Shore Bancshares Reports 2020 Results

EASTON, Md., Jan. 28, 2021 /PRNewswire/ -- Shore Bancshares, Inc. (NASDAQ: SHBI) (the "Company") reported income from continuing operations of $3.886 million or $0.32 per diluted common share for the fourth quarter of 2020, compared to income from continuing operations of $3.391 million or $0.27 per diluted common share for the third quarter of 2020, and income from continuing operations of $4.014 million or $0.32 per diluted common share for the fourth quarter of 2019. Income from continuing operations for fiscal year 2020 was $15.730 million or $1.27 per diluted common share, compared to income from continuing operations of $16.284 million or $1.28 per diluted common share for fiscal year 2019.

When comparing net income from continuing operations for the fourth quarter of 2020 to the third quarter of 2020, net income increased $495 thousand, primarily due to increases in net interest income of $482 thousand and noninterest income of $466 thousand, coupled with a decrease in provision for credit losses of $450 thousand. These improvements were partially offset by an increase in noninterest expenses of $725 thousand in the fourth quarter of 2020. When comparing income from continuing operations for the fourth quarter of 2020 to the fourth quarter of 2019, net income decreased $128 thousand due to increases in the provision for credit losses of $850 thousand and noninterest expenses of $711 thousand, partially offset by increases in net interest income of $1.0 million and noninterest income of $353 thousand.

"To say 2020 was a challenging year would be an understatement. However, we were fortunate to be able to support our customers and communities while still producing a very respectable outcome." said Lloyd L. "Scott" Beatty, Jr., President and Chief Executive Officer. "I cannot say enough about the quality and commitment of our staff during the year. Despite all the issues surrounding the pandemic, their performance was exceptional. Contrary to the dire predictions, our credit metrics are the best they have been in recent memory. During the year we completed the repurchase of approximately 717,000 shares of common stock at very favorable prices. As we look ahead to 2021, we remain cautiously optimistic. Even given the added complexities caused by the pandemic, we have not changed our focus on finding strategic growth opportunities, providing superior customer service, and maximizing long-term shareholder value." 

Ongoing response to COVID-19

Employees

Many 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. Most of our Company meetings have transitioned to telephonic or video conferencing. We suspended all unnecessary business-related travel, public events, and meetings with outside parties to promote the safety and well-being of our employees.

Banking Locations

All our branch locations remain open, with normal hours of operation. We have re-opened our branch lobbies to the public with limits on the number of people allowed in the branch at any time.  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.

Customers

We thank our customers for their commitment and understanding as we continue to find ways to serve them as safely and securely as possible. For our customers impacted by the pandemic, we have provided fee waivers and loan payment deferrals to assist them during this challenging time.

Loan Deferrals

As of December 31, 2020, the Company's outstanding COVID related loan deferral balance amounted to $34.9 million, or 2.40% of the total loan portfolio.  The most significant deferrals were comprised of loans within the hospitality industry of $32.3 million, as they have continued to be one of the most impacted sectors in the country due to the pandemic. The majority of our hospitality borrowers are located within seasonal resorts which typically shutdown during the winter months and re-open in the spring. Due to these circumstances, the Company extended its loan deferral program to these borrowers so that they can be ready for the 2021 vacation season.     

Small Business Administration's Paycheck Protection Program ("PPP")

We remain a SBA preferred lender and actively participated in the first PPP program that ended on August 8, 2020. We provided loans for 1,488 small business customers totaling $126.7 million and we continue to work with these customers on the forgiveness of these loans. Congress passed the Economic Aid Act on December 27, 2020 which is deemed a second draw for PPP loans. This new program has different qualifications than the first PPP program and remains subject to change as rules and guidance are written and released. The Company intends to participate in this program to help customers that meet the current qualifications of the program.    

Share Repurchases

The Company completed its original stock repurchase program that was approved in April of 2019 on October 26, 2020 which authorized the repurchase of up to $10.0 million of the Company's common stock. Subsequently, on November 24, 2020 the Company announced an additional stock repurchase program which was approved by the Board and authorized management to repurchase up to $5.0 million of the Company's common stock. During the fourth quarter of 2020, the Company repurchased 183,471 shares of its common stock under the "old" repurchase plan and repurchased 253,900 shares of its common stock under the "new" repurchase plan. 

Dividends

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

Balance Sheet Review

Total assets were $1.933 billion at December 31, 2020, a $374.3 million, or 24.0%, increase when compared to $1.559 billion at the end of 2019.  The increase was primarily due to the $205.6 million, or 16.5%, increase in gross loans, of which $122.8 million related to PPP loans as of December 31, 2020.  In addition, interest-bearing deposits with other banks increased $93.7 million, or 122.5% and total investment securities increased $73.2 million, or 53.4%. The increases in gross loans, interest-bearing deposits with other banks and total investment securities were funded by an increase in deposits of $359.4 million, or 26.8%.   

