Shore Bancshares Reports Second Quarter and First-Half Results

EASTON, Md., July 24, 2013 /PRNewswire/ -- Shore Bancshares, Inc. (NASDAQ: SHBI) reported net income of $361 thousand or $0.04 per diluted common share for the second quarter of 2013, compared to net income of $222 thousand or $0.03 per diluted common share for the first quarter of 2013, and net income of $293 thousand or $0.03 per diluted common share for the second quarter of 2012.  The Company reported net income of $583 thousand or $0.07 per diluted common share for the first half of 2013, compared to a net loss of $2.7 million or $(0.32) per diluted common share for the first half of 2012.

When comparing the second quarter of 2013 to the first quarter of 2013, the primary reasons for the improved results were an increase in net interest income of $524 thousand and a decrease in noninterest expense of $732 thousand, which were partially offset by an increase in the provision for credit losses of $550 thousand and a decrease in noninterest income of $528 thousand.  Noninterest income included a $1.3 million loss incurred to recognize the remaining ineffective portion of a terminated interest rate cap instrument.  When comparing the second quarter of 2013 to the second quarter of 2012, the main reason for the improved results was a decrease in the provision for credit losses of $825 thousand, which was partially offset by a decrease in noninterest income of $615 thousand.  When comparing the first half of 2013 to the first half of 2012, the principal factor driving the difference was a decline in the provision for credit losses of $7.0 million, which was partially offset by a decrease in net interest income of $750 thousand and noninterest income of $699 thousand.

"We are pleased to report a sequential quarter and period over period of improved earnings.  We continue to be cautiously optimistic that the real estate values driving our regional economy are beginning to stabilize," said Lloyd L. "Scott" Beatty, Jr., president and chief executive officer.  "We are moving as aggressively as possible to resolve problem credits and remove nonperforming assets from the balance sheet.  Our credit administration and loan workout units have been expanded with the addition of experienced new staff members, in an effort to accelerate the resolution of our credit issue and position the organization for future growth.  We continue to maintain solid underlying capital ratios and are confident the company has the underlying strength and resiliency to outlast and grow from this very challenging banking environment on the Delmarva peninsula."

Balance Sheet Review
Total assets were $1.054 billion at June 30, 2013, a $131.5 million, or 11.1%, decrease when compared to the $1.186 billion at the end of 2012.  The decline in total assets was primarily due to a decrease in interest-bearing deposits with other banks ($65.5 million) and investment securities ($50.2 million).  Total deposits decreased 12.1% to $922.1 million mainly due to a decline in money market deposit accounts associated with the Company's participation in the Promontory Insured Network Deposits Program ("IND Program"). In December 2012, the Company decided to partially exit the IND Program as a way to decrease its excess liquidity and, in June 2013, the Company fully exited the IND Program.  Total stockholders' equity remained relatively unchanged from the end of 2012.  For the first six months of 2013, the ratio of average equity to average assets was 10.60% and the ratio of average tangible equity to average tangible assets was 9.23%.

Review of Quarterly Financial Results
Net interest income was $9.0 million for the second quarter of 2013, compared to $8.5 million for the first quarter of 2013 and $9.0 million for the second quarter of 2012.  The increase in net interest income when compared to the first quarter of 2013 was due to higher interest income combined with lower interest expense.  The increase in interest income was partially the result of a $308 thousand nonrecurring adjustment to loan income related to a troubled debt restructuring.  The decrease in interest expense was mainly the result of lower balances of and rates paid on money market and savings deposits due to exiting the remainder of the IND Program and terminating the interest rate caps associated with these deposits.  Net interest income for the second quarter of 2013 was relatively unchanged when compared to the second quarter of 2012.  The Company's net interest margin improved to 3.60% for the second quarter of 2013, compared to 3.30% for the first quarter of 2013 and 3.36% for the second quarter of 2012.  For the second quarter of 2013, the nonrecurring adjustment to loan income increased the net interest margin 12 basis points.

The provision for credit losses was $2.7 million for the three months ended June 30, 2013.  The comparable amounts were $2.2 million and $3.5 million for the three months ended March 31, 2013 and June 30, 2012, respectively.  The higher level of provision for credit losses when comparing the second quarter of 2013 to the first quarter of 2013 was primarily due to increases in loan net charge-offs ($306 thousand) and nonaccrual loans ($3.0 million).  Conversely, the lower level of provision for credit losses when comparing  the second quarter of 2013 to the second quarter of 2012 was primarily due to decreases in loan net charge-offs ($1.4 million) and nonaccrual loans ($13.1 million).  Net charge-offs were $2.7 million for the second quarter of 2013, $2.4 million for the first quarter of 2013 and $4.1 million for the second quarter of 2012.  The charge offs in all three quarters were mainly real estate related loans.  The ratio of quarter-to-date annualized net charge-offs to average loans was 1.38% for the second quarter of 2013, 1.25% for the first quarter of 2013 and 2.01% for the second quarter of 2012.  The ratio of the allowance for credit losses to period-end loans was 2.01% at June 30, 2013, compared to 2.00% at March 31, 2013 and 1.60% at June 30, 2012. 

