Item 2. Management’s Discussion and Analysis
Item 2 – Management’s Discussion and Analysis (“MD&A”) of Financial Condition and Results of Operations.
Unless the context clearly suggests otherwise, references to “the Company”, “we”, “our”, and “us” in the remainder of this Quarterly Report on Form 10Q are to Shore Bancshares, Inc. and its consolidated subsidiaries.
Forward-Looking Information
This Quarterly Report on Form 10-Q contains 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:
• general economic conditions, (including the interest rate environment, government economic and monetary policies, the strength of global financial markets and inflation/deflation and supply chain issues), whether national or regional, and conditions in the lending markets in which we participate that may have an adverse effect on the demand for our loans and other products, our credit quality and related levels of nonperforming assets and loan losses, and the value and salability of the real estate that we own or that is the collateral for our loans;
• recent 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;
• the Company’s ability to remediate the material weaknesses identified in the Company’s internal control over financial reporting;
• the effectiveness of the Company’s internal control over financial reporting and disclosure controls and procedures;
• cybersecurity threats and the cost of defending against them;
• results of examinations of us by our regulators, including the possibility that our regulators may, among other things, require us to increase our reserve for loan losses or to write-down assets;
• changing bank regulatory conditions, policies or programs, whether arising as new legislation or regulatory initiatives, which could lead to restrictions on activities of banks generally, or our subsidiary bank in particular, more restrictive regulatory capital requirements, increased costs, including deposit insurance premiums, regulation or prohibition of certain income producing activities or changes in the secondary market for loans and other products;
• changes in market rates and prices may adversely impact the value of securities, loans, deposits and other financial instruments and the interest rate sensitivity of our balance sheet;
• our liquidity requirements could be adversely affected by changes in our assets and liabilities;
• our ability to prudently manage our growth and execute our strategy;
• impairment of our goodwill and intangible assets;
• competitive factors among financial services organizations, including product and pricing pressures and our ability to attract, develop and retain qualified banking professionals;
• the expected cost savings, synergies and other financial benefits from the acquisition of The Community Financial Corporation (“TCFC”) or any other acquisition the Company has made or may make might not be realized within the expected time frames or at all;
• the growth and profitability of non-interest or fee income being less than expected;
• the effect of legislative or regulatory developments, including changes in laws concerning taxes, banking, securities, insurance and other aspects of the financial services industry;
• the effect of any change in federal government enforcement of federal laws affecting the cannabis industry;
• the effect of changes in accounting policies and practices, as may be adopted by the Financial Accounting Standards Board (the “FASB”), the Securities and Exchange Commission (the “SEC”), the Public Company Accounting Oversight Board and other regulatory agencies;
• potential changes in federal policy and at regulatory agencies as a result of the upcoming 2024 presidential election;
• 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 the debt ceiling and the federal budget;
• the impact of recent or future changes in Federal Deposit Insurance Corporation (the “FDIC”) insurance assessment rate or the rules and regulations related to the calculation of the FDIC insurance assessment amount, including any special assessments;
• the effect of fiscal and governmental policies of the U.S. federal government;
• climate change, including the enhanced regulatory, compliance, credit and reputational risks and costs; and
• geopolitical conditions, including acts or threats of terrorism, actions taken by the United States or other governments in response to acts of terrorism, and/or military conflicts, including the war between Russian and Ukraine and the conflict in the Middle East, which could impact business and economic conditions in the United States and abroad.
Additional factors that could cause actual results to differ materially from those expressed in the forward-looking statements are discussed in the Company's Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Annual Report”) filed with SEC and available at the SEC’s Internet site (http://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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Critical Accounting Policies
The Company’s consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and follow general practices within the industries in which it operates. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially different than originally reported.
The most significant accounting policies that the Company follows are presented in Note 1 to the Notes to Consolidated Financial Statement included in the 2023 Annual Report. These policies, along with the disclosures presented in the notes to the financial statements and in this MD&A, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has determined that the accounting policies for the allowance for credit losses (“ACL”) on loans, goodwill and bargain purchase gain, loans acquired in a business combination and income taxes are critical accounting policies. These policies are considered critical because they relate to accounting areas that require the most subjective or complex judgments, and, as such, could be most subject to revision as new information becomes available.
Allowance for Credit Losses on Loans
The Company adopted ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326)”, as amended, on January 1, 2023 and in accordance with ASC 326, has recorded an ACL on loans carried at amortized cost. The ACL represents management’s best estimate of expected lifetime credit losses within the Company's loan portfolio as of the balance sheet date. The ACL is established through a provision for credit losses and is increased by recoveries of loans previously charged off. Loan losses are charged against the allowance when management's assessments confirm that the Company will not collect the full amortized cost basis of a loan. The calculation of expected credit losses is determined using cash flow methodology, and includes considerations of historical experience, current conditions, and reasonable and supportable economic forecasts that may affect collection of the recorded balances. The Company assesses an ACL to groups of loans which share similar risk characteristics or on an individual basis, as deemed appropriate. Changes in the ACL on loans, and as a result, the related provision for credit losses, can materially affect financial results. Although the overall balance is determined based on specific portfolio segments and individually assessed assets, the entire balance is available to absorb credit losses for loans in the portfolio.
The determination of the appropriate level of ACL on loans inherently involves a high degree of subjectivity and requires the Company to make significant judgments concerning credit risks and trends using quantitative and qualitative information, as well as reasonable and supportable forecasts of future economic conditions, all of which may undergo frequent and significant changes. Changes in conditions, including unforeseen events, changes in asset-specific risk characteristics, and other economic factors, both within and outside the Company's control, may indicate the need for an increase or decrease in the ACL on loans. While management makes every effort to utilize the best information available in making its assessment of the ACL estimate, the estimation process is inherently challenging as potential changes in any one factor or input may occur at different rates and/or impact pools of loans in different ways. Further, changes in factors and inputs may also be directionally inconsistent, such that improvement in one factor may offset deterioration in others.
Goodwill and Bargain Purchase Gain
Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Determining fair value is subjective, requiring the use of estimates, assumptions and management judgment. Goodwill is tested at least annually for impairment, usually during the fourth quarter, or on an interim basis if circumstances dictate. Impairment testing requires a qualitative assessment or that the fair value of each of the Company’s reporting units be compared to the carrying amount of its net assets, including goodwill. If the fair value of a reporting unit is less than book value, an expense may be required to write down the related goodwill to record an impairment loss.
A bargain purchase gain represents the excess of the fair value of net assets acquired over the cost of an acquisition. Determining fair value is subjective, requiring the use of estimates, assumptions and management judgement. Bargain purchase gain is recorded within noninterest income in the period it was generated. An acquirer has a measurement period to finalize the accounting for a business combination which could adjust bargain purchase gain if material facts or circumstances arise.
Loans Acquired in a Business Combination
Acquired loans are classified as either (i) purchase credit-deteriorated (“PCD”) loans or (ii) purchased performing loans and are recorded at fair value on the date of acquisition.
PCD loans are those for which there is more than insignificant evidence of credit deterioration since origination. When determining fair value, PCD loans are aggregated into pools based on common risk characteristics as of the date of acquisition such as loan type, date of origination, and evidence of credit quality deterioration such as internal risk grades and past due and nonaccrual status. At the acquisition date, the ACL is determined and added to the fair value of the loan to determine the new amortized cost basis. The difference between the new amortized cost basis and the unpaid principal balance is either a noncredit discount or premium that will be amortized or accredited into the interest income over the remaining life of the loan. Disposals of loans, which may include sale of loans to third parties, receipt of payments in full or in part from the borrower or foreclosure of the collateral, result in removal of the loan from the PCD loan portfolio at its carrying amount.
