10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended June 30, 2017

OR

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

For the transition period from ________ to ________

Commission file number 0-22345

SHORE BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

Maryland	52-1974638
(State or Other Jurisdiction of	(I.R.S. Employer
Incorporation or Organization)	Identification No.)
28969 Information Lane, Easton, Maryland	21601
(Address of Principal Executive Offices)	(Zip Code)

(410) 763-7800

Registrant’s Telephone Number, Including Area Code

N/A

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐

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

Large accelerated filer	☐	Accelerated filer	☑
Non-accelerated filer	☐	Smaller reporting company	☐
(Do not check if a smaller reporting company)		Emerging growth company	☐

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  12,686,767 shares of common stock outstanding as of July 31, 2017.

INDEX

	Page
Part I. Financial Information	2
Item 1.  Financial Statements	2
Consolidated Balance Sheets –March 31, 2017 (unaudited) and December 31, 2016	2
Consolidated Statements of Operations -For the three months ended March 31, 2017 and 2016 (unaudited)	3
Consolidated Statements of Comprehensive Income -For the three months ended March 31, 2017 and 2016 (unaudited)	4
Consolidated Statements of Changes in Stockholders’ Equity -For the three months ended March 31, 2017 and 2016 (unaudited)	5
Consolidated Statements of Cash Flows -For the three months ended March 31, 2017 and 2016 (unaudited)	6
Notes to Consolidated Financial Statements (unaudited)	7
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
Item 3.  Quantitative and Qualitative Disclosures about Market Risk	46
Item 4.  Controls and Procedures	46
Part II.  Other Information	47
Item 1.  Legal Proceedings	47
Item 1A.  Risk Factors	47
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds	47
Item 3.  Defaults Upon Senior Securities	47
Item 4.  Mine Safety Disclosures	47
Item 5.  Other Information	47
Item 6.  Exhibits	47
Signatures	47
Exhibit Index	48

1

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

SHORE BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
	June 30,		December 31,
	2017		2016
ASSETS		(Unaudited)
Cash and due from banks	$	15,748	$	14,596
Interest-bearing deposits with other banks		38,331		61,342
Cash and cash equivalents		54,079		75,938
Investment securities:
Available-for-sale, at fair value		201,587		163,902
Held to maturity, at amortized cost - fair value of $6,663 (2017)
and $6,806 (2016)		6,411		6,704
Loans		1,034,605		871,525
Less: allowance for credit losses		(9,132)		(8,726)
Loans, net		1,025,473		862,799
Premises and equipment, net		23,297		16,558
Goodwill		27,207		11,931
Other intangible assets, net		4,946		1,079
Other real estate owned, net		2,302		2,477
Other assets		17,496		18,883
TOTAL ASSETS	$	1,362,798	$	1,160,271
LIABILITIES
Deposits:
Noninterest-bearing	$	311,438	$	261,575
Interest-bearing		884,820		735,914
Total deposits		1,196,258		997,489
Short-term borrowings		3,325		3,203
Other liabilities		3,275		5,280
TOTAL LIABILITIES		1,202,858		1,005,972
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share; shares authorized -
35,000,000; shares issued and outstanding - 12,685,440 (2017) and
12,664,797 (2016)		127		127
Additional paid in capital		64,791		64,201
Retained earnings		94,848		90,964
Accumulated other comprehensive income (loss)		174		(993)
TOTAL STOCKHOLDERS' EQUITY		159,940		154,299
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	1,362,798	$	1,160,271

 See accompanying notes to Consolidated Financial Statements.

2

SHORE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Dollars in thousands, except per share amounts)
	For Three Months Ended				For Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016
INTEREST INCOME
Interest and fees on loans	$	10,441	$	9,117	$	19,991	$	18,078
Interest and dividends on investment securities:
Taxable		937		824		1,764		1,694
Tax-exempt		1		2		3		4
Interest on federal funds sold		-		2		-		5
Interest on deposits with other banks		70		58		138		130
Total interest income		11,449		10,003		21,896		19,911
INTEREST EXPENSE
Interest on deposits		538		617		1,049		1,278
Interest on short-term borrowings		11		3		14		7
Total interest expense		549		620		1,063		1,285
NET INTEREST INCOME		10,900		9,383		20,833		18,626
Provision for credit losses		974		375		1,401		825
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES		9,926		9,008		19,432		17,801
NONINTEREST INCOME
Service charges on deposit accounts		878		870		1,712		1,683
Trust and investment fee income		372		364		733		715
Insurance agency commissions		2,032		1,941		4,851		4,700
Other noninterest income		897		866		1,690		1,484
Total noninterest income		4,179		4,041		8,986		8,582
NONINTEREST EXPENSE
Salaries and wages		4,803		4,422		9,305		8,899
Employee benefits		1,127		964		2,367		2,078
Occupancy expense		629		583		1,254		1,196
Furniture and equipment expense		284		248		517		483
Data processing		1,015		854		1,887		1,663
Directors' fees		102		131		182		235
Amortization of other intangible assets		55		33		88		66
FDIC insurance premium expense		45		268		209		550
Other real estate owned expense, net		108		66		163		73
Legal and professional		702		609		1,362		994
Other noninterest expenses		1,329		1,187		2,516		2,467
Total noninterest expense		10,199		9,365		19,850		18,704
INCOME BEFORE INCOME TAXES		3,906		3,684		8,568		7,679
Income tax expense		1,554		1,412		3,416		2,947
NET INCOME	$	2,352	$	2,272	$	5,152	$	4,732
Basic net income per common share	$	0.19	$	0.18	$	0.41	$	0.37
Diluted net income per common share		0.19		0.18		0.41		0.37
Dividends paid per common share		0.05		0.03		0.10		0.06

See accompanying notes to Consolidated Financial Statements.

3

SHORE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Dollars in thousands)
	For Three Months Ended				For Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016
Net Income	$	2,352	$	2,272	$	5,152	$	4,732
Other comprehensive income
Securities available for sale:
Unrealized holding gains on available-for-sale-securities		731		422		1,955		2,011
Tax effect		(306)		(170)		(788)		(812)
Net of tax amount		425		252		1,167		1,199
Total other comprehensive income		425		252		1,167		1,199
Comprehensive income	$	2,777	$	2,524	$	6,319	$	5,931

See accompanying notes to Consolidated Financial Statements.

4

SHORE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
For the Six Months Ended June 30, 2017 and 2016
(Dollars in thousands, except per share amounts)
							Accumulated
			Additional				Other		Total
	Common		Paid in		Retained		Comprehensive		Stockholders'
	Stock		Capital		Earnings		Income (Loss)		Equity
Balances, January 1, 2017	$	127	$	64,201	$	90,964	$	(993)	$	154,299
Net Income		-		-		5,152		-		5,152
Unrealized gains on available-for-sale
securities, net of taxes		-		-		-		1,167		1,167
Stock-based compensation		-		590		-		-		590
Cash dividends declared		-		-		(1,268)		-		(1,268)
Balances, June 30, 2017	$	127	$	64,791	$	94,848	$	174	$	159,940
Balances, January 1, 2016	$	126	$	63,815	$	83,097	$	(71)	$	146,967
Net Income		-		-		4,732		-		4,732
Unrealized gains on available-for-sale
securities, net of taxes		-		-		-		1,199		1,199
Common shares issued for employee stock-
based awards		-		3		-		-		3
Stock-based compensation		1		177		-		-		178
Cash dividends declared		-		-		(758)		-		(758)
Balances, June 30, 2016	$	127	$	63,995	$	87,071	$	1,128	$	152,321

See accompanying notes to Consolidated Financial Statements.

5

SHORE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
	For Six Months Ended
	June 30,
	2017		2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	5,152	$	4,732
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for credit losses		1,401		825
Depreciation and amortization		1,132		1,230
Discount accretion on debt securities		(18)		(16)
Stock-based compensation expense		590		178
Deferred income tax expense		2,783		2,438
Losses on disposals of premises and equipment		-		2
Gains on sales of other real estate owned		(3)		(2)
Write-downs of other real estate owned		161		73
Net changes in:
Accrued interest receivable		(190)		(123)
Other assets		(2,123)		272
Accrued interest payables		(20)		(20)
Other liabilities		(1,992)		(614)
Net cash provided by operating activities		6,873		8,975
CASH FLOWS FROM INVESTING ACTIVITES:
Proceeds from maturities and principal payments of investment securities
available for sale		20,007		26,092
Purchases of investment securities available for sale		(56,124)		(8,143)
Proceeds from maturities and principal payments of investment securities
held to maturity		304		192
Net change in loans		(41,323)		(26,750)
Purchases of premises and equipment		(933)		(317)
Proceeds from sales of other real estate owned		125		2,284
Cash received in branch acquisition (net of cash paid)		64,045		-
Net cash used in investing activities		(13,899)		(6,642)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net changes in:
Noninterest-bearing deposits		15,301		1,928
Interest-bearing deposits		(28,988)		(16,297)
Short-term borrowings		122		197
Proceeds from the issuance of common stock		-		3
Common stock dividends paid		(1,268)		(758)
Net cash used in financing activities		(14,833)		(14,927)
Net decrease in cash and cash equivalents		(21,859)		(12,594)
Cash and cash equivalents at beginning of period		75,938		73,811
Cash and cash equivalents at end of period	$	54,079	$	61,217
Supplemental cash flows information:
Interest paid	$	1,083	$	1,303
Income taxes paid	$	2,000	$	523
Change in unrealized (gains) losses on securities available for sale	$	(380)	$	(1,893)
Branch purchase:
Tangible assets acquired (net of cash received)	$	129,188	$	-
Identifiable intangible assets acquired	$	3,954	$	-
Liabilities assumed	$	212,463	$	-

See accompanying notes to Consolidated Financial Statements.

6

Shore Bancshares, Inc.

Notes to Consolidated Financial Statements

For the Three and Six Months Ended June 30, 2017 and 2016

(Unaudited)

Note 1 - Basis of Presentation

The consolidated financial statements include the accounts of Shore Bancshares, Inc. and its subsidiaries with all significant intercompany transactions eliminated. The consolidated financial statements conform to accounting principles generally accepted in the United States of America (“GAAP”) and to prevailing practices within the banking industry. The accompanying interim financial statements are unaudited; however, in the opinion of management all adjustments necessary to present fairly the consolidated financial position at June 30, 2017, the consolidated results of operations and comprehensive income for the three and six months ended June 30, 2017 and 2016, and changes in stockholders’ equity and cash flows for the six months ended June 30, 2017 and 2016, have been included. All such adjustments are of a normal recurring nature. The amounts as of December 31, 2016 were derived from the 2016 audited financial statements. The results of operations for the three and six months ended June 30, 2017 are not necessarily indicative of the results to be expected for any other interim period or for the full year. This Quarterly Report on Form 10-Q should be read in conjunction with the Annual Report of Shore Bancshares, Inc. on Form 10-K for the year ended December 31, 2016. For purposes of comparability, certain reclassifications have been made to amounts previously reported to conform with the current period presentation.

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

Effective July 1, 2016, the Company’s two bank subsidiaries, The Talbot Bank of Easton Maryland and CNB were consolidated into one bank known as Shore United Bank. In these notes to the consolidated financial statements and the management discussion and analysis section, the term “the Bank” refers to Shore United Bank, unless the context requires stipulating results of the individual banks before the consolidation occurred.

Recent Accounting Standards

ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” amendment requires entities to recognize revenue to depict the transfer of promised goods or services to customers in amounts that reflect the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective for periods beginning after December 15, 2016. ASU 2015-14, “Revenue from Contracts with Customers (Topic 606) Deferral of the Effective Date ” – ASU 2015-14 amendments defer the effective date of Update 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations” – ASU 2016-08 amendments are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. ASU 2016-10, “Revenue from Contracts with Customers (Topic 606):  Identifying Performance Obligations and Licensing” – ASU 2016-10 amendments clarify that contractual provisions that, explicitly or implicitly, require an entity to transfer control of additional goods or services to a customer should be distinguished from contractual provisions that, explicitly or implicitly, define the attributes of a single promised license. Attributes of a promised license define the scope of a customer’s right to use or right to access an entity’s intellectual property and, therefore, do not define whether the entity satisfies its performance obligation at a point in time or over time and do not create an obligation for the entity to transfer any additional rights to use or access its intellectual property. Revenues from services provided by financial institutions that could be impacted by the new guidance includes credit card arrangements, trust and custody services and administration services for customer deposits accounts (e.g., ATM and wire transfer transactions). This update will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Adoption of the ASU is not expected to have a significant impact on the Company’s consolidated financial statements and related disclosures. The Company’s primary sources of revenue are derived from interest and dividends earned on loans, investment securities, and other financial instruments that are not within the scope of ASU 2014-09. The Company’s revenue recognition pattern for revenue streams within the scope of ASU 2014-09, including but not limited to service charges on deposit accounts and gains/losses on the sale of OREO, is not expected to change significantly from current practice. The standard permits the use of either the full retrospective or modified retrospective transition method. The Company is currently planning to use the modified retrospective transition method which requires application of ASU 2014-09 to uncompleted contracts at the date of adoption. Periods prior to the date of adoption are not retrospectively revised, but a cumulative effect of adoption is recognized for the impact of the ASU on uncompleted contracts at the date of adoption.

ASU No. 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”. This ASU, among other things, (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the

7

balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (vii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities. ASU 2016-01 will be effective for us on January 1, 2018 and is not expected to have a significant impact on our financial statements.

ASU No. 2016-02, “Leases (Topic 842).” This ASU stipulates that a lessee should recognize the assets and liabilities that arise from leases. All leases create an asset and a liability for the lessee in accordance with FASB Concepts Statement No. 6, Elements of Financial Statement , and, therefore, recognition of those lease assets and lease liabilities represents an improvement over previous GAAP, which did not require lease assets and lease liabilities to be recognized for most leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. When measuring assets and liabilities arising from a lease, a lessee (and a lessor) should include payments to be made in optional periods only if the lessee is reasonably certain to exercise an option to extend the lease or not to exercise an option to terminate the lease. Similarly, optional payments to purchase the underlying asset should be included in the measurement of lease assets and lease liabilities only if the lessee is reasonably certain to exercise that purchase option. In addition, also consistent with the previous leases guidance, a lessee (and a lessor) should exclude most variable lease payments in measuring lease assets and lease liabilities, other than those that depend on an index or a rate or are in substance fixed payments. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. The amendments in this ASU are effective for fiscal years after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Leases and lessors may not apply a full retrospective transition approach. While the Company is currently evaluating the impact of the new standard, we expect an increase to the Consolidated Balance Sheets for right-of-use assets and interest expense of the lease liabilities in the Consolidated Statements of Income, for arrangements previously accounted for as operating leases.

ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” This ASU simplifies the treatment and accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public business entities, the amendments in this update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any entity in any interim or annual period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. Upon adoption of ASU No. 2016-09 on January 1, 2017, the Company made an accounting policy election to recognize forfeitures of stock-based awards as they occur. The adoption of ASU No. 2016-09 did not have a material impact on our consolidated financial statements.

ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU will replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The use of forecasted information incorporates more timely information in the estimate of expected credit losses, which will be more decision useful to users of the financial statements. It is not expected that an entity will need to create an economic forecast over the entire contractual life of long-dated financial assets. Therefore, the amendments will allow an entity to revert to historical loss information that is reflective of the contractual term (considering the effect of prepayments) for periods that are beyond the time frame for which the entity is able to develop reasonable and supportable forecasts. The amendments retain many of the disclosure amendments in Accounting Standards Update No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, updated to reflect the change from an incurred loss methodology to an expected credit loss methodology. Credit losses on available-for-sale debt securities should be measured in a manner similar to current GAAP. However, the amendments require that credit losses be presented as an allowance rather than a write-down. For public entities that are U.S. Securities and Exchange Commission (SEC) filers, the amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. All entities may adopt the amendments earlier as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company believes this ASU will have a significant impact on our consolidated financial statements and the method in which we calculate our credit losses, primarily on loans and held to maturity securities. At this time, the Company has established a project management team which is in the process of developing and understanding this pronouncement, evaluating the impact of this pronouncement and researching additional software resources that could assist with the implementation.

8

ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments." Current GAAP is unclear or does not include specific guidance on how to classify certain transactions in the statement of cash flows. This ASU is intended to reduce diversity in practice in how eight particular transactions are classified in the statement of cash flows. ASU No. 2016-15 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, provided that all of the amendments are adopted in the same period. Entities will be required to apply the guidance retrospectively. If it is impracticable to apply the guidance retrospectively for an issue, the amendments related to that issue would be applied prospectively. We adopted the amendments in this ASU effective January 1, 2017. The adoption of ASU No. 2016-15 did not have a material impact on our consolidated financial statements.

ASU No. 2017-01 – In January 2017, FASB issued ASU No. 2017-01, Business Combinations (Topic 805)” Clarifying the Definition of a Business. The ASU clarifies the definition of a business to assist with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The guidance is not expected to have a significant impact on the Company’s financial positions, results of operations or disclosures.

ASU No. 2017-03 – In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-03, “Accounting Changes and Error Corrections (Topic 250) and Investments – Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings.” The ASU adds an SEC paragraph to ASUs 2014-09, 2016-02, and 2016-13 which specifies the SEC staff view that a registrant should evaluate ASUs that have not yet been adopted to determine the appropriate disclosure about the potential material effects of those ASUs on the financial statements when adopted. The guidance also specifies the SEC staff view on financial statement disclosures when the company does not know or cannot reasonably estimate the impact that adoption of the ASUs will have on the financial statements. The ASU also conforms SEC guidance on accounting for tax benefits resulting from investments in affordable housing projects to the guidance in ASU 2014-01, Investments – Equity Method and Joint Ventures (Topic 323). The amendments in this update are effective upon issuance. The guidance did not have a significant impact on our consolidated financial statements.

ASU No. 2017-04 – In January 2017, FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” The ASU simplifies measurement of goodwill and eliminates Step 2 from the goodwill impairment test. The Company should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. The impairment charge is limited to the amount of goodwill allocated to that reporting unit. The amendments in this update are effective for fiscal years beginning after

December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for goodwill impairment tests performed on testing dates after January 1, 2017. The guidance is not expected to have a significant impact on the Company’s financial positions, results of operations or disclosures 

ASU No. 2017-08 – In March 2017, the FASB issued ASU No. 2017-08, “Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities.” Under current GAAP, entities normally amortize the premium as an adjustment of yield over the contractual life of the instrument. This guidance shortens the amortization period of certain callable debt securities held at a premium to the earliest call date. This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The adoption of ASU No. 2017-08 is not expected to have a material impact on the Company’s consolidated financial statements.

ASU No. 2017-09 – In May 2017, the FASB issued ASU No. 2017-09 “Stock Compensation, Scope of Modification Accounting.” This ASU clarifies when changes to the terms of conditions of a share-based payment award must be accounted for as modifications. Companies will apply the modification accounting guidance if the value, vesting conditions or classification of the award changes. The new guidance should reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as modifications, as the guidance will allow companies to make certain non-substantive changes to awards without accounting for them as modifications. It does not change the accounting for modifications. ASU No. 2017-09 is effective for interim and annual reporting periods beginning after December 15, 2017; early adoption is permitted. ASU No. 2017-09 is not expected to have a material impact on the Company’s consolidated financial statements.

Note 2 – Business Combination

Northwest Bank Branch Acquisition

On May 19, 2017, the Bank purchased three branches from Northwest Bank (“NWBI”) located in Arbutus, Elkridge, and Owings Mills, Maryland. Pursuant to the transaction, the Bank acquired $122.5 million in loans and $212.5 million in deposits, as well as the branch premises and equipment. In connection with its purchase of the branches from Northwest, the Bank received a cash payment from Northwest of $62.7 million, which was net of a premium paid on deposits of $17.2 million. This acquisition provides the Bank with the opportunity to enhance its footprint in Maryland by extending its branch network across the Eastern Shore to the greater Baltimore area communities of Elkridge, Owings Mills and Arbutus.

9

The Company has accounted for the branch purchases under the acquisition method of accounting in accordance with FASB ASC topic 805, “Business Combinations,” whereby the acquired assets and liabilities were recorded by the Bank at their estimated fair values as of their acquisition date.

The acquired assets and assumed liabilities of the NWBI branches were measured at estimated fair value. Management made significant estimates and exercised significant judgement in accounting for the acquisition of the NWBI branches. Management evaluated expected cash flows, prepayment speeds and estimated loss factors to measure fair values for loans. However,pursuant to the purchase and assumption agreement, the Bank has the option to require the repurchase or exchange of any purchased loans that become nonperforming during the 75 day period following the May 19, 2017 closing. Deposits were valued based upon interest rates, original and remaining terms and maturities, as well as current rates for similar funds in the same markets. Premises were based on recent appraised values, whereas equipment was acquired based on the remaining book value from NWBI, which approximated fair value.

The statement of net assets acquired and the resulting goodwill recorded is presented in the following tables. As explained in the notes that accompany the following table, the purchased assets, assumed liabilities and identifiable assets were recorded at the acquisition date fair value.

	Acquired				Acquired
	Balances as		Fair		Balances as
	Recorded By		Value		Recorded By
	Northwest Bank		Adjustments		Shore United Bank
Cash and due from banks	$	81,231	$	-	$	81,231
Loans		125,131		(2,269)		122,862
Less: allowance for credit losses		-		-		-
Loans, net		125,131		(2,269)		122,862
						-
Premises and equipment, net		5,363		963		6,326
Core deposit intangible		-		3,954		3,954
Total assets	$	211,725	$	2,648	$	214,373
Deposits:
Noninterest-bearing	$	34,481	$	-	$	34,481
Interest-bearing		177,237		738		177,975
Total deposits		211,718		738		212,456
Other liabilities		7		-		7
Total liabilities	$	211,725	$	738	$	212,463
Net assets acquired	$	-	$	1,910	$	1,910

10

The following table summarizes the acquired assets and assumed liabilities in the purchase as of the acquisition date, and the resulting goodwill of $15.3 million resulting from the transaction (in thousands):

Assets acquired at fair value:
Cash and cash equivalents	$	81,231
Loans		122,862
Premises and equipment, net		6,326
Core deposit intangible		3,954
Total fair value of assets acquired	$	214,373
Liabilities assumed at fair value:
Deposits	$	212,456
Other liabilities		7
Total fair value of liabilities assumed	$	212,463
Net assets acquired at fair value:	$	1,910
Transaction consideration paid to Northwest Bank	$	17,186
Amount of goodwill resulting from acquisition	$	15,276

The total amount of goodwill arising from this transaction of $15.3 million is expected to be deductible for tax purposes, pursuant to section 197 of the Internal Revenue Code.

Acquired loans

The following table outlines the contractually required payments receivable, cash flows we expect to receive, and the accretable yield for all NWBI loans as of the acquisition date.

	Contractually
	Required		Cash Flows				Carrying Value
	Payments		Expected To Be		Accretable FMV		of Loans
	Receivable		Collected		Adjustments		Receivable
Performing loans acquired	$	125,131		125,131		2,269	$	122,862

The Company recorded all loans acquired at the estimated fair value on the purchase date with no carryover of the related allowance for loan losses. The Company only acquired loans which were deemed to be performing loans with no signs of credit deterioration.

The Company determined the net discounted value of cash flows on approximately 864 performing loans totaling $125.1 million. The valuation took into consideration the loans’ underlying characteristics, including account types, remaining terms, annual interest rates, interest types, past delinquencies, timing of principal and interest payments, current market rates, loan-to-value ratios, loss exposures, and remaining balances. These performing loans were segregated into pools based on loan and payment type. The effect of this fair valuation process was a net accretable discount adjustment of $2.3 million at acquisition.

11

Note 3 – Earnings Per Share

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

	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
(In thousands, except per share data)	2017		2016		2017		2016
Net Income	$	2,352	$	2,272	$	5,152	$	4,732
Weighted average shares outstanding - Basic		12,681		12,648		12,676		12,642
Dilutive effect of common stock equivalents-options		21		-		21		-
Dilutive effect of common stock equivalents-restricted stock units		33		17		33		15
Weighted average shares outstanding - Diluted		12,735		12,665		12,730		12,657
Earnings per common share - Basic	$	0.19	$	0.18	$	0.41	$	0.37
Earnings per common share - Diluted	$	0.19	$	0.18	$	0.41	$	0.37

There were no weighted average common stock equivalents excluded from the calculation of diluted earnings per share for the three and six months ended June 30, 2017 and 2016.

Note 4 – Investment Securities

The following table provides information on the amortized cost and estimated fair values of investment securities.

			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
(Dollars in thousands)	Cost		Gains		Losses		Value
Available-for-sale securities:
June 30, 2017
U.S. Government agencies	$	49,173	$	83	$	40	$	49,216
Mortgage-backed		151,375		822		484		151,713
Equity		659		-		1		658
Total	$	201,207	$	905	$	525	$	201,587
December 31, 2016
U.S. Government agencies	$	34,320	$	56	$	58	$	34,318
Mortgage-backed		130,490		263		1,809		128,944
Equity		652		-		12		640
Total	$	165,462	$	319	$	1,879	$	163,902
Held-to-maturity securities:
June 30, 2017
U.S. Government agencies	$	2,007	$	57	$	-	$	2,064
States and political subdivisions		1,404		71		-		1,475
Other equity securities (1)		3,000		124		-		3,124
Total	$	6,411	$	252	$	-	$	6,663
December 31, 2016
U.S. Government agencies	$	2,089	$	26	$	-	$	2,115
States and political subdivisions		1,615		76		-		1,691
Other equity securities (1)		3,000		-		-		3,000
Total	$	6,704	$	102	$	-	$	6,806

(1) On December 15, 2016, the Company bought $3.0 million in subordinated notes with a fixed to floating rate of 6.5% from a local regional bank which it intends to hold to maturity of December 30, 2026.

12

The following tables provide information about gross unrealized losses and fair value by length of time that the individual securities have been in a continuous unrealized loss position at June 30, 2017 and December 31, 2016.

	Less than				More than
	12 Months				12 Months				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(Dollars in thousands)	Value		Losses		Value		Losses		Value		Losses
June 30, 2017
Available-for-sale securities:
U.S. Government agencies	$	18,941	$	40	$	-	$	-	$	18,941	$	40
Mortgage-backed		40,040		283		8,139		201		48,179		484
Equity securities		659		1		-		-		658		1
Total	$	59,640	$	324	$	8,139	$	201	$	67,778	$	525
	Less than				More than
	12 Months				12 Months				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(Dollars in thousands)	Value		Losses		Value		Losses		Value		Losses
December 31, 2016
Available-for-sale securities:
U.S. Government agencies	$	11,926	$	58	$	-	$	-	$	11,926	$	58
Mortgage-backed		100,237		1,546		9,208		263		109,445		1,809
Equity securities		640		12		-		-		640		12
Total	$	112,803	$	1,616	$	9,208	$	263	$	122,011	$	1,879

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

The following table provides information on the amortized cost and estimated fair values of investment securities by maturity date at June 30, 2017.

	Available for sale				Held to maturity
	Amortized		Estimated		Amortized		Estimated
(Dollars in thousands)	Cost		Fair Value		Cost		Fair Value
Due in one year or less	$	12,005	$	11,997	$	-	$	-
Due after one year through five years		34,992		34,997		501		527
Due after five years through ten years		18,649		18,651		903		949
Due after ten years		134,902		135,284		2,007		2,063
		200,548		200,929		3,411		3,539
Equity securities		659		658		3,000		3,124
Total	$	201,207	$	201,587	$	6,411	$	6,663

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

13

Note 5 – Loans and Allowance for Credit Losses

The Company makes residential mortgage, commercial and consumer loans to customers primarily in Talbot County, Queen Anne’s County, Kent County, Caroline County, Dorchester County, Baltimore County and Howard County in Maryland and in Kent County, Delaware. The following table provides information about the principal classes of the loan portfolio at June 30, 2017 and December 31, 2016.

(Dollars in thousands)	June 30, 2017		December 31, 2016
Construction	$	100,095	$	84,002
Residential real estate		384,777		325,768
Commercial real estate		452,132		382,681
Commercial		90,650		72,435
Consumer		6,951		6,639
Total loans		1,034,605		871,525
Allowance for credit losses		(9,132)		(8,726)
Total loans, net	$	1,025,473	$	862,799

Loans are stated at their principal amount outstanding net of any purchase premiums, deferred fees and costs. Interest income on loans is accrued at the contractual rate based on the principal amount outstanding. Fees charged and costs capitalized for originating loans are being amortized substantially on the interest method over the term of the loan. A loan is placed on nonaccrual (i.e., interest income is no longer accrued) when it is specifically determined to be impaired or when principal or interest is delinquent for 90 days or more, unless the loan is well secured and in the process of collection. Any unpaid interest previously accrued on those loans is reversed from income.

Interest payments received on nonaccrual loans are applied as a reduction of the loan principal balance unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.

A loan is considered impaired if it is probable that the Company will not collect all principal and interest payments according to the loan’s contractual terms. An impaired loan may show deficiencies in the borrower’s overall financial condition, payment history, support available from financial guarantors and/or the fair market value of collateral. The impairment of a loan is measured at the present value of expected future cash flows using the loan’s effective interest rate, or at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. Generally, the Company measures impairment on such loans by reference to the fair value of the collateral. Once the amount of impairment has been determined, the uncollectible portion is charged off. Income on impaired loans is recognized on a cash basis, and payments are first applied against the principal balance outstanding (i.e., placing impaired loans on nonaccrual status). Generally, interest income is not recognized on impaired loans unless the likelihood of further loss is remote. The allowance for credit losses may include specific reserves related to impaired loans. Specific reserves remain until charge offs are made. Impaired loans do not include groups of smaller balance homogenous loans such as residential mortgage and consumer installment loans that are evaluated collectively for impairment. Reserves for probable credit losses related to these loans are based on historical loss ratios and are included in the formula portion of the allowance for credit losses. See additional discussion under the caption “Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

A loan is considered a troubled debt restructuring (“TDR”) if a borrower is experiencing financial difficulties and a creditor has granted a concession. Concessions may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules and other actions intended to minimize potential losses. Loans are identified to be restructured when signs of impairment arise such as borrower interest rate reduction request, slowness to pay, or when an inability to repay becomes evident. The terms being offered are evaluated to determine if they are more liberal than those that would be indicated by policy or industry standards for similar, untroubled credits. In those situations where the terms or the interest rates are considered to be more favorable than industry standards or the current underwriting guidelines of the Company’s banking subsidiary, Shore United Bank (the “Bank”), the loan is classified as a TDR. All loans designated as TDRs are considered impaired loans and may be on either accrual or nonaccrual status. In instances where the loan has been placed on nonaccrual status, six consecutive months of timely payments are required prior to returning the loan to accrual status.

14

All loans classified as TDRs which are restructured and accrue interest under revised terms require a full and comprehensive review of the borrower’s financial condition, capacity for repayment, realistic assessment of collateral values, and the assessment of risk entered into any workout agreement. Current financial information on the borrower, guarantor, and underlying collateral is analyzed to determine if it supports the ultimate collection of principal and interest. For commercial loans, the cash flows are analyzed, both for the underlying project and globally. For consumer loans, updated salary, credit history and cash flow information is obtained. Current market conditions are also considered. Following a full analysis, the determination of the appropriate loan structure is made.

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

Construction loans – Construction loans generally finance the construction of residential real estate for builders and individuals for single family dwellings. In addition, the Bank periodically finances the construction of commercial projects. Credit risk factors include the borrower’s ability to successfully complete the construction on time and within budget, changing market conditions which could affect the value and marketability of projects, changes in the borrower’s ability or willingness to repay the loan and potentially rising interest rates which can impact both the borrower’s ability to repay and the collateral value.

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

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

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

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

15

The following tables include impairment information relating to loans and the allowance for credit losses as of June 30, 2017 and December 31, 2016.

			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Total
June 30, 2017
Loans individually
evaluated for impairment	$	6,926	$	6,443	$	5,567	$	345	$	-	$	19,281
Loans collectively
evaluated for impairment		93,169		378,334		446,565		90,305		6,951		1,015,324
Total loans	$	100,095	$	384,777	$	452,132	$	90,650	$	6,951	$	1,034,605
Allowance for credit
losses allocated to:
Loans individually
evaluated for impairment	$	593	$	259	$	165	$	-	$	-	$	1,017
Loans collectively
evaluated for impairment		1,756		1,837		2,637		1,652		233		8,115
Total allowance	$	2,349	$	2,096	$	2,802	$	1,652	$	233	$	9,132

			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Total
December 31, 2016
Loans individually
evaluated for impairment	$	8,007	$	7,778	$	6,088	$	-	$	99	$	21,972
Loans collectively
evaluated for impairment		75,995		317,990		376,593		72,435		6,540		849,553
Total loans	$	84,002	$	325,768	$	382,681	$	72,435	$	6,639	$	871,525
Allowance for credit
losses allocated to:
Loans individually
evaluated for impairment	$	1,639	$	317	$	185	$	-	$	-	$	2,141
Loans collectively
evaluated for impairment		1,148		1,636		2,425		1,145		231		6,585
Total allowance	$	2,787	$	1,953	$	2,610	$	1,145	$	231	$	8,726

16

The following tables provide information on impaired loans and any related allowance by loan class as of June 30, 2017 and December 31, 2016. The difference between the unpaid principal balance and the recorded investment is the amount of partial charge-offs that have been taken.

				Recorded		Recorded			Quarter-to-		Year-to-date
	Unpaid			investment		investment			date average		average		Interest
	principal			with no		with an	Related		recorded		recorded		income
(Dollars in thousands)	balance			allowance		allowance	allowance		investment		investment		recognized
June 30, 2017
Impaired nonaccrual loans:
Construction	$	3,017	$	51	$	2,838	$	580	$	3,153	$	3,435	$	-
Residential real estate		3,352		1,066		2,143		114		3,870		3,940		-
Commercial real estate		1,271		547		167		90		670		696		-
Commercial		425		345		-		-		115		57		-
Consumer		-		-		-		-		66		82		-
Total	$	8,065	$	2,009	$	5,148	$	784	$	7,874	$	8,210	$	-
Impaired accruing TDRs:
Construction	$	4,037	$	3,336	$	701	$	13	$	4,040	$	4,111	$	55
Residential real estate		3,234		2,204		1,030		145		3,409		3,585		87
Commercial real estate		4,853		1,866		2,987		75		4,869		4,888		100
Commercial		-		-		-		-		-		-		-
Consumer		-		-		-		-		-		-		-
Total	$	12,124	$	7,406	$	4,718	$	233	$	12,318	$	12,584	$	242
Total impaired loans:
Construction	$	7,054	$	3,387	$	3,539	$	593	$	7,193	$	7,546	$	55
Residential real estate		6,586		3,270		3,173		259		7,279		7,525		87
Commercial real estate		6,124		2,413		3,154		165		5,539		5,584		100
Commercial		425		345		-		-		115		57		-
Consumer		-		-		-		-		66		82		-
Total	$	20,189	$	9,415	$	9,866	$	1,017	$	20,192	$	20,794	$	242

17

									June 30, 2016
				Recorded		Recorded			Quarter-to-		Year-to-date
	Unpaid			investment		investment			date average		average		Interest
	principal			with no		with an	Related		recorded		recorded		income
(Dollars in thousands)	balance			allowance		allowance	allowance		investment		investment		recognized
December 31, 2016
Impaired nonaccrual loans:
Construction	$	7,247	$	-	$	3,818	$	1,621	$	5,489	$	6,353	$	-
Residential real estate		4,013		1,957		1,946		166		3,914		3,103		-
Commercial real estate		1,801		959		193		117		2,058		2,308		-
Commercial		-		-		-		-		164		161		-
Consumer		99		99		-		-		106		114		-
Total	$	13,160	$	3,015	$	5,957	$	1,904	$	11,731	$	12,039	$	-
Impaired accruing TDRs:
Construction	$	4,189	$	3,479	$	710	$	18	$	4,244	$	4,142	$	43
Residential real estate		3,875		2,829		1,046		151		4,931		5,300		102
Commercial real estate		4,936		1,573		3,363		68		5,066		5,215		85
Commercial		-		-		-		-		-		-		-
Consumer		-		-		-		-		-		-		-
Total	$	13,000	$	7,881	$	5,119	$	237	$	14,241	$	14,657	$	230
Total impaired loans:
Construction	$	11,436	$	3,479	$	4,528	$	1,639	$	9,733	$	10,495	$	43
Residential real estate		7,888		4,786		2,992		317		8,845		8,403		102
Commercial real estate		6,737		2,532		3,556		185		7,124		7,523		85
Commercial		-		-		-		-		164		161		-
Consumer		99		99		-		-		106		114		-
Total	$	26,160	$	10,896	$	11,076	$	2,141	$	25,972	$	26,696	$	230

18

The following tables provide a roll-forward for troubled debt restructurings as of June 30, 2017 and June 30, 2016.

