Shore Bancshares Reports Third Quarter and Nine-Month Financial Results

EASTON, Md., Oct. 28, 2021 /PRNewswire/ -- Shore Bancshares, Inc. (NASDAQ - SHBI) (the "Company") reported net income of $4.617 million or $0.39 per diluted common share for the third quarter of 2021, compared to net income of $4.031 million or $0.34 per diluted common share for the second quarter of 2021, and net income of $3.391 million or $0.27 per diluted common share for the third quarter of 2020. Net income for the first nine months of 2021 was $12.645 million or $1.08 per diluted common share, compared to net income for the first nine months of 2020 of $11.844 million or $0.95 per diluted common share. On March 3, 2021, the Company and Severn Bancorp, Inc. ("Severn") announced that they had entered into a merger agreement pursuant to which Severn will be merged with and into the Company (the "Merger"). For the third quarter and the first nine months of 2021, the Company recorded $538 thousand and $915 thousand, respectively, in merger-related expenses and will continue to recognize additional merger-related expenses in future quarters as they are incurred. As previously reported, the Company has obtained all required regulatory approvals for the consummation of the Merger, the Company and Severn have received all required shareholder approvals and the Merger is presently expected to be consummated effective October 31, 2021. 

When comparing net income for the third quarter of 2021 to the second quarter of 2021, net income increased $586 thousand, due to an increase in net interest income of $1.5 million and lower provision for credit losses of $360 thousand, which were partially offset by an increase in noninterest expense of $1.1 million. When comparing net income for the third quarter of 2021 to the third quarter of 2020, net income increased $1.2 million, primarily due to increases in net interest income of $2.3 million and noninterest income of $328 thousand, coupled with a decrease in the provision for credit losses of $1.2 million. These improvements to net income, were partially offset by an increase in almost all noninterest expense line items, adding $2.1 million in overall expenses. 

"We are pleased to announce our third quarter earnings and our continuing growth trend in 2021." said Lloyd L. "Scott" Beatty, Jr., President and Chief Executive Officer. "Excluding PPP lending, loan growth is up 9.2% for the first nine months of 2021, and loan demand is showing no signs of weakening. We continue to see growth among all lines of business, as well as deposits which continue to create excess liquidity and downward pressure on our net interest margin."

"We are also pleased to have received the approval of our shareholders for our acquisition of Severn and the issuance of shares of our common stock to Severn's shareholders in connection with our acquisition. Our teams have been working diligently on a successful transition with limited disruptions to operations. This acquisition is just one step to enhancing our franchise value, expand our markets and business lines and provide enhanced returns for our shareholders."  

Ongoing response to COVID-19

EmployeesMany of our non-branch personnel have returned to our offices and continue to practice social distancing as the Company has implemented enhanced cleaning and disinfecting procedures across all locations. Due to vaccinations and low positivity rates for COVID within our markets, we have been able to resume in-person meetings at limited capacity. We continue to have some meetings through telephonic or video conferencing. We have resumed most of our business-related travel, public events, and meetings with outside parties. In addition, we have encouraged our employees to sign-up and receive the COVID vaccine in accordance with state and local guidelines.

Banking LocationsAll our branch locations remain open, with normal hours of operation. The drive-thru locations have expanded their capabilities to accommodate an array of transactions for our customers. We notified our customers of our changes in operations as well as promoted the use of online and mobile banking.

CustomersWe thank our customers for their commitment and understanding as we continue to find ways to serve them as safely and securely as possible.

Loan DeferralsAs of September 30, 2021, the Company had no COVID related loan deferrals.

Small Business Administration's Paycheck Protection Program ("PPP")We remain a SBA preferred lender and actively participated in the first and second PPP programs. The first round of PPP lending resulted in 1,495 loans for $129.0 million, of which 1,447 loans have been forgiven or paid down in the amount of $125.9 million as of September 30, 2021. The second round of PPP lending, which began in 2021, resulted in 959 loans for $67.3 million, of which 597 loans have been forgiven or paid down in the amount of $28.9 million. As of September 30, 2021, the Company had 410 PPP loans totaling $41.5 million that were outstanding, inclusive of loans issued during both the first and second rounds of PPP.  