The Company accounts for purchased performing loans using the contractual cash flows method of recognizing discount accretion based on the acquired loans’ contractual cash flows. Purchased performing loans are recorded at fair value, including a credit discount. The fair value discount is accreted as an adjustment to yield over the estimated lives of the loans. Purchased performing loans do not have a more-than-insignificant deterioration in credit quality since origination and have an ACL established in a manner that is consistent with the Company originated loans. The allowance for PCD loans is
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determined based upon the Company’s methodology for estimating the allowance under CECL, and is recorded as an adjustment to the acquired loan balance on the date of acquisition. Additionally, upon the purchase or acquisition of non-PCD loans, the Company measures and records a reserve for credit losses based on the Company’s methodology for determining the allowance under CECL. The allowance for non-PCD loans is recorded through a charge to provision for credit losses in the period in which the loans were purchased or acquired.
Income Taxes
The Company and its subsidiaries file a consolidated federal income tax return. The Company accounts for income taxes using the liability method in accordance with required accounting guidance. Under this method, deferred tax assets and liabilities are determined by applying the applicable federal and state income tax rates to cumulative temporary differences. These temporary differences represent differences between financial statement carrying amounts and the corresponding tax bases of certain assets and liabilities. Deferred taxes result from such temporary differences.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. A valuation allowance, if needed, reduces deferred tax assets to the expected amount most likely to be realized. Realization of deferred tax assets is dependent on the generation of a sufficient level of future taxable income, recoverable taxes paid in prior years and tax planning strategies. The Company evaluates all positive and negative evidence before determining if a valuation allowance is deemed necessary regarding the realization of deferred tax assets.
The Company recognizes accrued interest and penalties as a component of tax expense.
The provision for income taxes includes the impact of reserve provisions and changes in the reserves that are considered appropriate as well as the related net interest and penalties. In addition, the Company is subject to the continuous examination of its income tax returns by the IRS and other tax authorities which may assert assessments against the Company. The Company regularly assesses the likelihood of adverse outcomes resulting from these examinations and assessments to determine the adequacy of its provision for income taxes. The Company remains subject to examination for tax years ending on or after December 31, 2020.
Introduction
The following MD&A is intended as a review of significant factors affecting the Company’s financial condition and results of operations for the periods indicated. This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and related notes presented elsewhere in this report, as well as the audited consolidated financial statements and related notes included in the 2023 Annual Report.
Shore Bancshares, Inc. is headquartered on the Eastern Shore of Maryland. It is the parent company of Shore United Bank, N.A. (the “Bank”). The Bank operates 42 full-service branches in Baltimore County, Howard County, Kent County, Queen Anne’s County, Caroline County, Talbot County, Dorchester County, Anne Arundel County, Charles County, St Mary's County, Calvert County and Worcester County in Maryland, Kent County and Sussex County in Delaware and Accomack County, Fredericksburg City, Stafford County and Spotsylvania County in Virginia. The Company through Wye Financial Partners, a department of the Bank, provides full-service investment and insurance solutions through our broker/dealer, LPL Financial. The Bank also offers wealth management solutions such as corporate trustee services and trust administration through Wye Trust, a division of the Bank. The Company also engages in title work for real estate transactions through its wholly-owned subsidiary, Mid-Maryland Title Company, Inc.
The shares of common stock of Shore Bancshares, Inc. are listed on the NASDAQ Global Select Market under the symbol “SHBI”.
Shore Bancshares, Inc. maintains an Internet site at www.shorebancshares.com on which it makes available free of charge its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to the foregoing as soon as reasonably practicable after these reports are electronically filed with, or furnished to, the SEC.
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OVERVIEW
The Company’s net income for the first quarter of 2024 was $8.2 million or $0.25 per diluted common share compared to net income of $10.5 million or $0.32 per diluted common share for the fourth quarter of 2023, and net income of $6.5 million or $0.32 per diluted common share for the first quarter of 2023.
First Quarter 2024 Highlights:
• Return on Average Assets (“ROAA”) - The Company reported ROAA of 0.57% for the first quarter of 2024, compared to 0.72% and 0.75% for the fourth and first quarters of 2023, respectively.
• Stable Net Interest Margin - Net interest margin (“NIM”) remained relatively stable at 3.08% for the first quarter of 2024 from 3.09% for the fourth quarter of 2023. Excluding net accretion interest income of $3.6 million and $3.0 million for the same time periods, NIM decreased six basis points to 2.81% for the first quarter of 2024 from 2.87% for the fourth quarter of 2023.
• Deposit Costs - Decreases in rates on higher cost deposit relationships mitigated margin compression in the first quarter of 2024 . For the month of March 2024, asset yields grew more quickly than funding costs which positively impacted the Company’s NIM and may position the Bank to see positive margin movement during the second quarter of 2024 . As a result of decreased rates paid on some deposits and expected seasonal cash outflows in the first quarter of 2024 , deposits decreased $201.8 million, or 3.7% to $5.2 billion at March 31, 2024 when compared to December 31, 2023. Liquidity remained relatively stable with the loan to deposit ratio modestly increasing from 86.2% at December 31, 2023 to 89.7% at March 31, 2024 . The Bank had no brokered deposits or advances at March 31, 2024 .
• Stable Credit Trends - The Company’s total nonperforming assets to total assets at March 31, 2024 was 0.28% compared to 0.23% at December 31, 2023. The Company’s credit quality metrics remain at historical lows with no signs of significant deterioration or systemic issues within its loan portfolios.
• Operational Efficiencies - Management continues to pursue opportunities to increase efficiencies and decrease expenses as a percentage of operating revenues. Following feasibility assessments, management decided to close two branches by the end of the third quarter. The Onley, VA branch should close on or about July 17, 2024 and the Westgate branch located in Annapolis, MD should close on or about September 30, 2024. Limited growth opportunities within the Eastern Shore of Virginia and a conscientious focus on profitability led to the decision to close the Onley branch. The Westgate branch has limited foot traffic and is located less than a mile from another SUB branch within the City of Annapolis. Customer disruption is expected to be limited. These closures are estimated to cost $0.2 million. The Company is expected to reduce four positions as part of these closings.
• Additionally, the Company plans to reduce professional office space located in Easton, MD. By the end of the third quarter, a newly renovated office building is expected to be put into service eliminating the need for two currently-occupied office buildings. In the second quarter, the Company expects to begin marketing for sale the two redundant office properties. Recent appraisals on these properties exceed the Bank’s cost bases resulting in no impairment. At the present time, the two properties remain in service, are not listed for immediate sale, and are classified as active assets on our balance sheet. Once these properties meet the accounting criteria they will be moved to held for sale.
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SUMMARY OF OPERATING RESULTS
A comparison of the results of operations for the three months ended March 31, 2024 and March 31, 2023 is presented below.