	1/1/2017												6/30/2017
	TDR		New		Disbursements		Charge		Reclassifications/				TDR		Related
(Dollars in thousands)	Balance		TDRs		(Payments)		offs		Transfer In/(Out)		Payoffs		Balance		Allowance
For six months ended
June 30, 2017
Accruing TDRs
Construction	$	4,189	$	-	$	(18)	$	-	$	-	$	(134)	$	4,037	$	13
Residential real estate		3,875		-		(102)		(89)		-		(450)		3,234		145
Commercial real estate		4,936		-		(83)		-		-		-		4,853		75
Commercial		-		-		-		-		-		-		-		-
Consumer		-		-		-		-		-		-		-		-
Total	$	13,000	$	-	$	(203)	$	(89)	$	-	$	(584)	$	12,124	$	233
Nonaccrual TDRs
Construction	$	3,818	$	-	$	(872)	$	-	$	(108)	$	-	$	2,838	$	580
Residential real estate		1,603		-		(44)		-		-		-		1,559		110
Commercial real estate		83		-		-		-		-		-		83		-
Commercial		-		345		-		-		-		-		345		-
Consumer		-		-		-		-		-		-		-		-
Total	$	5,504	$	345	$	(916)	$	-	$	(108)	$	-	$	4,825	$	690
Total	$	18,504	$	345	$	(1,119)	$	(89)	$	(108)	$	(584)	$	16,949	$	923

	1/1/2016												6/30/2016
	TDR		New		Disbursements		Charge		Reclassifications/				TDR		Related
(Dollars in thousands)	Balance		TDRs		(Payments)		offs		Transfer In/(Out)		Payoffs		Balance		Allowance
For six months ended
June 30, 2016
Accruing TDRs
Construction	$	4,069	$	-	$	172	$	-	$	-	$	-	$	4,241	$	25
Residential real estate		5,686		533		(350)		-		(1,595)		(179)		4,095		73
Commercial real estate		5,740		495		(659)		(117)		(458)		-		5,001		155
Commercial		-		-		-		-		-		-		-		-
Consumer		-		-		-		-		-		-		-		-
Total	$	15,495	$	1,028	$	(837)	$	(117)	$	(2,053)	$	(179)	$	13,337	$	253
Nonaccrual TDRs
Construction	$	4,960	$	2,570	$	(1,847)	$	(254)	$	-	$	-	$	5,429	$	739
Residential real estate		445		-		(293)		-		1,595		-		1,747		72
Commercial real estate		-		-		-		(258)		458		-		200		112
Commercial		-		-		-		-		-		-		-		-
Consumer		23		-		(23)		-		-		-		-		-
Total	$	5,428	$	2,570	$	(2,163)	$	(512)	$	2,053	$	-	$	7,376	$	923
Total	$	20,923	$	3,598	$	(3,000)	$	(629)	$	-	$	(179)	$	20,713	$	1,176

19

The following tables provide information on loans that were modified and considered TDRs during the six months ended June 30, 2017 and June 30, 2016.

		Premodification		Postmodification
		outstanding		outstanding
	Number of	recorded		recorded		Related
(Dollars in thousands)	contracts	investment		investment		allowance
TDRs:
For six months ended
June 30, 2017
Construction	-	$	-	$	-	$	-
Residential real estate	-		-		-		-
Commercial real estate	1		760		755		-
Commercial	1		462		345		-
Consumer	-		-		-		-
Total	2	$	1,222	$	1,100	$	-
For six months ended
June 30, 2016
Construction	-	$	-	$	-	$	-
Residential real estate	3		668		668		-
Commercial real estate	1		495		495		-
Commercial	-		-		-		-
Consumer	-		-		-		-
Total	4	$	1,163	$	1,163	$	-

During the six months ended June 30, 2017, there was one new TDR and one previously recorded TDR which was modified. The new TDR consisted of a reduction in principal, whereas, the previously recorded TDR consisted of a change in maturity date.

The following tables provide information on TDRs that defaulted during the six months ended June 30, 2017 and June 30, 2016. Generally, a loan is considered in default when principal or interest is past due 90 days or more.

	Number of	Recorded		Related
(Dollars in thousands)	contracts	investment		allowance
TDRs that subsequently defaulted:
For six months ended
June 30, 2017
Construction	-	$	-	$	-
Residential real estate	1		89		-
Commercial real estate	-		-		-
Commercial	-		-		-
Consumer	-		-		-
Total	1	$	89	$	-
For six months ended
June 30, 2016
Construction	1	$	241	$	-
Residential real estate	-		-		-
Commercial real estate	2		375		-
Commercial	-		-		-
Consumer	-		-		-
Total	3	$	616	$	-

20

Management uses risk ratings as part of its monitoring of the credit quality in the Company’s loan portfolio. Loans that are identified as special mention, substandard or doubtful are adversely rated. They are assigned higher risk ratings than favorably rated loans in the calculation of the formula portion of the allowance for credit losses. At June 30, 2017, there were no nonaccrual loans classified as special mention or doubtful and $7.2 million of nonaccrual loans were identified as substandard. Similarly, at December 31, 2016, there were no nonaccrual loans classified as special mention or doubtful and $9.0 million of nonaccrual loans were identified as substandard.

The following tables provide information on loan risk ratings as of June 30, 2017 and December 31, 2016.

			Special
(Dollars in thousands)	Pass/Performing		Mention		Substandard		Doubtful		Total
June 30, 2017
Construction	$	89,918	$	4,055	$	6,122	$	-	$	100,095
Residential real estate		372,148		6,725		5,904		-		384,777
Commercial real estate		428,971		15,495		7,666		-		452,132
Commercial		89,451		799		400		-		90,650
Consumer		6,951		-		-		-		6,951
Total	$	987,439	$	27,074	$	20,092	$	-	$	1,034,605

			Special
(Dollars in thousands)	Pass/Performing		Mention		Substandard		Doubtful		Total
December 31, 2016
Construction	$	72,641	$	4,195	$	7,166	$	-	$	84,002
Residential real estate		312,242		6,646		6,880		-		325,768
Commercial real estate		363,461		10,939		8,281		-		382,681
Commercial		71,313		857		265		-		72,435
Consumer		6,540		-		99		-		6,639
Total	$	826,197	$	22,637	$	22,691	$	-	$	871,525

The following tables provide information on the aging of the loan portfolio as of June 30, 2017 and December 31, 2016.

		Accruing
				30-59 days			60-89 days			Greater than			Total
(Dollars in thousands)	Current			past due			past due			90 days			past due			Nonaccrual			Total
June 30, 2017
Construction	$	97,045		$	-		$	50		$	111		$	161		$	2,889		$	100,095
Residential real estate		379,217			310			1,838			203			2,351			3,209			384,777
Commercial real estate		450,740			219			459			-			678			714			452,132
Commercial		90,272			33			-			-			33			345			90,650
Consumer		6,944			5			2			-			7			-			6,951
Total	$	1,024,218		$	567		$	2,349		$	314		$	3,230		$	7,157		$	1,034,605
Percent of total loans		99.0	%		0.1	%		0.2	%		-	%		0.3	%		0.7	%		100.0	%

		Accruing
				30-59 days			60-89 days			Greater than			Total
(Dollars in thousands)	Current			past due			past due			90 days			past due			Nonaccrual			Total
December 31, 2016
Construction	$	80,079		$	-		$	105		$	-		$	105		$	3,818		$	84,002
Residential real estate		317,992			1,778			2,095			-			3,873			3,903			325,768
Commercial real estate		375,552			3,219			2,758			-			5,977			1,152			382,681
Commercial		72,272			19			134			10			163			-			72,435
Consumer		6,515			13			2			10			25			99			6,639
Total	$	852,410		$	5,029		$	5,094		$	20		$	10,143		$	8,972		$	871,525
Percent of total loans		97.8	%		0.6	%		0.6	%		-	%		1.2	%		1.0	%		100.0	%

21

Management evaluates the adequacy of the allowance for credit losses at least quarterly and adjusts the provision for credit losses based on this analysis. The following tables provide a summary of the activity in the allowance for credit losses allocated by loan class for the three months and six months ended June 30, 2017 and 2016. Allocation of a portion of the allowance to one loan class does not preclude its availability to absorb losses in other loan classes.

Management re-evaluated the allowance methodology during the third quarter of 2016, in connection with the consolidation of the two former bank subsidiaries. Prior to consolidation, each bank subsidiary applied a separate allowance methodology based on their respective loan portfolios. The revised methodology incorporates both previous methodologies to align with a consolidated loan portfolio. In addition, beginning in January of 2017, the allowance methodology was expanded to require the allocation of general reserves to pass/watch loans. This change resulted in an increase in allowance for the first quarter of 2017 when compared to the fourth quarter of 2016 of $1.1 million, which was partially offset by a reduction in specific reserves of $850 thousand.

			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Unallocated		Total
For three months ended
June 30, 2017
Allowance for credit losses:
Beginning Balance	$	2,290	$	2,131	$	2,912	$	1,338	$	256	$	-	$	8,927
Charge-offs		(25)		(100)		-		(706)		(15)		-		(846)
Recoveries		9		10		8		42		8		-		77
Net charge-offs		(16)		(90)		8		(664)		(7)		-		(769)
Provision		75		55		(118)		978		(16)		-		974
Ending Balance	$	2,349	$	2,096	$	2,802	$	1,652	$	233	$	-	$	9,132

			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Unallocated		Total
For three months ended
June 30, 2016
Allowance for credit losses:
Beginning Balance	$	1,753	$	2,014	$	3,257	$	585	$	177	$	523	$	8,309
Charge-offs		(13)		(102)		(265)		(58)		(2)		-		(440)
Recoveries		10		33		10		57		4		-		114
Net charge-offs		(3)		(69)		(255)		(1)		2		-		(326)
Provision		(6)		90		(131)		93		27		302		375
Ending Balance	$	1,744	$	2,035	$	2,871	$	677	$	206	$	825	$	8,358

22

			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Unallocated		Total
For six months ended
June 30, 2017
Allowance for credit losses:
Beginning Balance	$	2,787	$	1,953	$	2,610	$	1,145	$	231	$	-	$	8,726
Charge-offs		(54)		(323)		-		(771)		(15)		-		(1,163)
Recoveries		16		21		19		100		12		-		168
Net charge-offs		(38)		(302)		19		(671)		(3)		-		(995)
Provision		(400)		445		173		1,178		5		-		1,401
Ending Balance	$	2,349	$	2,096	$	2,802	$	1,652	$	233	$	-	$	9,132

			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Unallocated		Total
For six months ended
June 30, 2016
Allowance for credit losses:
Beginning Balance	$	1,646	$	2,181	$	2,999	$	558	$	156	$	776	$	8,316
Charge-offs		(254)		(118)		(503)		(125)		(10)		-		(1,010)
Recoveries		16		67		10		122		12		-		227
Net charge-offs		(238)		(51)		(493)		(3)		2		-		(783)
Provision		336		(95)		365		122		48		49		825
Ending Balance	$	1,744	$	2,035	$	2,871	$	677	$	206	$	825	$	8,358

23

Foreclosure Proceedings

Consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure totaled $105thousand and $ 687 thousand as of June 30, 2017 and December 31, 2016, respectively. At June 30, 2017, there was 1 residential property held in other real estate owned totaling $15 thousand, compared to 3 residential properties totaling $92 thousand at December 31, 2016.

Performing TDRs were in compliance with their modified terms and there are no further commitments associated with these loans.

Note 6  – Goodwill and Other Intangibles

On May 19, 2017, the Bank acquired three branches located in Arbutus, Owings Mills and Elkridge, Maryland from NWBI. The purchase of these branches resulted in core deposit intangibles of $4.0 million.

The gross carrying amount and accumulated amortization of intangible assets is as follows:

June 30, 2017
									Weighted
	Gross		Accumulated				Net		Average
	Carrying		Impairment		Accumulated		Carrying		Remaining Life
(Dollars in thousands)	Amount		Charges		Amortization		Amount		(in years)
Goodwill	$	30,511	$	(2,637)	$	(667)	$	27,207	-
Other intangible assets
Amortizable
Employment agreements	$	440	$	-	$	(440)	$	-	-
Insurance expirations		1,270		-		(1,264)		6	0.1
Customer relationships		795		(95)		(461)		239	5.1
Core deposit intangible		3,954		-		(33)		3,921	9.9
		6,459		(95)		(2,198)		4,166
Unamortizable
Carrier relationships		-		-		-		-
Trade name		780		-		-		780	-
		780		-		-		780
Total other intangible assets	$	7,239	$	(95)	$	(2,198)	$	4,946
December 31, 2016
									Weighted
	Gross		Accumulated				Net		Average
	Carrying		Impairment		Accumulated		Carrying		Remaining Life
(Dollars in thousands)	Amount		Charges		Amortization		Amount		(in years)
Goodwill	$	15,235	$	(2,637)	$	(667)	$	11,931	-
Other intangible assets
Amortizable
Employment agreements	$	440	$	-	$	(440)	$	-	-
Insurance expirations		1,270		-		(1,233)		37	0.4
Customer relationships		795		(95)		(438)		262	5.6
Core deposit intangible		-		-		-		-	-
		2,505		(95)		(2,111)		299
Unamortizable
Carrier relationships		-		-		-		-
Trade name		780		-		-		780	-
		780		-		-		780
Total other intangible assets	$	3,285	$	(95)	$	(2,111)	$	1,079

24

Estimated future amortizing expense for amortization intangibles within the years ending December 31, are as follows:

(Dollars in thousands)
June 30, 2017	$	88
2018		442
2019		442
2020		395
2021		439
Thereafter		2,360
Total amortizing intangible assets	$	4,166

Note 7 – Other Assets

The Company had the following other assets at June 30, 2017 and December 31, 2016.

(Dollars in thousands)	June 30, 2017		December 31, 2016
Nonmarketable investment securities	$	3,069	$	1,650
Accrued interest receivable		2,865		2,675
Deferred income taxes		3,467		7,039
Prepaid expenses		1,111		1,149
Cash surrender value on life insurance		2,599		2,589
Other assets		4,385		3,781
Total	$	17,496	$	18,883

25

The following table provides information on significant components of the Company’s deferred tax assets and liabilities as of June 30, 2017 and December 31, 2016.

	June 30,		December 31,
(Dollars in thousands)	2017		2016
Deferred tax assets:
Allowance for credit losses	$	3,647	$	3,486
Reserve for off-balance sheet commitments		122		122
Net operating loss carry forward		1,188		2,232
Write-downs of other real estate owned		300		387
Deferred income		168		1,011
Unrealized gains on available-for-sale securities		-		672
AMT Credits		403		869
Other		936		1,192
Total deferred tax assets		6,764		9,971
Deferred tax liabilities:
Depreciation		200		239
Amortization on loans FMV adjustment		138		156
Purchase accounting adjustments		2,292		2,019
Deferred capital gain on branch sale		350		401
Unrealized losses on available-for-sale securities		117		-
Other		200		116
Total deferred tax liabilities		3,297		2,931
Net deferred tax assets	$	3,467	$	7,040

The Company’s deferred tax assets consist of gross net operating loss carryovers for state tax purposes of $22.2 million that will be used to offset taxable income in future periods. The Company’s state net operating loss carryovers will begin to expire in the year ended December 31, 2026 with limited amounts available through December 31, 2034. Additionally, the Company has $403 thousand of alternative minimum tax credit carryforwards as of June 30, 2017 which may be carried forward indefinitely.

No valuation allowance on these deferred tax assets was recorded at June 30, 2017 and December 31, 2016 as management believes it is more likely than not that all deferred tax assets will be realized based on the following positive material factors: 1) The Company was profitable for all four quarters of 2014, 2015 and 2016 on a GAAP basis. The net operating loss was originally created in the third quarter of 2013 and was solely attributable to the former Talbot Bank’s sale of loans and other real estate owned (the “Asset Sale”), which is considered non-recurring. 2) The Company had pre-tax income of $15.9 million and $11.5 million for the years ended December 31, 2016 and 2015, providing further evidence that the Asset Sale was producing positive results and confirming the expectation of utilizing the deferred tax assets. Alternatively, the Company has reviewed negative factors which would influence the conclusion of realizing the deferred tax assets. These factors include the following: 1) The Company could be subject to Section 382 of the Internal Revenue Code (“IRC”), which could further limit the realization of the net operating loss-related deferred tax asset (“NOL-DTA”). 2) Although the local economy of the market in which the Company operates has been showing continued signs of improvement over the past four years, if this trend flattens or reverses, there is a potential that this potential negative evidence could outweigh the prevailing positive factors.

Based on the aforementioned considerations, the Company has concluded that the predominance of observable positive evidence outweighs the future potential of negative evidence and therefore it is more likely than not that the Company will be able to realize in the future all of the net deferred tax assets.

26

Note 8 – Other Liabilities

The Company had the following other liabilities at June 30, 2017 and December 31, 2016.

(Dollars in thousands)	June 30, 2017		December 31, 2016
Accrued interest payable	$	55	$	74
Other accounts payable		2,032		2,461
Deferred compensation liability		1,188		1,444
Other liabilities		-		1,301
Total	$	3,275	$	5,280

Note 9 - Stock-Based Compensation

At the 2016 annual meeting, stockholders approved the Shore Bancshares, Inc. 2016 Stock and Incentive Plan (“2016 Equity Plan”), replacing the Shore Bancshares, Inc. 2006 Stock and Incentive Plan (“2006 Equity Plan”), which expired on that date. The Company may issue shares of common stock or grant other equity-based awards pursuant to the 2016 Equity Plan. Stock-based awards granted to date generally are time-based, vest in equal installments on each anniversary of the grant date and range over a one- to five-year period of time, and, in the case of stock options, expire 10 years from the grant date. As part of the 2016 Equity Plan, a performance equity incentive award program, known as the “Long-term incentive plan” allows participating officers of the Company to earn incentive awards of performance share/restricted stock units if certain pre-determined targets are achieved at the end of a three-year performance cycle. Stock-based compensation expense based on the grant date fair value is recognized ratably over the requisite service period for all awards and reflects forfeitures as they occur. The 2016 Equity Plan originally reserved 750,000 shares of common stock for grant, and 711,200 shares remained available for grant at June 30, 2017.

The following tables provide information on stock-based compensation expense for the three and six months ended June 30, 2017 and 2016.

	For Three Months Ended				For six months ended
	June 30, 2017				June 30, 2017
(Dollars in thousands)	2017		2016		2017		2016
Stock-based compensation expense	$	173	$	66	$	590	$	177
Excess tax benefits related to stock-based
compensation		11		-		13		3

	June 30,
(Dollars in thousands)	2017			2016
Unrecognized stock-based compensation
expense	$	354		$	179
Weighted average period unrecognized
expense is expected to be recognized		1.1	years		0.8	years

27

The following table summarizes restricted stock award activity for the Company under the 2016 Equity Plan for the six months ended June 30, 2017 and 2016.

	Six Months Ended June 30, 2017			Six Months Ended June 30, 2016
		Weighted Average			Weighted Average
	Number of	Grant Date		Number of	Grant Date
	Shares	Fair Value		Shares	Fair Value
Nonvested at beginning of period	17,066	$	11.46	12,488	$	8.74
Granted	20,143		16.69	23,239		11.47
Vested	(21,296)		13.47	(18,662)		9.63
Cancelled	-		-	-		-
Nonvested at end of period	15,913	$	12.49	17,065	$	11.46

The fair value of restricted stock awards that vested during the first six months of 2017 and 2016 was $287 thousand and $180 thousand, respectively.

Restricted stock units (RSUs) are similar to restricted stock, except the recipient does not receive the stock immediately, but instead receives it upon the terms and conditions of the Company’s long-term incentive plans which are subject to performance milestones achieved at the end of a three-year period.  Each RSU cliff vests at the end of the three-year period and entitles the recipient to receive one share of common stock on a specified issuance date.  The recipient does not have any stockholder rights, including voting rights, with respect to the shares underlying awarded RSUs until the recipient becomes the holder of those shares.

During 2016, the Company entered into a long-term incentive program agreement with officers of the Company and its subsidiaries to award RSUs based on a performance metric to be achieved as of December 31, 2018. These awards will cliff vest on this date, in which the final number of common shares to be issued will be determined. The range of RSUs which could potentially be awarded at the end of the performance cycle is between 12,214 shares and 48,871 shares, assuming a certain performance metric is met. In addition, two members of the long-term incentive plan from 2015 forfeited their RSUs due to leaving the Company before the end of the vesting period. The table below presents management’s evaluation of the probable number of common stock awards to be issued at the end of the performance cycle.

During 2015, the Company entered into a long-term incentive program agreement with officers of the Company and its subsidiaries to award RSUs based on performance metrics to be achieved as of December 31, 2017. These awards will cliff vest on this date, in which the final number of common shares to be issued will be determined. The range of RSUs which could potentially be awarded at the end of the performance cycle is between10,953 shares and 43,821 shares, assuming certain performance metrics are met. The table below presents management’s evaluation of the probable number of common stock awards to be issued at the end of the performance cycle.

28

The following table summarizes restricted stock units activity based on management’s evaluation of the probable number of common stock awards to be issued at the end of the performance cycle for the Company under the 2016 and 2006 Equity Plans for the six months ended June 30, 2017 and 2016.

	Six Months Ended June 30, 2017			Six Months Ended June 30, 2016
		Weighted Average			Weighted Average
	Number of	Grant Date		Number of	Grant Date
	Shares	Fair Value		Shares	Fair Value
Outstanding at beginning of period	46,342	$	10.64	26,943	$	9.49
Granted	-		-	24,433		11.68
Vested	-		-	-		-
Forfeited	-		-	(5,034)		9.49
Outstanding at end of period	46,342	$	10.64	46,342	$	10.64

The following table summarizes stock option activity for the Company under the 2016 Equity Plan for the six months ended June 30, 2017 and 2016.

	Six Months Ended June 30, 2017			Six Months Ended June 30, 2016
		Weighted Average			Weighted Average
	Number of	Grant Date		Number of	Grant Date
	Shares	Fair Value		Shares	Fair Value
Outstanding at beginning of period	62,086	$	8.29	61,327	$	8.05
Granted	1,202		10.99	12,443		11.12
Exercised	(859)		6.64	(450)		6.64
Expired/Cancelled	-		-	-		-
Outstanding at end of period	62,429	$	8.36	73,320	$	8.58
Exercisable at end of period	61,828	$	8.34	69,990	$	8.46

The weighted average fair value of stock options granted during the six months ended June 30, 2017 was $10.99. The Company estimates the fair value of options using the Black-Scholes valuation model with weighted average assumptions for dividend yield, expected volatility, risk-free interest rate and expected lives (in years). The expected dividend yield is calculated by dividing the total expected annual dividend payout by the average stock price. The expected volatility is based on historical volatility of the underlying securities. The risk-free interest rate is based on the Federal Reserve Bank’s constant maturities daily interest rate in effect at grant date. The expected contract life of the options represents the period of time that the Company expects the awards to be outstanding based on historical experience with similar awards. The following weighted average assumptions were used as inputs to the Black-Scholes valuation model for options granted in 2017 and 2016.

	2017		2016
Dividend yield	0.84	%	0.73	%
Expected volatility	64.80	%	38.60	%
Expected forfeiture rate	-	%	-	%
Risk-free interest rate	2.42	%	1.75	%
Expected contract life (in years)	10 years		10 years

At the end of the second quarter of 2017, the aggregate intrinsic value of the options outstanding under the 2016 Equity Plan was $505 thousand based on the $16.45 market value per share of the Company’s common stock at June 30, 2017. Similarly, the aggregate intrinsic value of the options exercisable was $232 thousand at June 30, 2016. The intrinsic value on options exercised during the six months ended June 30, 2017 was $8 thousand based on the $15.89 market value per share of the Company’s common stock at January 30, 2017. The intrinsic value on options exercised in 2016 was $2 thousand based on the $11.35 market value per share of the Company’s common stock at February 8, 2016. At June 30, 2017, the weighted average remaining contract life of options outstanding was 6.6 years.

29

Note 10 – Accumulated Other Comprehensive Income

The Company records unrealized holding gains (losses), net of tax, on investment securities available for sale as accumulated other comprehensive income (loss), a separate component of stockholders’ equity. The following table provides information on the changes in the components of accumulated other comprehensive income (loss) for the six months ended June 30, 2017 and 2016.

	Accumulated net
	unrealized holding		Total accumulated
	gains (losses) on		other
	available for sale		comprehensive
(Dollars in thousands)	securities		income (loss)
Balance, December 31, 2016	$	(993)	$	(993)
Other comprehensive income		1,167		1,167
Balance, June 30, 2017	$	174	$	174
Balance, December 31, 2015	$	(71)	$	(71)
Other comprehensive income		1,199		1,199
Balances, June 30, 2016	$	1,128	$	1,128

Note 11 – Fair Value Measurements

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

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

Under fair value accounting guidance, assets and liabilities are grouped at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine their fair values. These hierarchy levels are:

Level 1 inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.

Level 2 inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 inputs – Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

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

Investment Securities Available for Sale

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

30

The tables below present the recorded amount of assets measured at fair value on a recurring basis at June 30, 2017 and December 31, 2016. No assets were transferred from one hierarchy level to another during the first six months of 2017 or 2016.

					Significant
					Other		Significant
			Quoted		Observable		Unobservable
			Prices		Inputs		Inputs
(Dollars in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
June 30, 2017
Securities available for sale:
U.S. Government agencies	$	49,216	$	-	$	49,216	$	-
Mortgage-backed		151,713		-		151,713		-
Equity		658		-		658		-
Total	$	201,587	$	-	$	201,587	$	-
					Significant
					Other		Significant
			Quoted		Observable		Unobservable
			Prices		Inputs		Inputs
(Dollars in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
December 31, 2016
Securities available for sale:
U.S. Government agencies	$	34,318	$	-	$	34,318	$	-
Mortgage-backed		128,944		-		128,944		-
Equity		640		-		640		-
Total	$	163,902	$	-	$	163,902	$	-

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

Impaired Loans

Loans are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loan impairment is measured using the present value of expected cash flows, the loan’s observable market price or the fair value of the collateral (less selling costs) if the loans are collateral dependent and these are considered Level 3 in the fair value hierarchy. Collateral may be real estate and/or business assets including equipment, inventory and/or accounts receivable. The value of business equipment, inventory and accounts receivable, discounted on management’s review and analysis. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and the client’s business. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the factors identified above. Valuation techniques are consistent with those techniques applied in prior periods.

Other Real Estate Owned (Foreclosed Assets)

Foreclosed assets are adjusted for fair value upon transfer of loans to foreclosed assets. Subsequently, foreclosed assets are carried at the lower of carrying value and fair value. The estimated fair value for foreclosed assets included in Level 3 are determined by independent market based appraisals and other available market information, less costs to sell, that may be reduced further based on market expectations or an executed sales agreement. If the fair value of the collateral deteriorates subsequent to the initial recognition, the Company records the foreclosed asset as a non-recurring Level 3 adjustment. Valuation techniques are consistent with those techniques applied in prior periods.

31

The tables below present the recorded amount of assets measured at fair value on a nonrecurring basis at June 30, 2017 and December 31, 2016. The assets in the following table were transferred during 2016 from Level 2 to Level 3, based on management’s reassessment an evaluation of the inputs in relation to impaired loans and foreclosed assets. This reassessment resulted in management conclusion that the inputs for these assets were more reflective of Level 3 as unobservable inputs and applied retrospectively to prior periods reported.

					Significant
					Other		Significant
			Quoted		Observable		Unobservable
			Prices		Inputs		Inputs
(Dollars in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
June 30, 2017
Impaired loans
Construction	$	6,333	$	-	$	-	$	6,333
Residential real estate		6,184		-		-		6,184
Commercial real estate		5,402		-		-		5,402
Commercial		345		-		-		345
Consumer		-		-		-		-
Total impaired loans		18,264		-		-		18,264
Other real estate owned		2,302		-		-		2,302
Total assets measured at fair value on a
nonrecurring basis	$	20,566	$	-	$	-	$	20,566

					Significant
					Other		Significant
			Quoted		Observable		Unobservable
			Prices		Inputs		Inputs
(Dollars in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
December 31, 2016
Impaired loans
Construction	$	6,368	$	-	$	-	$	6,368
Residential real estate		7,461		-		-		7,461
Commercial real estate		5,903		-		-		5,903
Commercial		-		-		-		-
Consumer		99		-		-		99
Total impaired loans		19,831		-		-		19,831
Other real estate owned		2,477		-		-		2,477
Total assets measured at fair value on a
nonrecurring basis	$	22,308	$	-	$	-	$	22,308

The following information relates to the estimated fair values of financial assets and liabilities that are reported in the Company’s consolidated balance sheets at their carrying amounts. The discussion below describes the methods and assumptions used to estimate the fair value of each class of financial asset and liability for which it is practicable to estimate that value.

Cash and Cash Equivalents

Cash equivalents include interest-bearing deposits with other banks and federal funds sold. For these short-term instruments, the carrying amount is a reasonable estimate of fair value.

Investment Securities Held to Maturity

For all investments in debt securities, fair values are based on quoted prices. If a quoted price is not available, fair value is estimated using quoted prices for similar securities.

32

Loans

The fair values of categories of fixed rate loans, such as commercial loans, residential real estate, and other consumer loans, are estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Other loans, including variable rate loans, are adjusted for differences in loan characteristics.

Deposits and Short-Term Borrowings

The fair values of demand deposits, savings accounts, and certain money market deposits are the amounts payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. These estimates do not take into consideration the value of core deposit intangibles. Generally, the carrying amount of short-term borrowings is a reasonable estimate of fair value. The fair values of securities sold under agreements to repurchase (included in short-term borrowings) and long-term debt are estimated using the rates offered for similar borrowings.

Commitments to Extend Credit and Standby Letters of Credit

The majority of the Company’s commitments to grant loans and standby letters of credit are written to carry current market interest rates if converted to loans. In general, commitments to extend credit and letters of credit are not assignable by the Company or the borrower, so they generally have value only to the Company and the borrower. Therefore, it is impractical to assign any value to these commitments.

The following table provides information on the estimated fair values of the Company’s financial assets and liabilities that are reported in the balance sheets at their carrying amounts. The financial assets and liabilities have been segregated by their classification level in the fair value hierarchy.

	June 30, 2017				December 31, 2016
			Estimated				Estimated
	Carrying		Fair		Carrying		Fair
(Dollars in thousands)	Amount		Value		Amount		Value
Financial assets
Level 1 inputs
Cash and cash equivalents	$	54,079	$	54,079	$	75,938	$	75,938
Level 2 inputs
Investment securities held to maturity	$	6,411	$	6,663	$	6,704	$	6,806
Loans, net		1,025,473		1,027,011		862,799		867,594
Financial liabilities
Level 2 inputs
Deposits	$	1,196,258	$	1,124,815	$	997,489	$	929,573
Short-term borrowings		3,325		3,325		3,203		3,203

Note 12 – Financial Instruments with Off-Balance Sheet Risk

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

The following table provides information on commitments outstanding at June 30, 2017 and December 31, 2016.

(Dollars in thousands)	June 30, 2017		December 31, 2016
Commitments to extend credit	$	201,361	$	178,233
Letters of credit		9,541		8,024
Total	$	210,902	$	186,257

33

Note 13 – Segment Reporting

The Company operates two primary business segments: Community Banking and Insurance Products and Services. Through the Community Banking business, the Company provides services to consumers and small businesses in Maryland and Delaware through its 20branch network and 2  loan production offices. Community banking activities include small business services, retail brokerage, trust services and consumer banking products and services. Loan products available to consumers include mortgage, home equity, automobile, marine, and installment loans, credit cards and other secured and unsecured personal lines of credit. Small business lending includes commercial mortgages, real estate development loans, equipment and operating loans, as well as secured and unsecured lines of credit, credit cards, accounts receivable financing arrangements, and merchant card services.

Through the Insurance Products and Services business, the Company provides a full range of insurance products and services to businesses and consumers in the Company’s market areas. Products include property and casualty, life, marine, individual health and long-term care insurance. Pension and profit sharing plans and retirement plans for executives and employees are available to suit the needs of individual businesses.

The following table includes selected financial information by business segments for the first six months of 2017 and 2016.

	Community		Insurance Products		Parent		Consolidated
(Dollars in thousands)	Banking		and Services		Company		Total
2017
Interest Income	$	21,830	$	(1)	$	67	$	21,896
Interest Expense		(1,063)		-		-		(1,063)
Provision for credit losses		(1,401)		-		-		(1,401)
Noninterest income		3,933		5,053		-		8,986
Noninterest expense		(12,044)		(3,834)		(3,972)		(19,850)
Net intersegment (expense) income		(3,594)		(162)		3,756		-
Income (loss) before taxes		7,661		1,056		(149)		8,568
Income tax (expense) benefit		(3,054)		(422)		60		(3,416)
Net Income (loss)	$	4,607	$	634	$	(89)	$	5,152
Total assets	$	1,346,340	$	10,031	$	6,427	$	1,362,798
2016
Interest Income	$	19,785	$	-	$	126	$	19,911
Interest Expense		(1,285)		-		-		(1,285)
Provision for credit losses		(825)		-		-		(825)
Noninterest income		3,850		4,732		-		8,582
Noninterest expense		(10,691)		(3,435)		(4,578)		(18,704)
Net intersegment (expense) income		(3,979)		(367)		4,346		-
Income (loss) before taxes		6,855		930		(106)		7,679
Income tax (expense) benefit		(2,616)		(369)		38		(2,947)
Net Income (loss)	$	4,239	$	561	$	(68)	$	4,732
Total assets	$	1,097,433	$	9,347	$	18,910	$	1,125,690

34

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

Unless the context clearly suggests otherwise, references to “the Company”, “we”, “our”, and “us” in the remainder of this report are to Shore Bancshares, Inc. and its consolidated subsidiaries.

Forward-Looking Information

Portions of this Quarterly Report on Form 10-Q contain forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. Statements that are not historical in nature, including statements that include the words “anticipate”, “estimate”, “should”, “expect”, “believe”, “intend”, and similar expressions, are expressions about our confidence, policies, and strategies, the adequacy of capital levels, and liquidity and are not guarantees of future performance. Such forward-looking statements involve certain risks and uncertainties, including economic conditions, competition in the geographic and business areas in which we operate, inflation, fluctuations in interest rates, legislation, and governmental regulation. These risks and uncertainties are described in detail in the section of the periodic reports that Shore Bancshares, Inc. files with the Securities and Exchange Commission (the “SEC”) entitled “Risk Factors” (see Item 1A of Part II of this report and Item 1A of Part I of the Annual Report of Shore Bancshares, Inc. on Form 10-K for the year ended December 31, 2016 (the “2016 Annual Report”)). Actual results may differ materially from such forward-looking statements, and we assume no obligation to update forward-looking statements at any time except as required by law.

