SHORE BANCSHARES INC (SHBI)

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 Quarterly Report on Form 10-Q are to Shore Bancshares, Inc. and its consolidated subsidiaries.

FORWARD-LOOKING INFORMATION

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

•the strength of the United States (“U.S.”) economy and general economic conditions, (including the interest rate environment, government economic and monetary policies, the strength of global financial markets and inflation/deflation and supply chain issues), whether national or regional, and conditions in the lending markets in which we participate that may have an adverse effect on the demand for our loans and other products, our credit quality and related levels of nonperforming assets and loan losses, and the value and salability of the real estate that we own or that is the collateral for our loans;

•the ability to effectively manage the information technology systems, including third-party vendors, cyber or data privacy incidents or other failures, disruptions or security breaches, and risk related to the development and use of artificial intelligence;

•the ability to develop and use technologies to provide products and services that will satisfy customer demands;

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

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

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

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

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

•impairment of our goodwill and intangible assets;

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

•the effect of acquisitions we have made or may make, including, without limitation, the failure to achieve the expected revenue growth and/or expense savings from such acquisitions, and/or the failure to effectively integrate an acquisition target into our operations;

•the growth and profitability of noninterest or fee income being less than expected;

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

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

•the effect of changes in accounting policies and practices, as may be adopted by the Financial Accounting Standards Board, the U.S. Securities and Exchange Commission (the “SEC”), the Public Company Accounting Oversight Board and other regulatory agencies;

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•changes in U.S. trade policies, including the implementation of tariffs and other protectionist trade policies;

•the impact of governmental efforts to restructure or adjust the U.S. financial regulatory system;

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

•the effects of federal government shutdowns, debt ceiling standoff, or other uncertainty regarding fiscal and governmental policies of the U.S. federal government;

•climate change and other catastrophic events or disasters;

•geopolitical conditions, including acts or threats of terrorism, actions taken by the United States or other governments in response to acts of terrorism, and/or military conflicts, which could impact business and economic conditions in the United States and abroad;

•and other factors that may affect our future results.

Additional factors that could cause actual results to differ materially from those expressed in the forward-looking statements are discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2025 (the “2025 Annual Report”) filed with SEC and available at the SEC’s website (www.sec.gov). The information on, or accessible through, our website or any other website cited in this Quarterly Report on Form 10-Q is not part of, or incorporated by reference into, this Quarterly Report on Form 10-Q and should not be relied upon in determining whether to make an investment decision.

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

INTRODUCTION

The following management’s discussion and analysis of financial condition and results of operations 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 2025 Annual Report.

Shore Bancshares, Inc. is headquartered on the Eastern Shore of Maryland. It is the parent company of Shore United Bank, N.A. (the “Bank”). The Bank currently operates 40 full-service branches in Maryland, Delaware and Virginia. The Company, through Wye Financial Partners, a division of the Bank, offers full-service investment, insurance and financial planning services through our broker/dealer, LPL Financial. The Company, through Wye Trust, a division of the Bank, offers wealth management, corporate trustee services and trust administration to customers within our market areas and nationwide.

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

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

CRITICAL ACCOUNTING POLICIES

The Company’s consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and follow general practices within the industries in which it operates. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the consolidated 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 Company’s most significant accounting policies are presented in Note 1 – “Summary of Significant Accounting Policies” in the “Notes to Consolidated Financial Statements” included in Part II, Item 8 of the 2025 Annual Report. These policies, along with the disclosures presented in the notes to consolidated financial statements and in this management’s discussion and analysis of financial condition and results of operations, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has determined that the accounting policy for the allowance for credit losses (“ACL”) on loans is a critical accounting policy. This policy is considered critical because it relates to an accounting area that requires the most subjective or complex judgments, and, as such, could be most subject to revision as new information becomes available.

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Allowance for Credit Losses on Loans

The ACL represents management’s best estimate of expected lifetime credit losses within the Company’s loan portfolio as of the balance sheet date. The ACL is established through a provision for credit losses and is increased by recoveries of loans previously charged off. Loan losses are charged against the allowance when management’s assessments confirm that the Company will not collect the full amortized cost basis of a loan. The calculation of expected credit losses is determined using a cash flow methodology, and includes considerations of historical experience, current conditions, and reasonable and supportable economic forecasts that may affect collection of the recorded balances. The Company assesses an ACL to groups of loans which share similar risk characteristics or on an individual basis, as deemed appropriate. Changes in the ACL on loans and the related provision for credit losses can materially affect financial results. Although the overall balance is determined based on specific portfolio segments and individually assessed assets, the entire balance is available to absorb credit losses for loans in the portfolio.

The determination of the appropriate level of the ACL on loans inherently involves a high degree of subjectivity and requires the Company to make significant judgments concerning credit risks and trends using quantitative and qualitative information, as well as reasonable and supportable forecasts of future economic conditions, all of which may

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Item 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion compares the Company’s financial condition at December 31, 2025 to its financial condition at December 31, 2024 and the results of operations for the years ended December 31, 2025 and 2024. This discussion should be read in conjunction with the consolidated financial statements and the notes thereto included in Part II, Item 8 of this Annual Report on Form 10-K.

