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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________________________
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2023
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number: 0-22345
Shore_Bancshares_Logo.jpg
SHORE BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Maryland52-1974638
(State or Other Jurisdiction of Incorporation or Organization)(I.R.S. Employer 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
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common StockSHBINASDAQ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
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 x No o
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 fileroAccelerated filero
Non-accelerated filerxSmaller reporting company
x
Emerging growth companyo
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
The number of shares outstanding of the registrant’s common stock as of November 13, 2023 was 33,145,695.


INDEX
Table of ContentsPage
Consolidated Balance Sheets at September 30, 2023 (unaudited) and December 31, 2022
2

PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
SHORE BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)September 30, 2023December 31, 2022
ASSETS(Unaudited) 
Cash and due from banks$68,097 $37,661 
Interest-bearing deposits with other banks 40,612 17,838 
Cash and cash equivalents108,709 55,499 
Investment securities:  
Available-for-sale, at fair value (amortized cost of $93,052 (2023) and $95,999 (2022))
79,143 83,587 
Held to maturity, net of allowance for credit losses of $126 (2023) (fair value of $445,652 (2023) and $494,627 (2022))
523,051 559,455 
Equity securities, at fair value5,434 1,233 
Restricted securities, at cost13,361 11,169 
Loans held for sale, at fair value14,725 4,248 
Loans held for investment ($9,302 (2023) and $8,437 (2022), at fair value)
4,617,719 2,556,107 
Less: allowance for credit losses(57,051)(16,643)
Loans, net4,560,668 2,539,464 
Premises and equipment, net81,149 51,488 
Goodwill63,266 63,266 
Core deposit intangible, net50,685 5,547 
Other real estate owned, net179 197 
Mortgage servicing rights, at fair value5,890 5,275 
Right-of-use assets12,741 9,629 
Cash surrender value on life insurance100,950 59,218 
Accrued interest receivable15,683 9,384 
Deferred income taxes48,699 7,357 
Other assets24,392 11,260 
TOTAL ASSETS$5,708,725 $3,477,276 
LIABILITIES
Deposits:
Noninterest-bearing$1,211,401 $862,015 
Interest-bearing3,897,343 2,147,769 
Total deposits5,108,744 3,009,784 
Advances from FHLB - short-term 40,000 
Guaranteed preferred beneficial interest in junior subordinated debentures ("TRUPS")29,079 18,398 
Subordinated debt42,956 24,674 
Total borrowings72,035 83,072 
Lease liabilities13,082 9,908 
Other liabilities9,933 10,227 
TOTAL LIABILITIES5,203,794 3,112,991 
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share; shares authorized - 35,000,000; shares issued and outstanding - 33,136,182 (2023) and 19,864,956 (2022)
331 199 
Additional paid in capital355,575 201,494 
Retained earnings159,134 171,613 
Accumulated other comprehensive loss(10,109)(9,021)
TOTAL STOCKHOLDERS' EQUITY504,931 364,285 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY$5,708,725 $3,477,276 
See accompanying notes to Consolidated Financial Statements.
3

SHORE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF (LOSS)/INCOME (Unaudited)
For Three Months Ended September 30,For Nine Months Ended September 30,
(In thousands, except per share data)2023202220232022
INTEREST INCOME
Interest and fees on loans$64,869 $25,924 $128,424 $71,458 
Interest and dividends on taxable investment securities5,047 3,186 12,840 7,562 
Interest and dividends on tax-exempt investment securities27  41  
Interest on federal funds sold92  92  
Interest on deposits with other banks1,213 1,466 1,546 2,546 
Total interest income71,248 30,576 142,943 81,566 
INTEREST EXPENSE
Interest on deposits23,473 2,561 40,668 5,429 
Interest on short-term borrowings692  5,501 2 
Interest on long-term borrowings1,461 700 2,992 1,776 
Total interest expense25,626 3,261 49,161 7,207 
NET INTEREST INCOME45,622 27,315 93,782 74,359 
Provision for credit losses28,176 675 30,056 1,475 
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES17,446 26,640 63,726 72,884 
NONINTEREST INCOME
Service charges on deposit accounts1,505 1,509 3,981 4,306 
Trust and investment fee income1,933 421 2,764 1,383 
Loss on sales and calls of investment securities(2,166) (2,166) 
Interchange credits1,557 1,241 4,081 3,532 
Mortgage-banking revenue1,377 680 3,408 3,643 
Title Company revenue89 397 412 1,146 
Bargain purchase gain12,169  12,169  
Other noninterest income1,873 1,096 4,317 3,214 
Total noninterest income18,337 5,344 28,966 17,224 
NONINTEREST EXPENSE
Salaries and wages14,183 8,562 31,822 27,022 
Employee benefits3,607 2,191 8,968 7,122 
Occupancy expense2,245 1,496 5,463 4,548 
Furniture and equipment expense750 533 1,761 1,370 
Data processing2,485 1,759 6,022 5,034 
Directors' fees295 217 730 617 
Amortization of core deposit intangible2,634 499 3,510 1,528 
FDIC insurance premium expense618 339 1,747 1,111 
Other real estate owned expenses, net2 1 2 52 
Legal and professional fees1,217 756 2,926 2,204 
Merger-related expenses14,866 159 16,754 1,130 
Other noninterest expenses4,256 2,387 9,956 7,585 
Total noninterest expense47,158 18,899 89,661 59,323 
(Loss)/income before income taxes(11,375)13,085 3,031 30,785 
Income tax (benefit) expense(4,991)3,427 (1,060)8,016 
NET (LOSS) INCOME$(6,384)$9,658 $4,091 $22,769 
Basic and diluted net (loss) income per common share$(0.19)$0.49 $0.17 $1.15 
Dividends paid per common share$0.12 $0.12 $0.36 $0.36 
See accompanying notes to Consolidated Financial Statements.
