Shore Bancshares Reports Third Quarter and Nine-Month Results

EASTON, Md., Oct. 19, 2017 /PRNewswire/ -- Shore Bancshares, Inc. (NASDAQ: SHBI) reported net income of $3.412 million or $0.27 per diluted common share for the third quarter of 2017, compared to net income of $2.352 million or $0.19 per diluted common share for the second quarter of 2017, and net income of $2.411 million or $0.19 per diluted common share for the third quarter of 2016.  The Company reported net income of $8.6 million or $0.68 per diluted common share for the first nine months of 2017, compared to net income of $7.1 million or $0.56 per diluted common share for the first nine months of 2016.

When comparing the third quarter of 2017 to the second quarter of 2017, the primary reasons for the improved results were increases in net interest income of $1.4 million, noninterest income of $246 thousand and a reduction in provision for credit losses of $629 thousand.  These improvements to income were partially offset by an increase in noninterest expenses of $521 thousand.  The increases in both net interest income and noninterest expenses were mainly attributed to a full quarter of operating the three branches acquired from Northwest Bank during the second quarter of 2017.  When comparing the third quarter of 2017 to the third quarter of 2016, improved results were due to increases in net interest income of $2.7 million, noninterest income of $418 thousand and a reduction in provision for credit losses of $260 thousand, respectively, offset by an increase in noninterest expenses of $1.5 million.  When comparing the first nine months of 2017 to the first nine months of 2016, improved earnings were due to increases in net interest income of $4.9 million and noninterest income of $822 thousand.  Noninterest expenses increased $2.6 million, of which $977 thousand related to merger and acquisition costs from the branch purchase.

"We are pleased to report improved earnings for the quarter, which reflected the accretion to earnings from the branch acquisition in the second quarter," said Lloyd L. "Scott" Beatty, Jr., President and Chief Executive Officer.  "During the quarter we opened a new branch in Onley, Virginia providing the opportunity to increase loans and deposits while expanding our market presence."  

Balance Sheet Review
Total assets were $1.376 billion at September 30, 2017, a $215.9 million, or 18.6%, increase when compared to $1.160 billion at the end of 2016.  The primary reason for the increase was the acquisition of three branches in the second quarter of 2017 which consisted of assets which had a balance of $200.3 million at September 30, 2017.  Absent the branch acquisition, total assets have increased $15.6 million since December 31, 2016 which include increases in both gross loans of $59.2 million and investment securities of $49.6 million. These increases were funded by a decrease in interest-bearing deposits with other banks of $96.2 million. 

Total deposits at September 30, 2017 increased $208.7 million, or 20.9%, when compared to December 31, 2016.  The increase was the direct result of the deposits acquired in the recent branch purchase which had a balance of $199.9 million at September 30, 2017. Excluding the acquisition, deposits increased $8.8 million, the result of increases in noninterest bearing deposits of $50.6 million and checking deposits of $21.6 million, which were partially offset by decreases in money market and savings deposits of $22.6 million and time deposits of $40.8 million. 

Total stockholders' equity increased $8.3 million, or 5.4%, when compared to the end of 2016.  At September 30, 2017, the ratio of total equity to total assets was 11.82% and the ratio of total tangible equity to total tangible assets was 9.67%, lower than the 13.30% and 12.32%, respectively, at December 31, 2016 primarily due to the branch acquisition which significantly increased both tangible and intangible assets.

Review of Quarterly Financial Results
Net interest income was $12.3 million for the third quarter of 2017, compared to $10.9 million for the second quarter of 2017 and $9.7 million for the third quarter of 2016.  The increase in net interest income when compared to the second quarter of 2017 and the third quarter of 2016 was primarily due a full quarter of earnings from the loans acquired from the branch purchase in the second quarter of 2017.   Total interest income on loans increased $1.3 million, or 12.7% during the third quarter of 2017, which was the direct result of the loans acquired from the branch purchase which carried higher yields than the Company's legacy portfolio, resulting in an increase in yields on average loans of 12 basis points ("bps").  In addition, the yields on total earning assets increased 6bps, while interest-bearing liabilities decreased 1bp, due to utilizing cash received from the purchase to reduce short-term borrowings.  These positive variances resulted in a net interest margin of 3.79% for the third quarter of 2017, compared to 3.73% for the second quarter of 2017.  The net interest margin improved for the third quarter of 2017 compared to the third quarter of 2016, primarily due to an increase in average loans of $197.6 million and investment securities of $28.2 million, coupled with lower rates paid on interest-bearing deposits and improved credit quality.            

The provision for credit losses was $345 thousand for the three months ended September 30, 2017.  The comparable amounts were $974 thousand and $605 thousand for the three months ended June 30, 2017 and September 30, 2016, respectively.  The decreased level of provision for credit losses when comparing the third quarter of 2017 to the second quarter of 2017 was due to a partial charge-off of a negotiated restructured commercial loan in the second quarter of 2017. The decreased level of provision for credit losses when comparing the third quarter of 2016 was due to lower charge-offs and improved credit quality.  Net charge-offs were $182 thousand for the third quarter of 2017, $769 thousand for the second quarter of 2017 and $349 thousand for the third quarter of 2016.  The ratio of annualized net charge-offs to average loans was 0.07% for the third quarter of 2017, 0.32% for the second quarter of 2017 and 0.17% for the third quarter of 2016.  The ratio of the allowance for credit losses to period-end loans was 0.89% at September 30, 2017, 0.88% at June 30, 2017 and 1.00% at September 30, 2016.  The decrease at September 30, 2017 and June 30, 2017 relative to September 30, 2016 primarily reflects the performing loans acquired in the recent branch acquisition. 

