SHBI Shore Bancshares Inc

EASTON, Md., Jan. 31, 2024 /PRNewswire/ -- Shore Bancshares, Inc. (NASDAQ - SHBI) (the "Company" or "Shore Bancshares"), the holding company for Shore United Bank N.A. (the "Bank" or "SUB") reported net income for  the fourth quarter of 2023 of $10.5 million or $0.32 per diluted common share compared to a net loss of $9.7 million or $0.29 per diluted common share for the third quarter of 2023, and net income of $8.4 million or $0.42 per diluted common share for the fourth quarter of 2022. Net income for the fiscal year of 2023 was $11.2 million or $0.42 per diluted common share, compared to net income for the fiscal year of 2022 of $31.2 million or $1.57 per diluted common share.

Fourth Quarter 2023 Highlights

• Net Interest Margin Impacted by Growth in Liquidity - Net interest margin ("NIM") decreased to 3.09% for the fourth quarter of 2023 from 3.35% for the third quarter of 2023, due to significant deposit growth and less net accretion income when compared to the third quarter of 2023. Excluding net accretion interest income of $3.0 million and $5.4 million for the same time periods, NIM decreased nine basis points to 2.87% for the fourth quarter of 2023 from 2.96% for the third quarter of 2023.
  
  
• Continued Deposit Growth - During the fourth quarter, total deposits increased 5.43% to $5.4 billion and non-interest bearing ("NIB") deposits increased 3.8% to $1.3 billion at December 31, 2023 compared to total deposits of $5.1 billion and NIB of $1.2 billion at September 30, 2023. Deposit growth for the quarter was split between core transaction and time deposits. The increased liquidity should help support 2024 loan growth. Current customer interest is indicating that growth could exceed management’s previous guidance of 4%-6% loan growth in 2024. The Bank's loan to deposit ratio at December 31, 2023 was 86%. Sustained efforts to enhance the Bank's deposit franchise are expected to attract additional deposits in future quarters.
  
  
• Stable Funding and Liquidity - Total funding, which includes customer deposits, Federal Home Loan Bank ("FHLB") advances, and brokered deposits increased $210.4 million from $5.2 billion at September 30, 2023 to $5.4 billion at December 31, 2023. The Bank had no FHLB advances at December 31, 2023 and reduced brokered deposits $67.0 million during the fourth quarter to $44.5 million or 0.8% of total deposits. The Bank's uninsured deposits at December 31, 2023 were $1.05 billion or 19.49% of total deposits. The Bank's uninsured deposits, excluding deposits secured with pledged collateral, at December 31, 2023 were $893.5 million or 16.59% of total deposits.
  
  At December 31, 2023, the Bank had approximately $1.4 billion of available liquidity including: $372.4 million in cash, $1.0 billion in secured borrowing capacity at the FHLB and other correspondent banks, and $45.0 million in unsecured lines of credit. At December 31, 2023, available liquidity of approximately $1.4 billion was 159% of uninsured deposits, excluding deposits secured with pledged collateral of $893.5 million.
  
  
• Continued Solid Asset Quality - Non-accrual loans, OREO and loan modifications to borrowers' experiencing financial difficulties ("BEFDs") were $13.3 million or 0.22% of total assets at December 31, 2023 compared to $9.2 million or 0.16% of total assets at September 30, 2023. The modest increase in nonperforming and classified assets was the result of a small increase in late payments in consumer loans and a proactive review of larger commercial relationships in the current interest rate environment.

"Stable interest income was offset by higher interest expenses in the fourth quarter as we added liquidity and continued to see pressure on the cost of deposits," stated James ("Jimmy") M. Burke, President and Chief Executive Officer of Shore Bancshares, Inc. "We made good progress expanding our market share and adding new customers in the third and fourth quarters and are optimistic that we can build on the  deposit growth we experienced in the fourth quarter. Improved liquidity should provide an opportunity to grow loans and stabilize margins. We continue to focus on expenses and have undertaken a number of expense-reduction initiatives, including a 7% reduction in headcount since the close of the transaction in the third quarter. Shore Bancshares, with its considerable scale, diversification, and resources, is well-positioned to enhance shareholder value, effectively manage risks, and deliver outstanding service to customers."

