impairment

Accumulated

Carrying

Remaining Life

Carrying

Period

Impairment

Accumulated

Carrying

Remaining Life

(Dollars in thousands)

Amount

Charges

Amortization

Amount

(in years)

Amount

Adjustments

Charges

Amortization

Amount

(in years)

Goodwill

19,728

(1,543)

(667)

17,518

—

65,631

(140)

(1,543)

(667)

63,281

—

Other intangible assets

Amortizable

Core deposit intangible

3,954

—

(2,589)

1,365

3.5

10,504

—

(3,486)

7,018

3.0

Total other intangible assets

3,954

—

(2,589)

1,365

10,504

—

(3,486)

7,018


December 31, 2020
December 31, 2021											December 31, 2021
									Weighted													Weighted
	Gross			Accumulated			Net		Average			Gross				Accumulated					Net	Average
	Carrying		Impairment			Accumulated	Carrying		Remaining Life			Carrying				Impairment			Accumulated		Carrying	Remaining Life
(Dollars in thousands)	Amount		Charges			Amortization	Amount		(in years)			Amount		Additions		Charges			Amortization		Amount	(in years)

Goodwill	$	19,728	$	(1,543)	$	(667)	$	17,518		—		$	19,728	$	45,903	$	(1,543)	$	(667)	$	63,421	—

Other intangible assets
Amortizable
Core deposit intangible	$	3,954	$	—	$	(2,235)	$	1,719		4.7		$	3,954	$	6,550	$	—	$	(2,969)	$	7,535	3.8
Total other intangible assets	$	3,954	$	—	$	(2,235)	$	1,719				$	3,954	$	6,550	$	—	$	(2,969)	$	7,535

The aggregate amortization expense was ~~$353~~$517 thousand for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 and ~~$407~~$126 thousand for the ~~nine~~three months ended ~~September 30, 2020.~~

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

(Dollars in thousands)

Amortization
Expense
2021

$
108
2022

389
2023

317
2024

246
2025

174
2026

102
Thereafter

29
Total amortizing intangible assets

$
1,365

2021.

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


(Dollars in thousands)	Amortization Expense
2022	$	1,471
2023		1,682
2024		1,376
2025		1,070
2026		765
2027		459
Thereafter		195
Total amortizing intangible assets	$	7,018

Note 78 – Other Assets

The Company had the following other assets at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021.

September 30,

December 31,

(Dollars in thousands)

2021

2020

Accrued interest receivable

$
5,037

$
6,616

Deferred income taxes

5,307

4,442

Prepaid expenses

1,649

1,472

Cash surrender value on life insurance

41,949

31,018

Income taxes receivable

68

156

Other assets

4,732

3,075

Total

$
58,742

$
46,779

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

September 30,

December 31,
(Dollars in thousands)

2021

2020
Deferred tax assets:




Allowance for credit losses

$
4,156

$
3,721
Write-downs of other real estate owned

12

12
Nonaccrual loan interest

281

367
Other

2,461

2,152
Total deferred tax assets

6,910

6,252
Less valuation allowance

(327)

(169)
Deferred tax assets, net of valuation allowance

6,583

6,083
Deferred tax liabilities:




Depreciation

176

177
Acquisition accounting adjustments

735

580
Deferred capital gain on branch sale

182

187
Unrealized gains on available-for-sale securities

78

567
Other

105

130
Total deferred tax liabilities

1,276

1,641
Net deferred tax assets

$
5,307

$
4,442


	March 31,		December 31,
(Dollars in thousands)	2022		2021
Accrued interest receivable	$	7,264	$	6,719
Deferred income taxes		3,682		2,926
Prepaid expenses		2,964		2,865
Cash surrender value on life insurance		58,186		47,935
Income taxes receivable		—		616
Derivatives		1,055		435
Other assets		7,834		6,371
Total	$	80,985	$	67,867

Note 89 - 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~~used the net proceeds of this offering for general corporate purposes, organic growth and to support the Bank’s regulatory capital ratios. The Notes were structured to qualify as Tier 2 capital for regulatory capital purposes and bear an initial interest rate of 5.375% until September 1, 2025, with interest during this period payable semi-annually in arrears. From and including September 1, 2025, to but excluding the maturity date or early redemption date, the interest rate will reset quarterly to an annual floating rate equal to three-month SOFR, plus 526.5 basis points, with interest during this period payable quarterly in arrears. The Notes are 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~~$24.6 million is presented net of unamortized issuance costs of ~~$479~~$418 thousand at ~~September 30, 2021.~~March 31, 2022.

In conjunction with the acquisition of Severn, the Company assumed $20.6 million in junior subordinated debt securities (“2035 Debentures”). The 2035 Debentures were issued and sold to Severn Capital Trust I (the “Trust”), of which 100% of the common equity is owned by the Company. The Trust was formed for the purpose of issuing corporation-obligated mandatorily redeemable Capital Securities (“Capital Securities”) to third-party investors and using the proceeds from the sale of such Capital Securities to purchase the 2035 Debentures. The 2035 Debentures held by the Trust are the sole assets of the Trust. Distributions on the Capital Securities issued by the Trust are payable quarterly at a rate per annum equal to the interest rate being earned by the Trust on the 2035 Debentures. The Capital Securities are subject to mandatory redemption, in whole or in part, upon repayment of the 2035 Debentures. We have entered into an agreement which, taken

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collectively, fully and unconditionally guarantees the Capital Securities subject to the terms of the guarantee. The recorded balance was $18.2 million at March 31, 2022 and December 31, 2021, which included fair value adjustments of $2.4 million.

Under the terms of the 2035 Debentures, we are permitted to defer the payment of interest on the 2035 Debentures for up to 20 consecutive quarterly periods, provided that no event of default has occurred and is continuing. As of March 31, 2022, we were current on all interest due on the 2035 Debentures.

Note 910 – Other Liabilities

The Company had the following other liabilities at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021.


(Dollars in thousands)	September 30, 2021		December 31, 2020		March 31, 2022		December 31, 2021
Accrued interest payable	$	201	$	647	$	369	$	692
Accrued salaries and wages						990		3,422
Accounts payable						95		2,745
Deferred compensation liability		4,180		2,905		5,013		4,660
Income taxes payable						1,221		—
Other liabilities		3,013		3,686		3,119		3,081
Total	$	7,394	$	7,238	$	10,807	$	14,600

Note 1011 - Stock-Based Compensation

At the 2016 annual meeting, stockholders approved the Shore Bancshares, Inc. 2016 Stock and Incentive Plan (“2016 Equity Plan”), replacing the Shore Bancshares, Inc. 2006 Stock and Incentive Plan (“2006 Equity Plan”), which expired on that date. The Company may issue shares of common stock or grant other equity-based awards pursuant to the 2016 Equity Plan. Stock-based awards granted to date generally are time-based, vest in equal installments on each anniversary of the grant date and range over a one- to five-year period of time, and, in the case of stock options, expire 10 years from the grant date. As part of the 2016 Equity Plan, a performance equity incentive award program, known as the “Long-term incentive plan” allows participating officers of the Company to earn incentive awards of performance share/restricted stock units if certain pre-determined targets are achieved at the end of a three-year performance cycle. Stock-based compensation expense based on the grant date fair value is recognized ratably over the requisite service period for all awards and reflects forfeitures as they occur. The 2016 Equity Plan originally reserved 750,000 shares of common stock for grant, and ~~581,822~~546,217 shares remained available for grant at ~~September 30, 2021.~~March 31, 2022.

The following tables provide information on stock-based compensation expense for the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 and ~~2020.~~

For Three Months Ended

For Nine Months Ended

September 30,

September 30,

(Dollars in thousands)

2021

2020

2021

2020

Stock-based compensation expense

$
91

$
67

$
287

$
190

Excess tax benefits related to stock-based compensation

2

—

3

11

September 30,

(Dollars in thousands)

2021

2020

Unrecognized stock-based compensation expense

$
120

$
143

Weighted average period unrecognized expense is expected to be recognized

0.3
years

0.5
years

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

Nine Months Ended September 30, 2021

For Three Months Ended

Weighted Average

March 31,

Number of

Grant Date

Fair Value

Nonvested at beginning of period

24,505

13.78

Granted

24,583

13.34

Vested

(18,040)

13.74

Forfeited

(1,423)

13.34

Nonvested at end of period

29,625

13.38

(Dollars in thousands)

2022

2021

Stock-based compensation expense

130

Excess tax benefits related to stock-based compensation


	March 31,
(Dollars in thousands)	2022			2021
Unrecognized stock-based compensation expense	$	633		$	329
Weighted average period unrecognized expense is expected to be recognized		0.9	years		0.8	years

~~The fair value of restricted stock awards that vested during the first nine months of 2021 and 2020 was $268 thousand and $254 thousand, respectively.~~

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The following table summarizes restricted stock ~~option~~award activity for the Company under the 2016 Equity Plan for the ~~nine~~three months ended ~~September 30, 2021.~~March 31, 2022.


	Nine Months Ended September 30, 2021			Three Months Ended March 31, 2022
		Weighted Average			Weighted Average
	Number of	Grant Date		Number of	Grant Date
	Shares	Exercise Price		Shares	Fair Value
Outstanding at beginning of period	2,709	$	6.64
Nonvested at beginning of period				29,425	$	15.57
Granted	—		—	33,605		20.49
Exercised	(2,009)		6.64
Expired/Cancelled	(700)		6.64
Outstanding at end of period	—	$	—

Exercisable at end of period	—	$	—
Vested				(24,626)		13.51
Forfeited				—		—
Nonvested at end of period				38,404	$	19.92

The fair value of restricted stock awards that vested during the first three months of 2022 and 2021 was $492 thousand and $230 thousand, respectively.

There were 0 stock options granted during the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and March 31, 2021. All of the Company’s previously issued stock options that were outstanding on January 1, 2021 ~~and September 30, 2020.~~were either exercised or expired prior to December 31, 2021.

Note 12 – Derivatives

We maintain and account for derivatives, in the form of interest rate lock commitments (IRLCs) and mandatory forward contracts, in accordance with the FASB guidance on accounting for derivative instruments and hedging activities. We recognize gains and losses through mortgage-banking revenue in the Consolidated Statements of Income.