The discussion comparing the Company’s financial condition at December 31, 2024 to its financial condition at December 31, 2023 and the results of operations for the years ended December 31, 2024 and 2023 that are not included in this Annual Report on Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2024.

CRITICAL ACCOUNTING POLICIES

The Company’s consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and follow general practices within the industries in which it operates. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the consolidated 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 Company’s most significant accounting policies are presented in Note 1 – “Summary of Significant Accounting Policies” in the “Notes to Consolidated Financial Statements” included in Part II, Item 8 of this Annual Report on Form 10-K. These policies, along with the disclosures presented in the notes to consolidated financial statements and in this management’s discussion and analysis of financial condition and results of operations, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has determined that the accounting policy for the allowance for credit losses (“ACL”) on loans is a critical accounting policy. This policy is considered critical because it relates to an accounting area that requires the most subjective or complex judgments, and, as such, could be most subject to revision as new information becomes available.

Allowance for Credit Losses on Loans

The ACL represents management’s best estimate of expected lifetime credit losses within the Company’s loan portfolio as of the balance sheet date. The ACL is established through a provision for credit losses and is increased by recoveries of loans previously charged off. Loan losses are charged against the allowance when management’s assessments confirm that the Company will not collect the full amortized cost basis of a loan. The calculation of expected credit losses is determined using a cash flow methodology, and includes considerations of historical experience, current conditions, and reasonable and supportable economic forecasts that may affect collection of the recorded balances. The Company assesses an ACL to groups of loans which share similar risk characteristics or on an individual basis, as deemed appropriate. Changes in the ACL on loans and the related provision for credit losses can materially affect financial results. Although the overall balance is determined based on specific portfolio segments and individually assessed assets, the entire balance is available to absorb credit losses for loans in the portfolio.

The determination of the appropriate level of the ACL on loans inherently involves a high degree of subjectivity and requires the Company to make significant judgments concerning credit risks and trends using quantitative and qualitative information, as well as reasonable and supportable forecasts of future economic conditions, all of which may undergo frequent and significant changes. Changes in conditions, including unforeseen events, changes in asset-specific risk characteristics, and other economic factors, both within and outside the Company’s control, may indicate the need for an increase or decrease in the ACL on loans. While management seeks to utilize the best information available in making its assessment of the ACL estimate, the estimation process is inherently challenging as potential changes in any one factor or input may occur at different rates and/or impact pools of loans in different ways. Further, changes in factors and inputs may also be directionally inconsistent, such that improvement in one factor may offset deterioration in others.

The Company’s management reviews the adequacy of the ACL on loans on at least a quarterly basis. Refer to Note 1 – “Summary of Significant Accounting Policies” in the “Notes to Consolidated Financial Statements” included in Part II, Item 8 of this Annual Report on Form 10-K for additional details concerning the determination of the ACL on loans.

RECENT ACCOUNTING PRONOUNCEMENTS AND DEVELOPMENTS

The notes to consolidated financial statements discuss the expected impact of accounting policies recently issued or proposed but not yet required to be adopted. To the extent the adoption of new accounting standards materially affects our financial condition, results of operations or liquidity, the impacts are discussed in the applicable section(s) of this discussion and notes to consolidated financial statements.

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RESULTS OF OPERATIONS

Summary of Financial Results

The Company reported net income for the year ended December 31, 2025 of $59.5 million, or $1.78 diluted earnings per common share, compared to $43.9 million, or $1.32 diluted earnings per common share, for the year ended December 31, 2024. The Company’s return on average assets, return on average common equity and return on average tangible common equity were 0.98%, 10.52% and 14.09%, respectively, for the year ended December 31, 2025, compared to 0.74%, 8.35% and 12.21%, respectively, for the year ended December 31, 2024. For additional details, see “Reconciliation of Non-GAAP Measures.” The increase in net income in 2025 compared to 2024 was primarily due to higher net interest income (“NII”) driven by loan growth in 2025 coupled with loans and deposits repricing favorably. These were partially offset by a higher provision for credit losses of $3.6 million.

The following table presents selected consolidated statement of operations data for each of the periods indicated.

A comparison of key operating ratios and common share data for the years ended December 31, 2025, 2024 and 2023 is presented below.

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(1)ROAA – non-GAAP is computed by dividing (i) net income (excluding net of tax adjustments for the amortization of other intangible assets, credit card fraud losses and the sale and fair value of held for sale assets) by (ii) average assets.

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

(3)Efficiency ratio – GAAP is computed by dividing (i) noninterest expense by (ii) the sum of NII and noninterest income.

(4)Efficiency ratio – non-GAAP is computed by dividing (i) noninterest expense less amortization of other intangible assets and credit card fraud losses by (ii) the sum of taxable-equivalent NII and noninterest income less the sale and the fair value of held for sale assets.

