SHORE BANCSHARES INC (SHBI) FY 2024 MD&A

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, 2024 to its financial condition at December 31, 2023 and the results of operations for the years ended December 31, 2024 and 2023. 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.

CRITICAL ACCOUNTING POLICIES

The Company’s consolidated financial statements are prepared in accordance with GAAP and follow general practices within the industries in which it operates. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the 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 most significant accounting policies that we follow 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 policies for the ACL on loans, loans acquired in a business combination, and income taxes are critical accounting policies. These policies are considered critical because they relate to accounting areas that require the most subjective or complex judgments, and, as such, could be most subject to revision as new information becomes available.

Allowance for Credit Losses on Loans

The Company adopted ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326),” as amended, on January 1, 2023 and in accordance with ASC 326, has recorded an ACL on loans carried at amortized cost. The ACL represents management’s best estimate of expected lifetime credit losses within the Company’s loan portfolio as of the balance sheet date. The 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 makes every effort to utilize the best information available in making its assessment of the ACL estimate, the estimation process is inherently challenging as potential changes in any one factor or input may occur at different rates and/or impact pools of loans 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 the 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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PERFORMANCE OVERVIEW

The Company recorded net income of $43.9 million and $11.2 million for the years ended December 31, 2024 and 2023, respectively. The basic and diluted net income per share was $1.32 and $0.42 for the years ended December 31, 2024 and 2023, respectively.

Total assets were $6.23 billion at December 31, 2024, an increase of $219.8 million or 3.7%, when compared to $6.01 billion at December 31, 2023. The aggregate increase was primarily due to increases year-over-year in loans held for investment of $131.0 million, or 2.8%, and cash and cash equivalents of $87.4 million.

Total liabilities were $5.69 billion at December 31, 2024, an increase of $189.9 million or 3.45%, when compared to $5.50 billion at December 31, 2023, primarily due to an increase in deposits and borrowings.

Total borrowings were $123.7 million at December 31, 2024, an increase of $51.0 million or 70.2%, when compared to $72.7 million at December 31, 2023. Total borrowings at December 31, 2024 were comprised of $50.0 million long-term FHLB advances, $43.9 million of subordinated debt and $29.8 million of trust preferred debentures. The increase in total borrowings at December 31, 2024 when compared to December 31, 2023 was primarily due to a $50.0 million long-term FHLB advance that was obtained in 2024. Total deposits increased $142.2 million, or 2.6% to $5.53 billion at December 31, 2024 when compared to December 31, 2023. The increase in total deposits when compared to December 31, 2023 was primarily due to increases in noninterest-bearing deposits of $304.8 million and money market and savings of $28.0 million, partially offset by decreases in interest-bearing checking of $187.5 million and and time deposits of $3.0 million.

Total stockholder’s equity amounted to $541.1 million at December 31, 2024, an increase of $29.9 million or 5.9%, when compared to $511.1 million at December 31, 2023. This increase was due to net income of $43.9 million, partially offset by cash dividends of $16.0 million.

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RESULTS OF OPERATIONS

Summary of Financial Results

The Company reported net income for the year ended December 31, 2024 of $43.9 million, or diluted earnings per share of $1.32, compared to net income of $11.2 million, or diluted earnings per share of $0.42, for the year ended December 31, 2023. The Company’s return on average assets, return on average common equity and return on average tangible common equity were 0.74%, 8.35% and 13.00%, respectively, for the year ended December 31, 2024, compared to 0.24%, 2.54% and 7.74%, respectively, for the year ended December 31, 2023. For additional details, see “Reconciliation of Non-GAAP Measures.” The increase in net income in 2024 compared to 2023 was primarily due to higher net interest income driven by loan growth in 2024, and a lower provision for credit losses. These were partially offset by the absence of the one-time bargain purchase gain of $8.8 million in 2023, higher noninterest expense driven by expanded operation of the newly-combined company and the $4.7 million credit card fraud event in 2024.

