SHBI Shore Bancshares Inc

EASTON, Md., Oct. 24, 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 third quarter of 2024 of $11.2 million or $0.34 per diluted common share which was equal to the second quarter of 2024. The Company's had a net loss of $9.7 million or $(0.29) per diluted common share for the third quarter of 2023 as a result of the merger of equals on July 1, 2023 between the Company and The Community Financial Corporation. Net income for the first nine months of 2024 was $30.6 million or $0.92 per diluted common share, compared to the first nine months of 2023 of $0.7 million or $0.03 per diluted common share.

Third Quarter and Nine-Months Ended September 30, 2024 Highlights

• Steady Return on Average Assets ("ROAA") - The Company reported ROAA of 0.77% for the third quarter of 2024, which was equal to reported ROAA for the second quarter of 2024. Non-GAAP, ROAA^([1]) was 0.90% for the third quarter of 2024, compared to 0.91% for the second quarter of 2024.
• Increased Net Interest Income and Net Interest Margin - Third quarter 2024 net interest income increased $1.1 million to $43.3 million from $42.1 million in the second quarter of 2024. Net interest income increased due to modest loan growth, slightly higher accelerated accretion income, and loans and securities repricing at a faster pace than the Bank's cost of funds. Net interest margin ("NIM") increased six basis points ("bps") to 3.17% for the third quarter of 2024 from 3.11% for the second quarter of 2024. Excluding net accretion interest income of $4.5 million and $3.8 million for the same time periods, NIM increased one bps to 2.84% for the third quarter of 2024 from 2.83% for the second quarter of 2024.
• Asset Quality Remains Strong - Allowance for credit losses ("ACL") was $58.7 million at September 30, 2024 compared to $58.5 million at June 30, 2024. The third quarter of 2024 ACL as a percentage of loans remained stable at 1.24% from the second quarter of 2024. Nonperforming assets to total assets were 0.27% for the third quarter of 2024 compared to 0.29% for the second quarter of 2024 and 0.23% for the fourth quarter of 2023. Classified assets to total assets increased to 0.39% in the third quarter of 2024 compared to 0.33% for the second quarter of 2024 and 0.25% for the fourth quarter of 2023.
• Stable Operating Leverage - The third quarter of 2024 efficiency ratio was 67.49% when compared to 66.23% in the second quarter of 2024. The third quarter efficiency ratio was affected by one-time data processing expense related to the fraud incident in the first quarter of 2024. The third quarter of 2024 non-GAAP efficiency ratio⁽¹⁾ was 62.10% when compared to 61.05% in the second quarter of 2024.
• Strong Deposit Growth - Total deposits increased to $5.23 billion at September 30, 2024 from $5.15 billion at June 30, 2024. Average noninterest bearing deposits increased to $1.58 billion for the third quarter of 2024 representing 30.55% of average funding, excluding subordinated debt, compared to 28.42% during the second quarter of 2024. The Bank's use of wholesale funding, which includes Federal Home Loan Bank ("FHLB") advances and brokered deposits, has been minimal in 2024. Wholesale funding increased from $44.5 million or 0.74% of assets at December 31, 2023 to $50.0 million or 0.84% of total assets at September 30, 2024. Sustained efforts to enhance the Bank's deposit franchise are expected to continue to attract additional deposits in future quarters.

"Increasing net interest income drove a healthy increase in net interest margin in the third quarter," stated James ("Jimmy") M. Burke, President and Chief Executive Officer of Shore Bancshares, Inc. "Active management of our deposit relationships, combined with the recent reduction in rates by the Federal Reserve, have helped us stabilize our cost of funding even as assets yields continue to increase. Credit remains stable and economic activity in our markets remains strong. We continue to rapidly build capital and are optimistic that decreasing rates and clarity in November will result in loan growth."

Balance Sheet Review

Total assets were $5.9 billion at September 30, 2024, a decrease of $93.2 million or 1.6%, when compared to $6.0 billion at December 31, 2023. The aggregate decrease was primarily due to a decrease in cash and cash equivalents of $188.8 million and investment securities held to maturity of $28.6 million partially offset by an increase in investment securities available for sale of $22.8 million and loans held for investment of $92.9 million. The ratio of the ACL to total loans remained flat at 1.24% at September 30, 2024 compared to December 31, 2023.