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

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

March 31, 2022

December 31, 2021

Notional

Estimated

Notional

Estimated

(Dollars in thousands)

Amount

Fair Value

Amount

Fair Value

Asset - IRLCs

21,815

217

17,557

380

Asset - TBA securities

38,107

838

26,500

Liability - TBA securities

1,500

20,500

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Note 1113 – Accumulated Other Comprehensive Income (Loss)

The Company records unrealized holding gains (losses), net of tax, on investment securities available for sale as accumulated other comprehensive income (loss), a separate component of stockholders’ equity. The following table provides information on the changes in the components of accumulated other comprehensive income (loss) for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 and ~~2020.~~2021.


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

Balance, December 31, 2020	$	1,529	$	—	$	1,529	$	1,529	$	—	$	1,529
Other comprehensive loss		(1,300)		—		(1,300)
Reclassification of gains recognized		(1)		—		(1)
Balance, September 30, 2021	$	228	$	—	$	228

Balance, December 31, 2019	$	218	$	(11)	$	207
Other comprehensive income		1,945		11		1,956
Reclassification of (gain) recognized		(259)		—		(259)
Balances, September 30, 2020	$	1,904	$	—	$	1,904
Other comprehensive (loss)								(782)		—		(782)
Balances, March 31, 2021							$	747	$	—	$	747

Note 1214 – Fair Value Measurements

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

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

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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.

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

Investment Securities Available for Sale

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

Subordinated Debt

Fair value measurement for subordinated debt is based on recent issuance rates of subordinated debt offerings over the prior 3 months for issuers of a relative size. A liquidity premium was added to the assumed market spreads to reflect exit pricing and the marketability/liquidity costs contained with consummating an orderly transaction. 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.

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~~LHFS

Loans held for sale (LHFS) are carried at fair value, which is determined based on ~~a recurring basis at September 30, 2021 and December 31, 2020. NaN assets were transferred from one hierarchy level~~Mark to ~~another during the first nine months of 2021~~Trade (MTT) for allocated/committed loans or ~~2020.~~Mark to Market (MTM) analysis for unallocated/uncommitted loans based on third-party pricing models.

Significant

Other

Significant

Quoted

Observable

Unobservable

Prices

Inputs

Inputs
(Dollars in thousands)

Fair Value

(Level 1)

(Level 2)

(Level 3)
September 30, 2021








Securities available for sale:








U.S. Government agencies

$
17,983

$
—

$
17,983

$
—
Mortgage-backed

87,142

—

87,142

—

105,125

—

105,125

—

Equity

1,384

—

1,384

—
Total

$
106,509

$
—

$
106,509

$
—

MSRs

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

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

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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

$
—

IRLCs

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


(Dollars in thousands)	Fair Value		Valuation Technique	Unobservable Input	Range
March 31, 2022
MSRs (1)	$	5,113	Market Approach	Weighted average prepayment speed (PSA) (2)	121

IRLCs - net asset	$	217	Market Approach	Range of pull through rate	78% - 100%
				Average pull through rate	92%


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

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

(1)

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

(2)

PSA = Public Securities Association Standard Prepayment Model

The following table presents activity in MSRs for the three months ended March 31, 2022.


(Dollars in thousands)	March 31, 2022
Beginning balance	$	4,087
Servicing rights reulting from sales of loans		472
Valuation adjustment		554
Ending balance	$	5,113

The following table presents activity in the IRLCs for the three months ended March 31, 2022.


(Dollars in thousands)	March 31, 2022
Beginning balance	$	380
Valuation adjustment		(163)
Ending balance	$	217

Forward Contracts

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

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

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


					Significant
					Other		Significant
			Quoted		Observable		Unobservable
			Prices		Inputs		Inputs
(Dollars in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
March 31, 2022
Assets:
Securities available for sale:
U.S. Government agencies	$	21,255	$	—	$	21,255	$	—
Mortgage-backed		83,442		—		83,442		—
Other Debt Securities		1,998		—		1,998		—
		106,695		—		106,695		—

Equity securities		1,305		—		1,305		—


TBA securities		838		—		838		—
LHFS		12,906		—		12,906		—
MSRs		5,113		—		—		5,113
IRLCs		217		—		—		217

Total assets at fair value	$	127,074	$	—	$	121,744	$	5,330

Liabilities:
TBA securities	$	6	$	—	$	6	$	—

Total liabilities at fair value	$	6	$	—	$	6	$	—

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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, 2021
Assets:
Securities available for sale:
U.S. Government agencies	$	22,305	$	—	$	22,305	$	—
Mortgage-backed		92,637		—		92,637		—
Other Debt Securities		2,040		—		2,040		—
		116,982		—		116,982		—

Equity securities		1,372		—		1,372		—


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

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

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

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

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

Impaired Loans

Loans are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts 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 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.

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The following tables set forth the Company’s financial and nonfinancial assets subject to fair value adjustments (impairment) on a nonrecurring basis at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, 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								Quantitative Information about Level 3 Fair Value Measurements
								Weighted								Weighted
(Dollars in thousands)	Fair Value		Valuation Technique		Unobservable Input		Range	Average (3)	Fair Value		Valuation Technique		Unobservable Input		Range	Average (3)
September 30, 2021
March 31, 2022
Nonrecurring measurements:

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

Impaired loans	$	408	Discounted cash flow analysis	(1)	Discount rate		4% - 7.25%	(6%)	$	1,878	Discounted cash flow analysis	(1)	Discount rate		6% - 7.25%	(6%)

Other real estate owned	$	203	Appraisal of collateral	(1)	Appraisal adjustments	(2)	0% - 19%	(1%)	$	561	Appraisal of collateral	(1)	Appraisal adjustments	(2)	0% - 20%	(7%)


	Quantitative Information about Level 3 Fair Value Measurements								Quantitative Information about Level 3 Fair Value Measurements
								Weighted								Weighted
(Dollars in thousands)	Fair Value		Valuation Technique		Unobservable Input		Range	Average (3)	Fair Value		Valuation Technique		Unobservable Input		Range	Average (3)
December 31, 2020
December 31, 2021
Nonrecurring measurements:

Impaired loans	$	610	Appraisal of collateral	(1)	Liquidation expense	(2)	10%	(10%)	$	617	Appraisal of collateral	(1)	Liquidation expense	(2)	10%	(10%)

Impaired loans	$	1,110	Discounted cash flow analysis	(1)	Discount rate		6% - 7.25%	(6%)	$	2,026	Discounted cash flow analysis	(1)	Discount rate		4% - 7.25%	(6%)

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

(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 ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 were estimated using an exit price notion.


	September 30, 2021				December 31, 2020				March 31, 2022				December 31, 2021
			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	$	310,852	$	310,852	$	186,917	$	186,917	$	570,976	$	570,976	$	583,613	$	583,613

Level 2 inputs
Investment securities available for sale									$	106,695	$	106,695	$	116,982	$	116,982
Investment securities held to maturity	$	250,501	$	247,835	$	65,706	$	65,828		407,138		390,541		404,594		401,524
Equity securities										1,305		1,305		1,372		1,372
Restricted securities		3,189		3,189		3,626		3,626		9,894		9,894		4,159		4,159
LHFS										12,906		12,906		37,749		37,749
TBA securities										838		838		55		55
Cash surrender value on life insurance		41,949		41,949		31,018		31,018		58,186		58,186		47,935		47,935

Level 3 inputs
Loans, net	$	1,479,372	$	1,475,793	$	1,440,368	$	1,436,292	$	2,166,396	$	2,140,286	$	2,105,231	$	2,106,373
MSRs										5,113		5,113		4,087		4,087
IRLCs										217		217		380		380

Financial liabilities
Level 2 inputs
Deposits:
Noninterest-bearing demand	$	554,902	$	554,902	$	509,091	$	509,091	$	876,415	$	876,415	$	927,497	$	927,497
Checking plus interest		515,796		515,796		446,243		446,243		695,407		695,407		524,143		524,143
Money market		443,270		443,270		292,974		292,974		726,858		726,858		889,099		889,099
Savings		220,346		220,346		177,524		177,524		309,926		309,926		225,546		225,546
Club		1,490		1,490		392		392		745		745		388		388
Certificates of deposit, $100,000 or more		140,390		141,610		129,623		131,271
Other time		141,871		142,450		144,858		146,137
Certificates of deposit										459,144		459,171		459,563		461,135
Securities sold under retail repurchase agreement		3,501		3,501		1,050		1,050		—		—		4,143		4,143
Advances from FHLB - long-term										10,094		10,052		10,135		10,187
Subordinated debt		24,521		26,903		24,429		25,745		42,840		45,430		42,762		44,876
TBA Securities										6		6		41		41

Note 1314 – ~~Financial Instruments with Off-Balance Sheet Risk~~Commitments and Contingencies

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

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The following table provides information on commitments outstanding at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021.


(Dollars in thousands)	September 30, 2021		December 31, 2020		March 31, 2022		December 31, 2021
Commitments to extend credit	$	298,389	$	248,607	$	462,508	$	421,088
Letters of credit		7,557		7,944		8,723		8,399
Total	$	305,946	$	256,551	$	471,231	$	429,487

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

The Company provides banking services to customers who do business in the medical-use cannabis industry. While the growing, processing, and sales of medical-use cannabis is legal in the state of Maryland, such customers engaged in those activities currently violate Federal law. The Company may be deemed to be aiding and abetting illegal activities through the services that it provides to these customers. The strict enforcement of Federal laws regarding medical-use cannabis would likely result in the Company’s inability to continue to provide banking services to these customers and the Company could have legal action taken against it by the Federal government, including imprisonment and fines. There is an uncertainty of the potential impact to the Company’s Consolidated Financial Statements if the Federal government takes actions against the Company. As of March 31, 2022, the Company had not accrued an amount for the potential impact of any such actions.

Following is a summary of the level of business activities with our medical-use cannabis customers:

● Deposit and loan balances at March 31, 2022 were approximately $54.2 million, or 1.8% of total deposits, and $35.2 million, or 1.6% of total gross loans, respectively.