Net Interest Income

Tax-equivalent net interest income increased $35.3 million to $170.9 million for 2024 compared to $135.6 million for 2023. The increase in tax-equivalent net interest income was primarily due to an increase in total interest income of $81.3 million, or 38.0%, which included an increase in interest and fees on loans of $75.3 million, or 38.7%. The increase in interest and fees on loans was primarily due to the increase in the average balance of loans of $1.08 billion, or 29.8%, and an increase in net accretion income of $5.1 million due to the merger with TCFC (the “merger”). These were partially offset by an increase in interest expense of $46.0 million, primarily due to increases in the cost of funds and the average balance of interest-bearing deposits of $749.2 million, or 25.1%. All of the increases in average balances were primarily due to the merger.

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Average Balances and Yields

The following tables present the distribution of the average consolidated balance sheets, interest income/expense, and annualized yields earned and rates paid for the years ended December 31, 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 $16.9 million and $11.8 million of accretion interest on loans for the years ended December 31, 2024 and 2023, respectively.

(4) Interest expense on deposits and borrowing includes amortization of deposit premiums and amortization of borrowing fair value adjustment. There were $1.5 million and $1.8 million of amortization of deposits premium, and $926 thousand and $557 thousand of amortization of borrowing fair value adjustment for the years ended December 31, 2024 and 2023, respectively.

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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.

The Company’s NIM decreased to 3.10% for 2024, from 3.11% for 2023. The decrease in the NIM was primarily due to an increase in the average balance and rates paid on interest-bearing liabilities of $723.3 million and 72 basis points, respectively, partially offset by an increase in the average balance and rates earned on total earning assets of $1.16 billion and 44 basis points, respectively. Margins were flat as more rapid increases in rates on interest-bearing liabilities were offset by increases in interest-earning asset yields and larger balances in noninterest-bearing deposits. The average balances of noninterest-bearing deposits increased $410.6 million, or 39.35%, from 24.86% of average funding for the year ended December 31, 2023 to 27.27% for the year ended December 31, 2024. Net accretion income impacted NIM by 27 bps and 21 bps for the years ended December 31, 2024 and 2023, respectively, which resulted in core NIMs of 2.83% and 2.90% for the same periods

Noninterest Income

Total noninterest income for 2024 of $31.1 million decreased $2.0 million, or 6.1%, from $33.2 million for 2023. The decrease was primarily due to a one-time bargain purchase gain of $8.8 million in the third quarter of 2023, partially offset by $2.2 million of losses on the sale of investment securities, which were both a direct result of the merger with TCFC in the third quarter of 2023. These were offset by increases in gains on sale of other assets, other noninterest income and interchange fees.

Noninterest Expense

Total noninterest expense of $138.3 million for 2024 increased $14.9 million, or 12.1%, when compared to $123.3 million for 2023. Almost all noninterest expense line items increased as a result of the expanded operations of the newly-combined Company from the merger. In addition fraud costs increase by $4.1 million driven by the credit card fraud in the first quarter 2024. There were no merger-

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related expenses for 2024, compared to $17.4 million for 2023. Excluding merger and merger-related expenses, core deposit intangible amortization of $9.8 million for 2024 and $6.1 million for 2023, noninterest expense for the comparable periods was $128.5 million and $99.9 million, respectively. Noninterest expense as a percentage of average assets decreased to 2.3% for 2024 from 2.6% for 2023. Excluding merger and merger-related expenses and core deposit intangible amortization for the comparable periods, noninterest expense as a percentage of average assets increased to 2.2% for 2024 compared to 2.1% for 2023. Management continues to focus on further streamlining processes, unlocking operational efficiencies and reducing overall noninterest expense.

Income Taxes

The Company reported income tax expense of $14.8 million and $3.0 million for the years ended December 31, 2024 and 2023, respectively. The effective tax rate was 25.2% for 2024 and 20.8% for 2023. The primary drivers of the increased effective tax rate for 2024 when compared to 2023 were the bargain purchase gain recorded and nondeductible merger-related costs, in connection with the acquisition of TCFC. As of December 31, 2024 the Company recorded net deferred tax assets of $31.9 million compared to $40.7 million in 2023. The decrease was primarily due to the utilization of the federal NOLs and the decrease attributable to acquisition-related adjustments in 2024 compared to 2023.