Merger with The Community Financial Corporation ("TCFC") 

The Company merged with TCFC and its wholly-owned subsidiary Community Bank of the Chesapeake ("CBTC") on July 1, 2023 (the "merger"). The acquisition method was used to account for the transaction with the Company as the acquirer. The Company recorded the assets and liabilities of TCFC at their respective fair values as of July 1, 2023. The transaction was valued at approximately $153.6 million and expanded the Bank's footprint into the Southern Maryland Counties of Charles, St. Mary's and Calvert and the greater Fredericksburg area in Virginia, which includes, Stafford and Spotsylvania Counties. This acquired market area is one of the fastest growing regions in the country and is home to a mix of federal facilities and industrial and high-tech businesses. These areas boast a strong median household income, low unemployment and projected population growth better than national averages. Based on information from the U.S. Bureau of Labor Statistics, unemployment rates in legacy CBTC's footprint have historically remained well below the national average. At the time of the acquisition, TCFC added $2.4 billion in assets, $454.5 million in investments, $1.8 billion in loans, $2.0 billion in deposits, $150.6 million in brokered deposits, $69.0 million in FHLB advances and $32.0 million in subordinated debt and trust preferred debentures. The excess of the fair value of net TCFC assets acquired over the merger consideration resulted in a $8.8 million bargain purchase gain.

Balance Sheet Review

Total assets were $6.0 billion at December 31, 2023, an increase of $2.5 billion or 72.9%, when compared to $3.5 billion at December 31, 2022. The aggregate increase was primarily due to the merger, with significant increases in loans held for investment of $2.1 billion, or 81.6%, and cash and cash equivalents of $316.9 million, partially offset by an increase in allowance for credit losses of $40.7 million. The ratio of the allowance to total loans increased from 0.65% at December 31, 2022, to 1.24% at December 31, 2023. The increases were due to the adoption of CECL on January 1, 2023 and the merger. Due to a lack of uniformity of historical data between the legacy banks in their respective models, management implemented a new post merger model methodology. The Bank's provision for credit losses for the twelve months ended December 31, 2023 was $31.0 million and were due primarily to $20.1 million related to the acquisition of TCFC legacy loans and $7.3 million due to the change in ACL methodology on SUB legacy loans.

The Company's tangible common equity ratio at December 31, 2023 was 6.78%. The Company's Tier 1 and Total Risk-Based Capital Ratios at December 31, 2023 were 9.31% and 11.48%, respectively. The Bank's Tier 1 and Total Risk-Based Capital Ratios at December 31, 2023 were 10.02% and 11.27%, respectively. Non-owner occupied commercial real estate ("CRE") loans as a percentage of the Bank's Tier 1 Capital + ACL at December 31, 2023 and December 31, 2022 were $2.0 billion or 382.6% and $1.0 billion or 289.4%, respectively. Construction loans as a percentage of the Bank's Tier 1 Capital + ACL at December 31, 2023 and December 31, 2022 were $299.0 million or 56.7% and $246.3 million or 69.9%, respectively.

The Bank's office CRE portfolio, which included owner-occupied and non-owner occupied CRE loans, was $521.7 million or 11.2% of total loans of $4.6 billion at December 31, 2023, which included $142.9 million or 27.4% with medical tenants and $74.9 million or 14.4% with government or government contractor tenants. There were 507 loans in the office CRE portfolio with an average and median loan size of $1.0 million and $0.4 million, respectively. Loan to Value ("LTV") estimates are less than 70% for $398.7 million or 76.4% of the office CRE portfolio.

The Bank had 23 CRE office loans totaling $189.8 million that were greater than $5.0 million at December 31, 2023. For this subset of the office CRE portfolio, at December 31, 2023, the average loan debt-service coverage ratio was 1.8x and average LTV was 53.9%. Most buildings in the Bank's office CRE portfolio are two stories or less and outside metropolitan areas.

Total borrowings were $72.3 million at December 31, 2023, a decrease of $10.8 million, or 13.0%, when compared to $83.1 million at December 31, 2022. Total borrowings at December 31, 2023 were comprised of $43.1 million of subordinated debt and $29.2 million of trust preferred debentures. The decrease in total borrowings at December 31, 2023 when compared to December 31, 2022 was primarily due to repayment of $40.0 million in FHLB short-term advances, partially offset by an increase of $29.2 million in subordinated debt and trust preferred debentures from the acquisition of TCFC. The Company's wholesale funding increased $4.5 million, which includes brokered deposits and FHLB advances, from $40.0 million in FHLB advances at December 31, 2022 to $44.5 million in brokered deposits at December 31, 2023. The Bank redeemed callable brokered certificates of $67.0 million during the fourth quarter of 2023.