4

SHORE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)/INCOME (Unaudited)
For Three Months Ended September 30,For Nine Months Ended September 30,
(In thousands)2023202220232022
Net (loss) income$(6,384)$9,658 $4,091 $22,769 
Other comprehensive loss:
Investment securities:
Unrealized holding losses on available-for-sale-securities(2,132)(4,307)(1,498)(13,533)
Tax effect584 1,177 410 3,696 
Total other comprehensive loss(1,548)(3,130)(1,088)(9,837)
Comprehensive (loss) income$(7,932)$6,528 $3,003 $12,932 
See accompanying notes to Consolidated Financial Statements.
5

SHORE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)
For the Three and Nine Months Ended September 30, 2023 and 2022
(In thousands)Common StockAdditional Paid in CapitalRetained EarningsAccumulated Other Comprehensive (Loss) IncomeTotal Stockholders’ Equity
Balances, January 1, 2023$199 $201,494 $171,613 $(9,021)$364,285 
Cumulative effect adjustment due to the adoption of ASC 326, net of tax— — (7,818)— (7,818)
Net income— — 6,457 — 6,457 
Other comprehensive income— — — 860 860 
Common shares issued for employee stock purchase plan— 87 — — 87 
Stock-based compensation— 155 — — 155 
Cash dividends declared— — (2,388)— (2,388)
Balances, March 31, 2023$199 $201,736 $167,864 $(8,161)$361,638 
Net income$— $— $4,018 $— $4,018 
Other comprehensive loss— — — (400)(400)
Common shares issued for employee stock purchase plan— 102 — — 102 
Stock-based compensation— 170 — — 170 
Cash dividends declared— — (2,388)— (2,388)
Balances, June 30, 2023$199 $202,008 $169,494 $(8,561)$363,140 
Net loss$— $— $(6,384)$— $(6,384)
Other comprehensive loss— — — (1,548)(1,548)
TCFC acquisition132 152,954 — — 153,086 
Common shares issued for employee stock purchase plan— 84 — — 84 
Stock-based compensation— 529 — — 529 
Cash dividends declared— — (3,976)— (3,976)
Balances, September 30, 2023$331 $355,575 $159,134 $(10,109)$504,931 
6

SHORE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited) - Continued
(In thousands)Common StockAdditional Paid in CapitalRetained EarningsAccumulated Other Comprehensive (Loss) IncomeTotal Stockholders’ Equity
Balances, January 1, 2022$198 $200,473 $149,966 $56 $350,693 
Net Income— — 5,613 — 5,613 
Other comprehensive loss— — — (2,228)(2,228)
Common shares issued for employee stock purchase plan— 37 — — 37 
Stock-based compensation— 130 — — 130 
Cash dividends declared— — (2,381)— (2,381)
Balances, March 31, 2022$198 $200,640 $153,198 $(2,172)$351,864 
Net Income$— $— $7,499 $— $7,499 
Other comprehensive loss— — — (4,479)(4,479)
Common shares issued for employee stock purchase plan— 102 — — 102 
Stock-based compensation— 172 — — 172 
Cash dividends declared— — (2,381)— (2,381)
Balances, June 30, 2022$198 $200,914 $158,316 $(6,651)$352,777 
Net Income$— $— $9,658 $— $9,658 
Other comprehensive loss— — — (3,130)(3,130)
Common shares issued for employee stock purchase plan1 124 — — 125 
Stock-based compensation— 175 — — 175 
Cash dividends declared— — (2,384)— (2,384)
Balances, September 30, 2022$199 $201,213 $165,590 $(9,781)$357,221 
See accompanying notes to Consolidated Financial Statements.