● Interest and noninterest income for the three months ended March 31, 2022, were approximately $503 thousand and $506 thousand, respectively

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

Note 15 – Segment Reporting

We are in the business of providing financial services and subsequent to the acquisition of Severn in the fourth quarter of 2021 we operate in 2 business segments – community banking and mortgage-banking. Community banking is conducted through the Bank and involves delivering a broad range of financial services, including lending and deposit taking, to individuals and commercial enterprises. This segment also includes our treasury and administrative functions. Mortgage-banking is conducted through the residential mortgage division of the Bank and involves originating first and second-lien residential mortgages for sale in the secondary market.

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The following tables present certain information regarding our business segments for the three months ended March 31, 2022.


	Community				Consolidated
(Dollars in thousands)	Banking		Mortgage Banking		Total
March 31, 2022
Interest Income	$	22,433	$	1,891	$	24,324
Interest Expense		1,815		79		1,894
Net interest income		20,618		1,812		22,430
Provision for credit losses		600		—		600
Net interest income after provision for credit losses		20,018		1,812		21,830
Noninterest income		4,140		1,906		6,046
Noninterest expense		17,554		2,778		20,332
Income before income taxes		6,604		940		7,544
Income tax expense		1,689		242		1,931
Net income	$	4,915	$	698	$	5,613
Total assets, March 31, 2022	$	3,475,400	$	19,097	$	3,494,497

Note 1416 – 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.

Title Company Revenue

Title Company revenue consists of revenue earned on performing title work for real estate transactions. The revenue is earned when the title work is performed. Payment for such performance obligations generally occurs at the time of the

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settlement of a real estate transaction. As such settlement is generally within 90 days of the performance of the title work, we recognize the revenue at the time of the settlement.

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

Other Noninterest Income

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

The following presents noninterest income from continuing operations, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 and ~~2020.~~2021.


	For Three Months Ended				For Nine Months Ended				For Three Months Ended
	September 30,				September 30,				March 31,
(Dollars in thousands)	2021		2020		2021		2020		2022		2021
Noninterest Income
In-scope of Topic 606:
Service charges on deposit accounts	$	805	$	647	$	2,162	$	2,057	$	1,359	$	674
Trust and investment fee income		477		381		1,359		1,119		514		407
Interchange income		1,016		808		2,922		2,169		1,038		869
Title Company revenue										323		—
Other noninterest income		358		455		1,119		1,141		460		305
Noninterest Income (in-scope of Topic 606)		2,656		2,291		7,562		6,486		3,694		2,255
Noninterest Income (out-of-scope of Topic 606)		253		290		807		1,216		2,352		302
Total Noninterest Income	$	2,909	$	2,581	$	8,369	$	7,702	$	6,046	$	2,557

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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 ~~September 30, 2021,~~March 31, 2022, and December 31, ~~2020,~~2021, the Company did not have any significant contract balances.

~~Note 15 – Subsequent Event~~

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. On September 27, 2021, the Company and Severn received regulatory approval from the Office of the Comptroller of the Currency to convert Shore United Bank to a national bank and, for Severn to be merged with and into Shore United Bank, National Association. The Company also received regulatory approval from the Federal Reserve Bank of Richmond for Severn to be merged with and into the Company. On October 22, 2021, the shareholders of the Company and Severn approved the merger of Severn with and into the Company, with the Company as the surviving corporation. The transaction closed on October 31, 2021, and as of that date, Severn had approximately, $1.3 billion in total assets, $950.0 million in total deposits and $589.6 million in total loans.

Under the terms of the agreement, Severn shareholders received 0.6207 shares of Shore common stock and $1.59 in cash for each share of Severn common stock. The following table represents the consideration paid by the Company to acquire Severn:

(Dollars in thousands)

Purchase Price:

Shore Bancshares, Inc common stock paid at closing price of $18.48

$
148,827
Cash consideration

20,630
Cash consideration for Severn options

310
Total purchase price

$
169,767

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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 ~~2020~~2021 Form 10-K and other reports as filed by us with the SEC.

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

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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 ~~2020~~2021 Annual Report.

Shore Bancshares, Inc. is the largest independent financial holding company headquartered on the Eastern Shore of Maryland. It is the parent company of Shore United ~~Bank.~~Bank, N.A. The Bank operates 2229 full-service branches in Baltimore City, Baltimore County, Howard County, Kent County, Queen Anne’s County, Caroline County, Talbot County, ~~Caroline~~Dorchester County, ~~Dorchester~~Anne Arundel County and Worcester County in Maryland, Kent County, Delaware and in Accomack County, Virginia. The Company engages in trust and wealth management services through Wye Financial Partners, a division of Shore United ~~Bank.~~

As discussed in Note 15 to the consolidated financial statements, the Company recently completed its acquisition of Annapolis-based Severn Bancorp, Inc. (“Severn”). The acquisition of Severn will expand the Company’s footprint in the Annapolis and Anne Arundel County market areas, among others, and provide additional banking resources to our customers, including but not limited to, a robust secondary market mortgage banking line of business.

Bank, N.A.

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 outbreak of COVID-19 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 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 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. The first round of PPP lending resulted in 1,495 loans for $129.0 million, of which 1,447 loans have been forgiven or paid down in the amount of $125.9 million as of September 30, 2021. The second round of PPP lending which began in 2021, resulted in 959 loans for $67.3 million, of which 597 loans have been forgiven or paid down in the amount of $28.9 million. As of September 30, 2021, the Company had 410 PPP loans totaling $41.5 million that were outstanding, inclusive of loans issued during both the first and second rounds of the PPP. This has allowed us to further strengthen and deepen our client relationships, while positively impacting thousands of individuals.

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~~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.~~

~~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 the COVID-19 pandemic. Section 4013 of the CARES Act 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 and December 2020, short-term modifications made to 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. Since the beginning of the pandemic and through September 30, 2021, the Company had executed principal and/or interest deferrals on outstanding loan balances of $221.1 million. As of September 30, 2021, the Company had no COVID related loan deferrals remaining.

~~Liquidity~~

We are vigilantly monitoring our liquidity position on an ongoing 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. 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~~

The Company currently has a share repurchase program, in which $542 thousand remains available until expirations on December 31, 2021. The Board of directors and management will re-evaluate the need for an additional stock repurchase program based on the market price of the Company’s stock, capital position, and necessary regulatory approvals.

~~Dividends and Capital~~

We currently expect to maintain our quarterly cash dividend based on our strong capital position. At September 30, 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 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 ~~2020~~2021 Annual Report. These policies, along with the disclosures presented in the notes to the financial statements and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods,

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assumptions, and estimates underlying those amounts, management has determined that the accounting policies with respect to the loans acquired in a business combination, allowance for credit losses and goodwill are critical accounting policies. These policies are considered critical because they relate to accounting areas that require the most subjective or complex judgments, and, as such, could be most subject to revision as new information becomes available.

Loans Acquired in a Business Combination

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

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

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

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

The Company accounts for purchased performing loans using the contractual cash flows method of recognizing discount accretion based on the acquired loans’ contractual cash flows. Purchased performing loans are recorded at fair value, including a credit discount. The fair value discount is accreted as an adjustment to yield over the estimated lives of the loans. There is no allowance for loan losses established at the acquisition date for purchased performing loans. A provision for loan losses may be required for any deterioration in these loans in future periods.

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Allowance for Credit Losses

The allowance for credit losses represents management’s estimate of credit losses inherent in the loan portfolio as of the balance sheet date. Determining the amount of the allowance for credit losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of similar loans based on historical loss experience, and consideration of current economic trends and conditions and other factors, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the consolidated balance sheets. Note 1 to the ~~2020~~2021 Annual Report describes the methodology used to determine the allowance for credit losses. A discussion of the allowance determination and factors driving changes in the amount of the allowance for credit losses is included in the Provision for Credit Losses and Allowance for Credit Losses sections below.

Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Determining fair value is subjective, requiring the use of estimates, assumptions and management judgment. Goodwill is tested at least annually for impairment, usually during the fourth quarter, or on an interim basis if circumstances dictate. Impairment testing requires a qualitative assessment or that the fair value of each of the Company’s reporting units be compared to the carrying amount of its net assets, including goodwill. If the fair value of a reporting unit is less than book value, an expense may be required to write down the related goodwill to record an impairment loss. As of ~~September 30, 2021,~~March 31, 2022, the Company had ~~only one~~a banking and mortgage reporting unit.

~~As previously noted, the Company acquired Severn Bancorp, Inc. during the 4~~^th ~~quarter of 2021. The Company’s 2021 Annual Report on Form 10-K will also include the critical accounting policies related to its acquisition of Severn.~~

OVERVIEW

The Company reported net income of ~~$4.6~~$5.6 million for the ~~third~~first quarter of ~~2021,~~2022, or diluted income per common share of ~~$0.39,~~$0.28, compared to ~~net income of $3.4 million, or diluted income per common share of $0.27, for the third quarter of 2020. For the second quarter of 2021, the Company reported~~ net income of $4.0 million, or diluted income per common share of ~~$0.34.~~$0.34, for the first quarter of 2021. For the fourth quarter of 2021, the Company reported net income of $2.7 million, or diluted income per common share of $0.16. Net income, excluding merger related expenses, for the first quarter of 2022 was $6.2 million or $0.31 per diluted common share, compared to net income, excluding merger related expenses, of $7.9 million or $0.46 per diluted common share for the fourth quarter of 2021. When comparing net income, excluding merger related expenses, for the ~~third~~first quarter of 2022 to the first quarter of 2021, ~~to the third quarter of 2020,~~ net income increased ~~$1.2~~$2.4 million, primarily due to increases in net interest income of ~~$2.3~~$8.6 million and noninterest income of ~~$328 thousand, combined with a lower provision for credit losses of $1.2 million. These improvements to net income were partially offset by an increase in almost all expense line items, adding $2.1~~$3.5 million, to noninterest expense. When comparing the third quarter of 2021 to the second quarter of 2021, the net income increased $586 thousand, due to an increase in net interest income of $1.5 million and lower provision for credit losses of $360 thousand, which was partially offset by an increase in noninterest ~~expense~~expenses of ~~$1.1~~$9.1 million. ~~In addition, merger-related expenses were recorded for~~When comparing the ~~second and third quarters~~first quarter of 2022 to the fourth quarter of 2021, net income, excluding merger related expenses, decreased $1.8 million, due to increases in noninterest expenses of ~~$377~~$3.7 million and the cumulative impact of a reversal of the provision for credit losses of $1.7 million in the fourth quarter of 2021 and a provision of $600 thousand ~~and $538 thousand, respectively.~~

~~For~~in the first ~~nine months~~quarter of 2021, the Company reported net income of $12.6 million, or diluted income per common share of $1.08, compared to net income of $11.8 million, or diluted income per common share of $0.95, for the first nine months of 2020. When comparing net income for the first nine months of 2021 to the first nine months of 2020, net income increased $801 thousand, primarily due to2022, partially offset by increases in net interest income of ~~$4.7~~$1.8 million and noninterest income of ~~$667 thousand, combined with a lower provision for credit losses of $1.5 million. These improvements to net income~~$917 thousand. Merger-related expenses were ~~partially offset by an increase in almost all expense line items, adding $5.5 million to noninterest expense. In addition, total merger-related expenses~~recorded for the first ~~nine months were $915 thousand.~~quarter of 2022 and the fourth quarter of 2021 of $730 thousand and $7.6 million, respectively.