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REVIEW OF FINANCIAL CONDITION

Balance Sheet Summary

Total assets were $6.23 billion at December 31, 2024, an increase of $219.8 million or 3.7%, when compared to $6.01 billion at December 31, 2023. The increase was primarily due to increases in loans held for investment of $131.0 million, or 2.8%, and cash and cash equivalents of $87.4 million or 23.50%, partially offset by an increase in the ACL of $559 thousand.

Cash and Cash Equivalents

Cash and cash equivalents totaled $459.9 million at December 31, 2024, compared to $372.4 million at December 31, 2023. 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 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, 2024, 23.7% of the portfolio of debt securities was classified as AFS and 76.3% was classified as HTM, compared to 17.7% and 82.3% respectively, at December 31, 2023.

See Note 3 – “Investment Securities” in the “Notes to the Consolidated Financial Statements” included in Part II, Item 8. of this Annual Report on Form 10-K for additional details on the composition of our investment portfolio.

Investment securities, including restricted stock and equity securities, totaled $656.4 million at December 31, 2024, a $9.0 million, or 1.4%, increase compared to $647.3 million at December 31, 2023. At December 31, 2024, AFS securities, carried at fair value, totaled $149.2 million compared to $110.5 million at December 31, 2023. At December 31, 2024, AFS securities consisted of 82.0% mortgage-backed, 13.5% U.S. government agency securities and 4.4% corporate bonds, compared to 76.0%, 18.5%, and 5.5%, respectively, at December 31, 2023. At December 31, 2024, AFS securities gross unrealized losses were all related to changes in interest rates and were $10.9 million, or less than 1% of total assets and 2% of stockholder’s equity.

At December 31, 2024, HTM securities, carried at amortized cost, totaled $481.1 million, compared to $513.2 million at December 31, 2023. At December 31, 2024, HTM securities consisted of 70.0% mortgage-backed, 27.6% U.S. government agency securities, 2.1% other debt securities and 0.3% state and political entities, compared to 69.7%, 28.0%, 2.0% and 0.3%, respectively, at December 31, 2023. At December 31, 2024, the HTM securities had an allowance for credit losses of $203 thousand for the year ended December 31, 2024, compared to $94 thousand for the year ended December 31, 2023.

At December 31, 2024 and 2023, 97.1% 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, 2024.

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(1)Yields have been adjusted to reflect a tax equivalent basis using the statutory federal tax rate of 21%.

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, 2024 or 2023. 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 table presents the amortized cost of HTM securities based on their lowest publicly available credit rating as of December 31, 2024.

Loans Held for Sale

We originate residential mortgage loans for sale on the secondary market, which we have elected to carry at fair value. At December 31, 2024, the fair value of loans held for sale amounted to $19.6 million, compared to $8.8 million at December 31, 2023.

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

The Company was not required to repurchase any loans during the years ended December 31, 2024 or 2023.

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Loans Held for Investment

The following table summarizes the Company’s loan portfolio at December 31, 2024 and 2023.

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 instructions 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 totaled $2.08 billion and $2.02 billion at December 31, 2024 and 2023, respectively, and as a percentage of the Bank’s Tier 1 Capital + ACL were 359.5% and 382.6%, respectively. Construction loans totaled $336.0 million and $299.0 million at December 31, 2024 and 2023, respectively, and as a percentage of the Bank’s Tier 1 Capital + ACL were 58.0% and 56.7%, respectively.

The CRE portfolio has increased in the past two years. 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, which may adversely affect shareholder returns.

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Non-Owner Occupied CRE Loans

(1) Other non-owner occupied CRE loans include 1-4 family dwelling loans of $138.6 million, lot/land loans of $94.3 million, self-storage loans of $72.6 million and other loans of $102.3 million.

(2) The balances for our non-owner occupied commercial real estate portfolio as of December 31, 2024, 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 $19.6 million.

Owner Occupied CRE Loans

(1) Other owner occupied CRE loans include marine/boat slips of $59.1 million, restaurant loans of $58.4 million, fire/CMS building loans of $25.9 million and other loans of $56.7 million.

(2) Excludes loans held for sale of $19.6 million.