Total deposits increased $2.4 billion, or 79.0% to $5.4 billion at December 31, 2023 when compared to December 31, 2022. The increase in total deposits was primarily due to the merger, which resulted in an increase in time deposits of $760.3 million, demand deposits of $471.4 million, money market and savings of $748.6 million and noninterest-bearing deposits of $396.0 million. Total deposits increased $277.4 million from $5.1 billion at September 30, 2023 to $5.4 billion at December 31, 2023. The increase in deposits during the fourth quarter was due to increases in non-interest bearing deposits of $46.6 million, and increases in interest bearing deposits of $230.7 million which was comprised of an increase in money market and savings deposits of $227.1 million and time deposits of $48.1 million partially offset by a decrease in demand deposits of $44.5 million.

At December 31, 2023, total deposits consisted of $5.3 billion in customer deposits and $44.5 million in traditional brokered deposits. Traditional brokered deposits decreased from $111.5 million or 2.2% of total deposits at September 30, 2023 to $44.5 million or 0.8% of total deposits at December 31, 2023. Traditional brokered deposits do not include the portion of reciprocal deposits classified as brokered deposits for call reporting purposes. For FDIC call reporting purposes reciprocal deposits are classified as brokered deposits when they exceed 20% of a bank's liabilities or $5.0 billion. Reciprocal deposits are included in customer deposits and are used to maximize FDIC insurance available to our customers. Reciprocal deposits considered brokered deposits for call reporting purposes were $204.8 million at December 31, 2023.

NIB accounts increased from $862.0 million at December 31, 2022 to $1.3 billion at December 31, 2023, and represent 23.4% of total deposits.

Total stockholders' equity increased $146.9 million, or 40.3%, when compared to December 31, 2022, primarily due to the $153.1 million increase in paid in capital due to the merger. As of December 31, 2023, the ratio of total equity to total assets was 8.50% and the ratio of total tangible equity to total tangible assets was 6.78% compared to 10.48% and 8.67% at the end of 2022, respectively.

Review of Quarterly Financial Results

Net interest income was $41.5 million for the fourth quarter of 2023, compared to $45.6 million for the third quarter of 2023 and $26.9 million for the fourth quarter of 2022. The decrease in net interest income when compared to the third quarter of 2023 was primarily due to the increase in interest expense of $4.0 million resulting from an increase in the average balance of deposits of $187.8 million. The increase when compared to the fourth quarter of 2022 was primarily due to the increase in interest and fees on loans partially offset by the increase in interest on deposits, both significantly impacted by the merger in the third quarter of 2023.

The Company's net interest margin decreased to 3.09% for the fourth quarter of 2023 from 3.35% for the third quarter of 2023 due to lower net accretion income and an increase in the overall mix of interest bearing deposits compared to non-interest bearing deposits. Average interest-bearing deposits increased $187.8 million which resulted in an 36 basis point rate increase in interest-bearing deposits. In addition to the change in deposit mix, rates on money market and time deposits also increased, which were partly offset by lower rates on demand deposits. The increase in interest bearing deposits was the result of a strategic focus by the Company to grow deposits during the fourth quarter to support 2024 loan growth.

The Company's net interest margin decreased to 3.09% for the fourth quarter of 2023 from 3.34% for the fourth quarter of 2022. Comparing the fourth quarter of 2023 to the fourth quarter of 2022, the Company's interest-earning asset yields increased 129 basis points to 5.29% from 4.00%, while the cost of funds increased at a faster rate of 156 basis points to 2.25% from 0.69% for the same period.

The provision for credit losses was $0.9 million for the three months ended December 31, 2023. The comparable amounts were $28.2 million for the three months ended September 30, 2023, and $0.5 million for the three months ended December 31, 2022. The decrease in  the provision for credit losses for the fourth quarter of 2023 compared to the third quarter of 2023 was primarily related to the acquisition of the TCFC legacy loans in the third quarter of 2023 and the change in ACL methodology on SUB legacy loans. The increase in the provision for credit losses when compared to the fourth quarter of 2022 was also impacted by higher reserves required by the Company's CECL allowance model as compared to the incurred loss model utilized in 2022. Net charge-offs for the fourth quarter of 2023 were $0.5 million compared to net charge-offs of $1.4 million for the third quarter of 2023 and net charge offs of $84,000 for the fourth quarter of 2022. Included in the net charge-offs for the third quarter of 2023 were $1.2 million in charge-offs related to loan sales of $10.7 million that reduced classified assets and CRE concentrations.

