EASTON, Md., Oct. 22, 2020 /PRNewswire/ -- Shore Bancshares, Inc. (NASDAQ - SHBI) (the "Company") reported income from continuing operations of $3.391 million or $0.27 per diluted common share for the third quarter of 2020, compared to income from continuing operations of $5.335 million or $0.43 per diluted common share for the second quarter of 2020, and income from continuing operations of $4.214 million or $0.33 per diluted common share for the third quarter of 2019. Income from continuing operations for the first nine months of 2020 was $11.844 million or $0.95 per diluted common share, compared to income from continuing operations of $12.270 million or $0.96 per diluted common share for the first nine months of 2019.

When comparing net income from continuing operations for the third quarter of 2020 to the second quarter of 2020, net income decreased $1.9 million, primarily due to an increase in noninterest expenses of $2.2 million. Net interest income increased $252 thousand in the third quarter when compared to the second quarter, which was more than offset by an increase in provision for credit losses of $500 thousand and a decrease in noninterest income of $188 thousand. When comparing income from continuing operations for the third quarter of 2020 to the third quarter of 2019, net income decreased $823 thousand due to an increase in noninterest expense of $447 thousand, coupled with an increase in provision for credit losses of $1.3 million, partially offset by an increase in net interest income of $603 thousand.  

"The positive earnings and strategic moves by management in the third quarter furthered the Company's ability to achieve its core objectives," said Lloyd L. "Scott" Beatty, Jr., President and Chief Executive Officer.  "During the quarter, the Company issued and sold $25 million of fixed to floating rate subordinated notes due 2030 to further strengthen the Company's capital position and provided $1.5 million to its allowance for loan losses to position the Company to face the continuing adverse economic consequences of this pandemic, including any future deterioration in credit quality. COVID related loan deferrals were significantly reduced to approximately 1% of the outstanding loan balance as of September 30, 2020. Loan demand has remained strong throughout the third quarter with an annualized growth rate of 5%, which is anticipated to improve as we approach year-end. Lastly, we reinstated our common stock repurchase program to utilize some of our excess liquidity and to capitalize on purchasing our shares below tangible book value."  

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.

Loan Deferrals
As of September 30, 2020, the Company's outstanding COVID related loan deferral balance amounted to $12.9 million, or 0.91% of the total loan portfolio.  The most significant deferrals by loan type or industry were as follows: other commercial of $6.4 million, hospitality of $4.7 million, residential 1-4 family rentals of $1.1 million, consumer loans of $435 thousand, restaurants of $220 thousand and retail stores of $160 thousand.

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 August 8, 2020, we provided loans for 1,488 small business customers totaling $126.7 million.

Share Repurchases

We reinstated our common stock repurchase program on September 1, 2020. During the third quarter of 2020, we repurchased approximately 310,800 shares of the Company's common stock.

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

Balance Sheet Review
Total assets were $1.828 billion at September 30, 2020, a $268.9 million, or 17.2%, increase when compared to $1.559 billion at the end of 2019.  The increase was primarily due to the $175.3 million, or 14.0%, increase in gross loans, of which $126.7 million related to PPP loans.  The increase in gross loans was funded by an increase in deposits of $252.8 million, or 18.8%.   

Total deposits increased $252.8 million, or 18.8%, when compared to December 31, 2019.  The increase in total deposits consisted of increases in the following categories: Interest-bearing checking accounts of $109.5 million, noninterest-bearing deposits of $108.7 million and savings and money market accounts of $37.3 million, partially offset by a decrease in time deposits of $2.7 million.

Total stockholders' equity increased $6.1 million, or 3.2%, when compared to the end of 2019. At September 30, 2020, the ratio of total equity to total assets was 10.88% and the ratio of total tangible equity to total tangible assets was 9.92%.

Total assets at September 30, 2020 increased $266.5 million, or 17.1%, when compared to total assets at September 30, 2019, primarily the result of loan growth of $188.9 million and increases in cash and cash equivalents of $53.1 million and investment securities of $9.9 million. In addition, other assets increased $16.9 million, primarily the result of purchasing additional bank owned life insurance ("BOLI") in the fourth quarter of 2019. 