Unaudited (QTD)
Three Months Ended March 31,
(Dollars in thousands) 2024 2023
OPERATING DATA
Interest income $ 71,139 $ 35,062
Interest expenses 30,004 9,398
Net interest income (“NII”)
41,135 25,664
Provision for credit loses 407 1,213
NII after provision for credit losses 40,728 24,451
Noninterest income 6,567 5,334
Noninterest expenses 36,698 20,893
Income before income tax taxes 10,597 8,892
Income tax expense 2,413 2,435
Net income $ 8,184 $ 6,457
Unaudited (QTD)
Three Months Ended March 31,
(Dollars in thousands, except per share amounts) 2024 2023
KEY OPERATING RATIOS
Return on average assets (“ROAA”)
0.57 % 0.75 %
Return on average equity (“ROAE”)
6.38 7.25
Return on average tangible equity (“ROATCE”) Non-GAAP (1)
13.39 10.09
Average total equity to average total assets 8.93 10.30
Interest rate spread 2.34 2.69
Net interest margin 3.08 3.18
Efficiency ratio (2)
76.93 67.40
Non-interest income to average assets 0.46 0.62
Non-interest expense to average assets 2.56 2.42
Net operating expense to average assets (3)
2.10 1.80
COMMON SHARE DATA
Basic and diluted net income per common share
$ 0.25 $ 0.32
Cash dividends paid per common share $ 0.12 $ 0.12
Common dividend payout ratio 48.00 % 37.50 %
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(1) ROATCE is computed by dividing net earnings applicable to common stockholders by average tangible common stockholders' equity. ROATCE is a non-GAAP measure and may not be comparable to similar non-GAAP measures used by other companies. Refer to Use of Non-GAAP Financial Measures for additional details.
(2) Efficiency ratio is noninterest expense divided by the sum of net interest income and noninterest income.
(3) Net operating expense is the sum of noninterest expense offset by noninterest income.
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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023
Summary of Financial Results
The Company reported net income for the three months ended March 31, 2024 of $8.2 million or $0.25 diluted earnings per share compared to net income of $6.5 million or diluted earnings per share of $0.32 for the three months ended March 31, 2023. The Company’s ROAA, ROACE 1 and ROATCE 2 were 0.57%, 6.38% and 13.39%, respectively, for the three months ended March 31, 2024 compared to 0.75%, 7.25% and 10.09%, respectively, for the three months ended March 31, 2023.
Three Months Ended March 31,
(Dollars in thousands) 2024 2023 $ Change % Change
Interest and dividend income $ 71,139 $ 35,062 $ 36,077 102.89 %
Interest expenses 30,004 9,398 20,606 219.26 %
Net interest income 41,135 25,664 15,471 60.28 %
Provision for credit losses 407 1,213 (806) (66.45) %
Noninterest income 6,567 5,334 1,233 23.12 %
Noninterest expenses 36,698 20,893 15,805 75.65 %
Income before income taxes 10,597 8,892 1,705 19.17 %
Income tax expense 2,413 2,435 (22) (0.90) %
Net income $ 8,184 $ 6,457 $ 1,727 26.75 %
Net Interest Income
Tax-equivalent net interest income is net interest income adjusted for the tax-favored status of income from certain loans and investments. As shown in the table below, tax-equivalent net interest income was $41.2 million for the first quarter of 2024 and $25.7 million for the first quarter of 2023. The increase in net interest income when compared to the first quarter of 2023 was primarily due to the increase in interest and fees on loans, interest on deposits from other banks, a decrease in interest on short term borrowings partially offset by the increase in interest on deposits and interest on long-term borrowings all significantly impacted by the merger of equals with TCFC in the third quarter of 2023.
Three Months Ended March 31,
(Dollars in thousands) 2024 2023 $ Change % Change
Interest and dividend income
Loans, including fees $ 65,754 $ 30,828 $ 34,926 113.29 %
Interest and dividends on investment securities
4,425 4,071 354 8.70 %
Interest on deposits with banks 960 163 797 488.96 %
Total Interest and Dividend Income $ 71,139 $ 35,062 $ 36,077 102.89 %
Interest Expenses
Deposits $ 28,497 $ 7,281 $ 21,216 291.39 %
Short-term borrowings 56 1,361 (1,305) (95.89) %
Long-term debt 1,451 756 695 91.93 %
Total Interest Expenses $ 30,004 $ 9,398 $ 20,606 219.26 %
Taxable-equivalent adjustment $ 79 $ 40 $ 39 97.50 %
Tax Equivalent Net Interest Income $ 41,214 $ 25,704 $ 15,510 60.34 %
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1 For additional details, see "Reconciliation of Non-GAAP Measures (Unaudited).
2 For additional details, see "Reconciliation of Non-GAAP Measures (Unaudited).
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Average Balances and Yields
The following table sets forth average balances, average yields and costs, and certain other information for the periods indicated. Tax-equivalent adjustments were made. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances. The yields set forth below include the effects of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.
Three Months Ended March 31, Three Months Ended March 31,
2024 2023
(Dollars in thousands) Average Balance Interest Yield/ Rate Average Balance Interest Yield/ Rate
Earning assets
Loans (1), (2), (3)
Residential real estate $ 1,361,636 $ 18,492 5.46 % $ 881,799 $ 10,507 4.83 %
Commercial real estate 2,722,600 38,604 5.70 1,279,923 15,173 4.81
Commercial 219,884 4,097 7.49 142,797 1,819 5.17
Consumer 329,118 4,272 5.22 297,528 3,274 4.46
State and political 1,473 16 4.37 978 9 3.73
Credit Cards 7,457 167 9.01 — — —
Other 13,015 183 5.66 8,619 84 3.91
Total Loans 4,655,183 65,831 5.69 2,611,644 30,866 4.79
Investment securities:
Taxable 654,663 4,419 2.70 653,527 4,064 2.49
Tax-exempt (1)
660 8 4.85 666 9 5.41
Interest-bearing deposits 77,276 960 5.00 13,849 163 4.77
Total earning assets 5,387,782 71,218 5.32 % 3,279,686 35,102 4.34 %
Cash and due from banks 49,499 28,602
Other assets 395,023 228,054
Allowance for credit losses (57,480) (30,006)
Total assets $ 5,774,824 $ 3,506,336
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Three Months Ended March 31, Three Months Ended March 31,
2024 2023
(Dollars in thousands) Average Balance Interest Yield/ Rate Average Balance Interest Yield/ Rate
Interest-bearing liabilities
Demand deposits $ 1,110,524 $ 6,362 2.30 % $ 694,894 $ 3,236 1.89 %
Money market and savings deposits 1,669,074 10,160 2.45 1,004,553 2,374 0.96
Brokered deposits 20,465 251 4.93 — — —
Certificates of deposit $100,000 or more 762,210 7,675 4.05 241,436 1,076 1.81
Other time deposits 417,362 4,049 3.90 207,403 595 1.16
Interest-bearing deposits (4)
3,979,635 28,497 2.88 2,148,286 7,281 1.37
Advances from FHLB - short-term 4,000 56 5.63 113,972 1,361 4.84
Subordinated debt and Guaranteed preferred beneficial interest in junior subordinated debentures ("TRUPS") (4)
72,418 1,451 8.06 43,108 756 7.11
Total interest-bearing liabilities 4,056,053 30,004 2.98 % 2,305,366 9,398 1.65 %
Noninterest-bearing deposits 1,163,023 820,162
Accrued expenses and other liabilities 39,772 19,634
Stockholders’ equity 515,976 361,174
Total liabilities and stockholders’ equity $ 5,774,824 $ 3,506,336
Net interest income $ 41,214 $ 25,704
Net interest spread 2.34 % 2.69 %
Net interest margin 3.08 % 3.18 %
Cost of Funds 2.31 % 1.22 %
Cost of Deposits 2.23 % 0.99 %
Cost of Debt 7.93 % 5.47 %
Tax-equivalent adjustment
Loans $ 77 $ 38
Investment securities 2 2
Total $ 79 $ 40
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(1) All amounts are reported on a tax-equivalent basis computed using the statutory federal income tax rate of 21.0%, exclusive of nondeductible interest expense.