At December 31, 2023 and September 30, 2023, nonperforming assets were $13.7 million or 0.23% of total assets and $11.3 million, or 0.20% of total assets, respectively. The balance of nonperforming assets increased primarily due to an increase in nonaccrual loans of $3.8 million, primarily offset by a decrease of $1.4 million in loans 90 days past due and still accruing. The composition of the additional  $3.8 million in nonaccrual loans at December 31, 2023 were made up of a few credits and does not signify an overall declining trend in asset quality. When comparing December 31, 2023 to December 31, 2022, nonperforming assets increased $9.8 million, primarily due to increases in nonaccrual loans of $10.9 million and offset primarily by a decrease of $1.1 million in loans 90 days past due and still accruing. The modest increase in nonperforming assets was the result of a proactive review of larger commercial relationships in the current interest rate environment.

Total noninterest income for the fourth quarter of 2023 was $7.5 million, a decrease of $7.4 million from $15.0 million for the third quarter of 2023 and an increase $1.7 million from $5.9 million for the fourth quarter of 2022. The decrease from the third quarter of 2023 was primarily due to the bargain purchase gain of $8.8 million and a decrease of $1.1 million in trust and investment fee income, both the result of the acquisition of TCFC, partially offset by a loss of $2.2 million on the sale of investment securities in the third quarter of 2023. Shortly following the closing of the merger on July 1, 2023, management sold virtually all of CBTC's available for sale investment securities. The $2.2 million loss relates to the difference in the fair values of the securities on July 1, 2023 compared to actual sales proceeds received from the sales on the settlement date. The increase from the fourth quarter of 2022 was primarily due to other noninterest income which included increases in other loan fee income, gains on life insurance contracts and an increase in credit card income all a result of the merger.

Total noninterest expense of $33.7 million for the fourth quarter of 2023 decreased $13.5 million when compared to the third quarter of 2023 expense of $47.2 million and increased $12.7 million when compared to the fourth quarter of 2022 expense of $21.0 million. Excluding merger costs and core deposit amortization of $3.2 million for the fourth quarter of 2023 and $17.5 million for the third quarter of 2023, noninterest expense for the comparable periods was $30.5 million and $29.7 million, respectively. The increase was primarily due to higher FDIC insurance premium expense as a result of the increased size of the Bank. Based on the Bank's current size, FDIC insurance premiums are expected to be between $1.0 million and $1.2 million per quarter in 2024. The increase in total noninterest expense, when excluding merger and acquisition costs and core deposit intangibles of $1.4 million for the fourth quarter of 2022, was primarily due to the acquisition of TCFC in the third quarter of 2023, and resulting additional headcount, infrastructure (11 additional branches), processing fees and FDIC insurance premiums.

Review of Twelve Month Financial Results

Net interest income for the first twelve months of 2023 was $135.3 million, an increase of $34.0 million, or 33.6%, when compared to the first twelve months of 2022. The increase in net interest income was primarily due to an increase in total interest income of $100.2 million, or 88.0%, which included an increase in interest and fees on loans of $95.2 million, or 96.1%. The increase of interest and fees on loans was primarily due to the increase in the average balance of loans of $1.3 billion, or 58.7%, and an increase in net accretion income of $7.5 million due to the merger. Increases to net interest income were partially offset by increased total interest expense of $66.2 million, or 528.0%, primarily due to increases in the cost of funds and in the average balance of interest-bearing deposits of $859.9 million, or 40.5%, largely due to the merger.

The Company's net interest margin decreased to 3.11% for 2023 from 3.15% for 2022, primarily due to costs on interest-bearing liabilities increasing at a faster rate than increasing yields on interest-earning assets. The average balance and rates paid on interest-bearing deposits increased $859.9 million and 183 basis points compared to increased average balance and yields earned on average earning assets of $1.1 billion and 138 basis points. Total net accretion income for 2023 was $9.4 million, compared to $1.9 million for 2022. During 2023, until the balance sheet restructuring in the third quarter of 2023, the net interest margin experienced compression due to the Company's liability sensitive position, the result of deposit rate pressures and significantly higher FHLB borrowing rates.

The provision for credit losses for the twelve months ended December 31, 2023 and 2022 was $31.0 million and $1.9 million, respectively. The increase in the provision for credit losses for 2023 was impacted by higher levels of reserves required by the Company's CECL model as compared to the incurred loss methodology utilized in 2022 and higher reserves required for the acquisition of TCFC in the third quarter of 2023 and a change in CECL methodology in the third quarter of 2023 for the legacy SUB loans. Net charge offs for the twelve months ended December 31, 2023 were $2.0 million compared to net recoveries of $0.8 million for the twelve months ended December 31, 2022.