Total deposits at September 30, 2020 increased $268.6 million, or 20.3%, when compared to September 30, 2019. The increase in total deposits included growth within interest-bearing checking accounts of $123.2 million, noninterest-bearing deposits of $102.7 million, savings and money market accounts of $53.1 million and time deposits of $1.7 million. Brokered deposits of $12.1 million matured in 2019 and were not renewed. 

Total stockholders' equity increased $4.9 million, or 2.5%, when compared to September 30, 2019.

Review of Quarterly Financial Results
Net interest income was $13.3 million for the third quarter of 2020, compared to $13.0 million for the second quarter of 2020 and $12.7 million for the third quarter of 2019. The increase in net interest income when compared to the second quarter of 2020 was primarily due to increases in the average balances in loans of $32.4 million, taxable investment securities of $28.1 million and interest-bearing deposits with other banks of $69.8 million. These increases in the average balances on earning assets contributed $304 thousand to interest income over the second quarter, despite a decline in the weighted average yield on these assets of 26bps. In addition, the weighted average rate paid on interest-bearing deposits declined by 8bps in the third quarter when compared to the second quarter, reducing interest expense by $87 thousand. However, this decline was more than offset by the $142 thousand of additional interest expense related to subordinated debt issued during the third quarter. Net interest income increased when compared to the third quarter of 2019, primarily due to lower rates paid on interest bearing deposits of 44bps and the elimination of short and long-term advances from FHLB borrowings which reduced interest expense by a combined $935 thousand. Lower yields on earning assets of 66bps, specifically, taxable investment securities and interest-bearing deposits with other banks, reduced interest income by $330 thousand for the third quarter, partially offset by the increase in the average balance in loans of $171.3 million.  The higher average balance on loans was driven by the $127.6 million of PPP loans funded in the second quarter of 2020 which had yet to be forgiven in accordance with SBA guidelines and had an average yield of 2.00% for the third quarter. The forgiveness of PPP loans which is anticipated in future quarters will have a positive impact on the net interest margin as these loans carry a much lower yield than our traditional loan portfolio. The Company's net interest margin decreased to 3.17% for the third quarter of 2020 from 3.41% in the second quarter of 2020 and down from 3.52% in the third quarter of 2019. The decline in net interest margin in the third quarter of 2020 when compared to the second quarter of 2020 and the third quarter of 2019, was significantly impacted by excess liquidity of approximately $100 million, which has yet to be fully invested. Without this excess liquidity the margin for the third quarter would have been 3.37%.

The provision for credit losses was $1.5 million for the three months ended September 30, 2020.  The comparable amounts were $1.0 million and $200 thousand for the three months ended June 30, 2020 and September 30, 2019, respectively. The ratio of the allowance for credit losses to period-end loans was 0.90% at September 30, 2020. Excluding PPP loans, the ratio of the allowance for credit losses to period-end loans was 0.98% at September 30, 2020, higher than both the 0.86% at June 30, 2020 and the 0.84% at September 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 the result of new and elevated qualitative factors within the allowance model related to economic conditions and the COVID-19 pandemic . The Company reported net recoveries in the third quarter of 2020 of $187 thousand, compared to net charge-offs of $288 thousand for the second quarter of 2020 and $67 thousand for the third quarter of 2019.

At September 30, 2020, nonperforming assets were $8.4 million, a decrease of $3.9 million, or 31.8%, when compared to June 30, 2020, primarily due to a decrease in nonaccrual loans of $4.7 million, or 40.2%. Other real estate owned remained at $38 thousand and accruing troubled debt restructurings ("TDRs") decreased $45 thousand, or less than 1% over the same time period. When comparing September 30, 2020 to September 30, 2019, nonperforming assets decreased $4.9 million, or 37.1%, primarily due to a decrease in nonaccrual loans of $5.6 million, or 44.4%. TDR's decreased $321 thousand, or 4.2%, and other real estate owned decreased $36 thousand, or 48.6%, over the same time period. The ratio of nonperforming assets and accruing TDRs to total assets was 0.86%, 1.14% and 1.34% at September 30, 2020, June 30, 2020 and September 30, 2019, respectively.  In addition, the ratio of accruing TDRs to total loans at September 30, 2020 was 0.51%, compared to 0.52% at June 30, 2020 and 0.61% at September 30, 2019.