Net Interest Income

Tax-equivalent NII is NII adjusted for the tax-favored status of income from certain loans and investments. As shown in the table below, tax-equivalent NII increased $21.8 million to $192.7 million for the year ended December 31, 2025, compared to $170.9 million for the year ended December 31, 2024. The increase in NII was primarily due to an increase in total interest income of $14.7 million, or 5.0%, which included an increase in interest and fees on loans of $11.0 million, or 4.1%, and an increase in interest on deposits with other banks of $2.8 million, or 44.6%. The increase in interest and fees on loans was primarily due to the increase in the average balance of loans of $130.3 million, or 2.8%, coupled with loans repricing favorably during the year. The decrease in total interest expense was primarily due to a decrease in interest on deposits of $6.1 million and a decrease in interest expense on long-term borrowings of $1.0 million. The decrease in expense on borrowings was related to lower FHLB advances in 2025.

The following table presents taxable-equivalent net interest income for each of the periods indicated.

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Average Balances and Yields

The following table presents the distribution of the average consolidated balance sheets, interest income, interest expense and annualized yields earned and rates paid for the years ended December 31, 2025, 2024 and 2023.

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

(2) Average loan balances include nonaccrual loans.

(3) Interest income on loans includes accreted loan fees, net of costs and accretion of discounts on acquired loans, which are included in the yield calculations. There were $15.4 million, $16.9 million and $11.8 million of accretion interest on loans for the years ended December 31, 2025, 2024 and 2023, respectively.

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(4) Interest expense on deposits and borrowings includes amortization of deposit discounts and amortization of borrowing fair value adjustments. There were $2.2 million, $1.5 million and $1.8 million of amortization of deposit discounts and $865 thousand, $926 thousand and $557 thousand of amortization of borrowing fair value adjustments for the years ended December 31, 2025, 2024 and 2023, respectively.

Rate and Volume Analysis

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

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

The Company’s NIM increased from 3.10% for the year ended December 31, 2024 to 3.36% for the year ended December 31, 2025. Margins were higher due to a $211.0 million increase in interest-earning asset balances and a 5 basis point increase in interest-earning asset yields. These positive movements were coupled with lower cost interest-bearing deposits. The increase in the average balances of interest-bearing deposits of $49.9 million was offset by a 20 basis point decrease in the associated rates paid, as well as a $27.2 million decrease in the average balance of FHLB advances and a 44 basis point decrease in the associated rates paid. Net accretion income impacted net interest margin by 21 basis points and 27 basis points for the years ended December 31, 2025 and 2024, respectively, which resulted in NIMs excluding accretion of 3.15% and 2.83% for the same periods.

Provision for Credit Losses (“PCL”) and ACL

Refer to the discussion of the Bank’s PCL and ACL in the asset quality discussion in the analysis of financial condition in this management’s discussion and analysis of financial condition and results of operations.

Noninterest Income

Total noninterest income for the year ended December 31, 2025 was $32.7 million, an increase of $1.5 million, or 4.9%, when compared to the same period in 2024. The increase was primarily due to a $631 thousand decrease in other noninterest income driven by one-time insurance proceeds, a $344 thousand increase in interchange credits and a $338 thousand increase in trust and investment fee income.

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Noninterest Expense

Total noninterest expense was $138.0 million for the year ended December 31, 2025, a decrease of $219 thousand, or 0.2%, when compared to the same period in 2024. Noninterest expense line items decreased primarily due to the absence of the $4.7 million credit card fraud event during the year ended December 31, 2024 and lower amortization of intangible assets of $1.2 million, which was partially offset by higher salaries and employee benefit expenses of $4.8 million and an increase of $2.4 million of software and data processing expense in the year ended December 31, 2025. Noninterest expense as a percentage of average assets decreased to 2.26% for the year ended December 31, 2025 from 2.34% for the year ended December 31, 2024.

Income Taxes

The Company reported income tax expense of $19.1 million and $14.8 million for the years ended December 31, 2025 and 2024, respectively. The effective tax rates were 24.35% and 25.24% for the years ended December 31, 2025 and 2024, respectively. Deferred tax assets were $29.8 million and $31.9 million as of December 31, 2025 and 2024, respectively.

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ANALYSIS OF FINANCIAL CONDITION

Balance Sheet Summary

Total assets were $6.26 billion at December 31, 2025, an increase of $28.1 million, or 0.5%, when compared to $6.23 billion at December 31, 2024. The increase was primarily due to an increase in our loan portfolio of $128.3 million and an increase in our investment securities portfolio of $5.3 million, which were partially offset by a decrease in cash and cash equivalents of $104.3 million. The decrease in cash and cash equivalents was primarily driven by loan growth. The ratio of the ACL as a percentage of loans was 1.20% and 1.21% at December 31, 2025 and 2024, respectively.

