Shore Bancshares, Inc. (NASDAQ - SHBI) reported net income of $2.352 million or $0.19 per diluted common share for the second quarter of 2017, compared to net income of $2.800 million or $0.22 per diluted common share for the first quarter of 2017, and net income of $2.272 million or $0.18 per diluted common share for the second quarter of 2016. The Company reported net income of $5.152 million or $0.41 per diluted common share for the first half of 2017, compared to net income of $4.732 million or $0.37 per diluted common share for the first half of 2016.
The Company's core earnings for the second quarter of 2017 when excluding the acquisition costs of the Northwest Bank branches of $367 thousand, net of tax, resulted in net income of $2.719 million or $0.21 per diluted common share for the second quarter of 2017. On a comparative basis, the Company's core earnings for the first quarter of 2017 when excluding the acquisition costs of the Northwest Bank branches of $136 thousand, net of tax, resulted in net income of $2.936 million or $0.23 per diluted common share.
When comparing the second quarter of 2017 to the first quarter of 2017, the lower result was primarily attributable to lower noninterest income due to insurance agency contingent commissions which are typically received in the first quarter of the year, additional merger expenses due to the acquisition of three branches from Northwest Bank, and an increase in provision for credit losses due to a partial charge-off associated with a negotiated restructured commercial loan. When comparing the second quarter of 2017 to the second quarter of 2016, improved results were due to increases in net interest income and noninterest income of $1.5 million and $138 thousand, respectively, offset by increases in both provision for credit losses of $599 thousand and noninterest expenses of $834 thousand. When comparing the first half of 2017 to the first half of 2016, improved earnings were due to increases in net interest income and noninterest income of $2.2 million and $404 thousand, respectively, offset by increases in both the provision for credit losses of $576 thousand and noninterest expenses of $1.1 million.
"We are pleased to report another strong quarter of earnings despite the additional expenses related to the branch acquisition. While we absorbed the impact of these expenses primarily in the second quarter, we are well positioned to capitalize on the accretive earnings from both the newly acquired and legacy loan portfolios," said Lloyd L. "Scott" Beatty, Jr., president and chief executive officer. "We continue to be strategically focused on expanding our market footprint while maintaining our core values of healthy and stable loan and deposit growth."
Balance Sheet Review
Total assets were $1.363 billion at June 30, 2017, a $202.5 million, or 17.5%, increase when compared to $1.160 billion at the end of 2016. The primary reason for the increase was the acquisition of three branches from Northwest Bank which contributed $212.5 million in total assets, offset by decreases in interest-bearing deposits with other banks. The increase in gross loans, less the loans acquired from Northwest Bank of $122.5 million, was $40.5 million, or a 9.4% annualized loan growth rate for the period.
Total deposits increased $198.8 million, or 19.9%, when compared to December 31, 2016. The increase was the direct result of the acquisition of three branches from Northwest Bank which contributed $212.5 million in total deposits, offset by declines in time deposits and checking plus interest accounts. The deposits acquired from Northwest Bank were primarily core deposits consisting of the following: $34.6 million in noninterest bearing deposits, money market and savings deposits of $99.3 million and checking plus interest of $17.2 million. Noncore deposits acquired from Northwest Bank included $19.8 million in time deposits over $100 thousand and $41.7 million in other time deposits. Total stockholders' equity increased $5.6 million, or 3.7%, when compared to the end of 2016. At June 30, 2017, the ratio of total equity to total assets was 11.74% and the ratio of total tangible equity to total tangible assets was 9.60%, lower than the 13.30% and 12.32%, respectively, at December 31, 2016primarily due to the acquisition of the Northwest Bank branches which significantly increased both tangible and intangible assets.
Total assets at June 30, 2017 increased $237.1 million, or 21.1%, when compared to total assets at June 30, 2016. The primary reason for the increase was the acquisition of three branches from Northwest Bank which contributed $212.5 million in total assets. Gross loans increased $213.5 million, or 26.0% when compared to June 30, 2016, of which $122.5 million was acquired from Northwest Bank and $90.6 million, or 11.0% was originated organically. Total deposits increased $235.2 million, or 24.5%, when compared to June 30, 2016, of which $212.5 million was acquired from Northwest Bank and $22.7 million, or 2.4% was originated. Total stockholders' equity increased $7.6 million, or 5.0%, when compared to June 30, 2016.
Review of Quarterly Financial Results
Net interest income was $10.9 million for the second quarter of 2017, compared to $9.9 million for the first quarter of 2017 and $9.4 million for the second quarter of 2016. The increase in net interest income when compared to the first quarter of 2017 was primarily due to an increase in average loans of $78.9 million resulting in $891 thousand in additional interest and fees on loans, coupled with an increase in average investment securities of $20.3 million resulting in $110 thousand in additional income. These increases were partially offset by an increase in volume and rates paid on average interest-bearing deposits and short-term liabilities. The increase in net interest income for the second quarter of 2017 when compared to the second quarter of 2016 was primarily due to an increase in average loans of $152.4 million resulting in $1.3 million in additional interest and fees on loans. In addition, the Company was able to utilize the additional core deposits received in the Northwest Bank acquisition to fund loan growth which had a positive impact on net interest income despite the continual decrease in the overall yield on loans. The Company's net interest margin has remained flat at 3.71% for both the second and first quarter of 2017, and has increased over the second quarter of 2016 of 3.57%.