RESULTS OF OPERATIONS

Net Interest Income

Tax-equivalent net interest income is net interest income adjusted for the tax-favored status of income from certain loans and investments. As shown in the table below, tax-equivalent net interest income was ~~$15.6~~$22.5 million for the ~~third~~first quarter

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~~of 2021~~2022 and ~~$13.3~~$13.8 million for the ~~third~~first quarter of ~~2020.~~2021. Tax-equivalent net interest income was ~~$14.1~~$20.7 million for the ~~second~~fourth quarter of 2021. The increase in net interest income when comparing the ~~third~~first quarter of 2022 to the first quarter of 2021 ~~to the third quarter of 2020~~ and the ~~second~~fourth quarter of 2021, was ~~the result of higher~~due to increases in interest and fees on loans and income from taxable investment securities, ~~coupled with a decrease~~partially offset by increases in interest ~~expense.~~expense on interest-bearing deposits and subordinated debt primarily due to the acquisition of Severn. Net interest margin is tax-equivalent net interest income (annualized) divided by average earning assets. The net interest margin for the ~~third~~first quarter of ~~2021~~2022 was ~~2.99%~~2.78%, which was a decrease of ~~18bps~~22bps when compared to ~~3.17%~~3.00% for the ~~third~~first quarter of ~~2020~~2021 and ~~an increase~~a decrease of ~~8bps~~9bps when compared to ~~2.91%~~2.87% for the ~~second~~fourth quarter of 2021. The decline in net interest margin in the ~~third~~first quarter of ~~2021~~2022 when compared to the ~~third~~first quarter of ~~2020,~~2021 was significantly impacted by excess liquidity and higher average balances on lower yielding assets, coupled with additional

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borrowings resulting from the ~~decrease in yields of taxable investment securities.~~Severn acquisition. The ~~increase~~decline in net interest margin when compared to the ~~second~~fourth quarter of 2021, was primarily due to ~~improvement~~a decline in the yields ~~on earning assets, specifically~~of loans due to lower accretion income and organic loan growth experienced late in the first quarter of ~~14bps, and the continued decrease in rates paid on interest-bearing deposits.~~2022. Without estimated excess liquidity of ~~$200~~$400 million, the margin for the ~~third~~first quarter of ~~2021~~2022 would have been ~~3.31%~~3.07%.

Interest Income

On a tax-equivalent basis, interest income increased ~~$2.0~~$9.0 million, or ~~13.4%~~58.4%, for the ~~third~~first quarter of ~~2021~~2022 when compared to the ~~third~~first quarter of ~~2020.~~2021. The ~~increase~~improvement to interest income was the result of ~~higher~~increases in interest and fees on loans, ~~and~~ income from investment ~~securities.~~securities and higher rates paid on interest-bearing deposits with other banks. The primary driver for the increase in interest income on loans was the higher average volume of loans of ~~$80.6~~$684.9 million, ~~and~~coupled with a higher average yield of ~~13bps,~~17bps, partially impacted by PPP forgiveness and accretion income from the acquired loan portfolio of Severn in the ~~third~~first quarter of ~~2021.~~2022. The average balance of taxable investment securities increased ~~$198.2~~$303.2 million, providing ~~$588 thousand~~$1.1 million of additional income, despite a decrease in the average yield of ~~56bps.~~14bps.

On a tax-equivalent basis, interest income increased ~~$1.4~~$1.9 million, or ~~8.8%~~8.6%, for the ~~third~~first quarter of ~~2021~~2022 when compared to the ~~second~~fourth quarter of 2021. The increase was primarily a result of growth in the average balance in loans of ~~$42.6~~$248.6 million, ~~and a higher~~or 13.2%. In addition, the average ~~yield~~balance of ~~14bps, partially impacted by PPP forgiveness in the third quarter of 2021. In addition,~~ taxable investment securities ~~were purchased during the third quarter of 2021, resulting in a higher average balance in these securities of $48.1~~increased $62.3 million and ~~improvement in~~ the average yield ~~of 5bps,~~increased 7bps, which provided ~~$224~~$322 thousand of additional income.

Interest Expense

Interest expense ~~decreased $309~~increased $350 thousand, or ~~19.0%~~22.7%, when comparing the ~~third~~first quarter of ~~2021~~2022 to the ~~third~~first quarter of ~~2020.~~2021. The ~~decrease~~increase in interest expense from the ~~third~~first quarter of ~~2020~~2021 was athe result of ~~the decrease~~increases in ~~the average rate paid~~expenses on interest-bearing deposits of ~~27bps.This decrease in interest expense was partially offset by the issuance of~~$174 thousand and both long-term advances from FHLB and subordinated debt ~~late in the third quarter of 2020 which added $211 thousand of additional expense~~ for ~~the third quarter of 2021 when compared to the third quarter of 2020.~~a combined $175 thousand.

Interest expense ~~decreased $116~~increased $137 thousand, or ~~8.1%~~7.8%, when comparing the ~~third~~first quarter of 2022 to the fourth quarter of 2021 primarily due to ~~the second quarter of 2021.~~an increase in interest expense on deposits. The ~~decrease~~increase in interest expense on deposits was due to ~~a 6bps decline~~an increase in the average ~~rate~~balance of interest-bearing deposits of $284.4 million, or 15.4%, the result of both a full quarter of deposits acquired from Severn and $93.3 million in organic deposit growth during the first quarter of 2022. The rates paid on interest-bearing deposits ~~specifically time~~decreased slightly to 26bps in the first quarter of 2022 from 27 bps in the fourth quarter of 2021, maintaining a low cost of funds on core deposits. In addition, the increase in interest expense was impacted by a full quarter of additional long-term advances from the FHLB and, junior subordinated debt acquired from Severn.

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The following tables present the distribution of the average consolidated balance sheets, interest income/expense, and annualized yields earned and rates paid for the three months ended ~~September 30, 2021~~March 31, 2022 and ~~2020.~~2021.


													For Three Months Ended						For Three Months Ended
	For Three Months Ended						For Three Months Ended						March 31, 2022						March 31, 2021
	September 30, 2021						September 30, 2020						2022
	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)	$	1,487,281	$	15,518	4.14	%	$	1,406,683	$	14,173	4.01	%	$	2,135,734	$	22,124	4.20	%	$	1,450,883	$	14,402	4.03	%
Investment securities:
Taxable		334,205		1,318	1.58			136,017		730	2.14			531,017		1,985	1.49			227,816		931	1.63
Interest-bearing deposits		250,019		97	0.15			127,494		33	0.10			586,798		254	0.18			189,231		47	0.10
Total earning assets		2,071,505		16,933	3.24	%		1,670,194		14,936	3.56	%		3,253,549		24,363	3.01	%		1,867,930		15,380	3.34	%
Cash and due from banks		19,453						18,860						(15,253)						19,245
Other assets		108,989						94,755						253,424						103,010
Allowance for credit losses		(15,499)						(11,865)						(14,239)						(14,234)
Total assets	$	2,184,448					$	1,771,944					$	3,477,481					$	1,975,951

Interest-bearing liabilities
Demand deposits	$	462,950		165	0.14	%	$	370,922		174	0.19	%	$	589,737		228	0.16	%	$	438,340		156	0.14	%
Money market and savings deposits		644,330		295	0.18			442,322		229	0.21			1,075,791		598	0.23			510,881		230	0.18
Certificates of deposit $100,000 or more		136,059		243	0.71			127,983		539	1.68			286,587		286	0.40			130,745		405	1.26
Other time deposits		142,777		246	0.68			148,223		528	1.42			175,683		246	0.57			144,919		393	1.10
Interest-bearing deposits		1,386,116		949	0.27			1,089,450		1,470	0.54			2,127,798		1,358	0.26			1,224,885		1,184	0.39
Securities sold under retail repurchase agreements and short-term FHLB advances		2,718		2	0.29			1,575		1	0.25			2,770		2	0.29			2,238		1	0.18
Advances from FHLB - short-term		—		—	—			—		—	—			—		—	—			—		—	—
Advances from FHLB - long-term		—		—	—			—		—	—			10,116		14	0.57			—		—	—
Subordinated debt		24,504		359	5.81			9,859		148	5.97			42,804		520	4.93			24,443		359	5.96
Total interest-bearing liabilities		1,413,338		1,310	0.37	%		1,100,884		1,619	0.59	%		2,183,488		1,894	0.35	%		1,251,566		1,544	0.50	%
Noninterest-bearing deposits		557,109						458,622						916,415						517,781
Other liabilities		13,120						11,359						24,567						10,813
Stockholders’ equity		200,881						201,079						353,011						195,791
Total liabilities and stockholders’ equity	$	2,184,448					$	1,771,944					$	3,477,481					$	1,975,951

Net interest spread			$	15,623	2.87	%			$	13,317	2.97	%			$	22,469	2.66	%			$	13,836	2.84	%
Net interest margin					2.99	%					3.17	%					2.76	%					3.00	%

Tax-equivalent adjustment
Loans			$	34					$	34					$	39					$	36
Total			$	34					$	34					$	39					$	36

~~(1)~~(2)

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)~~(3)

Average loan balances include nonaccrual loans.