7

SHORE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For Nine Months Ended September 30,
(In thousands)20232022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income$4,091 $22,769 
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Net accretion of acquisition accounting estimates(6,672)(1,225)
Provision for credit losses30,056 1,475 
Depreciation and amortization6,847 4,253 
Net amortization of securities724 1,121 
Amortization of debt issuance costs92 92 
Bargain purchase gain(12,169) 
(Gain) on mortgage banking activities(2,602)(2,526)
Proceeds from sale of mortgage loans held for sale80,846 128,595 
Originations of loans held for sale(89,485)(98,020)
Stock-based compensation expense853 477 
Deferred income tax (benefit)(934)(723)
Losses on sales and calls of securities2,166  
Loss (Gain) on valuation adjustments on mortgage servicing rights5 (459)
Valuation adjustments on premises transferred to held for sale271  
(Gain) Loss on sales and valuation adjustments on other real estate owned(3)44 
Fair value adjustments on loans held for investments, at fair value492  
Fair value adjustment on equity securities177 162 
Bank owned life insurance income(1,305)(702)
Net changes in:
Accrued interest receivable2,810 (721)
Other assets(10,145)(304)
Accrued interest payable1,192 (217)
Other liabilities(20,663)(4,030)
Net cash (used in) provided by operating activities(13,356)50,061 
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and principal payments of investment securities available for sale12,304 16,719 
Proceeds from the sale of acquired AFS securities434,215  
Proceeds from maturities and principal payments of investment securities held to maturity35,023 40,603 
Proceeds from sale of loans held for investment8,611  
Purchases of securities held to maturity (207,466)
Purchases of equity securities(41)(12)
Purchase of restricted securities(26,076)(5,735)
Net change in loans(297,999)(280,874)
Purchases of premises and equipment(3,654)(2,274)
Proceeds from sales of other real estate owned21 394 
Improvements to other real estate owned (34)
Redemption of restricted securities28,224  
Purchases of bank owned life insurance(187)(10,131)
Proceeds from disposal of premises held for sale721  
Cash acquired in the acquisition of TCFC, net of cash paid25,372  
Net cash provided by (used in) investing activities216,534 (448,810)
8

SHORE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - Continued
For Nine Months Ended September 30,
(In thousands)20232022
CASH FLOWS FROM FINANCING ACTIVITIES: 
Net changes in: 
Noninterest-bearing deposits(239,293)(33,689)
Interest-bearing deposits206,804 23,156 
Short-term borrowings(109,000)(4,143)
Common stock dividends paid(8,752)(7,146)
Issuance of common stock273 264 
Net cash provided by (used in) financing activities(149,968)(21,558)
Net increase (decrease) in cash and cash equivalents53,210 (420,307)
Cash and cash equivalents at beginning of period55,499 583,613 
Cash and cash equivalents at end of period$108,709 $163,306 
Supplemental cash flows information:
Interest paid$47,243 $7,705 
Income taxes paid$7,894 $7,070 
Recognition (remeasurement of) lease liabilities arising from right-of-use assets$45 $(616)
Transfers from loans to other real estate owned$ $69 
Unrealized losses on securities available for sale$(1,498)$(13,533)
Transfer of premises to held for sale (included in other assets)$750 $ 
See accompanying notes to Consolidated Financial Statements.
9

Shore Bancshares, Inc.
Notes to Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2023 and 2022
(Unaudited)
Note 1 – Basis of Presentation
The consolidated financial statements include the accounts of Shore Bancshares, Inc. and its subsidiaries with all significant intercompany transactions eliminated. The consolidated financial statements conform to accounting principles generally accepted in the United States of America (“GAAP”) and to prevailing practices within the banking industry. The accompanying interim financial statements are unaudited; however, in the opinion of management all adjustments necessary to present fairly the consolidated financial position at September 30, 2023, the consolidated results of income and comprehensive income for the three and nine months ended September 30, 2023 and 2022, changes in stockholders’ equity for the three and nine months ended September 30, 2023 and 2022 and cash flows for the nine months ended September 30, 2023 and 2022, have been included. All such adjustments were of a normal recurring nature. The amounts as of December 31, 2022 were derived from the 2022 audited financial statements. The results of operations for the three and nine months ended September 30, 2023 are not necessarily indicative of the results to be expected for any other interim period or for the full year. This Quarterly Report on Form 10-Q should be read in conjunction with the Annual Report of Shore Bancshares, Inc. on Form 10-K for the year ended December 31, 2022. For purposes of comparability, certain immaterial reclassifications have been made to amounts previously reported to conform with the current period presentation.