Share RepurchasesAt the present time, all share repurchases have been suspended due to the current status of our merger with Severn. Once the merger is consummated, the Company intends to resume its current share buyback program in which $546 thousand remains available. The Board of Directors and management will re-evaluate the need for an additional stock repurchase program once the current plan is exhausted or expires.

DividendsWe currently expect to maintain our quarterly cash dividends based on our strong capital position.

Balance Sheet ReviewTotal assets were $2.261 billion at September 30, 2021, a $327.5 million, or 16.9%, increase when compared to $1.933 billion at the end of 2020.  This growth was due to increases in both investment securities held to maturity and interest-bearing deposits with other banks of $184.8 million and $122.2 million, respectively. These increases were funded by an increase in deposits of $317.4 million.   

Total deposits increased $317.4 million, or 18.7%, when compared to December 31, 2020.  The increase in total deposits consisted of increases in the following categories: savings and money market accounts of $193.1 million, interest checking accounts of $69.6 million, noninterest-bearing deposits of $45.8 million and other time deposits of $8.9 million. The significant movement within deposit accounts continues to be impacted by direct government stimulus payments to our customers, new account openings and municipal deposit inflows.  

Total stockholders' equity increased $6.6 million, or 3.4%, when compared to December 31, 2020. At September 30, 2021, the ratio of total equity to total assets was 8.92% and the ratio of total tangible equity to total tangible assets was 8.15%.

Total assets at September 30, 2021 increased $432.6 million, or 23.7%, when compared to total assets at September 30, 2020, primarily the result of increases in total investment securities of $195.7 million, cash and cash equivalents of $154.4 million and loan growth of $70.9 million. In addition, other assets increased $11.6 million, primarily the result of purchasing bank owned life insurance contracts in the first quarter of 2021. 

Total deposits at September 30, 2021 increased $423.9 million, or 26.6%, when compared to September 30, 2020. The increase in total deposits included growth within savings and money market accounts of $220.9 million, interest-bearing checking accounts of $104.1 million, noninterest-bearing deposits of $89.6 million and other time deposits of $9.4 million.

Total stockholders' equity increased $2.7 million, or 1.4%, when compared to September 30, 2020, primarily attributed to positive earnings, partially offset by stock buybacks in the third and fourth quarters of 2020 and unrealized losses on available-for-sale securities.

Review of Quarterly Financial Results Net interest income was $15.6 million for the third quarter of 2021, compared to $14.1 million for the second quarter of 2021 and $13.3 million for the third quarter of 2020. The increase in net interest income when compared to the second quarter of 2021 was primarily due to increases in interest and fees on loans of $1.1 million and interest on taxable investment securities of $223 thousand, combined with a decrease in interest expense on interest-bearing deposits of $107 thousand. The improvement in interest and fees on loans was due to an increase in the average balance of loans of $42.6 million, or 2.9%, combined with an increase of 13bps in the average yield on loans. PPP loan forgiveness had a direct impact on the improved yield and increased fee income on total loans, due to the loans forgiven during the third quarter being replaced by higher yielding traditional loans and the automatic recognition of fees net of costs which had been previously deferred. The increase in interest on taxable investment securities was due to the continued purchase of held to maturity securities during the third quarter of 2021 and the improved yield on these securities of 5bps, which resulted in an increase in the average balance in taxable investment securities of $48.1 million, or 16.8%. Due to an excess liquidity position at the Bank, management continued to purchase these taxable investment securities as an alternative investment to low-yielding interest-bearing deposits with other banks. The decrease in interest expense on interest-bearing deposits was due to a 6bps decline on rates paid on these deposits, specifically time deposits that matured and renewed at lower rates than when they originated. The increase in net interest income when comparing the third quarter of 2021 to the third quarter of 2020 was the result of higher interest and fees on loans and income from investment securities, coupled with a decrease in interest expense. The increase in interest income on loans was driven by an increase of $80.6 million in the average volume of loans, which included PPP lending. The average balance of taxable investment securities increased $198.2 million, providing $588 thousand of additional income, despite a decrease in the average yield of 56bps. The decrease in interest expenses from the third quarter of 2020 was impacted by the decrease in the rates paid on interest-bearing deposits of 27bps, which reduced expense by $521 thousand, partially offset by the addition of subordinated debt in the third quarter of 2020 of $25.0 million, which resulted in $211 thousand of additional expense for the third quarter of 2021. The Company's net interest margin increased to 2.99% for the third quarter of 2021 from 2.91% for the second quarter of 2021 and decreased from 3.17% for the third quarter of 2020. The increase in net interest margin in the third quarter of 2021 when compared to the second quarter of 2021, was primarily due to PPP loan forgiveness and higher average yields on taxable investment securities. The decrease in net interest margin when compared to the third quarter of 2020 was primarily due to excess liquidity, which has been partially invested in investment securities at lower yields. Absent excess liquidity of $200 million, we estimate our margin for the third quarter of 2021 would have been 3.31%.