Office CRE Loan Portfolio

The Bank’s office CRE loan portfolio, which includes owner occupied and non-owner occupied CRE loans, was $506.0 million or 10.6% of total loans of $4.77 billion at December 31, 2024. At December 31, 2024, the Bank’s medical tenant loans were $138.7 million and government or government contractor tenant loans were $55.0 million, which equaled 27.4% and 10.9%, respectively, of the total office CRE loan portfolio. There were 501 loans in the office CRE portfolio with an average and median loan size of $1.0 million and $375 thousand, respectively. Loan-to-value (“LTV”) estimates are less than 50% for $182.3 million, or 36.0%, of the office CRE loan portfolio and greater than 80% for $9.7 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

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summarized 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 18 office CRE loans totaling $164.5 million that were greater than $5.0 million at December 31, 2024, compared to 24 office CRE loans totaling $189.8 million at December 31, 2023. The decrease in this portfolio segment was the result of normal amortization and one closed loan totaling $10.4 million, and adjustments totaling $13.9 million to remove non-bank-owned participation balances. For the office CRE portfolio at December 31, 2024, the average loan debt-service coverage ratio was 1.9x and the average LTV was 49.3%. Of the office CRE portfolio balance, 75% was secured by properties in rural or suburban areas with limited exposure to metropolitan cities and 97% were secured by properties with five stories or less. Of the office CRE loans, $33.6 million will mature and $17.5 million will reprice prior to December 31, 2025. Of the office CRE loans, $2.3 million are special mention or substandard.

Maturity of Loan Portfolio

The following table below sets forth the maturities and interest rate sensitivity of the loan portfolio at December 31, 2024. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less.

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Asset Quality

The following table summarizes asset quality information and ratios at December 31, 2024 and 2023.

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(1)Classified assets consist of substandard loans and OREO. Classified assets do not include special mention loans.

(2)BEFD modification loans include both nonaccrual and accruing performing loans. All BEFD modification loans are included in the calculation of asset quality financial ratios. Nonaccrual BEFD modification loans are included in the nonaccrual balance and accruing BEFD modification loans are included in the accruing BEFD modification balance.

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ACL and Provision for Credit Losses

On January 1, 2023, the Company adopted ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326).” The ACL is a valuation allowance that is deducted from loans’ amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged-off against the ACL when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries may not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

The Bank uses loan data to estimate expected credit losses under CECL, including information about past events, current conditions, and reasonable and supportable forecasts relevant to assessing the collectability of the cash flows of the loans. Historical loss experience serves as the foundation for our estimated credit losses. Adjustments to our historical loss experience are made for differences in current loan portfolio segment credit risk characteristics such as the impact of changing unemployment rates, changes in U.S. Treasury yields, portfolio concentrations, the volume of classified loans, and other prevailing economic conditions and factors that may affect the borrower’s ability to repay, or reduction in the estimated value of any underlying collateral. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. Upon the adoption of ASC 326, the Company recorded a $10.8 million increase to the ACL.

The following is a breakdown of the Company’s general and specific allowances as a percentage of total portfolio loans at December 31, 2024 and 2023:

ACL as a percentage of loans decreased to 1.21% at December 31, 2024 compared to 1.24% at December 31, 2023. At December 31, 2024, the Company’s ACL increased $559 thousand, or 0.97%, to $57.9 million from $57.4 million at December 31, 2023. The increase in the general allowance was primarily due to loan growth, partially offset by favorable economic conditions in 2024.

The Company recorded a provision for credit losses on loans of $4.6 million for the year ended December 31, 2024 compared to $30.4 million for the year ended December 31, 2023 primarily due to $20.1 million related to the acquisition of TCFC legacy loans and $7.3 million resulting from the change in ACL methodology on TCFC legacy loans in 2023. Net charge-offs amounted to $2.0 million, or 0.06% of average loans for the year ended December 31, 2023 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 2024 were primarily due to the marine portfolio.

Management believes that the ACL was adequate at December 31, 2024. The ACL as a percent of total loans may increase or decrease in future periods based on economic conditions. Management’s determination of the adequacy of the ACL is based on a periodic evaluation of the loan portfolio. For additional information regarding the ACL, refer to Note 1 – “Summary of Significant Accounting Policies” and Note 4 – “Loans and Allowance for Credit Losses” in the “Notes to Consolidated Financial Statements” included in Part II, Item 8., as well as “Critical Accounting Policies” contained in Part II, Item 7. of this Annual Report on Form 10-K.