When used in these notes, the term “the Company” refers to Shore Bancshares, Inc. and, unless the context requires otherwise, its consolidated subsidiaries, Shore United Bank, N.A. (the “Bank”) and Mid-Maryland Title Company, Inc. (the “Title Company”).
Pending Recent Accounting Standards
ASU No. 2022-03 - In June 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions”. ASU 2022-03 clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The ASU is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2023. Early adoption is permitted. The Company does not expect the adoption of ASU 2022-03 to have a material impact on its consolidated financial statements.
Note 2 – Adoption of Accounting Standards
On January 1, 2023, the Company adopted ASU 2016-13 “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses,” ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,” ASU 2019-05, “Financial Instruments – Credit Losses (Topic 326): Targeted Transition Relief,” ASU 2019-10, “Financial instruments – Credit losses (Topic 326), Derivatives and hedging (Topic 815), and Leases (Topic 842) – Effective dates,” ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses,” ASU 2020-02, “Financial Instruments – Credit Losses (Topic 326) and Leases (Topic 842),” ASU 2020-03, “Codification Improvements to Financial Instruments” and ASU 2022-02, “Financial Instruments – Credit Losses (Topic 326) – Troubled Debt Restructurings and Vintage Disclosures” (collectively, ASC 326). The significant impacts of adopting these standards and related updates to the Company’s accounting policies are discussed below.
ASC 326 requires entities to estimate an allowance for credit losses (“ACL”) on certain types of financial instruments measured at amortized cost using a current expected credit losses (“CECL”) methodology, replacing the incurred loss methodology from prior GAAP. It also applies to unfunded commitments to extend credit, including loan commitments, standby letters of credit, and other similar instruments. The impairment model for available-for-sale (“AFS”) debt securities was modified and ASC 326 also provided for a simplified accounting model for purchased financial assets with credit deterioration since their origination. Additionally, the measurement principles for modifications of loans to borrowers experiencing financial difficulty were modified, including how the ACL is measured for such loans.
The amendments of ASC 326, upon adoption, were applied on a modified retrospective basis, by recording an increase in the reported balance of loans and the allowance for credit losses on loans, an increase in the liability for credit losses on commitments to extend credit and reducing total equity of both the Company and the Bank. As a result of adopting ASC 326, the Company recorded a decrease to opening retained earnings, net of taxes, of approximately $7.8 million.
ASC 326 also replaced the Company’s previous accounting policies for purchased credit-impaired (“PCI”) loans and troubled-debt restructurings (“TDRs”). With the adoption of ASC 326, loans previously designated as PCI loans were designated as purchased loans with credit deterioration (“PCD loans”). The Company adopted ASC 326 using the prospective transition approach for PCD loans that were previously identified as PCI and accounted for under ASC 310-30. On January 1, 2023, the Company’s PCD loans were adjusted to reflect the addition of expected credit losses to the amortized cost basis of the loans and a corresponding increase to the ACL. The remaining
10

noncredit discount, which represents the difference between the adjusted amortized cost basis and the outstanding principal balance on PCD loans, will be accreted into interest income over the estimated remaining lives of the loans using the effective interest rate method. The evaluation of the ACL will include PCD loans together with other loans that share similar risk characteristics, rather than using the separate pools that were used under PCI accounting, unless the loans are specifically identified for individual evaluation under our CECL methodology. The adoption of ASC 326 also replaced previous TDR accounting guidance, and the evaluation of the ACL will include loans previously designated as TDRs together with other loans that share similar risk characteristics, unless the loans are specifically identified for individual evaluation under our CECL methodology.
The following table shows the impact of the Company's adoption of ASC 326 on loans, the ACL, and the Company’s reserve for unfunded commitments.
