Shore Bancshares Reports Third Quarter and Nine-Month Results

EASTON, Md., Oct. 18, 2018 /PRNewswire/ -- Shore Bancshares, Inc. (NASDAQ: SHBI) reported net income of $4.454 million or $0.35 per diluted common share for the third quarter of 2018, compared to net income of $4.391 million or $0.34 per diluted common share for the second quarter of 2018, and net income of $3.412 million or $0.27 per diluted common share for the third quarter of 2017.  The Company reported net income of $12.903 million or $1.01 per diluted common share for the first nine months of 2018, compared to net income of $8.564 million or $0.68 per diluted common share for the first nine months of 2017.

When comparing the third quarter of 2018 to the second quarter of 2018, the primary reasons for the improved results were increases in net interest income of $314 thousand, noninterest income of $170 thousand and a reduction in provision for credit losses of $111 thousand.  These improvements to income were partially offset by an increase in noninterest expenses of $458 thousand.  When comparing the third quarter of 2018 to the third quarter of 2017, improved results were due to increases in net interest income of $621 thousand, noninterest income of $285 thousand and a reduced corporate income tax rate from 35% to 21%, respectively, offset by an increase in noninterest expenses of $566 thousand.  When comparing the first nine months of 2018 to the first nine months of 2017, improved earnings were due to increases in net interest income of $4.8 million, noninterest income of $768 thousand, a reduction in provision for credit losses of $532 thousand and a lower corporate income tax rate.  Noninterest expenses increased $3.0 million when comparing the first nine months of 2018 to the first nine months of 2017, primarily due to operating four additional branches for the entire nine months of 2018 compared to only four months in 2017.

"We are pleased to report improved earnings for the quarter as we continue to experience strong loan demand and growth in our core deposits," said Lloyd L. "Scott" Beatty, Jr., President and Chief Executive Officer.  "Loans increased $23.7 million, while deposits increased $6.7 million when comparing the third and second quarter of 2018.  We remain diligent in our efforts to be a major participant in all lending and saving activities in the states of Maryland and Delaware as well as the Eastern Shore of Virginia."  

Balance Sheet Review
Total assets were $1.474 billion at September 30, 2018, a $79.0 million, or 5.7%, increase when compared to $1.394 billion at the end of 2017.  The primary reason for the increase was the addition of $87.0 million in loans, which were funded by a decrease in investment securities available for sale of $29.3 million, and an increase in short-term borrowings of $92.3 million.

Total deposits at September 30, 2018 decreased $20.9 million, or 1.7%, when compared to December 31, 2017.  The decrease in deposits was spread among all interest-bearing deposit categories with the exception of brokered deposits which increased $23.5 million in 2018.  In addition, noninterest-bearing deposits have increased $3.4 million in 2018 helping offset the decrease in interest-bearing deposits.  The decline in deposits was primarily due to seasonal shifts in municipal deposits coupled with deployment of capital by many small business customers.

Total stockholders' equity increased $7.7 million, or 4.7%, when compared to the end of 2017.  At September 30, 2018, the ratio of total equity to total assets was 11.63% and the ratio of total tangible equity to total tangible assets was 9.69%, lower than the 11.75% and slightly higher than the 9.65%, respectively, at December 31, 2017.

Total assets at September 30, 2018 increased $97.4 million, or 7.1%, when compared to total assets at September 30, 2017.  The primary reason for the increase was the growth in loans of $133.3 million, or 12.7% which was partially funded by the decrease in investment securities available for sale of $45.7 million.  Total deposits decreased $24.4 million, or 2.0%, when compared to September 30, 2017, which included a reduction in interest-bearing deposits of $30.1 million, partially offset by an increase in noninterest-bearing deposits of $5.7 million.  Total stockholders' equity increased $8.8 million, or 5.4%, when compared to September 30, 2017. 

Review of Quarterly Financial Results
Net interest income was $12.9 million for the third quarter of 2018, compared to $12.6 million for the second quarter of 2018 and $12.3 million for the third quarter of 2017.  The increase in net interest income when compared to the second quarter of 2018 was primarily due to an increase in average loans of $33.2 million contributing $574 thousand in interest and fees on loans, partially offset by an increase in interest expense on interest-bearing deposits of $246 thousand.  The increase in net interest income for the third quarter of 2018 when compared to the third quarter of 2017 was primarily due to an increase in average loans of $140.0 million resulting in $1.4 million in additional interest and fees on loans, partially offset by an increase in interest on short-term borrowings of $459 thousand and higher rates paid on interest-bearing deposits of $219 thousand.  The Company's net interest margin decreased to 3.76% from 3.79% in both the second quarter of 2018 and third quarter of 2017.  The decline in net interest margin from the second quarter of 2018 and the third quarter of 2017 was the direct result of increased short-term borrowings and rising rates paid on interest-bearing deposits which allowed the Bank to remain competitive for core deposits and help fund loan growth during the period.