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The following table allocates the ACL by portfolio loan category at 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) Percent of loans in each category to total portfolio loans.

The following table indicates net charge-offs or recoveries by average loan portfolio category for the years ended as indicated:

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(1) Excludes loans held for sale.

(2) Includes the marine portfolio.

Off-Balance Sheet Credit Exposure Reserve

The Company’s reserve for off-balance sheet credit exposures was $1.1 million at December 31, 2024 and December 31, 2023. The Company is monitoring line of credit usage and has not seen substantive increases in usage or expected usage. 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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Classified Assets and Special Mention Assets

Classified assets increased $13.3 million from $14.9 million at December 31, 2023 to $28.2 million at December 31, 2024. Management considers classified assets to be an important measure of asset quality. Increases in classified and special mention loan categories were due to loans related to our marine lending portfolio and residential mortgages, all of which are diverse in origination date. The Company’s risk rating process for classified loans is an important input into the Company’s allowance methodology. Risk ratings are an important input into the Company’s ACL qualitative framework. The following is a breakdown of the Company’s classified and special mention assets at December 31, 2024 and 2023, respectively:

Nonperforming Assets

At December 31, 2024, nonperforming assets were $24.8 million, an increase of $11.1 million, or 80.98%, when compared to December 31, 2023. The increase in nonperforming assets was primarily due to the increase in nonaccrual loans acquired in the merger and an increase in repossessed assets related to the marine portfolio. At December 31, 2024, the ratio of nonaccrual loans to total assets was 0.34%, an increase from 0.21% at December 31, 2023. The ratio of nonperforming assets to total assets at December 31, 2024 was 0.40% compared to 0.23% at December 31, 2023.

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

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The following table summarizes our nonperforming assets for the years ended December 31, 2024 and 2023.

Deposits

The following is a breakdown of the Company’s deposit portfolio at December 31, 2024 and 2023:

Total deposits increased $142.2 million, or 2.6%, to $5.53 billion at December 31, 2024 when compared to December 31, 2023. The increase in total deposits was primarily due to an increase in noninterest-bearing demand deposits of $304.8 million and money market and savings deposits of $28.0 million, partially offset by decreases in interest-bearing demand deposits of $187.5 million and time deposits of $3.0 million.

Total estimated uninsured deposits were $905.3 million, or 16.4% of total deposits, at December 31, 2024. At December 31, 2024, there were $160.2 million included in uninsured deposits that the Bank secured using the market value of pledged collateral. The Bank’s uninsured deposits, excluding deposits secured by the market value of pledged collateral, at December 31, 2024 was $745.1 million, or 13.5% 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 $5.00 billion. Reciprocal deposits increased $354.2 million to $1.65 billion at December 31, 2024, compared to $1.29 billion at December 31, 2023. Reciprocal deposits as a percentage of the Bank’s liabilities at December 31, 2024 and 2023 were 29.8% and 24.0%, respectively. For call reporting purposes, $520.5 million of reciprocal deposits were considered brokered at December 31, 2024 compared to $229.9 million at December 31, 2023.

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, 2024, the Bank had three local municipal customer deposit

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relationships that exceeded 2% of total deposits, totaling $547.4 million, or 9.90% of total deposits of $5.53 billion. At December 31, 2023, there were four customer deposit relationships that exceeded 2% of total deposits, totaling $598.5 million or 11.11% of total deposits of $5.39 billion.

The Bank uses deposits primarily to fund loans and to purchase investment securities. Average total deposits increased from $4.03 billion at December 31, 2023 to $5.19 billion at December 31, 2024, an increase of $1.16 billion, or 28.79%.

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, 2024 and 2023.

Average interest-bearing deposits increased $749.2 million, or 25.1%, in 2024, compared to 2023. Average noninterest-bearing deposits increased $410.6 million, or 39.3%, in 2024, compared to 2023. Deposits provided funding for approximately 94.0% and 92.5% of average earning assets for 2024 and 2023, 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, 2024, as well as the portion that is uninsured.