January 1, 2023
(Dollars in thousands)As Reported Under ASC 326Pre-ASC 326 AdoptionChange
Total Loans, gross$2,556,267 $2,556,107 $160 
Allowance for credit losses(27,434)(16,643)(10,791)
Total loans, net$2,528,833 $2,539,464 $(10,631)
Liabilities: Reserve for Unfunded Commitments$581 $316 $265 
As discussed in Note 3, the Company completed the merger with The Community Financial Corporation (“TCFC”) on July 1, 2023. Due to inconsistencies with historical loan loss data between the Bank and TCFC, management updated the methodology used to estimate the probability of default and the independent economic variables used to forecast default rates. Due to the lack of uniformity of historical data used for probability default data between the legacy banks, management concluded that the exclusive use of either legacy model was inappropriate in a post-merger environment. As a result, management engaged the model vendor to perform a Loss Driver Analysis ("LDA"), which utilized the legacy Shore United and legacy CBTC’s Call Report data to derive gross loan balances and charge-off data on a quarterly basis dating back to 2004. Using this data, the vendor performed regression analyses of a number of independent economic variables to determine the "best fit" of the economic variable to be used as a predictor of expected losses or the periodic default rate ("PDR"). Loss Given Default (“LGD”) values were calculated utilizing Frye-Jacobs model using the same historical gross-charge-off data derived from the Call Reports. In conjunction with our change in methodology used to derive the PDR/LGD, management also reassessed our qualitative factor overlay design.
The following table shows the impact of change in methodology.
(Dollars in thousands)Balance as of June 30, 2023Impact of methodology changeBalance as of adoption of methodology change
Construction$2,386 $33 $2,419 
Residential real estate9,151 4,016 13,167 
Commercial real estate10,267 1,065 11,332 
Commercial1,956 442 2,398 
Consumer5,254 1,791 7,045 
Total allowance$29,014 $7,347 $36,361 
The following accounting policies have been updated in connection with the adoption of ASC 326 and apply to periods beginning after December 31, 2022. Accounting policies applying to prior periods are described in the 2022 Annual Report, as discussed above.
Investments in Debt Securities
Investments in debt securities are classified as either held to maturity (“HTM”), AFS, or trading, based on management’s intent. Currently, the Company has classified its debt securities within the AFS and HTM classifications. Debt securities purchased with the positive intent and ability to hold to maturity are classified as HTM and are recorded at amortized cost, net of any ACL. Debt securities not classified as HTM are classified as AFS and are carried at estimated fair value with the corresponding unrealized gains and losses recognized in other comprehensive income (loss).
Gains or losses are recognized in net income on the trade date using the amortized cost of the specific security sold. Purchase premiums are recognized in interest income using the effective interest rate method over the period from purchase to maturity or, for callable securities, the earliest call date, and purchase discounts are recognized in the same manner from purchase to maturity.
11

The Company has elected to exclude accrued interest receivable from the amortized cost basis and fair value of its HTM and AFS debt securities and has included such accrued interest of $2.0 million at September 30, 2023 within the accrued interest receivable line item of the Consolidated Balance Sheets.
The Company estimates an ACL for held to maturity debt securities on a collective basis by major security type and standard credit rating. Certain securities in our HTM securities portfolio are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses. With respect to these securities, we consider the risk of credit loss to be zero and, therefore, we do not record an ACL.
The estimate of an ACL on our HTM securities that are not guaranteed by the U.S. government considers historical credit loss information and severity of loss in the event of default and leverages external data. No ACL is recorded on accrued interest receivable and amounts written-off are reversed by an adjustment to interest income.
An ACL on held to maturity debt securities that do not share common risk characteristics with our collective portfolio are individually measured based on net realizable value, or the difference between the discounted value of the expected future cash flows and the recorded amortized cost basis of the security.
For debt securities AFS, impairment is recognized in its entirety in net income if either (i) we intend to sell the security or (ii) it is more-likely-than-not that we will be required to sell the security before recovery of its amortized cost basis. If, however, the Company does not intend to sell the security and it is not more-likely-than-not that the Company will be required to sell the security before recovery, the Company evaluates unrealized losses to determine whether a decline in fair value below amortized cost basis is a result of a credit loss, which occurs when the amortized cost basis of the security exceeds the present value of the cash flows expected to be collected from the security, or other factors such as changes in market interest rates. If a credit loss exists, an ACL is recorded that reflects the amount of the impairment related to credit losses, limited by the amount by which the specific security’s amortized cost basis exceeds its fair value. Changes in the ACL are recorded in net income in the period of change and are included in provision for credit losses. Changes in the fair value of debt securities AFS not resulting from credit losses are recorded in other comprehensive income (loss). The Company regularly reviews unrealized losses in its investments in securities and cash flows expected to be collected from impaired securities based on criteria including the extent to which market value is below amortized cost, the financial health of and specific prospects for the issuer, the Company’s intention with regard to holding the security to maturity and the likelihood that the Company would be required to sell the security before recovery.