The provision for credit losses was $290 thousand for the three months ended September 30, 2021.  The comparable amounts were $650 thousand and $1.5 million for the three months ended June 30, 2021 and September 30, 2020, respectively. The ratio of the allowance for credit losses to period-end loans was 1.04% at September 30, 2021, compared to 1.02% at June 30, 2021 and 0.90% at September 30, 2020. Excluding PPP loans, these ratios were 1.07% at September 30, 2021, 1.09% at June 30, 2021 and 0.98% at September 30, 2020. The decreased percentage of the allowance to total loans, excluding PPP loans, as compared to June 30, 2021, was due to slightly reduced pandemic qualitative factors within the allowance model. The increased percentage of the allowance to total loans, excluding PPP loans, as compared to September 30, 2020, was primarily due to significant loan originations in segments which carry higher reserves and pandemic related allocations prior to the end of 2020, which as mentioned, were partially reduced during the quarter. The Company reported net recoveries of $147 thousand in the third quarter of 2021, compared to net recoveries of $125 thousand in the second quarter of 2021 and net recoveries of $187 thousand for the third quarter of 2020.

At September 30, 2021 and June 30, 2021, nonperforming assets were $4.4 million and $4.9 million, respectively. The balance of nonperforming assets decreased primarily due to a decrease in nonaccrual loans of $490 thousand, or 12.4%. Accruing troubled debt restructurings ("TDRs") decreased $588 thousand, or 9.3%, over the same time period. Other real estate owned properties remained at $203 thousand for September 30, 2021 and June 30, 2021. When comparing September 30, 2021 to September 30, 2020, nonperforming assets decreased $4.0 million, or 47.4%, primarily due to decreases in nonaccrual loans of $3.5 million, or 50.4% and loans 90 days past due and still accruing of $625 thousand, or 45.5%. Accruing TDRs decreased $1.5 million, or 20.9%, and other real estate owned increased $165 thousand, or 434.2%, over the same time period. The ratio of nonperforming assets and accruing TDRs to total assets was 0.44%, 0.53% and 0.86% at September 30, 2021, June 30, 2021 and September 30, 2020, respectively.  In addition, the ratio of accruing TDRs to total loans at September 30, 2021 was 0.38%, compared to 0.43% at June 30, 2021 and 0.51% at September 30, 2020.

Total noninterest income for the third quarter of 2021 increased $6 thousand, or less than 1%, when compared to the second quarter of 2021 and increased $328 thousand, or 12.7%, when compared to the third quarter of 2020. The increase compared to the second quarter of 2021 was primarily due to higher deposit related fees, which was almost entirely offset by the absence of a debit card incentive received in the second quarter of 2021. The increase in noninterest income compared to the third quarter of 2020 was among all lines of business, but predominately service charges on deposit accounts, trust and investment fee income and other debit card interchange fees.  

Total noninterest expense for the third quarter of 2021 increased $1.1 million, or 9.7%, when compared to the second quarter of 2021 and increased $2.1 million, or 21.4%, when compared to the third quarter of 2020. The increase in noninterest expense when compared to the second quarter of 2021 was primarily due to increases in salaries and wages, employee related benefits and legal and professional fees partially offset by lower merger-related costs. The increase in salaries and wages was due to the absence of deferred costs for originating PPP loans which occurred in the second quarter of 2021, as well as additional accruals related to incentive payouts and bonuses for employees. The increase in employee benefits was the result of higher supplemental executive retirement plan costs in the third quarter of 2021 as compared to the second quarter of 2021. The increase in noninterest expenses when compared to the third quarter of 2020 was primarily driven by salaries and wages, employee benefits, furniture and fixtures, FDIC insurance premiums and merger-related expenses. As previously mentioned, salaries and wages were impacted by originations of PPP loans in 2020 as well as incentive accruals for 2021. FDIC insurance premiums increased due to a higher assessment base and renovations of a couple branches incurred higher furniture and fixtures which were below our capitalization limit.

