Shore Bancshares Reports Second Quarter and First-Half Financial Results

EASTON, Md., July 29, 2021 /PRNewswire/ -- Shore Bancshares, Inc. (NASDAQ - SHBI) (the "Company") reported net income of $4.031 million or $0.34 per diluted common share for the second quarter of 2021, compared to net income of $3.998 million or $0.34 per diluted common share for the first quarter of 2021, and net income of $5.335 million or $0.43 per diluted common share for the second quarter of 2020. Net income for the first half of 2021 was $8.028 million or $0.68 per diluted common share, compared to net income for the first half of 2020 of $8.453 million or $0.68 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. For both the second quarter and the first six months of 2021, the Company recorded $377 thousand in merger-related expenses and will continue to recognize additional merger-related expenses in future quarters as they are incurred.   

When comparing net income for the second quarter of 2021 to the first quarter of 2021, net income increased $33 thousand, primarily due to increases in net interest income of $303 thousand and noninterest income of $346 thousand, which was almost entirely offset by an increase in provision for credit losses of $225 thousand and noninterest expense of $377 thousand. When comparing net income for the second quarter of 2021 to the second quarter of 2020, net income decreased $1.3 million, primarily due to the return to a more normalized operating noninterest expense run-rate given that a large production of PPP loan originations occurred in the second quarter of 2020 allowing for the deferral of costs, specifically salaries and wages tied to generating these loans. Despite lower deferred loan origination costs in the second quarter of 2021 when compared to the second quarter of 2020, the Company experienced an increase in net interest income of $1.1 million and a reduced provision for credit losses of $350 thousand. In addition, merger-related expenses previously mentioned of $377 thousand, reduced profitability in the second quarter of 2021 when compared to the linked and previous quarters. 

"We are pleased to announce our second quarter earnings and a strong demand for our banking services." said Lloyd L. "Scott" Beatty, Jr., President and Chief Executive Officer. "All of our markets have rebounded nicely from the pandemic. We have especially seen very robust activity in our vacation travel markets. This has been a very welcoming turnaround and has led to some significant loan and deposit growth. We processed a total of 2,454 loans for a cumulative balance of $196.0 million through both rounds of the PPP program. We have been working diligently with our PPP borrowers this quarter on forgiveness and have reduced our outstanding balance of PPP loans to $86.8 million at June 30, 2021. Despite the decrease in PPP loans, we have been able to grow our loan portfolio through traditional lending channels and our pipeline remains very strong. We have a very positive outlook on the remainder of 2021 and remain focused on core earnings and enhanced returns for our shareholders." 

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. Due to vaccinations and very 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. We have encouraged our employees to sign-up and receive the COVID vaccine in accordance with state and local guidelines.

Banking Locations
All 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.

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.

Loan Deferrals
As of June 30, 2021, the Company's outstanding COVID related loan deferral balance amounted to $9.5 million, or less than 1% of the total loan portfolio. This balance consisted of two hotel loans on principal only deferral as they continue to make interest only payments. The outstanding COVID loan deferral balance at March 31, 2021 was $16.1 million, or 1.10% of the total loan portfolio and $34.9 million, or 2.40% of the total loan portfolio at December 31, 2020.     

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 1,037 loans have been forgiven or paid down in the amount of $102.3 million as of June 30, 2021. The second round of PPP lending which began in 2021, resulted in 959 loans for $67.3 million, of which 223 loans have been forgiven or paid down in the amount of $7.2 million. As of June 30, 2021, the Company had 1,195 PPP loans totaling $86.8 million that were outstanding, inclusive of loans issued during both the first and second rounds of PPP.  

Share Repurchases
At 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.

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

Balance Sheet Review
Total assets were $2.120 billion at June 30, 2021, a $186.9 million, or 9.7%, 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 $133.2 million and $48.7 million, respectively.  These increases were funded by an increase in deposits of $179.9 million and proceeds from the maturity and principal payments on investment securities available for sale of $25.6 million.   

Total deposits increased $179.9 million, or 10.6%, when compared to December 31, 2020.  The increase in total deposits consisted of increases in the following categories: savings and money market accounts of $150.6 million, noninterest-bearing deposits of $28.9 million and other time deposits of $2.7 million, partially offset by a decrease in interest checking accounts of $2.3 million. The significant movement within deposit accounts continues to be impacted by direct government stimulus payments to our customers and new account openings.  

Total stockholders' equity increased $3.7 million, or 1.9%, when compared to the end of 2020. At June 30, 2021, the ratio of total equity to total assets was 9.37% and the ratio of total tangible equity to total tangible assets was 8.55%.