Total noninterest income for the third quarter of 2020 decreased $188 thousand, or 6.8%, when compared to the second quarter of 2020 and increased $52 thousand, or 2.1%, when compared to the third quarter of 2019. The decrease was primarily due to sales of available for sale securities at a gain of $347 thousand in the second quarter of 2020. Absent the sale of these securities, noninterest income would have increased $159 thousand, or 6.6%, for the third quarter of 2020, which was primarily the result of increases in loan fee income and service charges on deposit accounts. The increase in noninterest income from the third 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.

Total noninterest expense from continuing operations for the third quarter of 2020 increased $2.2 million, or 28.3%, when compared to the second quarter of 2020 and increased $447 thousand, or 4.8%, when compared to the third quarter of 2019. The increase in noninterest expense when compared to the second quarter of 2020 was primarily related to higher salaries and wages, due to the significant volume of PPP loans originated in the second quarter which resulted in heightened deferrals of direct origination costs during the second quarter of 2020. The deferred origination costs are being amortized over the lives of the related PPP loans and will be accelerated upon forgiveness or repayment. The increase in noninterest expenses when compared to the third quarter of 2019 was primarily due to higher salaries and wages, employee benefits and data processing fees, partially offset by decreases in other real estate owned expenses and other loan expenses.

Review of Nine-Month Financial Results
Net interest income for the first nine months of 2020 was $38.8 million, an increase of $1.5 million, or 3.9%, when compared to the first nine months of 2019.  T he increase was due to lower interest expense on interest-bearing deposits of $1.4 million and an aggregate decrease of $679 thousand related to the elimination of both short and long-term advances from the FHLB, partially offset by the addition of subordinated debt of $148 thousand. Although the average balance of total earning assets increased by $145 million, or 10.3%, primarily in loans and interest-bearing deposits with other banks of $128.7 million and $51.8 million, respectively, the interest income from these assets was impacted by lower yields due to below market rates on PPP loans and Federal Reserve interest rate cuts during 2020. In addition, the average balance of taxable investment securities declined $35.5 million, or 22.2%, which reduced interest income by $668 thousand. These significant swings in both the average balances and rates on both sides of the balance sheet resulted in a net interest margin of 3.35% for the first nine months of 2020 compared to 3.56% for the first nine months of 2019.   

The provision for credit losses for the nine months ended September 30, 2020 and 2019 was $2.9 million and $500 thousand, respectively, while net charge-offs were $580 thousand and $405 thousand, respectively.  The increase in provision for credit losses was the result of new and elevated qualitative factors within the allowance model related to economic conditions and the COVID-19 pandemic.  Excluding PPP loans, the ratio of the allowance for credit losses to period-end loans increased to 0.98% at September 30, 2020 from 0.84% at December 31, 2019. As previously discussed, this ratio increased primarily due to the addition of qualitative factors in the analysis of the allowance for loan losses. The ratio of annualized net charge-offs to average loans was 0.06% for the first nine months of 2020 and 0.04% for the first nine months 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 nine months ended September 30, 2020 increased $376 thousand, or 5.1%, 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 nine months ended September 30, 2020 increased $131 thousand, or 0.5%, when compared to the same period in 2019. The increase was a result of higher costs related to employee benefits and higher data processing fees, which were almost entirely offset by decreases in salaries and wages due to the deferral of direct origination costs related to the origination of PPP loans, FDIC insurance premiums, other real estate owned expenses, and other loan related expenses. 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.