At September 30, 2017, nonperforming assets were $8.1 million, a decrease of $1.7 million, or 17.1%, when compared to June 30, 2017.  Nonaccrual loans declined $868 thousand, or 12.1% which was due to two loans transitioning from nonaccrual troubled debt restructurings ("TDRs") to accruing TDRs which reflected an increase of $1.4 million, or 11.3% compared to June 30, 2017.  When comparing September 30, 2017 to September 30, 2016, nonperforming assets decreased $5.6 million, or 41.1%, and accruing TDRs increased $220 thousand, or 1.7%.  The positive trend in nonperforming assets when comparing September 30, 2017 to September 30, 2016 resulted from the Company's continued workout efforts.  The ratio of nonperforming assets to total assets was 0.59%, 0.72% and 1.19% at September 30, 2017, June 30, 2017 and September 30, 2016, respectively.  In addition, the ratio of accruing TDRs to total assets at September 30, 2017 was 0.98%, compared to 0.89% at June 30, 2017 and 1.15% at September 30, 2016.

Total noninterest income for the third quarter of 2017 increased $246 thousand, or 5.9%, when compared to the second quarter of 2017 and increased $418 thousand, or 10.4%, when compared to the third quarter of 2016.  The increase from the second quarter of 2017 was primarily due to service charges on deposit accounts for a full quarter on the deposits acquired in the branch purchase, higher insurance agency commissions and an increase on an insurance agency investment included in other noninterest income.  The increase from the third quarter of 2016 was due to higher service charges and fees on deposit accounts, higher trust and investment income, higher insurance agency commissions and a positive result on an insurance agency investment, partially offset by higher recognized gains on investment securities in the third quarter of 2016. 

Total noninterest expense for the third quarter of 2017 increased $521 thousand, or 5.1%, when compared to the second quarter of 2017 and increased $1.5 million, or 16.3%, when compared to the third quarter of 2016.  The increase in noninterest expenses from the second quarter of 2017 was primarily due to a full quarter of operating three additional branches acquired in the second quarter of 2017.  The branch purchase resulted in increases in salary and wages, employee benefits, and FDIC insurance premium expense, which were partially offset by lower legal and professional fees which also related to the acquisition.  The increases in noninterest expenses for the third quarter of 2017 compared to the third quarter of 2016 were primarily due to operating three additional branches, acquisition costs and increases in employee benefits due to the higher insurance premiums paid for group insurance and higher salaries and wages due to pay increases implemented in the first quarter of 2017.

Review of Nine-Month Financial Results
Net interest income for the first nine months of 2017 was $33.2 million, an increase of $4.9 million, or 17.2% when compared to the first nine months of 2016.  The increase was primarily due an increase in average loans of approximately $144.9 million and a decline in rates paid on interest-bearing deposits of 6bps.  The increase in volume on loans was the direct result of loans acquired from the branch purchase in the second quarter of 2017 and the organic growth of loans which were funded by lower yielding assets and core deposits acquired from the purchase. These factors resulted in an increase in the yield on total earning assets of 16bps over the first nine months of 2016.  This, coupled with higher yields earned on investment securities and two rate increases by the Federal Reserve which impacted interest-bearing deposits with other banks, resulted in a net interest margin of 3.75% for the first nine months of 2017 compared to 3.54% for the first nine months of 2016.      

The provisions for credit losses for the nine months ended September 30, 2017 and 2016 were $1.7 million and $1.4 million, respectively, while net charge-offs were $1.2 million and $1.1 million, respectively.  The ratio of year-to-date annualized net charge-offs to average loans was 0.16% for the first nine months of 2017 and 0.19% for the first nine months of 2016.

Total noninterest income for the nine months ended September 30, 2017 increased $822 thousand, or 6.5%, when compared to the same period in 2016, primarily due to increases in insurance agency commissions of $185 thousand and other noninterest income of $538 thousand which included higher fees on bank services of $241 thousand and positive earnings from an insurance investment of $274 thousand.

Total noninterest expense for the nine months ended September 30, 2017 increased $2.6 million, or 9.5%, when compared to the same period in 2016.  The increase was primarily due to the branch purchase in the second quarter of 2017 which resulted in merger and acquisition costs of $977 thousand and the cost of operating those branches for four months. In addition, higher salaries/wages and employee benefits resulted in increased non-interest expenses which were partially offset by a decrease in FDIC insurance premiums.     

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 Shore United Bank; one retail insurance producer firm, The Avon-Dixon Agency, LLC ("Avon-Dixon"), with two specialty lines, Elliott Wilson Insurance (Trucking) and Jack Martin Associates (Marine); and an insurance premium finance company, Mubell Finance, LLC ("Mubell").  Shore Bancshares Inc. engages in trust and wealth management services through Wye Financial & Trust, a division of Shore United Bank.  Additional information is available at www.shorebancshares.com.

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

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.