Loans Held for Investment
The Company’s recorded investment in loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally is reported at the unpaid principal balances adjusted for charges-offs, unearned discounts, any deferred fees or costs on originated loans, and the ACL. The Company has elected to exclude accrued interest receivable from the amortized cost basis of its loans held for investment and has included such accrued interest of $13.6 million at September 30, 2023 within the accrued interest receivable line item of the Consolidated Balance Sheets. Interest on loans is recorded to interest income based on the contractual rates and the amount of outstanding principal of the loans. Loan fees and origination costs are deferred and the net amount is amortized as an adjustment of the related loan’s yield using the level-yield method.
Loans acquired in a business combination are recorded at estimated fair value on the date of acquisition. In the case of loans that have experienced more than insignificant deterioration in credit quality since origination as of the acquisition date, the loan’s amortized cost basis is increased above estimated fair value by the amount of expected credit losses as of the acquisition date, and a corresponding ACL is also recorded.
A loan’s past due status is based on the contractual due date of the most delinquent payment due. Loans are generally placed on nonaccrual status when the collection of principal or interest is 90 days or more past due, or earlier, if collection is uncertain. Any accrued interest receivable on loans placed on nonaccrual status is reversed by an adjustment to interest income. Loans greater than 90 days past due may remain on accrual status if management determines it has adequate collateral to cover the principal and interest. Interest payments received on nonaccrual loans are applied as a reduction of the loan principal balance unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. A loan may be returned to accrual status if the borrower has demonstrated a sustained period of repayment performance in accordance with the contractual terms of the loan and there is reasonable assurance the borrower will continue to make payments as agreed.
In the ordinary course of business, the Company has entered into commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the Consolidated Balance Sheets when they are funded.
In the normal course of banking business, risks related to specific loan categories are as follows:
Construction loans – Construction loans are offered primarily to builders and individuals to finance the construction of single-family dwellings. In addition, the Bank periodically finances the construction of commercial projects. Credit risk factors include the borrower’s ability to successfully complete the construction on time and within budget, changing market conditions which could affect the value and
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marketability of projects, changes in the borrower’s ability or willingness to repay the loan and potentially rising interest rates which can impact both the borrower’s ability to repay and the collateral value.
Residential real estate – Residential real estate loans are typically made to consumers and are secured by residential real estate. Credit risk arises from the borrower’s continuing financial stability, which can be adversely impacted by job loss, divorce, illness, or personal bankruptcy, among other factors. Also impacting credit risk would be a shortfall in the value of the residential real estate in relation to the outstanding loan balance in the event of a default or subsequent liquidation of the real estate collateral.
Commercial real estate – Commercial real estate loans consist of both loans secured by owner occupied properties and non-owner occupied properties where an established banking relationship exists and involves investment properties for warehouse, retail, and office space with a history of occupancy and cash flow. These loans are subject to adverse changes in the local economy and commercial real estate markets. Credit risk associated with owner occupied properties arises from the borrower’s financial stability and the ability of the borrower and the business to repay the loan. Non-owner occupied properties carry the risk of a tenant’s deteriorating credit strength, lease expirations in soft markets and sustained vacancies which can adversely impact cash flow.
Commercial – Commercial loans are secured or unsecured loans for business purposes. Loans are typically secured by accounts receivable, inventory, equipment and/or other assets of the business. Credit risk arises from the successful operation of the business which may be affected by competition, rising interest rates, regulatory changes and adverse conditions in the local and regional economy.
Consumer – Consumer loans include installment loans and personal lines of credit. Credit risk is similar to residential real estate loans above as it is subject to the borrower’s continuing financial stability and the value of the collateral securing the loan.
ACL on Loans Held for Investment
An ACL is estimated on loans held for investment, excluding loans carried at fair value. The ACL on loans is established through charges to earnings in the form of a provision for credit losses. Loan losses are charged against the ACL for the difference between the carrying value of the loan and the estimated net realizable value or fair value of the collateral, if collateral dependent, when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance.
The allowance represents management’s current estimate of expected credit losses over the contractual term of loans held for investment, and is recorded at an amount that, in management’s judgment, reduces the recorded investment in loans to the net amount expected to be collected. No ACL is recorded on accrued interest receivable and amounts written-off are reversed by an adjustment to interest income. Management’s judgment in determining the level of the allowance is based on evaluations of historical loan losses, current conditions and reasonable and supportable forecasts relevant to the collectability of loans. The methodology for estimating the amount reported in the ACL is the sum of two main components, an allowance assessed on a collective basis for pools of loans that share similar risk characteristics and an allowance assessed on individual loans that do not share similar risk characteristics with other loans. Loans that share common risk characteristics are evaluated collectively using a cash flow approach. The discounted cash flow approach used by the Company utilizes loan-level cash flow projections and pool-level assumptions. For loans that do not share risk characteristics with other loans, the ACL is measured based on the net realizable value, that is, the difference between the discounted value of the expected future cash flows and the amortized cost basis of the loan. When a loan is collateral-dependent and the repayment is expected to be provided substantially through the operation or sale of the collateral, the ACL is measured as the difference between the amortized cost basis of the loan and the fair value of the collateral.