Introduction

The following discussion and analysis is intended as a review of significant factors affecting the Company’s financial condition and results of operations for the periods indicated. This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and related notes presented elsewhere in this report, as well as the audited consolidated financial statements and related notes included in the 2016 Annual Report.

Shore Bancshares, Inc. is the largest independent financial holding company headquartered on the Eastern Shore of Maryland. It is the parent company of Shore United Bank. The Bank operates 20 full service branches in Baltimore County, Howard County, Kent County, Queen Anne’s County, Talbot County, Caroline County and Dorchester County in Maryland and Kent County, Delaware. The Company engages in the insurance business through an insurance producer firm, The Avon-Dixon Agency, LLC, (“Avon-Dixon”) with two specialty lines, Elliott Wilson Insurance (Trucking) and Jack Martin Associates (Marine); and an insurance premium finance company, Mubell Finance, LLC (“Mubell”) (Avon-Dixon and Mubell are collectively referred to as the “Insurance Subsidiaries”). Avon-Dixon and Mubell are wholly-owned subsidiaries of Shore Bancshares, Inc. The Company engages in the trust services business through the trust department at Shore United Bank under the trade name Wye Financial & Trust.

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

Our financial statements are prepared in accordance with GAAP. The financial information contained within the financial statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. 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 with respect to the allowance for credit losses, goodwill and other intangible assets, deferred tax assets, and fair value 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

The allowance for credit losses is an estimate of the losses that may be sustained in the loan portfolio. The allowance is based on two basic principles of accounting: (i) Topic 450, “ Contingencies ”, of the Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”), which requires that losses be accrued when they are probable of occurring and estimable; and (ii) ASC Topic 310, “ Receivables ”, which requires that losses be accrued based on the differences between the loan balance and the value of collateral, present value of future cash flows or values that are observable in the secondary market. Management uses many factors to estimate the inherent loss that may be present in our loan portfolio, including economic conditions and trends, the value and adequacy of collateral, the volume and mix of the loan portfolio, and our internal loan processes. Actual losses could differ significantly from management’s estimates. In addition, GAAP itself may change from one previously acceptable method to another. Although the economics of transactions would be the same, the timing of events that would impact the transactions could change.

35

Three basic components comprise our allowance for credit losses: (i) the specific allowance; (ii) the formula allowance; and (iii) the unallocated allowance. Each component is determined based on estimates that can and do change when the actual events occur. The specific allowance is established against impaired loans (i.e., nonaccrual loans and troubled debt restructurings (“TDRs”)) based on our assessment of the losses that may be associated with the individual loans. The specific allowance remains until charge-offs are made. An impaired loan may show deficiencies in the borrower’s overall financial condition, payment history, support available from financial guarantors and/or the fair market value of collateral. The formula allowance is used to estimate the loss on internally risk-rated loans, exclusive of those identified as impaired. Loans are grouped by type (construction, residential real estate, commercial real estate, commercial or consumer). Each loan type is assigned allowance factors based on management’s estimate of the risk, complexity and size of individual loans within a particular category. Loans identified as special mention, substandard, and doubtful are adversely rated. These loans are assigned higher allowance factors than favorably rated loans due to management’s concerns regarding collectability or management’s knowledge of particular elements regarding the borrower. The unallocated allowance captures losses that have impacted the portfolio but have yet to be recognized in either the specific or formula allowance.

Management has significant discretion in making the adjustments inherent in the determination of the provision and allowance for credit losses, including in connection with the valuation of collateral, the estimation of a borrower’s prospects of repayment, and the establishment of the allowance factors in the formula allowance and unallocated allowance components of the allowance. The establishment of allowance factors is a continuing exercise, based on management’s ongoing assessment of the totality of all factors, including, but not limited to, delinquencies, loss history, trends in volume and terms of loans, effects of changes in lending policy, the experience and depth of management, national and local economic trends, concentrations of credit, the quality of the loan review system and the effect of external factors such as competition and regulatory requirements, and their impact on the portfolio. Allowance factors may change from period to period, resulting in an increase or decrease in the amount of the provision or allowance, based on the same volume and classification of loans. Changes in allowance factors will have a direct impact on the amount of the provision, and a corresponding effect on net income. Errors in management’s perception and assessment of these factors and their impact on the portfolio could result in the allowance not being adequate to cover losses in the portfolio, and may result in additional provisions or charge-offs.

Goodwill and Other Intangible Assets

Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Other intangible assets represent purchased assets that also lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset or liability. Goodwill and other intangible assets are required to be recorded at fair value. Determining fair value is subjective, requiring the use of estimates, assumptions and management judgment. Goodwill and other intangible assets with indefinite lives are tested at least annually for impairment, usually during the third quarter, or on an interim basis if circumstances dictate. Intangible assets that have finite lives are amortized over their estimated useful lives and also are subject to impairment testing. Impairment testing requires that the fair value of each of the Company’s reporting units be compared to the carrying amount of its net assets, including goodwill. The Company’s reporting units were identified based on an analysis of each of its individual operating segments (i.e., the Bank and Insurance Subsidiaries). If the fair value of a reporting unit is less than book value, an expense may be required to write down the related goodwill or purchased intangibles to record an impairment loss.

Deferred Tax Assets

Deferred tax assets and liabilities are determined by applying the applicable federal and state income tax rates to cumulative temporary differences. These temporary differences represent differences between financial statement carrying amounts and the corresponding tax bases of certain assets and liabilities. Deferred taxes result from such temporary differences. A valuation allowance, if needed, reduces deferred tax assets to the amount most likely to be realized, which is based on estimates of future taxable income, recoverable taxes paid in prior years and expected results of tax planning strategies. The Company evaluates all positive and negative evidence before determining if a valuation allowance is deemed necessary regarding the realization of deferred tax assets.

Fair Value

The Company measures certain financial assets and liabilities at fair value, with the measurements made on a recurring or nonrecurring basis. Significant financial instruments measured at fair value on a recurring basis are investment securities. Impaired loans and other real estate owned are significant financial instruments measured at fair value on a nonrecurring basis. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. In determining fair value, the Company is required to maximize the use of observable inputs and minimize the use of unobservable inputs, reducing subjectivity.

36

OVERVIEW

The Company reported net income of $2.4 million for the second quarter of 2017, or diluted income per common share of $0.19, compared to net income of $2.3 million, or diluted income per common share of $0.18, for the second quarter of 2016. For the first quarter of 2017, the Company reported net income of $2.8 million, or diluted income per common share of $0.22. When comparing the second quarter of 2017 to the second quarter of 2016, the primary reasons for improved net income were increases in net interest income of $1.5 million and noninterest income of $138 thousand, partially offset by increases in provision for credit losses of $599 thousand and noninterest expenses of $834 thousand. When comparing the second quarter of 2017 to the first quarter of 2017, the lower net income was primarily attributable to a decrease in noninterest income due to insurance agency commissions which are typically received in the first quarter of the year as well as an increase in noninterest expenses primarily the result of the additional acquisition costs incurred in connection with the purchase of the three NWBI branches.

For the first six months of 2017, the Company reported net income of $5.2 million, or diluted income per common share of $0.41, compared to net income of $4.7 million, or diluted income per common share of $0.37, for the first six months of 2016. Earnings improved due to increases in net interest income of $2.2 million and noninterest income of $404 thousand, partially offset by increases in noninterest expenses of $1.1 million and provision for credit losses of $576 thousand. 

RESULTS OF OPERATIONS

Net Interest Income

Tax-equivalent net interest income is net interest income adjusted for the tax-favored status of income from certain loans and investments. As shown in the table below, tax-equivalent net interest income was $11.0 million for the second quarter of 2017 and $9.4 million for the second quarter of 2016. Tax-equivalent net interest income was $10.0 million for the first quarter of 2017. The increase in net interest income for the second quarter of 2017 when compared to the second quarter of 2016 was primarily due to an increase in average earning assets of $123.5 million, the result of an increase in average loans of $152.4 million, offset by decreases in investment securities of $6.1 million and interest-bearing deposits with other banks of $20.0 million. The significant increase in average loans was primarily due to loan originations and purchases and, to a lesser, extent, the purchasing of $122.5 million in loans from NWBI, which had an impact on the average outstanding loan balance of $27.6 million. Total average interest-bearing deposits exhibited an increase primarily in demand, money market and savings deposits, partially offset by a decline in time deposits resulting in a lower cost of funding. The increase in average interest-bearing deposits of $63.7 million was due to an increase in municipal deposits as well as the acquisition of deposits from NWBI of $212.5 million, which had an impact on the average interest-bearing deposits of $38.5 million.  

The increase of $966 thousand in net interest income for the second quarter of 2017 when compared to the first quarter of 2017 was primarily due to the acquisition of loans from NWBI, higher average taxable securities and one additional day of earning interest, partially offset by a decline in total average loan yields of 4 basis points and an increase in the short-term borrowing rate of 55 basis points. The increase in average investment securities was due to excess cash received from the NWBI transaction.  In addition, the Company continued to transition lower yielding assets to higher yielding loans which positively impacted net interest income despite a decrease in the overall yield on loans. Net interest margin is tax-equivalent net interest income (annualized) divided by average earning assets. Our net interest margin was 3.71% for both the second and first quarter of 2017, compared to 3.57% for the second quarter of 2016. The net interest margin remained unchanged between the second and first quarter of 2017, mostly due to increases in both average loan and investment securities balances and higher yields on interest-bearing deposits with other banks which offset the 4basis point decline in yields on loans. The higher net interest margin for the second quarter of 2017 when compared to the second quarter of 2016 was primarily due to a significant increase in average loans of $152.4 million resulting in $1.4 million in additional interest and fees on loans, further aided by lower rates paid on interest bearing deposits of 7basis points.  

On a tax-equivalent basis, interest income increased $1.5 million, or 16.4%, for the second quarter of 2017 when compared to the second quarter of 2016. The increase in interest income was due to a 11.6% increase in average earning assets (i.e., loans, interest-bearing deposits with other banks, and federal funds sold) resulting in a 10 basis point increase in yields earned on such assets. Loans had the largest impact on the increase in interest income, due to an increase in the average balance of $152.4 million, or 18.9%, resulting in an increase in interest income of $1.4 million, or 14.8%. The decline in the yield on average loans was due to downward re-pricing on renewal loans as well as yields on newly originated loans.The average balance on interest-bearing deposits with other banks decreased $20.0 million, or 42.4%, compared to the second quarter of 2016, resulting in a favorable shift to higher yielding loans. Despite the decrease in interest-bearing deposits with other banks, the corresponding interest income increased $12 thousand or 20.7%, due to the two rate increases of 25 basis points each by the Federal Reserve since the second quarter of 2016.

37

Interest expense decreased $72 thousand, or 11.6%, when comparing the second quarter of 2017 to the second quarter of 2016. The decrease in interest expense was due to a 6basis point decline in rates paid on interest-bearing liabilities (i.e., deposits and borrowings). Changes in the rates and balances related to time deposits (i.e., certificates of deposit $100,000 or more and other time deposits) had the largest impact on interest expense. For the three months ended June 30, 2017, the rates paid on time deposits decreased 15 basis points and the average balances of these deposits decreased $8.2 million, or 2.9%, when compared to the same period last year, which reduced interest expense $115 thousand. A portion of this decline was offset primarily by increases in the average balance of demand, money market and savings deposits. The average balance of noninterest-bearing deposits increased $43.0 million when compared to the same period last year contributing to a lower cost of funding.

The following table presents the distribution of the average consolidated balance sheets, interest income/expense, and annualized yields earned and rates paid for the three months ended June 30, 2017 and 2016.

	For Three Months Ended						For Three Months Ended
	June 30, 2017						June 30, 2016
	Average		Income(1)/		Yield/		Average		Income(1)/		Yield/
(Dollars in thousands)	Balance		Expense		Rate		Balance		Expense		Rate
Earning assets
Loans (2), (3)	$	959,642	$	10,501	4.39	%	$	807,231	$	9,149	4.56	%
Investment securities:
Taxable		198,160		937	1.89			204,147		824	1.61
Tax-exempt		141		2	5.36			210		3	5.30
Federal funds sold		-		-	-			2,910		2	0.34
Interest-bearing deposits		27,156		70	1.05			47,147		58	0.50
Total earning assets		1,185,099		11,510	3.90	%		1,061,645		10,036	3.80	%
Cash and due from banks		14,798						14,776
Other assets		58,693						54,699
Allowance for credit losses		(9,064)						(8,552)
Total assets	$	1,249,526					$	1,122,568
Interest-bearing liabilities
Demand deposits	$	198,593		78	0.16	%	$	186,137		55	0.12	%
Money market and savings deposits		320,967		99	0.12			261,495		86	0.13
Certificates of deposit $100,000 or more		121,967		156	0.51			129,544		221	0.69
Other time deposits		150,953		205	0.55			151,577		256	0.68
Interest-bearing deposits		792,480		538	0.27			728,753		618	0.34
Short-term borrowings		5,589		11	0.82			5,792		3	0.24
Total interest-bearing liabilities		798,069		549	0.28	%		734,545		621	0.34	%
Noninterest-bearing deposits		273,685						230,644
Other liabilities		5,421						6,109
Stockholders' equity		172,351						151,270
Total liabilities and stockholders' equity	$	1,249,526					$	1,122,568
Net interest spread			$	10,961	3.62	%			$	9,415	3.46	%
Net interest margin					3.71	%					3.57	%
Tax-equivalent adjustment
Loans			$	60					$	32
Investment securities				1						-
Total			$	61					$	32

(1)	All amounts are reported on a tax-equivalent basis computed using the statutory federal income tax rate of 35.0%, exclusive of the alternative minimum tax rate and nondeductible interest expense.
(2)	Average loan balances include nonaccrual loans.
(3)	Interest income on loans includes amortized loan fees, net of costs, and all are included in the yield calculations.

38

Tax-equivalent net interest income for the six months ended June 30, 2017 was $21.0 million. This represented an increase of $2.3 million, or 12.1%, when compared to the same period last year. The increase was mainly due to an increase in average earning assets of $75.7 million, the result of an increase in average loans of $121.4 million, offset by decreases in investment securities of $21.4 million and interest-bearing deposits with other banks of $21.0 million. The significant increase in average loans was primarily due to loan originations and purchases and, to a lesser extent, the purchasing of$122.5 million in loans from NWBI, which had an impact on the average outstanding loan balance of $27.6 million. Total average interest-bearing deposits exhibited an increase primarily in demand, money market and savings deposits, partially offset by a decline in time deposits resulting in a lower cost of funding. The increase in average interest-bearing deposits of $27.0 million was the result of the acquisition of deposits from NWBI of $212.5 million, which had an impact on the average interest-bearing deposits of $38.5 million, which were offset by a decline of $11.5 million from the legacy portfolio, primarily due to the seasonality of municipal deposits.  The net interest margin improved by 19 basis points to 3.71% for the first half of 2017 from the 3.53% for the first half of 2016.

On a tax-equivalent basis, interest income was $22.0 million for the first six months of 2017, an increase of $2.0 million, or 10.2%, when compared to the first six months of 2016, mainly due to the higher volume in loans of $121.4 million, or 15.2%. The higher average loan balances for the first six months of 2017 over 2016 resulted in a $2.0 million increase in interest income. In addition, despite a decrease in average taxable securities of $21.4 million, or 10.2%, interest income from these securities increased $70 thousand, or 4.1% due to a 26 basis point increase in yields on such securities.   

Interest expense was $1.1 million for the six months ended June 30, 2017, a decrease of $222 thousand, or 17.3%, when compared to the same period last year. Average interest-bearing liabilities increased $25.9 million, or 3.5%, while rates paid declined 7basis points to 0.28% primarily due to a decline in time deposits.

For the first six months of 2017, the average balance of time deposits decreased $18.7 million, or 6.6%, when compared to the same period last year, and the average rate paid on these deposits declined 16 basis points, which reduced interest expense $276 thousand. For the six months ended June 30, 2017, the average balance of money market and savings deposits increased $38.6 million, or 14.8%, when compared to the same period last year, and the average rate paid on these deposits remained unchanged at 13basis points, which increased interest expense $15 thousand. Noninterest bearing deposits increased $33.6 million, or 14.5%, when compared to the same period last year providing a lower cost of funding.

39

	For Six Months Ended						For Six Months Ended
	June 30, 2017						June 30, 2016
	Average		Income(1)/		Yield/		Average		Income(1)/		Yield/
(Dollars in thousands)	Balance		Expense		Rate		Balance		Expense		Rate
Earning assets
Loans (2), (3)	$	920,434	$	20,111	4.41	%	$	799,004	$	18,139	4.57	%
Investment securities:
Taxable		188,068		1,764	1.88			209,462		1,694	1.62
Tax-exempt		175		5	5.38			210		6	5.30
Federal funds sold		-		-	-			3,275		5	0.34
Interest-bearing deposits		30,593		138	0.91			51,628		130	0.51
Total earning assets		1,139,270		22,018	3.90	%		1,063,579		19,974	3.78	%
Cash and due from banks		14,355						15,491
Other assets		54,750						55,868
Allowance for credit losses		(8,956)						(8,535)
Total assets	$	1,199,419					$	1,126,403
Interest-bearing liabilities
Demand deposits	$	196,809		147	0.15	%	$	189,612		115	0.12	%
Money market and savings deposits		298,695		187	0.13			260,105		172	0.13
Certificates of deposit $100,000 or more		120,477		313	0.52			130,978		455	0.70
Other time deposits		144,429		402	0.56			152,675		537	0.71
Interest-bearing deposits		760,410		1,049	0.28			733,370		1,279	0.35
Short-term borrowings		4,873		14	0.59			6,017		7	0.24
Total interest-bearing liabilities		765,283		1,063	0.28	%		739,387		1,286	0.35	%
Noninterest-bearing deposits		264,381						230,824
Other liabilities		5,398						6,041
Stockholders' equity		164,357						150,151
Total liabilities and stockholders' equity	$	1,199,419					$	1,126,403
Net interest spread			$	20,955	3.62	%			$	18,688	3.43	%
Net interest margin					3.71	%					3.53	%
Tax-equivalent adjustment
Loans			$	120					$	61
Investment securities				2						1
Total			$	122					$	62

(1)	All amounts are reported on a tax-equivalent basis computed using the statutory federal income tax rate of 35.0%, exclusive of the alternative minimum tax rate and nondeductible interest expense.
(2)	Average loan balances include nonaccrual loans.
(3)	Interest income on loans includes amortized loan fees, net of costs, and all are included in the yield calculations.

Noninterest Income

Total noninterest income for the second quarter of 2017increased $138 thousand,or 3.4%, when compared to the second quarter of 2016.The increase from the second quarter of 2016 was primarily due to higher service insurance agency commissions of $91thousand.Noninterest income decreased $628 thousand when compared to the first quarter of 2017 mainly due to higher insurance agency commissions from contingency payments which are typically received in the first quarter of each year based on the prior year’s performance.

Total noninterest income for the six months ended June 30, 2017 increased $404 thousand, or 4.7%, when compared to the same period in 2016.  The increase in noninterest income primarily consists of increases in insurance agency commissions of $151 thousand and other noninterest income of $206 thousand. The increase in other noninterest income consisted of returns on an insurance investment of $174 thousand. In addition, increases in service charges on deposit accounts of $29 thousand and trust and investment fee income of $18 thousand helped contribute to the overall increase in noninterest income.

40

Noninterest Expense

Total noninterest expense for the second quarter of 2017 increased $834 thousand, or 8.9%, when compared to the second quarter of 2016 and increased $548 thousand, or 5.7%, when compared to the first quarter of 2017. The increases in noninterest expense from the second quarter of 2016 were primarily due to the acquisition costs of three NWBI branches of $325 thousand and the cost of operating these branches for one month.  Also contributing to the higher noninterest expenses between quarters were increases in employee benefits due to the higher insurance premiums paid for group insurance and higher salaries and wages due to pay increases implemented in the first quarter of 2017, offset by a decrease in FDIC insurance premium expenses due the consolidation of the two former bank subsidiaries, The Talbot Bank and CNB which occurred on July 1, 2016. The increase in noninterest expense compared to the first quarter of 2017 was primarily due to additional acquisition costs of $325 thousand for the Northwest branches and the cost of operating those branches for one month which impacted salaries and wages. Offsetting this increase was a decrease in employee benefits which are typically higher in the first quarter due to meeting maximum thresholds for certain payroll taxes, federal and state unemployment insurance, and 401(k) contributions. In addition, FDIC insurance premiums decreased $119 thousand.

Total noninterest expense for the six months ended June 30, 2017 increased $1.1 million, or 6.1%, when compared to the same period in 2016.  The increase was primarily due to acquisition costs of the three NWBI branches which approximated $825 thousand and the cost of operating those branches for one month.  In addition, higher salaries/wages and employee benefits resulted in increased non-interest expenses which were partially offset by a decrease in FDIC insurance premiums.

Income Taxes

For the second quarter of 2017 and 2016, the Company reported income tax expense of $1.6 million and $1.4 million, respectively, while the effective tax rate was 39.8% and 38.3%, respectively. The increase in tax rates for the second quarter of 2017 when compared to the same period in 2016 was due to higher pretax income.  Income taxes for the six months ended June 30, 2017 increased $469thousand, or 15.9%, when compared to the same period in 2016.  The increase was primarily due higher taxable income of $889 thousand, which increased tax rates from 38.4% in the prior period to 39.9% for the 2017 period.

ANALYSIS OF FINANCIAL CONDITION

Loans

Loans totaled $1.0 billion at June 30, 2017 and $871.5 million at December 31, 2016, an increase of $163.1 million, or 18.7%. The significant increase was primarily due to loans acquired from NWBI of $122.5 million. The loans acquired from NWBI consisted of the following: construction of $102 thousand, residential real estate of $45.7 million, commercial real estate of $72.9 million, commercial of $3.0 million and consumer of $826 thousand. Excluding, the loans acquired from NWBI, total loans increased $40.6, or 4.7%. The most significant categories which increased organically were construction of$16.0 million, residential real estate of $13.3 million and commercial of $15.2 million. Loans included deferred costs, net of deferred fees, of $619 thousand at June 30, 2017 and $509 thousand at December 31, 2016. We do not engage in foreign or subprime lending activities. See Note 4, “Loans and Allowance for Credit Losses”, in the Notes to Consolidated Financial Statements and below under the caption “Allowance for Credit Losses” for additional information.

Our loan portfolio has a commercial real estate loan concentration, which is defined as a combination of construction and commercial real estate loans. Construction loans were $100.1 million, or 9.7% of total loans, at June 30, 2017, higher than the $84.0 million, or 9.6% of total loans at December 31, 2016. Commercial real estate loans were $452.1 million, or 43.7% of total loans, at June 30, 2017, compared to $382.7 million, or 43.9% of total loans at December 31, 2016.

The federal banking regulators have issued guidance for those institutions which are deemed to have concentrations in commercial real estate lending. Pursuant to the supervisory criteria contained in the guidance for identifying institutions with a potential commercial real estate concentration risk, institutions which have (1) total reported loans for construction, land development, and other land acquisitions which represent 100% or more of an institution’s total risk-based capital; or (2) total commercial real estate loans representing 300% or more of the institution’s total risk-based capital and the institution’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months are identified as having potential commercial real estate concentration risk. Institutions which are deemed to have concentrations in commercial real estate lending are expected to employ heightened levels of risk management with respect to their commercial real estate portfolios, and may be required to hold higher levels of capital. The Company, like many community banks, has a concentration in commercial real estate loans, and the Company has experienced significant growth in its commercial real estate portfolio in recent years. At June 30, 2017, non-owner-occupied commercial real estate loans (including construction, land and land development loans) represented 298.3% of total risk based capital. At such time, construction, land and land development loans represented 82.8% of total risk based capital. The commercial real estate portfolio has increased 92.1% during the prior 36 months, $54.5 million, or 15.12% of which resulted from the NWBI transaction. Management has extensive experience in commercial real estate lending, and has implemented and continues to maintain heightened risk management procedures, and strong underwriting criteria with respect to its commercial real estate portfolio. Monitoring practices include periodic stress testing analysis to evaluate changes to cash flows, owing to interest rate increases and declines in net operating income. We may be required to maintain higher levels of capital as a result of our commercial real estate concentrations, which could require us to obtain additional capital, and may adversely affect shareholder returns.

41

Allowance for Credit Losses

We have established an allowance for credit losses, which is increased by provisions charged against earnings and recoveries of previously charged-off debts and is decreased by current period charge-offs of uncollectible debts. Management evaluates the adequacy of the allowance for credit losses at least quarterly and adjusts the provision for credit losses based on this analysis. The evaluation of the adequacy of the allowance for credit losses is based primarily on a risk rating system of individual loans, as well as on a collective evaluation of smaller balance homogenous loans, each grouped by loan type. Each loan type is assigned allowance factors based on criteria such as past credit loss experience, local economic and industry trends, and other measures which may impact collectability. Please refer to the discussion above under the caption “Critical Accounting Policies” for an overview of the underlying methodology management employs to maintain the allowance.

The provision for credit losses was $974 thousand for the second quarter of 2017, $375 thousand for the second quarter of 2016 and $427 thousand for the first quarter of 2017. The higher level of provision for credit losses when comparing the second quarter of 2017 to both the second quarter of 2016 and the first quarter of 2017 was associated with a partial charge-off during the second quarter of 2017 of $575 thousand. This charge-off related to three commercial loans to one borrower aggregating $1.4 million, in which the Bank renegotiated the loans into one loan and obtained cash and collateral of $825 thousand. The increase to the provision for credit losses when compared to the second quarter of 2016 was also due to growth in the loan portfolio of $40.5 million, excluding the loans acquired from NWBI on May 19, 2017.  The provision for credit losses for the six months ended June 30, 2017 and 2016 was $1.4 million and $825 thousand, respectively, while net charge-offs were $995 thousand and $783 thousand, respectively. The increase in provision for credit losses primarily occurred in the second quarter of 2017 due to thepartial charge-off previously mentioned.  The ratio of annualized net charge-offs to average loans was 0.22% for the first half of 2017 and 0.20% for the first half of 2016.

Net charge-offs were $769 thousand for the second quarter of 2017 and $326 thousand for the second quarter of 2016. The significant increase in net charge-offs was primarily due to the charge-off mentioned above. Management remains focused on its efforts to dispose of problem loans and to prudently charge-off nonperforming assets to enable the Company to continue to improve its overall credit quality. The allowance for credit losses as a percentage of period-end loans was 0.88% as of June 30, 2017, 1.00% as of December 31, 2016 and 1.02% as of June 30, 2016. The decrease in such ratio at June 30, 2017 was primarily due to the performing loans acquired in the NWBI transaction with no associated allowance since they were purchased at fair value. Management believes that the provision for credit losses and the resulting allowance were adequate to provide for probable losses inherent in our loan portfolio at June 30, 2017.

42

The following table presents a summary of the activity in the allowance for credit losses at or for the three and six months ended June 30, 2017 and 2016.

	At or for Three Months				At or for Six Months
	Ended June 30,				Ended June 30,
(Dollars in thousands)		2017	2016		2017			2016
Allowance balance - beginning of period	$	8,927	$	8,309	$	8,726		$	8,316
Charge-offs:
Construction		(25)		(13)		(54)			(254)
Residential real estate		(100)		(102)		(323)			(118)
Commercial real estate		-		(265)		-			(503)
Commercial		(706)		(58)		(771)			(125)
Consumer		(15)		(2)		(15)			(10)
Total		(846)		(440)		(1,163)			(1,010)
Recoveries:
Construction		9		10		16			16
Residential real estate		10		33		21			67
Commercial real estate		8		10		19			10
Commercial		42		57		100			122
Consumer		8		4		12			12
Totals		77		114		168			227
Net charge-offs		(769)		(326)		(995)			(783)
Provision for credit losses		974		375		1,401			825
Allowance balance - end of period	$	9,132	$	8,358	$	9,132		$	8,358
Average loans outstanding during the period	$	959,642	$	807,231	$	920,434		$	799,004
Net charge-offs (annualized) as a percentage of
average loans outstanding during the period		0.32%		0.16%		0.22%	%		0.20%	%
Allowance for credit losses at period end as a
percentage of total period end loans		0.88%		1.02%		0.88%	%		1.02%	%

Nonperforming Assets and Accruing TDRs

As shown in the following table, nonperforming assets decreased $1.7 million to $9.8 million at June 30, 2017 from $11.5 million at December 31, 2016, primarily due to decreases in nonaccrual loans of $1.8 million and other real estate owned of $175 thousand, partially offset by an increase in loans 90 days and still accruing of $294 thousand. Accruing TDRs decreased $876 thousand to $12.1 million at June 30, 2017 from $13.0 million at December 31, 2016. The ratio of nonaccrual loans to total loans decreased to 0.69% at June 30, 2017 from 1.03% at December 31, 2016.

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 other real estate owned; aggressively marketing other real estate owned; and selling loans. The reduction of nonperforming and problem loans is and will continue to be a high priority for the Company.

43

The following table summarizes our nonperforming assets and accruing TDRs at June 30, 2017 and December 31, 2016.

(Dollars in thousands)	June 30, 2017			December 31, 2016
Nonperforming assets
Nonaccrual loans
Construction	$	2,889		$	3,818
Residential real estate		3,209			3,903
Commercial real estate		714			1,152
Commercial		345			-
Consumer		-			99
Total nonaccrual loans		7,157			8,972
Loans 90 days or more past due and still accruing
Construction		111			-
Residential real estate		203			-
Commercial real estate		-			-
Commercial		-			10
Consumer		-			10
Total loans 90 days or more past due and still accruing		314			20
Other real estate owned		2,302			2,477
Total nonperforming assets	$	9,773		$	11,469
Accruing TDRs
Construction	$	4,037		$	4,189
Residential real estate		3,234			3,875
Commercial real estate		4,853			4,936
Commercial		-			-
Consumer		-			-
Total accruing TDRs	$	12,124		$	13,000
Total nonperforming assets and accruing TDRs	$	21,897		$	24,469
As a percent of total loans:
Nonaccrual loans		0.69	%		1.03	%
Accruing TDRs		1.17	%		1.49	%
Nonaccrual loans and accruing TDRs		1.86	%		2.52	%
As a percent of total loans and other real estate owned:
Nonperforming assets		0.94	%		1.31	%
Nonperforming assets and accruing TDRs		2.11	%		2.80	%
As a percent of total assets:
Nonaccrual loans		0.53	%		0.77	%
Nonperforming assets		0.72	%		0.99	%
Accruing TDRs		0.89	%		1.12	%
Nonperforming assets and accruing TDRs		1.61	%		2.11	%

Investment Securities

The investment portfolio is comprised of securities that are either available for sale or held to maturity. Investment securities available for sale are stated at estimated fair value based on quoted prices. They represent securities which may be sold as part of the asset/liability management strategy or in response to changing interest rates. Net unrealized holding gains and losses on these securities are reported net of related income taxes as accumulated other comprehensive income, a separate component of stockholders’ equity. Investment securities in the held to maturity category are stated at cost adjusted for amortization of premiums and accretion of discounts. We have the intent and current ability to hold such securities until maturity. At June 30, 2017 and December 31, 2016, 96% of the portfolio was classified as available for sale and 4% as held to maturity. With the exception of municipal securities, our general practice is to classify all newly-purchased securities as available for sale. See Note 3 - Investment Securities, in the Notes to Consolidated Financial Statements for additional details on the composition of our investment portfolio.

44

Investment securities totaled $208.0 million at June 30, 2017, a $37.4 million, or 21.9%, increase since December 31, 2016. The increase was due to utilizing the net cash received from theNWBI branch acquisition to purchase available-for-sale securities. At the end of June 2017, 75.3% of the securities available for sale were mortgage-backed, 24.3% were U.S. Government agencies, compared to 78.7%, and 20.9%, respectively, at year-end 2016. Our investments in mortgage-backed securities are issued or guaranteed by U.S. Government agencies or government-sponsored agencies.

Deposits

Total deposits at June 30, 2017 were $1.2 billion, a $198.8 million, or 19.9%, increase when compared to the level at December 31, 2016. The increase was the direct result of the acquisition of three branches from NWBI which contributed $212.5 million in total deposits, offset by declines in time deposits and checking plus interest accounts. The deposits acquired from NWBI were primarily core deposits consisting of the following: $34.6 million in noninterest bearing deposits, money market and savings deposits of $99.3 million and checking plus interest of $17.2 million. Noncore deposits acquired from NWBI included $19.8 million in time deposits over $100 thousand and $41.7 million in other time deposits.

Short-Term Borrowings

Short-term borrowings at June 30, 2017 and December 31, 2016 were $3.3 million and $3.2 million, respectively. Short-term borrowings generally consist of securities sold under agreements to repurchase, which are issued in conjunction with cash management services for commercial depositors, overnight borrowings from correspondent banks and short-term advances from the Federal Home Loan Bank (the “FHLB”). Short-term advances are defined as those with original maturities of one year or less. At June 30, 2017 and December 31, 2016, short-term borrowings included only repurchase agreements.

Liquidity and Capital Resources

We derive liquidity through increased customer deposits, maturities in the investment portfolio, loan repayments and income from earning assets. As seen in the Consolidated Statements of Cash Flows in the Financial Statements, the net decrease in cash and cash equivalents was $21.9 million for the first six months of 2017 compared to a decrease in cash of $12.6 million for the first six months of 2016. The decrease in cash and cash equivalents in 2017 was mainly due to receiving excess cash from the NWBI branch transaction which was used to purchase available-for-sale securities and paydown short-term borrowings.

To the extent that deposits are not adequate to fund customer loan demand, liquidity needs can be met in the short-term funds markets through arrangements with correspondent banks. The Bank had $15 million in federal funds lines of credit and a reverse repurchase agreement available on a short-term basis from correspondent banks at June 30, 2017 and December 31, 2016. The Bank is also a member of the FHLB, which provides another source of liquidity. Through the FHLB, the Bank had credit availability of approximately $201.8 million and $205.1 million at June 30, 2017 and December 31, 2016, respectively. These lines of credit are paid for monthly on a fee basis of 0.10%. The Bank has pledged, under a blanket lien, all qualifying residential and commercial real estate loans under borrowing agreements with the FHLB. Management is not aware of any demands, commitments, events or uncertainties that are likely to materially affect our future ability to maintain liquidity at satisfactory levels.

Total stockholders’ equity increased $5.6 million to $159.9 million at June 30, 2017 when compared to December 31, 2016 primarily due to current year’s earnings.

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 will increase 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 from 4.0% 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 became effective as of January 1, 2016 at 0.625% of risk-weighted assets and will 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. As of June 30, 2017, the Company's capital levels remained characterized as "well-capitalized" under the new rules.

45

The following tables present the capital ratios for Shore Bancshares, Inc. and Shore United Bank as of June 30, 2017 and December 31, 2016.

During the first quarter of 2017, Shore Bancshares, Inc. contributed $10.5 million in capital to its bank subsidiary, Shore United Bank, in preparation for the branch acquisition in the second quarter of 2017. Of the $10.5 million contributed, $10.2 million consisted of mortgage-backed securities and $300 thousand consisted of cash.