Total noninterest income for the twelve months ended December 31, 2023 increased $10.1 million or 43.6%, when compared to the same period in 2022. The increase in noninterest income was due to the bargain purchase gain of $8.8 million associated with the merger, an increase of $1.8 million in trust and investment fee income and an increase of $0.9 million in interchange credits, partially offset by a $2.2 million loss on sales of investment securities and a decrease of $0.8 million in title company revenue.

Total noninterest expense for the twelve months ended December 31, 2023 increased $43.0 million, or 53.5%, when compared to the same period in 2022. Almost all noninterest expense line items increased as a result of the merger and the expanded operations of the newly combined Company. Merger-related expenses for the twelve months ended December 31, 2023 were $17.4 million, compared to the twelve months ended December 31, 2022 of $2.1 million. As the Company continues its merger integration, a key focus of management will be to streamline processes, unlock operational efficiencies and reduce overall noninterest expenses.

Shore Bancshares Information

Shore Bancshares is a financial holding company headquartered in Easton, Maryland and is the parent company of Shore United Bank, N.A. Shore Bancshares engages in title work related to real estate transactions through its wholly-owned subsidiary, Mid-Maryland Title Company, Inc. and in trust and wealth management services through Wye Financial Partners, a division of Shore United Bank, N.A. Additional information is available at www.shorebancshares.com.

Forward-Looking Statements

The statements contained herein that are not historical facts are forward-looking statements (as defined by the Private Securities Litigation Reform Act of 1995) based on management's current expectations and beliefs concerning future developments and their potential effects on the Company. Such statements involve inherent risks and uncertainties, many of which are difficult to predict and are generally beyond the control of the Company. There can be no assurance that future developments affecting the Company will be the same as those anticipated by management. These statements are evidenced by terms such as "anticipate," "estimate," "should," "expect," "believe," "intend," and similar expressions. Although these statements reflect management's good faith beliefs and projections, they are not guarantees of future performance and they may not prove true. These projections involve risk and uncertainties that could cause actual results to differ materially from those addressed in the forward-looking statements. While there is no assurance that any list of risks and uncertainties or risk factors is complete, below are certain factors which could cause actual results to differ materially from those contained or implied in the forward-looking statements: the expected cost savings, synergies and other financial benefits from the acquisition of TCFC or any other acquisition the Company has made or may make might not be realized within the expected time frames or at all; the effect of acquisitions we have made or may make, including, without limitation, the failure to achieve the expected revenue growth and/or expense savings from such acquisitions, and/or the failure to effectively integrate an acquisition target into our operations; recent adverse developments in the banking industry highlighted by high-profile bank failures and the potential impact of such developments on customer confidence, liquidity, and regulatory responses to these developments; changes in general economic, political, or industry conditions; geopolitical concerns, including the ongoing wars in Ukraine and the Middle East; uncertainty in U.S. fiscal and monetary policy, including the interest rate policies of the Board of Governors of the Federal Reserve System; inflation/deflation, interest rate, market, and monetary fluctuations; volatility and disruptions in global capital and credit markets; any failures to adequately manage the transition from USD LIBOR as a reference rate; competitive pressures on product pricing and services; success, impact, and timing of our business strategies, including market acceptance of any new products or services; the impact of changes in financial services policies, laws, and regulations, including those concerning taxes, banking, securities, and insurance, and the application thereof by regulatory bodies; potential changes in federal policy and at regulatory agencies as a result of the upcoming 2024 presidential election; a deterioration of the credit rating for U.S. long-term sovereign debt, actions that the U.S. government may take to avoid exceeding the debt ceiling, and uncertainties surrounding debt ceiling and the federal budget; the impact of recent or future changes in FDIC insurance assessment rate or the rules and regulations related to the calculation of the FDIC insurance assessment amount, including any special assessments; cybersecurity threats and the cost of defending against them, including the costs of compliance with potential legislation to combat cybersecurity at a state, national, or global level; our ability to remediate the material weakness identified in our internal control over financial reporting; the effectiveness of the Company's internal control over financial reporting and disclosure controls and procedures; climate change, including any enhanced regulatory, compliance, credit and reputational risks and costs; and other factors that may affect our future results. For a discussion of these risks and uncertainties, see the section of the periodic reports filed by Shore Bancshares, Inc. with the Securities and Exchange Commission entitled "Risk Factors."

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