Cash flow projections and estimated expected losses on loans which share common risk characteristics are based in part on forecasts economic independent variables, namely the national unemployment rate, 10 year Treasury rate and changes in GDP that are reasonable and supportable over a twelve month period and incorporated into the estimate of expected credit losses using a statistical regression analysis. For periods beyond those for which reasonable and supportable forecasts are available, projections are based on a reversion of the corresponding economic independent variable from the last forecast to a historical average level over the following twelve months.
Management’s estimate of the ACL on loans that are collectively evaluated also includes a qualitative assessment of available information relevant to assessing collectability that is not captured in the quantitative loss estimation process. Factors considered by management include changes in general market, economic and business conditions; the nature and volume of the loan portfolio; the volume and severity of delinquencies and adversely classified loan balances and the value of underlying collateral; and other factors as deemed necessary and appropriate. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.
Reserve for Unfunded Commitments
The Company records a reserve, reported in other liabilities, for expected credit losses on commitments to extend credit that are not unconditionally cancellable by the Company. The reserve for unfunded commitments is measured based on the principles utilized in estimating the ACL on loans and an estimate of the amount of unfunded commitments expected to be advanced. Changes in the reserve for unfunded commitments are recorded through the provision for credit losses. During the three and nine months ended September 30, 2023, the Company recorded a $241,000 and $308,000, respectively, provision for credit losses associated with its unfunded commitments.
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Note 3 – Business Combinations
On July 1, 2023 (the “Acquisition Date”), the Company completed the acquisition of TCFC, a Maryland charted commercial bank, in accordance with the definitive agreement that was entered into on December 14, 2022, by and among the Company and TCFC. The primary reasons for the merger included: expansion of the branch network and commanding market share positions in attractive Maryland markets and a growing presence in Virginia and Delaware; attractive low-cost funding base; strong cultural alignment and a deep commitment to shareholders, customers, employees, and communities served by Shore and TCFC, meaningful value creation to shareholders; and increased trading liquidity for both companies and increased dividends for TCFC shareholders. In connection with the completion of the merger, former TCFC shareholders received 2.3287 shares of the Company’s common stock. The value of the total transaction consideration was approximately $153.6 million. The consideration included the issuance of 13,201,693 shares of the Company’s common stock, which had a value of $11.56 per share, which was the closing price of the Company’s common stock on June 30, 2023, the last trading day prior to the consummation of the acquisition. Also included in the total consideration were cash in lieu of any fractional shares, converted share-based payment awards, and debt of TCFC that was effectively settled upon closing.
The acquisition of TCFC 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 bargain purchase gain as of the Acquisition Date was approximately $12.2 million. The exchange ratio was determined at the time of announcement of the merger between the Company and TCFC in December of 2022 when the stock price of the Company was much higher than at the legal merger date. The decline in the Company’s stock price was the primary driver in recording a bargain purchase gain on this transaction. The decline in stock price for the Company was comparable to other financial institutions similar to the Company leading up to the merger due to bank failures in the first quarter of 2023 and increases to overnight borrowing rates by the Fed which resulted in continued pressure on net interest margins. The Company will continue to keep the measurement of bargain purchase gain open for any additional adjustments to the fair value of certain accounts, for example loans, that may arise during the Company’s final review procedures of any updated information. If considered necessary, any subsequent adjustments to the fair value of assets acquired and liabilities assumed, identifiable intangible assets, or other purchase accounting adjustments will result in adjustments to bargain purchase gain within the first 12 months following the Acquisition Date. The bargain purchase gain is not expected to be included as taxable income for tax purposes.
As a a result of the integration of operations of TCFC, it is not practicable to determine revenue or net income included in the Company’s consolidated operating results relating to TCFC since the Acquisition Date, as TCFC’s results cannot be separately identified. Comparative pro-forma financial statements for the prior year period were not presented, as adjustments to those statements would not be indicative of what would have occurred had the acquisition taken place on January 1, 2022. In particular, adjustments that would have been necessary to be made to record the loans at fair value, the provision of credit losses or the core deposit intangible would not be practical to estimate.