	Tier 1		Common Equity		Tier 1		Total
	leverage		Tier 1		risk-based		risk-based
June 30, 2017	ratio		ratio		capital ratio		capital ratio
Company	10.53	%	12.18	%	12.18	%	13.08	%
Shore United Bank	9.97	%	11.54	%	11.54	%	12.44	%
	Tier 1		Common Equity		Tier 1		Total
	leverage		Tier 1		risk-based		risk-based
December 31, 2016	ratio		ratio		capital ratio		capital ratio
Company	12.31	%	15.78	%	15.78	%	16.79	%
Shore United Bank	10.88	%	13.84	%	13.84	%	14.86	%

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Our primary market risk is interest rate fluctuation and management has procedures in place to evaluate and mitigate this risk. This risk and these procedures are discussed in Item 7 of Part II of the 2016 Annual Report under the caption “Market Risk Management and Interest Sensitivity”. Management believes that there have been no material changes in our market risks, the procedures used to evaluate and mitigate these risks, or our actual and simulated sensitivity positions since December 31, 2016.

Item 4. Controls and Procedures.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that Shore Bancshares, Inc. files under the Securities Exchange Act of 1934 with the SEC, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in those rules and forms, and that such information is accumulated and communicated to management, including Shore Bancshares, Inc.’s principal executive officer (“CEO”) and its principal accounting officer (“PAO”), as appropriate, to allow for timely decisions regarding required disclosure. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

An evaluation of the effectiveness of these disclosure controls and procedures as of June 30, 2017 was carried out under the supervision and with the participation of management, including the CEO and the PAO. Based on that evaluation, the Company’s management, including the CEO and the PAO, has concluded that our disclosure controls and procedures are, in fact, effective at the reasonable assurance level at June 30, 2017.

There was no change in our internal control over financial reporting during the second quarter of 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

46

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

From time to time the Company may become involved in legal proceedings. At the present time, there are no proceedings which the Company believes will have a material adverse impact on the financial condition or earnings of the Company.

Item 1A. Risk Factors

The risks and uncertainties to which our financial condition and operations are subject are discussed in detail in Item 1A of Part I of the 2016 Annual Report. Management does not believe that any material changes in our risk factors have occurred since they were last disclosed in our 2016 Annual Report.

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

None.

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not Applicable

Item 5. Other Information

None

Item 6.Exhibits.

The exhibits filed or furnished with this quarterly report are shown on the Exhibit List that follows the signatures to this report, which list is incorporated herein by reference.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	SHORE BANCSHARES, INC.
Date: August 9, 2017	By:	/s/ Lloyd L. Beatty, Jr.
		Lloyd L. Beatty, Jr.
		President & Chief Executive Officer
		(Principal Executive Officer)
Date: August9, 2017	By:	/s/ Edward C. Allen
		Edward C. Allen
		Senior Vice President & Chief Financial Officer
		(Principal Financial Officer)

47

EXHIBIT INDEX

Exhibit
Number	Description
10.1	Form of Performance Share/Restricted Stock Unit Award Agreement under the 2006 Stock and Incentive Compensation Plan (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on July 8, 2015).
31.1	Certifications of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act (filed herewith).
31.2	Certifications of the Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act (filed herewith).
32	Certification pursuant to Section 906 of the Sarbanes-Oxley Act (furnished herewith).
101	Interactive Data File
101.INS	XBRL Instance Document (filed herewith)
101.SCH	XBRL Taxonomy Extension Schema (filed herewith)
101.CAL	XBRL Taxonomy Extension Calculation Linkbase (filed herewith)
101.DEF	XBRL Taxonomy Extension Definition Linkbase (filed herewith)
101.LAB	XBRL Taxonomy Extension Label Linkbase (filed herewith)
101.PRE	XBRL Taxonomy Extension Presentation Linkbase (filed herewith)

48

EX-31.1

EXHIBIT 31.1

Certifications of the Principal Executive Officer

Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14

As adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Lloyd L. Beatty, Jr., certify that:

1.    I have reviewed this quarterly report on Form 10-Q of Shore Bancshares, Inc.;

2.    Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.    Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.    The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.    The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 9, 2017	By:	/s/ Lloyd L. Beatty, Jr.
		Lloyd L. Beatty, Jr.
		President & Chief Executive Officer
		(Principal Executive Officer)

EX-31.2

EXHIBIT 31.2

Certifications of the Principal Accounting Officer

Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14

As adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Edward C. Allen, certify that:

1.    I have reviewed this quarterly report on Form 10-Q of Shore Bancshares, Inc.;

2.    Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.    Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.    The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.    The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 9, 2017	By:	/s/ Edward C. Allen
		Edward C. Allen
		Senior Vice President & Chief Financial Officer
		(Principal Financial Officer)

EX-32

EXHIBIT 32

Certification of Periodic Report

Pursuant to 18 U.S.C. Section 1350

As adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Pursuant to, and for purposes only of, 18 U.S.C. § 1350, the undersigned hereby certifies that (i) the Quarterly Report of Shore Bancshares, Inc. on Form 10-Q for the quarter ended June 30, 2017 filed with the Securities and Exchange Commission (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (ii) information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Shore Bancshares, Inc.

Date: August 9, 2017	By:	/s/ Lloyd L. Beatty, Jr.
		Lloyd L. Beatty, Jr.
		President & Chief Executive Officer
		(Principal Executive Officer)
Date: August 9, 2017	By:	/s/ Edward C. Allen
		Edward C. Allen
		Senior Vice President & Chief Financial Officer
		(Principal Financial Officer)

XML

Document And Entity Information - shares	6 Months Ended
	Jun. 30, 2017	Jul. 31, 2017
Document And Entity Information [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Jun. 30, 2017
Document Fiscal Year Focus	2017
Document Fiscal Period Focus	Q2
Entity Registrant Name	SHORE BANCSHARES INC
Entity Central Index Key	0001035092
Current Fiscal Year End Date	--12-31
Entity Filer Category	Accelerated Filer
Trading Symbol	shbi
Entity Common Stock, Shares Outstanding		12,686,767

XML

CONSOLIDATED BALANCE SHEETS - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
ASSETS
Cash and due from banks	$ 15,748	$ 14,596
Interest-bearing deposits with other banks	38,331	61,342
Cash and cash equivalents	54,079	75,938
Investment securities:
Available for sale, at fair value	201,587	163,902
Held to maturity, at amortized cost - fair value of $6,663 (2017) and $6,806 (2016)	6,411	6,704
Loans	1,034,605	871,525
Less: allowance for credit losses	(9,132)	(8,726)
Loans, net	1,025,473	862,799
Premises and equipment, net	23,297	16,558
Goodwill	27,207	11,931
Other intangible assets, net	4,946	1,079
Other real estate owned, net	2,302	2,477
Other assets	17,496	18,883
TOTAL ASSETS	1,362,798	1,160,271
Deposits:
Noninterest-bearing	311,438	261,575
Interest-bearing	884,820	735,914
Total deposits	1,196,258	997,489
Short-term borrowings	3,325	3,203
Other liabilities	3,275	5,280
TOTAL LIABILITIES	1,202,858	1,005,972
STOCKHOLDERS’ EQUITY
Common stock, par value $.01 per share; shares authorized - 35,000,000; shares issued and outstanding - 12,685,440 (2017) and 12,664,797 (2016)	127	127
Additional paid in capital	64,791	64,201
Retained earnings	94,848	90,964
Accumulated other comprehensive income (loss)	174	(993)
TOTAL STOCKHOLDERS’ EQUITY	159,940	154,299
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$ 1,362,798	$ 1,160,271

XML

CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Statement Of Financial Position [Abstract]
Investment securities held to maturity	$ 6,663	$ 6,806
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized	35,000,000	35,000,000
Common Stock, shares, issued	12,685,440	12,664,797
Common stock, shares outstanding	12,685,440	12,664,797

XML

CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
INTEREST INCOME
Interest and fees on loans	$ 10,441	$ 9,117	$ 19,991	$ 18,078
Interest and dividends on investment securities:
Taxable	937	824	1,764	1,694
Tax-exempt	1	2	3	4
Interest on federal funds sold		2		5
Interest on deposits with other banks	70	58	138	130
Total interest income	11,449	10,003	21,896	19,911
INTEREST EXPENSE
Interest on deposits	538	617	1,049	1,278
Interest on short-term borrowings	11	3	14	7
Total interest expense	549	620	1,063	1,285
NET INTEREST INCOME	10,900	9,383	20,833	18,626
Provision for credit losses	974	375	1,401	825
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES	9,926	9,008	19,432	17,801
NONINTEREST INCOME
Service charges on deposit accounts	878	870	1,712	1,683
Trust and investment fee income	372	364	733	715
Insurance agency commissions	2,032	1,941	4,851	4,700
Other noninterest income	897	866	1,690	1,484
Total noninterest income	4,179	4,041	8,986	8,582
NONINTEREST EXPENSE
Salaries and wages	4,803	4,422	9,305	8,899
Employee benefits	1,127	964	2,367	2,078
Occupancy expense	629	583	1,254	1,196
Furniture and equipment expense	284	248	517	483
Data processing	1,015	854	1,887	1,663
Directors’ fees	102	131	182	235
Amortization of other intangible assets	55	33	88	66
FDIC insurance premium expense	45	268	209	550
Other real estate owned expense, net	108	66	163	73
Legal and professional fees	702	609	1,362	994
Other noninterest expenses	1,329	1,187	2,516	2,467
Total noninterest expense	10,199	9,365	19,850	18,704
INCOME BEFORE INCOME TAXES	3,906	3,684	8,568	7,679
Income tax expense	1,554	1,412	3,416	2,947
NET INCOME	$ 2,352	$ 2,272	$ 5,152	$ 4,732
Basic net income per common share (in dollars per share)	$ 0.19	$ 0.18	$ 0.41	$ 0.37
Diluted net income per common share (in dollars per share)	0.19	0.18	0.41	0.37
Dividends paid per common share (in dollars per share)	$ 0.05	$ 0.03	$ 0.10	$ 0.06

XML

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Statement of Comprehensive Income [Abstract]
Net income	$ 2,352	$ 2,272	$ 5,152	$ 4,732
Securities available for sale:
Unrealized holding gains on available-for-sale securities	731	422	1,955	2,011
Tax effect	(306)	(170)	(788)	(812)
Net of tax amount	425	252	1,167	1,199
Total other comprehensive income	425	252	1,167	1,199
Comprehensive income	$ 2,777	$ 2,524	$ 6,319	$ 5,931

XML

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - USD ($) $ in Thousands	Common Stock [Member]	Additional Paid in Capital [Member]	Retained Earnings [Member]	Accumulated Other Comprehensive Income (Loss) [Member]	Total
Balances at Dec. 31, 2015	$ 126	$ 63,815	$ 83,097	$ (71)	$ 146,967
Net income			4,732		4,732
Unrealized gains on available-for-sale securities, net of taxes				1,199	1,199
Common shares issued for employee stock-based awards		3			3
Stock-based compensation	1	177			178
Cash dividends declared			(758)		(758)
Balances at Jun. 30, 2016	127	63,995	87,071	1,128	152,321
Balances at Dec. 31, 2016	127	64,201	90,964	(993)	154,299
Net income			5,152		5,152
Unrealized gains on available-for-sale securities, net of taxes				1,167	1,167
Stock-based compensation		590			590
Cash dividends declared			(1,268)		(1,268)
Balances at Jun. 30, 2017	$ 127	$ 64,791	$ 94,848	$ 174	$ 159,940

XML

CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$ 5,152	$ 4,732
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses	1,401	825
Depreciation and amortization	1,132	1,230
Discount accretion on debt securities	(18)	(16)
Stock-based compensation expense	590	178
Deferred income tax expense	2,783	2,438
Losses on disposals of premises and equipment		2
Gains on sales of other real estate owned	(3)	(2)
Write-downs of other real estate owned	161	73
Net changes in:
Accrued interest receivable	(190)	(123)
Other assets	(2,123)	272
Accrued interest payable	(20)	(20)
Other liabilities	(1,992)	(614)
Net cash provided by operating activities	6,873	8,975
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and principal payments of investment securities available for sale	20,007	26,092
Purchases of investment securities available for sale	(56,124)	(8,143)
Proceeds from maturities and principal payments of investment securities held to maturity	304	192
Net change in loans	(41,323)	(26,750)
Purchases of premises and equipment	(933)	(317)
Proceeds from sales of other real estate owned	125	2,284
Cash received in branch acquisition (net of cash paid)	64,045
Net cash used in investing activities	(13,899)	(6,642)
CASH FLOWS FROM FINANCING ACTIVITIES:
Noninterest-bearing deposits	15,301	1,928
Interest-bearing deposits	(28,988)	(16,297)
Short-term borrowings	122	197
Proceeds from the issuance of common stock		3
Common stock dividends paid	(1,268)	(758)
Net cash used in financing activities	(14,833)	(14,927)
Net decrease in cash and cash equivalents	(21,859)	(12,594)
Cash and cash equivalents at beginning of period	75,938	73,811
Cash and cash equivalents at end of period	54,079	61,217
Supplemental cash flows information:
Interest paid	1,083	1,303
Income taxes paid	2,000	523
Change in unrealized (gains) on securities available for sale	(380)	$ (1,893)
Tangible assets acquired (net of cash received)	129,188
Identifiable intangible assets acquired	3,954
Liabilities assumed	$ 212,463

XML

Basis of Presentation

6 Months Ended

Jun. 30, 2017

Basis of Presentation [Abstract]

Basis of Presentation

Note 1 - Basis of Presentation

The consolidated financial statements include the accounts of Shore Bancshares, Inc. and its subsidiaries with all significant intercompany transactions eliminated. The consolidated financial statements conform to accounting principles generally accepted in the United States of America (“GAAP”) and to prevailing practices within the banking industry. The accompanying interim financial statements are unaudited; however, in the opinion of management all adjustments necessary to present fairly the consolidated financial position at June 30, 2017, the consolidated results of operations and comprehensive income for the three and six months ended June 30, 2017 and 2016, and changes in stockholders’ equity and cash flows for the six months ended June 30, 2017 and 2016, have been included. All such adjustments are of a normal recurring nature. The amounts as of December 31, 2016 were derived from the 2016 audited financial statements. The results of operations for the three and six months ended June 30, 2017 are not necessarily indicative of the results to be expected for any other interim period or for the full year. This Quarterly Report on Form 10-Q should be read in conjunction with the Annual Report of Shore Bancshares, Inc. on Form 10-K for the year ended December 31, 2016. For purposes of comparability, certain reclassifications have been made to amounts previously reported to conform with the current period presentation.

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

Effective July 1, 2016, the Company’s two bank subsidiaries, The Talbot Bank of Easton Maryland and CNB were consolidated into one bank known as Shore United Bank. In these notes to the consolidated financial statements and the management discussion and analysis section, the term “the Bank” refers to Shore United Bank, unless the context requires stipulating results of the individual banks before the consolidation occurred.

Recent Accounting Standards

ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” amendment requires entities to recognize revenue to depict the transfer of promised goods or services to customers in amounts that reflect the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective for periods beginning after December 15, 2016. ASU 2015-14, “Revenue from Contracts with Customers (Topic 606) Deferral of the Effective Date ” – ASU 2015-14 amendments defer the effective date of Update 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations” – ASU 2016-08 amendments are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. ASU 2016-10, “Revenue from Contracts with Customers (Topic 606):  Identifying Performance Obligations and Licensing” – ASU 2016-10 amendments clarify that contractual provisions that, explicitly or implicitly, require an entity to transfer control of additional goods or services to a customer should be distinguished from contractual provisions that, explicitly or implicitly, define the attributes of a single promised license. Attributes of a promised license define the scope of a customer’s right to use or right to access an entity’s intellectual property and, therefore, do not define whether the entity satisfies its performance obligation at a point in time or over time and do not create an obligation for the entity to transfer any additional rights to use or access its intellectual property. Revenues from services provided by financial institutions that could be impacted by the new guidance includes credit card arrangements, trust and custody services and administration services for customer deposits accounts (e.g., ATM and wire transfer transactions). This update will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Adoption of the ASU is not expected to have a significant impact on the Company’s consolidated financial statements and related disclosures. The Company’s primary sources of revenue are derived from interest and dividends earned on loans, investment securities, and other financial instruments that are not within the scope of ASU 2014-09. The Company’s revenue recognition pattern for revenue streams within the scope of ASU 2014-09, including but not limited to service charges on deposit accounts and gains/losses on the sale of OREO, is not expected to change significantly from current practice. The standard permits the use of either the full retrospective or modified retrospective transition method. The Company is currently planning to use the modified retrospective transition method which requires application of ASU 2014-09 to uncompleted contracts at the date of adoption. Periods prior to the date of adoption are not retrospectively revised, but a cumulative effect of adoption is recognized for the impact of the ASU on uncompleted contracts at the date of adoption.

ASU No. 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”. This ASU, among other things, (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (vii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities. ASU 2016-01 will be effective for us on January 1, 2018 and is not expected to have a significant impact on our financial statements.

ASU No. 2016-02, “Leases (Topic 842).” This ASU stipulates that a lessee should recognize the assets and liabilities that arise from leases. All leases create an asset and a liability for the lessee in accordance with FASB Concepts Statement No. 6, Elements of Financial Statement , and, therefore, recognition of those lease assets and lease liabilities represents an improvement over previous GAAP, which did not require lease assets and lease liabilities to be recognized for most leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. When measuring assets and liabilities arising from a lease, a lessee (and a lessor) should include payments to be made in optional periods only if the lessee is reasonably certain to exercise an option to extend the lease or not to exercise an option to terminate the lease. Similarly, optional payments to purchase the underlying asset should be included in the measurement of lease assets and lease liabilities only if the lessee is reasonably certain to exercise that purchase option. In addition, also consistent with the previous leases guidance, a lessee (and a lessor) should exclude most variable lease payments in measuring lease assets and lease liabilities, other than those that depend on an index or a rate or are in substance fixed payments. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. The amendments in this ASU are effective for fiscal years after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Leases and lessors may not apply a full retrospective transition approach. While the Company is currently evaluating the impact of the new standard, we expect an increase to the Consolidated Balance Sheets for right-of-use assets and interest expense of the lease liabilities in the Consolidated Statements of Income, for arrangements previously accounted for as operating leases.

ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” This ASU simplifies the treatment and accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public business entities, the amendments in this update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any entity in any interim or annual period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. Upon adoption of ASU No. 2016-09 on January 1, 2017, the Company made an accounting policy election to recognize forfeitures of stock-based awards as they occur. The adoption of ASU No. 2016-09 did not have a material impact on our consolidated financial statements.

ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU will replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The use of forecasted information incorporates more timely information in the estimate of expected credit losses, which will be more decision useful to users of the financial statements. It is not expected that an entity will need to create an economic forecast over the entire contractual life of long-dated financial assets. Therefore, the amendments will allow an entity to revert to historical loss information that is reflective of the contractual term (considering the effect of prepayments) for periods that are beyond the time frame for which the entity is able to develop reasonable and supportable forecasts. The amendments retain many of the disclosure amendments in Accounting Standards Update No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, updated to reflect the change from an incurred loss methodology to an expected credit loss methodology. Credit losses on available-for-sale debt securities should be measured in a manner similar to current GAAP. However, the amendments require that credit losses be presented as an allowance rather than a write-down. For public entities that are U.S. Securities and Exchange Commission (SEC) filers, the amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. All entities may adopt the amendments earlier as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company believes this ASU will have a significant impact on our consolidated financial statements and the method in which we calculate our credit losses, primarily on loans and held to maturity securities. At this time, the Company has established a project management team which is in the process of developing and understanding this pronouncement, evaluating the impact of this pronouncement and researching additional software resources that could assist with the implementation.

ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments." Current GAAP is unclear or does not include specific guidance on how to classify certain transactions in the statement of cash flows. This ASU is intended to reduce diversity in practice in how eight particular transactions are classified in the statement of cash flows. ASU No. 2016-15 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, provided that all of the amendments are adopted in the same period. Entities will be required to apply the guidance retrospectively. If it is impracticable to apply the guidance retrospectively for an issue, the amendments related to that issue would be applied prospectively. We adopted the amendments in this ASU effective January 1, 2017. The adoption of ASU No. 2016-15 did not have a material impact on our consolidated financial statements.

ASU No. 2017-01 – In January 2017, FASB issued ASU No. 2017-01, Business Combinations (Topic 805)” Clarifying the Definition of a Business. The ASU clarifies the definition of a business to assist with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The guidance is not expected to have a significant impact on the Company’s financial positions, results of operations or disclosures.

ASU No. 2017-03 – In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-03, “Accounting Changes and Error Corrections (Topic 250) and Investments – Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings.” The ASU adds an SEC paragraph to ASUs 2014-09, 2016-02, and 2016-13 which specifies the SEC staff view that a registrant should evaluate ASUs that have not yet been adopted to determine the appropriate disclosure about the potential material effects of those ASUs on the financial statements when adopted. The guidance also specifies the SEC staff view on financial statement disclosures when the company does not know or cannot reasonably estimate the impact that adoption of the ASUs will have on the financial statements. The ASU also conforms SEC guidance on accounting for tax benefits resulting from investments in affordable housing projects to the guidance in ASU 2014-01, Investments – Equity Method and Joint Ventures (Topic 323). The amendments in this update are effective upon issuance. The guidance did not have a significant impact on our consolidated financial statements.

ASU No. 2017-04 – In January 2017, FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” The ASU simplifies measurement of goodwill and eliminates Step 2 from the goodwill impairment test. The Company should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. The impairment charge is limited to the amount of goodwill allocated to that reporting unit. The amendments in this update are effective for fiscal years beginning after

December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for goodwill impairment tests performed on testing dates after January 1, 2017. The guidance is not expected to have a significant impact on the Company’s financial positions, results of operations or disclosures 

ASU No. 2017-08 – In March 2017, the FASB issued ASU No. 2017-08, “Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities.” Under current GAAP, entities normally amortize the premium as an adjustment of yield over the contractual life of the instrument. This guidance shortens the amortization period of certain callable debt securities held at a premium to the earliest call date. This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The adoption of ASU No. 2017-08 is not expected to have a material impact on the Company’s consolidated financial statements.

ASU No. 2017-09 – In May 2017, the FASB issued ASU No. 2017-09 “Stock Compensation, Scope of Modification Accounting.” This ASU clarifies when changes to the terms of conditions of a share-based payment award must be accounted for as modifications. Companies will apply the modification accounting guidance if the value, vesting conditions or classification of the award changes. The new guidance should reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as modifications, as the guidance will allow companies to make certain non-substantive changes to awards without accounting for them as modifications. It does not change the accounting for modifications. ASU No. 2017-09 is effective for interim and annual reporting periods beginning after December 15, 2017; early adoption is permitted. ASU No. 2017-09 is not expected to have a material impact on the Company’s consolidated financial statements.

XML

Business Combination

6 Months Ended

Jun. 30, 2017

Business Combination [Abstract]

Business Combination

Note 2 – Business Combination

Northwest Bank Branch Acquisition

On May 19, 2017, the Bank purchased three branches from Northwest Bank (“NWBI”) located in Arbutus, Elkridge, and Owings Mills, Maryland. Pursuant to the transaction, the Bank acquired $122.5 million in loans and $212.5 million in deposits, as well as the branch premises and equipment. In connection with its purchase of the branches from Northwest, the Bank received a cash payment from Northwest of $62.7 million, which was net of a premium paid on deposits of $17.2 million. This acquisition provides the Bank with the opportunity to enhance its footprint in Maryland by extending its branch network across the Eastern Shore to the greater Baltimore area communities of Elkridge, Owings Mills and Arbutus.

The Company has accounted for the branch purchases under the acquisition method of accounting in accordance with FASB ASC topic 805, “Business Combinations,” whereby the acquired assets and liabilities were recorded by the Bank at their estimated fair values as of their acquisition date.

The acquired assets and assumed liabilities of the NWBI branches were measured at estimated fair value. Management made significant estimates and exercised significant judgement in accounting for the acquisition of the NWBI branches. Management evaluated expected cash flows, prepayment speeds and estimated loss factors to measure fair values for loans. However,pursuant to the purchase and assumption agreement, the Bank has the option to require the repurchase or exchange of any purchased loans that become nonperforming during the 75 day period following the May 19, 2017 closing. Deposits were valued based upon interest rates, original and remaining terms and maturities, as well as current rates for similar funds in the same markets. Premises were based on recent appraised values, whereas equipment was acquired based on the remaining book value from NWBI, which approximated fair value.

The statement of net assets acquired and the resulting goodwill recorded is presented in the following tables. As explained in the notes that accompany the following table, the purchased assets, assumed liabilities and identifiable assets were recorded at the acquisition date fair value.

	Acquired				Acquired
	Balances as		Fair		Balances as
	Recorded By		Value		Recorded By
	Northwest Bank		Adjustments		Shore United Bank
Cash and due from banks	$	81,231	$	-	$	81,231
Loans		125,131		(2,269)		122,862
Less: allowance for credit losses		-		-		-
Loans, net		125,131		(2,269)		122,862
						-
Premises and equipment, net		5,363		963		6,326
Core deposit intangible		-		3,954		3,954
Total assets	$	211,725	$	2,648	$	214,373
Deposits:
Noninterest-bearing	$	34,481	$	-	$	34,481
Interest-bearing		177,237		738		177,975
Total deposits		211,718		738		212,456
Other liabilities		7		-		7
Total liabilities	$	211,725	$	738	$	212,463
Net assets acquired	$	-	$	1,910	$	1,910

The following table summarizes the acquired assets and assumed liabilities in the purchase as of the acquisition date, and the resulting goodwill of $15.3 million resulting from the transaction (in thousands):

Assets acquired at fair value:
Cash and cash equivalents	$	81,231
Loans		122,862
Premises and equipment, net		6,326
Core deposit intangible		3,954
Total fair value of assets acquired	$	214,373
Liabilities assumed at fair value:
Deposits	$	212,456
Other liabilities		7
Total fair value of liabilities assumed	$	212,463
Net assets acquired at fair value:	$	1,910
Transaction consideration paid to Northwest Bank	$	17,186
Amount of goodwill resulting from acquisition	$	15,276

The total amount of goodwill arising from this transaction of $15.3 million is expected to be deductible for tax purposes, pursuant to section 197 of the Internal Revenue Code.

Acquired loans

The following table outlines the contractually required payments receivable, cash flows we expect to receive, and the accretable yield for all NWBI loans as of the acquisition date.

	Contractually
	Required		Cash Flows				Carrying Value
	Payments		Expected To Be		Accretable FMV		of Loans
	Receivable		Collected		Adjustments		Receivable
Performing loans acquired	$	125,131		125,131		2,269	$	122,862

The Company recorded all loans acquired at the estimated fair value on the purchase date with no carryover of the related allowance for loan losses. The Company only acquired loans which were deemed to be performing loans with no signs of credit deterioration.

The Company determined the net discounted value of cash flows on approximately 864 performing loans totaling $125.1 million. The valuation took into consideration the loans’ underlying characteristics, including account types, remaining terms, annual interest rates, interest types, past delinquencies, timing of principal and interest payments, current market rates, loan-to-value ratios, loss exposures, and remaining balances. These performing loans were segregated into pools based on loan and payment type. The effect of this fair valuation process was a net accretable discount adjustment of $2.3 million at acquisition.

XML

Earnings Per Share

6 Months Ended

Jun. 30, 2017

Earnings Per Share [Abstract]

Earnings Per Share

Note 3 – Earnings Per Share

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

	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
(In thousands, except per share data)	2017		2016		2017		2016
Net Income	$	2,352	$	2,272	$	5,152	$	4,732
Weighted average shares outstanding - Basic		12,681		12,648		12,676		12,642
Dilutive effect of common stock equivalents-options		21		-		21		-
Dilutive effect of common stock equivalents-restricted stock units		33		17		33		15
Weighted average shares outstanding - Diluted		12,735		12,665		12,730		12,657
Earnings per common share - Basic	$	0.19	$	0.18	$	0.41	$	0.37
Earnings per common share - Diluted	$	0.19	$	0.18	$	0.41	$	0.37

There were no weighted average common stock equivalents excluded from the calculation of diluted earnings per share for the three and six months ended June 30, 2017 and 2016.

XML

Investment Securities

6 Months Ended

Jun. 30, 2017

Investment Securities [Abstract]

Investment Securities

Note 4 – Investment Securities

The following table provides information on the amortized cost and estimated fair values of investment securities.

			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
(Dollars in thousands)	Cost		Gains		Losses		Value
Available-for-sale securities:
June 30, 2017
U.S. Government agencies	$	49,173	$	83	$	40	$	49,216
Mortgage-backed		151,375		822		484		151,713
Equity		659		-		1		658
Total	$	201,207	$	905	$	525	$	201,587
December 31, 2016
U.S. Government agencies	$	34,320	$	56	$	58	$	34,318
Mortgage-backed		130,490		263		1,809		128,944
Equity		652		-		12		640
Total	$	165,462	$	319	$	1,879	$	163,902
Held-to-maturity securities:
June 30, 2017
U.S. Government agencies	$	2,007	$	57	$	-	$	2,064
States and political subdivisions		1,404		71		-		1,475
Other equity securities (1)		3,000		124		-		3,124
Total	$	6,411	$	252	$	-	$	6,663
December 31, 2016
U.S. Government agencies	$	2,089	$	26	$	-	$	2,115
States and political subdivisions		1,615		76		-		1,691
Other equity securities (1)		3,000		-		-		3,000
Total	$	6,704	$	102	$	-	$	6,806

(1) On December 15, 2016, the Company bought $3.0 million in subordinated notes with a fixed to floating rate of 6.5% from a local regional bank which it intends to hold to maturity of December 30, 2026.

The following tables provide information about gross unrealized losses and fair value by length of time that the individual securities have been in a continuous unrealized loss position at June 30, 2017 and December 31, 2016.

	Less than				More than
	12 Months				12 Months				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(Dollars in thousands)	Value		Losses		Value		Losses		Value		Losses
June 30, 2017
Available-for-sale securities:
U.S. Government agencies	$	18,941	$	40	$	-	$	-	$	18,941	$	40
Mortgage-backed		40,040		283		8,139		201		48,179		484
Equity securities		659		1		-		-		658		1
Total	$	59,640	$	324	$	8,139	$	201	$	67,778	$	525
	Less than				More than
	12 Months				12 Months				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(Dollars in thousands)	Value		Losses		Value		Losses		Value		Losses
December 31, 2016
Available-for-sale securities:
U.S. Government agencies	$	11,926	$	58	$	-	$	-	$	11,926	$	58
Mortgage-backed		100,237		1,546		9,208		263		109,445		1,809
Equity securities		640		12		-		-		640		12
Total	$	112,803	$	1,616	$	9,208	$	263	$	122,011	$	1,879

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

The following table provides information on the amortized cost and estimated fair values of investment securities by maturity date at June 30, 2017.

	Available for sale				Held to maturity
	Amortized		Estimated		Amortized		Estimated
(Dollars in thousands)	Cost		Fair Value		Cost		Fair Value
Due in one year or less	$	12,005	$	11,997	$	-	$	-
Due after one year through five years		34,992		34,997		501		527
Due after five years through ten years		18,649		18,651		903		949
Due after ten years		134,902		135,284		2,007		2,063
		200,548		200,929		3,411		3,539
Equity securities		659		658		3,000		3,124
Total	$	201,207	$	201,587	$	6,411	$	6,663

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

XML

Loans and Allowance for Credit Losses

6 Months Ended

Jun. 30, 2017

Loans and Allowance for Credit Losses [Abstract]

Loans and Allowance for Credit Losses

Note 5 – Loans and Allowance for Credit Losses

The Company makes residential mortgage, commercial and consumer loans to customers primarily in Talbot County, Queen Anne’s County, Kent County, Caroline County, Dorchester County, Baltimore County and Howard County in Maryland and in Kent County, Delaware. The following table provides information about the principal classes of the loan portfolio at June 30, 2017 and December 31, 2016.

(Dollars in thousands)	June 30, 2017		December 31, 2016
Construction	$	100,095	$	84,002
Residential real estate		384,777		325,768
Commercial real estate		452,132		382,681
Commercial		90,650		72,435
Consumer		6,951		6,639
Total loans		1,034,605		871,525
Allowance for credit losses		(9,132)		(8,726)
Total loans, net	$	1,025,473	$	862,799

Loans are stated at their principal amount outstanding net of any purchase premiums, deferred fees and costs. Interest income on loans is accrued at the contractual rate based on the principal amount outstanding. Fees charged and costs capitalized for originating loans are being amortized substantially on the interest method over the term of the loan. A loan is placed on nonaccrual (i.e., interest income is no longer accrued) when it is specifically determined to be impaired or when principal or interest is delinquent for 90 days or more, unless the loan is well secured and in the process of collection. Any unpaid interest previously accrued on those loans is reversed from income.

Interest payments received on nonaccrual loans are applied as a reduction of the loan principal balance unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.

A loan is considered impaired if it is probable that the Company will not collect all principal and interest payments according to the loan’s contractual terms. An impaired loan may show deficiencies in the borrower’s overall financial condition, payment history, support available from financial guarantors and/or the fair market value of collateral. The impairment of a loan is measured at the present value of expected future cash flows using the loan’s effective interest rate, or at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. Generally, the Company measures impairment on such loans by reference to the fair value of the collateral. Once the amount of impairment has been determined, the uncollectible portion is charged off. Income on impaired loans is recognized on a cash basis, and payments are first applied against the principal balance outstanding (i.e., placing impaired loans on nonaccrual status). Generally, interest income is not recognized on impaired loans unless the likelihood of further loss is remote. The allowance for credit losses may include specific reserves related to impaired loans. Specific reserves remain until charge offs are made. Impaired loans do not include groups of smaller balance homogenous loans such as residential mortgage and consumer installment loans that are evaluated collectively for impairment. Reserves for probable credit losses related to these loans are based on historical loss ratios and are included in the formula portion of the allowance for credit losses. See additional discussion under the caption “Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

A loan is considered a troubled debt restructuring (“TDR”) if a borrower is experiencing financial difficulties and a creditor has granted a concession. Concessions may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules and other actions intended to minimize potential losses. Loans are identified to be restructured when signs of impairment arise such as borrower interest rate reduction request, slowness to pay, or when an inability to repay becomes evident. The terms being offered are evaluated to determine if they are more liberal than those that would be indicated by policy or industry standards for similar, untroubled credits. In those situations where the terms or the interest rates are considered to be more favorable than industry standards or the current underwriting guidelines of the Company’s banking subsidiary, Shore United Bank (the “Bank”), the loan is classified as a TDR. All loans designated as TDRs are considered impaired loans and may be on either accrual or nonaccrual status. In instances where the loan has been placed on nonaccrual status, six consecutive months of timely payments are required prior to returning the loan to accrual status.

All loans classified as TDRs which are restructured and accrue interest under revised terms require a full and comprehensive review of the borrower’s financial condition, capacity for repayment, realistic assessment of collateral values, and the assessment of risk entered into any workout agreement. Current financial information on the borrower, guarantor, and underlying collateral is analyzed to determine if it supports the ultimate collection of principal and interest. For commercial loans, the cash flows are analyzed, both for the underlying project and globally. For consumer loans, updated salary, credit history and cash flow information is obtained. Current market conditions are also considered. Following a full analysis, the determination of the appropriate loan structure is made.

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

Construction loans – Construction loans generally finance the construction of residential real estate for builders and individuals for single family dwellings. In addition, the Bank periodically finances the construction of commercial projects. Credit risk factors include the borrower’s ability to successfully complete the construction on time and within budget, changing market conditions which could affect the value and marketability of projects, changes in the borrower’s ability or willingness to repay the loan and potentially rising interest rates which can impact both the borrower’s ability to repay and the collateral value.

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

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

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

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

The following tables include impairment information relating to loans and the allowance for credit losses as of June 30, 2017 and December 31, 2016.

