REGULATORY CAPITAL REQUIREMENTS

12 Months Ended

Dec. 31, 2016

REGULATORY CAPITAL REQUIREMENTS [Abstract]

REGULATORY CAPITAL REQUIREMENTS

NOTE 17. REGULATORY CAPITAL REQUIREMENTS

Shore Bancshares, Inc. and the Bank 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 direct 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 the Banks’ assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Banks’ capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Basel III

The FRB and the FDIC approved the final rules implementing the Basel Committee on Banking Supervision's (“BCBS”) capital guidelines for U.S. banks. Under the final rules, minimum requirements increased for both the quantity and quality of capital held by the Company. The rules include a new common equity Tier 1 capital to risk-weighted assets minimum ratio of 4.5%, raise the minimum ratio of Tier 1 capital to risk-weighted assets to 6.0%, require a minimum ratio of Total Capital to risk-weighted assets of 8.0%, and require a minimum Tier 1 leverage ratio of 4.0%. A new capital conservation buffer, comprised of common equity Tier 1 capital, is also established above the regulatory minimum capital requirements. This capital conservation buffer was phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increase each subsequent year by an additional 0.625% until reaching its final level of 2.5% on January 1, 2019. Strict eligibility criteria for regulatory capital instruments were also implemented under the final rules. The final rules also revise the definition and calculation of Tier 1 capital, Total Capital, and risk-weighted assets.

The phase-in period for the final rules became effective for the Company on January 1, 2015, with full compliance with all of the final rules’ requirements phased in over a multi-year schedule, to be fully phased-in by January 1, 2019.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain amounts and ratios (set forth in the table below) of Tier 1 and total capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (leverage ratio). As of December 31, 2016, management believes that Shore Bancshares, Inc. and Shore United Bank met all capital adequacy requirements to which they are subject.

As of December 31, 2016, the most recent notification from the Federal Deposit Insurance Corporation categorized the former Talbot Bank and CNB, now Shore Untied Bank, as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes would change the Bank’s classification. To be categorized as well capitalized, the Bank must maintain minimum common equity Tier 1, Tier 1 risk-based and total risk-based capital ratios, and Tier 1 leverage ratios, which are described below.

The minimum ratios for capital adequacy purposes are 5.125%, 6.625%, 8.625% and 4.000% for the common equity Tier 1, Tier 1 risk-based capital, total risk-based capital and leverage ratios, which includes a capital conservation buffer of 0.625% respectively. To be categorized as well capitalized, a bank must maintain minimum ratios of 6.50%, 8.00%, 10.00% and 5.00% for its common equity Tier 1, Tier 1 risk-based capital, total risk-based capital and leverage ratios, respectively. Shore Bancshares, Inc., as a financial holding company, is subject to the well-capitalized requirement.

The following tables present the capital amounts and ratios for Shore Bancshares, Inc. and Shore United Bank as of December 31, 2016 and Shore Bancshares, Inc., Talbot Bank and CNB as of December 31, 2015.

	Common		Total		Net						Tier 1		Total
	Equity/		Risk-		Risk-		Adjusted		Common		Risk-Based		Risk-Based		Tier 1
	Tier 1		Based		Weighted		Average		Equity		Capital		Capital		Leverage
December 31, 2016	Capital		Capital		Assets		Total Assets		Tier 1 ratio		Ratio		Ratio		Ratio
Company	$	140,897	$	149,924	$	893,116	$	1,144,968	15.78	%	15.78	%	16.79	%	12.31	%
Shore United Bank		122,543		131,570		885,206		1,126,136	13.84	%	13.84	%	14.86	%	10.88	%
	Common		Total		Net						Tier 1		Total
	Equity/		Risk-		Risk-		Adjusted		Common		Risk-Based		Risk-Based		Tier 1
	Tier 1		Based		Weighted		Average		Equity		Capital		Capital		Leverage
December 31, 2015	Capital		Capital		Assets		Total Assets		Tier 1 ratio		Ratio		Ratio		Ratio
Company (1)	$	126,024	$	134,643	$	807,807	$	1,116,692	15.60	%	15.60	%	16.67	%	11.29	%
Talbot Bank (1)		59,692		64,405		448,634		613,945	13.31	%	13.31	%	14.36	%	9.72	%
CNB		48,051		51,957		354,278		486,404	13.56	%	13.56	%	14.67	%	9.88	%

(1) During 2016 an amended Call Report was filed for December 31, 2015.

Bank and holding company regulations, as well as Maryland law, impose certain restrictions on dividend payments by the Bank, as well as restricting extensions of credit and transfers of assets between the Bank and the Company. At December 31, 2016, the Bank could pay dividends to the parent to the extent of its earnings so long as it maintained required capital ratios. The former CNB paid dividends of $680 thousand to Shore Bancshares, Inc. during 2016 before merging with the Talbot Bank and becoming Shore United Bank. Shore Bancshares, Inc. had no outstanding receivables from subsidiaries at December 31, 2016 or 2015.