Shore Bancshares Reports Second Quarter and First-Half Results

EASTON, Md., July 23, 2020 /PRNewswire/ -- Shore Bancshares, Inc. (NASDAQ: SHBI) (the "Company") reported income from continuing operations of $5.335 million or $0.43 per diluted common share for the second quarter of 2020, compared to income from continuing operations of $3.118 million or $0.25 per diluted common share for the first quarter of 2020, and income from continuing operations of $4.228 million or $0.33 per diluted common share for the second quarter of 2019. Income from continuing operations for the first half of 2020 was $8.453 million or $0.68 per diluted common share, compared to income from continuing operations of $8.056 million or $0.63 per diluted common share for the first half of 2019.

When comparing income from continuing operations for the second quarter of 2020 to the first quarter of 2020, net income increased $2.2 million, primarily due to a decrease in noninterest expenses of $2.7 million. In addition, net interest income and noninterest income increased $513 thousand and $417 thousand, respectively, partially offset by an increase in the provision for credit losses of $650 thousand. When comparing income from continuing operations for the second quarter of 2020 to the second quarter of 2019, net income increased $1.1 million due to a decrease in noninterest expense of $1.3 million, coupled with increases in net interest income of $738 thousand and noninterest income of $160 thousand, partially offset by an increase in the provision for credit losses of $800 thousand.

"During these uncertain times in the midst of the current health and economic crisis, the Company has remained a viable source of strength in our communities," said Lloyd L. "Scott" Beatty, Jr., President and Chief Executive Officer.  "The first half of 2020 has been challenging, but the resolve of our committed team has produced very positive results. Our earnings remain healthy despite increases to our provision for credit losses during the second quarter, deposit growth has been remarkable, loan growth remains on budget, and the Company's strong capital position enables us to weather the current economic climate."  

Ongoing response to COVID-19

Employees
Many of our non-branch personnel have returned to our offices and continue to practice social distancing as the Company has implemented enhanced cleaning and disinfecting procedures across all locations. Most of our Company meetings have transitioned to telephonic or video conferencing. We suspended all unnecessary business-related travel, public events, and meetings with outside parties to promote the safety and well-being of our employees.

Banking Locations
All our branch locations remain open, with normal hours of operation. We have re-opened our branch lobbies to the public with limits on the number of people allowed in the branch at any time.  The drive-thru locations have expanded their capabilities to accommodate an array of transactions for our customers. We notified our customers of our changes in operations as well as promoted the use of online and mobile banking.

Customers
We thank our customers for their commitment and understanding as we continue to find ways to serve them as safely and securely as possible. For our customers impacted by the pandemic, we have provided fee waivers and loan payment deferrals to assist them during this challenging time. The Company has provided total loan deferrals of $221.1 million which consists of 15.7% of the total loan portfolio as of June 30, 2020. The most significant deferrals by loan type or industry were as follows: hospitality of $80.4 million, retail stores of $58.6 million, other commercial of $66.7 million, residential 1-4 family rentals of $10.0 million and restaurants of $5.3 million.

Small Business Administration's Paycheck Protection Program ("PPP")
We remain an SBA preferred lender and are actively participating in the PPP program. From the inception of the program through June 30, 2020, we had provided loans for 1,427 small business customers totaling $123.0 million. We will continue to process applications until the government funding is completely exhausted.

Share Repurchases
We have suspended all share buybacks of our Company's common stock until further notice.

Dividends
We currently expect to maintain our quarterly cash dividends based on our strong capital position.

Balance Sheet Review
Total assets were $1.720 billion at June 30, 2020, a $160.3 million, or 10.3%, increase when compared to $1.559 billion at the end of 2019.  The increase was primarily due to the $158.6 million, or 12.7% increase in gross loans, of which $123.0 million related to PPP loans.  The increase in gross loans was funded by an increase in deposits of $163.4 million, or 12.2%.   

Total deposits increased $163.4 million, or 12.2%, when compared to December 31, 2019.  The increase in total deposits consisted of increases in all deposit categories. Noninterest-bearing deposits increased $86.4 million, checking accounts increased $42.7 million, savings and money market accounts increased $32.7 million and time deposits increased $1.6 million. A significant amount of the PPP loan proceeds resided in deposit accounts as of June 30, 2020. The Company expects these funds to be utilized over the coming weeks and months, which may or may not result in a decline in deposit balances.

Total stockholders' equity increased $7.3 million, or 3.8%, when compared to the end of 2019. At June 30, 2020, the ratio of total equity to total assets was 11.64% and the ratio of total tangible equity to total tangible assets was 10.63%.