			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Total
June 30, 2017
Loans individually
evaluated for impairment	$	6,926	$	6,443	$	5,567	$	345	$	-	$	19,281
Loans collectively
evaluated for impairment		93,169		378,334		446,565		90,305		6,951		1,015,324
Total loans	$	100,095	$	384,777	$	452,132	$	90,650	$	6,951	$	1,034,605
Allowance for credit
losses allocated to:
Loans individually
evaluated for impairment	$	593	$	259	$	165	$	-	$	-	$	1,017
Loans collectively
evaluated for impairment		1,756		1,837		2,637		1,652		233		8,115
Total allowance	$	2,349	$	2,096	$	2,802	$	1,652	$	233	$	9,132

			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Total
December 31, 2016
Loans individually
evaluated for impairment	$	8,007	$	7,778	$	6,088	$	-	$	99	$	21,972
Loans collectively
evaluated for impairment		75,995		317,990		376,593		72,435		6,540		849,553
Total loans	$	84,002	$	325,768	$	382,681	$	72,435	$	6,639	$	871,525
Allowance for credit
losses allocated to:
Loans individually
evaluated for impairment	$	1,639	$	317	$	185	$	-	$	-	$	2,141
Loans collectively
evaluated for impairment		1,148		1,636		2,425		1,145		231		6,585
Total allowance	$	2,787	$	1,953	$	2,610	$	1,145	$	231	$	8,726

The following tables provide information on impaired loans and any related allowance by loan class as of June 30, 2017 and December 31, 2016. The difference between the unpaid principal balance and the recorded investment is the amount of partial charge-offs that have been taken.

				Recorded		Recorded			Quarter-to-		Year-to-date
	Unpaid			investment		investment			date average		average		Interest
	principal			with no		with an	Related		recorded		recorded		income
(Dollars in thousands)	balance			allowance		allowance	allowance		investment		investment		recognized
June 30, 2017
Impaired nonaccrual loans:
Construction	$	3,017	$	51	$	2,838	$	580	$	3,153	$	3,435	$	-
Residential real estate		3,352		1,066		2,143		114		3,870		3,940		-
Commercial real estate		1,271		547		167		90		670		696		-
Commercial		425		345		-		-		115		57		-
Consumer		-		-		-		-		66		82		-
Total	$	8,065	$	2,009	$	5,148	$	784	$	7,874	$	8,210	$	-
Impaired accruing TDRs:
Construction	$	4,037	$	3,336	$	701	$	13	$	4,040	$	4,111	$	55
Residential real estate		3,234		2,204		1,030		145		3,409		3,585		87
Commercial real estate		4,853		1,866		2,987		75		4,869		4,888		100
Commercial		-		-		-		-		-		-		-
Consumer		-		-		-		-		-		-		-
Total	$	12,124	$	7,406	$	4,718	$	233	$	12,318	$	12,584	$	242
Total impaired loans:
Construction	$	7,054	$	3,387	$	3,539	$	593	$	7,193	$	7,546	$	55
Residential real estate		6,586		3,270		3,173		259		7,279		7,525		87
Commercial real estate		6,124		2,413		3,154		165		5,539		5,584		100
Commercial		425		345		-		-		115		57		-
Consumer		-		-		-		-		66		82		-
Total	$	20,189	$	9,415	$	9,866	$	1,017	$	20,192	$	20,794	$	242

									June 30, 2016
				Recorded		Recorded			Quarter-to-		Year-to-date
	Unpaid			investment		investment			date average		average		Interest
	principal			with no		with an	Related		recorded		recorded		income
(Dollars in thousands)	balance			allowance		allowance	allowance		investment		investment		recognized
December 31, 2016
Impaired nonaccrual loans:
Construction	$	7,247	$	-	$	3,818	$	1,621	$	5,489	$	6,353	$	-
Residential real estate		4,013		1,957		1,946		166		3,914		3,103		-
Commercial real estate		1,801		959		193		117		2,058		2,308		-
Commercial		-		-		-		-		164		161		-
Consumer		99		99		-		-		106		114		-
Total	$	13,160	$	3,015	$	5,957	$	1,904	$	11,731	$	12,039	$	-
Impaired accruing TDRs:
Construction	$	4,189	$	3,479	$	710	$	18	$	4,244	$	4,142	$	43
Residential real estate		3,875		2,829		1,046		151		4,931		5,300		102
Commercial real estate		4,936		1,573		3,363		68		5,066		5,215		85
Commercial		-		-		-		-		-		-		-
Consumer		-		-		-		-		-		-		-
Total	$	13,000	$	7,881	$	5,119	$	237	$	14,241	$	14,657	$	230
Total impaired loans:
Construction	$	11,436	$	3,479	$	4,528	$	1,639	$	9,733	$	10,495	$	43
Residential real estate		7,888		4,786		2,992		317		8,845		8,403		102
Commercial real estate		6,737		2,532		3,556		185		7,124		7,523		85
Commercial		-		-		-		-		164		161		-
Consumer		99		99		-		-		106		114		-
Total	$	26,160	$	10,896	$	11,076	$	2,141	$	25,972	$	26,696	$	230

The following tables provide a roll-forward for troubled debt restructurings as of June 30, 2017 and June 30, 2016.

	1/1/2017												6/30/2017
	TDR		New		Disbursements		Charge		Reclassifications/				TDR		Related
(Dollars in thousands)	Balance		TDRs		(Payments)		offs		Transfer In/(Out)		Payoffs		Balance		Allowance
For six months ended
June 30, 2017
Accruing TDRs
Construction	$	4,189	$	-	$	(18)	$	-	$	-	$	(134)	$	4,037	$	13
Residential real estate		3,875		-		(102)		(89)		-		(450)		3,234		145
Commercial real estate		4,936		-		(83)		-		-		-		4,853		75
Commercial		-		-		-		-		-		-		-		-
Consumer		-		-		-		-		-		-		-		-
Total	$	13,000	$	-	$	(203)	$	(89)	$	-	$	(584)	$	12,124	$	233
Nonaccrual TDRs
Construction	$	3,818	$	-	$	(872)	$	-	$	(108)	$	-	$	2,838	$	580
Residential real estate		1,603		-		(44)		-		-		-		1,559		110
Commercial real estate		83		-		-		-		-		-		83		-
Commercial		-		345		-		-		-		-		345		-
Consumer		-		-		-		-		-		-		-		-
Total	$	5,504	$	345	$	(916)	$	-	$	(108)	$	-	$	4,825	$	690
Total	$	18,504	$	345	$	(1,119)	$	(89)	$	(108)	$	(584)	$	16,949	$	923

	1/1/2016												6/30/2016
	TDR		New		Disbursements		Charge		Reclassifications/				TDR		Related
(Dollars in thousands)	Balance		TDRs		(Payments)		offs		Transfer In/(Out)		Payoffs		Balance		Allowance
For six months ended
June 30, 2016
Accruing TDRs
Construction	$	4,069	$	-	$	172	$	-	$	-	$	-	$	4,241	$	25
Residential real estate		5,686		533		(350)		-		(1,595)		(179)		4,095		73
Commercial real estate		5,740		495		(659)		(117)		(458)		-		5,001		155
Commercial		-		-		-		-		-		-		-		-
Consumer		-		-		-		-		-		-		-		-
Total	$	15,495	$	1,028	$	(837)	$	(117)	$	(2,053)	$	(179)	$	13,337	$	253
Nonaccrual TDRs
Construction	$	4,960	$	2,570	$	(1,847)	$	(254)	$	-	$	-	$	5,429	$	739
Residential real estate		445		-		(293)		-		1,595		-		1,747		72
Commercial real estate		-		-		-		(258)		458		-		200		112
Commercial		-		-		-		-		-		-		-		-
Consumer		23		-		(23)		-		-		-		-		-
Total	$	5,428	$	2,570	$	(2,163)	$	(512)	$	2,053	$	-	$	7,376	$	923
Total	$	20,923	$	3,598	$	(3,000)	$	(629)	$	-	$	(179)	$	20,713	$	1,176

The following tables provide information on loans that were modified and considered TDRs during the six months ended June 30, 2017 and June 30, 2016.

		Premodification		Postmodification
		outstanding		outstanding
	Number of	recorded		recorded		Related
(Dollars in thousands)	contracts	investment		investment		allowance
TDRs:
For six months ended
June 30, 2017
Construction	-	$	-	$	-	$	-
Residential real estate	-		-		-		-
Commercial real estate	1		760		755		-
Commercial	1		462		345		-
Consumer	-		-		-		-
Total	2	$	1,222	$	1,100	$	-
For six months ended
June 30, 2016
Construction	-	$	-	$	-	$	-
Residential real estate	3		668		668		-
Commercial real estate	1		495		495		-
Commercial	-		-		-		-
Consumer	-		-		-		-
Total	4	$	1,163	$	1,163	$	-

During the six months ended June 30, 2017, there was one new TDR and one previously recorded TDR which was modified. The new TDR consisted of a reduction in principal, whereas, the previously recorded TDR consisted of a change in maturity date.

The following tables provide information on TDRs that defaulted during the six months ended June 30, 2017 and June 30, 2016. Generally, a loan is considered in default when principal or interest is past due 90 days or more.

	Number of	Recorded		Related
(Dollars in thousands)	contracts	investment		allowance
TDRs that subsequently defaulted:
For six months ended
June 30, 2017
Construction	-	$	-	$	-
Residential real estate	1		89		-
Commercial real estate	-		-		-
Commercial	-		-		-
Consumer	-		-		-
Total	1	$	89	$	-
For six months ended
June 30, 2016
Construction	1	$	241	$	-
Residential real estate	-		-		-
Commercial real estate	2		375		-
Commercial	-		-		-
Consumer	-		-		-
Total	3	$	616	$	-

Management uses risk ratings as part of its monitoring of the credit quality in the Company’s loan portfolio. Loans that are identified as special mention, substandard or doubtful are adversely rated. They are assigned higher risk ratings than favorably rated loans in the calculation of the formula portion of the allowance for credit losses. At June 30, 2017, there were no nonaccrual loans classified as special mention or doubtful and $7.2 million of nonaccrual loans were identified as substandard. Similarly, at December 31, 2016, there were no nonaccrual loans classified as special mention or doubtful and $9.0 million of nonaccrual loans were identified as substandard.

The following tables provide information on loan risk ratings as of June 30, 2017 and December 31, 2016.

			Special
(Dollars in thousands)	Pass/Performing		Mention		Substandard		Doubtful		Total
June 30, 2017
Construction	$	89,918	$	4,055	$	6,122	$	-	$	100,095
Residential real estate		372,148		6,725		5,904		-		384,777
Commercial real estate		428,971		15,495		7,666		-		452,132
Commercial		89,451		799		400		-		90,650
Consumer		6,951		-		-		-		6,951
Total	$	987,439	$	27,074	$	20,092	$	-	$	1,034,605

			Special
(Dollars in thousands)	Pass/Performing		Mention		Substandard		Doubtful		Total
December 31, 2016
Construction	$	72,641	$	4,195	$	7,166	$	-	$	84,002
Residential real estate		312,242		6,646		6,880		-		325,768
Commercial real estate		363,461		10,939		8,281		-		382,681
Commercial		71,313		857		265		-		72,435
Consumer		6,540		-		99		-		6,639
Total	$	826,197	$	22,637	$	22,691	$	-	$	871,525

The following tables provide information on the aging of the loan portfolio as of June 30, 2017 and December 31, 2016.

		Accruing
				30-59 days			60-89 days			Greater than			Total
(Dollars in thousands)	Current			past due			past due			90 days			past due			Nonaccrual			Total
June 30, 2017
Construction	$	97,045		$	-		$	50		$	111		$	161		$	2,889		$	100,095
Residential real estate		379,217			310			1,838			203			2,351			3,209			384,777
Commercial real estate		450,740			219			459			-			678			714			452,132
Commercial		90,272			33			-			-			33			345			90,650
Consumer		6,944			5			2			-			7			-			6,951
Total	$	1,024,218		$	567		$	2,349		$	314		$	3,230		$	7,157		$	1,034,605
Percent of total loans		99.0	%		0.1	%		0.2	%		-	%		0.3	%		0.7	%		100.0	%

		Accruing
				30-59 days			60-89 days			Greater than			Total
(Dollars in thousands)	Current			past due			past due			90 days			past due			Nonaccrual			Total
December 31, 2016
Construction	$	80,079		$	-		$	105		$	-		$	105		$	3,818		$	84,002
Residential real estate		317,992			1,778			2,095			-			3,873			3,903			325,768
Commercial real estate		375,552			3,219			2,758			-			5,977			1,152			382,681
Commercial		72,272			19			134			10			163			-			72,435
Consumer		6,515			13			2			10			25			99			6,639
Total	$	852,410		$	5,029		$	5,094		$	20		$	10,143		$	8,972		$	871,525
Percent of total loans		97.8	%		0.6	%		0.6	%		-	%		1.2	%		1.0	%		100.0	%

Management evaluates the adequacy of the allowance for credit losses at least quarterly and adjusts the provision for credit losses based on this analysis. The following tables provide a summary of the activity in the allowance for credit losses allocated by loan class for the three months and six months ended June 30, 2017 and 2016. Allocation of a portion of the allowance to one loan class does not preclude its availability to absorb losses in other loan classes.

Management re-evaluated the allowance methodology during the third quarter of 2016, in connection with the consolidation of the two former bank subsidiaries. Prior to consolidation, each bank subsidiary applied a separate allowance methodology based on their respective loan portfolios. The revised methodology incorporates both previous methodologies to align with a consolidated loan portfolio. In addition, beginning in January of 2017, the allowance methodology was expanded to require the allocation of general reserves to pass/watch loans. This change resulted in an increase in allowance for the first quarter of 2017 when compared to the fourth quarter of 2016 of $1.1 million, which was partially offset by a reduction in specific reserves of $850 thousand.

			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Unallocated		Total
For three months ended
June 30, 2017
Allowance for credit losses:
Beginning Balance	$	2,290	$	2,131	$	2,912	$	1,338	$	256	$	-	$	8,927
Charge-offs		(25)		(100)		-		(706)		(15)		-		(846)
Recoveries		9		10		8		42		8		-		77
Net charge-offs		(16)		(90)		8		(664)		(7)		-		(769)
Provision		75		55		(118)		978		(16)		-		974
Ending Balance	$	2,349	$	2,096	$	2,802	$	1,652	$	233	$	-	$	9,132

			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Unallocated		Total
For three months ended
June 30, 2016
Allowance for credit losses:
Beginning Balance	$	1,753	$	2,014	$	3,257	$	585	$	177	$	523	$	8,309
Charge-offs		(13)		(102)		(265)		(58)		(2)		-		(440)
Recoveries		10		33		10		57		4		-		114
Net charge-offs		(3)		(69)		(255)		(1)		2		-		(326)
Provision		(6)		90		(131)		93		27		302		375
Ending Balance	$	1,744	$	2,035	$	2,871	$	677	$	206	$	825	$	8,358

			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Unallocated		Total
For six months ended
June 30, 2017
Allowance for credit losses:
Beginning Balance	$	2,787	$	1,953	$	2,610	$	1,145	$	231	$	-	$	8,726
Charge-offs		(54)		(323)		-		(771)		(15)		-		(1,163)
Recoveries		16		21		19		100		12		-		168
Net charge-offs		(38)		(302)		19		(671)		(3)		-		(995)
Provision		(400)		445		173		1,178		5		-		1,401
Ending Balance	$	2,349	$	2,096	$	2,802	$	1,652	$	233	$	-	$	9,132

			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Unallocated		Total
For six months ended
June 30, 2016
Allowance for credit losses:
Beginning Balance	$	1,646	$	2,181	$	2,999	$	558	$	156	$	776	$	8,316
Charge-offs		(254)		(118)		(503)		(125)		(10)		-		(1,010)
Recoveries		16		67		10		122		12		-		227
Net charge-offs		(238)		(51)		(493)		(3)		2		-		(783)
Provision		336		(95)		365		122		48		49		825
Ending Balance	$	1,744	$	2,035	$	2,871	$	677	$	206	$	825	$	8,358

Foreclosure Proceedings

Consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure totaled $105thousand and $  687 thousand as of June 30, 2017 and December 31, 2016, respectively. At June 30, 2017, there was 1 residential property held in other real estate owned totaling $15 thousand, compared to 3 residential properties totaling $92 thousand at December 31, 2016.

Performing TDRs were in compliance with their modified terms and there are no further commitments associated with these loans.

XML

Goodwill and Other Intangibles

6 Months Ended

Jun. 30, 2017

Goodwill and Other Intangibles [Abstract]

Goodwill and Other Intangibles

Note 6  – Goodwill and Other Intangibles

On May 19, 2017, the Bank acquired three branches located in Arbutus, Owings Mills and Elkridge, Maryland from NWBI. The purchase of these branches resulted in core deposit intangibles of $4.0 million.

The gross carrying amount and accumulated amortization of intangible assets is as follows:

June 30, 2017
									Weighted
	Gross		Accumulated				Net		Average
	Carrying		Impairment		Accumulated		Carrying		Remaining Life
(Dollars in thousands)	Amount		Charges		Amortization		Amount		(in years)
Goodwill	$	30,511	$	(2,637)	$	(667)	$	27,207	-
Other intangible assets
Amortizable
Employment agreements	$	440	$	-	$	(440)	$	-	-
Insurance expirations		1,270		-		(1,264)		6	0.1
Customer relationships		795		(95)		(461)		239	5.1
Core deposit intangible		3,954		-		(33)		3,921	9.9
		6,459		(95)		(2,198)		4,166
Unamortizable
Carrier relationships		-		-		-		-
Trade name		780		-		-		780	-
		780		-		-		780
Total other intangible assets	$	7,239	$	(95)	$	(2,198)	$	4,946
December 31, 2016
									Weighted
	Gross		Accumulated				Net		Average
	Carrying		Impairment		Accumulated		Carrying		Remaining Life
(Dollars in thousands)	Amount		Charges		Amortization		Amount		(in years)
Goodwill	$	15,235	$	(2,637)	$	(667)	$	11,931	-
Other intangible assets
Amortizable
Employment agreements	$	440	$	-	$	(440)	$	-	-
Insurance expirations		1,270		-		(1,233)		37	0.4
Customer relationships		795		(95)		(438)		262	5.6
Core deposit intangible		-		-		-		-	-
		2,505		(95)		(2,111)		299
Unamortizable
Carrier relationships		-		-		-		-
Trade name		780		-		-		780	-
		780		-		-		780
Total other intangible assets	$	3,285	$	(95)	$	(2,111)	$	1,079

Estimated future amortizing expense for amortization intangibles within the years ending December 31, are as follows:

(Dollars in thousands)
June 30, 2017	$	88
2018		442
2019		442
2020		395
2021		439
Thereafter		2,360
Total amortizing intangible assets	$	4,166

XML

Other Assets

6 Months Ended

Jun. 30, 2017

Other Assets [Abstract]

Other Assets

Note 7 – Other Assets

The Company had the following other assets at June 30, 2017 and December 31, 2016.

(Dollars in thousands)	June 30, 2017		December 31, 2016
Nonmarketable investment securities	$	3,069	$	1,650
Accrued interest receivable		2,865		2,675
Deferred income taxes		3,467		7,039
Prepaid expenses		1,111		1,149
Cash surrender value on life insurance		2,599		2,589
Other assets		4,385		3,781
Total	$	17,496	$	18,883

The following table provides information on significant components of the Company’s deferred tax assets and liabilities as of June 30, 2017 and December 31, 2016.

	June 30,		December 31,
(Dollars in thousands)	2017		2016
Deferred tax assets:
Allowance for credit losses	$	3,647	$	3,486
Reserve for off-balance sheet commitments		122		122
Net operating loss carry forward		1,188		2,232
Write-downs of other real estate owned		300		387
Deferred income		168		1,011
Unrealized gains on available-for-sale securities		-		672
AMT Credits		403		869
Other		936		1,192
Total deferred tax assets		6,764		9,971
Deferred tax liabilities:
Depreciation		200		239
Amortization on loans FMV adjustment		138		156
Purchase accounting adjustments		2,292		2,019
Deferred capital gain on branch sale		350		401
Unrealized losses on available-for-sale securities		117		-
Other		200		116
Total deferred tax liabilities		3,297		2,931
Net deferred tax assets	$	3,467	$	7,040

The Company’s deferred tax assets consist of gross net operating loss carryovers for state tax purposes of $22.2 million that will be used to offset taxable income in future periods. The Company’s state net operating loss carryovers will begin to expire in the year ended December 31, 2026 with limited amounts available through December 31, 2034. Additionally, the Company has $403 thousand of alternative minimum tax credit carryforwards as of June 30, 2017 which may be carried forward indefinitely.

No valuation allowance on these deferred tax assets was recorded at June 30, 2017 and December 31, 2016 as management believes it is more likely than not that all deferred tax assets will be realized based on the following positive material factors: 1) The Company was profitable for all four quarters of 2014, 2015 and 2016 on a GAAP basis. The net operating loss was originally created in the third quarter of 2013 and was solely attributable to the former Talbot Bank’s sale of loans and other real estate owned (the “Asset Sale”), which is considered non-recurring. 2) The Company had pre-tax income of $15.9 million and $11.5 million for the years ended December 31, 2016 and 2015, providing further evidence that the Asset Sale was producing positive results and confirming the expectation of utilizing the deferred tax assets. Alternatively, the Company has reviewed negative factors which would influence the conclusion of realizing the deferred tax assets. These factors include the following: 1) The Company could be subject to Section 382 of the Internal Revenue Code (“IRC”), which could further limit the realization of the net operating loss-related deferred tax asset (“NOL-DTA”). 2) Although the local economy of the market in which the Company operates has been showing continued signs of improvement over the past four years, if this trend flattens or reverses, there is a potential that this potential negative evidence could outweigh the prevailing positive factors.

Based on the aforementioned considerations, the Company has concluded that the predominance of observable positive evidence outweighs the future potential of negative evidence and therefore it is more likely than not that the Company will be able to realize in the future all of the net deferred tax assets.

XML

Other Liabilities

6 Months Ended

Jun. 30, 2017

Other Liabilities [Abstract]

Other Liabilities

Note 8 – Other Liabilities

The Company had the following other liabilities at June 30, 2017 and December 31, 2016.

(Dollars in thousands)	June 30, 2017		December 31, 2016
Accrued interest payable	$	55	$	74
Other accounts payable		2,032		2,461
Deferred compensation liability		1,188		1,444
Other liabilities		-		1,301
Total	$	3,275	$	5,280

XML

Stock-Based Compensation

6 Months Ended

Jun. 30, 2017

Stock-Based Compensation [Abstract]

Stock-Based Compensation

Note 9 - Stock-Based Compensation

At the 2016 annual meeting, stockholders approved the Shore Bancshares, Inc. 2016 Stock and Incentive Plan (“2016 Equity Plan”), replacing the Shore Bancshares, Inc. 2006 Stock and Incentive Plan (“2006 Equity Plan”), which expired on that date. The Company may issue shares of common stock or grant other equity-based awards pursuant to the 2016 Equity Plan. Stock-based awards granted to date generally are time-based, vest in equal installments on each anniversary of the grant date and range over a one- to five-year period of time, and, in the case of stock options, expire 10 years from the grant date. As part of the 2016 Equity Plan, a performance equity incentive award program, known as the “Long-term incentive plan” allows participating officers of the Company to earn incentive awards of performance share/restricted stock units if certain pre-determined targets are achieved at the end of a three-year performance cycle. Stock-based compensation expense based on the grant date fair value is recognized ratably over the requisite service period for all awards and reflects forfeitures as they occur. The 2016 Equity Plan originally reserved 750,000 shares of common stock for grant, and 711,200 shares remained available for grant at June 30, 2017.

The following tables provide information on stock-based compensation expense for the three and six months ended June 30, 2017 and 2016.

	For Three Months Ended				For six months ended
	June 30, 2017				June 30, 2017
(Dollars in thousands)	2017		2016		2017		2016
Stock-based compensation expense	$	173	$	66	$	590	$	177
Excess tax benefits related to stock-based
compensation		11		-		13		3

	June 30,
(Dollars in thousands)	2017			2016
Unrecognized stock-based compensation
expense	$	354		$	179
Weighted average period unrecognized
expense is expected to be recognized		1.1	years		0.8	years

The following table summarizes restricted stock award activity for the Company under the 2016 Equity Plan for the six months ended June 30, 2017 and 2016.

	Six Months Ended June 30, 2017			Six Months Ended June 30, 2016
		Weighted Average			Weighted Average
	Number of	Grant Date		Number of	Grant Date
	Shares	Fair Value		Shares	Fair Value
Nonvested at beginning of period	17,066	$	11.46	12,488	$	8.74
Granted	20,143		16.69	23,239		11.47
Vested	(21,296)		13.47	(18,662)		9.63
Cancelled	-		-	-		-
Nonvested at end of period	15,913	$	12.49	17,065	$	11.46

The fair value of restricted stock awards that vested during the first six monthsof 2017 and 2016 was $287 thousand and $180 thousand, respectively.

Restricted stock units (RSUs) are similar to restricted stock, except the recipient does not receive the stock immediately, but instead receives it upon the terms and conditions of the Company’s long-term incentive plans which are subject to performance milestones achieved at the end of a three-year period.  Each RSU cliff vests at the end of the three-year period and entitles the recipient to receive one share of common stock on a specified issuance date.  The recipient does not have any stockholder rights, including voting rights, with respect to the shares underlying awarded RSUs until the recipient becomes the holder of those shares.

During 2016, the Company entered into a long-term incentive program agreement with officers of the Company and its subsidiaries to award RSUs based on a performance metric to be achieved as of December 31, 2018. These awards will cliff vest on this date, in which the final number of common shares to be issued will be determined. The range of RSUs which could potentially be awarded at the end of the performance cycle is between 12,214 shares and 48,871 shares, assuming a certain performance metric is met. In addition, two members of the long-term incentive plan from 2015 forfeited their RSUs due to leaving the Company before the end of the vesting period. The table below presents management’s evaluation of the probable number of common stock awards to be issued at the end of the performance cycle.

During 2015, the Company entered into a long-term incentive program agreement with officers of the Company and its subsidiaries to award RSUs based on performance metrics to be achieved as of December 31, 2017. These awards will cliff vest on this date, in which the final number of common shares to be issued will be determined. The range of RSUs which could potentially be awarded at the end of the performance cycle is between 10,953 shares and 43,821 shares, assuming certain performance metrics are met. The table below presents management’s evaluation of the probable number of common stock awards to be issued at the end of the performance cycle.

The following table summarizes restricted stock units activity based on management’s evaluation of the probable number of common stock awards to be issued at the end of the performance cycle for the Company under the 2016 and 2006 Equity Plans for the six months ended June 30, 2017 and 2016.

	Six Months Ended June 30, 2017			Six Months Ended June 30, 2016
		Weighted Average			Weighted Average
	Number of	Grant Date		Number of	Grant Date
	Shares	Fair Value		Shares	Fair Value
Outstanding at beginning of period	46,342	$	10.64	26,943	$	9.49
Granted	-		-	24,433		11.68
Vested	-		-	-		-
Forfeited	-		-	(5,034)		9.49
Outstanding at end of period	46,342	$	10.64	46,342	$	10.64

The following table summarizes stock option activity for the Company under the 2016 Equity Plan for the six months ended June 30, 2017 and 2016.

	Six Months Ended June 30, 2017			Six Months Ended June 30, 2016
		Weighted Average			Weighted Average
	Number of	Grant Date		Number of	Grant Date
	Shares	Fair Value		Shares	Fair Value
Outstanding at beginning of period	62,086	$	8.29	61,327	$	8.05
Granted	1,202		10.99	12,443		11.12
Exercised	(859)		6.64	(450)		6.64
Expired/Cancelled	-		-	-		-
Outstanding at end of period	62,429	$	8.36	73,320	$	8.58
Exercisable at end of period	61,828	$	8.34	69,990	$	8.46

The weighted average fair value of stock options granted during the six months ended June 30, 2017 was $10.99. The Company estimates the fair value of options using the Black-Scholes valuation model with weighted average assumptions for dividend yield, expected volatility, risk-free interest rate and expected lives (in years). The expected dividend yield is calculated by dividing the total expected annual dividend payout by the average stock price. The expected volatility is based on historical volatility of the underlying securities. The risk-free interest rate is based on the Federal Reserve Bank’s constant maturities daily interest rate in effect at grant date. The expected contract life of the options represents the period of time that the Company expects the awards to be outstanding based on historical experience with similar awards. The following weighted average assumptions were used as inputs to the Black-Scholes valuation model for options granted in 2017 and 2016.

	2017		2016
Dividend yield	0.84	%	0.73	%
Expected volatility	64.80	%	38.60	%
Expected forfeiture rate	-	%	-	%
Risk-free interest rate	2.42	%	1.75	%
Expected contract life (in years)	10 years		10 years

At the end of the second quarter of 2017, the aggregate intrinsic value of the options outstanding under the 2016 Equity Plan was $505 thousand based on the $16.45 market value per share of the Company’s common stock at June 30, 2017. Similarly, the aggregate intrinsic value of the options exercisable was $232 thousand at June 30, 2016. The intrinsic value on options exercised during the six months ended June 30, 2017 was $8 thousand based on the $15.89 market value per share of the Company’s common stock at January 30, 2017. The intrinsic value on options exercised in 2016 was $2 thousand based on the $11.35 market value per share of the Company’s common stock at February 8, 2016. At June 30, 2017, the weighted average remaining contract life of options outstanding was 6.6 years.

XML

Accumulated Other Comprehensive Income

6 Months Ended

Jun. 30, 2017

Accumulated Other Comprehensive Income [Abstract]

Accumulated Other Comprehensive Income

Note 10 – Accumulated Other Comprehensive Income

The Company records unrealized holding gains (losses), net of tax, on investment securities available for sale as accumulated other comprehensive income (loss), a separate component of stockholders’ equity. The following table provides information on the changes in the components of accumulated other comprehensive income (loss) for the six months ended June 30, 2017 and 2016.

	Accumulated net
	unrealized holding		Total accumulated
	gains (losses) on		other
	available for sale		comprehensive
(Dollars in thousands)	securities		income (loss)
Balance, December 31, 2016	$	(993)	$	(993)
Other comprehensive income		1,167		1,167
Balance, June 30, 2017	$	174	$	174
Balance, December 31, 2015	$	(71)	$	(71)
Other comprehensive income		1,199		1,199
Balances, June 30, 2016	$	1,128	$	1,128

XML

Fair Value Measurements

6 Months Ended

Jun. 30, 2017

Fair Value Measurements [Abstract]

Fair Value Measurements

Note 11 – Fair Value Measurements

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

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

Under fair value accounting guidance, assets and liabilities are grouped at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine their fair values. These hierarchy levels are:

Level 1 inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.

Level 2 inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 inputs – Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

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

Investment Securities Available for Sale

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

The tables below present the recorded amount of assets measured at fair value on a recurring basis at June 30, 2017 and December 31, 2016. No assets were transferred from one hierarchy level to another during the first six months of 2017 or 2016.

					Significant
					Other		Significant
			Quoted		Observable		Unobservable
			Prices		Inputs		Inputs
(Dollars in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
June 30, 2017
Securities available for sale:
U.S. Government agencies	$	49,216	$	-	$	49,216	$	-
Mortgage-backed		151,713		-		151,713		-
Equity		658		-		658		-
Total	$	201,587	$	-	$	201,587	$	-
					Significant
					Other		Significant
			Quoted		Observable		Unobservable
			Prices		Inputs		Inputs
(Dollars in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
December 31, 2016
Securities available for sale:
U.S. Government agencies	$	34,318	$	-	$	34,318	$	-
Mortgage-backed		128,944		-		128,944		-
Equity		640		-		640		-
Total	$	163,902	$	-	$	163,902	$	-

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

Impaired Loans

Loans are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loan impairment is measured using the present value of expected cash flows, the loan’s observable market price or the fair value of the collateral (less selling costs) if the loans are collateral dependent and these are considered Level 3 in the fair value hierarchy. Collateral may be real estate and/or business assets including equipment, inventory and/or accounts receivable. The value of business equipment, inventory and accounts receivable, discounted on management’s review and analysis. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and the client’s business. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the factors identified above. Valuation techniques are consistent with those techniques applied in prior periods.

Other Real Estate Owned (Foreclosed Assets)

Foreclosed assets are adjusted for fair value upon transfer of loans to foreclosed assets. Subsequently, foreclosed assets are carried at the lower of carrying value and fair value. The estimated fair value for foreclosed assets included in Level 3 are determined by independent market based appraisals and other available market information, less costs to sell, that may be reduced further based on market expectations or an executed sales agreement. If the fair value of the collateral deteriorates subsequent to the initial recognition, the Company records the foreclosed asset as a non-recurring Level 3 adjustment. Valuation techniques are consistent with those techniques applied in prior periods.

The tables below present the recorded amount of assets measured at fair value on a nonrecurring basis at June 30, 2017 and December 31, 2016. The assets in the following table were transferred during 2016 from Level 2 to Level 3, based on management’s reassessment an evaluation of the inputs in relation to impaired loans and foreclosed assets. This reassessment resulted in management conclusion that the inputs for these assets were more reflective of Level 3 as unobservable inputs and applied retrospectively to prior periods reported.

					Significant
					Other		Significant
			Quoted		Observable		Unobservable
			Prices		Inputs		Inputs
(Dollars in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
June 30, 2017
Impaired loans
Construction	$	6,333	$	-	$	-	$	6,333
Residential real estate		6,184		-		-		6,184
Commercial real estate		5,402		-		-		5,402
Commercial		345		-		-		345
Consumer		-		-		-		-
Total impaired loans		18,264		-		-		18,264
Other real estate owned		2,302		-		-		2,302
Total assets measured at fair value on a
nonrecurring basis	$	20,566	$	-	$	-	$	20,566

					Significant
					Other		Significant
			Quoted		Observable		Unobservable
			Prices		Inputs		Inputs
(Dollars in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
December 31, 2016
Impaired loans
Construction	$	6,368	$	-	$	-	$	6,368
Residential real estate		7,461		-		-		7,461
Commercial real estate		5,903		-		-		5,903
Commercial		-		-		-		-
Consumer		99		-		-		99
Total impaired loans		19,831		-		-		19,831
Other real estate owned		2,477		-		-		2,477
Total assets measured at fair value on a
nonrecurring basis	$	22,308	$	-	$	-	$	22,308

The following information relates to the estimated fair values of financial assets and liabilities that are reported in the Company’s consolidated balance sheets at their carrying amounts. The discussion below describes the methods and assumptions used to estimate the fair value of each class of financial asset and liability for which it is practicable to estimate that value.

Cash and Cash Equivalents

Cash equivalents include interest-bearing deposits with other banks and federal funds sold. For these short-term instruments, the carrying amount is a reasonable estimate of fair value.

Investment Securities Held to Maturity

For all investments in debt securities, fair values are based on quoted prices. If a quoted price is not available, fair value is estimated using quoted prices for similar securities.

Loans

The fair values of categories of fixed rate loans, such as commercial loans, residential real estate, and other consumer loans, are estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Other loans, including variable rate loans, are adjusted for differences in loan characteristics.

Deposits and Short-Term Borrowings

The fair values of demand deposits, savings accounts, and certain money market deposits are the amounts payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. These estimates do not take into consideration the value of core deposit intangibles. Generally, the carrying amount of short-term borrowings is a reasonable estimate of fair value. The fair values of securities sold under agreements to repurchase (included in short-term borrowings) and long-term debt are estimated using the rates offered for similar borrowings.

