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"Increasing net interest income, lower credit provisions and higher noninterest income supported net income growth in the fourth quarter," stated James ("Jimmy") M. Burke, President and Chief Executive Officer of Shore Bancshares, Inc. "Funding costs decreased due to stable noninterest-bearing deposits and lower rates on interest-bearing deposits. Although we saw a $300 million increase in higher cost seasonal municipal deposits, core NIM increased one bp to 2.85% during the fourth quarter. Overall credit in our loan portfolios remains stable and economic activity in our markets is strong. We continue to focus on controlling expenses to enhance operating leverage and improve our operating efficiency."

Balance Sheet Review

Total assets were $6.23 billion at December 31, 2024, an increase of $219.8 million, or 3.66%, when compared to $6.01 billion at December 31, 2023. The aggregate increase was primarily due to increases in loans held for investment of $131.0 million, cash and cash equivalents of $87.4 million and investment securities available for sale of $38.7 million, partially offset by a decrease in investments held to maturity of $32.1 million. The ratio of the ACL to total loans decreased to 1.21% at December 31, 2024, compared to 1.24% at December 31, 2023.

The Company's tangible common equity ratio at December 31, 2024 was 7.17%, compared to 6.78% at December 31, 2023. The Company's Tier 1 and Total Risk-Based Capital Ratios at December 31, 2024 were 10.06% and 12.18%, respectively. The Bank's Tier 1 and Total Risk-Based Capital Ratios at December 31, 2024 were 10.75% and 11.97%, respectively. Non-owner occupied commercial real estate ("CRE") loans as a percentage of the Bank's Tier 1 Capital + ACL at December 31, 2024 and December 31, 2023 were $2.08 billion or 359.52%, and $2.02 billion or 382.57%, respectively. Non owner-occupied construction loans as a percentage of the Bank's Tier 1 Capital + ACL at December 31, 2024 and December 31, 2023 were $336.0 million or 57.99%, and $299.0 million or 56.68%, respectively.

CRE loans at December 31, 2024 were $2.56 billion compared to $2.54 billion at December 31, 2023. The following table provides stratification of the classes of CRE loans at December 31, 2024.

The Bank's office CRE loan portfolio, which includes owner occupied and non-owner occupied CRE loans, was $506.0 million, or 10.60% of total loans of $4.77 billion, at December 31, 2024. The Bank's office CRE loan portfolio included medical tenants of $138.7 million, or 27.40% of the total office CRE loan portfolio, at December 31, 2024. The Bank's office CRE loan portfolio also included government or government contractor tenants of $55.0 million, or 10.87% of the total office CRE loan portfolio, at December 31, 2024.

There were 501 loans in the office CRE portfolio with an average and median loan size of $1.0 million and $375 thousand, respectively. LTV estimates for the office CRE portfolio at December 31, 2024 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 $164.5 million with balances greater than $5.0 million at December 31, 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 one loan payoff totaling $10.4 million, and adjustments totaling $13.9 million to exclude non-bank-owned participation balances. At December 31, 2024, the average loan debt-service coverage ratio was 1.9x and the average LTV was 49.30%. Of the office CRE portfolio balance, 74.88% was secured by properties in rural or suburban areas with limited exposure to metropolitan cities and 97.05% was secured by properties with five stories or less. Of the office CRE loans, $2.3 million were classified as special mention or substandard at December 31, 2024. The Bank did not have any charge-offs related to the office CRE portfolio during 2024.

At December 31, 2024 and September 30, 2024, nonperforming assets were $24.8 million, or 0.40% of total assets and $15.8 million, or 0.27% of total assets, respectively. The balance of nonperforming assets increased $9.0 million, primarily due to a commercial real estate nonaccrual loan and an increase in repossessed marine assets of $3.0 million. When comparing December 31, 2024 to December 31, 2023, nonperforming assets increased $11.1 million, primarily due to an increase in nonaccrual loans of $8.2 million and an increase in repossessed marine loans of $3.3 million, almost entirely impacted by the merger with The Community Financial Corporation ("TCFC") in the third quarter of 2023.

Total deposits increased $142.2 million, or 2.64%, to $5.53 billion at December 31, 2024 when compared to December 31, 2023. The increase in total deposits was primarily due to increases in noninterest-bearing deposits of $304.8 million and money market and savings deposits of $28.0 million. These increases were partially offset by decreases in interest-bearing checking deposits of $187.5 million and time deposits of $3.0 million. The increase in noninterest-bearing and overall deposits was due to the Bank's focus on customer acquisition and retention with superior customer service. 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, Federal Home Loan Bank ("FHLB") advances and brokered deposits was $5.58 billion at December 31, 2024, compared to $5.28 billion at September 30, 2024 and $5.39 billion at December 31, 2023. The Bank had a $50.0 million FHLB advance at December 31, 2024 and at September 30, 2024, compared to zero at December 31, 2023. The advance consisted of an 18-month Bermuda Convertible note of $50.0 million. The Bank had zero brokered deposits at December 31, 2024 and at September 30, 2024, compared to $19.4 million at December 31, 2023. Total reciprocal deposits were $1.65 billion at December 31, 2024 and $1.29 billion at September 30, 2024 and at December 31, 2023.