Total deposits increased $359.4 million, or 26.8%, when compared to December 31, 2019.  The increase in total deposits consisted of increases in the following categories: Noninterest-bearing deposits of $152.5 million, interest-bearing checking accounts of $144.0 million, and savings and money market accounts of $65.1 million, partially offset by a decrease in time deposits of $2.2 million.

Total stockholders' equity increased $2.2 million, or 1.1%, when compared to the end of 2019. At December 31, 2020, the ratio of total equity to total assets was 10.09% and the ratio of total tangible equity to total tangible assets was 9.18%.

Review of Quarterly Financial Results

Net interest income was $13.8 million for the fourth quarter of 2020, compared to $13.3 million for the third quarter of 2020 and $12.8 million for the fourth quarter of 2019. The increase in net interest income when compared to the third quarter of 2020 was primarily due to an increase in interest income on loans as a result of an increase in the average yield on and average balance of loans. The improvement in the yield on loans was driven by loan interest recoveries from problem assets, and the recognition of remaining net fees on PPP loans that were forgiven during the quarter. The average balance of loans increased by $23.3 million, or 1.7%. Total interest-bearing deposit costs decreased $116 thousand when compared to the third quarter of 2020, more than offset by a $226 thousand increase in expense on the Company's subordinated debt issued during the latter half of the third quarter. Net interest income increased when compared to the fourth quarter of 2019, primarily due to a decrease in rates paid on interest-bearing deposits of 47bps and the elimination of long-term advances from FHLB borrowings which reduced interest expense by a combined $1.0 million. Lower yields on earning assets of 65bps, specifically, interest-bearing deposits with other banks, reduced interest income by $251 thousand for the fourth quarter, partially offset by increases in the average balances of loans of $183.7 million, or 14.7% and taxable investment securities of $34.3 million, or 23.5%.  The higher average balance of loans was partially driven by the $127.6 million of PPP loans funded in the second quarter of 2020, which as of December 31, 2020, had approximately $4.8 million forgiven in accordance with SBA guidelines, with a corresponding average yield of 2.25% for the fourth quarter. The forgiveness of PPP loans which is anticipated to continue in future quarters will have a positive impact on the net interest margin due to a recapture of net deferred fees on these loans. The Company's net interest margin decreased to 3.08% for the fourth quarter of 2020 from 3.17% in the third quarter of 2020 and down from 3.47% for the fourth quarter of 2019. The decline in net interest margin in the fourth quarter of 2020 when compared to the third quarter of 2020 and the fourth quarter of 2019, was significantly impacted by excess liquidity, which has yet to be fully invested.

The provision for credit losses was $1.1 million for the three months ended December 31, 2020.  The comparable amounts were $1.5 million and $200 thousand for the three months ended September 30, 2020 and December 31, 2019, respectively. The ratio of the allowance for credit losses to period-end loans was 0.95% at December 31, 2020. Excluding PPP loans at both September 30, 2020 and December 31, 2020, the ratio of the allowance for credit losses to period-end loans was 1.04% at December 31, 2020, higher than both the 0.98% at September 30, 2020 and the 0.84% at December 31, 2019. The primary drivers of the increased percentage of the allowance to total loans, excluding PPP loans, and the increase in provision for loan losses as compared to the fourth quarter of 2019 were the result of elevated qualitative factors within the allowance model related to economic conditions and the COVID-19 pandemic. The decrease in provision for credit losses when compared to the third quarter of 2020, was the direct result of recoveries from problem assets which carried a specific reserve and a decrease in quantitative factors due to a decline in historical losses. The Company reported net recoveries in the fourth quarter of 2020 of $61 thousand, compared to net recoveries of $187 thousand for the third quarter of 2020 and net charge-offs of $131 thousand for the fourth quarter of 2019.

At December 31, 2020, nonperforming assets were $6.3 million, a decrease of $2.1 million, or 25.3%, when compared to September 30, 2020, primarily due to decreases in nonaccrual loans of $1.5 million, or 21.7% and loans 90 days past due and still accruing of $569 thousand, or 41.4%. Accruing troubled debt restructurings ("TDRs") decreased $270 thousand, or 3.7% over the same time period. There were no other real estate owned properties held at December 31, 2020 as compared to $38 thousand at September 30, 2020. When comparing December 31, 2020 to December 31, 2019, nonperforming assets decreased $5.7 million, or 47.8%, primarily due to a decrease in nonaccrual loans of $5.1 million, or 48.5%. Accruing TDRs decreased $504 thousand, or 6.7%, and other real estate owned decreased $74 thousand, or 100.0%, over the same time period. The ratio of nonperforming assets and accruing TDRs to total assets was 0.68%, 0.86% and 1.25% at December 31, 2020, September 30, 2020 and December 31, 2019, respectively.  In addition, the ratio of accruing TDRs to total loans at December 31, 2020 was 0.48%, compared to 0.51% at September 30, 2020 and 0.60% at December 31, 2019. Despite the improvement in nonperforming loans and assets, the allowance increased as other factors related to the COVID-19 pandemic were considered in the Company's allowance calculation.