The Company's tangible common equity ratio⁽¹⁾ at September 30, 2024 was 7.39% compared to 6.78% at December 31, 2023. The Company's Tier 1 and Total Risk-Based Capital Ratios at September 30, 2024 were 9.89% and 12.04%, respectively. The Bank's Tier 1 and Total Risk-Based Capital Ratios at September 30, 2024 were 10.60% and 11.84%, respectively. Non-owner occupied CRE loans as a percentage of the Bank's Tier 1 Capital + ACL at September 30, 2024 and December 31, 2023 were $2.1 billion or 364.0% and $2.0 billion or 382.6%, respectively. Construction loans as a percentage of the Bank's Tier 1 Capital + ACL at September 30, 2024 and December 31, 2023 were $337.1 million or 59.3% and $299.0 million or 56.7%, respectively.

The Bank's office CRE loan portfolio, which includes owner-occupied and non-owner occupied CRE loans, was $509.4 million or 10.8% of total loans of $4.7 billion at September 30, 2024. The Bank's office CRE loan portfolio included $140.9 million or 27.7% of the total with medical tenants and $71.8 million or 14.1% of the total with government or government contractor tenants. There were 503 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 for the office CRE portfolio are summarized below and LTV collateral values are based on the most recent appraisal, which may vary from the appraised value at loan origination.

The Bank had 18 office CRE loans totaling $164.6 million with balances greater than $5.0 million at September 30, 2024, compared to 24 office CRE loans totaling $189.8 million at December 31, 2023. The decrease in this portfolio segment was the result of normal amortization and two large loan payoffs in the quarter. At September 30, 2024, the average loan debt-service coverage ratio was 2.5x and average LTV was 50.0%. Of the office CRE portfolio balance, 73% is secured by properties in rural or suburban areas with limited exposure to metropolitan cities and 97% is secured by properties with five stories or less. Of the office CRE loans, $2.0 million were classified as special mention or substandard at September 30, 2024.

Total deposits decreased $160.4 million, or 3.0% to $5.2 billion at September 30, 2024 when compared to December 31, 2023. The decrease in total deposits was primarily due to decreases in demand deposits of $414.0 million and money market and savings of $143.8 million, partially offset by increases in noninterest-bearing deposits of $313.4 million and time deposits of $84.0 million. The decrease in deposits is primarily attributable to seasonal municipal runoff and a decrease in interest rate-sensitive cannabis-related deposits. During the second quarter of 2024, the Company reclassified $399.4 million of demand deposits which carried an average rate of 4 bps to noninterest bearing deposits.

Total funding, which includes customer deposits, FHLB short and long-term advances, and brokered deposits was $5.28 billion at September 30, 2024 compared to $5.26 billion at June 30, 2024 and $5.43 billion at December 31, 2023. The Bank had $50.0 million in total FHLB advances at September 30, 2024 compared to aggregate advances of $81.0 million at June 30, 2024 and zero at December 31, 2023. The advance consisted of 18-month Bermuda Convertible of $50 million. The Bank had zero brokered deposits (excluding reciprocal deposits) at September 30, 2024 compared to $28.2 million at June 30, 2024 and $19.4 million at December 31, 2023. Total reciprocal deposits were $1.3 billion at September 30, 2024 compared to $1.2 billion at June 30, 2024 and $1.3 billion at December 31, 2023. 

The Bank's uninsured deposits at September 30, 2024 were $895.9 million or 17.14% of total deposits. The Bank's uninsured deposits, excluding deposits secured with pledged collateral, at September 30, 2024 were $768.6 million or 14.71% of total deposits. At September 30, 2024, the Bank had approximately $1.1 billion of available liquidity including: $183.6 million in cash, $932.5 million in secured borrowing capacity at the FHLB and other correspondent banks, and $95.0 million in unsecured lines of credit.

Total stockholders' equity increased $22.1 million, or 4.3%, when compared to December 31, 2023, primarily due to current year earnings, offset by cash dividends paid. As of September 30, 2024, the ratio of total equity to total assets was 9.01% and the ratio of total tangible equity to total tangible assets⁽¹⁾ was 7.39% compared to 8.50% and 6.78% at December 31, 2023, respectively.