Total assets at June 30, 2021 increased $400.7 million, or 23.3%, when compared to total assets at June 30, 2020, primarily the result of increases in total investment securities of $214.7 million, cash and cash equivalents of $117.2 million and loan growth of $65.2 million. In addition, other assets increased $12.9 million, primarily the result of purchasing life insurance contracts in the first quarter of 2021. 

Total deposits at June 30, 2021 increased $375.9 million, or 25.0%, when compared to June 30, 2020. The increase in total deposits included growth within savings and money market accounts of $183.0 million, interest-bearing checking accounts of $99.0 million and noninterest-bearing deposits of $95.0 million. These increases were partially offset by a decrease in other time deposits of $1.1 million.

Total stockholders' equity decreased $1.5 million, or 0.7%, when compared to June 30, 2020, primarily attributed to stock buybacks of $9.1 million which occurred in the third and fourth quarters of 2020.

Review of Quarterly Financial Results
Net interest income was $14.1 million for the second quarter of 2021, compared to $13.8 million for the first quarter of 2021 and $13.0 million for the second quarter of 2020. The increase in net interest income when compared to the first quarter of 2021 was primarily due to an increase in interest on taxable investment securities, coupled with a decrease in interest expense on interest-bearing deposits. The increase in interest on taxable investment securities was due to the purchase of held to maturity securities during the second quarter of 2021, which resulted in an increase in the average balance in taxable investment securities of $58.3 million. Due to an excess liquidity position at the Bank, management purchased these taxable investment securities, which had an average yield of 1.53% during the second quarter of 2021, which is 10bps lower than the average yield on these similar taxable investment securities during the first quarter of 2021, as it was deemed a better alternative than remaining in low-yielding interest-bearing deposits with other banks of only 10bps. 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 during the second quarter of 2021 at lower rates than when they originated. The slight increase in interest and fees on loans was primarily due to increased loan originations, specifically within the consumer lending category in the last month of the second quarter of 2021. The increase in net interest income when comparing the second quarter of 2021 to the second 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 $70.4 million in the average volume of loans, which included PPP lending. The average balance of investment securities increased $178.2 million, providing $456 thousand of additional income, despite a decrease in the average yield of 84bps. The decrease in interest expenses from the second quarter of 2020 was impacted by the decrease in the rates paid on interest-bearing deposits of 29bps, which reduced expense by $502 thousand, partially offset by the addition of subordinated debt in the third quarter of 2020 of $25.0 million, which resulted in $370 thousand of additional expense for the second quarter of 2021. The Company's net interest margin decreased to 2.91% for the second quarter of 2021 from 3.00% for the first quarter of 2021 and 3.41% for the second quarter of 2020. The decline in net interest margin in the second quarter of 2021 when compared to the first quarter of 2021 and the second quarter of 2020 was primarily due to excess liquidity, which has been partially invested in investment securities at lower yields and the remainder yet to be invested. Absent excess liquidity of $100 million, we estimate our margin for the second quarter of 2021 would have been 3.07%.

The provision for credit losses was $650 thousand for the three months ended June 30, 2021.  The comparable amounts were $425 thousand and $1.0 million for the three months ended March 31, 2021 and June 30, 2020, respectively. The ratio of the allowance for credit losses to period-end loans was 1.02% at June 30, 2021, compared to 0.98% at March 31, 2021 and 0.79% at June 30, 2020. Excluding PPP loans, these ratios were 1.09% at June 30, 2021, 1.07% at March 31, 2021 and 0.86% at June 30, 2020. The primary drivers of the increased percentage of the allowance to total loans, excluding PPP loans, as compared to March 31, 2021 and June 30, 2020, were significant loan originations in the second quarter of 2021, specifically within the commercial real estate portfolio, which require a higher level of allowance than other traditional loan categories, as well as, pandemic related qualitative factors which have remained elevated due to uncertainty and associated risks with the COVID-19 virus/variants and lagging vaccination rates.  The Company reported net recoveries of $125 thousand in the second quarter of 2021, compared to no net charge offs or recoveries for the first quarter of 2021 and net charge-offs of $288 thousand for the second quarter of 2020.

