Shore Bancshares, Inc. (NASDAQ:SHBI) reported net income of $2.411 million or $0.19 per diluted common share for the third quarter of 2016, compared to net income of $2.272 million or $0.18 per diluted common share for the second quarter of 2016, and net income of $1.909 million or $0.15 per diluted common share for the third quarter of 2015. The Company reported net income of $7.1 million or $0.56 per diluted common share for the first nine months of 2016, compared to net income of $4.9 million or $0.39 per diluted common share for the first nine months of 2015.
When comparing the third quarter of 2016 to the second quarter of 2016, the primary reasons for the improved results were due to an increase in net interest income of $275 thousand and lower noninterest expenses of $148 thousand, partially offset by an increase in the provision for credit losses of $230 thousand and lower noninterest income of $34 thousand. When comparing the third quarter of 2016 to the third quarter of 2015, improved results were due to an increase in net interest income of $648 thousand, attributed to significant loan growth between the periods, and higher noninterest income of $102 thousand coupled with lower noninterest expenses of $179 thousand. When comparing the first nine months of 2016 to the first nine months of 2015, improved earnings were due to increases in net interest income of $2.1 million and noninterest income of $811 thousand. Noninterest expenses decreased $479 thousand due to lower FDIC insurance premiums from the removal of the consent order for the former Talbot Bank along with a reduction in internal audit and legal fees.
“We are excited to report improved earnings as well as significant growth in our loan portfolio for the quarter.” said Lloyd L. “Scott” Beatty, Jr., president and chief executive officer. “The loan growth experienced in the quarter positions us to potentially meet our goal of 8-10% growth for 2016. We continue to place an extraordinary emphasis on high credit quality standards when originating new loans allowing us to achieve maximum earning potential.”
Balance Sheet Review
Total assets were $1.158 billion at September 30, 2016, a $22.7 million, or 2.0%, increase when compared to $1.135 billion at the end of 2015. The increase in total assets was primarily the result of an increase in gross loans of $65.4 million or 8.2%, which was partially funded by decreases in investment securities of $37.4 million.
Total deposits at September 30, 2016 increased $16.8 million, or 1.7%, when compared to December 31, 2015. The increase in total deposits was due to increases in noninterest-bearing and savings deposits of $26.9 million and $19.5 million, respectively, partially offset by a decline in interest-bearing demand deposits of $8.0 million and time deposits of $21.6 million. Total stockholders’ equity increased $7.9 million, or 5.4%, when compared to the end of 2015. At September 30, 2016, the ratio of total equity to total assets was 13.37% and the ratio of total tangible equity to total tangible assets was 12.39%, higher than the 12.95% and 11.93%, respectively, at December 31, 2015.
Total assets at September 30, 2016 increased $40.1 million, or 3.6%, when compared to total assets at September 30, 2015. The increase in total assets was primarily due to an increase in gross loans of $83.5 million, or 10.7%. The increase was offset by a decrease in investment securities available for sale of $45.6 million, which was used to partially fund the loan growth. Total deposits increased $32.9 million, or 3.4%, when compared to September 30, 2015. The increase in total deposits were due to increases in non-interest bearing deposits of $35.6 million, money market and savings deposits of $25.0 million, and interest-bearing checking of $10.2 million, partially offset by a decrease in time deposits of $37.9 million. Total stockholders’ equity increased $8.9 million, or 6.1%, when compared to September 30, 2015.
Review of Quarterly Financial Results
Net interest income was $9.7 million for the third quarter of 2016, compared to $9.4 million for the second quarter of 2016 and $9.0 million for the third quarter of 2015. The increase in net interest income when compared to the second quarter of 2016 and the third quarter of 2015 were primarily due to higher volumes on loans coupled with lower rates paid on interest-bearing deposits. Although loan volume increased in the third quarter of 2016 compared to the second quarter of 2016, continued downward repricing on loan renewals had a negative impact on loan yields of 6bps, partially offset by lower rates paid on interest-bearing deposits of 3bps, resulting in a net interest margin of 3.54% compared to 3.57%. Net interest margin improved for the third quarter of 2016 compared to the third quarter of 2015, primarily due to lower rates paid on interest-bearing deposits and improved credit quality in the loan portfolio which offset lower yields on loans.
The provision for credit losses was $605 thousand for the three months ended September 30, 2016. The comparable amounts were $375 thousand and $410 thousand for the three months ended June 30, 2016 and September 30, 2015, respectively. The increased level of provision for credit losses when comparing the third quarter of 2016 to the second quarter of 2016 and the third quarter of 2015 was the result of an increase in gross loans of $39.5 million and $83.5 million, respectively. Net charge-offs were $349 thousand for the third quarter of 2016, $326 thousand for the second quarter of 2016 and $229 thousand for the third quarter of 2015. The ratio of annualized net charge-offs to average loans was 0.17% for the third quarter of 2016, 0.16% for the second quarter of 2016 and 0.12% for the third quarter of 2015. The ratio of the allowance for credit losses to period-end loans was 1.00% at September 30, 2016, lower than 1.02% at June 30, 2016 and 1.04% at September 30, 2015, which reflects loan growth and management’s assessment of the improved credit quality in the loan portfolio.