Note 8 – “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 $1.18 billion at December 31, 2024.

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, 2024 and 2023.

Wholesale Funding - Short-Term Borrowings and Brokered Deposits

The Company borrows from the FHLB on a short-term basis to meet liquidity needs. There were no short-term borrowings outstanding at December 31, 2024 and 2023.

The Company’s wholesale funding increased $5.5 million, which includes FHLB advances and brokered deposits, from $44.5 million in brokered deposits at December 31, 2023 to $50.0 million in FHLB advances at December 31, 2024. Brokered deposits for the Company’s measurement of wholesale funding exclude reciprocal deposit balances that exceeded 20% of the Bank’s total liabilities.

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

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applications supporting bank operations. For information regarding material contractual obligations, please see Note 6 – “Leases” and Note 22 – “Revenue Recognition” in the “Notes to Consolidated Financial Statements” included in Part II, Item 8. of this Annual Report on Form 10-K.

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. There were $50.0 million and zero long-term borrowings from the FHLB outstanding at December 31, 2024 and 2023, respectively.

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

As a result of the acquisition of Severn, effective October 31, 2021, the Company acquired Junior Subordinated Debt Securities due in 2035, which had an outstanding principal balance of $20.6 million. The debt balance of $18.8 million at December 31, 2024 and $18.6 million at December 31, 2023 was presented net of fair value adjustments of $1.8 million and $2.0 million, respectively.

Additionally, as a result of the TCFC merger in 2023, the Company acquired Junior Subordinated Debt Securities which had an outstanding principal balance of $12.4 million. The debt balance of $11.1 million at December 31, 2024 was presented net of a fair value adjustment of $1.3 million. In addition, the Company also acquired 4.75% fixed-to-floating rate subordinated notes with a principal balance of $19.5 million. At December 31, 2024, the debt had a balance of $19.0 million, which was presented net of fair value adjustment of $548 thousand.

For additional information regarding long-term debt, refer to Note 9 – “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 was $541.1 million at December 31, 2024, compared to $511.1 million at December 31, 2023. The increase in stockholders’ equity in 2024 was primarily due to net income of $43.9 million, partially offset by dividends paid of $16.0 million. The ratio of period-end equity to total assets was 8.68% for 2024, as compared to 8.50% for 2023.

We record unrealized holding gains (losses), net of tax, on investment securities available for sale as AOCI (loss), a separate component of stockholders’ equity. At December 31, 2024 and 2023, the portion of the investment portfolio designated as “available for sale” had a net unrealized holding loss, net of tax, of $7.5 million.

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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.

The Company’s 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, we believe that there are no conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s or the Bank’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.

We derive liquidity through increased customer deposits, non-reinvestment of the cash flow from the investment portfolio, loan repayments, borrowings and income from earning assets. As seen in the consolidated statements of cash flows, the net increase in cash and cash equivalents was $87.4 million for the year ended December 31, 2024, compared to an increase of $316.9 million for the year ended December 31, 2023.

To the extent that deposits are not adequate to fund customer loan demand, liquidity needs can be met in the short-term fund markets. At December 31, 2024, the Bank had approximately $1.47 billion of available liquidity, including $459.9 million in cash and cash equivalents, $317.9 million in unpledged securities, $743.6 million in secured borrowing capacity at the FHLB of Atlanta, partially offset by FHLB advances and a letter of credit of $50.0 million and $6.1 million, respectively. 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 which 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 $743.6 million and $745.1 million at December 31, 2024 and 2023, 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, 2024.

(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, 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, 2024.

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.

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 to maintain minimum ratios of CET 1, Tier 1, and total capital as a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 1250%. The Bank is also required to maintain capital at a minimum level based on quarterly average assets, which is known as the leverage ratio.

In July 2013, federal bank regulatory agencies issued a final rule that revised their risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with certain standards that were developed by Basel III and certain provisions of the Dodd-Frank Act. The final rule currently applies to all depository institutions and bank holding companies and savings and loan holding companies with total consolidated assets of more than $3 billion.

As of December 31, 2024, 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, 2024 and 2023.