Review of Quarterly Financial Results

Net interest income was $43.3 million for the third quarter of 2024, compared to $42.1 million for the second quarter of 2024 and $45.6 million for the third quarter of 2023. The increase in net interest income when compared to the second quarter of 2024 was primarily due to the increase in interest and fees on loans of $1.9 million and interest and dividends on investment securities of $268 thousand, partially offset by an increase in interest expense of $460 thousand. The increase in interest expense in the third quarter of 2024 was the result of higher interest expense on deposits of $1.3 million, partially offset by lower interest expense from carrying lower short-term advances from the FHLB during the quarter to offset seasonal outflows from municipal customers of $1.1 million. The decrease in net interest income when compared to the third quarter of 2023 was primarily due the higher interest expense on deposits of $5.4 million and long-term borrowings of $618 thousand. These were partially offset by an increase in interest and fees on loans of $4.3 million. All of these items were significantly impacted by the merger in the third quarter of 2023.

The Company's net interest margin increased to 3.17% for the third quarter of 2024 from 3.11% for the second quarter of 2024 primarily due to loans repricing at a greater rate than deposits. The Company's cost of funds was positively impacted during the second quarter due to a shift from interest-bearing to noninterest-bearing deposits. Average interest-bearing deposits decreased $77.8 million, or 2.2% which resulted in $1.3 million less interest expense. These interest-bearing deposits were almost entirely replaced with an increase in the average balance on noninterest-bearing deposits of $99.1 million, or 6.7%. The Company's net interest margin decreased to 3.17% for the third quarter of 2024 from 3.35% for the third quarter of 2023. Comparing the third quarter of 2024 to the third quarter of 2023, the Company's interest-earning asset yields increased 23 bps to 5.47% from 5.24%, while the cost of funds repriced at a slower pace resulting in an increase of 43 bps to 2.38% from 1.95% for the same period.

The provision for credit losses was $1.5 million for the three months ended September 30, 2024. The comparable amounts were $2.1 million for the three months ended June 30, 2024, and $28.2 million for the three months ended September 30, 2023. The increase in the provision for credit losses for the third quarter of 2024 compared to the second quarter of 2024 was due to new loan growth, increases in specific reserves and charge-offs in the third quarter of 2024. Coverage ratios remained flat at 1.24% at September 30, 2024 and June 30, 2024. The decrease in the provision for credit losses when compared to the third quarter of 2023 was primarily due to an enhanced CECL model in the third quarter of 2023 due to the merger. Net charge-offs were $1.4 million for the third quarter of 2024 and third quarter of 2023, compared to $886 thousand for the second quarter of 2024.

At September 30, 2024 and June 30, 2024, nonperforming assets were $15.8 million, or 0.27% of total assets and $17.0 million, or 0.29% of total assets, respectively. The balance of nonperforming assets decreased primarily due to a decrease in repossessed properties of $1.3 million. When comparing September 30, 2024 to September 30, 2023, nonperforming assets increased $4.5 million, primarily due to increases in nonaccrual loans of $5.9 million, an increase in repossessed marine loans and assets held for sale of $306 thousand, partially offset by a decrease of $1.7 million in loans 90 days past due and still accruing almost entirely impacted by the merger in the third quarter of 2023.

Total noninterest income for the third quarter of 2024 was $7.3 million, a decrease of $1.2 million from $8.4 million for the second quarter of 2024 and a decrease $7.7 million from $15.0 million for the third quarter of 2023. The decrease from the second quarter of 2024 was lower revenues from mortgage banking and Mid-Maryland Title Company, Inc. (the "title Company"). The Bank's mortgage revenue declined $806 thousand due to lower interest rates which decreased the value of mortgage servicing rights $686 thousand and also drove higher prepayment rates. The title company revenues declined due to lower settlement activity than the prior quarter.