Nonperforming assets at June 30, 2013 decreased $1.2 million when compared to March 31, 2013, which included declines in accruing troubled debt restructurings of $2.3 million and other real estate owned of $2.0 million,  partially offset by an increase in nonaccrual loans of  $3.0 million.  The decline in troubled debt restructurings was mainly due to two loan relationships that migrated to nonaccrual loans during the second quarter of 2013.  Nonperforming assets at June 30, 2013 decreased $8.7 million when compared to June 30, 2012, primarily due to an aggregate decline of $21.7 million in nonaccrual and 90 days past due and still accruing loans, and other real estate owned, partially offset by troubled debt restructurings which increased $13.0 million.  When comparing June 30, 2013 to June 30, 2012, the changes in the components of nonperforming assets reflected a shift primarily from nonaccrual loans to troubled debt restructurings.  Nonaccrual loans and troubled debt restructurings were approximately 38% and 55% of nonperforming assets, respectively, at June 30, 2013, compared to 48% and 37%, respectively, at June 30, 2012.  At June 30, 2013 and 2012, the ratio of nonaccrual loans to total assets was 3.30% and 4.08%, respectively, while accruing troubled debt restructurings to total assets was 4.77% and 3.17%, respectively. 

Total noninterest income for the second quarter of 2013 decreased $528 thousand, or 11.8%, when compared to the first quarter of 2013 and decreased $615 thousand, or 13.4%, when compared to the second quarter of 2012.  Included in other noninterest income for the second quarter of 2013 was a $1.3 million loss incurred to recognize the ineffective portion of the previously mentioned interest rate caps related to the IND Program.  This loss was substantially offset by $913 thousand in gains on sales of investment securities.  Insurance agency commissions for the second quarter of 2013 were $180 thousand lower when compared to the first quarter of 2013 due to the fact that contingency payments are typically received in the first quarter of the year.  However, such commissions were $227 thousand higher when compared to the second quarter of 2012 due to a stronger wholesale market.  Included in other noninterest income for the second quarter of 2012 was a $217 thousand gain on the sale of a bank branch building.

Total noninterest expense for the second quarter of 2013 decreased $732 thousand, or 7.0%, when compared to the first quarter of 2013, primarily due to lower write-downs of other real estate owned included in other noninterest expenses.  When compared to the second quarter of 2012, total noninterest expense for the second quarter of 2013 increased $96 thousand, or 1.0%. 

Review of Six-Month Financial Results

Net interest income for the first six months of 2013 was $17.5 million, a decrease of 4.1% when compared to the first six months of 2012.  The decrease was primarily due to lower yields earned on average earning assets and a decline in higher-yielding average loan balances.  The net interest margin was 3.45% for the first half of 2013 and 3.39% for the first half of 2012.

The provisions for credit losses for the six months ended June 30, 2013 and 2012 were $4.9 million and $11.9 million, respectively, while net charge-offs were $5.1 million and $13.2 million, respectively.  The ratio of year-to-date annualized net charge-offs to average loans was 1.32% for the first half of 2013 and 3.22% for the first half of 2012.

Total noninterest income for the six months ended June 30, 2013 decreased $699 thousand, or 7.6%, when compared to the same period in 2012.  Included in total noninterest income for the first half of 2013 were the $1.3 million loss incurred to terminate the interest rate caps associated with the IND Program and the $913 thousand in gains on sales of investment securities discussed above.  Insurance agency commissions grew $351 thousand in the first half of 2013 when compared to the first half of 2012.  Other noninterest income for the first six months of 2012 included the $217 thousand gain on the sale of a bank branch building.

Total noninterest expense for the six months ended June 30, 2013 increased $89 thousand, or less than 1.0%, when compared to the same period in 2012.  The increase was primarily due to higher insurance agency commissions expense ($190 thousand), FDIC insurance premiums ($116 thousand) and other noninterest expenses ($142 thousand) which were partially offset by lower salaries and wages ($202 thousand) and occupancy expense ($116 thousand).

Shore Bancshares Information
Shore Bancshares, Inc. is a financial holding company headquartered in Easton, Maryland and is the largest independent bank holding company located on Maryland's Eastern Shore.  It is the parent company of two banks, The Talbot Bank of Easton, Maryland, and CNB; three insurance producer firms, The Avon-Dixon Agency, LLC, Elliott Wilson Insurance, LLC and Jack Martin and Associates, Inc; a wholesale insurance company, TSGIA, Inc; an insurance premium finance company, Mubell Finance, LLC, and a registered investment adviser firm, Wye Financial Services, LLC.  Additional information is available at www.shbi.com.

Forward-Looking Statements 
 The statements contained herein that are not historical facts are forward-looking statements (as defined by the Private Securities Litigation Reform Act of 1995) based on management's current expectations and beliefs concerning future developments and their potential effects on the Company.  Such statements involve inherent risks and uncertainties, many of which are difficult to predict and are generally beyond the control of the Company.  There can be no assurance that future developments affecting the Company will be the same as those anticipated by management.  These statements are evidenced by terms such as "anticipate," "estimate," "should," "expect," "believe," "intend," and similar expressions.  Although these statements reflect management's good faith beliefs and projections, they are not guarantees of future performance and they may not prove true.  These projections involve risk and uncertainties that could cause actual results to differ materially from those addressed in the forward-looking statements.  For a discussion of these risks and uncertainties, see the section of the periodic reports filed by Shore Bancshares, Inc. with the Securities and Exchange Commission entitled "Risk Factors".

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.