At June 30, 2021 and March 31, 2021, nonperforming assets were $4.9 million and $6.3 million, respectively. The balance of nonperforming assets decreased primarily due to decreases in nonaccrual loans of $933 thousand, or 19.1%, and loans 90 days past due and still accruing of $436 thousand, or 36.7%. Accruing troubled debt restructurings ("TDRs") decreased $118 thousand, or 1.8%, over the same time period. Other real estate owned properties decreased to $203 thousand at June 30, 2021 from $205 thousand at March 31, 2021. When comparing June 30, 2021 to June 30, 2020, nonperforming assets decreased $7.4 million, or 60.1%, primarily due to a decrease in nonaccrual loans of $7.7 million, or 66.1%. Accruing TDRs decreased $974 thousand, or 13.3%, 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 0.53%, 0.63% and 1.14% at June 30, 2021, March 31, 2021 and June 30, 2020, respectively.  In addition, the ratio of accruing TDRs to total loans at June 30, 2021 was 0.43%, compared to 0.44% at March 31, 2021 and 0.52% at June 30, 2020.

Total noninterest income for the second quarter of 2021 increased $346 thousand, or 13.5%, when compared to the first quarter of 2021 and increased $134 thousand, or 4.8%, when compared to the second quarter of 2020. The increase compared the first quarter of 2021 was primarily due to higher deposit related fees and other bank service charges. The increase in noninterest income compared to the second quarter of 2020 was due to higher deposit related fees, service charges on deposit accounts and trust and investment fee income, partially offset by the absence of a gain on sale of an investment security in the second quarter of 2021 compared to a gain of $347 thousand in the same period in 2020.

Total noninterest expense for the second quarter of 2021 increased $377 thousand, or 3.6%, when compared to the first quarter of 2021 and increased $3.2 million, or 41.9%, when compared to the second quarter of 2020. The increase in noninterest expense when compared to the first quarter of 2021 was primarily due to merger-related expenses, salaries and wages, furniture and fixtures and legal and professional fees, partially offset by lower employee benefit costs. The increase in salaries and wages was mainly attributable to the deferral of costs associated with originating the second round of PPP loans in the first quarter of 2021. The decrease in employee benefits was the result of lower payroll taxes and medical insurance claims in the second quarter of 2021. The increase in noninterest expenses when compared to the second quarter of 2020 was primarily driven by salary and wages being deferred in the second quarter of 2020 as a result of originating first round PPP loans. Absent the deferral of salary and wages, increases in furniture and fixtures, data processing and merger-related expenses resulted in the overall increase in noninterest expenses when comparing these periods.  

Review of Six-Month Financial Results
Net interest income for the first six months of 2021 was $27.9 million, an increase of $2.4 million, or 9.2% when compared to the first six months of 2020.  The increase was due to higher interest income of $1.6 million, specifically loans of $1.0 million and taxable investment securities of $668 thousand, and lower interest expense of $759 thousand. The lower interest expense was a result of lower costs of deposits of $1.4 million, partially offset by an increase in long-term borrowings from a subordinated debt issuance in the third quarter of 2020 of $616 thousand. The decrease of yields on earning assets of 68bps were partially offset by the decrease in rates paid on interest-bearing deposits of 37bps. The decrease of yields on earnings assets consisted of the following: lower yields on loans of 23bps due to the origination of PPP loans at 1.0%, well below the market rate for loans originated in the normal course of business, lower yields on taxable investment securities of 71bps, due to the decline in 10yr. treasury notes and its impact on the bond market and lower yields on interest-bearing deposits of 54bps, due to the Federal Reserve Board's target federal funds rate to near 0%. These declines in the yields of earning assets resulted in a net interest margin of 2.96% for the first six months of 2021 compared to 3.45% for the first six months of 2020.   

The provision for credit losses for the six months ended June 30, 2021 and 2020 was $1.1 million and $1.4 million, respectively, while net recoveries were $125 thousand and net charge offs were $767 thousand, respectively.  The decrease in provision for credit losses was the result of lower charge-offs in 2021 and increases in qualitative factors related to the pandemic in 2020. The ratio of allowance to total loans increased from 0.79% at June 30, 2020, to 1.02% at June 30, 2021. Excluding PPP loans, the ratio of the allowance for credit losses to period-end loans was 1.09% at June 30, 2021, higher than the 0.86% at June 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 in the second quarter of 2021, as well as continued elevated pandemic related qualitative factors. 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 six months ended June 30, 2021 increased $339 thousand, or 6.6%, when compared to the same period in 2020. The increase in noninterest income primarily consisted of higher deposit related fees, service charges on other bank services and trust and investment fee income, partially off-set by the absence of a gain on sale of securities in the second quarter of 2021 compared to a gain of $347 thousand in the same period 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 six months ended June 30, 2021 increased $3.4 million, or 18.7%, 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 2021, higher data processing costs and FDIC insurance premiums due to significant increases in new and existing customer accounts, specifically deposits 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 six months of 2021 the Company recorded merger-related expenses of $377 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.