Commitments to Extend Credit and Standby Letters of Credit

The majority of the Company’s commitments to grant loans and standby letters of credit are written to carry current market interest rates if converted to loans. In general, commitments to extend credit and letters of credit are not assignable by the Company or the borrower, so they generally have value only to the Company and the borrower. Therefore, it is impractical to assign any value to these commitments.

The following table provides information on the estimated fair values of the Company’s financial assets and liabilities that are reported in the balance sheets at their carrying amounts. The financial assets and liabilities have been segregated by their classification level in the fair value hierarchy.

	June 30, 2017				December 31, 2016
			Estimated				Estimated
	Carrying		Fair		Carrying		Fair
(Dollars in thousands)	Amount		Value		Amount		Value
Financial assets
Level 1 inputs
Cash and cash equivalents	$	54,079	$	54,079	$	75,938	$	75,938
Level 2 inputs
Investment securities held to maturity	$	6,411	$	6,663	$	6,704	$	6,806
Loans, net		1,025,473		1,027,011		862,799		867,594
Financial liabilities
Level 2 inputs
Deposits	$	1,196,258	$	1,124,815	$	997,489	$	929,573
Short-term borrowings		3,325		3,325		3,203		3,203

XML

Financial Instruments with Off-Balance Sheet Risk

6 Months Ended

Jun. 30, 2017

Financial Instruments With Off Balance Sheet Risk [Abstract]

Financial Instruments with Off-Balance Sheet Risk

Note 12 – Financial Instruments with Off-Balance Sheet Risk

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

The following table provides information on commitments outstanding at June 30, 2017 and December 31, 2016.

(Dollars in thousands)	June 30, 2017		December 31, 2016
Commitments to extend credit	$	201,361	$	178,233
Letters of credit		9,541		8,024
Total	$	210,902	$	186,257

XML

Segment Reporting

6 Months Ended

Jun. 30, 2017

Segment Reporting [Abstract]

Segment Reporting

Note 13 – Segment Reporting

The Company operates two primary business segments: Community Banking and Insurance Products and Services. Through the Community Banking business, the Company provides services to consumers and small businesses in Maryland and Delaware through its 20branch network and 2 loan production offices. Community banking activities include small business services, retail brokerage, trust services and consumer banking products and services. Loan products available to consumers include mortgage, home equity, automobile, marine, and installment loans, credit cards and other secured and unsecured personal lines of credit. Small business lending includes commercial mortgages, real estate development loans, equipment and operating loans, as well as secured and unsecured lines of credit, credit cards, accounts receivable financing arrangements, and merchant card services.

Through the Insurance Products and Services business, the Company provides a full range of insurance products and services to businesses and consumers in the Company’s market areas. Products include property and casualty, life, marine, individual health and long-term care insurance. Pension and profit sharing plans and retirement plans for executives and employees are available to suit the needs of individual businesses.

The following table includes selected financial information by business segments for the first six months of 2017 and 2016.

	Community		Insurance Products		Parent		Consolidated
(Dollars in thousands)	Banking		and Services		Company		Total
2017
Interest Income	$	21,830	$	(1)	$	67	$	21,896
Interest Expense		(1,063)		-		-		(1,063)
Provision for credit losses		(1,401)		-		-		(1,401)
Noninterest income		3,933		5,053		-		8,986
Noninterest expense		(12,044)		(3,834)		(3,972)		(19,850)
Net intersegment (expense) income		(3,594)		(162)		3,756		-
Income (loss) before taxes		7,661		1,056		(149)		8,568
Income tax (expense) benefit		(3,054)		(422)		60		(3,416)
Net Income (loss)	$	4,607	$	634	$	(89)	$	5,152
Total assets	$	1,346,340	$	10,031	$	6,427	$	1,362,798
2016
Interest Income	$	19,785	$	-	$	126	$	19,911
Interest Expense		(1,285)		-		-		(1,285)
Provision for credit losses		(825)		-		-		(825)
Noninterest income		3,850		4,732		-		8,582
Noninterest expense		(10,691)		(3,435)		(4,578)		(18,704)
Net intersegment (expense) income		(3,979)		(367)		4,346		-
Income (loss) before taxes		6,855		930		(106)		7,679
Income tax (expense) benefit		(2,616)		(369)		38		(2,947)
Net Income (loss)	$	4,239	$	561	$	(68)	$	4,732
Total assets	$	1,097,433	$	9,347	$	18,910	$	1,125,690

XML

Basis of Presentation (Policies)

6 Months Ended

Jun. 30, 2017

Basis of Presentation [Abstract]

Basis of Presentation

The consolidated financial statements include the accounts of Shore Bancshares, Inc. and its subsidiaries with all significant intercompany transactions eliminated. The consolidated financial statements conform to accounting principles generally accepted in the United States of America (“GAAP”) and to prevailing practices within the banking industry. The accompanying interim financial statements are unaudited; however, in the opinion of management all adjustments necessary to present fairly the consolidated financial position at June 30, 2017, the consolidated results of operations and comprehensive income for the three and six months ended June 30, 2017 and 2016, and changes in stockholders’ equity and cash flows for the six months ended June 30, 2017 and 2016, have been included. All such adjustments are of a normal recurring nature. The amounts as of December 31, 2016 were derived from the 2016 audited financial statements. The results of operations for the three and six months ended June 30, 2017 are not necessarily indicative of the results to be expected for any other interim period or for the full year. This Quarterly Report on Form 10-Q should be read in conjunction with the Annual Report of Shore Bancshares, Inc. on Form 10-K for the year ended December 31, 2016. For purposes of comparability, certain reclassifications have been made to amounts previously reported to conform with the current period presentation.

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

Effective July 1, 2016, the Company’s two bank subsidiaries, The Talbot Bank of Easton Maryland and CNB were consolidated into one bank known as Shore United Bank. In these notes to the consolidated financial statements and the management discussion and analysis section, the term “the Bank” refers to Shore United Bank, unless the context requires stipulating results of the individual banks before the consolidation occurred.

Recent Accounting Standards

Recent Accounting Standards

ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” amendment requires entities to recognize revenue to depict the transfer of promised goods or services to customers in amounts that reflect the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective for periods beginning after December 15, 2016. ASU 2015-14, “Revenue from Contracts with Customers (Topic 606) Deferral of the Effective Date ” – ASU 2015-14 amendments defer the effective date of Update 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations” – ASU 2016-08 amendments are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. ASU 2016-10, “Revenue from Contracts with Customers (Topic 606):  Identifying Performance Obligations and Licensing” – ASU 2016-10 amendments clarify that contractual provisions that, explicitly or implicitly, require an entity to transfer control of additional goods or services to a customer should be distinguished from contractual provisions that, explicitly or implicitly, define the attributes of a single promised license. Attributes of a promised license define the scope of a customer’s right to use or right to access an entity’s intellectual property and, therefore, do not define whether the entity satisfies its performance obligation at a point in time or over time and do not create an obligation for the entity to transfer any additional rights to use or access its intellectual property. Revenues from services provided by financial institutions that could be impacted by the new guidance includes credit card arrangements, trust and custody services and administration services for customer deposits accounts (e.g., ATM and wire transfer transactions). This update will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Adoption of the ASU is not expected to have a significant impact on the Company’s consolidated financial statements and related disclosures. The Company’s primary sources of revenue are derived from interest and dividends earned on loans, investment securities, and other financial instruments that are not within the scope of ASU 2014-09. The Company’s revenue recognition pattern for revenue streams within the scope of ASU 2014-09, including but not limited to service charges on deposit accounts and gains/losses on the sale of OREO, is not expected to change significantly from current practice. The standard permits the use of either the full retrospective or modified retrospective transition method. The Company is currently planning to use the modified retrospective transition method which requires application of ASU 2014-09 to uncompleted contracts at the date of adoption. Periods prior to the date of adoption are not retrospectively revised, but a cumulative effect of adoption is recognized for the impact of the ASU on uncompleted contracts at the date of adoption.

ASU No. 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”. This ASU, among other things, (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (vii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities. ASU 2016-01 will be effective for us on January 1, 2018 and is not expected to have a significant impact on our financial statements.

ASU No. 2016-02, “Leases (Topic 842).” This ASU stipulates that a lessee should recognize the assets and liabilities that arise from leases. All leases create an asset and a liability for the lessee in accordance with FASB Concepts Statement No. 6, Elements of Financial Statement , and, therefore, recognition of those lease assets and lease liabilities represents an improvement over previous GAAP, which did not require lease assets and lease liabilities to be recognized for most leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. When measuring assets and liabilities arising from a lease, a lessee (and a lessor) should include payments to be made in optional periods only if the lessee is reasonably certain to exercise an option to extend the lease or not to exercise an option to terminate the lease. Similarly, optional payments to purchase the underlying asset should be included in the measurement of lease assets and lease liabilities only if the lessee is reasonably certain to exercise that purchase option. In addition, also consistent with the previous leases guidance, a lessee (and a lessor) should exclude most variable lease payments in measuring lease assets and lease liabilities, other than those that depend on an index or a rate or are in substance fixed payments. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. The amendments in this ASU are effective for fiscal years after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Leases and lessors may not apply a full retrospective transition approach. While the Company is currently evaluating the impact of the new standard, we expect an increase to the Consolidated Balance Sheets for right-of-use assets and interest expense of the lease liabilities in the Consolidated Statements of Income, for arrangements previously accounted for as operating leases.

ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” This ASU simplifies the treatment and accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public business entities, the amendments in this update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any entity in any interim or annual period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. Upon adoption of ASU No. 2016-09 on January 1, 2017, the Company made an accounting policy election to recognize forfeitures of stock-based awards as they occur. The adoption of ASU No. 2016-09 did not have a material impact on our consolidated financial statements.

ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU will replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The use of forecasted information incorporates more timely information in the estimate of expected credit losses, which will be more decision useful to users of the financial statements. It is not expected that an entity will need to create an economic forecast over the entire contractual life of long-dated financial assets. Therefore, the amendments will allow an entity to revert to historical loss information that is reflective of the contractual term (considering the effect of prepayments) for periods that are beyond the time frame for which the entity is able to develop reasonable and supportable forecasts. The amendments retain many of the disclosure amendments in Accounting Standards Update No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, updated to reflect the change from an incurred loss methodology to an expected credit loss methodology. Credit losses on available-for-sale debt securities should be measured in a manner similar to current GAAP. However, the amendments require that credit losses be presented as an allowance rather than a write-down. For public entities that are U.S. Securities and Exchange Commission (SEC) filers, the amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. All entities may adopt the amendments earlier as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company believes this ASU will have a significant impact on our consolidated financial statements and the method in which we calculate our credit losses, primarily on loans and held to maturity securities. At this time, the Company has established a project management team which is in the process of developing and understanding this pronouncement, evaluating the impact of this pronouncement and researching additional software resources that could assist with the implementation.

ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments." Current GAAP is unclear or does not include specific guidance on how to classify certain transactions in the statement of cash flows. This ASU is intended to reduce diversity in practice in how eight particular transactions are classified in the statement of cash flows. ASU No. 2016-15 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, provided that all of the amendments are adopted in the same period. Entities will be required to apply the guidance retrospectively. If it is impracticable to apply the guidance retrospectively for an issue, the amendments related to that issue would be applied prospectively. We adopted the amendments in this ASU effective January 1, 2017. The adoption of ASU No. 2016-15 did not have a material impact on our consolidated financial statements.

ASU No. 2017-01 – In January 2017, FASB issued ASU No. 2017-01, Business Combinations (Topic 805)” Clarifying the Definition of a Business. The ASU clarifies the definition of a business to assist with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The guidance is not expected to have a significant impact on the Company’s financial positions, results of operations or disclosures.

ASU No. 2017-03 – In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-03, “Accounting Changes and Error Corrections (Topic 250) and Investments – Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings.” The ASU adds an SEC paragraph to ASUs 2014-09, 2016-02, and 2016-13 which specifies the SEC staff view that a registrant should evaluate ASUs that have not yet been adopted to determine the appropriate disclosure about the potential material effects of those ASUs on the financial statements when adopted. The guidance also specifies the SEC staff view on financial statement disclosures when the company does not know or cannot reasonably estimate the impact that adoption of the ASUs will have on the financial statements. The ASU also conforms SEC guidance on accounting for tax benefits resulting from investments in affordable housing projects to the guidance in ASU 2014-01, Investments – Equity Method and Joint Ventures (Topic 323). The amendments in this update are effective upon issuance. The guidance did not have a significant impact on our consolidated financial statements.

ASU No. 2017-04 – In January 2017, FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” The ASU simplifies measurement of goodwill and eliminates Step 2 from the goodwill impairment test. The Company should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. The impairment charge is limited to the amount of goodwill allocated to that reporting unit. The amendments in this update are effective for fiscal years beginning after

December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for goodwill impairment tests performed on testing dates after January 1, 2017. The guidance is not expected to have a significant impact on the Company’s financial positions, results of operations or disclosures 

ASU No. 2017-08 – In March 2017, the FASB issued ASU No. 2017-08, “Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities.” Under current GAAP, entities normally amortize the premium as an adjustment of yield over the contractual life of the instrument. This guidance shortens the amortization period of certain callable debt securities held at a premium to the earliest call date. This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The adoption of ASU No. 2017-08 is not expected to have a material impact on the Company’s consolidated financial statements.

ASU No. 2017-09 – In May 2017, the FASB issued ASU No. 2017-09 “Stock Compensation, Scope of Modification Accounting.” This ASU clarifies when changes to the terms of conditions of a share-based payment award must be accounted for as modifications. Companies will apply the modification accounting guidance if the value, vesting conditions or classification of the award changes. The new guidance should reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as modifications, as the guidance will allow companies to make certain non-substantive changes to awards without accounting for them as modifications. It does not change the accounting for modifications. ASU No. 2017-09 is effective for interim and annual reporting periods beginning after December 15, 2017; early adoption is permitted. ASU No. 2017-09 is not expected to have a material impact on the Company’s consolidated financial statements.

XML

Business Combination (Table)

6 Months Ended

Jun. 30, 2017

Business Combination [Abstract]

Schedule of Recognized Identified Assets Acquired and Liabilities Assumed

The statement of net assets acquired and the resulting goodwill recorded is presented in the following tables. As explained in the notes that accompany the following table, the purchased assets, assumed liabilities and identifiable assets were recorded at the acquisition date fair value.

	Acquired				Acquired
	Balances as		Fair		Balances as
	Recorded By		Value		Recorded By
	Northwest Bank		Adjustments		Shore United Bank
Cash and due from banks	$	81,231	$	-	$	81,231
Loans		125,131		(2,269)		122,862
Less: allowance for credit losses		-		-		-
Loans, net		125,131		(2,269)		122,862
						-
Premises and equipment, net		5,363		963		6,326
Core deposit intangible		-		3,954		3,954
Total assets	$	211,725	$	2,648	$	214,373
Deposits:
Noninterest-bearing	$	34,481	$	-	$	34,481
Interest-bearing		177,237		738		177,975
Total deposits		211,718		738		212,456
Other liabilities		7		-		7
Total liabilities	$	211,725	$	738	$	212,463
Net assets acquired	$	-	$	1,910	$	1,910

The following table summarizes the acquired assets and assumed liabilities in the purchase as of the acquisition date, and the resulting goodwill of $15.3 million resulting from the transaction (in thousands):

Assets acquired at fair value:
Cash and cash equivalents	$	81,231
Loans		122,862
Premises and equipment, net		6,326
Core deposit intangible		3,954
Total fair value of assets acquired	$	214,373
Liabilities assumed at fair value:
Deposits	$	212,456
Other liabilities		7
Total fair value of liabilities assumed	$	212,463
Net assets acquired at fair value:	$	1,910
Transaction consideration paid to Northwest Bank	$	17,186
Amount of goodwill resulting from acquisition	$	15,276

Schedule of Contractually Required Payments Receivable

The following table outlines the contractually required payments receivable, cash flows we expect to receive, and the accretable yield for all NWBI loans as of the acquisition date.

	Contractually
	Required		Cash Flows				Carrying Value
	Payments		Expected To Be		Accretable FMV		of Loans
	Receivable		Collected		Adjustments		Receivable
Performing loans acquired	$	125,131		125,131		2,269	$	122,862

XML

Earnings Per Share (Tables)

6 Months Ended

Jun. 30, 2017

Earnings Per Share [Abstract]

Schedule of Earnings Per Share, Basic and Diluted

The following table provides information relating to the calculation of earnings per common share:

	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
(In thousands, except per share data)	2017		2016		2017		2016
Net Income	$	2,352	$	2,272	$	5,152	$	4,732
Weighted average shares outstanding - Basic		12,681		12,648		12,676		12,642
Dilutive effect of common stock equivalents-options		21		-		21		-
Dilutive effect of common stock equivalents-restricted stock units		33		17		33		15
Weighted average shares outstanding - Diluted		12,735		12,665		12,730		12,657
Earnings per common share - Basic	$	0.19	$	0.18	$	0.41	$	0.37
Earnings per common share - Diluted	$	0.19	$	0.18	$	0.41	$	0.37

XML

Investment Securities (Tables)

6 Months Ended

Jun. 30, 2017

Investment Securities [Abstract]

Schedule of Available-for-Sale Securities Reconciliation

The following table provides information on the amortized cost and estimated fair values of investment securities.

			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
(Dollars in thousands)	Cost		Gains		Losses		Value
Available-for-sale securities:
June 30, 2017
U.S. Government agencies	$	49,173	$	83	$	40	$	49,216
Mortgage-backed		151,375		822		484		151,713
Equity		659		-		1		658
Total	$	201,207	$	905	$	525	$	201,587
December 31, 2016
U.S. Government agencies	$	34,320	$	56	$	58	$	34,318
Mortgage-backed		130,490		263		1,809		128,944
Equity		652		-		12		640
Total	$	165,462	$	319	$	1,879	$	163,902
Held-to-maturity securities:
June 30, 2017
U.S. Government agencies	$	2,007	$	57	$	-	$	2,064
States and political subdivisions		1,404		71		-		1,475
Other equity securities (1)		3,000		124		-		3,124
Total	$	6,411	$	252	$	-	$	6,663
December 31, 2016
U.S. Government agencies	$	2,089	$	26	$	-	$	2,115
States and political subdivisions		1,615		76		-		1,691
Other equity securities (1)		3,000		-		-		3,000
Total	$	6,704	$	102	$	-	$	6,806

On December 15, 2016, the Company bought $3.0 million in subordinated notes with a fixed to floating rate of 6.5% from a local regional bank which it intends to hold to maturity of December 30, 2026.

Available-For-Sale Securities, Continuous Unrealized Loss Position, Fair Value

The following tables provide information about gross unrealized losses and fair value by length of time that the individual securities have been in a continuous unrealized loss position at June 30, 2017 and December 31, 2016.

	Less than				More than
	12 Months				12 Months				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(Dollars in thousands)	Value		Losses		Value		Losses		Value		Losses
June 30, 2017
Available-for-sale securities:
U.S. Government agencies	$	18,941	$	40	$	-	$	-	$	18,941	$	40
Mortgage-backed		40,040		283		8,139		201		48,179		484
Equity securities		659		1		-		-		658		1
Total	$	59,640	$	324	$	8,139	$	201	$	67,778	$	525
	Less than				More than
	12 Months				12 Months				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(Dollars in thousands)	Value		Losses		Value		Losses		Value		Losses
December 31, 2016
Available-for-sale securities:
U.S. Government agencies	$	11,926	$	58	$	-	$	-	$	11,926	$	58
Mortgage-backed		100,237		1,546		9,208		263		109,445		1,809
Equity securities		640		12		-		-		640		12
Total	$	112,803	$	1,616	$	9,208	$	263	$	122,011	$	1,879

Schedule of Securities Debt Maturities

The following table provides information on the amortized cost and estimated fair values of investment securities by maturity date at June 30, 2017.

	Available for sale				Held to maturity
	Amortized		Estimated		Amortized		Estimated
(Dollars in thousands)	Cost		Fair Value		Cost		Fair Value
Due in one year or less	$	12,005	$	11,997	$	-	$	-
Due after one year through five years		34,992		34,997		501		527
Due after five years through ten years		18,649		18,651		903		949
Due after ten years		134,902		135,284		2,007		2,063
		200,548		200,929		3,411		3,539
Equity securities		659		658		3,000		3,124
Total	$	201,207	$	201,587	$	6,411	$	6,663

XML

Loans and Allowance for Credit Losses (Tables)

6 Months Ended

Jun. 30, 2017

Loans and Allowance for Credit Losses [Abstract]

Schedule of Financing Receivables

The following table provides information about the principal classes of the loan portfolio at June 30, 2017 and December 31, 2016.

(Dollars in thousands)	June 30, 2017		December 31, 2016
Construction	$	100,095	$	84,002
Residential real estate		384,777		325,768
Commercial real estate		452,132		382,681
Commercial		90,650		72,435
Consumer		6,951		6,639
Total loans		1,034,605		871,525
Allowance for credit losses		(9,132)		(8,726)
Total loans, net	$	1,025,473	$	862,799

Allowance for Credit Losses on Financing Receivables

The following tables include impairment information relating to loans and the allowance for credit losses as of June 30, 2017 and December 31, 2016.

			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Total
June 30, 2017
Loans individually
evaluated for impairment	$	6,926	$	6,443	$	5,567	$	345	$	-	$	19,281
Loans collectively
evaluated for impairment		93,169		378,334		446,565		90,305		6,951		1,015,324
Total loans	$	100,095	$	384,777	$	452,132	$	90,650	$	6,951	$	1,034,605
Allowance for credit
losses allocated to:
Loans individually
evaluated for impairment	$	593	$	259	$	165	$	-	$	-	$	1,017
Loans collectively
evaluated for impairment		1,756		1,837		2,637		1,652		233		8,115
Total allowance	$	2,349	$	2,096	$	2,802	$	1,652	$	233	$	9,132

			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Total
December 31, 2016
Loans individually
evaluated for impairment	$	8,007	$	7,778	$	6,088	$	-	$	99	$	21,972
Loans collectively
evaluated for impairment		75,995		317,990		376,593		72,435		6,540		849,553
Total loans	$	84,002	$	325,768	$	382,681	$	72,435	$	6,639	$	871,525
Allowance for credit
losses allocated to:
Loans individually
evaluated for impairment	$	1,639	$	317	$	185	$	-	$	-	$	2,141
Loans collectively
evaluated for impairment		1,148		1,636		2,425		1,145		231		6,585
Total allowance	$	2,787	$	1,953	$	2,610	$	1,145	$	231	$	8,726

Impaired Financing Receivables

The following tables provide information on impaired loans and any related allowance by loan class as of June 30, 2017 and December 31, 2016. The difference between the unpaid principal balance and the recorded investment is the amount of partial charge-offs that have been taken.

				Recorded		Recorded			Quarter-to-		Year-to-date
	Unpaid			investment		investment			date average		average		Interest
	principal			with no		with an	Related		recorded		recorded		income
(Dollars in thousands)	balance			allowance		allowance	allowance		investment		investment		recognized
June 30, 2017
Impaired nonaccrual loans:
Construction	$	3,017	$	51	$	2,838	$	580	$	3,153	$	3,435	$	-
Residential real estate		3,352		1,066		2,143		114		3,870		3,940		-
Commercial real estate		1,271		547		167		90		670		696		-
Commercial		425		345		-		-		115		57		-
Consumer		-		-		-		-		66		82		-
Total	$	8,065	$	2,009	$	5,148	$	784	$	7,874	$	8,210	$	-
Impaired accruing TDRs:
Construction	$	4,037	$	3,336	$	701	$	13	$	4,040	$	4,111	$	55
Residential real estate		3,234		2,204		1,030		145		3,409		3,585		87
Commercial real estate		4,853		1,866		2,987		75		4,869		4,888		100
Commercial		-		-		-		-		-		-		-
Consumer		-		-		-		-		-		-		-
Total	$	12,124	$	7,406	$	4,718	$	233	$	12,318	$	12,584	$	242
Total impaired loans:
Construction	$	7,054	$	3,387	$	3,539	$	593	$	7,193	$	7,546	$	55
Residential real estate		6,586		3,270		3,173		259		7,279		7,525		87
Commercial real estate		6,124		2,413		3,154		165		5,539		5,584		100
Commercial		425		345		-		-		115		57		-
Consumer		-		-		-		-		66		82		-
Total	$	20,189	$	9,415	$	9,866	$	1,017	$	20,192	$	20,794	$	242

									June 30, 2016
				Recorded		Recorded			Quarter-to-		Year-to-date
	Unpaid			investment		investment			date average		average		Interest
	principal			with no		with an	Related		recorded		recorded		income
(Dollars in thousands)	balance			allowance		allowance	allowance		investment		investment		recognized
December 31, 2016
Impaired nonaccrual loans:
Construction	$	7,247	$	-	$	3,818	$	1,621	$	5,489	$	6,353	$	-
Residential real estate		4,013		1,957		1,946		166		3,914		3,103		-
Commercial real estate		1,801		959		193		117		2,058		2,308		-
Commercial		-		-		-		-		164		161		-
Consumer		99		99		-		-		106		114		-
Total	$	13,160	$	3,015	$	5,957	$	1,904	$	11,731	$	12,039	$	-
Impaired accruing TDRs:
Construction	$	4,189	$	3,479	$	710	$	18	$	4,244	$	4,142	$	43
Residential real estate		3,875		2,829		1,046		151		4,931		5,300		102
Commercial real estate		4,936		1,573		3,363		68		5,066		5,215		85
Commercial		-		-		-		-		-		-		-
Consumer		-		-		-		-		-		-		-
Total	$	13,000	$	7,881	$	5,119	$	237	$	14,241	$	14,657	$	230
Total impaired loans:
Construction	$	11,436	$	3,479	$	4,528	$	1,639	$	9,733	$	10,495	$	43
Residential real estate		7,888		4,786		2,992		317		8,845		8,403		102
Commercial real estate		6,737		2,532		3,556		185		7,124		7,523		85
Commercial		-		-		-		-		164		161		-
Consumer		99		99		-		-		106		114		-
Total	$	26,160	$	10,896	$	11,076	$	2,141	$	25,972	$	26,696	$	230

Troubled Debt Restructurings on Financing Receivables

The following tables provide a roll-forward for troubled debt restructurings as of June 30, 2017 and June 30, 2016.

	1/1/2017												6/30/2017
	TDR		New		Disbursements		Charge		Reclassifications/				TDR		Related
(Dollars in thousands)	Balance		TDRs		(Payments)		offs		Transfer In/(Out)		Payoffs		Balance		Allowance
For six months ended
June 30, 2017
Accruing TDRs
Construction	$	4,189	$	-	$	(18)	$	-	$	-	$	(134)	$	4,037	$	13
Residential real estate		3,875		-		(102)		(89)		-		(450)		3,234		145
Commercial real estate		4,936		-		(83)		-		-		-		4,853		75
Commercial		-		-		-		-		-		-		-		-
Consumer		-		-		-		-		-		-		-		-
Total	$	13,000	$	-	$	(203)	$	(89)	$	-	$	(584)	$	12,124	$	233
Nonaccrual TDRs
Construction	$	3,818	$	-	$	(872)	$	-	$	(108)	$	-	$	2,838	$	580
Residential real estate		1,603		-		(44)		-		-		-		1,559		110
Commercial real estate		83		-		-		-		-		-		83		-
Commercial		-		345		-		-		-		-		345		-
Consumer		-		-		-		-		-		-		-		-
Total	$	5,504	$	345	$	(916)	$	-	$	(108)	$	-	$	4,825	$	690
Total	$	18,504	$	345	$	(1,119)	$	(89)	$	(108)	$	(584)	$	16,949	$	923

	1/1/2016												6/30/2016
	TDR		New		Disbursements		Charge		Reclassifications/				TDR		Related
(Dollars in thousands)	Balance		TDRs		(Payments)		offs		Transfer In/(Out)		Payoffs		Balance		Allowance
For six months ended
June 30, 2016
Accruing TDRs
Construction	$	4,069	$	-	$	172	$	-	$	-	$	-	$	4,241	$	25
Residential real estate		5,686		533		(350)		-		(1,595)		(179)		4,095		73
Commercial real estate		5,740		495		(659)		(117)		(458)		-		5,001		155
Commercial		-		-		-		-		-		-		-		-
Consumer		-		-		-		-		-		-		-		-
Total	$	15,495	$	1,028	$	(837)	$	(117)	$	(2,053)	$	(179)	$	13,337	$	253
Nonaccrual TDRs
Construction	$	4,960	$	2,570	$	(1,847)	$	(254)	$	-	$	-	$	5,429	$	739
Residential real estate		445		-		(293)		-		1,595		-		1,747		72
Commercial real estate		-		-		-		(258)		458		-		200		112
Commercial		-		-		-		-		-		-		-		-
Consumer		23		-		(23)		-		-		-		-		-
Total	$	5,428	$	2,570	$	(2,163)	$	(512)	$	2,053	$	-	$	7,376	$	923
Total	$	20,923	$	3,598	$	(3,000)	$	(629)	$	-	$	(179)	$	20,713	$	1,176

The following tables provide information on loans that were modified and considered TDRs during the six months ended June 30, 2017 and June 30, 2016.

		Premodification		Postmodification
		outstanding		outstanding
	Number of	recorded		recorded		Related
(Dollars in thousands)	contracts	investment		investment		allowance
TDRs:
For six months ended
June 30, 2017
Construction	-	$	-	$	-	$	-
Residential real estate	-		-		-		-
Commercial real estate	1		760		755		-
Commercial	1		462		345		-
Consumer	-		-		-		-
Total	2	$	1,222	$	1,100	$	-
For six months ended
June 30, 2016
Construction	-	$	-	$	-	$	-
Residential real estate	3		668		668		-
Commercial real estate	1		495		495		-
Commercial	-		-		-		-
Consumer	-		-		-		-
Total	4	$	1,163	$	1,163	$	-

During the six months ended June 30, 2017, there was one new TDR and one previously recorded TDR which was modified. The new TDR consisted of a reduction in principal, whereas, the previously recorded TDR consisted of a change in maturity date.

The following tables provide information on TDRs that defaulted during the six months ended June 30, 2017 and June 30, 2016. Generally, a loan is considered in default when principal or interest is past due 90 days or more.

	Number of	Recorded		Related
(Dollars in thousands)	contracts	investment		allowance
TDRs that subsequently defaulted:
For six months ended
June 30, 2017
Construction	-	$	-	$	-
Residential real estate	1		89		-
Commercial real estate	-		-		-
Commercial	-		-		-
Consumer	-		-		-
Total	1	$	89	$	-
For six months ended
June 30, 2016
Construction	1	$	241	$	-
Residential real estate	-		-		-
Commercial real estate	2		375		-
Commercial	-		-		-
Consumer	-		-		-
Total	3	$	616	$	-

Financing Receivable Credit Quality Indicators

The following tables provide information on loan risk ratings as of June 30, 2017 and December 31, 2016.

			Special
(Dollars in thousands)	Pass/Performing		Mention		Substandard		Doubtful		Total
June 30, 2017
Construction	$	89,918	$	4,055	$	6,122	$	-	$	100,095
Residential real estate		372,148		6,725		5,904		-		384,777
Commercial real estate		428,971		15,495		7,666		-		452,132
Commercial		89,451		799		400		-		90,650
Consumer		6,951		-		-		-		6,951
Total	$	987,439	$	27,074	$	20,092	$	-	$	1,034,605

			Special
(Dollars in thousands)	Pass/Performing		Mention		Substandard		Doubtful		Total
December 31, 2016
Construction	$	72,641	$	4,195	$	7,166	$	-	$	84,002
Residential real estate		312,242		6,646		6,880		-		325,768
Commercial real estate		363,461		10,939		8,281		-		382,681
Commercial		71,313		857		265		-		72,435
Consumer		6,540		-		99		-		6,639
Total	$	826,197	$	22,637	$	22,691	$	-	$	871,525

Past Due Financing Receivables

The following tables provide information on the aging of the loan portfolio as of June 30, 2017 and December 31, 2016.

		Accruing
				30-59 days			60-89 days			Greater than			Total
(Dollars in thousands)	Current			past due			past due			90 days			past due			Nonaccrual			Total
June 30, 2017
Construction	$	97,045		$	-		$	50		$	111		$	161		$	2,889		$	100,095
Residential real estate		379,217			310			1,838			203			2,351			3,209			384,777
Commercial real estate		450,740			219			459			-			678			714			452,132
Commercial		90,272			33			-			-			33			345			90,650
Consumer		6,944			5			2			-			7			-			6,951
Total	$	1,024,218		$	567		$	2,349		$	314		$	3,230		$	7,157		$	1,034,605
Percent of total loans		99.0	%		0.1	%		0.2	%		-	%		0.3	%		0.7	%		100.0	%

		Accruing
				30-59 days			60-89 days			Greater than			Total
(Dollars in thousands)	Current			past due			past due			90 days			past due			Nonaccrual			Total
December 31, 2016
Construction	$	80,079		$	-		$	105		$	-		$	105		$	3,818		$	84,002
Residential real estate		317,992			1,778			2,095			-			3,873			3,903			325,768
Commercial real estate		375,552			3,219			2,758			-			5,977			1,152			382,681
Commercial		72,272			19			134			10			163			-			72,435
Consumer		6,515			13			2			10			25			99			6,639
Total	$	852,410		$	5,029		$	5,094		$	20		$	10,143		$	8,972		$	871,525
Percent of total loans		97.8	%		0.6	%		0.6	%		-	%		1.2	%		1.0	%		100.0	%

Consolidated Allowance for Credit Losses on Financing Receivables

			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Unallocated		Total
For three months ended
June 30, 2017
Allowance for credit losses:
Beginning Balance	$	2,290	$	2,131	$	2,912	$	1,338	$	256	$	-	$	8,927
Charge-offs		(25)		(100)		-		(706)		(15)		-		(846)
Recoveries		9		10		8		42		8		-		77
Net charge-offs		(16)		(90)		8		(664)		(7)		-		(769)
Provision		75		55		(118)		978		(16)		-		974
Ending Balance	$	2,349	$	2,096	$	2,802	$	1,652	$	233	$	-	$	9,132

			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Unallocated		Total
For three months ended
June 30, 2016
Allowance for credit losses:
Beginning Balance	$	1,753	$	2,014	$	3,257	$	585	$	177	$	523	$	8,309
Charge-offs		(13)		(102)		(265)		(58)		(2)		-		(440)
Recoveries		10		33		10		57		4		-		114
Net charge-offs		(3)		(69)		(255)		(1)		2		-		(326)
Provision		(6)		90		(131)		93		27		302		375
Ending Balance	$	1,744	$	2,035	$	2,871	$	677	$	206	$	825	$	8,358

			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Unallocated		Total
For six months ended
June 30, 2017
Allowance for credit losses:
Beginning Balance	$	2,787	$	1,953	$	2,610	$	1,145	$	231	$	-	$	8,726
Charge-offs		(54)		(323)		-		(771)		(15)		-		(1,163)
Recoveries		16		21		19		100		12		-		168
Net charge-offs		(38)		(302)		19		(671)		(3)		-		(995)
Provision		(400)		445		173		1,178		5		-		1,401
Ending Balance	$	2,349	$	2,096	$	2,802	$	1,652	$	233	$	-	$	9,132

			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Unallocated		Total
For six months ended
June 30, 2016
Allowance for credit losses:
Beginning Balance	$	1,646	$	2,181	$	2,999	$	558	$	156	$	776	$	8,316
Charge-offs		(254)		(118)		(503)		(125)		(10)		-		(1,010)
Recoveries		16		67		10		122		12		-		227
Net charge-offs		(238)		(51)		(493)		(3)		2		-		(783)
Provision		336		(95)		365		122		48		49		825
Ending Balance	$	1,744	$	2,035	$	2,871	$	677	$	206	$	825	$	8,358

XML

Goodwill and Other Intangibles (Table)

6 Months Ended

Jun. 30, 2017

Goodwill and Other Intangibles [Abstract]

Schedule of Components of Goodwill and Other Acquired Intangible Assets

The gross carrying amount and accumulated amortization of intangible assets is as follows:

June 30, 2017
									Weighted
	Gross		Accumulated				Net		Average
	Carrying		Impairment		Accumulated		Carrying		Remaining Life
(Dollars in thousands)	Amount		Charges		Amortization		Amount		(in years)
Goodwill	$	30,511	$	(2,637)	$	(667)	$	27,207	-
Other intangible assets
Amortizable
Employment agreements	$	440	$	-	$	(440)	$	-	-
Insurance expirations		1,270		-		(1,264)		6	0.1
Customer relationships		795		(95)		(461)		239	5.1
Core deposit intangible		3,954		-		(33)		3,921	9.9
		6,459		(95)		(2,198)		4,166
Unamortizable
Carrier relationships		-		-		-		-
Trade name		780		-		-		780	-
		780		-		-		780
Total other intangible assets	$	7,239	$	(95)	$	(2,198)	$	4,946
December 31, 2016
									Weighted
	Gross		Accumulated				Net		Average
	Carrying		Impairment		Accumulated		Carrying		Remaining Life
(Dollars in thousands)	Amount		Charges		Amortization		Amount		(in years)
Goodwill	$	15,235	$	(2,637)	$	(667)	$	11,931	-
Other intangible assets
Amortizable
Employment agreements	$	440	$	-	$	(440)	$	-	-
Insurance expirations		1,270		-		(1,233)		37	0.4
Customer relationships		795		(95)		(438)		262	5.6
Core deposit intangible		-		-		-		-	-
		2,505		(95)		(2,111)		299
Unamortizable
Carrier relationships		-		-		-		-
Trade name		780		-		-		780	-
		780		-		-		780
Total other intangible assets	$	3,285	$	(95)	$	(2,111)	$	1,079

Future Amortization Expense for Amortizable Other Intangible Assets

Estimated future amortizing expense for amortization intangibles within the years ending December 31, are as follows:

(Dollars in thousands)
June 30, 2017	$	88
2018		442
2019		442
2020		395
2021		439
Thereafter		2,360
Total amortizing intangible assets	$	4,166

XML

Other Assets (Tables)

6 Months Ended

Jun. 30, 2017

Other Assets [Abstract]

Schedule of Other Assets

The Company had the following other assets at June 30, 2017 and December 31, 2016.