The provision for credit losses was $974 thousand for the three months ended June 30, 2017. The comparable amounts were $427 thousand and $375 thousand for the three months ended March 31, 2017 and June 30, 2016, respectively. The increase in the amount of provision for credit losses from the first quarter of 2017 of $547 thousand was associated with a partial charge-off of a negotiated restructured commercial loan. Net charge-offs were $769 thousand for the second quarter of 2017, $226 thousand for the first quarter of 2017 and $326 thousand for the second quarter of 2016. The ratio of annualized net charge-offs to average loans was 0.32% for the second quarter of 2017, 0.10% for the first quarter of 2017 and 0.16% for the second quarter of 2016. The ratio of the allowance for credit losses to period-end loans was 0.88% at June 30, 2017, lower than the 1.00% at March 31, 2017and 1.02% at June 30, 2016. The decrease in such ratio at June 30, 2017 was primarily due to the performing loans acquired in the Northwest Bank transaction with no associated allowance since they were purchased at fair value. Under the terms of the Northwest Bank asset purchase and assumptions agreement, Northwest Bank is required to repurchase any loan(s) that experience early payment default within 75 days after the May 19, 2017 closing.
At June 30, 2017, nonperforming assets were $9.8 million, a decrease of $1.4 million, or 12.7%, when compared to March 31, 2017 and accruing troubled debt restructurings ("TDRs") decreased $658 thousand, or 5.1% over the same time period. When comparing June 30, 2017 to June 30, 2016, nonperforming assets decreased $5.7 million, or 36.7%, and accruing TDRs decreased $1.2 million, or 9.1%. The positive trend in nonperforming assets and TDRs when comparing June 30, 2017 to June 30, 2016 resulted mostly from the Company's continued workout efforts. The ratio of nonperforming assets to total assets was 0.72%, 0.96% and 1.37% at June 30, 2017, March 31, 2017 and June 30, 2016, respectively. In addition, the ratio of accruing TDRs to total assets at June 30, 2017 was 0.89%, compared to 1.10% at March 31, 2017 and 1.18% at June 30, 2016.
Total noninterest income for the second quarter of 2017 decreased $628 thousand, or 13.1%, when compared to the first quarter of 2017 and increased $138 thousand, or 3.4%, when compared to the second quarter of 2016. The decrease from the first quarter of 2017 was primarily due to a decline in insurance agency commissions of $787 thousand which was partially offset by an increase in other noninterest income of $104 thousand. Insurance agency commissions for the second quarter of 2017 were lower when compared to the first quarter of 2017 due to the fact that contingency commission payments are typically received in the first quarter of the year. The increase from the second quarter of 2016 was mainly due to higher insurance agency commissions of $91 thousand.
Total noninterest expense for the second quarter of 2017 increased $548 thousand, or 5.7%, when compared to the first quarter of 2017 and increased $834 thousand, or 8.9%, when compared to the second quarter of 2016. The increase when compared to the first quarter of 2017 was primarily due to acquisition costs of the three Northwest Bank branches of an additional $325 thousand and the cost of operating those branches for one month. The increases in noninterest expenses from the second quarter of 2016 were due to the acquisition and operating costs of the Northwest Bank branches, 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, offset by a decrease in FDIC insurance premium expenses due the consolidation of the two former bank subsidiaries, The Talbot Bank and CNB.
Review of Six-Month Financial Results
Net interest income for the first six months of 2017 was $20.8 million, an increase of $2.2 million, or 11.8% when compared to the first six months of 2016. The increase was primarily due an increase in average loans of approximately $121.4 million and a decline in rates paid on interest-bearing deposits of 7bps. The increase in volume on loans was the direct result of loans acquired from Northwest Bank and the organic growth of loans which were funded by lower yielding assets and core deposits acquired from the acquisition, allowing the overall yield on total earning assets to increase. 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 3.71% for the first six months of 2017 compared to 3.53% for the first six months of 2016.
The provision for credit losses for the six months ended June 30, 2017 and 2016 was $1.4 million and $825 thousand, respectively, while net charge-offs were $995 thousand and $783 thousand, respectively. The increase in provision for credit losses primarily occurred in the second quarter of 2017 due to a single problem credit discussed above. The ratio of annualized net charge-offs to average loans was 0.22% for the first half of 2017 and 0.20% for the first half of 2016.
Total noninterest income for the six months ended June 30, 2017 increased $404 thousand, or 4.7%, when compared to the same period in 2016. The increase in noninterest income primarily consists of increases in insurance agency commissions of $151 thousand and other noninterest income of $206 thousand. The increase in other noninterest income primarily consisted of an increase in an insurance investment of $174 thousand.
Total noninterest expense for the six months ended June 30, 2017 increased $1.1 million, or 6.1%, when compared to the same period in 2016. The increase was primarily due to acquisition costs of the three Northwest Bank branches which approximated $825 thousand and the cost of operating those branches for one month. 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.