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(Dollars in thousands)
Purchase Price Consideration:
Shore Bancshares, Inc. common stock paid at closing price of $11.56 as of June 30, 2023
$152,612 
Effective settlement of pre-existing debt (1)
500 
Cash consideration (cash in lieu for fractional shares)
5 
Fair value of converted restricted stock units (2)
475 
Total purchase price$153,592 
Identifiable assets:
Cash and cash equivalents$25,377 
Total securities454,468 
Loans, net 1,765,255 
Premises and equipment, net29,277 
Core deposit intangible, net
48,648 
Other assets93,161 
Total identifiable assets$2,416,186 
Identifiable Liabilities
Deposits$2,131,141 
Total debt97,545 
Other liabilities21,739 
Total identifiable liabilities$2,250,425 
Provisional fair value of net assets acquired$165,761 
Provisional bargain purchase gain$(12,169)
____________________________________
(1)SHBI held $500,000 in subordinated debt of TCFC. The debt was effectively settled.
(2)Represents the number of TCFC restricted stock units outstanding and the equity exchange ratio, further multiplied by the price per share of SHBI common stock of $11.56 and the estimated ratio of the completed service period relative to the total service period of the underlying awards.
The 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 $1.9 billion, including 3,858 of Non-PCD loans and 323 PCD loans. The valuation took into consideration the loans’ underlying characteristics, including account types, remaining terms, annual interest rates, interest types, past delinquencies, timing of principal and interest payments, current market rates, loan-to-loan value ratios, loss exposures, and remaining balances. These Non-PCD loans were segregated into pools based on loan and payment type. The effect of the valuation process was a total net discount $120.9 million at the Acquisition Date.
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Note 4 – Investment Securities
On January 1, 2023, the Company adopted ASC 326, which made changes to accounting for AFS debt securities whereby credit losses should be presented as an allowance, rather than as a write-down when management does not intend to sell and does not believe that it is more likely than not they will be required to sell prior to maturity. In addition, ASC 326 requires an ACL to be recorded on HTM debt securities measured at amortized cost. All securities information presented as of September 30, 2023 is in accordance with ASC 326. All securities information presented as of December 31, 2022 or a prior date is presented in accordance with previously applicable GAAP. For further discussion on the Corporation’s accounting policies and policy elections related to the accounting standard update refer to Note 2.
The following table summarizes the activity in the ACL on HTM securities.
(Dollars in thousands)Three Months Ended September 30, 2023Nine Months Ended September 30, 2023
Balance, beginning of period$163 $ 
Other debt securities, provision for credit losses(37)126 
Balance, end of period$126 $126 
The ACL for HTM securities was initially determined to be immaterial as of the date of adoption of ASC 326. Upon re-estimation in the third quarter of 2023, an ACL recovery of $37,000 was recorded based on the results of our evaluation at September 30, 2023. The provision for credit losses of $126,000 was recorded for the nine months ended September 30, 2023.
The following tables provide information on the amortized cost and estimated fair values of debt securities.
(Dollars in thousands)Amortized CostGross Unrealized GainsGross Unrealized LossesEstimated Fair Value
Available-for-sale securities:
September 30, 2023
U.S. Government agencies$23,622 $4 $3,995 $19,631 
Mortgage-backed-residential63,371  9,798 53,573 
Other debt securities6,059 26 146 5,939 
Total$93,052 $30 $13,939 $79,143 
December 31, 2022
U.S. Government agencies$21,798 $5 $3,625 $18,178 
Mortgage-backed-residential72,183 2 8,666 63,519 
Other debt securities2,018  128 1,890 
Total$95,999 $7 $12,419 $83,587 
No AFS securities were sold from the Company’s legacy securities’ portfolios during the three and nine months ended September 30, 2023 and 2022. The Company sold virtually all of the AFS securities portfolio acquired from TCFC immediately after the legal merger with the proceeds of $430.0 million, and recognized gross losses of $2.2 million from the sale of securities.
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(Dollars in thousands)Amortized CostGross Unrealized GainsGross Unrealized LossesEstimated Fair ValueAllowance for Credit Losses
Held-to-maturity securities:
September 30, 2023
U.S. Government agencies$143,494 $ $14,873 $128,621 $ 
Mortgage-backed-residential367,712  61,177 306,535  
States and political subdivisions1,471 2 68 1,405  
Other debt securities10,500  1,409 9,091 126 
Total$523,177 $2 $77,527 $445,652 $126 
December 31, 2022
U.S. Government agencies$148,097 $ $13,601 $134,496 $ 
Mortgage-backed-residential398,884  50,464 348,420  
States and political subdivisions1,474 35 28 1,481