~~(3)~~(4)

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

~~Net Interest Income~~

Tax-equivalent net interest income increased $4.7 million, or 12.0%, during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. The higher net interest income was due to an increase in interest income of $3.6 million, or 8.1% and a decrease in interest expense on interest-bearing deposits of $1.9 million, or 20.0%. Despite the improved results, compression in the margin was due to lower yields on total earning assets. This resulted in a net interest margin of 2.97% for the nine months ended September 30, 2021 compared to 3.35% for the nine months ended September 30, 2020.

~~Interest Income~~

On a tax-equivalent basis, interest income increased $3.6 million, or 8.1%, for the nine months ended September 30, 2021 when compared to the nine months ended September 30, 2020. The increase was primarily due to higher interest and fees

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on loans of $2.4 million, or 5.6% and taxable investment securities of $1.3 million, or 60.2%. The increase in interest and fees on loans was due to a higher average balance of loans of $112.7 million, or 8.4%, which included forgiveness on PPP loans in 2021. The increase in interest on taxable investment securities was due to a higher average balance in these securities of $158.6 million, or 127.4%, despite the decline in the average yield of such securities of 66bps.

~~Interest Expense~~

Interest expense decreased $1.1 million, or 20.0%, when comparing the nine months ended September 30, 2021 to the nine months ended September 30, 2020. The decrease in interest expense was due to a decline in the rates paid on interest-bearing deposits of 33bps and the elimination of long-term advances from FHLB. These improvements were partially offset by the addition of subordinated debt, issued in the third quarter of 2020, which added $940 thousand in interest expense when compared to the first nine months of 2020.

~~Table of Contents~~

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

For Nine Months Ended

For Nine Months Ended

September 30, 2021

September 30, 2020


Average

Income(1)/

Yield/

Average

Income(1)/

Yield/

(Dollars in thousands)

Balance

Expense

Rate

Balance

Expense

Rate

Earning assets













Loans (2), (3)

$
1,461,083

$
44,339

4.06
%
$
1,348,362

$
41,987

4.16
%
Investment securities:













Taxable

283,104

3,343

1.58

124,487

2,087

2.24

Interest-bearing deposits

219,540

199

0.12

81,125

216

0.36

Total earning assets

1,963,727

47,881

3.26
%

1,553,974

44,290

3.81
%
Cash and due from banks

18,536





18,302





Other assets

107,174





91,642





Allowance for credit losses

(14,802)





(11,042)





Total assets

$
2,074,635





$
1,652,876





Interest-bearing liabilities













Demand deposits

$
435,678

453

0.14
%
$
318,083

714

0.30
%
Money market and savings deposits

591,959

777

0.18

426,570

941

0.29

Certificates of deposit $100,000 or more

134,080

998

1.00

129,319

1,723

1.78

Other time deposits

143,832

961

0.89

149,841

1,708

1.52

Interest-bearing deposits

1,305,549

3,189

0.33

1,023,813

5,086

0.66

Securities sold under retail repurchase agreements and federal funds purchased

2,695

5

0.25

1,613

4

0.33

Advances from FHLB - long-term

—

—

—

5,255

113

2.87

Subordinated debt

24,474

1,088

5.94

3,310

148

5.97

Total interest-bearing liabilities

1,332,718

4,282

0.43
%

1,033,991

5,351

0.69
%
Noninterest-bearing deposits

531,199





410,702





Other liabilities

12,631





10,088





Stockholders’ equity

198,087





198,095





Total liabilities and stockholders’ equity

$
2,074,635





$
1,652,876





Net interest spread



$
43,599

2.83
%



$
38,939

3.12
%
Net interest margin





2.97
%





3.35
%

Tax-equivalent adjustment

Loans

$
108

$
107

Total

$
108

$
107

~~(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.~~

Noninterest Income

Total noninterest income for the ~~third~~first quarter of ~~2021~~2022 increased ~~$328 thousand,~~$3.5 million, or ~~12.7%~~136.4%, when compared to the ~~third~~first quarter of ~~2020.~~2021. The increase from the ~~third~~first quarter of ~~2020 included~~2021 was across all ~~lines~~noninterest income categories but was primarily due to the expenses related to the addition of ~~business, but predominately~~the mortgage division of $1.9 million, service charges on deposit accounts ~~trust and investment~~of $685 thousand, additional rental fee income of $345 thousand and ~~other debit card interchange fees.~~Mid-Maryland Title Company revenue of $323 thousand. Noninterest income increased $6$917 thousand, or ~~less than 1%~~17.9%, when compared to the ~~second~~fourth quarter of 2021 primarily due to higher revenue from the mortgage division of $919 thousand, increase in service charges on ~~deposit accounts, almost entirely~~deposits of $125 thousand, and higher revenue from the Mid-Maryland Title Company of $75 thousand, partially offset by ~~the absence of~~ a ~~debit card incentive received~~reduction in ~~the second quarter of 2021.~~other noninterest income primarily related to higher expenses related to retirement funding costs as well as lower other loan fee income.

Total noninterest income for the nine months ended September 30, 2021, increased $667 thousand, or 8.7%, when compared to the same period in 2020. The increase in noninterest income primarily consisted of higher trust and investment fee income, deposit related fees and service charges on other bank services, partially off-set by lower gains on securities year over year. The increase in deposit related fees and other bank service charges has been impacted by the growth in

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~~new accounts and balances of deposits, as well as a return to a more normalized local economy and consumer demand for products and services in 2021.~~

Noninterest Expense

Total noninterest expense, excluding merger-related expenses, for the ~~third~~first quarter of ~~2021~~2022 increased ~~$2.1~~$9.1 million, or ~~21.4%~~86.7%, when compared to the ~~third~~first quarter of ~~2020~~2021 and increased ~~$1.1~~$3.7 million, or ~~9.7%~~15.8%, when compared to the ~~second~~fourth quarter of 2021. The increase in noninterest expense when compared to both the ~~third~~first quarter of ~~2020~~2021 and ~~second~~fourth quarter of 2021 was primarily driven by salary and wages being deferred in the third quarter of 2020 and the second quarter of 2021, the result of originating first and second round PPP loans, combined with additional accruals related to incentive payouts and bonuses for employees. In addition, increases in employee benefits, furniture and fixtures, and FDIC insurance contributed to the higher expense base in the third quarter of 2021. Employee benefits increased due to higher supplemental executive retirement plan costs in the third quarter of 2021, while furniture and fixtures increased due to renovations of an existing bank branch. FDIC insurance premiums have increased due to the growth in deposit accounts in 2021. Merger-related expenses due to the acquisition of Severn remained a significant variance when comparing the comparative third quarters of 2021 and 2020.

Total noninterest expense for the nine months ended September 30, 2021, increased $5.5 million, or 19.6%, when compared to the same period in 2020. The increase was mainly the result of the absence of the deferralincreases in salaries and wages, ~~due to PPP loan originations in 2020, accruals~~employee related ~~to incentive payouts and bonuses, higher~~benefits, occupancy expense, data processing, ~~costs, FDIC insurance premiums~~amortization of intangible assets and ~~occupancy costs. The higher occupancy costs are associated with~~legal and professional fees, which were all significantly impacted by adding Severn branches and its operations for a ~~new branch lease~~full quarter in ~~Ocean City, Maryland~~2022.In addition, salaries and wages were impacted by incentive increases which ~~will open~~took effect in ~~2022. In addition, the Company recorded merger-related expenses~~January of ~~$915 thousand for the first nine months of 2021 due to the acquisition of Severn.~~2022.

Provision for Credit Losses

The provision for credit losses was ~~$290~~$600 thousand for the ~~third~~first quarter of 2022, $425 thousand for the first quarter of 2021 ~~$1.5~~and $(1.7) million for the ~~third quarter of 2020 and $650 thousand for the second~~fourth quarter of 2021. The ratio of the allowance for credit losses to period-end loans was ~~1.04%~~0.67% at ~~September 30, 2021, 0.95%~~March 31, 2022, 0.66% at December 31, ~~2020~~2021 and ~~1.02%~~0.98% at ~~June~~March 30, 2021. Excluding PPP loans and acquired loans, the ratio of the allowance for credit losses to period-end loans was ~~1.07%~~0.92% at ~~September 30, 2021, higher than the 1.04% at December~~March 31, ~~2020 and~~2022, slightly lower than the ~~1.09%~~0.93% at ~~June 30,~~December 31, 2021 and lower than the 1.11% at March 31, 2021. The primary driver of the ~~increased~~decreased percentage of the allowance to total loans, excluding PPP loans, as compared to December 31, ~~2020,~~2021, was ~~significant loan originations within segments of the portfolio which carry higher reserves.~~due to further reduced pandemic qualitative factors. The decrease in the percentage of the allowance to total loans, excluding PPP loans, as compared to ~~June 30,~~March 31, 2021, was ~~due slightly reduced~~also primarily attributed to the Company’s reduction of pandemic related qualitative factors within the allowance model. The Company reported net recoveries in the ~~third~~first quarter of ~~2021~~2022 of ~~$147~~$166 thousand, compared to no net charge offs or recoveries ~~of $187 thousand~~ for the ~~third~~first quarter of ~~2020~~2021 and net recoveries of ~~$125~~$142 thousand for the ~~second~~fourth quarter of 2021.

