Shore Bancshares Reports First Quarter 2022 Financial Results

EASTON, Md., April 28, 2022 /PRNewswire/ -- Shore Bancshares, Inc. (NASDAQ - SHBI) (the "Company") reported net income of $5.613 million or $0.28 per diluted common share for the first quarter of 2022, compared to net income of $2.723 million or $0.16 per diluted common share for the fourth quarter of 2021, and net income of $3.998 million or $0.34 per diluted common share for the first quarter of 2021. Net income, excluding merger related expenses for the first quarter of 2022 was $6.156 million or $0.31 per diluted common share, compared to net income, excluding merger related expenses of $7.914 million or $0.46 per diluted common share for the fourth quarter of 2021.

When comparing net income, excluding merger related expenses, for the first quarter of 2022 to the fourth quarter of 2021, net income decreased $1.8 million, primarily due increases in noninterest expenses of $3.7 million and provision for credit losses of $2.3 million, partially offset by increases in net interest income of $1.8 million and noninterest income of $917 thousand. When comparing net income, excluding merger related expenses, for the first quarter of 2022 to the first quarter of 2021, net income increased $2.4 million, primarily due to increases in net interest income of $8.6 million and noninterest income of $3.5 million, partially offset by an increase in noninterest expenses of $9.1 million. 

"We are pleased to announce our first quarter earnings and financial results," said Lloyd L. "Scott" Beatty, Jr., President and Chief Executive Officer. "We saw significant growth in both loans and deposits during the quarter, resulting from our ability to be competitive in all areas of our footprint. Our current size allows us the ability to originate larger loans than some of our competitors, while providing the opportunity for borrowers to remain with a local community bank. We are already experiencing the advantages of having a stronger presence in Central Maryland, particularly Anne Arundel County, and continue to capitalize on opportunities in our Delaware market."

Balance Sheet Review

Total assets were $3.494 billion at March 31, 2022, a $34.4 million, or 1.0%, increase when compared to $3.460 billion at the end of 2021. This increase was due to an increase in loans held for investment of $61.9 million, or 2.9%, partially offset by a decrease in loans held for sale of $24.8 million, or 65.8%. The positive organic loan growth for loans held for investment was due to strong loan demand, specifically within our commercial real estate, construction and consumer portfolios, while loan demand for residential real estate was limited by an increasing interest rate environment and lack of inventory. As of March 31, 2022, the Company had 114 Paycheck Protection Program ("PPP") loans totaling $14.9 million that were outstanding.

Total deposits increased $42.3 million, or 1.4%, when compared to December 31, 2021. The increase in total deposits was primarily due to $171.3 million in additional checking deposits, partially offset by decreases in money market and savings deposits of $77.9 million and noninterest-bearing deposits of $51.1 million.  

Total stockholders' equity increased $1.2 million, or less than 1%, when compared to December 31, 2021, primarily due to first quarter earnings, partially offset by unrealized losses of $2.2 million on available for sale securities during the quarter, which are recorded in accumulated other comprehensive loss. At March 31, 2022, the ratio of total equity to total assets was 10.07% and the ratio of total tangible equity to total tangible assets was 8.22%.