(2) Average loan balances include nonaccrual loans.
(3) Interest income on loans includes accreted loan fees, net of costs and accretion of discounts on acquired loans, which are included in the yield calculations. There were $4.2 million and $0.5 million of accretion interest on loans for the three months ended March 31, 2024 and 2023, respectively.
(4) Interest expense on deposits and borrowing includes amortization of deposit premiums and amortization of borrowing fair value adjustment. There were $(0.4) million and $0.1 million of amortization of deposits premium, and $(0.2) million and $(47,000) of amortization of borrowing fair value adjustment for the three months ended March 31, 2024 and 2023, respectively.
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The following table presents changes in interest income and interest expense for the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to (1) changes in volume (changes in volume multiplied by old rate) (2) changes in rate (changes in rate multiplied by old volume). Changes in rate-volume (changes in rate multiplied by the change in volume) have been allocated to changes due to volume.
Three Months Ended March 31, 2024 Compared to the Three Months Ended March 31, 2023
Volume Due to Rate Total
Interest income:
Loan Portfolio
Residential real estate $ 6,517 $ 1,468 $ 7,985
Commercial real estate 20,456 2,975 23,431
Commercial 1,436 842 2,278
Consumer 410 588 998
State and political 5 2 7
Credit Cards 167 — 167
Other 62 37 99
Taxable investment securities 8 347 355
Tax-exempt investment securities — (1) (1)
Interest-bearing deposits 788 9 797
Total interest income $ 29,848 $ 6,267 $ 36,116
Interest-bearing liabilities:
Interest-bearing demand deposits $ 2,381 $ 745 $ 3,126
Money market and savings deposits 4,045 3,741 7,786
Certificate of deposits 7,532 2,772 10,304
Advances from FHLB - Short-term (1,540) 235 (1,305)
Subordinated debt 587 108 695
Total interest-bearing liabilities $ 13,005 $ 7,601 $ 20,606
Net change in net interest income $ 16,843 $ (1,334) $ 15,509
Fluctuations in net interest income can result from the combination of changes in the average balances of asset and liability categories and changes in interest rates. Interest rates earned and paid are affected by general economic conditions, particularly changes in market interest rates, and by competitive factors, government policies and actions of regulatory authorities.
Net interest income was $41.1 million for the first quarter of 2024, compared to $41.5 million for the fourth quarter of 2023 and $25.7 million for the first quarter of 2023. The decrease in net interest income when compared to the fourth quarter of 2023 was primarily due to the increase in interest expense of $0.4 million resulting from an increase in the average balance of interest-bearing deposits of $70.9 million. The increase when compared to the first quarter of 2023 was primarily due to the increase in interest and fees on loans, interest on deposits from other banks, a decrease in interest on short term borrowings partially offset by the increase in interest on deposits and interest on long-term borrowings all significantly impacted by the merger of equals with TCFC in the third quarter of 2023.
The Company’s NIM decreased slightly to 3.08% for the first quarter of 2024 from 3.09% for the fourth quarter of 2023 primarily due to an increase in the overall mix of interest-bearing deposits compared to non-interest-bearing deposits. Average interest-bearing deposits increased $70.9 million which resulted in a two basis point rate increase. In addition to the change in deposit mix, rates on money market and time deposits also increased, which were partly offset by lower rates on demand deposits. The Company’s NIM decreased to 3.08% for the first quarter of 2024 from 3.18% for the first quarter of 2023. Comparing the first quarter of 2024 to the first quarter of 2023, the Company’s interest-earning asset yields increased 98 basis points to 5.32% from 4.34%, while the cost of funds repriced at a faster pace resulting in an increase of 109 basis points to 2.31% from 1.22% for the same period.
Provision for Credit Losses (“PCL”) and Allowance for Credit Losses
See discussion of the Bank’s PCL and ACL in the asset quality discussion in the analysis of financial condition in this MD&A.
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Noninterest Income
Total noninterest income for the first quarter of 2024 was $6.6 million, a decrease of $1.0 million from $7.5 million for the fourth quarter of 2023 and an increase $1.2 million from $5.3 million for the first quarter of 2023. The decrease from the fourth quarter of 2023 was primarily due to other noninterest income, which included decreases in other fees on bank services and other loan fee income, decreases in mortgage banking revenue and trust and investment fee income. The increase from the first quarter of 2023 was primarily due to other noninterest income, which included increases in other loan fee income, gains on life insurance contracts and an increase in credit card income, increases in trust and investment fee income and interchange credits all a result of the merger in the third quarter of 2023 .
Noninterest Expense
Total noninterest expense of $36.7 million for the first quarter of 2024 increased $3.0 million when compared to the fourth quarter of 2023 expense of $33.7 million and increased $15.8 million when compared to the first quarter of 2023 expense of $20.9 million. The increase from the fourth quarter of 2023 was primarily due to credit card fraud expense of $4.3 million, and an increase in employee benefits of $0.7 million partially offset by decreases in salaries and wages expense of $1.0 million, merger-related expenses of $0.6 million, and FDIC insurance premium expense of $0.6 million. The increase from the first quarter of 2023 was primarily due to other noninterest expense, salaries, amortization of intangibles, employee benefits, data processing, and the credit card fraud expenses. Other than the credit card fraud expenses, all noninterest expenses categories were significantly impacted by the merger in the third quarter of 2023.
Income Taxes
The Company reported income tax expense of $2.4 million for the first quarter of 2024, and income tax expense of $2.4 million for the first quarter of 2023. The effective tax rate for the first quarter of 2024 was 22.8% and 27.4% for the first quarter of 2023. The decrease in the effective tax rate was due to a re-assessment of year-end 2023 tax deductions during the first quarter of 2024 which presented favorable differences. Due to the timing of the re-assessment, the differences were recorded in the first quarter of 2024 to reduce significant tax return to provision adjustments when the 2023 tax return is filed and to properly calculate the effective tax rate. The Company’s estimated effective tax rate applied to net deferred tax assets of $39.0 million at March 31, 2024 was 27.52%. The Bank's deferred taxes are recorded at 26.00%. As of March 31, 2024 the Company recorded $23.2 million and $39.2 million of gross federal and state net operating loss carryovers (“NOL’s”). These NOL’s will offset future taxable income to the Company.
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ANALYSIS OF FINANCIAL CONDITION
Balance Sheet Summary
Total assets were $5.8 billion at March 31, 2024, a decrease of $185.2 million or 3.1%, when compared to $6.0 billion at December 31, 2023. The aggregate decrease was primarily due to decreases in cash and cash equivalents of $257.9 million and investment securities held to maturity (“HTM”) of $9.4 million partially offset by an increase in investment securities available for sale (“AFS”) of $69.0 million and loans held for investment of $7.7 million. The ratio of the ACL on loans to total loans decreased from 1.24% at December 31, 2023 to 1.23% at March 31, 2024.