At September 30, 2016, nonperforming assets were $13.8 million, a decrease of $1.7 million, or 10.9%, when compared to June 30, 2016. Additionally, accruing troubled debt restructurings (“TDRs”) decreased $65 thousand, or less than 1.0% compared to June 30, 2016. When comparing September 30, 2016 to September 30, 2015, nonperforming assets decreased $2.3 million, or 14.2%, and accruing TDRs decreased $3.2 million, or 19.2%. The positive trend in nonperforming assets and TDRs when comparing September 30, 2016 to September 30, 2015 resulted from the Company’s continued workout efforts and modest improvement in economic conditions in the Company’s market area. The ratio of nonperforming assets to total assets was 1.19%, 1.37% and 1.43% at September 30, 2016, June 30, 2016 and September 30, 2015, respectively. In addition, the ratio of accruing TDRs to total assets at September 30, 2016 was 1.15%, compared to 1.18% at June 30, 2016 and 1.47% at September 30, 2015.
Total noninterest income for the third quarter of 2016 decreased $34 thousand, or less than 1%, when compared to the second quarter of 2016 and increased $102 thousand, or 2.6%, when compared to the third quarter of 2015. The decrease from the second quarter of 2016 was primarily due to a loss on other real estate owned, partially offset by an increase in insurance agency commissions. The increase from the third quarter of 2015 was due to higher service charges and fees on deposit accounts, partially offset by lower insurance agency commissions.
Total noninterest expense for the third quarter of 2016 decreased $148 thousand, or 1.6%, when compared to the second quarter of 2016 and decreased $179 thousand, or 1.9%, when compared to the third quarter of 2015. The decreases in noninterest expenses from the second quarter of 2016 were primarily due to lower than expected FDIC insurance premium expense of $164 thousand, lower legal and professional fees of $169 thousand and a decrease in write-downs of other real estate owned property of $64 thousand. The decrease in FDIC insurance premium expense was the result of a nonrecurring adjustment to the annual assessment in the third quarter of 2016. Legal and professional fees were higher in the second quarter of 2016 when compared to the third quarter of 2016 due to legal expenses incurred in preparation of the consolidation of the former bank subsidiaries. These decreases were partially offset by increased costs in data processing fees and other expenses due to the consolidation of the former bank subsidiaries of $279 thousand. The decreases in noninterest expenses from the third quarter of 2016 compared to the third quarter of 2015 were primarily due to a decline in salaries and wages, reduced FDIC insurance assessments and lower legal and professional expenses.
Review of Nine-Month Financial Results
Net interest income for the first nine months of 2016 was $28.3 million, an increase of 7.8% when compared to the first nine months of 2015. The increase was primarily due to significant growth of average loans of approximately $76.3 million and the shift of average deposits from time deposits to demand and money market accounts offering lower rates. The decrease in the average yield on loans was offset by the transition of lower yielding securities to new loan growth allowing the yield on total earning assets to remain unchanged. The lower rates paid on interest-bearing deposits resulted in an improved net interest margin to 3.54% from 3.43%.
The provisions for credit losses for the nine months ended September 30, 2016 and 2015 were $1.4 million and $1.6 million, respectively, while net charge-offs were $1.1 million and $1.2 million, respectively. The ratio of year-to-date annualized net charge-offs to average loans was 0.19% for the first nine months of 2016 and 0.22% for the first nine months of 2015.
Total noninterest income for the nine months ended September 30, 2016 increased $811 thousand, or 6.9%, when compared to the same period in 2015, primarily due to increases in service charges on deposit accounts of $521 thousand, insurance agency commissions of $240 thousand and other noninterest income of $226 thousand, partially offset by a decline in trust and investment fee income of $206 thousand. The increase in other noninterest income consisted of bank service and loan fees of $197 thousand.
Total noninterest expense for the nine months ended September 30, 2016 decreased $479 thousand, or 1.7%, when compared to the same period in 2015. The decrease was primarily due to a decline in legal and professional fees of $506 thousand and reduced FDIC insurance premiums of $279 thousand, partially offset by an increase in consolidation expenses for the former bank subsidiaries of $362 thousand. The increased legal and professional fees in 2015 were the direct result of management outsourcing its internal audit function which resulted in significant implementation costs. In addition, the lower FDIC insurance premiums over the prior period are the direct result of the upgraded regulatory status and financial performance of the former Talbot Bank of Easton in the second quarter of 2015 and an adjustment of the annual assessment in the third quarter of 2016.
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.