EASTON, Md., Jan. 31, 2019 /PRNewswire/ -- Shore Bancshares, Inc. (NASDAQ: SHBI) reported net income of $12.094 million or $0.95 per diluted common share for the fourth quarter of 2018, which included the sale of its retail insurance business, Avon Dixon, LLC ("Avon") on December 31, 2018 for net proceeds of $25.2 million and a net gain after tax of $8.2 million, or $0.64 per diluted common share.  Absent the sale of Avon, the Company reported net income of $3.905 million or $0.31 per diluted common share for the fourth quarter of 2018. This compared to net income of $4.454 million or $0.35 per diluted common share for the third quarter of 2018, and net income of $2.698 million or $0.21 per diluted common share for the fourth quarter of 2017.  The Company reported net income of $24.997 million or $1.96 per diluted common share for fiscal year 2018. Excluding the sale of Avon, the Company reported net income of $16.832 million or $1.32 per diluted common share for fiscal year 2018.  This compared to net income of $11.262 million, or $0.89 per diluted common share for fiscal year 2017, an increase of $5.6 million, or $0.43 per diluted common share.

When comparing the fourth quarter of 2018 to the third quarter of 2018, excluding the sale of Avon, net income decreased due to higher interest expenses on deposits and borrowings coupled with a higher provision for credit losses.  When comparing the fourth quarter of 2018 to the fourth quarter of 2017, excluding the sale of Avon, the improved results were driven by an increase in net interest income due to higher loan volume, partially offset by an increase in interest expenses which included competitive pressure to increase core deposit rates.  When comparing fiscal year 2018 to fiscal year 2017, excluding the sale of Avon, improved earnings were due to increases in net interest income of $5.1 million and noninterest income of $603 thousand. In addition, the provision for credit losses declined $617 thousand. Partially offsetting these positive variances were increases in interest expenses of $3.0 million and noninterest expenses of $3.5 million.  The reduced corporate income tax rate from 35% in 2017 to 21% for 2018 was also a contributing factor for improved earnings when comparing the fourth quarter and fiscal year 2018 to the fourth quarter and fiscal year 2017.

"This has been a significant year for the Company, in terms of loan growth, core earnings and the divesture of our insurance agency Avon-Dixon," said Lloyd L. "Scott" Beatty Jr., CEO. "The proceeds from the sale of our insurance agency will provide the opportunity to fund new loan growth and expand our activities in some of our new markets. As we look forward to 2019, we are committed to our strategic plan for growing the Company both organically and through opportunistic acquisitions."

Balance Sheet Review
Total assets were $1.483 billion at December 31, 2018, a $89.2 million, or 6.4%, increase when compared to $1.394 billion at the end of 2017.  The primary reason for the increase was the addition of $101.8 million in loans or 9.3%, which were funded by a decrease in investment securities available for sale of $42.5 million, and an increase in short-term and long-term borrowings of $54.1 million.

Total deposits at December 31, 2018 increased $9.6 million, or less than 1%, when compared to December 31, 2017.  The increase was due to increases in rates paid on core deposits as well as a new insured cash sweep ("ICS") product for customers.

Total stockholders' equity increased $19.5 million, or 11.9%, when compared to the end of 2017 primarily due to current year's earnings which included the sale of Avon, partially offset by common stock dividends paid to shareholders of $4.1 million.  At December 31, 2018, the ratio of total equity to total assets was 12.35% and the ratio of total tangible equity to total tangible assets was 11.13%, higher than the ratios of 11.75% and 9.65%, respectively, at December 31, 2017. These ratios were significantly impacted by the sale of Avon on December 31, 2018, which resulted in the transition of intangible assets to tangible assets.

Review of Quarterly Financial Results
Net interest income was $12.5 million for the fourth quarter of 2018, compared to $12.9 million for the third quarter of 2018 and $12.4 million for the fourth quarter of 2017.  The decrease in net interest income when compared to the third quarter of 2018 was primarily due to an increase in interest on deposits of $751 thousand and borrowings of $128 thousand.  The increase in interest on core deposits was implemented late in the third quarter and the entire fourth quarter of 2018 to combat competitive market rates.  This had a significant impact on the net interest margin, resulting in a decline of 18 bps. The increase in net interest income when compared to the fourth quarter of 2017 was due to significant increases in average loans of $126.5 million, or 11.9%.  Total interest income on loans increased $1.7 million, or 13.0% in the fourth quarter of 2018 as compared to the fourth quarter of 2017, which was mostly offset by an increase in interest expense of $1.6 million, or 261.9%.  In addition, the yield on total earning assets increased 21 bps, while the cost of interest-bearing liabilities increased 64 bps quarter over quarter.  These variances resulted in a net interest margin of 3.58% for the fourth quarter of 2018, compared to 3.81% for the fourth quarter of 2017. 