Cash and Cash Equivalents
Cash and cash equivalents totaled $114.6 million at March 31, 2024, compared to $372.4 million at December 31, 2023. Total cash and cash equivalents fluctuate due to transactions in process and other liquidity demands. Management believes liquidity needs are satisfied by the current balance of cash and cash equivalents, readily available access to traditional and wholesale funding sources, and the portions of the investment and loan portfolios that mature within one year.
Investment Securities
The investment portfolio includes debt and equity securities. Securities are classified as either AFS or HTM. AFS investment securities are stated at estimated fair value based on market prices. They represent securities which may be sold as part of the asset/liability management strategy or in response to changing interest rates. Net unrealized holding gains and losses on these securities are reported net of related income taxes as accumulated other comprehensive income (loss), a separate component of stockholders’ equity. Investment securities in the HTM category are stated at cost adjusted for amortization of premiums and accretion of discounts and the ACL. We have the intent and ability to hold such securities until maturity. At March 31, 2024, 26.3% of the portfolio of debt securities was classified as AFS and 73.7% was classified as HTM, compared to 17.7% and 82.3% respectively, at December 31, 2023. See Note 3 – “Investment Securities”, in the Notes to Consolidated Financial Statements for additional details on the composition of our investment portfolio.
Investment securities, including restricted stock and equity securities, totaled $707.0 million at March 31, 2024, a $59.6 million, or 9.2%, increase compared to $647.4 million at December 31, 2023.
At March 31, 2024, AFS securities, carried at fair value, totaled $179.5 million compared to $110.5 million at December 31, 2023. At March 31, 2024, AFS securities consisted of 57.7% mortgage-backed, 38.7% U.S. Government agencies and 3.5% corporate bonds, compared to 76.0%, 18.5% and 5.5%, respectively, at year-end 2023.
At March 31, 2024, HTM securities, carried at amortized cost, totaled $503.9 million compared to $513.3 million at December 31, 2023. At March 31, 2024, HTM securities consisted of 69.2% mortgage-backed, 28.4% U.S. Government agencies, 2.1% other debt securities, and 0.3% states and political subdivisions, compared to 69.7%, 27.9%, 2.0% and 0.3%, respectively, at year-end 2023.
At March 31, 2024 and December 31, 2023, 97.3% and 97.1%, respectively, of the Bank’s carrying value of its investment portfolio consisted of securities issued or guaranteed by U.S. Government agencies or government-sponsored agencies.
Loans
Loans Held for Sale
The Bank originates residential mortgage loans for sale on the secondary market, which are recorded at fair value. At March 31, 2024 and December 31, 2023 , the fair value of loans held for sale amounted to $13.8 million and $8.8 million, respectively. The Bank makes certain representations to purchasers in the sale of the mortgage loans related to loan ownership, loan compliance and legality, and accurate documentation. If a loan is found to be out of compliance with any of the representations subsequent to the date of purchase, the Bank may be required to repurchase the loan or indemnify the purchaser.
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Loans Held for Investment
The following table summarizes the Company’s loan portfolio at March 31, 2024 and December 31, 2023.
(Dollars in thousands) March 31, 2024 % December 31, 2023 % $ Change % Change
Construction $ 299,133 6.43 % $ 299,000 6.44 % $ 133 0.04 %
Residential real estate 1,515,134 32.59 % 1,490,438 32.11 % 24,696 1.66 %
Commercial real estate 2,272,867 48.90 % 2,286,154 49.27 % (13,287) (0.58) %
Commercial 229,594 4.94 % 229,939 4.95 % (345) (0.15) %
Consumer 325,076 6.99 % 328,896 7.09 % (3,820) (1.16) %
Credit Cards 6,921 0.15 % 6,583 0.14 % 338 5.13 %
Total loans 4,648,725 100.00 % 4,641,010 100.00 % 7,715 0.17 %
Allowance for credit losses on loans (57,336) (57,351) 15 (0.03) %
Total loans, net $ 4,591,389 $ 4,583,659 $ 7,730 0.17 %
Our loan portfolio has a commercial real estate loan (“CRE”) concentration, which is generally defined as a combination of certain construction and CRE loans. The federal banking regulators have issued guidance for those institutions which are deemed to have concentrations in CRE lending. Pursuant to the supervisory criteria contained in the guidance for identifying institutions with a potential CRE concentration risk, institutions which have (1) total reported loans for construction, land development, and other land acquisitions which represent 100% or more of an institution’s total risk-based capital; or (2) total non-owner occupied CRE loans representing 300% or more of the institution’s total risk-based capital and the institution’s non-owner occupied CRE loan portfolio (including construction) has increased 50% or more during the prior 36 months are identified as having potential CRE concentration risk. Institutions which are deemed to have concentrations in CRE estate lending are expected to employ heightened levels of risk management with respect to their CRE portfolios, and may be required to hold higher levels of capital. The Bank has a concentration in CRE loans, and has experienced significant growth in its CRE portfolio in recent years and was further impacted with its acquisition of CBTC in the third quarter of 2023. Non-owner occupied CRE loans as a percentage of the Bank’s Tier 1 Capital + ACL at March 31, 2024 and December 31, 2023 were $2.0 billion or 370.0% and $2.0 billion or 382.6%, respectively. Construction loans as a percentage of the Bank’s Tier 1 Capital + ACL at March 31, 2024 and December 31, 2023 were $299.1 million or 54.9% and $299.0 million or 56.7%, respectively.
The CRE portfolio (including construction) has increased significantly in the past two years. Management has extensive experience in CRE lending, and has implemented and continues to maintain heightened risk management procedures, as well as strong underwriting criteria with respect to its CRE portfolio. Monitoring practices include stress testing analysis to evaluate changes in collateral values and to cash flows from interest rate increases and declines in net operating income. We may be required to maintain higher levels of capital as a result of our CRE concentrations, which could require us to obtain additional capital or be required to sell/participate portions of loans, which may adversely affect stockholder returns.
Non-Owner Occupied CRE Loans
March 31, 2024
(dollars in thousands) Amount Average Loan Size % of Non-Owner Occupied CRE Loans % of Total Portfolio Loans, Gross
Loan Type:
Retail $ 454,347 $ 2,113 22.5 % 9.7 %
Office/Office Condo 375,143 1,443 18.6 % 8.0 %
Multi-Family (5+ Units) 265,709 2,233 13.2 % 5.7 %
Industrial/Warehouse 217,890 1,492 10.8 % 4.7 %
Other (1)
702,900 688 34.9 % 15.1 %
Total non-owner occupied CRE loans (2)
$ 2,015,989 $ 1,145 100.0 % 43.2 %
Total Portfolio loans, gross (3)
$ 4,662,492
____________________________________
(1) Other non-owner occupied CRE loans include Motel/Hotel loans of $215.1 million, mini-storage loans of $85.2 million, restaurant loans of $45.9 million, and other loans of $356.7 million.
(2) The balances for our non-owner occupied CRE portfolio as of March 31, 2024, as presented in this table, coincide with our internal evaluation of risk for the purpose of monitoring loan concentrations in accordance with internal and regulatory guidelines. Within the non-owner occupied balances presented in this table, the Company has included certain loans secured by multi-family residential properties and other investor owned 1-4 family residential properties that are reported in the residential real estate caption in other areas of this report. As such, the total balance of loans presented in this table when added to the balance of the table presented below detailing owner occupied CRE may not reconcile to the CRE caption included in other tables and footnotes.