Review of Quarterly Financial Results

Net interest income was $22.4 million for the first quarter of 2022, compared to $20.6 million for the fourth quarter of 2021 and $13.8 million for the first quarter of 2021. The increase in net interest income when compared to the fourth quarter of 2021 was primarily due to increases in interest and fees on loans of $1.5 million, interest on taxable investment securities of $322 thousand and interest on deposits with other banks of $85 thousand, partially offset by increases in expense on interest-bearing deposits of $86 thousand and long-term borrowings of $25 thousand. The improvement in interest and fees on loans was due to an increase in the average balance of loans of $248.6 million, or 13.2%. The acquisition of loans from Severn had a significant impact on the average balance of loans due to carrying these loans for a full quarter but was also complemented by significant organic loan growth of $61.9 million, fees received from PPP loan forgiveness of $272 thousand and accretion income from loans acquired of $258 thousand. The increase in interest on deposits with other banks was primarily due to an increase in the average balance of $100.6 million, or 20.7%, combined with an increase in the yield on these deposits of 4bps due to an increase in the Fed funds rate during the first quarter. The increase in interest on taxable investment securities was driven by an increase in the average balance within these securities of $62.3 million, or 13.3%, due to a full quarter of acquired securities from Severn and additional purchases of held to maturity securities during the first quarter of 2022. The increase in deposits with other banks and investment securities was primarily due to excess liquidity. The increase in interest expense on interest-bearing deposits was primarily due an increase in the average balance of interest-bearing deposits of $284.4 million, or 15.4%, the result of both a full quarter of deposits acquired from Severn and $93.3 million in organic deposit growth during the first quarter of 2022. The rates paid on interest-bearing deposits decreased slightly to 26bps in the first quarter of 2022 from 27bps in the fourth quarter of 2021, maintaining a low cost of funds on core deposits. The increase in interest expenses was due to a full quarter of additional long-term debt, specifically the junior subordinated debt acquired from Severn.

The increase in net interest income when compared to the first quarter of 2021 was primarily due to increases in interest and fees on loans of $7.7 million, interest on taxable investment securities of $1.1 million and interest on deposits with other banks of $207 thousand, partially offset by increases in expense on interest-bearing deposits of $174 thousand and long-term borrowings of $175 thousand.  The increase in interest income was due to a higher average balance in loans, taxable investment securities and deposits with other banks of $684.9 million, $303.2 million and $397.6 million, respectively. These assets were significantly impacted by the acquisition of Severn in the fourth quarter of 2021 as well as organic loan growth and excess liquidity throughout 2021 and 2022. Interest-bearing liabilities also increased when compared to the first quarter of 2021 due to a higher average balance in interest-bearing deposits of $902.9 million, coupled with the addition of long-term advances from the FHLB of $10.1 million and subordinated debt of $18.2 million net of a fair value adjustment of $2.4 million, both of which were acquired from Severn in the fourth quarter of 2021. The long-term advances from the FHLB are set to mature in October of 2022 and the subordinated debt acquired from Severn may be called at any time.

The Company's net interest margin decreased to 2.78% for the first quarter of 2022 from 2.87% for the fourth quarter of 2021 and 3.00% for the first quarter of 2021. The decrease in net interest margin in the first quarter of 2022 when compared to the fourth quarter of 2021, was primarily due to lower yields on loans of 13bps resulting from decreases in accretion income on the acquired loan portfolio and PPP fee income. In addition, excess liquidity continues to put downward pressure on earning assets due to excess cash being invested in lower yielding assets. The decrease in net interest margin in the first quarter of 2022 when compared to the first quarter of 2021, was primarily due to a lower yield on taxable investment securities of 14bps, which was magnified by an increase in the average balance in these securities of $303.2 million, partially offset by a higher yield on loans of 17bps and lower rates paid on interest-bearing liabilities of 13bps. As previously mentioned, excess liquidity when compared to the first quarter of 2021 continues to compress the overall net interest margin. Absent excess liquidity of $400 million, we estimate our margin for the first quarter of 2022 would have been 3.07%.