Cash and Cash Equivalents

Cash and cash equivalents totaled $355.6 million at December 31, 2025, compared to $459.9 million at December 31, 2024. Total cash and cash equivalents fluctuate due to transactions in process and other liquidity demands. Management believes liquidity needs are satisfied by the current balance of cash and cash equivalents, readily available access to traditional and wholesale funding sources, and the portions of the investment and loan portfolios that mature within one year.

Investment Securities

The investment portfolio includes debt and equity securities. Debt securities are classified as either AFS or HTM. AFS investment securities are stated at estimated fair value based on market prices. They represent securities which may be sold as part of the asset/liability management strategy or in response to changing interest rates. Net unrealized holding gains and losses on these securities are reported net of related income taxes as accumulated other comprehensive income (“AOCI”) (loss), a separate component of stockholders’ equity. Investment securities in the HTM category are stated at cost adjusted for amortization of premiums and accretion of discounts and the ACL. We have the intent and ability to hold such securities until maturity. At December 31, 2025, 34.7% of the portfolio of debt securities was classified as AFS and 65.3% was classified as HTM, compared to 23.7% and 76.3%, respectively, at December 31, 2024. See Note 2 – “Investment Securities” in the “Notes to Consolidated Financial Statements” included in Part II, Item 8 of this Annual Report on Form 10-K for additional details on the composition of the investment portfolio.

Investment securities, including restricted stock and equity securities, totaled $659.4 million at December 31, 2025, an increase of $3.0 million, or 0.5%, compared to $656.4 million at December 31, 2024. At December 31, 2025, AFS securities, carried at fair value, totaled $220.4 million, compared to $149.2 million at December 31, 2024. At December 31, 2025, AFS securities consisted of 88.5% mortgage-backed, 9.4% U.S. government agencies and 2.1% corporate bonds, compared to 82.0%, 13.5% and 4.4%, respectively, at December 31, 2024. At December 31, 2025, the gross unrealized losses on AFS securities were all related to changes in interest rates and were $7.1 million, or less than 1% of total assets and 2% of total stockholders’ equity. At December 31, 2025, the AOCI (loss) was $4.6 million, compared to $7.5 million at December 31, 2024.

At December 31, 2025, HTM securities, carried at amortized cost, totaled $414.8 million, compared to $481.1 million at December 31, 2024. At December 31, 2025, HTM securities consisted of 73.1% mortgage-backed, 25.3% U.S. government agency securities and 1.7% other debt securities, compared to 70.0%, 27.6% and 2.5%, respectively, at December 31, 2024.

At December 31, 2025 and 2024, 98.2% and 97.1%, respectively, of the Bank’s carrying value of its investment portfolio consisted of securities issued or guaranteed by U.S. government agencies or government-sponsored agencies.

The following tables set forth the weighted-average yields by maturity category of the bond investment portfolio as of December 31, 2025.

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Credit Quality Information

The Company monitors the credit quality of HTM securities through credit ratings provided by Standard & Poor’s Rating Services and Moody’s Investor Services. Credit ratings express opinions about the credit quality of a security and are updated at each quarter end. Investment grade securities are rated BBB- or higher by S&P and Baa3 or higher by Moody’s and are generally considered by the rating agencies and market participants to be of low credit risk. Conversely, securities rated below investment grade, which are labeled as speculative grade by the rating agencies, are considered to have distinctively higher credit risk than investment grade securities. There were no speculative grade HTM securities at December 31, 2025 or 2024. HTM securities that are not rated are agency mortgage-backed securities sponsored by U.S. government agencies, as well as direct obligations of the agencies, with the remainder being sub-debt of other banks.

The following tables present the amortized cost of HTM securities based on their lowest publicly available credit rating as of December 31, 2025 and 2024.

Loans Held for Sale

The Company originates residential mortgage loans for sale on the secondary market, which are recorded at fair value. At December 31, 2025 and 2024, the fair value of loans held for sale amounted to $32.5 million and $19.6 million, respectively. The Bank makes certain representations to purchasers in the sale of mortgage loans related to loan ownership, loan compliance and legality, and accurate documentation. If a loan is found to be out of compliance with any of the representations subsequent to the date of purchase, the Bank may be required to repurchase the loan or indemnify the purchaser. During the year ended December 31, 2025, the Bank repurchased two loans with an aggregate value of $938 thousand. No loans were repurchased during the year ended December 31, 2024.

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Loans Held for Investment

The following table summarizes the Company’s loan portfolio at December 31, 2025 and 2024.