(3) Includes loans held for sale of $13.8 million.
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Owner-Occupied CRE Loans
March 31, 2024
(dollars in thousands) Amount Average Loan Size % of Owner-Occupied CRE Loans % of Total Portfolio Loans, Gross
Loan Type:
Office/Office Condo $ 140,839 $ 514 18.6 % 3.0 %
Industrial/Warehouse 111,599 631 14.7 % 2.4 %
Church 71,106 936 9.4 % 1.5 %
Retail 61,411 558 8.1 % 1.3 %
Other (1)
373,353 1,023 49.2 % 8.0 %
Total owner-occupied CRE loans $ 758,308 $ 757 100.0 % 16.2 %
Total Portfolio loans, gross (2)
$ 4,662,492
____________________________________
(1) Other owner-occupied CRE loans include restaurant loans of $61.0 million, marine/boat slips of $59.9 million, fire/CMS building loans of $41.6 million and other loans of $210.9 million..
(2) Includes loans held for sale of $13.8 million.
Office CRE Portfolio
The Bank's office CRE loan portfolio, which includes owner-occupied and non-owner-occupied CRE loans, was $516.0 million or 11.1% of total loans of $4.6 billion at March 31, 2024. The Bank’s office CRE loan portfolio included $137.7 million or 26.7% of the total with medical tenants and $73.3 million or 14.2% of the total with government or government contractor tenants. There were 513 loans in the office CRE portfolio with an average and median loan size of $1.0 million and $0.4 million, respectively. Loan to Value ("LTV") estimates are less than 70% for $395.8 million or 76.7% of the office CRE portfolio and less than 80% for $490.4 million or 95.0% of the office CRE portfolio.
The Bank had 19 office CRE loans totaling $172.0 million that were greater than $5.0 million at March 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 two large loan payoffs in the quarter. For the office CRE portfolio, at March 31, 2024, the average loan debt-service coverage ratio was 1.7x and average LTV was 57.6%. Of the office CRE portfolio balance, 73% is secured by properties in rural or suburban areas with limited exposure to metropolitan cities and 92% are secured by properties with five stories or less. Of the office CRE loans, $5.8 million will mature and $5.1 million will reprice prior to December 31, 2024. Of the office CRE loans, $2.2 million are special mention or substandard.
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The following table summarizes asset quality information and ratios at March 31, 2024 and December 31, 2023.
(dollars in thousands,) March 31, 2024 December 31, 2023
ASSET QUALITY
Total portfolio loans $ 4,648,725 $ 4,641,010
Classified Assets (1)
15,427 14,851
Allowance for credit losses on loans
(57,336) (57,351)
Past due loans - 30 to 89 days
8,339 10,853
Accruing past due loans >= 90 days
1,560 738
Total past due (delinquency) loans 9,899 11,591
Non-accrual loans 12,776 12,784
Accruing borrowers experiencing financial difficulty ("BEFD") modifications (2)
— 153
Other real estate owned (OREO) and Repossessed Property 2,024 179
Non-accrual loans, OREO, Repossessed Property and BEFD modifications 14,800 13,116
ASSET QUALITY RATIOS
Classified assets to total assets (1)
0.26 % 0.25 %
Classified assets to risk-based capital (1)
2.79 % 2.75 %
Allowance for credit losses on loans to total portfolio loans
1.23 % 1.24 %
Allowance for credit losses on loans to non-accrual loans
448.78 % 448.62 %
Past due loans - 30 to 89 days to total portfolio loans
0.18 % 0.23 %
Past due loans >=90 days and non-accrual to total loans 0.31 % 0.29 %
Total past due (delinquency) and non-accrual to total portfolio loans
0.49 % 0.53 %
Non-accrual loans to total portfolio loans 0.27 % 0.28 %
Non-accrual loans and BEFD modifications to total loans 0.27 % 0.28 %
Non-accrual loans OREO and repossessed property to total assets 0.25 % 0.22 %
Non-accrual loans OREO and repossessed property to total portfolio loans, OREO and repossessed property 0.32 % 0.28 %
Non-accrual loans, OREO, repossessed property and BEFD modifications to total assets 0.25 % 0.22 %
____________________________________
(1) Classified assets are substandard loans and OREO and other repossessed property. Classified assets do not include special mention loans.
(2) BEFD modification loans include both non-accrual and accruing performing loans. All BEFD modification loans are included in the calculation of asset quality financial ratios. Non-accrual BEFD modification loans are included in the non-accrual balance and accruing BEFD modification loans are included in the accruing BEFD modification balance.
Allowance for Credit Losses on Loans
The ACL was $57.3 million at March 31, 2024, $57.4 million at December 31, 2023 and $28.5 million at March 31, 2023. There were net charge-offs of $0.6 million for the first quarter of 2024, compared to net charge-offs of $0.5 million for the fourth quarter of 2023 and net charge-offs of $20,000 for the first quarter of 2023. The ratio of annualized net charge-offs to average loans was 0.05% for the first quarter of 2024, compared to annualized net charge-offs of 0.04% for the fourth quarter of 2024 and annualized net recoveries of 0.00% for the first quarter of 2023. Management remains focused on its efforts to dispose of problem loans and to prudently charge-off nonperforming loans to enable the Company to maintain overall credit quality. The ACL on loans as a percentage of period-end loans was 1.23% at March 31, 2024 and 1.24% at December 31, 2023.
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The following tables present a summary of the net charge-off activity in the ACL at or for the three months ended March 31, 2024 and 2023.
For the Three Months Ended
March 31, 2024 March 31, 2023
(Dollars in thousands) Net (Charge-offs) Recoveries Average Balance (1)
% Net (Charge-offs) Recoveries Average Balance (1)
%
Construction $ (10) $ 292,803 0.01 % $ 3 $ 248,286 — %
Residential real estate 1 1,512,805 - % 31 835,683 (0.02) %
Commercial real estate — 2,279,899 - % — 1,079,490 — %
Commercial 1 230,844 - % (54) 141,838 0.15 %
Consumer (449) 325,258 0.56 % — 301,261 — %
Credit Cards (108) 4,196 10.35 % — — — %
$ (565) $ 4,645,805 0.05 % $ (20) $ 2,606,558 — %
Allowance for credit losses — (57,336) - % — (28,464) — %
Total net charge-off and average loans $ (565) $ 4,588,469 0.05 % $ (20) $ 2,578,094 - %
____________________________________
(1) Excludes Loans Held for Sale
Nonperforming Assets
Classified assets increased $0.6 million to $15.4 million or 0.26% of total assets at March 31, 2024 from $14.9 million or 0.25% of total assets at December 31, 2023. Classified assets are substandard loans, repossessed properties and OREO. The increase was primarily due to the repossessed properties of $1.8 million and offset by decrease of $1.3 million in substandard loans.
As shown in the following table, nonperforming assets were $16.4 million or 0.28% of total assets at March 31, 2024 compared to $13.7 million or 0.23% of total assets at December 31, 2023. The balance of nonperforming assets increased primarily due to an increase in repossessed properties of $1.8 million and an increase of $0.8 million in loans 90 days past due and still accruing.
The following table summarizes our nonperforming assets at March 31, 2024 and December 31, 2023.