On February 4, 2025, the Company announced that its Board of Directors declared a cash dividend of $0.12 per share, payable on February 28, 2025, to holders of record of shares of common stock as of February 14, 2025.

See Note 16 – “Regulatory Capital Requirements” in the “Notes to Consolidated Financial Statements” included in Part II, Item 8. of this Annual Report on Form 10-K for further information about the regulatory capital positions of the Bank and Company.

The Company provides banking services to customers who do business in the cannabis industry. Prior to the second quarter of 2022, the Company restricted these businesses to include only those in the medical-use cannabis industry in the state of Maryland. During the second quarter of 2022, the Company expanded its cannabis banking program to include both medical and adult-use licensees in other states, with an initial offering of the Company’s existing Maryland customers with multi-state operations. While the Company is providing banking services to customers that are engaged in growing, processing, and sales of both medical and adult-use cannabis in a manner that complies

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with applicable state law, such customers engaged in those activities currently violate federal law. The Company may be deemed to be aiding and abetting illegal activities through the services that it provides to these customers. While we are not aware of any instance of a federally-insured financial institution being subject to such aiding and abetting liability, the strict enforcement of federal laws regarding cannabis would likely result in the Company’s inability to continue to provide banking services to these customers and the Company could have legal action taken against it by the federal government, including imprisonment and fines. There is an uncertainty of the potential impact to the Company’s consolidated financial statements if the federal government takes actions against the Company. As of December 31, 2024, the Company has not accrued an amount for the potential impact of any such actions.

The following is a summary of the level of business activities with our cannabis customers:

•Deposit and loan balances at December 31, 2024 were approximately $151.4 million, or 2.7% of total deposits, and $82.6 million, or 1.7% of total gross loans, respectively.

•Interest and noninterest income for the year ended December 31, 2024 were approximately $4.1 million and $1.1 million, respectively.

For information about risks relating to liquidity, see “Risk Factors” included in Part I, Item 1A. of this this Annual Report on Form 10-K.

Comparison of Cash Flows for the Years Ended December 31, 2024 and 2023

During the year ended December 31, 2024, all financing activities provided $175.1 million in cash compared to $121.9 million in cash provided for the same period in 2023. The Company was provided $53.2 million more cash from financing activities compared to the prior year, primarily due to increased deposits of $304.8 million from management’s efforts to expand deposit relationships. The Company used less cash in 2024 compared to 2023 for net long-term debt activity. Short-term borrowings activity used $109.0 million less cash in 2024 compared to 2023 as the Bank paid down wholesale funding. The Company used $3.3 million more cash for stock-related activities in 2024 compared to 2023, primarily due to a $3.3 million increase in common stock dividend payments.

The Bank’s principal use of cash has been in investing activities including its investments in loans and investment securities. In 2024, the level of net cash used in investing activities increased $306.9 million to $134.5 million from net cash provided by investing activities of $172.3 million in 2023. The increase in cash used was primarily the result of cash used for loan activities and investment securities. Cash used for loan activities decreased $194.0 million to $123.3 million for the year ended December 31, 2024 from $317.3 million for the year ended December 31, 2023 as organic loan growth slowed in 2024 as management focused on merger integration as well as safe and sound moderate loan growth in the current economic environment. The use of funds to purchase investment securities increased $93.7 million to $162.4 million for the year ended December 31, 2024, from $68.7 million for the year ended December 31, 2023. Cash proceeds from investment securities decreased $388.8 million as total proceeds from sales of acquired AFS securities decreased for the year ended December 31, 2024, compared to the year ended December 31, 2023.

Operating activities provided more cash of $24.2 million as cash provided increased to $46.9 million for the year ended December 31, 2024, compared to $22.7 million of cash provided for the same period of 2023.

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.

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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

Return on average common equity 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 after tax divided by the average shareholders’ equity for a specific period of time.

Return on Average Tangible Common Equity

Return on average tangible common equity is computed by dividing net earnings applicable to common shareholders by average tangible common stockholders’ equity. Management believes that return on average tangible common equity is meaningful because it measures the performance of a business consistently, whether acquired or internally-developed. ROATCE is a non-GAAP measure and may not be comparable to similar non-GAAP measures used by other companies.

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