Total assets at June 30, 2020 increased $231.0 million, or 15.5%, when compared to total assets at June 30, 2019, primarily the result of loan growth of $167.0 million and an increase in cash and cash equivalents of $87.0 million. Investment securities (including restricted securities) decreased $55.0 million, which was used to partially fund loan growth. 

Total deposits at June 30, 2020 increased $255.7 million, or 20.5%, when compared to June 30, 2019. The increase in total deposits included growth within interest-bearing checking accounts of $112.8 million, noninterest-bearing deposits of $96.1 million, savings and money market accounts of $55.7 million and time deposits of $11.2 million. Brokered deposits of $20.0 million rolled off by June 30, 2020 as they were no longer needed as a funding source. 

Total stockholders' equity increased $8.8 million, or 4.6%, when compared to June 30, 2019.

Review of Quarterly Financial Results
Net interest income was $13.0 million for the second quarter of 2020, compared to $12.5 million for the first quarter of 2020 and $12.3 million for the second quarter of 2019. The increase in net interest income when compared to the first quarter of 2020 was primarily due to the decrease in the average rate paid on interest-bearing deposits of 23bps, coupled with the payoff of FHLB borrowings which reduced interest expense by $101 thousand. The increase in the average balance in noninterest bearing deposits of $67.6 million also contributed to lower interest expense for the quarter by reducing the Company's reliance on interest-bearing sources of funding. The significant growth in the average balance of loans of $110.9 million helped offset the decreased yield on loans of 31bps, which was primarily the result of adding the $123.0 million of PPP loans which had an average yield of 2.36% for the second quarter of 2020, inclusive of the stated interest rate of 1.0% and the net accretion of origination fees and costs. Also impacting total earning assets for the second quarter of 2020 was the decrease in the average balance of taxable investment securities of $21.5 million coupled with the decrease in yield on interest-bearing deposits with other banks of 113bps. Net interest income increased when compared to the second quarter of 2019 due to a decrease in interest expense of $893 thousand, or 36.4%. The decrease in interest expense was the direct result of the significant decline in both long-term and short-term borrowings which both carried higher rates than interest bearing deposits. In addition, the rates paid on interest bearing deposits declined by a combined 37bps.  The average balance of loans increased $153.1 million, when compared to the second quarter of 2019 which provided an additional $196 thousand of interest income, but was offset by the decline in the average balance in taxable securities of $52.0 million and the decrease in the yield on interest-bearing deposits with other banks of 240bps. The Company's net interest margin decreased to 3.41% for the second quarter of 2020 from 3.48% in the first quarter of 2020 and down from 3.54% in the second quarter of 2019. 

The provision for credit losses was $1.0 million for the three months ended June 30, 2020.  The comparable amounts were $350 thousand and $200 thousand for the three months ended March 31, 2020 and June 30, 2019, respectively. The ratio of the allowance for credit losses to period-end loans was 0.79% at June 30, 2020. Excluding PPP loans, the ratio of the allowance for credit losses to period-end loans was 0.86% at June 30, 2020, higher than both the 0.81% at March 31, 2020 and the 0.83% at June 30, 2019. The primary drivers of the increased percentage of the allowance to total loans, excluding PPP loans, and the increase in provision for loan losses as compared to both the prior periods were increases in qualitative factors and, in particular, elevated unemployment statistics, the impact of the COVID-19 pandemic, as well as an increase in loan volume. Net charge-offs were $288 thousand for the second quarter of 2020, compared to $479 thousand for the first quarter of 2020 and $313 thousand for the second quarter of 2019. The charge-offs in the second quarter related to continued workout efforts on nonperforming assets.

At June 30, 2020 and March 31, 2020, nonperforming assets were $12.3 million. Total nonperforming assets were $15.6 million at June 30, 2019. Total nonperforming assets decreased by $8 thousand between the linked quarters, which consisted of an increase in nonaccruals of $109 thousand, offset by a decrease in loans 90 days and still accruing of $117 thousand. Accruing troubled debt restructurings ("TDRs") decreased $132 thousand, or 1.8%, over the same time period. When comparing June 30, 2020 to June 30, 2019, nonperforming assets decreased $3.3 million, or 21.0%, and accruing TDRs decreased $456 thousand, or 5.9%. The decrease in nonperforming assets from June 30, 2019 to June 30, 2020 was due to diligent workout efforts by the Company to reduce nonaccrual loans and other real estate owned properties. The ratio of nonperforming assets and accruing TDRs to total assets was 1.14% at June 30, 2020, 1.25% at March 31, 2020 and 1.56% at June 30, 2019.  In addition, the ratio of accruing TDRs to total loans at June 30, 2020 was 0.52%, compared to 0.58% at March 31, 2020 and 0.63% at June 30, 2019.