The Bank's uninsured deposits were $905.3 million, or 16.38% of total deposits, at December 31, 2024. The Bank's uninsured deposits, excluding deposits secured with pledged collateral, were $745.1 million, or 13.48% for same period. At December 31, 2024, the Bank had approximately $1.47 billion of available liquidity, including $459.9 million in cash and cash equivalents, $1.01 billion in secured borrowing capacity at the FHLB and other correspondent banks, and $95.0 million in unsecured lines of credit.

Total stockholders' equity increased $29.9 million, or 5.86%, when compared to December 31, 2023, primarily due to current year earnings, offset by cash dividends paid. As of December 31, 2024, the ratio of total equity to total assets was 8.68% and the ratio of total tangible equity to total tangible assets^([2]) was 7.17%, compared to 8.50% and 6.78%, respectively, at December 31, 2023.

Review of Quarterly Financial Results

Net interest income was $44.0 million for the fourth quarter of 2024, compared to $43.3 million for the third quarter of 2024 and $41.5 million for the fourth quarter of 2023. The increase in net interest income when compared to the third quarter of 2024 was primarily due to the increase in interest income of $1.7 million, partially offset by an increase in interest expense of $967 thousand. The increase in net interest income of $2.5 million, when compared to the fourth quarter of 2023, was primarily due to increase in interest and fees on loans of $1.5 million and an increase in interest on deposits at other institutions of $2.9 million, partially offset by higher interest expense on deposits and long-term borrowings of $2.8 million.

The Company's net interest margin decreased to 3.03% for the fourth quarter of 2024 from 3.17% for the third quarter of 2024, primarily due to less net accretion interest income. Core NIM increased for the comparable periods from 2.84% to 2.85%. Excluding accretion interest, loan yields and funding costs decreased similarly at seven bps and nine bps, respectively, for the comparable periods. Interest expense for the fourth quarter of 2024 increased $967 thousand when compared to the third quarter of 2024. Money market and demand deposits repriced at favorable rates, and was partially offset by a large increase in seasonal higher rate municipal interest-bearing deposits. The Company's net interest margin decreased to 3.03% for the fourth quarter of 2024 from 3.09% for the fourth quarter of 2023. Comparing the fourth quarter of 2024 to the fourth quarter of 2023, the Company's interest-earning asset yields decreased 4 bps to 5.25% from 5.29%, while the cost of funds increased 6 bps to 2.31% from 2.25% for the same periods.

The provision for credit losses was $780 thousand for the three months ended December 31, 2024. The comparable amounts were $1.5 million for the three months ended September 30, 2024 and $896 thousand for the three months ended December 31, 2023. The decrease in the provision for credit losses for the fourth quarter of 2024 compared to the third quarter of 2024 was due to an improved economic outlook, partially offset by loan growth in the fourth quarter of 2024. Coverage ratios decreased to 1.21% at December 31, 2024, from 1.24% at September 30, 2024 and at December 31, 2023. Net charge-offs remained flat at $1.3 million for the fourth quarter of 2024 compared to the third quarter of 2024, and were $500 thousand for the fourth quarter of 2023.

Total noninterest income for the fourth quarter of 2024 was $8.9 million, an increase of $1.6 million from $7.3 million for the third quarter of 2024, and an increase of $1.3 million from $7.5 million for the fourth quarter of 2023. When comparing the fourth quarter of 2024 to the third quarter of 2024, the increase in noninterest income was primarily due to an increase in mortgage banking revenue of $849 thousand, driven by increased mortgage servicing activity and lower prepayment rates, and higher other noninterest income of $703 thousand resulting from the gain on sale of other assets held for sale. When comparing the fourth quarter of 2024 to the fourth quarter of 2023, the increase in noninterest income was primarily due to an increase in mortgage banking revenue of $921 thousand, driven by increased mortgage servicing activity and lower prepayment rates, and higher other noninterest income of $271 thousand resulting from the gain on sale of other assets held for sale.

Total noninterest expense of $33.9 million for the fourth quarter of 2024 decreased $171 thousand compared to the third quarter of 2024 expense of $34.1 million, and increased $273 thousand compared to the fourth quarter of 2023 expense of $33.7 million. The decrease from the third quarter of 2024 was primarily due to the absence of the one-time data processing costs related to the fraud incident in the first quarter of 2024 and other fraud expenses incurred in the third quarter of 2024, partially offset by higher salaries and employee benefits for year end bonus accruals and an increase in occupancy related expenses. The increase from the fourth quarter of 2023 was primarily due to higher salaries and employee benefits and occupancy related expenses, partially offset by lower FDIC fees and amortization of intangible assets.