The provision for credit losses was $600 thousand for the three months ended March 31, 2022.  The comparable amounts were $(1.7) million and $425 thousand for the three months ended December 31, 2021 and March 31, 2021, respectively. The increase in the provision for credit losses during the first quarter of 2022 as compared to the prior quarter was primarily attributed to the Company's reduction of pandemic related qualitative factors. The ratio of the allowance for credit losses to period-end loans, excluding PPP loans and acquired loans, was 0.92% at March 31, 2022, compared to 0.93% at December 31, 2021 and 1.11% at March 31, 2021. The decreased percentage of the allowance to total loans, excluding PPP loans and acquired loans, as compared to the fourth quarter of 2021, was due to further reduced pandemic qualitative factors previously mentioned, partially offset by the addition of organic loan growth in the first quarter of 2022 which required additional reserves. The decreased percentage of the allowance to total loans, excluding PPP loans and acquired loans, as compared to the first quarter of 2021, was primarily due to improved credit quality and reduced pandemic qualitative factors, during the fourth quarter of 2021 and first quarter of 2022. The Company reported net recoveries of $166 thousand in the first quarter of 2022, compared to net recoveries of $142 thousand in the fourth quarter of 2021 and no net charge offs or recoveries in the first quarter of 2021.

At March 31, 2022, nonperforming assets were $3.9 million, compared to $3.8 million at December 31, 2021. The balance of nonperforming assets slightly increased due to increases in nonaccrual loans of $62 thousand, or 2.2%, and other real estate owned of $29 thousand, or 5.5%. Accruing troubled debt restructurings ("TDRs") decreased $663 thousand, or 11.7% at March 31, 2022 compared to December 31, 2021. When comparing the first quarter of 2022 to the first quarter of 2021, nonperforming assets decreased $2.4 million, or 38.3%, primarily due to decreases in nonaccrual loans of $2.0 million, or 41.6%, and loans 90 days past due and still accruing of $729 thousand, or 61.4%. Accruing TDRs decreased $1.5 million, or 22.5%, and other real estate owned increased $356 thousand, or 173.7%, mainly due to acquiring other real estate owned from the Severn acquisition. The ratio of nonperforming assets and accruing TDRs to total assets was 0.25%, 0.27% and 0.63% at March 31, 2022, December 31, 2021 and March 31, 2021, respectively.  In addition, the ratio of accruing TDRs to total loans at March 31, 2022 was 0.23%, compared to 0.27% at December 31, 2021 and 0.44% at March 31, 2021.

Total noninterest income for the first quarter of 2022 increased $917 thousand, or 17.9%, when compared to the fourth quarter of 2021 and increased $3.5 million, or 136.4%, when compared to the first quarter of 2021. The increase compared to the fourth quarter of 2021 was primarily due to increases in revenue associated with the mortgage division of $919 thousand, service charges on deposit accounts of $125 thousand and revenue from Mid-Maryland Title Company, Inc. ("Mid-MD") of $76 thousand, partially offset by a reduction in other noninterest income primarily related to higher expenses related to retirement funding costs as well as lower other loan fee income. The increase in noninterest income when compared to the first quarter of 2021, was among all noninterest income categories, but primarily impacted by the addition of mortgage-banking revenue of $1.9 million, service charges on deposit accounts of $685 thousand, additional rental fee income of $345 thousand and Mid-MD revenue of $323 thousand.

Total noninterest expense, excluding merger related expenses, for the first quarter of 2022 increased $3.7 million, or 15.8%, when compared to the fourth quarter of 2021 and increased $9.1 million, or 86.7%, when compared to the first quarter of 2021. The increase in noninterest expense when compared to the fourth and first quarters of 2021 was primarily due to increases in salaries and wages, employee related benefits, occupancy expense, data processing, amortization of intangible assets and legal and professional fees, which were all significantly impacted by adding Severn and its operations for a full quarter in 2022. In addition, salaries and wages were impacted by incentive increases which took effect in January.

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. 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: changes in general economic, political, or industry conditions; geopolitical concerns, including the ongoing war in Ukraine; the magnitude and duration of the COVID-19 pandemic and related variants and mutations and their impact on the global economy and financial market conditions and our business, results of operations, and financial condition; 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; the transition away from USD LIBOR and uncertainty regarding potential alternative reference rates, including SOFR; 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; 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; and other factors that may affect our future results. For a discussion of these risks and uncertainties, see the section of the periodic reports filed by Shore Bancshares, Inc. with the Securities and Exchange Commission entitled "Risk Factors".

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