Total noninterest expense of $34.1 million for the third quarter of 2024 increased $615 thousand when compared to the second quarter of 2024 expense of $33.5 million and decreased $13.0 million when compared to the third quarter of 2023 expense of $47.2 million. The increase from the second quarter of 2024 was primarily due to one time data processing costs related to the fraud incident in the first quarter of 2024 and other fraud expenses. The decrease from the third quarter of 2023 was primarily due to one time merger related expenses that were incurred in 2023 partially offset by an increase in expenses due to the operation of a larger branch network and employee base due to the merger, which significantly impacted almost all expense line items. In addition, despite the increased size, the Company has prudently reduced its staff by approximately 72 FTE's since the consummation of the merger. The efficiency ratio for the third quarter of 2024 when compared to the second quarter of 2024 and the third quarter of 2023 was 67.49%, 66.23% and 77.81%, respectively. Furthermore, non-GAAP efficiency ratios⁽¹⁾ for the same periods were 62.10%, 61.05% and 54.89%, respectively. The net operating expense ratio, which is non-interest expense less non-interest income divided by average assets, for the third quarter 2024 was 1.84%, compared to 1.73% and 2.21% for the second quarter of 2024 and the third quarter of 2023, respectively. The non-GAAP net operating expense ratio⁽¹⁾, which excludes core deposit intangible amortization and non-recurring activity, for the third quarter 2024 was 1.65%, compared to 1.55% and 1.48% for the second quarter of 2024 and the third quarter of 2023, respectively.

Review of Nine Month Financial Results

Net interest income for the first nine months of 2024 was $126.5 million, an increase of $32.8 million, or 34.9%, when compared to the first nine months of 2023. The increase in net interest income was primarily due to an increase in total interest income of $76.0 million, or 53.2%, which included an increase in interest and fees on loans of $73.8 million, or 57.4%. The increase of interest and fees on loans was primarily due to the increase in the average balance of loans of $1.4 billion, or 42.3%, and an increase in net accretion income of $5.5 million due to the merger. Increases to net interest income were partially offset by increased total interest expense of $43.2 million, or 87.9%, primarily due to increases in the cost of funds and in the average balance of interest-bearing deposits of $1.0 billion, or 38.1%. All of the increases in average balances were largely due to the merger.

The Company's net interest margin remained flat at 3.12% for the nine months ended September 30, 2024 and 2023. Margins were flat as more rapid increases in rates on interest-bearing liabilities were offset by lower increases in interest-earning assets yields and larger balances in noninterest-bearing deposits. The increases in the average balance and rates paid on interest-bearing deposits of $1.0 billion and 104 bps, respectively, were partially offset by increases in  the average balance and yields earned on average earning assets of $1.4 billion and 64 bps, respectively. Additionally, margins were positively impacted as average balances of noninterest-bearing deposits increased $424.9 million, or 43.2% from 25.9% of average funding for the nine months ended September 30, 2023 to 27.2% of average funding for the nine months ended September 30, 2024. Net accretion income impacted net interest margin by 29 bps and 21 bps for the nine months ended September 30, 2024 and 2023, respectively.

The provision for credit losses for the nine months ended September 30, 2024 and 2023 was $4.0 million and $30.1 million, respectively. The decrease in the provision for credit losses was due to higher levels of reserves required by the Company's CECL model related to the merger in 2023. Net charge-offs for the nine months ended September 30, 2024 were $3.0 million compared to net recoveries of $1.5 million for the nine months ended September 30, 2023.

Total noninterest income for the nine months ended September 30, 2024 decreased $3.3 million or 13.0%, when compared to the same period in 2023. The decrease was primarily due to lower trust and investment fee income of $1.1 million and one-time third quarter 2023 bargain purchase income of $8.8 million offset by $2.2 million of losses on sale of investment securities, both a direct result of the merger with TCFC in the third quarter of 2023.

Total noninterest expense for the nine months ended September 30, 2024 increased $14.6 million, or 16.3%, when compared to the same period in 2023. Almost all noninterest expense line items increased as a result of the credit card fraud losses and the expanded operations of the newly combined Company. There were no merger-related expenses and $4.7 million of credit card fraud losses for the nine months ended September 30, 2024, compared to $16.8 million expenses and no fraud losses for the nine months ended September 30, 2023, respectively. The Company continues to focus on streamlining processes to 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 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; 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; the Company's ability to remediate the existing material weaknesses identified in its 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. Additional factors that could cause actual results to differ materially from those expressed in the forward-looking statements are discussed in the Company's 2023 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission ("SEC") and available at the SEC's Internet site (http://www.sec.gov).

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.