Review of Nine-Month Financial ResultsNet interest income for the first nine months of 2021 was $43.5 million, an increase of $4.7 million, or 12.0% when compared to the first nine months of 2020.  The increase was due to higher total interest income of $3.6 million, specifically loans of $2.4 million and taxable investment securities of $1.3 million. Total interest expense decreased $1.1 million, due to the average rates paid on interest-bearing deposits which declined by 33bps, partially offset by the addition of subordinated debt in the third quarter of 2020 of $25 million, which increased interest expense by $827 thousand. The Company's net interest margin decreased to 2.97% for the first nine-months of 2021, compared to 3.35% for the first nine-months of 2020. The primary factor impacting the net interest margin was the average yield on earnings assets which declined 55bps. Although the average yield on loans only declined 10bps, investment in taxable securities declined 66bps, while interest-bearing deposits with other banks declined 24bps. The Company believes this is a temporary liquidity issue as the Bank has experienced an increase of $423.9 million in deposits since September 30, 2020. The average cost of deposits has helped mitigate the declining net interest margin, due to lower average rates paid on core and time deposits and significant growth in noninterest-bearing deposits. 

The provision for credit losses for the nine months ended September 30, 2021 and 2020 was $1.4 million and $2.9 million, respectively, while net recoveries were $272 thousand and net charge offs were $580 thousand, respectively.  The decrease in provision for credit losses was the result of recoveries in 2021 compared to charge-offs in 2020 and increases in qualitative factors related to the pandemic in 2020. The ratio of allowance to total loans increased from 0.90% at September 30, 2020, to 1.04% at September 30, 2021. Excluding PPP loans, the ratio of the allowance for credit losses to period-end loans was 1.07% at September 30, 2021, higher than the 0.98% at September 30, 2020. The primary drivers for the increase in the percentage of allowance for credit losses to total loans were significant commercial real estate loan growth during 2021, as well as increases in pandemic related qualitative factors prior to the end of 2020. Management will continue to evaluate the adequacy of the allowance for credit losses as more economic data becomes available and as changes within the Company's portfolio are known.

Total noninterest income for the nine months ended September 30, 2021 increased $667 thousand, or 8.7%, when compared to the same period in 2020. The increase in noninterest income primarily consisted of higher trust and investment fee income, deposit related fees and service charges on other bank services, partially offset by a gain on sale of securities of $347 thousand in 2020. The increase in deposit related fees and other bank service charges are mostly due to the local government-imposed shutdowns in 2020 and a return to a more normalized local economy and consumer demand for products and services in 2021.  

Total noninterest expense for the nine months ended September 30, 2021 increased $5.5 million, or 19.6%, when compared to the same period in 2020. The increase was mainly the result of lower PPP loan originations, which resulted in lower deferred loan origination costs in salaries for all instances and wages, higher data processing costs and FDIC insurance premiums due to significant increases in new and existing deposit accounts and higher occupancy costs due a new branch lease in Ocean City, Maryland which will open in 2022. In addition, as previously mentioned, during the first nine months of 2021 the Company recorded merger-related expenses of $915 thousand due to the pending acquisition of Severn.   

Shore Bancshares Information

Shore Bancshares is a financial holding company headquartered in Easton, Maryland and is the largest independent bank holding company located on Maryland's Eastern Shore. It is the parent company of Shore United Bank. Shore Bancshares engages in trust and wealth management services through Wye Financial Partners, a division of Shore United Bank.

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. 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".

Further, given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be fully reopened. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations: the demand for our products and services may decline, making it difficult to grow assets and income; if the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income; collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase; our allowance for loan losses may increase if borrowers experience financial difficulties, which will adversely affect our net income; the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; as the result of the decline in the Federal Reserve Board's target federal funds rate to near 0%, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income; our cyber security risks are increased as the result of an increase in the number of employees working remotely; and FDIC premiums may increase if the agency experience additional resolution costs.

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.

 

 

 

 

 

 

 

 

 

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SOURCE Shore Bancshares, Inc.