(Dollars in thousands)	June 30, 2017		December 31, 2016
Nonmarketable investment securities	$	3,069	$	1,650
Accrued interest receivable		2,865		2,675
Deferred income taxes		3,467		7,039
Prepaid expenses		1,111		1,149
Cash surrender value on life insurance		2,599		2,589
Other assets		4,385		3,781
Total	$	17,496	$	18,883

Schedule of Deferred Tax Assets and Liabilities

The following table provides information on significant components of the Company’s deferred tax assets and liabilities as of June 30, 2017 and December 31, 2016.

	June 30,		December 31,
(Dollars in thousands)	2017		2016
Deferred tax assets:
Allowance for credit losses	$	3,647	$	3,486
Reserve for off-balance sheet commitments		122		122
Net operating loss carry forward		1,188		2,232
Write-downs of other real estate owned		300		387
Deferred income		168		1,011
Unrealized gains on available-for-sale securities		-		672
AMT Credits		403		869
Other		936		1,192
Total deferred tax assets		6,764		9,971
Deferred tax liabilities:
Depreciation		200		239
Amortization on loans FMV adjustment		138		156
Purchase accounting adjustments		2,292		2,019
Deferred capital gain on branch sale		350		401
Unrealized losses on available-for-sale securities		117		-
Other		200		116
Total deferred tax liabilities		3,297		2,931
Net deferred tax assets	$	3,467	$	7,040

XML

Other Liabilities (Tables)

6 Months Ended

Jun. 30, 2017

Other Liabilities [Abstract]

Schedule of Other Liabilities

The Company had the following other liabilities at June 30, 2017 and December 31, 2016.

(Dollars in thousands)	June 30, 2017		December 31, 2016
Accrued interest payable	$	55	$	74
Other accounts payable		2,032		2,461
Deferred compensation liability		1,188		1,444
Other liabilities		-		1,301
Total	$	3,275	$	5,280

XML

Stock-Based Compensation (Tables)

6 Months Ended

Jun. 30, 2017

Stock-Based Compensation [Abstract]

Schedule of Stock-Based Compensation

The following tables provide information on stock-based compensation expense for the three and six months ended June 30, 2017 and 2016.

	For Three Months Ended				For six months ended
	June 30, 2017				June 30, 2017
(Dollars in thousands)	2017		2016		2017		2016
Stock-based compensation expense	$	173	$	66	$	590	$	177
Excess tax benefits related to stock-based
compensation		11		-		13		3

	June 30,
(Dollars in thousands)	2017			2016
Unrecognized stock-based compensation
expense	$	354		$	179
Weighted average period unrecognized
expense is expected to be recognized		1.1	years		0.8	years

Schedule of Share-based Compensation, Restricted Stock Units Award Activity

The following table summarizes restricted stock award activity for the Company under the 2016 Equity Plan for the six months ended June 30, 2017 and 2016.

	Six Months Ended June 30, 2017			Six Months Ended June 30, 2016
		Weighted Average			Weighted Average
	Number of	Grant Date		Number of	Grant Date
	Shares	Fair Value		Shares	Fair Value
Nonvested at beginning of period	17,066	$	11.46	12,488	$	8.74
Granted	20,143		16.69	23,239		11.47
Vested	(21,296)		13.47	(18,662)		9.63
Cancelled	-		-	-		-
Nonvested at end of period	15,913	$	12.49	17,065	$	11.46

Schedule of Share-based Compensation, Restricted Stock Award Activity

The following table summarizes restricted stock units activity based on management’s evaluation of the probable number of common stock awards to be issued at the end of the performance cycle for the Company under the 2016 and 2006 Equity Plans for the six months ended June 30, 2017 and 2016.

	Six Months Ended June 30, 2017			Six Months Ended June 30, 2016
		Weighted Average			Weighted Average
	Number of	Grant Date		Number of	Grant Date
	Shares	Fair Value		Shares	Fair Value
Outstanding at beginning of period	46,342	$	10.64	26,943	$	9.49
Granted	-		-	24,433		11.68
Vested	-		-	-		-
Forfeited	-		-	(5,034)		9.49
Outstanding at end of period	46,342	$	10.64	46,342	$	10.64

Schedule of Share-based Compensation, Stock Options Activity

The following table summarizes stock option activity for the Company under the 2016 Equity Plan for the six months ended June 30, 2017 and 2016.

	Six Months Ended June 30, 2017			Six Months Ended June 30, 2016
		Weighted Average			Weighted Average
	Number of	Grant Date		Number of	Grant Date
	Shares	Fair Value		Shares	Fair Value
Outstanding at beginning of period	62,086	$	8.29	61,327	$	8.05
Granted	1,202		10.99	12,443		11.12
Exercised	(859)		6.64	(450)		6.64
Expired/Cancelled	-		-	-		-
Outstanding at end of period	62,429	$	8.36	73,320	$	8.58
Exercisable at end of period	61,828	$	8.34	69,990	$	8.46

Schedule of Share-based Payment Award, Stock Option Valuation Assumptions

The following weighted average assumptions were used as inputs to the Black-Scholes valuation model for options granted in 2017 and 2016.

	2017		2016
Dividend yield	0.84	%	0.73	%
Expected volatility	64.80	%	38.60	%
Expected forfeiture rate	-	%	-	%
Risk-free interest rate	2.42	%	1.75	%
Expected contract life (in years)	10 years		10 years

XML

Accumulated Other Comprehensive Income (Tables)

6 Months Ended

Jun. 30, 2017

Accumulated Other Comprehensive Income [Abstract]

Schedule of Accumulated Other Comprehensive Income (Loss)

The following table provides information on the changes in the components of accumulated other comprehensive income (loss) for the six months ended June 30, 2017 and 2016.

	Accumulated net
	unrealized holding		Total accumulated
	gains (losses) on		other
	available for sale		comprehensive
(Dollars in thousands)	securities		income (loss)
Balance, December 31, 2016	$	(993)	$	(993)
Other comprehensive income		1,167		1,167
Balance, June 30, 2017	$	174	$	174
Balance, December 31, 2015	$	(71)	$	(71)
Other comprehensive income		1,199		1,199
Balances, June 30, 2016	$	1,128	$	1,128

XML

Fair Value Measurements (Tables)

6 Months Ended

Jun. 30, 2017

Fair Value Measurements [Abstract]

Schedule of Fair Value of Assets and Liabilities Measured on Recurring Basis

The tables below present the recorded amount of assets measured at fair value on a recurring basis at June 30, 2017 and December 31, 2016. No assets were transferred from one hierarchy level to another during the first six months of 2017 or 2016.

					Significant
					Other		Significant
			Quoted		Observable		Unobservable
			Prices		Inputs		Inputs
(Dollars in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
June 30, 2017
Securities available for sale:
U.S. Government agencies	$	49,216	$	-	$	49,216	$	-
Mortgage-backed		151,713		-		151,713		-
Equity		658		-		658		-
Total	$	201,587	$	-	$	201,587	$	-
					Significant
					Other		Significant
			Quoted		Observable		Unobservable
			Prices		Inputs		Inputs
(Dollars in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
December 31, 2016
Securities available for sale:
U.S. Government agencies	$	34,318	$	-	$	34,318	$	-
Mortgage-backed		128,944		-		128,944		-
Equity		640		-		640		-
Total	$	163,902	$	-	$	163,902	$	-

Fair Value of Assets Measured on Nonrecurring Basis

The tables below present the recorded amount of assets measured at fair value on a nonrecurring basis at June 30, 2017 and December 31, 2016. The assets in the following table were transferred during 2016 from Level 2 to Level 3, based on management’s reassessment an evaluation of the inputs in relation to impaired loans and foreclosed assets. This reassessment resulted in management conclusion that the inputs for these assets were more reflective of Level 3 as unobservable inputs and applied retrospectively to prior periods reported.

					Significant
					Other		Significant
			Quoted		Observable		Unobservable
			Prices		Inputs		Inputs
(Dollars in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
June 30, 2017
Impaired loans
Construction	$	6,333	$	-	$	-	$	6,333
Residential real estate		6,184		-		-		6,184
Commercial real estate		5,402		-		-		5,402
Commercial		345		-		-		345
Consumer		-		-		-		-
Total impaired loans		18,264		-		-		18,264
Other real estate owned		2,302		-		-		2,302
Total assets measured at fair value on a
nonrecurring basis	$	20,566	$	-	$	-	$	20,566

					Significant
					Other		Significant
			Quoted		Observable		Unobservable
			Prices		Inputs		Inputs
(Dollars in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
December 31, 2016
Impaired loans
Construction	$	6,368	$	-	$	-	$	6,368
Residential real estate		7,461		-		-		7,461
Commercial real estate		5,903		-		-		5,903
Commercial		-		-		-		-
Consumer		99		-		-		99
Total impaired loans		19,831		-		-		19,831
Other real estate owned		2,477		-		-		2,477
Total assets measured at fair value on a
nonrecurring basis	$	22,308	$	-	$	-	$	22,308

Schedule of Estimated Fair Values of Financial Assets and Liabilities

The following table provides information on the estimated fair values of the Company’s financial assets and liabilities that are reported in the balance sheets at their carrying amounts. The financial assets and liabilities have been segregated by their classification level in the fair value hierarchy.

	June 30, 2017				December 31, 2016
			Estimated				Estimated
	Carrying		Fair		Carrying		Fair
(Dollars in thousands)	Amount		Value		Amount		Value
Financial assets
Level 1 inputs
Cash and cash equivalents	$	54,079	$	54,079	$	75,938	$	75,938
Level 2 inputs
Investment securities held to maturity	$	6,411	$	6,663	$	6,704	$	6,806
Loans, net		1,025,473		1,027,011		862,799		867,594
Financial liabilities
Level 2 inputs
Deposits	$	1,196,258	$	1,124,815	$	997,489	$	929,573
Short-term borrowings		3,325		3,325		3,203		3,203

XML

Financial Instruments with Off-Balance Sheet Risk (Tables)

6 Months Ended

Jun. 30, 2017

Financial Instruments With Off Balance Sheet Risk [Abstract]

Schedule of Commitments Outstanding

The following table provides information on commitments outstanding at June 30, 2017 and December 31, 2016.

(Dollars in thousands)	June 30, 2017		December 31, 2016
Commitments to extend credit	$	201,361	$	178,233
Letters of credit		9,541		8,024
Total	$	210,902	$	186,257

XML

Segment Reporting (Tables)

6 Months Ended

Jun. 30, 2017

Segment Reporting [Abstract]

Schedule of Segment Reporting Information by Segment

The following table includes selected financial information by business segments for the first six months of 2017 and 2016.

	Community		Insurance Products		Parent		Consolidated
(Dollars in thousands)	Banking		and Services		Company		Total
2017
Interest Income	$	21,830	$	(1)	$	67	$	21,896
Interest Expense		(1,063)		-		-		(1,063)
Provision for credit losses		(1,401)		-		-		(1,401)
Noninterest income		3,933		5,053		-		8,986
Noninterest expense		(12,044)		(3,834)		(3,972)		(19,850)
Net intersegment (expense) income		(3,594)		(162)		3,756		-
Income (loss) before taxes		7,661		1,056		(149)		8,568
Income tax (expense) benefit		(3,054)		(422)		60		(3,416)
Net Income (loss)	$	4,607	$	634	$	(89)	$	5,152
Total assets	$	1,346,340	$	10,031	$	6,427	$	1,362,798
2016
Interest Income	$	19,785	$	-	$	126	$	19,911
Interest Expense		(1,285)		-		-		(1,285)
Provision for credit losses		(825)		-		-		(825)
Noninterest income		3,850		4,732		-		8,582
Noninterest expense		(10,691)		(3,435)		(4,578)		(18,704)
Net intersegment (expense) income		(3,979)		(367)		4,346		-
Income (loss) before taxes		6,855		930		(106)		7,679
Income tax (expense) benefit		(2,616)		(369)		38		(2,947)
Net Income (loss)	$	4,239	$	561	$	(68)	$	4,732
Total assets	$	1,097,433	$	9,347	$	18,910	$	1,125,690

XML

Business Combination (Narrative) (Details) - USD ($) $ in Thousands	May 19, 2017	Jun. 30, 2017	Dec. 31, 2016
Business Acquisition [Line Items]
Loans, acquired	$ 122,862
Deposits, acquired	212,456
Goodwill		$ 27,207	$ 11,931
Northwest Bank Branches [Member]
Business Acquisition [Line Items]
Loans, acquired	122,862	$ 122,500
Deposits, acquired	212,456
Business combination cash received net of deposit premium	62,700
Business combination premium on deposits	17,200
Goodwill	15,276
Cash flows expected to be collected	125,131
Accretable FMV adjustments	$ 2,269

XML

Business Combination (Schedule of Recognized Identified Assets Acquired and Liabilities Assumed) (Details) - USD ($) $ in Thousands	Jun. 30, 2017	May 19, 2017	Dec. 31, 2016
Business Acquisition [Line Items]
Cash and due from banks		$ 81,231
Loans		122,862
Loans, net		122,862
Premises and equipment, net		6,326
Core deposits intangible		3,954
Total assets		214,373
Deposits: Noninterest-bearing		34,481
Deposits: Interest-bearing		177,975
Total deposits		212,456
Other liabilities		7
Total liabilities		212,463
Net assets acquired		1,910
Goodwill, Total	$ 27,207		$ 11,931
Northwest Bank Branches [Member]
Business Acquisition [Line Items]
Cash and due from banks		81,231
Loans, net	$ 122,500	122,862
Premises and equipment, net		6,326
Core deposits intangible		3,954
Total assets		214,373
Total deposits		212,456
Other liabilities		7
Total liabilities		212,463
Net assets acquired		1,910
Transaction consideration paid to Northwest Bank		17,186
Goodwill, Total		15,276
Northwest Bank Branches [Member] | Scenario, Adjustment [Member]
Business Acquisition [Line Items]
Loans		(2,269)
Loans, net		(2,269)
Premises and equipment, net		963
Core deposits intangible		3,954
Total assets		2,648
Deposits: Interest-bearing		738
Total deposits		738
Total liabilities		738
Net assets acquired		1,910
Northwest Bank Branches [Member] | Northwest Bank [Member]
Business Acquisition [Line Items]
Cash and due from banks		81,231
Loans		125,131
Loans, net		125,131
Premises and equipment, net		5,363
Total assets		211,725
Deposits: Noninterest-bearing		34,481
Deposits: Interest-bearing		177,237
Total deposits		211,718
Other liabilities		7
Total liabilities		$ 211,725

XML

Business Combination (Schedule of Contractually Required Payments Receivable) (Details) - Northwest Bank Branches [Member] $ in Thousands	May 19, 2017 USD ($)
Contractually required payments receivalbe	$ 125,131
Cash flows expected to be collected	125,131
Accretable FMV adjustments	2,269
Carrying value of loans receivable	$ 122,862

XML

Earnings Per Share (Calculation of Earnings Per Common Share) (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Net income	$ 2,352	$ 2,272	$ 5,152	$ 4,732
Weighted average shares outstanding - Basic (in shares)	12,681,000	12,648,000	12,676,000	12,642,000
Dilutive effect of common stock equivalents-options	21,000		21,000
Dilutive effect of common stock equivalents-restricted stock units	33,000	17,000	33,000	15,000
Weighted average shares outstanding - Diluted (in shares)	12,735,000	12,665,000	12,730,000	12,657,000
Earnings per common share - Basic (in dollars per share)	$ 0.19	$ 0.18	$ 0.41	$ 0.37
Earnings per common share - Diluted (in dollars per share)	$ 0.19	$ 0.18	$ 0.41	$ 0.37
Weighted average common stock excluded from calculation of diluted EPS	0	0	0	0

XML

Investment Securities (Amortized Cost and Estimated Fair Values of Investment Securities) (Details) - USD ($) $ in Thousands		Dec. 15, 2016	Jun. 30, 2017	Dec. 31, 2016
Schedule of Trading Securities and Other Trading Assets [Line Items]
Available-for-sale securities, Amortized Cost			$ 201,207	$ 165,462
Available-for-sale securities, Gross Unrealized Gains			905	319
Available-for-sale securities, Gross Unrealized Losses			525	1,879
Available-for-sale securities, Estimated Fair Value			201,587	163,902
Held-to-maturity securities, Amortized Cost			6,411	6,704
Held-to-maturity securities, Gross Unrealized Gains			252	102
Held-to-maturity securities, Estimated Fair Value			6,663	6,806
Equity [Member]
Schedule of Trading Securities and Other Trading Assets [Line Items]
Available-for-sale securities, Amortized Cost			659	652
Available-for-sale securities, Gross Unrealized Losses			1	12
Available-for-sale securities, Estimated Fair Value			658	640
Held-to-maturity securities, Amortized Cost			3,000
Other Equity Securities [Member]
Schedule of Trading Securities and Other Trading Assets [Line Items]
Available-for-sale securities, Amortized Cost	[1]		3,000	3,000
Available-for-sale securities, Gross Unrealized Gains	[1]		124
Available-for-sale securities, Estimated Fair Value	[1]		3,124	3,000
Floating interest rate		6.50%
U.S. Government Agencies [Member]
Schedule of Trading Securities and Other Trading Assets [Line Items]
Available-for-sale securities, Amortized Cost			49,173	34,320
Available-for-sale securities, Gross Unrealized Gains			83	56
Available-for-sale securities, Gross Unrealized Losses			40	58
Available-for-sale securities, Estimated Fair Value			49,216	34,318
Held-to-maturity securities, Amortized Cost			2,007	2,089
Held-to-maturity securities, Gross Unrealized Gains			57	26
Held-to-maturity securities, Estimated Fair Value			2,064	2,115
States and Political Subdivisions [Member]
Schedule of Trading Securities and Other Trading Assets [Line Items]
Held-to-maturity securities, Amortized Cost			1,404	1,615
Held-to-maturity securities, Gross Unrealized Gains			71	76
Held-to-maturity securities, Estimated Fair Value			1,475	1,691
Mortgage-backed [Member]
Schedule of Trading Securities and Other Trading Assets [Line Items]
Available-for-sale securities, Amortized Cost			151,375	130,490
Available-for-sale securities, Gross Unrealized Gains			822	263
Available-for-sale securities, Gross Unrealized Losses			484	1,809
Available-for-sale securities, Estimated Fair Value			$ 151,713	$ 128,944

[1] On December 15, 2016, the Company bought $3.0 million in subordinated notes with a fixed to floating rate of 6.5% from a local regional bank which it intends to hold to maturity of December 30, 2026.

XML

Investment Securities (Gross Unrealized Losses and Fair Value by Length of Continuous Unrealized Loss Position) (Details) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Schedule of Available-for-sale Securities [Line Items]
Available-for-sale securities, continuous unrealized loss position, less than 12 months, fair value	$ 59,640	$ 112,803
Available-for-sale securities, continuous unrealized loss position, less than 12 Months, unrealized losses	324	1,616
Available-for-sale securities, continuous unrealized loss position, more than 12 Months, fair value	8,139	9,208
Available-for-sale securities, continuous unrealized loss position, more than 12 Months, unrealized losses	201	263
Available-for-sale securities, continuous unrealized loss position, fair value	67,778	122,011
Available-for-sale securities, continuous unrealized loss position, unrealized losses	525	1,879
Equity [Member]
Schedule of Available-for-sale Securities [Line Items]
Available-for-sale securities, continuous unrealized loss position, less than 12 months, fair value	659	640
Available-for-sale securities, continuous unrealized loss position, less than 12 Months, unrealized losses	1	12
Available-for-sale securities, continuous unrealized loss position, fair value	658	640
Available-for-sale securities, continuous unrealized loss position, unrealized losses	1	12
U.S. Government Agencies [Member]
Schedule of Available-for-sale Securities [Line Items]
Available-for-sale securities, continuous unrealized loss position, less than 12 months, fair value	18,941	11,926
Available-for-sale securities, continuous unrealized loss position, less than 12 Months, unrealized losses	40	58
Available-for-sale securities, continuous unrealized loss position, fair value	18,941	11,926
Available-for-sale securities, continuous unrealized loss position, unrealized losses	40	58
Mortgage-backed [Member]
Schedule of Available-for-sale Securities [Line Items]
Available-for-sale securities, continuous unrealized loss position, less than 12 months, fair value	40,040	100,237
Available-for-sale securities, continuous unrealized loss position, less than 12 Months, unrealized losses	283	1,546
Available-for-sale securities, continuous unrealized loss position, more than 12 Months, fair value	8,139	9,208
Available-for-sale securities, continuous unrealized loss position, more than 12 Months, unrealized losses	201	263
Available-for-sale securities, continuous unrealized loss position, fair value	48,179	109,445
Available-for-sale securities, continuous unrealized loss position, unrealized losses	$ 484	$ 1,809

XML

Investment Securities (Amortized Cost and Estimated Fair Value by Maturity Date) (Details) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Schedule of Available-for-sale Securities [Line Items]
Available for sale, Amortized Cost, Due in one year or less	$ 12,005
Available for sale, Amortized Cost, Due after one year through five years	34,992
Available for sale, Amortized Cost, Due after five years through ten years	18,649
Available for sale, Amortized Cost, Due after ten years	134,902
Available for sale, Amortized Cost, Debt maturities	200,548
Available-for-sale securities, Amortized Cost	201,207	$ 165,462
Available for sale, Estimated Fair Value, Due in one year or less	11,997
Available for sale, Estimated Fair Value, Due after one year through five years	34,997
Available for sale, Estimated Fair Value, Due after five years through ten years	18,651
Available for sale, Estimated Fair Value, Due after ten years	135,284
Available for sale, Estimated Fair Value, Debt maturities	200,929
Available for sale, Estimated Fair Value, Total	201,587	163,902
Held to maturity securities, Amortized Cost, Due after one year through five years	501
Held to maturity securities, Amortized Cost, Due after five years through ten years	903
Held to maturity securities, Amortized Cost, Due after ten years	2,007
Held to maturity securities, Amortized Cost, Debt maturities	3,411
Held to maturity securities, Amortized Cost, Total	6,411	6,704
Held to maturity securities, Estimated Fair Value, Due after one year through five years	527
Held to maturity securities, Estimated Fair Value, Due after five years through ten years	949
Held to maturity securities, Estimated Fair Value, Due after ten years	2,063
Held to maturity securities, Estimated Fair Value, Debt maturities	3,539
Held-to-maturity securities, Estimated Fair Value, Total	6,663	6,806
Equity [Member]
Schedule of Available-for-sale Securities [Line Items]
Available-for-sale securities, Amortized Cost	659	652
Available for sale, Estimated Fair Value, Total	658	$ 640
Held to maturity securities, Amortized Cost, Total	3,000
Held to maturity securities, Estimated Fair Value, Debt maturities	$ 3,124

XML

Loans and Allowance for Credit Losses (Narrative) (Details) $ in Thousands	3 Months Ended		6 Months Ended	12 Months Ended
	Dec. 31, 2016 USD ($)	Jun. 30, 2016 USD ($)	Jun. 30, 2017 USD ($) property	Dec. 31, 2016 USD ($) property
Financing Receivable, Allowance for Credit Losses [Line Items]
Loans	$ 871,525		$ 1,034,605	$ 871,525
Allowance period increase due to revised methodology used in calculation	1,100
Allowance period adjusted amoung due to revised methodology used in calculation		$ (850)
Other real estate owned, net	2,477		$ 2,302	2,477
Number of properties in other real estate owned | property			1
Residential Portfolio Segment [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Loans	325,768		$ 384,777	325,768
Other real estate owned, net	92		15	$ 92
Number of properties in other real estate owned | property				3
Consumer Portfolio Segment [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Loans	6,639		6,951	$ 6,639
Mortgage loans in process of foreclosure, amount	687		105	687
Special Mention [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Loans	22,637		27,074	22,637
Special Mention [Member] | Residential Portfolio Segment [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Loans	6,646		6,725	6,646
Special Mention [Member] | Impaired Nonaccrual Loans [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Loans			0
Substandard [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Loans	22,691		20,092	22,691
Substandard [Member] | Residential Portfolio Segment [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Loans	6,880		5,904	6,880
Substandard [Member] | Consumer Portfolio Segment [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Loans	99			99
Substandard [Member] | Impaired Nonaccrual Loans [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Loans	$ 9,000		7,200	$ 9,000
Doubtful [Member] | Impaired Nonaccrual Loans [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Loans			$ 0

XML

Loans and Allowance for Credit Losses (Loans by Class of Loan Portfolio) (Details) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Loans and Leases Receivable Disclosure [Line Items]
Loans	$ 1,034,605	$ 871,525
Allowance for credit losses	(9,132)	(8,726)
Loans, net	1,025,473	862,799
Commercial and Residential Real Estate Portfolio Segment [Member] | Construction Loans [Member]
Loans and Leases Receivable Disclosure [Line Items]
Loans	100,095	84,002
Allowance for credit losses	(2,349)	(2,787)
Residential Portfolio Segment [Member]
Loans and Leases Receivable Disclosure [Line Items]
Loans	384,777	325,768
Allowance for credit losses	(2,096)	(1,953)
Commercial Real Estate Portfolio Segment [Member]
Loans and Leases Receivable Disclosure [Line Items]
Loans	452,132	382,681
Allowance for credit losses	(2,802)	(2,610)
Commercial Portfolio Segment [Member]
Loans and Leases Receivable Disclosure [Line Items]
Loans	90,650	72,435
Allowance for credit losses	(1,652)	(1,145)
Consumer Portfolio Segment [Member]
Loans and Leases Receivable Disclosure [Line Items]
Loans	6,951	6,639
Allowance for credit losses	$ (233)	$ (231)

XML

Loans and Allowance for Credit Losses (Allowance for Credit Losses on Loans Receivable with Impairment) (Details) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Financing Receivable, Allowance for Credit Losses [Line Items]
Total loans	$ 1,034,605	$ 871,525
Allowance for credit losses allocated to:
Loans and leases receivable, allowance, total	9,132	8,726
Commercial and Residential Real Estate Portfolio Segment [Member] | Construction Loans [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Loans individually evaluated for impairment	6,926	8,007
Loans collectively evaluated for impairment	93,169	75,995
Total loans	100,095	84,002
Allowance for credit losses allocated to:
Loans individually evaluated for impairment	593	1,639
Loans collectively evaluated for impairment	1,756	1,148
Loans and leases receivable, allowance, total	2,349	2,787
Residential Portfolio Segment [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Loans individually evaluated for impairment	6,443	7,778
Loans collectively evaluated for impairment	378,334	317,990
Total loans	384,777	325,768
Allowance for credit losses allocated to:
Loans individually evaluated for impairment	259	317
Loans collectively evaluated for impairment	1,837	1,636
Loans and leases receivable, allowance, total	2,096	1,953
Commercial Real Estate Portfolio Segment [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Loans individually evaluated for impairment	5,567	6,088
Loans collectively evaluated for impairment	446,565	376,593
Total loans	452,132	382,681
Allowance for credit losses allocated to:
Loans individually evaluated for impairment	165	185
Loans collectively evaluated for impairment	2,637	2,425
Loans and leases receivable, allowance, total	2,802	2,610
Commercial Portfolio Segment [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Loans individually evaluated for impairment	345
Loans collectively evaluated for impairment	90,305	72,435
Total loans	90,650	72,435
Allowance for credit losses allocated to:
Loans collectively evaluated for impairment	1,652	1,145
Loans and leases receivable, allowance, total	1,652	1,145
Consumer Portfolio Segment [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Loans individually evaluated for impairment		99
Loans collectively evaluated for impairment	6,951	6,540
Total loans	6,951	6,639
Allowance for credit losses allocated to:
Loans collectively evaluated for impairment	233	231
Loans and leases receivable, allowance, total	233	231
Unallocated Financing Receivables [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Loans individually evaluated for impairment	19,281	21,972
Loans collectively evaluated for impairment	1,015,324	849,553
Total loans	1,034,605	871,525
Allowance for credit losses allocated to:
Loans individually evaluated for impairment	1,017	2,141
Loans collectively evaluated for impairment	8,115	6,585
Loans and leases receivable, allowance, total	$ 9,132	$ 8,726

XML

Loans and Allowance for Credit Losses (Impaired Financing Receivables by Loan Class) (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016	Dec. 31, 2016
Financing Receivable, Allowance for Credit Losses [Line Items]
Unpaid principal balance	$ 20,189		$ 20,189		$ 26,160
Recorded investment with no allowance	9,415		9,415		10,896
Recorded investment with an allowance	9,866		9,866		11,076
Related allowance	1,017		1,017		2,141
Average recorded investment	20,192	$ 25,972	20,794	$ 26,696
Interest income recognized			242	230
Impaired Nonaccrual Loans [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Unpaid principal balance	8,065		8,065		13,160
Recorded investment with no allowance	2,009		2,009		3,015
Recorded investment with an allowance	5,148		5,148		5,957
Related allowance	784		784		1,904
Average recorded investment	7,874	11,731	8,210	12,039
Impaired Accruing Restructured Loans [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Unpaid principal balance	12,124		12,124		13,000
Recorded investment with no allowance	7,406		7,406		7,881
Recorded investment with an allowance	4,718		4,718		5,119
Related allowance	233		233		237
Average recorded investment	12,318	14,241	12,584	14,657
Interest income recognized			242	230
Residential Portfolio Segment [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Unpaid principal balance	6,586		6,586		7,888
Recorded investment with no allowance	3,270		3,270		4,786
Recorded investment with an allowance	3,173		3,173		2,992
Related allowance	259		259		317
Average recorded investment	7,279	8,845	7,525	8,403
Interest income recognized			87	102
Residential Portfolio Segment [Member] | Impaired Nonaccrual Loans [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Unpaid principal balance	3,352		3,352		4,013
Recorded investment with no allowance	1,066		1,066		1,957
Recorded investment with an allowance	2,143		2,143		1,946
Related allowance	114		114		166
Average recorded investment	3,870	3,914	3,940	3,103
Residential Portfolio Segment [Member] | Impaired Accruing Restructured Loans [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Unpaid principal balance	3,234		3,234		3,875
Recorded investment with no allowance	2,204		2,204		2,829
Recorded investment with an allowance	1,030		1,030		1,046
Related allowance	145		145		151
Average recorded investment	3,409	4,931	3,585	5,300
Interest income recognized			87	102
Commercial Real Estate Portfolio Segment [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Unpaid principal balance	6,124		6,124		6,737
Recorded investment with no allowance	2,413		2,413		2,532
Recorded investment with an allowance	3,154		3,154		3,556
Related allowance	165		165		185
Average recorded investment	5,539	7,124	5,584	7,523
Interest income recognized			100	85
Commercial Real Estate Portfolio Segment [Member] | Impaired Nonaccrual Loans [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Unpaid principal balance	1,271		1,271		1,801
Recorded investment with no allowance	547		547		959
Recorded investment with an allowance	167		167		193
Related allowance	90		90		117
Average recorded investment	670	2,058	696	2,308
Commercial Real Estate Portfolio Segment [Member] | Impaired Accruing Restructured Loans [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Unpaid principal balance	4,853		4,853		4,936
Recorded investment with no allowance	1,866		1,866		1,573
Recorded investment with an allowance	2,987		2,987		3,363
Related allowance	75		75		68
Average recorded investment	4,869	5,066	4,888	5,215
Interest income recognized			100	85
Commercial Portfolio Segment [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Unpaid principal balance	425		425
Recorded investment with no allowance	345		345
Average recorded investment	115	164	57	161
Commercial Portfolio Segment [Member] | Impaired Nonaccrual Loans [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Unpaid principal balance	425		425
Recorded investment with no allowance	345		345
Average recorded investment	115	164	57	161
Commercial Portfolio Segment [Member] | Impaired Accruing Restructured Loans [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Unpaid principal balance
Recorded investment with no allowance
Recorded investment with an allowance
Related allowance
Average recorded investment
Interest income recognized
Consumer Portfolio Segment [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Unpaid principal balance					99
Recorded investment with no allowance					99
Average recorded investment	66	106	82	114
Consumer Portfolio Segment [Member] | Impaired Nonaccrual Loans [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Unpaid principal balance					99
Recorded investment with no allowance					99
Average recorded investment	66	106	82	114
Consumer Portfolio Segment [Member] | Impaired Accruing Restructured Loans [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Unpaid principal balance
Recorded investment with no allowance
Recorded investment with an allowance
Related allowance
Average recorded investment
Interest income recognized
Construction Loans [Member] | Commercial and Residential Real Estate Portfolio Segment [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Unpaid principal balance	7,054		7,054		11,436
Recorded investment with no allowance	3,387		3,387		3,479
Recorded investment with an allowance	3,539		3,539		4,528
Related allowance	593		593		1,639
Average recorded investment	7,193	9,733	7,546	10,495
Interest income recognized			55	43
Construction Loans [Member] | Commercial and Residential Real Estate Portfolio Segment [Member] | Impaired Nonaccrual Loans [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Unpaid principal balance	3,017		3,017		7,247
Recorded investment with no allowance	51		51
Recorded investment with an allowance	2,838		2,838		3,818
Related allowance	580		580		1,621
Average recorded investment	3,153	5,489	3,435	6,353
Construction Loans [Member] | Commercial and Residential Real Estate Portfolio Segment [Member] | Impaired Accruing Restructured Loans [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Unpaid principal balance	4,037		4,037		4,189
Recorded investment with no allowance	3,336		3,336		3,479
Recorded investment with an allowance	701		701		710
Related allowance	13		13		$ 18
Average recorded investment	$ 4,040	$ 4,244	4,111	4,142
Interest income recognized			$ 55	$ 43