The provision for credit losses was $307 thousand for the three months ended September 30, 2018.  The comparable amounts were $418 thousand and $345 thousand for the three months ended June 30, 2018 and September 30, 2017, respectively.  Net charge-offs were $100 thousand for the third quarter of 2018, $84 thousand for the second quarter of 2018 and $182 thousand for the third quarter of 2017.  The ratio of annualized net charge-offs to average loans was 0.03% for the third and second quarters of 2018 and 0.07% for the third quarter of 2017.  The ratio of the allowance for credit losses to period-end loans was 0.87% at September 30, 2018 and June 30, 2018 and 0.89% at September 30, 2017. 

At September 30, 2018, nonperforming assets were $8.9 million, an increase of $557 thousand, or 6.7%, when compared to June 30, 2018.  Nonaccrual loans increased $605 thousand, or 9.0%, while accruing TDRs decreased $687 thousand, or 7.1%.  When comparing September 30, 2018 to September 30, 2017, nonperforming assets increased $780 thousand, or 9.6%, and accruing TDRs decreased $4.6 million, or 33.8%.  The ratio of nonperforming assets to total assets was 0.60%, 0.57% and 0.59% at September 30, 2018, June 30, 2018 and September 30, 2017, respectively.  In addition, the ratio of accruing TDRs to total assets at September 30, 2018 was 0.61%, compared to 0.66% at June 30, 2018 and 0.98% at September 30, 2017.

Total noninterest income for the third quarter of 2018 increased $170 thousand, or 3.7%, when compared to the second quarter of 2018 and increased $285 thousand, or 6.4%, when compared to the third quarter of 2017.  The increase from the second quarter of 2018 was primarily due to increases in loan fee income, fees on bank services and service charges on deposit accounts.  The increase when compared to the third quarter of 2017 was due to increased loan servicing and fee income and higher insurance agency commissions. 

Total noninterest expense for the third quarter of 2018 increased $458 thousand, or 4.2%, when compared to the second quarter of 2018 and increased $566 thousand, or 5.3%, when compared to the third quarter of 2017.  The increase in noninterest expenses from the second quarter of 2018 was primarily due to increased salary and wages due to an additional working day in the quarter, increased data processing fees and a write-down on an OREO property of $128 thousand.  The increase in noninterest expense for the third quarter of 2018 compared to the third quarter of 2017 was primarily due to increases in salary and wages and employee benefits resulting from pay increases, the filling of vacant positions throughout the Company and additional amortization of intangibles acquired in the Northwest branch acquisition in 2017.

Review of Nine-Month Financial Results
Net interest income for the first nine months of 2018 was $37.9 million, an increase of $4.7 million, or 14.3% when compared to the first nine months of 2017.  The increase was primarily due an increase in average loans of approximately $184.2 million and higher yields earned on taxable investment securities. This contributed to an increase in the yield on total earning assets of 17 bps over the first nine months of 2017. Partially offsetting the significant improvement on total earning assets for the first nine months of 2018 were increases in the average balance on short-term borrowings of $75.0 million and interest-bearing deposits of $47.4 million. Despite the increase in the cost of total interest-bearing liabilities of 16 bps, the net interest margin improved to 3.79% for the first nine months of 2018 compared to 3.75% for the first nine months of 2017.      

The provisions for credit losses for the nine months ended September 30, 2018 and 2017 were $1.2 million and $1.7 million, respectively, while net charge-offs were $667 thousand and $1.2 million, respectively.  The ratio of year-to-date annualized net charge-offs to average loans was 0.08% for the first nine months of 2018 and 0.16% for the first nine months of 2017.

Total noninterest income for the nine months ended September 30, 2018 increased $768 thousand, or 5.7%, when compared to the same period in 2017, primarily due to other noninterest income of $445 thousand which included higher fees on bank services of $326 thousand and higher loan fee income of $69 thousand.  In addition, service charges on deposit accounts increased $177 thousand while both Trust and Insurance divisions had positive variances.

Total noninterest expense for the nine months ended September 30, 2018 increased $3.0 million, or 9.8%, when compared to the same period in 2017.  The increase was primarily due to the cost of operating four additional branches which caused increases in almost all noninterest expense line items, offset by lower data processing fees, other real estate owned expenses and legal and professional fees.

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, with two specialty lines, Elliott Wilson Insurance (Trucking) and Jack Martin Associates (Marine); and an insurance premium finance company, Mubell Finance, LLC.  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.