(Dollars in thousands) March 31, 2024 December 31, 2023
Nonperforming assets
Nonaccrual loans $ 12,776 $ 12,784
Total loans 90 days or more past due and still accruing 1,560 738
Other real estate owned and repossessed property 2,024 179
Total nonperforming assets $ 16,360 $ 13,701
As a percent of total loans:
Nonaccrual loans 0.27 % 0.28 %
As a percent of total loans, other real estate owned and repossessed property:
Nonperforming assets 0.35 % 0.30 %
As a percent of total assets:
Nonaccrual loans 0.22 % 0.21 %
Nonperforming assets 0.28 % 0.23 %
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Deposits
The following is a breakdown of the Company’s deposit portfolio at March 31, 2024 and December 31, 2023:
(dollars in thousands) March 31, 2024 December 31, 2023
Balance % Balance % $ Change % Change
Noninterest-bearing demand $ 1,200,680 23.15 % $ 1,258,037 23.36 % $ (57,357) (4.60) %
Interest-bearing:
Demand 1,101,954 21.26 % 1,165,546 21.64 % (63,592) (5.50) %
Money market deposits 1,358,205 26.20 % 1,430,603 26.56 % (72,398) (5.10) %
Savings 354,098 6.83 % 347,324 6.45 % 6,774 2.00 %
Certificates of deposit 1,169,342 22.56 % 1,184,610 21.99 % (15,268) (1.30) %
Total interest-bearing 3,983,599 76.85 % 4,128,083 76.64 % (144,484) (3.50) %
Total Deposits $ 5,184,279 100.00 % $ 5,386,120 100.00 % $ (201,841) (3.70) %
Total deposits decreased $0.2 billion, or 3.7% to $5.2 billion at March 31, 2024 when compared to December 31, 2023. The decrease in total deposits was primarily due to a decrease in time deposits of $15.3 million, demand deposits of $63.6 million, money market and savings of $65.6 million, and noninterest-bearing deposits of $57.4 million. The decrease in deposits is attributable seasonal municipal runoff and MRB deposits.
Total estimated uninsured deposits were $1.0 billion or 18.9% of total deposits at March 31, 2024 and $1.0 billion or 19.5% of total deposits at December 31, 2023. At March 31, 2024, there were $155.4 million included in uninsured deposits that the Bank secured using the market value of pledged collateral. The Bank's uninsured deposits, excluding the market value of pledged collateral, at March 31, 2024 were $825.9 million or 15.9% of total deposits.
The Company does not consider reciprocal deposits to be brokered as reciprocal deposits are used to maximize FDIC insurance available to our customers. During 2018, revisions to the Federal Deposit Insurance Act determined that reciprocal deposits are core deposits and are not considered brokered deposits unless they exceed 20% of the Bank’s total liabilities of $5.2 billion. Reciprocal deposits were $1.2 billion at March 31, 2024 compared to $1.3 billion at December 31, 2023. Reciprocal deposits as a percentage of the Bank’s liabilities at March 31, 2024 and December 31, 2023 were 23.1% and 24%, respectively. For call reporting purposes, there were $161.5 million and $204.8 million reciprocal deposits that were considered brokered at March 31, 2024 and December 31, 2023.
The Bank is required to monitor large deposit relationships and concentration risks in accordance with regulatory guidance. This includes monitoring deposit concentrations and maintaining fund management policies and strategies that take into account potentially volatile concentrations and significant deposits that mature simultaneously. Regulatory guidance defines a large depositor as a customer or entity that owns or controls 2% or more of the Bank’s total deposits. At March 31, 2024, the Bank had three local municipal customer deposit relationships that exceeded 2% of total deposits, totaling $403.7 million which represented 7.8% of total deposits of $5.2 billion. At December 31, 2023, there were four customer deposit relationships that exceeded 2% of total deposits, totaling $598.5 million which represented 11.1% of total deposits of $5.4 billion.
Wholesale Funding - Short-Term Borrowings and Brokered Deposits
The Company had no short-term borrowings as of March 31, 2024, and reduced brokered deposits of $44.5 million to zero. Other short-term borrowings may consist of overnight borrowing from correspondent banks or securities sold under agreements to repurchase, primarily with commercial depositors. Short-term advances are defined as those with original maturities of one year or less. At March 31, 2024 and December 31, 2023, the Company had no securities sold under agreements to repurchase or overnight borrowings from correspondent banks.
Long-Term Debt
The Company occasionally borrows from the Federal Home Loan Bank (“FHLB”) to meet longer term liquidity needs, specifically to fund loan growth when liquidity from deposit growth is not sufficient. There were no long-term borrowings from the FHLB outstanding at March 31, 2024 and December 31, 2023.
On August 25, 2020, the Company entered into Subordinated Note Purchase Agreements with certain purchasers pursuant to which the Company issued and sold $25.0 million in aggregate principal amount with an initial interest rate of 5.375% of Fixed-to-Floating Rate Subordinated Notes due September 1, 2030.
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As a result of the merger with Severn Bancorp, Inc., effective October 31, 2021, the Company acquired Junior Subordinated Debt Securities due in 2035 which had an outstanding principal balance of $20.6 million. The debt balance of $18.6 million at March 31, 2024 and $18.6 million at December 31, 2023 was presented net of fair value adjustments of $2.0 million and $2.0 million, respectively.
Additionally, as a result of the TCFC merger, the Company acquired Junior Subordinated Debt Securities which had an outstanding principal balance of $12.0 million. The debt balance of $10.6 million at March 31, 2024 was presented net of a fair value adjustment of $1.4 million. In addition, the Company acquired 4.75% fixed-to-floating rate subordinated notes with a carrying value of $19.5 million at March 31, 2024. The notes balance of $18.5 million at March 31, 2024 was presented net of fair value adjustment of $1.0 million.
Stockholders’ Equity
(Dollars in thousands) March 31, 2024 December 31, 2023 $ Change % Change
Common Stock at par of $0.01 $ 332 $ 332 $ — — %
Additional paid in capital 356,464 356,007 457 0.13 %
Retained earnings 166,490 162,290 4,200 2.59 %
Accumulated other comprehensive loss (8,058) (7,494) (564) 7.53 %
Total Stockholders' Equity $ 515,228 $ 511,135 $ 4,093 0.80 %
Total stockholders’ equity increased $4.1 million, or 0.80%, to $515.2 million at March 31, 2024 when compared to December 31, 2023 primarily due to a $8.2 million of net income partially offset by dividends paid of $4.0 million.
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Liquidity and Capital Resources
Liquidity is our ability to meet cash demands as they arise. Cash needs may come from loan demand, deposit withdrawals or acquisition opportunities. Potential obligations resulting from the issuance of standby letters of credit and commitments to fund future borrowings to our loan customers are other factors affecting our liquidity needs. Many of these obligations and commitments are expected to expire without being drawn upon; therefore, the total commitment amounts do not necessarily represent future cash requirements affecting our liquidity position.
The Company’s principal sources of liquidity are cash on hand and dividends received from the Bank. The Bank’s most liquid assets are cash, cash equivalents and federal funds sold. The levels of such assets are dependent on the Bank’s operating, financing and investment activities at any given time. The variations in levels of cash and cash equivalents are influenced by deposit flows and anticipated future deposit flows. Customer deposits are considered the primary source of funds supporting the Bank’s lending and investment activities.
Based on management’s going concern evaluation, we believe that there are no conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s or the Bank’s ability to continue as a going concern, within one year of the date of the issuance of the financial statements.