The provision for credit losses for the nine months ended September 30, 2021, and 2020 was $1.4 million and $2.9 million, respectively, while net recoveries were $272 thousand and net charge-offs were $580 thousand, respectively. The decrease in the provision for credit losses was the result of lower charge-offs in 2021, overall improved credit quality and a slight reduction in pandemic related qualitative factors. The ratio of allowance to total loans increased from 0.95% at December 31, 2020, to 1.04% at September 30, 2021. Excluding PPP loans, the ratio of the allowance for credit losses to period-end loans was 1.07% at September 30, 2021, higher than the 1.04% at December 31, 2020. The primary drivers for the increase in the percentage of allowance for credit losses to total loans were significant originations within the construction and consumer loan portfolios, which require a higher level of allowance than certain other segments of the portfolio.~~The ratio of annualized net recoveries to average loans was 0.07% for the first nine months of 2021, compared to annualized net charge-offs of 0.06% for the first nine months of 2020.~~ Management ~~will continue to evaluate~~continually evaluates the adequacy of the allowance for credit losses as ~~more economic data becomes available~~changes in the environment and ~~as changes~~ within the ~~Company’s~~ portfolio ~~are~~become known.

Income Taxes

The Company reported income tax expense of ~~$1.7~~$1.9 million for the ~~third~~first quarter of ~~2021, $1.1 million for the third quarter of 2020 and~~2022, $1.4 million for the ~~second~~first quarter of 2021 and $1.3 million for the fourth quarter of 2021. Income tax expense increased when compared to both the ~~third~~

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first quarter of ~~2020~~2021 and ~~second~~fourth quarter of 2021 due to higher pre-tax earnings. The effective tax rate for the ~~second~~first quarter of 2022 was 25.6%, 31.8% for the fourth quarter of 2021, and ~~third quarters~~26.4% for the first quarter of 2021. The higher tax rate in the fourth quarter of 2021 was ~~26.4% and was 25.2% for~~attributed to non-deductible merger-related expenses in the third quarter of 2020. Income tax expense for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, increased $544 thousand due to higher pre-tax earnings. The effective tax rate at September 30, 2021 and September 30, 2020 were 26.4% and 25.2%, respectively.quarter.

ANALYSIS OF FINANCIAL CONDITION

Loans Held for Sale

We originate residential mortgage loans for sale on the secondary market, which we have elected to carry at fair value. At March 31, 2022 and December 31, 2021, the fair value of loans held for sale amounted to $12.9 million and $37.7 million, respectively.

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

Loans Held for Investment

~~Loans totaled $1.495 billion~~The following tables represent the composition of the Company’s loan portfolio at ~~September 30, 2021~~March 31, 2022 and ~~$1.454 billion at~~ December 31, ~~2020, an increase~~2021.


	March 31, 2022
			Loans acquired from
(Dollars in thousands)	Legacy Loans		Severn acquisition		Total Loans
Construction	$	179,260	$	78,916	$	258,176
Residential real estate		484,404		169,396		653,800
Commercial real estate		717,645		210,471		928,116
Commercial		115,593		46,544		162,137
Consumer		162,766		1,211		163,977
Total loans excluding PPP loans		1,659,668		506,538		2,166,206
PPP loans		10,253		4,647		14,900
Total loans	$	1,669,921	$	511,185	$	2,181,106
Allowance for credit losses						(14,710)
Total loans, net					$	2,166,396


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

The acquisition of ~~$40.6~~Severn added $584.6 million ~~or 2.8%. Excluding PPP loans, the increase~~ in total loans ~~was $121.9~~as of October 31, 2021, of which $506.5 million in total loans remained outstanding as of March 31, 2022. Excluding these loans and legacy PPP loans, total legacy loans increased $111.9 million, or ~~9.2%~~7.2%, ~~due~~when compared to ~~significant loan growth late in the second~~December 31, 2021. At March 31, 2022 and ~~third quarters~~December 31, 2021, PPP loans accounted for $14.9 million and $18.4 million of ~~2021.~~total loans, respectively. Most of our loans, excluding PPP loans, are secured by real estate and are classified as construction, residential or commercial real estate loans. The increase in legacy loans, excluding PPP loans, was comprised of increases in consumer loans of ~~$62.8~~$38.3 million, or ~~199.7%~~30.7%, construction loans of ~~$23.8~~$34.1 million, or ~~22.3%~~23.5%, commercial real estate loans of $37.8 million, or 5.6%, residential real estate loans of ~~$17.3~~$14.5 million, or ~~3.9%~~3.1%, partially offset by a decrease in commercial loans of ~~$15.2~~$12.9 million, or ~~7.2%~~10.0%, ~~and~~at March 31, 2022 compared to December 31, 2021. At March 31, 2022, the legacy loan portfolio, excluding PPP loans, was comprised of 43.2% commercial real estate, ~~loans of $2.7 million, or less than 1%. Construction loans included deferred fees, net of deferred costs, of $376 thousand~~29.2% residential real estate, 10.8% construction, 9.8% consumer and ~~discounts on acquired loans of $577 thousand at September 30, 2021, compared~~7.0% commercial. That compares to ~~deferred costs, net of deferred fees, of $622 thousand~~43.9%, 30.4%, 9.4%, 8.0% and ~~discounts on acquired loans of $754 thousand~~8.3, respectively, at December 31, ~~2020.~~2021. Outstanding PPP loans totaled ~~$41.5~~$14.9 million at ~~September 30, 2021~~March 31, 2022 and ~~$122.8~~$27.6 million at December 31, ~~2020,~~2021, a decrease of ~~$81.3~~$12.7 million or ~~66.2%~~45.9%. The decrease was primarily due to forgiveness on first and second round PPP loans originated in 2020 and 2021. We do not engage in foreign or subprime lending activities. See Note 4,5, “Loans and Allowance for Credit Losses”, in the Notes to Consolidated Financial Statements and below under the caption “Allowance for Credit Losses” for additional information.

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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 ~~$130.6~~$258.2 million, or ~~8.7%~~11.8% of total loans, at ~~September 30, 2021~~March 31, 2022 and ~~$106.8~~$239.4 million, or ~~7.3%~~11.3% of total loans, at December 31, ~~2020.~~2021. Commercial real estate loans were ~~$663.9~~$928.1 million, or ~~44.4%~~42.6% of total loans, at ~~September 30, 2021,~~March 31, 2022, compared to ~~$661.2~~$896.2 million, or ~~45.5%~~42.3% of total loans, at December 31, ~~2020.~~2021.

The federal banking regulators have issued guidance for those institutions which are deemed to have concentrations in commercial real estate lending. Pursuant to the supervisory criteria contained in the guidance for identifying institutions with a potential commercial real estate concentration risk, institutions which have (1) total reported loans for construction, land development, and other land acquisitions which represent 100% or more of an institution’s total risk-based capital; or (2) total non-owner occupied commercial real estate loans representing 300% or more of the institution’s total risk-based capital and the institution’s non-owner occupied commercial real estate loan portfolio (including construction) has increased 50% or more during the prior 36 months are identified as having potential commercial real estate concentration risk. Institutions which are deemed to have concentrations in commercial real estate lending are expected to employ heightened levels of risk management with respect to their commercial real estate portfolios, and may be required to hold higher levels of capital. The Company, like many community banks, has a concentration in commercial real estate loans, and the Company has experienced significant growth in its commercial real estate portfolio in recent years. At ~~September 30, 2021,~~March 31, 2022, non-owner-occupied commercial real estate loans (including construction, land and land development loans) represented ~~301.6%~~291.4% of total risk-based capital. At such time, construction, land and land development loans represented ~~61.8%~~79.1% of total risk-based capital.

The commercial real estate portfolio (including construction) has increased ~~45.2%~~101.4% during the prior 36 months. Management has extensive experience in commercial real estate lending, and has implemented and continues to maintain heightened risk management procedures, as well as strong underwriting criteria with respect to its commercial real estate portfolio. Monitoring practices include periodic stress testing analysis to evaluate changes to cash flows, owing to interest rate increases and declines in net operating income. We may be required to maintain higher levels of capital as a result of our commercial real estate concentrations, which could require us to obtain additional capital or be required to sell/participate portions of loans, which may adversely affect shareholder returns.

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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 ~~$15.5~~$14.7 million at ~~September 30, 2021,~~March 31, 2022, $13.9 million at December 31, ~~2020~~2021 and ~~$15.1~~$14.3 million at ~~June 30,~~March 31, 2021. There were net recoveries of ~~$147~~$166 thousand for the ~~third~~first quarter of ~~2021,~~2022, compared to net recoveries of ~~$61~~$142 thousand for the fourth quarter of ~~2020~~2021 and no net charge offs or recoveries ~~of $125 thousand~~ for the ~~second~~first quarter of 2021. The ratio of annualized net recoveries to average loans was ~~0.04%~~0.03% for the ~~third~~first quarter of ~~2021,~~2022, compared to annualized net recoveries of ~~0.02%~~0.03% for the fourth quarter of ~~2020~~2021 and ~~0.03%~~0.00% for the ~~second~~first quarter of 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 ~~1.04%~~0.67% at ~~September 30, 2021~~March 31, 2022 and ~~0.95%~~0.66% at December 31, ~~2020.~~2021. Excluding PPP loans and acquired loans from Severn and Northwest, the ratio of the allowance for credit losses to period-end loans ~~as 1.07%~~was 0.92% at ~~September 30, 2021, higher~~March 31, 2022, slightly lower than the ~~1.04%~~0.93% at December 31, ~~2020.~~2021. The ~~increase~~decrease in the percentage of the allowance to total loans, excluding PPP loans and acquired loans, at ~~September 30, 2021,~~March 31, 2022 compared to December 31, ~~2020,~~2021, was primarily due to ~~significant loan growth in~~ the ~~second and third quarters~~reduction of ~~2021 as previously discussed.~~pandemic

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related qualitative factors. Management currently believes that the provision for credit losses and the resulting allowance were adequate to provide for probable losses inherent in our loan portfolio at ~~September 30, 2021.~~March 31, 2022.

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The following ~~tables present~~table presents a summary of the activity in the allowance for credit losses at or for the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 and ~~2020.~~2021.