Total noninterest income for the second quarter of 2020 increased $417 thousand, or 17.7%, when compared to the first quarter of 2020 and increased $160 thousand, or 6.1%, when compared to the second quarter of 2019. The increase from the first quarter of 2020 was primarily due to sales of available for sale securities at a gain of $347 thousand. The increase from the second quarter of 2019 was due to additional income from BOLI purchased late in the fourth quarter of 2019, offset by lower service charges on deposit accounts and gains on sales of securities.

Total noninterest expense from continuing operations for the second quarter of 2020 decreased $2.7 million, or 26.0%, when compared to the first quarter of 2020 and decreased $1.3 million, or 14.7%, when compared to the second quarter of 2019. The decrease in noninterest expense when compared to the first quarter of 2020 and the second quarter of 2019 was primarily in salaries and wages, due to the increased volume in PPP loans which resulted in heightened FASB 91 costs being deferred for the period. These loan origination costs were deferred at origination along with the related origination fees. The net fees have and will continue to be accreted to interest income as a yield adjustment over the lives of the related PPP loans, which for most was 24 months at the time of origination. The recognition of these deferred fees and costs as a component of interest income will be accelerated upon forgiveness or repayment of the PPP loans. As previously stated, the Company funded 1,427 PPP loans during the second quarter of 2020 and does not anticipate this level of volume resulting in a reduction of salaries and wages expense in future quarters.

Review of Six-Month Financial Results
Net interest income for the first six months of 2020 was $25.5 million, an increase of $862 thousand, or 3.5% when compared to the first six months of 2019.  The increase was due to lower interest expense of $991 thousand which was a result of reduced interest expense on short and long-term borrowings of $455 thousand and lower costs on deposits of $536 thousand. These cost savings in interest expense were partially offset by a decrease in total interest income of $129 thousand. The decrease in interest income was the result of a decline in the average balance in taxable investment securities of $43.8 million, almost entirely offset by an increase in the average balance on loans of $107.3 million, despite a decline in loan yields of 31bps. This resulted in a net interest margin of 3.45% for the first six months of 2020 compared to 3.57% for the first six months of 2019.   

The provision for credit losses for the six months ended June 30, 2020 and 2019 was $1.4 million and $300 thousand, respectively, while net charge-offs were $767 thousand and $338 thousand, respectively.  The increase in provision for credit losses was the result of higher charge-offs in 2020 and qualitative factors related to economic conditions and the COVID-19 pandemic.  The ratio of allowance to total loans decreased over the first six months of the year from 0.84% at December 31, 2019 to 0.79% at June 30, 2020. As previously discussed, this ratio decreased as a result of the PPP loans' inclusion in the balance of total loans. Additionally, a reduction in specific reserves for certain legacy credits through charge-offs during the six months ended June 30, 2020 reduced the allowance to total loans ratio. The general reserve component of the allowance to legacy, non-impaired and non-PPP loans increased from 0.75% at December 31, 2019 to 0.89% at June 30, 2020, primarily resulting from increased qualitative allocations related to the COVID-19 pandemic. The ratio of annualized net charge-offs to average loans was 0.12% for the first half of 2020 and 0.06% for the first half of 2019. Management will continue to evaluate the adequacy of the allowance for credit losses as more economic data becomes available and as changes within the Company's portfolio are known.

Total noninterest income from continuing operations for the six months ended June 30, 2020 increased $324 thousand, or 6.8%, when compared to the same period in 2019. The increase in noninterest income primarily consisted of increases in BOLI income, gains on sales of securities and other fees on bank services, partially offset by a decrease in service charges on deposit accounts. 

Total noninterest expense from continuing operations for the six months ended June 30, 2020 decreased $316 thousand, or 1.7%, when compared to the same period in 2019. The decrease was a result of lower salaries and wages due to FASB 91 deferrals, lower FDIC insurance premiums and other real estate owned expenses, partially offset by higher employee benefit costs. The deferred costs for salaries and wages are being recognized over the lives of the related loans as previously mentioned.

Shore Bancshares Information

Shore Bancshares 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. Shore Bancshares engages in trust and wealth management services through Wye Financial Partners, 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".

Further, given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be fully reopened. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations: the demand for our products and services may decline, making it difficult to grow assets and income; if the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income; collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase; our allowance for loan losses may increase if borrowers experience financial difficulties, which will adversely affect our net income; the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; as the result of the decline in the Federal Reserve Board's target federal funds rate to near 0%, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income; our cyber security risks are increased as the result of an increase in the number of employees working remotely; and FDIC premiums may increase if the agency experience additional resolution costs.

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.