Total noninterest income for the fourth quarter of 2020 increased $466 thousand, or 18.1%, when compared to the third quarter of 2020 and increased $353 thousand, or 13.1%, when compared to the fourth quarter of 2019. The increase compared to the linked quarter in 2020 was primarily due to additional swap fee income on loans originated during the fourth quarter and an increase in service charges on deposit accounts. The increase in noninterest income compared to the fourth quarter of 2019 was due to additional income from BOLI purchased late in the fourth quarter of 2019 and additional swap fee income on loans originated in the fourth quarter of 2020, partially offset by lower service charges on deposit accounts.

Total noninterest expense from continuing operations for the fourth quarter of 2020 increased $725 thousand, or 7.4%, when compared to the third quarter of 2020 and increased $711 thousand, or 7.2%, when compared to the fourth quarter of 2019. The increase in noninterest expense when compared to the third quarter of 2020 was primarily related to higher salaries and wages, employee benefit costs and legal and professional fees. The increase in salaries and wages were attributed to accrued bonuses and the absence of deferrals related to origination costs from PPP lending which carried over into the third quarter of 2020. The increase in employee benefits was the result of higher medical insurance claims, in part due to the ongoing health crisis and increases in COVID positivity rates in the mid-Atlantic region. The increase in noninterest expenses when compared to the fourth quarter of 2019 was primarily due to higher salaries and wages, data processing fees and FDIC insurance premium expense, partially offset by a decrease in other expenses such as the absence of a fraud expense in the fourth quarter of 2019, advertising and marketing costs and travel and entertainment expenses.

Review of 2020 Financial Results

Net interest income for 2020 was $52.6 million, an increase of $2.5 million, or 4.9%, when compared to 2019. The increase was due to lower interest expense on interest-bearing deposits of $2.3 million and an aggregate decrease of $792 thousand related to the elimination of long-term advances from the FHLB and securities sold under retail purchase agreements, partially offset by the addition of subordinated debt and related interest expense of $522 thousand. The average balance of total earning assets increased by $188.3 million, or 13.2%, primarily in loans and interest-bearing deposits with other banks of $142.5 million and $63.8 million, respectively. The increase in the average balance of loans, loan interest recoveries from problem assets and to a lesser degree recognition of net deferred fees from PPP loan forgiveness resulted in an increase in interest income of $1.0 million, despite a decline in the average yields on loans of 40bps. This increase in interest income from loans was entirely offset by the decrease in the average balance of taxable securities as well as the lower yields on interest-bearing deposits which were significantly impacted by Federal Reserve interest rate cuts during 2020. These significant swings in both the average balances and rates on both sides of the balance sheet resulted in a net interest margin of 3.27% for 2020 compared to 3.54% for 2019.   

The provision for credit losses for 2020 and 2019 was $3.9 million and $700 thousand, respectively, while net charge-offs were $519 thousand and $536 thousand, respectively.  The increase in the provision for credit losses was the result of new and elevated qualitative factors within the allowance model related to economic conditions and the COVID-19 pandemic.  Excluding PPP loans, the ratio of the allowance for credit losses to period-end loans increased to 1.04% at December 31, 2020 from 0.84% at December 31, 2019. As previously discussed, this ratio increased primarily due to the addition of qualitative factors in the analysis of the allowance for loan losses. The ratio of net charge-offs to average loans was 0.04% for both 2020 and 2019. 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 from continuing operations for 2020 increased $729 thousand, or 7.3%, when compared to 2019. The increase in noninterest income primarily consisted of increases in BOLI income, gains on sales of securities, other fees on bank services and additional swap fee income on loans originated, partially offset by a decrease in service charges on deposit accounts. 

Total noninterest expense from continuing operations for 2020 increased $842 thousand, or 2.2%, when compared to 2019. The increase was primarily due to higher costs related to employee benefits, higher data processing fees and FDIC insurance premiums which were partially offset by decreases in salaries and wages due to the deferral of direct origination costs related to the origination of PPP loans, other real estate owned expenses, and other loan related expenses. The deferred costs for salaries and wages are being recognized over the lives of the related loans.

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.