The efficiency ratio for the fourth quarter of 2024 when compared to the third quarter of 2024 and the fourth quarter of 2023 was 64.21%, 67.49% and 68.61%, respectively. Non-GAAP efficiency ratios^([3]) for the same periods were 60.28%, 62.10% and 61.99%, respectively. The net operating expense ratio, which is noninterest expense less noninterest income divided by average assets, for the fourth quarter of 2024 was 1.62%, compared to 1.84% and 1.80% for the third quarter of 2024 and the fourth quarter of 2023, respectively. The non-GAAP net operating expense ratio⁽¹⁾, which excludes core deposit intangible amortization and non-recurring activity, was 1.50% for the fourth quarter of 2024, compared to 1.65% and 1.58% for the third quarter of 2024 and the fourth quarter of 2023, respectively.

Review of  Full-Year Financial Results

The Company merged with TCFC and its wholly-owned subsidiary Community Bank of the Chesapeake on July 1, 2023 (the "merger"). The merger added $2.4 billion in assets, $454.5 million in investments, $1.8 billion in loans, $2.0 billion in deposits, $150.6 million in brokered deposits, $69.0 million in FHLB advances and $32.0 million in subordinated debt and trust preferred debentures. The larger footprint has accelerated growth in income and has expanded the cost base. Fiscal year 2024 has the full impact of the newly combined company.

Net interest income for the year ended December 31, 2024 was $170.5 million, an increase of $35.2 million, or 26.05%, when compared to the year ended December 31, 2023. The increase in net interest income was primarily due to an increase in total interest income of $81.3 million, or 37.96%, which included an increase in interest and fees on loans of $75.3 million, or 38.74%. The increase in interest and fees on loans was primarily due to the increase in the average balance of loans of $1.08 billion, or 29.79%, and an increase in net accretion income of $5.1 million due to the merger. The increase in net interest income was partially offset by an increase in total interest expense of $46.0 million, or 58.42%, primarily due to increases in the cost of funds and the average balance of interest-bearing deposits of $749.2 million, or 25.09%. All of the increases in average balances were primarily due to the merger.

The Company's net interest margin decreased from 3.11% for the year ended December 31, 2023 to 3.10% for the year ended December 31, 2024. Margins were flat as more rapid increases in rates on interest-bearing liabilities were offset by increases in interest-earning asset yields and larger balances in noninterest-bearing deposits. The increases in the average balances and rates paid on interest-bearing deposits of $749.2 million and 79 bps, respectively, were partially offset by increases in  the average balance and yields earned on average earning assets of $1.16 billion and 44 bps, respectively. Additionally, margins were positively impacted as average balances of noninterest-bearing deposits increased $410.6 million, or 39.35%, from 24.86% of average funding for the year ended December 31, 2023 to 27.27% for the year ended December 31, 2024. Net accretion income impacted net interest margin by 27 bps and 21 bps for the years ended December 31, 2024 and 2023, respectively, which resulted in core NIMs of 2.83% and 2.90% for the same periods.

The provision for credit losses for the years ended December 31, 2024 and 2023 was $4.7 million and $31.0 million, respectively. The decrease in the provision for credit losses was due to higher levels of reserves required by the Company's CECL model for the acquired portfolio related to the merger in 2023. Net charge-offs for the year ended December 31, 2024 were $4.1 million, compared to $2.0 million for the year ended December 31, 2023.

Total noninterest income for the year ended December 31, 2024 decreased $2.0 million, or 6.07%, when compared to the same period in 2023. The decrease was primarily due to one-time bargain purchase gain of $8.8 million in the third quarter of 2023, partially offset by $2.2 million of losses on the sale of investment securities, which were both a direct result of the merger with TCFC in the third quarter of 2023. These were offset by increases in mortgage banking revenue, interchange fees and gain on sale of other assets

Total noninterest expense for the year ended December 31, 2024 increased $14.9 million, or 12.10%, when compared to the same period in 2023. Noninterest expense line items increased as a result of the $4.7 million credit card fraud event and the expanded operations of the newly-combined larger Company. There were no merger-related expenses and $4.7 million of credit card fraud losses for the fiscal year 2024, compared to $17.4 million of merger-related expenses and no fraud losses for the fiscal year 2023, respectively. The Company continues to focus on streamlining processes to unlock operational efficiencies and reduce the growth rate of noninterest expenses to increase operating leverage.

The efficiency ratio for the year ended December 31, 2024 was 68.55%, compared to 73.21% for the year ended December 31, 2023. Non-GAAP efficiency ratios for the same periods were 61.43% and 61.62%, respectively. The net operating expense ratio, which is noninterest expense less noninterest income divided by average assets, for the year ended December 31, 2024 was 1.82%, compared to 1.93% for the year ended December 31, 2023. The non-GAAP net operating expense ratio^([4]), which excludes core deposit intangible amortization and non-recurring activity was 1.58% for the year ended December 31, 2024, compared to 1.57% for the year ended December 31, 2023.

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; 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 war in Ukraine and the conflict in the Middle East; the effects of, and changes in, trade, monetary, and fiscal policies and laws, including 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; the impact of governmental efforts to restructure or adjust the U.S. financial regulatory system; 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 (https://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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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SOURCE Shore Bancshares, Inc.