CRE Loan Portfolio

Our loan portfolio has a CRE loan concentration, which is generally defined as a combination of certain construction and CRE loans. The federal banking regulators have issued guidance for those institutions which are deemed to have concentrations in CRE lending. Pursuant to the supervisory criteria contained in the guidance for identifying institutions with a potential CRE concentration risk, institutions which have (1) total reported loans for construction, land development, and other land acquisitions which represent 100% or more of an institution’s total risk-based capital; or (2) total non-owner occupied CRE loans representing 300% or more of the institution’s total risk-based capital and the institution’s non-owner occupied CRE loan portfolio (including construction) has increased 50% or more during the prior 36 months are identified as having potential CRE concentration risk. Institutions which are deemed to have concentrations in CRE lending are expected to employ heightened levels of risk management with respect to their CRE portfolios and may be required to hold higher levels of capital. The Bank has a concentration in CRE loans, and experienced significant growth in its CRE portfolio with its acquisition of TCFC and its wholly-owned subsidiary, CBTC. Non-owner occupied CRE loans including construction totaled $2.15 billion and $2.08 billion at December 31, 2025 and 2024, respectively, and as a percentage of the Bank’s Tier 1 Capital plus ACL were 342.55% and 359.52%, respectively.

Management has extensive experience in CRE lending and has implemented and continues to maintain heightened risk management procedures, as well as strong underwriting criteria with respect to its CRE portfolio. Monitoring practices are part of the Bank’s credit and risk departments’ annual test plans and are adjusted as needed on a quarterly basis if external or internal conditions merit changes. The Bank’s CRE monitoring plans include stress testing analysis to evaluate changes in collateral values and changes in cash flow debt service coverage ratios as a result of increasing interest rates or declines in customer net operating revenues. We may be required to maintain higher levels of capital as a result of our CRE concentrations, which could require us to obtain additional capital, or be required to sell/participate portions of loans, either of which may adversely affect shareholder returns.

Non-Owner Occupied CRE Loans

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(1)Other non-owner occupied CRE loans include commercial – improved loans of $164.4 million, lot/land loans of $82.4 million, self storage loans of $71.9 million and other loans $97.0 million.

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(2)The balances for the non-owner occupied CRE portfolio as of December 31, 2025, as presented in this table, coincide with our internal evaluation of risk for the purpose of monitoring loan concentrations in accordance with internal and regulatory guidelines.

(3)Excludes loans held for sale of $32.5 million.

Owner Occupied CRE Loans

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(1)Other owner occupied CRE loans include church loans of $59.7 million, marina/boat slip loans of $38.8 million, fire/EMS building loans of $38.3 million and other loans $82.0 million.

(2)Excludes loans held for sale of $32.5 million.

Office CRE Loan Portfolio

The Bank’s office CRE loan portfolio, which includes owner occupied and non-owner occupied CRE loans, was $485.9 million, or 9.9% of total loans of $4.90 billion at December 31, 2025. The Bank’s office CRE loan portfolio included $129.1 million, or 26.6% of total office CRE loans, with medical tenants, and $51.5 million, or 10.6%, of total office CRE loans, with government or government contractor tenants. There were 481 loans in the office CRE loan portfolio with an average and median loan size of $1.0 million and $365 thousand, respectively. Loan-to-value (“LTV”) estimates are less than 50% for $170.5 million, or 35.0%, of the office CRE loan portfolio, and greater than 80% for $9.1 million, or 1.9%, of the office CRE loan portfolio. LTV collateral values are based on the most recent appraisal, which varies from the initial loan boarding to interim credit reviews. LTV estimates for the office CRE loan portfolio are summarized in the table below and LTV collateral values are based on the most recent appraisal, which may vary from the appraised value at loan origination.

The Bank had 17 office CRE loans totaling $166.1 million that were greater than $5.0 million at December 31, 2025, compared to 18 office CRE loans totaling $164.5 million at December 31, 2024. The increase in the loan balance of this portfolio segment was the result of addition of a new loan partially offset by normal amortization, the payoff of a $5.6 million loan and the change in purpose of collateral of an $11.8 million loan from office to school. For the office CRE portfolio, at December 31, 2025, the average loan debt-service coverage ratio was 1.7x and the average LTV was 47.6%. Of the office CRE portfolio balance, 80.5% are secured by properties in rural or suburban areas with limited exposure to metropolitan cities and 97.1% are secured by properties with five stories or less. Of the office CRE loans, $45.0 million will mature and $26.7 million will reprice prior to December 31, 2026. Of the office CRE loans, $30.7 million are special mention or substandard. In the fourth quarter of 2025 there was a charge-off of $2.6 million related to the office CRE portfolio. There were no other office CRE portfolio charge-offs during 2025.

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Maturity of Loan Portfolio

The following table sets forth the maturities and interest rate sensitivity of the loan portfolio at December 31, 2025. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as maturing within one year.

Loans Related to Cannabis Business

Loan balances related to our cannabis business were $86.2 million and $82.6 million, or 1.76% and 1.73% of total gross loans, as of December 31, 2025 and 2024, respectively.

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Asset Quality

ACL and Provision for Credit Losses

The following table presents the Company’s general and specific allowances as a percentage of total portfolio loans at December 31, 2025 and 2024.

The ACL as a percentage of loans decreased to 1.20% at December 31, 2025, compared to 1.21% at December 31, 2024. At December 31, 2025, the Company’s ACL increased $926 thousand, or 1.60%, to $58.8 million from $57.9 million at December 31, 2024. The increase in the general allowance was primarily due to loan growth, partially offset by favorable economic conditions in 2025.