XML

Loans and Allowance for Credit Losses (Rollforward of TDRs) (Details) - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016
Financing Receivable, Allowance for Credit Losses [Line Items]
TDR beginning balance	$ 18,504	$ 20,923
New TDRs	345	3,598
Disbursements (payments)	(1,119)	(3,000)
Charge offs	(89)	(629)
Reclassifications/transfer in/(out)	(108)
Payoffs	(584)	(179)
TDR ending balance	16,949	20,713
TDR, related allowance	923	1,176
Impaired Nonaccrual Loans [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
TDR beginning balance	5,504	5,428
New TDRs	345	2,570
Disbursements (payments)	(916)	(2,163)
Charge offs		(512)
Reclassifications/transfer in/(out)	(108)	2,053
TDR ending balance	4,825	7,376
TDR, related allowance	690	923
Impaired Nonaccrual Loans [Member] | Residential Portfolio Segment [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
TDR beginning balance	1,603	445
Disbursements (payments)	(44)	(293)
Reclassifications/transfer in/(out)		1,595
TDR ending balance	1,559	1,747
TDR, related allowance	110	72
Impaired Nonaccrual Loans [Member] | Commercial Real Estate Portfolio Segment [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
TDR beginning balance	83
Charge offs		(258)
Reclassifications/transfer in/(out)		458
TDR ending balance	83	200
TDR, related allowance		112
Impaired Nonaccrual Loans [Member] | Commercial Portfolio Segment [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
New TDRs	345
TDR ending balance	345
Impaired Nonaccrual Loans [Member] | Consumer Portfolio Segment [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
TDR beginning balance		23
Disbursements (payments)		(23)
Impaired Nonaccrual Loans [Member] | Construction Loans [Member] | Commercial and Residential Real Estate Portfolio Segment [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
TDR beginning balance	3,818	4,960
New TDRs		2,570
Disbursements (payments)	(872)	(1,847)
Charge offs		(254)
Reclassifications/transfer in/(out)	(108)
TDR ending balance	2,838	5,429
TDR, related allowance	580	739
Impaired Accruing Restructured Loans [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
TDR beginning balance	13,000	15,495
New TDRs		1,028
Disbursements (payments)	(203)	(837)
Charge offs	(89)	(117)
Reclassifications/transfer in/(out)		(2,053)
Payoffs	(584)	(179)
TDR ending balance	12,124	13,337
TDR, related allowance	233	253
Impaired Accruing Restructured Loans [Member] | Residential Portfolio Segment [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
TDR beginning balance	3,875	5,686
New TDRs		533
Disbursements (payments)	(102)	(350)
Charge offs	(89)
Reclassifications/transfer in/(out)		(1,595)
Payoffs	(450)	(179)
TDR ending balance	3,234	4,095
TDR, related allowance	145	73
Impaired Accruing Restructured Loans [Member] | Commercial Real Estate Portfolio Segment [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
TDR beginning balance	4,936	5,740
New TDRs		495
Disbursements (payments)	(83)	(659)
Charge offs		(117)
Reclassifications/transfer in/(out)		(458)
TDR ending balance	4,853	5,001
TDR, related allowance	75	155
Impaired Accruing Restructured Loans [Member] | Construction Loans [Member] | Commercial and Residential Real Estate Portfolio Segment [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
TDR beginning balance	4,189	4,069
Disbursements (payments)	(18)	172
Payoffs	(134)
TDR ending balance	4,037	4,241
TDR, related allowance	$ 13	$ 25

XML

Loans and Allowance for Credit Losses (Troubled Debt Restructurings on Financing Receivables) (Details) $ in Thousands	6 Months Ended
	Jun. 30, 2017 USD ($) contract	Jun. 30, 2016 USD ($) contract
Financing Receivable, Allowance for Credit Losses [Line Items]
Number of contracts | contract	2	4
Premodification outstanding recorded investment	$ 1,222	$ 1,163
Postmodification outstanding recorded investment	1,100	1,163
Related allowance
Commercial and Residential Real Estate Portfolio Segment [Member] | Construction Loans [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Related allowance
Residential Portfolio Segment [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Number of contracts | contract		3
Premodification outstanding recorded investment		$ 668
Postmodification outstanding recorded investment		668
Related allowance
Commercial Real Estate Portfolio Segment [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Number of contracts | contract	1	1
Premodification outstanding recorded investment	$ 760	$ 495
Postmodification outstanding recorded investment	755	495
Related allowance
Commercial Portfolio Segment [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Number of contracts | contract	1
Premodification outstanding recorded investment	$ 462
Postmodification outstanding recorded investment	345
Related allowance
Consumer Portfolio Segment [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Related allowance

XML

Loans and Allowance for Credit Losses (Troubled Debt Restructurings With Subsequent Default) (Details) $ in Thousands	6 Months Ended
	Jun. 30, 2017 USD ($) contract	Jun. 30, 2016 USD ($) contract
Financing Receivable, Allowance for Credit Losses [Line Items]
Number of contracts | contract	1	3
Recorded investment	$ 89	$ 616
Related allowance
Residential Portfolio Segment [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Number of contracts | contract	1
Recorded investment	$ 89
Related allowance
Commercial Real Estate Portfolio Segment [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Number of contracts | contract		2
Recorded investment		$ 375
Related allowance
Commercial Portfolio Segment [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Related allowance
Consumer Portfolio Segment [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Related allowance
Construction Loans [Member] | Commercial and Residential Real Estate Portfolio Segment [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Number of contracts | contract		1
Recorded investment		$ 241
Related allowance

XML

Loans and Allowance for Credit Losses (Financing Receivable Credit Quality Indicators) (Details) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Financing Receivable, Recorded Investment [Line Items]
Loan Risk Rating	$ 1,034,605	$ 871,525
Pass [Member]
Financing Receivable, Recorded Investment [Line Items]
Loan Risk Rating	987,439	826,197
Special Mention [Member]
Financing Receivable, Recorded Investment [Line Items]
Loan Risk Rating	27,074	22,637
Substandard [Member]
Financing Receivable, Recorded Investment [Line Items]
Loan Risk Rating	20,092	22,691
Commercial and Residential Real Estate Portfolio Segment [Member] | Construction Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Loan Risk Rating	100,095	84,002
Commercial and Residential Real Estate Portfolio Segment [Member] | Construction Loans [Member] | Pass [Member]
Financing Receivable, Recorded Investment [Line Items]
Loan Risk Rating	89,918	72,641
Commercial and Residential Real Estate Portfolio Segment [Member] | Construction Loans [Member] | Special Mention [Member]
Financing Receivable, Recorded Investment [Line Items]
Loan Risk Rating	4,055	4,195
Commercial and Residential Real Estate Portfolio Segment [Member] | Construction Loans [Member] | Substandard [Member]
Financing Receivable, Recorded Investment [Line Items]
Loan Risk Rating	6,122	7,166
Residential Portfolio Segment [Member]
Financing Receivable, Recorded Investment [Line Items]
Loan Risk Rating	384,777	325,768
Residential Portfolio Segment [Member] | Pass [Member]
Financing Receivable, Recorded Investment [Line Items]
Loan Risk Rating	372,148	312,242
Residential Portfolio Segment [Member] | Special Mention [Member]
Financing Receivable, Recorded Investment [Line Items]
Loan Risk Rating	6,725	6,646
Residential Portfolio Segment [Member] | Substandard [Member]
Financing Receivable, Recorded Investment [Line Items]
Loan Risk Rating	5,904	6,880
Commercial Real Estate Portfolio Segment [Member]
Financing Receivable, Recorded Investment [Line Items]
Loan Risk Rating	452,132	382,681
Commercial Real Estate Portfolio Segment [Member] | Pass [Member]
Financing Receivable, Recorded Investment [Line Items]
Loan Risk Rating	428,971	363,461
Commercial Real Estate Portfolio Segment [Member] | Special Mention [Member]
Financing Receivable, Recorded Investment [Line Items]
Loan Risk Rating	15,495	10,939
Commercial Real Estate Portfolio Segment [Member] | Substandard [Member]
Financing Receivable, Recorded Investment [Line Items]
Loan Risk Rating	7,666	8,281
Commercial Portfolio Segment [Member]
Financing Receivable, Recorded Investment [Line Items]
Loan Risk Rating	90,650	72,435
Commercial Portfolio Segment [Member] | Pass [Member]
Financing Receivable, Recorded Investment [Line Items]
Loan Risk Rating	89,451	71,313
Commercial Portfolio Segment [Member] | Special Mention [Member]
Financing Receivable, Recorded Investment [Line Items]
Loan Risk Rating	799	857
Commercial Portfolio Segment [Member] | Substandard [Member]
Financing Receivable, Recorded Investment [Line Items]
Loan Risk Rating	400	265
Consumer Portfolio Segment [Member]
Financing Receivable, Recorded Investment [Line Items]
Loan Risk Rating	6,951	6,639
Consumer Portfolio Segment [Member] | Pass [Member]
Financing Receivable, Recorded Investment [Line Items]
Loan Risk Rating	$ 6,951	6,540
Consumer Portfolio Segment [Member] | Substandard [Member]
Financing Receivable, Recorded Investment [Line Items]
Loan Risk Rating		$ 99

XML

Loans and Allowance for Credit Losses (Aging of Past Due Financing Receivables) (Details) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Financing Receivable, Recorded Investment, Past Due [Line Items]
Current	$ 1,024,218	$ 852,410
Total past due	3,230	10,143
Nonaccrual	7,157	8,972
Total loans	$ 1,034,605	$ 871,525
Percent of total loans, Current	99.00%	97.80%
Percent of total loans, Total past due	0.30%	1.20%
Percent of total loans, Nonaccrual	0.70%	1.00%
Percent of total loans, Total loans	100.00%	100.00%
Financing Receivables, 30 to 59 Days Past Due [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total past due	$ 567	$ 5,029
Percent of total loans, Total past due	0.10%	0.60%
Financing Receivables, 60 to 89 Days Past Due [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total past due	$ 2,349	$ 5,094
Percent of total loans, Total past due	0.20%	0.60%
Financing Receivables, Equal to Greater than 90 Days Past Due [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total past due	$ 314	$ 20
Residential Portfolio Segment [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Current	379,217	317,992
Total past due	2,351	3,873
Nonaccrual	3,209	3,903
Total loans	384,777	325,768
Residential Portfolio Segment [Member] | Financing Receivables, 30 to 59 Days Past Due [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total past due	310	1,778
Residential Portfolio Segment [Member] | Financing Receivables, 60 to 89 Days Past Due [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total past due	1,838	2,095
Residential Portfolio Segment [Member] | Financing Receivables, Equal to Greater than 90 Days Past Due [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total past due	203
Commercial Real Estate Portfolio Segment [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Current	450,740	375,552
Total past due	678	5,977
Nonaccrual	714	1,152
Total loans	452,132	382,681
Commercial Real Estate Portfolio Segment [Member] | Financing Receivables, 30 to 59 Days Past Due [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total past due	219	3,219
Commercial Real Estate Portfolio Segment [Member] | Financing Receivables, 60 to 89 Days Past Due [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total past due	459	2,758
Commercial Portfolio Segment [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Current	90,272	72,272
Total past due	33	163
Nonaccrual	345
Total loans	90,650	72,435
Commercial Portfolio Segment [Member] | Financing Receivables, 30 to 59 Days Past Due [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total past due	33	19
Commercial Portfolio Segment [Member] | Financing Receivables, 60 to 89 Days Past Due [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total past due		134
Commercial Portfolio Segment [Member] | Financing Receivables, Equal to Greater than 90 Days Past Due [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total past due		10
Consumer Portfolio Segment [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Current	6,944	6,515
Total past due	7	25
Nonaccrual		99
Total loans	6,951	6,639
Consumer Portfolio Segment [Member] | Financing Receivables, 30 to 59 Days Past Due [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total past due	5	13
Consumer Portfolio Segment [Member] | Financing Receivables, 60 to 89 Days Past Due [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total past due	2	2
Consumer Portfolio Segment [Member] | Financing Receivables, Equal to Greater than 90 Days Past Due [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total past due		10
Construction Loans [Member] | Commercial and Residential Real Estate Portfolio Segment [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Current	97,045	80,079
Total past due	161	105
Nonaccrual	2,889	3,818
Total loans	100,095	84,002
Construction Loans [Member] | Commercial and Residential Real Estate Portfolio Segment [Member] | Financing Receivables, 60 to 89 Days Past Due [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total past due	50	$ 105
Construction Loans [Member] | Commercial and Residential Real Estate Portfolio Segment [Member] | Financing Receivables, Equal to Greater than 90 Days Past Due [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total past due	$ 111

XML

Loans and Allowance for Credit Losses (Allowance for Credit Losses on Financing Receivables) (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Allowance for credit losses:
Beginning balance	$ 8,927	$ 8,309	$ 8,726	$ 8,316
Charge-offs	(846)	(440)	(1,163)	(1,010)
Recoveries	77	114	168	227
Net charge-offs	(769)	(326)	(995)	(783)
Provision	974	375	1,401	825
Ending balance	9,132	8,358	9,132	8,358
Commercial and Residential Real Estate Portfolio Segment [Member] | Construction Loans [Member]
Allowance for credit losses:
Beginning balance	2,290	1,753	2,787	1,646
Charge-offs	(25)	(13)	(54)	(254)
Recoveries	9	10	16	16
Net charge-offs	(16)	(3)	(38)	(238)
Provision	75	(6)	(400)	336
Ending balance	2,349	1,744	2,349	1,744
Residential Portfolio Segment [Member]
Allowance for credit losses:
Beginning balance	2,131	2,014	1,953	2,181
Charge-offs	(100)	(102)	(323)	(118)
Recoveries	10	33	21	67
Net charge-offs	(90)	(69)	(302)	(51)
Provision	55	90	445	(95)
Ending balance	2,096	2,035	2,096	2,035
Commercial Real Estate Portfolio Segment [Member]
Allowance for credit losses:
Beginning balance	2,912	3,257	2,610	2,999
Charge-offs		(265)		(503)
Recoveries	8	10	19	10
Net charge-offs	8	(255)	19	(493)
Provision	(118)	(131)	173	365
Ending balance	2,802	2,871	2,802	2,871
Commercial Portfolio Segment [Member]
Allowance for credit losses:
Beginning balance	1,338	585	1,145	558
Charge-offs	(706)	(58)	(771)	(125)
Recoveries	42	57	100	122
Net charge-offs	(664)	(1)	(671)	(3)
Provision	978	93	1,178	122
Ending balance	1,652	677	1,652	677
Consumer Portfolio Segment [Member]
Allowance for credit losses:
Beginning balance	256	177	231	156
Charge-offs	(15)	(2)	(15)	(10)
Recoveries	8	4	12	12
Net charge-offs	(7)	2	(3)	2
Provision	(16)	27	5	48
Ending balance	$ 233	206	$ 233	206
Unallocated Financing Receivables [Member]
Allowance for credit losses:
Beginning balance		523		776
Provision		302		49
Ending balance		$ 825		$ 825

XML

Goodwill and Other Intangibles (Narrative) (Details) - USD ($) $ in Thousands	Jun. 30, 2017	May 19, 2017	Dec. 31, 2016
Finite-Lived Intangible Assets [Line Items]
Finite-lived intangibles	$ 4,166		$ 299
Core Deposits [Member]
Finite-Lived Intangible Assets [Line Items]
Finite-lived intangibles	$ 3,921
Northwest Bank Branches [Member] | Core Deposits [Member]
Finite-Lived Intangible Assets [Line Items]
Finite-lived intangibles		$ 4,000

XML

Goodwill and Other Intangibles (Schedule of Components of Goodwill and Other Acquired Intangible Assets) (Details) - USD ($) $ in Thousands	6 Months Ended	12 Months Ended
	Jun. 30, 2017	Dec. 31, 2016
Goodwill and Intangible Assets [Line Items]
Goodwill, Gross	$ 30,511	$ 15,235
Accumulated Impairment Charges	(2,637)	(2,637)
Accumulated Amortization	(667)	(667)
Goodwill, Total	27,207	11,931
Other intangible assets, Amortizable, Gross Carrying Amount	6,459	2,505
Other intangible assets, Amortizable, Accumulated Impairment Charges	(95)	(95)
Other intangible assets, Amortizable, Accumulated Amortization	(2,198)	(2,111)
Total amortizing intangible assets	4,166	299
Other intangible assets, Unamortizable, Net Carrying Amount	780	780
Intangible Assets, Gross (Excluding Goodwill)	7,239	3,285
Intangible Assets, Net (Excluding Goodwill), Total	4,946	1,079
Employment Agreements[Member]
Goodwill and Intangible Assets [Line Items]
Other intangible assets, Amortizable, Gross Carrying Amount	440	440
Other intangible assets, Amortizable, Accumulated Amortization	$ (440)	$ (440)
Weighted Average Remaining Life (in years)	0 years	0 years
Insurance Expirations [Member]
Goodwill and Intangible Assets [Line Items]
Other intangible assets, Amortizable, Gross Carrying Amount	$ 1,270	$ 1,270
Other intangible assets, Amortizable, Accumulated Amortization	(1,264)	(1,233)
Total amortizing intangible assets	$ 6	$ 37
Weighted Average Remaining Life (in years)	1 month 6 days	4 months 24 days
Customer Relationships [Member]
Goodwill and Intangible Assets [Line Items]
Other intangible assets, Amortizable, Gross Carrying Amount	$ 795	$ 795
Other intangible assets, Amortizable, Accumulated Impairment Charges	(95)	(95)
Other intangible assets, Amortizable, Accumulated Amortization	(461)	(438)
Total amortizing intangible assets	$ 239	$ 262
Weighted Average Remaining Life (in years)	5 years 1 month 6 days	5 years 7 months 6 days
Core Deposits [Member]
Goodwill and Intangible Assets [Line Items]
Other intangible assets, Amortizable, Gross Carrying Amount	$ 3,954
Other intangible assets, Amortizable, Accumulated Amortization	(33)
Total amortizing intangible assets	$ 3,921
Weighted Average Remaining Life (in years)	9 years 10 months 25 days	0 years
Trade Names [Member]
Goodwill and Intangible Assets [Line Items]
Other intangible assets, Unamortizable, Net Carrying Amount	$ 780	$ 780

XML

Goodwill and Other Intangibles (Future Amortization Expense for Amortizable Other Intangible Assets) (Details) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Goodwill and Other Intangibles [Abstract]
Amortization Expense, Estimate for years ended June 30, 2017	$ 88
Amortization Expense, Estimate for years ended June 30, 2018	442
Amortization Expense, Estimate for years ended June 30, 2019	442
Amortization Expense, Estimate for years ended June 30, 2020	395
Amortization Expense, Estimate for years ended June 30, 2021	439
Thereafter	2,360
Total amortizing intangible assets	$ 4,166	$ 299

XML

Other Assets (Narrative) (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended		12 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016	Dec. 31, 2016	Dec. 31, 2015
AMT carryover	$ 403		$ 403		$ 869
Deferred tax assets, valuation allowance, current	0		0		0
Income (loss) from continuing operations before equity method investments, income taxes, extraordinary items, noncontrolling interest, total	3,906	$ 3,684	8,568	$ 7,679	$ 15,900	$ 11,500
State and Local Jurisdiction [Member]
Operating loss carryforwards	$ 22,200		$ 22,200
Minimum [Member] | State and Local Jurisdiction [Member]
Operating loss carryforwards, expiration date			Dec. 31, 2026
Maximum [Member] | State and Local Jurisdiction [Member]
Operating loss carryforwards, expiration date			Dec. 31, 2034

XML

Other Assets (Schedule of Other Assets) (Details) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Other Assets [Abstract]
Nonmarketable investment securities	$ 3,069	$ 1,650
Accrued interest receivable	2,865	2,675
Deferred income taxes	3,467	7,039
Prepaid expenses	1,111	1,149
Cash surrender value of life insurance	2,599	2,589
Other assets	4,385	3,781
Total	$ 17,496	$ 18,883

XML

Other Assets (Schedule of Deferred Tax Assets and Liabilities) (Details) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Deferred tax assets:
Allowance for credit losses	$ 3,647	$ 3,486
Reserve for off-balance sheet commitments	122	122
Net operating loss carry forward	1,188	2,232
Write-downs of other real estate owned	300	387
Deferred income	168	1,011
Unrealized losses on available-for-sale securities		672
AMT carryover	403	869
Other	936	1,192
Total deferred tax assets	6,764	9,971
Deferred tax liabilities:
Depreciation	200	239
Amortization on loans FMV adjustment	138	156
Purchase accounting adjustments	2,292	2,019
Deferred capital gain on branch sale	350	401
Unrealized losses on available-for-sale securities	117
Other	200	116
Total deferred tax liabilities	3,297	2,931
Net deferred tax assets	$ 3,467	$ 7,040

XML

Other Liabilities (Schedule of Other Liabilities) (Details) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Other Liabilities [Abstract]
Accrued interest payable	$ 55	$ 74
Other accounts payable	2,032	2,461
Deferred compensation liability	1,188	1,444
Other liabilities		1,301
Total	$ 3,275	$ 5,280

XML

Stock-Based Compensation (Narrative) (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended	6 Months Ended		12 Months Ended
	Mar. 31, 2016	Jun. 30, 2017	Jun. 30, 2016	Dec. 31, 2018	Dec. 31, 2017	Jan. 30, 2017	Feb. 08, 2016
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Options, Weighted average remaining contractual term		6 years 7 months 6 days
Restricted Stock Units (RSUs) [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Other than options, granted			24,433
Equity Plan 2016 [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares authorized for granting		750,000
Shares available to be granted		711,200
Award description		The Company may issue shares of common stock or grant other equity-based awards pursuant to the 2016 Equity Plan. Stock-based awards granted to date generally are time-based, vest in equal installments on each anniversary of the grant date and range over a one- to five-year period of time, and, in the case of stock options, expire 10 years from the grant date. As part of the 2016 Equity Plan, a performance equity incentive award program, known as the "Long-term incentive plan" allows participating officers of the Company to earn incentive awards of performance share/restricted stock units if certain pre-determined targets are achieved at the end of a three-year performance cycle. Stock-based compensation expense based on the grant date fair value is recognized ratably over the requisite service period for all awards and reflects forfeitures as they occur.
Other than options, granted, fair value		$ 287	$ 180
Share price		$ 16.45
Equity Plan 2016 [Member] | Stock Appreciation Rights (SARs) [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Award expiration		10 years
Equity Plan 2016 [Member] | Restricted Stock Units (RSUs) [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Award vesting period		3 years
Award description		Restricted stock units (RSUs) are similar to restricted stock, except the recipient does not receive the stock immediately, but instead receives it upon the terms and conditions of the Company's long-term incentive plans which are subject to performance milestones achieved at the end of a three-year period. Each RSU cliff vests at the end of the three-year period and entitles the recipient to receive one share of common stock on a specified issuance date. The recipient does not have any stockholder rights, including voting rights, with respect to the shares underlying awarded RSUs until the recipient becomes the holder of those shares.
Equity Plan 2016 [Member] | Employee Stock Option [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Award method used for valuation		Black-Scholes valuation model
Share price							$ 11.35
Options, granted, weighted average fair value		$ 10.99
Options, outstanding intrinsic value		$ 505
Options, exercised, intrinsic value	$ 2	$ 8
Options, exercisable, intrinsic value			$ 232
Maximum [Member] | Equity Plan 2016 [Member] | Stock Appreciation Rights (SARs) [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Award vesting period		5 years
Maximum [Member] | Equity Plan 2016 [Member] | Restricted Stock Units (RSUs) [Member] | Scenario, Forecast [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Other than options, granted				48,871	43,821
Minimum [Member] | Equity Plan 2016 [Member] | Stock Appreciation Rights (SARs) [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Award vesting period		1 year
Minimum [Member] | Equity Plan 2016 [Member] | Restricted Stock Units (RSUs) [Member] | Scenario, Forecast [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Other than options, granted				12,214	10,953
Minimum [Member] | Equity Plan 2016 [Member] | Employee Stock Option [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share price						$ 15.89

XML

Stock-Based Compensation (Schedule of Stock-Based Compensation) (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Stock-Based Compensation [Abstract]
Stock-based compensation expense	$ 173	$ 66	$ 590	$ 177
Excess tax benefits related to stock-based compensation	11		13	3
Unrecognized stock-based compensation expense	$ 354	$ 179	$ 354	$ 179
Weighted average period unrecognized expense is expected to be recognized			1 year 1 month 6 days	9 months 18 days

XML

Stock-Based Compensation (Schedule of Stock-Based Compensation - RS Award Activity) (Details) - Restricted Stock [Member] - $ / shares	6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of Shares, Nonvested at beginning of period (in shares)	17,066	12,488
Number of Shares, Granted (in shares)	20,143	23,239
Number of Shares, Vested (in shares)	(21,296)	(18,662)
Number of Shares, Nonvested at end of period (in shares)	15,913	17,065
Weighted Average Grant Date Fair Value, Nonvested at beginning of period (in dollars per share)	$ 11.46	$ 8.74
Weighted Average Grant Date Fair Value, Granted (in dollars per share)	16.69	11.47
Weighted Average Grant Date Fair Value, Vested (in dollars per share)	13.47	9.63
Weighted Average Grant Date Fair Value, Nonvested at end of period (in dollars per share)	$ 12.49	$ 11.46

XML

Stock-Based Compensation (Schedule of Stock-Based Compensation - RSU Award Activity) (Details) - Restricted Stock Units (RSUs) [Member] - $ / shares	6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of Shares, Nonvested at beginning of period (in shares)	46,342	26,943
Number of Shares, Granted (in shares)		24,433
Number of Shares, Cancelled (in shares)		(5,034)
Number of Shares, Nonvested at end of period (in shares)	46,342	46,342
Weighted Average Grant Date Fair Value, Nonvested at beginning of period (in dollars per share)	$ 10.64	$ 9.49
Weighted Average Grant Date Fair Value, Granted (in dollars per share)		11.68
Weighted Average Grant Date Fair Value, Cancelled (in dollars per share)		9.49
Weighted Average Grant Date Fair Value, Nonvested at end of period (in dollars per share)	$ 10.64	$ 10.64

XML

Stock-Based Compensation (Schedule of Stock Option Activity) (Details) - Employee Stock Option [Member] - $ / shares	6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of shares, Outstanding at beginning of period (in shares)	62,086	61,327
Number of shares, Granted (in shares)	1,202	12,443
Number of shares, Exercised (in shares)	(859)	(450)
Number of shares, Outstanding at end of period (in shares)	62,429	73,320
Number of shares, Exercisable at end of period (in shares)	61,828	69,990
Weighted Average Exercise Price, Outstanding at beginning of period	$ 8.29	$ 8.05
Weighted Average Exercise Price, Granted	10.99	11.12
Weighted Average Exercise Price, Exercised	6.64	6.64
Weighted Average Exercise Price, Outstanding at end of period	8.36	8.58
Weighted Average Exercise Price, Exercisable at end of period	$ 8.34	$ 8.46

XML

Stock-Based Compensation (Stock Option Valuation Assumptions) (Details)	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Stock-Based Compensation [Abstract]
Dividend yield	0.84%	0.73%
Expected volatility	64.80%	38.60%
Risk-free interest rate	2.42%	1.75%
Expected contract life (in years)	10 years	10 years

XML

Accumulated Other Comprehensive Income (Schedule of Accumulated Other Comprehensive Income (Loss)) (Details) - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016
Accumulated Other Comprehensive Income (Loss) [Line Items]
Balances	$ 154,299	$ 146,967
Other comprehensive income	1,167	1,199
Balances	159,940	152,321
Accumulated Other Comprehensive Income (Loss) [Member]
Accumulated Other Comprehensive Income (Loss) [Line Items]
Balances	(993)	(71)
Balances	174	1,128
Accumulated Net Unrealized Investment Gain (Loss) [Member]
Accumulated Other Comprehensive Income (Loss) [Line Items]
Balances	(993)	(71)
Other comprehensive income	1,167	1,199
Balances	$ 174	$ 1,128

XML

Fair Value Measurements (Assets and Liabilities Measured on Recurring Basis) (Details) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Securities available for sale:
Available-for-sale Securities, Fair Value Disclosure	$ 201,587	$ 163,902
U.S. Government Agencies [Member]
Securities available for sale:
Available-for-sale Securities, Fair Value Disclosure	49,216	34,318
Mortgage-backed [Member]
Securities available for sale:
Available-for-sale Securities, Fair Value Disclosure	151,713	128,944
Equity [Member]
Securities available for sale:
Available-for-sale Securities, Fair Value Disclosure	658	640
Fair Value, Inputs, Level 2 [Member]
Securities available for sale:
Available-for-sale Securities, Fair Value Disclosure	201,587	163,902
Fair Value, Inputs, Level 2 [Member] | U.S. Government Agencies [Member]
Securities available for sale:
Available-for-sale Securities, Fair Value Disclosure	49,216	34,318
Fair Value, Inputs, Level 2 [Member] | Mortgage-backed [Member]
Securities available for sale:
Available-for-sale Securities, Fair Value Disclosure	151,713	128,944
Fair Value, Inputs, Level 2 [Member] | Equity [Member]
Securities available for sale:
Available-for-sale Securities, Fair Value Disclosure	$ 658	$ 640

XML

Fair Value Measurements (Fair Value of Assets Measured on Nonrecurring Basis) (Details) - Fair Value, Measurements, Nonrecurring [Member] - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Impaired loans:
Impaired loans	$ 18,264	$ 19,831
Other real estate owned	2,302	2,477
Total assets measured at fair value on a nonrecurring basis	20,566	22,308
Fair Value, Inputs, Level 3 [Member]
Impaired loans:
Impaired loans	18,264	19,831
Other real estate owned	2,302	2,477
Total assets measured at fair value on a nonrecurring basis	20,566	22,308
Residential Portfolio Segment [Member]
Impaired loans:
Impaired loans	6,184	7,461
Residential Portfolio Segment [Member] | Fair Value, Inputs, Level 3 [Member]
Impaired loans:
Impaired loans	6,184	7,461
Commercial Real Estate Portfolio Segment [Member]
Impaired loans:
Impaired loans	5,402	5,903
Commercial Real Estate Portfolio Segment [Member] | Fair Value, Inputs, Level 3 [Member]
Impaired loans:
Impaired loans	5,402	5,903
Commercial Portfolio Segment [Member]
Impaired loans:
Impaired loans	345
Commercial Portfolio Segment [Member] | Fair Value, Inputs, Level 3 [Member]
Impaired loans:
Impaired loans	345
Consumer Portfolio Segment [Member]
Impaired loans:
Impaired loans		99
Consumer Portfolio Segment [Member] | Fair Value, Inputs, Level 3 [Member]
Impaired loans:
Impaired loans		99
Construction Loans [Member] | Commercial and Residential Real Estate Portfolio Segment [Member]
Impaired loans:
Impaired loans	6,333	6,368
Construction Loans [Member] | Commercial and Residential Real Estate Portfolio Segment [Member] | Fair Value, Inputs, Level 3 [Member]
Impaired loans:
Impaired loans	$ 6,333	$ 6,368

XML

Fair Value Measurements (Estimated Fair Values of Financial Assets and Liabilities) (Details) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Financial assets, Estimated Fair Value
Investment securities held to maturity	$ 6,663	$ 6,806
Fair Value, Inputs, Level 1 [Member] | Carrying Amount [Member]
Financial assets, Estimated Fair Value
Cash and cash equivalents	54,079	75,938
Fair Value, Inputs, Level 1 [Member] | Estimated Fair Value [Member]
Financial assets, Estimated Fair Value
Cash and cash equivalents	54,079	75,938
Fair Value, Inputs, Level 2 [Member] | Carrying Amount [Member]
Financial assets, Estimated Fair Value
Investment securities held to maturity	6,411	6,704
Loans, net	1,025,473	862,799
Financial liabilities, Estimated Fair Value
Deposits	1,196,258	997,489
Short-term borrowings	3,325	3,203
Fair Value, Inputs, Level 2 [Member] | Estimated Fair Value [Member]
Financial assets, Estimated Fair Value
Investment securities held to maturity	6,663	6,806
Loans, net	1,027,011	867,594
Financial liabilities, Estimated Fair Value
Deposits	1,124,815	929,573
Short-term borrowings	$ 3,325	$ 3,203

XML

Financial Instruments with Off-Balance Sheet Risk (Schedule of Commitments Outstanding) (Details) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Fair Value, Off-balance Sheet Risks, Disclosure Information [Line Items]
Commitments outstanding	$ 210,902	$ 186,257
Commitments to Extend Credit [Member]
Fair Value, Off-balance Sheet Risks, Disclosure Information [Line Items]
Commitments outstanding	201,361	178,233
Unused lines of Credit [Member]
Fair Value, Off-balance Sheet Risks, Disclosure Information [Line Items]
Commitments outstanding	$ 9,541	$ 8,024

XML

Segment Reporting (Schedule of Segment Reporting Information by Segment) (Details) $ in Thousands	3 Months Ended		6 Months Ended		12 Months Ended
	Jun. 30, 2017 USD ($)	Jun. 30, 2016 USD ($)	Jun. 30, 2017 USD ($) segment	Jun. 30, 2016 USD ($)	Dec. 31, 2016 USD ($)	Dec. 31, 2015 USD ($)
Segment Reporting Information [Line Items]
Number of operating segments | segment			2
Interest income	$ 11,449	$ 10,003	$ 21,896	$ 19,911
Interest expense	(549)	(620)	(1,063)	(1,285)
Provision for credit losses	(974)	(375)	(1,401)	(825)
Noninterest income	4,179	4,041	8,986	8,582
Noninterest expense	(10,199)	(9,365)	(19,850)	(18,704)
Income (loss) before taxes	3,906	3,684	8,568	7,679	$ 15,900	$ 11,500
Income tax (expense) benefit	(1,554)	(1,412)	(3,416)	(2,947)
Net income (loss)	2,352	2,272	5,152	4,732
Total assets	1,362,798	1,125,690	1,362,798	1,125,690	$ 1,160,271
Operating Segments [Member] | Community Banking [Member]
Segment Reporting Information [Line Items]
Interest income			21,830	19,785
Interest expense			(1,063)	(1,285)
Provision for credit losses			(1,401)	(825)
Noninterest income			3,933	3,850
Noninterest expense			(12,044)	(10,691)
Net intersegment (expense) income			(3,594)	(3,979)
Income (loss) before taxes			7,661	6,855
Income tax (expense) benefit			(3,054)	(2,616)
Net income (loss)			4,607	4,239
Total assets	1,346,340	1,097,433	1,346,340	1,097,433
Operating Segments [Member] | Insurance Products and Services [Member]
Segment Reporting Information [Line Items]
Interest income			(1)
Noninterest income			5,053	4,732
Noninterest expense			(3,834)	(3,435)
Net intersegment (expense) income			(162)	(367)
Income (loss) before taxes			1,056	930
Income tax (expense) benefit			(422)	(369)
Net income (loss)			634	561
Total assets	10,031	9,347	10,031	9,347
Parent Company [Member] | Corporate, Non-Segment [Member] | Corporate and Other [Member]
Segment Reporting Information [Line Items]
Interest income			67	126
Noninterest expense			(3,972)	(4,578)
Net intersegment (expense) income			3,756	4,346
Income (loss) before taxes			(149)	(106)
Income tax (expense) benefit			60	38
Net income (loss)			(89)	(68)
Total assets	$ 6,427	$ 18,910	$ 6,427	$ 18,910