	For the Three Months Ended September 30,								For the Three Months Ended
	2021				2020				March 31, 2022						March 31, 2021
			Percentage of net				Percentage of net						Percentage of net						Percentage of net
			charge-offs (recoveries)				charge-offs (recoveries)						charge-offs (recoveries)						charge-offs (recoveries)
			(annualized) to				(annualized) to						(annualized) to						(annualized) to
			average loans				average loans						average loans						average loans
	Net (charge-offs)		outstanding		Net (charge-offs)		outstanding				Net (charge-offs)		outstanding				Net (charge-offs)		outstanding
(Dollars in thousands)	recoveries		during the year		recoveries		during the year		Average balances		recoveries		during the year		Average balances		recoveries		during the year
Construction	$	161	(0.49)	%	$	5	(0.02)	%	$	254,560	$	3	-	%	$	115,971	$	5	0.02	%
Residential real estate		9	(0.01)			189	(0.17)			650,224		46	(0.03)			449,651		6	0.01
Commercial real estate		—	-			—	-			893,158		150	(0.07)			630,516		—	-
Commercial		(29)	0.08			(8)	0.01			175,510		(24)	0.06			218,923		(9)	(0.02)
Consumer		6	(0.03)			1	(0.01)			162,282		(9)	0.02			35,822		(2)	0.01
Total	$	147	(0.04)	%	$	187	(0.05)	%			$	166	(0.03)	%			$	—	-	%

Average loans outstanding during the period	$	1,487,281			$	1,406,683			$	2,135,734					$	1,450,883
Allowance for credit losses at period end as a percentage of total period end loans ⁽¹⁾			1.04	%			0.91	%
Allowance for credit losses at period end as a percentage of average loans ⁽²⁾			1.04	%			0.90	%
Allowance for credit losses at period end as a percentage of period end nonaccrual loans			449.09	%			183.42	%


Allowance for credit losses at period end as a percentage of total period end loans ⁽¹⁾	0.67	%	0.98	%
Allowance for credit losses at period end as a percentage of total period end loans ⁽²⁾	0.92	%	1.07	%
Allowance for credit losses at period end as a percentage of average loans ⁽³⁾	0.69	%	0.99	%
Allowance for credit losses at period end as a percentage of period end nonaccrual loans	516.50	%	293.30	%

(1)

At ~~September 30,~~March 31, 2022 and March 31, 2021, ~~the loan balances used to calculate the ratio include~~these ratios included all loans held for investment, including PPP loans of $41.5 million. Excluding PPP loans, the ratio is 1.07%. At September 30, 2020, the loan balances used to calculate the ratio included PPP loans of $126.7 million. Excluding PPP loans, the ratio is 0.98%.$14.9 million and $129.1 million, respectively.

(2)

At ~~September 30,~~March 31, 2022 and March 31, 2021, ~~the quarter-to-date average loan balances used to calculate the ratio include~~these ratios exclude PPP loans, ~~of $63.9 million. Excluding PPP~~acquired loans and the ~~ratio is 1.09%. At September 30, 2020,~~associated purchase discount mark on the ~~quarter-to-date average loan balances used to calculate the ratio included PPP~~acquired loans ~~of $125.7 million. Excluding PPP loans, the ratio is 1.00%.~~

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For the Nine Months Ended September 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

$
171

(0.19)
%

$
13

(0.02)
%
Residential real estate

72

(0.02)

5

-

Commercial real estate

64

(0.01)

(601)

0.13

Commercial

(40)

0.03

(3)

-

Consumer

5

(0.01)

6

(0.02)

Total

$
272

(0.02)
%

$
(580)

0.05
%

Average loans outstanding during the period

$
1,461,083

$
1,348,362

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

1.04
%

0.90
%
Allowance for credit losses at period end as a percentage of average loans ⁽²⁾

1.06
%

0.95
%
Allowance for credit losses at period end as a percentage of period end nonaccrual loans

449.09
%

183.42
%

~~(1)~~

At September 30, 2021, the loan balances used to calculate the ratio include PPP loans of $41.5 million. Excluding PPP loans, the ratio is 1.07%. At September 30, 2020, the loan balances used to calculate the ratio included PPP loans of $126.7 million. Excluding PPP loans, the ratio is 0.98%.from both Severn and Northwest.

~~(2)~~(3)

At ~~September 30,~~March 31, 2022 and March 31, 2021, ~~the year-to-date average loan balances used to calculate the ratio include~~these ratios included all loans held for investment, including PPP loans of $103.9 million. Excluding PPP loans, the ratio is 1.14%. At September 30, 2020, the year-to-date average loan balances used to calculate the ratio included PPP loans of $72.2 million. Excluding PPP loans, the ratio is 1.00%.$18.9 million and $131.9 million, respectively.

Nonperforming Assets and Accruing TDRs

As shown in the following table, nonperforming assets were ~~$4.4~~$3.9 million and ~~$6.3~~$3.0 million at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively. The balance of nonperforming assets ~~decreased~~increased primarily due to ~~a decline~~an increase in nonaccrual loans of ~~$2.0 million,~~$844 thousand, or ~~36.6%~~42.1%. Accruing troubled debt restructurings (“TDRs”) decreased ~~$1.2 million,~~$663 thousand, or ~~17.8%~~11.7%, over the same time period. Other real estate owned properties increased to ~~$203~~$561 thousand from $0$532 thousand at December 31, ~~2020.~~2021. The ratio of nonaccrual loans and accruing TDRs to total loans ~~decreased to 0.62%~~stayed the same at ~~September 30, 2021 from 0.86%~~0.36% at March 31, 2022 and December 31, ~~2020.~~2021.

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

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The following table summarizes our nonperforming assets and accruing TDRs at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021.


(Dollars in thousands)	September 30, 2021			December 31, 2020			March 31, 2022			December 31, 2021
Nonperforming assets
Nonaccrual loans	$	3,457		$	5,455		$	2,848		$	2,004
Total loans 90 days or more past due and still accruing		748			804			459			508
Other real estate owned		203			—			561			532
Total nonperforming assets	$	4,408		$	6,259		$	3,868		$	3,044

Total accruing TDRs	$	5,750		$	6,997		$	5,004		$	5,667

As a percent of total loans:
Nonaccrual loans		0.23	%		0.38	%		0.13	%		0.09	%
Accruing TDRs		0.38	%		0.48	%		0.23	%		0.27	%
Nonaccrual loans and accruing TDRs		0.62	%		0.86	%		0.36	%		0.36	%

As a percent of total loans and other real estate owned:
Nonperforming assets		0.29	%		0.43	%		0.18	%		0.14	%
Nonperforming assets and accruing TDRs		0.68	%		0.91	%		0.41	%		0.41	%

As a percent of total assets:
Nonaccrual loans		0.15	%		0.28	%		0.08	%		0.06	%
Nonperforming assets		0.19	%		0.32	%		0.11	%		0.09	%
Accruing TDRs		0.25	%		0.36	%		0.14	%		0.16	%
Nonperforming assets and accruing TDRs		0.45	%		0.69	%		0.25	%		0.25	%

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.

Investment securities in the held to maturity category are stated at cost adjusted for amortization of premiums and accretion of discounts. We have the intent and ~~current~~ ability to hold such securities until maturity. At ~~September 30, 2021, 29.8%~~March 31, 2022, 21.5% of the portfolio of debt securities ~~was~~were classified as available for sale and ~~70.2%~~78.5% was classified as held to maturity, compared to ~~68.0%~~22.6% and ~~32.0%~~77.4% respectively, at December 31, ~~2020.~~2021. See Note 34 – “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 ~~$360.2~~$525.0 million at ~~September 30, 2021,~~March 31, 2022, a ~~$149.9~~$2.1 million, or ~~71.3%~~less than 1%, ~~increase~~decrease since December 31, ~~2020.~~2021. The ~~increase~~decrease was primarily due to ~~the~~proceeds from maturities and principal repayments of available for sale securities of $7.0 million and held to maturity securities of $11.3 million, partially offset by purchases of held to maturity securities of ~~$214.2~~$14.1 million, ~~partially offset by proceeds from maturities and sales~~purchases of ~~available for sale securities and held to maturity~~restricted securities of ~~$32.0~~$5.7 million and ~~$29.0 million, respectively, during 2021. Due to the excess liquidity experienced in 2020 and 2021, the Company strategically purchased short duration held to maturity~~purchases of equity securities ~~and subordinated debt~~ of 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 from maturities and paydowns, as well as excess liquidity to fund loan growth.$3 thousand. At ~~September 30, 2021, 82.9%~~March 31, 2022, 78.2% of the securities available for sale were mortgage-backed, ~~and 17.1%~~19.9% were U.S. Government agencies and 1.9% were corporate bonds, compared to ~~83.1%~~79.2%, 19.1% and ~~16.9%~~1.7%, respectively, at year-end ~~2020.~~2021. At ~~September 30, 2021, 67.6%~~March 31, 2022, 74.9% of the securities held to maturity were mortgage-backed, ~~27.1%~~21.3% were U.S. Government agencies, 3.7% were subordinated debt instruments and ~~5.3%~~less than 1% were ~~other debt securities,~~community reinvestment bonds, compared to ~~41.5%~~74.8%, ~~28.7%~~21.4%, 3.6% and ~~29.2%~~less than 1%, respectively, at year-end ~~2020.~~2021. Our investments in mortgage-backed securities are issued or guaranteed by U.S. Government agencies or government-sponsored agencies. The decline in fair values on available for sale securities in the first quarter of 2022 was the result of the recent volatility in interest rates and are not indicative of any credit concerns due to the Company holding high quality securities.

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Deposits

Total deposits at ~~September 30, 2021~~March 31, 2022 amounted to ~~$2.02~~$3.07 billion, an increase of ~~$317.4~~$42.3 million, or ~~18.7%~~1.4%, when compared to the level at December 31, ~~2020.~~2021. The increase in total deposits consisted of ~~increases~~an increase in ~~the following categories: Savings~~checking accounts of $171.3 million, partially offset by a decrease in savings and money market accounts of ~~$193.1~~$77.9 million ~~checking accounts of $69.6 million,~~and noninterest-bearing deposits of ~~$45.8 million and other time deposits of $8.9~~$51.1 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 consisted of securities sold under agreements to repurchase, which ~~increased~~decreased by ~~$2.5~~$4.1 million, or ~~233.4%~~100%, ~~to $3.5 million~~ at ~~September 30, 2021~~March 31, 2022 when compared to December 31, ~~2020.~~2021. Securities sold under agreements to repurchase are issued in conjunction with cash management services for commercial depositors. Other short-term borrowings may consist of overnight borrowing from correspondent banks or advances from the FHLB. Short-term advances are defined as those with original maturities of one year or less. At ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, the Company had no outstanding short-term ~~or long-term~~ advances with FHLB.