The Company recorded a provision for credit losses on loans of $8.4 million for the year ended December 31, 2025 compared to $4.7 million for the year ended December 31, 2024 primarily due to loan growth and net charge-offs, which amounted to $6.6 million, or 0.14% of average loans, for the year ended December 31, 2025 compared to net charge-offs of $4.1 million, or 0.09% of average loans, for the year ended December 31, 2024. The increase in charge-offs in 2025 was primarily due to the marine and CRE portfolio.

Management remains focused on its efforts to dispose of problem loans and to prudently charge-off nonperforming loans to enable the Company to maintain overall credit quality.

The following table allocates the ACL by loan portfolio category as of the dates indicated. The allocation of the ACL to each category is not necessarily indicative of future losses and does not restrict the use of the ACL to absorb losses in any category.

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(1)Excludes loans held for sale.

(2)ACL balance as a percent of average loan balance of each category.

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The following table presents the net charge-offs or recoveries by average loan portfolio category for the year ended December 31, 2025 and 2024.

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(1)Excludes loans held for sale.

(2)Includes the marine portfolio.

Classified Assets

The following tables present the Company’s classified assets by loan portfolio category at December 31, 2025 and 2024.

The following table presents the Company’s total classified assets as a percentage of total assets and risk-based capital at December 31, 2025 and 2024.

Classified assets increased $32.2 million to $60.4 million, or 0.96% of total assets, at December 31, 2025, from $28.2 million, or 0.45% of total assets, at December 31, 2024. Classified assets are substandard loans, repossessed assets and OREO. The increase was primarily due to several commercial non-owner occupied real estate loans, which were downgraded during the current year. All of these loans are well secured by collateral and required minimal individual reserves as of December 31, 2025.

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Special Mention Loans

The following table presents the Company’s special mention loans by loan portfolio category at December 31, 2025 and 2024.

Special mention loans increased to $73.4 million at December 31, 2025, from $33.5 million at December 31, 2024. Increases in special mention loan categories were due to loans in the multifamily commercial real estate and residential loan portfolios. Management believes these assets are well collateralized and will continue to monitor their cash flows. The Company’s risk rating process for classified loans is an important input into the Company’s allowance methodology and ACL qualitative framework.

Nonperforming Assets

At December 31, 2025, nonperforming assets were $43.2 million, an increase of $18.4 million, or 74.25%, when compared to December 31, 2024. The increase in nonperforming assets was primarily due to the increase in commercial real estate and consumer nonaccrual loans, offset by a decrease in repossessed assets related to the marine portfolio. At December 31, 2025, the ratio of nonaccrual loans to total assets was 0.64%, an increase from 0.34% at December 31, 2024. The ratio of nonperforming assets to total assets at December 31, 2025 was 0.69% compared to 0.40% at December 31, 2024.

The following table summarizes our nonperforming assets for the years ended December 31, 2025 and 2024.

Off-Balance Sheet Credit Exposure Reserve

The Company’s reserve for off-balance sheet credit exposure was $2.0 million and $1.1 million at December 31, 2025 and 2024, respectively. The Company monitors line of credit usage and did not see substantive increases in usage or expected usage during the year ended December 31, 2025. The Company will continue to monitor activity for potential increases in the off-balance sheet reserve in future quarters as customers use available liquidity.

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Deposits

The following is a breakdown of the Company’s deposit portfolio at December 31, 2025 and 2024:

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*Not meaningful for comparative purposes

Total deposits increased $5.5 million, to $5.53 billion at December 31, 2025 when compared to December 31, 2024. The slight increase in total deposits was primarily due to an increase in time deposits of $85.9 million, an increase in noninterest-bearing accounts of $25.1 million, an increase in brokered deposits of $10.9 million and an increase in money market and savings accounts of $9.0 million. These increases were partially offset by a decrease in interest-bearing checking deposits of $125.5 million. Core deposits, which exclude municipal deposits, increased by $154.8 million, or 3.8%, during the same period, which was partially offset by volatility driven by a large client relationship.

Total estimated uninsured deposits were $937.2 million, or 16.9% of total deposits, at December 31, 2025 and $905.3 million, or 16.4% of total deposits, at December 31, 2024. At December 31, 2025, there were $150.8 million included in uninsured deposits that the Bank secured using the market value of pledged collateral. The Bank’s uninsured deposits, excluding the market value of pledged collateral, at December 31, 2025 were $786.5 million, or 14.2% of total deposits.

For FDIC call reporting purposes, reciprocal deposits are classified as brokered deposits when they exceed 20% of a bank’s liabilities or $5 billion. Reciprocal deposits decreased $128.4 million to $1.52 billion at December 31, 2025, compared to $1.65 billion at December 31, 2024. Reciprocal deposits as a percentage of the Bank’s liabilities at December 31, 2025 and 2024 were 27.08% and 29.25%, respectively. For call reporting purposes, $396.9 million of reciprocal deposits were considered brokered at December 31, 2025, compared to $520.5 million at December 31, 2024.