The provision for credit losses was $460 thousand for the fourth quarter of 2018, $307 thousand for the third quarter of 2018 and $545 thousand for the fourth quarter of 2017.  The higher level of provision for credit losses when comparing the fourth quarter of 2018 to the third quarter of 2018 was primarily due to one large credit of approximately $7.5 million, transitioning to nonaccrual during the fourth quarter. The Company took a partial charge-off on this relationship and no additional loss is anticipated. The decline in the provision for credit losses when comparing the fourth quarter of 2018 to the fourth quarter of 2017, was due to significant growth in the portfolio and overall improved credit quality despite the large nonaccrual added in the fourth quarter of 2018.  Net charge-offs were $445 thousand for the fourth quarter of 2018, $100 thousand for the third quarter of 2018 and $59 thousand for the fourth quarter of 2017.  The increase in net charge-offs was directly related to the one large credit discussed above. The ratio of annualized net charge-offs to average loans was 0.15% for the fourth quarter of 2018, 0.03% for the third quarter of 2018 and 0.02% for the fourth quarter of 2017.  The ratio of the allowance for credit losses to period-end loans for both December 31, 2018 and September 30, 2018 was 0.87% and was 0.89% at December 31, 2017.  

At December 31, 2018, nonperforming assets, excluding accruing TDRs, were $18.0 million, an increase of $9.1 million, or 102.8%, when compared to September 30, 2018 and an increase of $10.6 million, or 143.3%, when compared to December 31, 2017.  Additionally, accruing TDRs were $8.7 million at December 31, 2018, a decrease of $270 thousand, or 3.0%, when compared to September 30, 2018 and a decrease of $4.7 million, or 35.0%, when compared to December 31, 2017.  Although a significant nonaccrual loan was added late in the fourth quarter of 2018, the Company had been experiencing positive trends through continued workout efforts and charge-offs on persistent troubled borrowers for the last 12 months.  At December 31, 2018, the ratio of nonperforming assets to total assets was 1.21%, higher than the 0.60% at September 30, 2018 and 0.53% at December 31, 2017.  However, the ratio of accruing TDRs to total assets at December 31, 2018 was 0.58%, compared to 0.61% at September 30, 2018 and 0.96% at December 31, 2017.

Total noninterest income for the fourth quarter of 2018, excluding the sale of Avon, decreased $292 thousand, or 6.2%, when compared to the third quarter of 2018 and increased $79 thousand, or 1.8%, when compared to the fourth quarter of 2017.  The decrease from the third quarter of 2018 was primarily due to a decline in insurance agency commissions of $179 thousand, which is typical during the last quarter of the year, and the additional distraction of the sale of Avon.  The increase from the fourth quarter of 2017, excluding the sale of Avon, of $79 thousand was the result of increases in insurance agency commissions of $93 thousand and service charges on deposit accounts of $74 thousand, partially offset by a decrease in trust and investment fee income of $50 thousand.

Total noninterest expense for the fourth quarter of 2018 decreased $112 thousand, or 1.0%, when compared to the third quarter of 2018 and increased $542 thousand, or 5.1%, when compared to the fourth quarter of 2017.  The decrease from the third quarter of 2018 was primarily due to lower costs associated with employee benefits due to reduced medical claims from the Company's self-funded insurance program and lower salaries and wages due to lower accrued bonus and incentive payouts.  Partially offsetting these decreases in noninterest expense were higher legal and professional fees, mostly related to negotiating the sale of Avon, and a write-down of a single other real estate owned property of $212 thousand. The increase from the fourth quarter of 2017 was primarily due to increases in other real estate owned write-downs, higher legal fees due to the sale of Avon and additional amortization of intangibles acquired in the Northwest branch acquisition in 2017. 

Review of 2018 Financial Results
Net interest income for 2018 was $50.6 million, an increase of $5.1 million, or 11.2%, when compared to 2017 primarily due to an increase in average loans of $169.7 million, or 17.3%.  The significant increase in loans generated higher interest income of approximately $7.7 million, or 17.7%. Although the yields on loans remained flat when compared to 2017, the growth and the transition of lower yielding assets to higher yielding loans resulted in a higher overall yield on earning assets of 18bps. This was offset by higher rates paid on interest-bearing deposits and increased borrowings resulting in compression of the net interest margin to 3.74% for fiscal 2018 from 3.76% for fiscal 2017. 

The provision for credit losses for 2018 and 2017 was $1.7 million and $2.3 million, respectively, while net charge-offs were $1.1 million and $1.2 million, respectively.  The ratio of annualized net charge-offs to average loans was 0.10% for 2018 and 0.13% for 2017.

Total noninterest income, excluding the sale of Avon, for 2018 increased $603 thousand, or 3.4%, when compared to 2017.  The increase was primarily due to increases in service charges on deposit accounts of $251 thousand and insurance agency commissions of $169 thousand.

Total noninterest expense for 2018 increased $3.5 million, or 8.6%, when compared to 2017.  The increase was primarily due to the cost of operating four additional branches for an entire year which caused increases in almost all noninterest expense line items, offset by lower fees for data processing due to renegotiating the core processor contract in 2018 and lower legal/professional fees related to the branch acquisition in 2017. 

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 and an insurance premium finance company, Mubell Finance, LLC. Shore Bancshares 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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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SOURCE Shore Bancshares, Inc.