The Bank’s principal sources of funds for investment and operations are net income, deposits, sales of loans, borrowings, principal and interest payments on loans, principal and interest received on investment securities and proceeds from the maturity and sale of investment securities. The Bank’s principal funding commitments are for the origination or purchase of loans, the purchase of securities and the payment of maturing deposits.
The Bank’s most liquid assets are cash, cash equivalents and federal funds sold. The levels of such assets are dependent on the Bank’s operating, financing and investment activities at any given time. The variations in levels of cash and cash equivalents are influenced by deposit flows and anticipated future deposit flows.
Liquidity is provided by access to funding sources, which include core depositors and brokered deposits. Other sources of funds include our ability to borrow, such as purchasing federal funds from correspondent banks, sales of securities under agreements to repurchase and advances from the FHLB of Atlanta. The Bank uses wholesale funding (brokered deposits and other sources of funds) to supplement funding when loan growth exceeds core deposit growth and for asset-liability management purposes.
We derive liquidity through increased customer deposits, non-reinvestment of the cash flow from the investment portfolio, loan repayments, borrowings and income from earning assets. As seen in the Consolidated Statements of Cash Flows, the net decrease in cash and cash equivalents was $257.9 million for the first three months of 2024 compared to a decrease of $17.8 million for the first three months of 2023. The decrease in cash and cash equivalents in the first quarter of 2024 was mainly due to the decrease of $144.9 million in interest-bearing deposits.
To the extent that deposits are not adequate to fund customer loan demand, liquidity needs can be met in the short-term fund markets. The Bank has arrangements with other correspondent banks whereby it has $45.0 million available in federal funds lines of credit and a reverse repurchase agreement available to meet any short-term needs which may not otherwise be funded by the Bank’s portfolio of readily marketable investments that can be converted to cash. At March 31, 2024, the Bank had approximately $1.2 billion of available liquidity including: $114.6 million in cash and cash equivalents, $321.0 million in unpledged securities, $782.2 million in secured borrowing capacity at the FHLB of Atlanta and the other correspondent banks of $66.1 million. The Bank is a member of the FHLB of Atlanta, which provides another source of liquidity. Through the FHLB of Atlanta, the Bank had available lendable collateral of approximately $782.2 million and $745.1 million at March 31, 2024 and December 31, 2023, respectively. The Bank has pledged, under a blanket lien, all qualifying residential and commercial real estate loans under borrowing agreements with the FHLB of Atlanta.
The Bank and the Company are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank and the Company to maintain minimum ratios of common equity Tier 1, Tier 1, and total capital as a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 12.50%. The Bank and Company are also required to maintain capital at a minimum level based on quarterly average assets, which is known as the leverage ratio. The Bank and the Company were deemed “well capitalized” under applicable regulatory capital requirements at March 31, 2024.
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The Bank and Company were in compliance with all applicable regulatory capital requirements to which they were subject, and the Bank was classified as “well capitalized” for purposes of the prompt corrective action regulations. The following tables present the applicable capital ratios for the Company and the Bank as of March 31, 2024 and December 31, 2023.
March 31, 2024 Tier 1 leverage ratio Common Equity Tier 1 ratio Tier 1 risk-based capital ratio Total risk-based capital ratio
Shore Bancshares, Inc. 7.93 % 8.91 % 9.53 % 11.68 %
Shore United Bank 8.58 % 10.32 % 10.32 % 11.56 %
December 31, 2023 Tier 1 leverage ratio Common Equity Tier 1 ratio Tier 1 risk-based capital ratio Total risk-based capital ratio
Shore Bancshares, Inc. 7.74 % 8.69 % 9.31 % 11.48 %
Shore United Bank 8.33 % 10.02 % 10.02 % 11.27 %
For information on risks relating to liquidity, see Item 1A. "Risk Factors - Liquidity Risk,” as presented in the Company's 2023 Annual Report.
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USE OF NON-GAAP FINANCIAL MEASURES
Statements in the MD&A include non-GAAP financial measures and should be read along with the accompanying tables, which provide a reconciliation of non-GAAP financial measures to GAAP financial measures. The Company’s management uses these non-GAAP financial measures and believes that non-GAAP financial measures provide additional useful information that allows readers to evaluate the ongoing performance of the Company. Non-GAAP financial measures should not be considered as an alternative to any measure of performance or financial condition as promulgated under GAAP, and investors should consider the Company’s performance and financial condition as reported under GAAP and all other relevant information when assessing the performance or financial condition of the Company. Non-GAAP financial measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for analysis of the results or financial condition as reported under GAAP. See Non-GAAP reconciliation schedules that immediately follow:
RECONCILIATION OF NON-GAAP MEASURES (UNAUDITED)
Reconciliation of GAAP total assets, common equity, common equity to assets and book value to non-GAAP tangible assets, tangible common equity, tangible common equity to tangible assets and tangible book value.
This Quarterly Report on Form 10-Q, including the accompanying financial statement tables, contains financial information determined by methods other than in accordance with GAAP. This financial information includes certain performance measures, which exclude intangible assets. These non-GAAP measures are included because the Company believes they may provide useful supplemental information for evaluating the underlying performance trends of the Company.
(dollars in thousands, except per share amounts) March 31, 2024 December 31, 2023 March 31, 2023
Total assets $ 5,825,704 $ 6,010,918 $ 3,553,694
Less: intangible assets
Goodwill 63,266 63,266 63,266
Core deposit intangibles 45,515 48,090 5,106
Total intangible assets 108,781 111,356 68,372
Tangible assets $ 5,716,923 $ 5,899,562 $ 3,485,322
Total common equity $ 515,228 $ 511,135 $ 361,638
Less: intangible assets 108,781 111,356 68,372
Tangible common equity $ 406,447 $ 399,779 $ 293,266
Common shares outstanding at end of period 33,210,522 33,161,532 19,898,388
Common equity to assets 8.84 % 8.50 % 10.18 %
Tangible common equity to tangible assets 7.11 % 6.78 % 8.41 %
Common book value per share $ 15.51 $ 15.41 $ 18.17
Tangible common book value per share $ 12.24 $ 12.06 $ 14.74
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Return on Average Common Equity (“ROACE”)
The ROACE is a financial ratio that measures the profitability of a company in relation to the average stockholders' equity. This financial metric is expressed in the form of a percentage which is equal to net income after tax divided by the average stockholders' equity for a specific period of time.
Three Months Ended March 31,
(dollars in thousands, except per share amounts) 2024 2023
Net income (as reported) $ 8,184 $ 6,457
ROACE 6.38 % 7.25 %
Average Equity $ 515,976 $ 361,174
Return on Average Tangible Common Equity (“ROATCE”)
ROATCE is computed by dividing net earnings applicable to common stockholders by average tangible common shareholders' equity. Management believes that ROATCE is meaningful because it measures the performance of a business consistently, whether acquired or internally developed. ROATCE is a non-GAAP measure and may not be comparable to similar non-GAAP measures used by other companies.
Three Months Ended March 31,
(dollars in thousands, except per share amounts) 2024 2023
Net income (as reported) $ 8,184 $ 6,457
Merger and acquisition costs (net of tax) — 502
Core deposit intangible amortization (net of tax) 1,989 320
Net earnings applicable to common stockholders
$ 10,173 $ 7,279
ROATCE 10.08 % 10.09 %
Average equity $ 515,976 $ 361,174
Less: Average goodwill and core deposit intangible (110,167) (68,607)
Average Tangible Common Equity $ 405,809 $ 292,567
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.