The Bank is required to monitor large deposit relationships and concentration risks in accordance with regulatory guidance. This includes monitoring deposit concentrations and maintaining fund management policies and strategies that take into account potentially volatile concentrations and significant deposits that mature simultaneously. Regulatory guidance defines a large depositor as a customer or entity that owns or controls 2% or more of the Bank’s total deposits. At December 31, 2025, the Bank had three local municipal customer deposit relationships that exceeded 2% of total deposits, totaling $539.0 million, which represented 9.70% of total deposits of $5.56 billion. At December 31, 2024, there were three customer deposit relationships that exceeded 2% of total deposits, totaling $547.4 million, which represented 9.89% of total deposits of $5.54 billion. Deposit balances related to the cannabis business were $159.4 million and $151.4 million, or 2.88% and 2.74% of total deposits, as of December 31, 2025 and 2024, respectively.

The Bank uses deposits primarily to fund loans and to purchase investment securities. Average total deposits increased from $5.19 billion at December 31, 2024 to $5.36 billion at December 31, 2025, an increase of $173.1 million, or 3.34%.

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The following table sets forth the average balances of deposits and percentage of each major category to total average deposits for the years ended December 31, 2025 and 2024.

Average interest-bearing deposits for the year ended December 31, 2025 increased $49.9 million, or 1.3%, compared to the year ended December 31, 2024. Average noninterest-bearing deposits increased $123.2 million, or 8.5%, for the year ended December 31, 2025, compared to the year ended December 31, 2024. Deposits provided funding for approximately 93.54% and 93.98% of average earning assets for the years ended December 31, 2025 and 2024, respectively.

The following table sets forth the aggregate amount and maturity ranges of certificates of deposit with balances of $250,000 or more as of December 31, 2025, as well as the portion that is uninsured.

Note 7 – “Deposits” in the “Notes to Consolidated Financial Statements” included in Part II, Item 8 of this Annual Report on Form 10-K includes the scheduled contractual maturities of total certificates of deposit of $1.27 billion at December 31, 2025.

Securities Sold Under Retail Repurchase Agreements

Securities sold under agreements to repurchase are issued in conjunction with cash management services for commercial depositors. There were no securities sold under retail purchase agreements at December 31, 2025 and 2024.

Wholesale Funding – Short-Term Borrowings

The Company borrows from the FHLB on a short-term basis to meet liquidity needs. There were no short-term borrowings outstanding as of December 31, 2025 and 2024.

The Company’s wholesale funding, which includes FHLB advances and brokered deposits, was $10.9 million and $50.0 million at December 31, 2025 and 2024, respectively. At December 31, 2025, the Company had $10.9 million of brokered deposits and no FHLB advances or securities sold under agreements to repurchase or overnight borrowings from correspondent banks. At December 31, 2024, the Company had $50.0 million in FHLB advances and no brokered deposits or securities sold under agreements to repurchase or overnight borrowings from correspondent banks.

Contractual Obligations

The Company has various contractual obligations that affect its cash flows and liquidity. Our operating leases are primarily related to branch premises and equipment. Purchase obligations arise from agreements to purchase goods and services that are enforceable and legally binding. Other contracts included in purchase obligations primarily consist of service agreements for various systems and applications supporting bank operations. For information regarding material contractual obligations, please see Note 5 – “Leases” and Note 21 – “Revenue Recognition” in the “Notes to Consolidated Financial Statements” included in Part II, Item 8 of this Annual Report on Form 10-K.

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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 Company had no short or long-term borrowings with the FHLB as of December 31, 2025.

In November 2025, the Company issued $60 million in subordinated debt maturing in 2035, carrying a fixed interest rate of 6.25% through November 2030. The proceeds were used to fully redeem two existing subordinated debt issuances totaling $44.5 million.

As a result of the merger with Severn Bancorp, Inc., effective October 31, 2021, the Company assumed liability for Junior Subordinated Debt Securities due in 2035, which had an outstanding principal balance of $20.6 million. The debt balances of $19.0 million at December 31, 2025 and $18.8 million at December 31, 2024 were presented net of fair value adjustments of $1.7 million and $1.8 million, respectively.

Additionally, as a result of the merger with The Community Financial Corporation in 2023, the Company assumed liability for Junior Subordinated Debt Securities with an outstanding principal balance of $12.4 million. The debt balances of $11.2 million and $11.1 million were presented net of fair value adjustments of $1.2 million and $1.3 million at December 31, 2025 and 2024, respectively.

For additional information regarding long-term debt, refer to Note 8 – “Borrowings” in the “Notes to Consolidated Financial Statements” included in Part II, Item 8 of this Annual Report on Form 10-K.

Stockholders’ Equity

Total stockholders’ equity increased $48.8 million, or 9.0%, to $589.9 million at December 31, 2025 when compared to December 31, 2024, primarily due to $59.5 million of net income and a decrease in accumulated other comprehensive loss of $3.0 million, partially offset by dividends declared of $16.1 million.