Long-Term Debt

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

The Company uses long-term borrowings to meet longer term liquidity needs, specifically to fund loan growth when liquidity from deposit growth is not sufficient. On August 25, 2020, the Company entered into Subordinated Note Purchase Agreements with certain purchasers pursuant to which the Company issued and sold $25.0 million in aggregate principal amount with an initial interest rate of 5.375% Fixed-to-Floating Rate Subordinated Notes due September 1, 2030.

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

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~~decrease in cash and cash equivalents was ~~$123.9~~$12.6 million for the first ~~nine~~three months of ~~2021~~2022 compared to an increase of ~~$61.5~~$40.2 million for the first ~~nine~~three months of ~~2020.~~2021. The ~~increase~~decrease in cash and cash equivalents in ~~2021~~2022 was mainly due to ~~the significant increase in deposits, the direct result~~funding net loan growth of ~~new account openings, government stimulus~~$61.2 million and ~~significant increases in municipal accounts. The Company expects these funds to be utilized over the coming months, which may result in deposit balance fluctuations.~~a purchase of bank owned life insurance of $10 million.

To the extent that deposits are not adequate to fund customer loan demand, liquidity needs can be met in the short-term fund markets. The Bank has arrangements with other correspondent banks whereby it has $15 million available in federal funds lines of credit and a reverse repurchase agreement available to meet any short-term needs which may not otherwise be funded by the Bank’s portfolio of readily marketable investments that can be converted to cash. The Bank is also a member of the FHLB, which provides another source of liquidity. Through the FHLB, the Bank had collateral pledged of approximately ~~$299.2~~$283.1 million and ~~$316.7~~$363.9 million at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively. The Bank has pledged, under a blanket lien, all qualifying residential and commercial real estate loans under borrowing agreements with the FHLB.

Total stockholders’ equity increased ~~$6.6~~$1.2 million to ~~$201.6~~$351.9 million, or ~~3.4%~~less than 1%, at ~~September 30, 2021~~March 31, 2022 when compared to December 31, ~~2020~~2021 primarily due to the current year’s retained earnings, partially offset by dividends paid during the first ~~nine~~three months of ~~2021~~2022 and the change in fair value of available-for-sale securities recorded in accumulated other comprehensive ~~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 designedincome (loss).

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

In July 2013, federal bank regulatory agencies issued a final rule that revised their risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with certain standards that were developed by Basel III and ~~reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework.~~

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 implementcertain provisions of the ~~CARES~~Dodd-Frank Act. ~~Under the interim~~The final ~~rules, the community bank leverage ratio was reduced~~rule currently applies to ~~8% beginning in the second quarter~~all depository institutions 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 Company has not opted-in to the CBLR 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~~savings and loan holding companies with total consolidated assets of more than $3 billion. The Company had total consolidated assets of more than $3 billion as of December 31, 2021, due to the ~~definitions~~acquisition of Severn in the fourth quarter of 2021. As such, the Company was required to comply with the consolidated capital requirements for the first quarterly report date following the effective date of the business combination as its total assets exceeded $3 billion.

Quantitative measures established by regulation to ensure capital adequacy require the Bank and ~~the components~~Company to maintain minimum ratios of common equity Tier 1, Tier 1, and total capital as a percentage of assets and ~~Total Capital,~~off-balance sheet exposures, adjusted for risk weights ranging from 0% to 1,250%. The Bank and Company are also required to maintain capital at a minimum level based on quarterly average assets, which is known as the 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 September 30, 2021, the Bank’s capital levels remained characterized as “well-capitalized” under the rules.leverage ratio.

The following tables present the applicable capital ratios as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021.


	Tier 1			Common Equity			Tier 1			Total		Tier 1			Common Equity			Tier 1			Total
	leverage			Tier 1			risk-based			risk-based		leverage			Tier 1			risk-based			risk-based
September 30, 2021	ratio			ratio			capital ratio			capital ratio
March 31, 2022												ratio			ratio			capital ratio			capital ratio
Shore Bancshares, Inc.													8.33	%		12.35	%		12.35	%	14.86	%
Shore United Bank		9.04	%		12.90	%		12.90	%	13.94	%		9.14	%		13.56	%		13.56	%	14.21	%

	Tier 1			Common Equity			Tier 1			Total		Tier 1			Common Equity			Tier 1			Total
	leverage			Tier 1			risk-based			risk-based		leverage			Tier 1			risk-based			risk-based
December 31, 2020	ratio			ratio			capital ratio			capital ratio
December 31, 2021												ratio			ratio			capital ratio			capital ratio
Shore Bancshares, Inc.													9.43	%		12.76	%		12.76	%	15.36	%
Shore United Bank		9.73	%		13.21	%		13.21	%	14.25	%		9.48	%		13.90	%		13.90	%	14.55	%

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 ~~2020~~2021 Annual Report under the caption “Market Risk Management and Interest Sensitivity”. Management ~~believes~~recognizes that ~~there have been no material changes~~recent increases in ~~our~~interest rates has had an impact on the Company’s market ~~risks, the~~risk. The procedures used to evaluate and mitigate these risks orremain unchanged and we continue to monitor our actual and simulated sensitivity positions since December 31, ~~2020.~~2021.

Item 4. Controls and Procedures.

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

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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 ~~September 30, 2021~~March 31, 2022 was carried out under the supervision and with the participation of management, including the PEO and the PFO. Based on that evaluation, the Company’s management, including the PEO and the PFO, has concluded that our disclosure controls and procedures are, in fact, effective at the reasonable assurance level at ~~September 30, 2021.~~March 31, 2022.

There was no change in our internal control over financial reporting during the ~~third~~first quarter of ~~2021~~2022 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 ~~2020~~2021 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. Management does not believe that any material changes in our risk factors have occurred since they were last disclosed in our ~~2020~~2021 Annual Report.

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

On November 24, 2020, the Company announced a stock repurchase program which was approved by the Board and authorized management to repurchase up to $5.0 million of the Company’s common stock. There were no purchases of the Company’s common stock during the second quarter of 2021.~~The stock repurchase program is currently suspended due to the recent announcement of our merger with Severn.~~None

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 third quarter of 2021.

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

Of Shares

Paid Per

of the Publicly Announced

Purchased Under the
Period

Purchased

Share

Plans or Programs

Plans or Programs
July 1, 2021 to July 31, 2021

—

$
—

—

$
541,973
August 1, 2021 to August 31, 2021

—

—

—

541,973
September 1, 2021 to September 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

5352

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Item 6. Exhibits.

Exhibit Number		Description

~~2.1~~		Agreement and Plan of Merger, dated as of March 3, 2021, between Shore Bancshares, Inc. and Severn Bancorp, Inc. (incorporated by reference to Exhibit 2.1 to SHBI’s Form 8-K filed with the SEC on March 3, 2021)

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

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

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

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

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

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

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

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

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

101		Inline Interactive Data File

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

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

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

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

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

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

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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: ~~November 15, 2021~~May 16, 2022	By:	/s/ Lloyd L. Beatty, Jr.
		Lloyd L. Beatty, Jr.
		President & Chief Executive Officer
		(Principal Executive Officer)

Date: ~~November 15, 2021~~May 16, 2022	By:	/s/ Edward C. Allen
		Edward C. Allen
		Executive Vice President & Chief Financial Officer
		(Principal Accounting Officer)

5554


	September 30,		December 31,
(In thousands, except share and per share data)	2021		2020
ASSETS	(Unaudited)
Cash and due from banks	$	18,440	$	16,666
Interest-bearing deposits with other banks		292,412		170,251
Cash and cash equivalents		310,852		186,917
Investment securities:
Available-for-sale, at fair value		105,125		139,568
Held to maturity, at amortized cost - fair value of $247,835 (2021) and $65,828 (2020)		250,501		65,706
Equity securities, at fair value		1,384		1,395
Restricted securities		3,189		3,626

Loans		1,494,897		1,454,256
Less: allowance for credit losses		(15,525)		(13,888)
Loans, net		1,479,372		1,440,368

Premises and equipment, net		27,011		24,924
Goodwill		17,518		17,518
Other intangible assets, net		1,365		1,719
Other real estate owned, net		203		—
Right-of-use assets		5,512		4,795
Other assets		58,742		46,779
TOTAL ASSETS	$	2,260,774	$	1,933,315

LIABILITIES
Deposits:
Noninterest-bearing	$	554,902	$	509,091
Interest-bearing		1,463,163		1,191,614
Total deposits		2,018,065		1,700,705

Securities sold under retail repurchase agreements		3,501		1,050
Subordinated debt		24,521		24,429
Total borrowings		28,022		25,479

Lease liabilities		5,686		4,874
Other liabilities		7,394		7,238
TOTAL LIABILITIES		2,059,167		1,738,296

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share; shares authorized - 35,000,000; shares issued and outstanding - 11,752,445 (2021) and 11,783,380 (2020)		118		118
Additional paid in capital		51,641		52,167
Retained earnings		149,620		141,205
Accumulated other comprehensive income		228		1,529
TOTAL STOCKHOLDERS' EQUITY		201,607		195,019
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	2,260,774	$	1,933,315


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

For nine months ended
September 30, 2020
Construction	—	$	—	$	—	$	—
Residential real estate	—		—		—		—
Commercial real estate	1		1,535		1,506		—
Commercial	—		—		—		—
Consumer	—		—		—		—
Total	1	$	1,535	$	1,506	$	—


(Dollars in thousands)
Purchase Price:
Shore Bancshares, Inc common stock paid at closing price of $18.48	$	148,827
Cash consideration		20,630
Cash consideration for Severn options		310
Total purchase price	$	169,767