We record unrealized holding gains (losses), net of tax, on available for sale investment securities as AOCI (loss), a separate component of stockholders’ equity. At December 31, 2025 and 2024, the portion of the investment portfolio designated as “available for sale” had an unrealized holding loss, net of tax, of $4.6 million and $7.5 million, respectively.

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LIQUIDITY

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

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

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

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

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

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

The Company derives liquidity through increased customer deposits, cash flow from the investment portfolio, loan repayments, borrowings and income from earning assets. The net decrease in cash and cash equivalents was $104.3 million for the year ended December 31, 2025, compared to a net increase of $87.4 million for the year ended December 31, 2024. The decrease in cash and cash equivalents in the year ended December 31, 2025 was mainly due to the decrease of $21.8 million in interest-bearing deposits, paid off FHLB Advances of $50.0 million, and redemption of subordinated debt of $44.5 million, partially offset by an increase of $25.1 million in noninterest-bearing deposits and issuance of new subordinated debt of $58.9 million, net of subordinated debt issuance costs.

To the extent that deposits are not adequate to fund customer loan demand, liquidity needs can be met in the short-term funds markets. At December 31, 2025, the Bank had approximately $1.42 billion of available liquidity, including $355.6 million in cash and cash equivalents, $314.5 million in unpledged securities and $788.1 million in secured borrowing capacity at the FHLB of Atlanta, partially offset by a letter of credit of $33.7 million. The Bank has arrangements with other correspondent banks whereby it has $95.0 million available in federal funds lines of credit and a reverse repurchase agreement available to meet any short-term needs that may not otherwise be funded by the Bank’s portfolio of readily marketable investments that can be converted to cash. Through the FHLB, the Bank had available lendable collateral of approximately $788.1 million and $743.6 million at December 31, 2025 and 2024, respectively. The Bank has pledged, under a blanket lien, all qualifying residential and commercial real estate loans under borrowing agreements with the FHLB of Atlanta. The following table presents the Company’s liquidity in use and liquidity available as of December 31, 2025.

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(1)The Bank has pledged a portion of the commercial real estate and residential loan portfolio to the FHLB to secure the line of credit.

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CAPITAL RESOURCES

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

Quantitative measures established by regulation to ensure capital adequacy require the Bank and the Company to maintain minimum ratios of common equity Tier 1 (“CET1”), Tier 1, and total capital as a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 12.50%. The Bank and Company are also required to maintain capital at a minimum level based on quarterly average assets, which is known as the leverage ratio. The Bank was deemed “well-capitalized” under applicable regulatory capital requirements at December 31, 2025.

The Company evaluates capital resources by the ability to maintain adequate regulatory capital ratios. The Company and the Bank annually update its strategic plan, which includes a three-year capital plan. In developing its plan, the Company considers the impact to capital of asset growth, loan concentrations, income accretion, dividends, holding company liquidity, investment in markets and people and stress testing.

As of December 31, 2025, the Bank and the Company were in compliance with all applicable regulatory capital requirements to which they were subject, and the Bank was classified as “well-capitalized” for purposes of the prompt corrective action regulations. The following tables present the applicable capital ratios for the Company and the Bank as of December 31, 2025 and 2024.

On February 18, 2026, the Company announced that its Board of Directors declared a cash dividend of $0.12 per share, payable on March 18, 2026, to holders of record of shares of common stock as of March 4, 2026.

The Company has no business other than holding the stock of the Bank and does not currently have any material funding requirements, except for the payment of dividends on common stock, and the payment of interest on subordinated debentures and subordinated notes, and noninterest expense.

See Note 15 – “Regulatory Capital Requirements” in the “Notes to Consolidated Financial Statements” included in Part I, Item 1 of this Annual Report on Form 10-K for further information about the regulatory capital positions of the Bank and the Company. For information about risks relating to liquidity, see “Risk Factors” included in Part I, Item 1A of this Annual Report on Form 10-K.

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USE OF NON-GAAP FINANCIAL MEASURES

Statements included in the Management’s Discussion and Analysis of Financial Condition and Results of Operations include non-GAAP financial measures and should be read along with the accompanying tables, which provide a reconciliation of non-GAAP financial measures to GAAP financial measures. The Company’s management uses these non-GAAP financial measures and believes that non-GAAP financial measures provide additional useful information that allows readers to evaluate the ongoing performance of the Company. Non-GAAP financial measures should not be considered as an alternative to any measure of performance or financial condition as promulgated under GAAP, and investors should consider the Company’s performance and financial condition as reported under GAAP and all other relevant information when assessing the performance or financial condition of the Company. Non-GAAP financial measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for analysis of the results or financial condition as reported under GAAP. See non-GAAP reconciliation schedules that immediately follow.

Reconciliation of Non-GAAP Measures

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

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Return on Average Common Equity

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