Shore Bancshares Reports 2019 Results

EASTON, Md., Jan. 30, 2020 /PRNewswire/ -- Shore Bancshares, Inc. (NASDAQ - SHBI) (the "Company") reported income from continuing operations of $4.014 million or $0.32 per diluted common share for the fourth quarter of 2019, compared to income from continuing operations of $4.214 million or $0.33 per diluted common share for the third quarter of 2019, and income from continuing operations of $3.853 million or $0.30 per diluted common share for the fourth quarter of 2018, which excludes the results of operations and 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 $0.65 per diluted common share. The Company reported income from continuing operations of $16.284 million or $1.28 per diluted common share for fiscal year 2019, compared to income from continuing operations of $15.763 million or $1.24 per diluted common share for fiscal year 2018, which excludes the results of operations and sale of Avon which totaled $9.234 million, or $0.72 per diluted common share.

Shore Bancshares Logo (PRNewsfoto/Shore Bancshares, Inc.)

When comparing income from continuing operations for the fourth quarter of 2019 to the third quarter of 2019, net income decreased $200 thousand due to an increase in noninterest expenses of $461 thousand, partially offset by increases in net interest income of $84 thousand and noninterest income of $165 thousand. When comparing income from continuing operations for the fourth quarter of 2019 to the fourth quarter of 2018, the improved results were due to an increase in noninterest income of $582 thousand, coupled with a decrease in the provision for credit losses of $260 thousand, partially offset by an increase in noninterest expenses of $629 thousand.

"2019 was a great year for deposit growth and despite a flat yield curve for most of the year, revenues remained strong." said Lloyd L. "Scott" Beatty, Jr., President and Chief Executive Officer. "We experienced deposit growth of nearly 11% in 2019 allowing us to reduce our alternative funding levels. During the year we increased our dividend by 31% and instituted a stock repurchase program through which we acquired 278,700 shares of our common stock. In addition, we hired new lending teams to reach untapped markets. We head into 2020 with a very positive outlook and a strategic focus for growth as we remain committed to providing excellent customer service and maximizing shareholder value."

Balance Sheet Review
Total assets were $1.559 billion at December 31, 2019, a $76.2 million, or 5.1%, increase when compared to $1.483 billion at December 31, 2018. The increase was primarily due to total deposits increasing $129.0 million or 10.6%. The significant growth in deposits funded increases in loans of $53.3 million, or 4.5%, interest-bearing deposits with other banks of $25.6 million, or 50.2%, and other assets of $22.9 million, or 129.5%, which includes the purchase of approximately $26.5 million of bank owned life insurance ("BOLI") during 2019. In addition, the increase in deposits allowed the Company to decrease its short-term borrowings by $59.6 million, or 98.0%.

Total deposits increased $129.0 million, or 10.6%, when compared to December 31, 2018. The increase in total deposits primarily consisted of increases in interest-bearing checking deposits of $62.4 million, noninterest-bearing deposits of $26.2 million, time deposits greater than $100 thousand of $29.7 million, savings and money market accounts of $24.0 million and other time deposits of $8.8 million, partially offset by a decrease in brokered deposits of $22.1 million.

Total stockholders' equity increased $9.6 million, or 5.2%, when compared to the end of 2018. At December 31, 2019, the ratio of total equity to total assets was 12.37% and the ratio of total tangible equity to total tangible assets was 11.24%.

Review of Quarterly Financial Results
Net interest income was $12.8 million for the fourth quarter of 2019, compared to $12.7 million for the third quarter of 2019 and $12.7 million for the fourth quarter of 2018. The primary reason for the increase in net interest income when compared to the third quarter of 2019 was due to the decrease in the average balance in short-term borrowings of $15.8 million, or 89.3%, which resulted in a reduction to interest expense of $111 thousand. Net interest income increased when compared to the fourth quarter of 2018 due to increases in the average balances on loans of $56.9 million, or 4.8% and interest-bearing deposits with other banks of $53.4 million, or 294.1%, resulting in $591 thousand and $192 thousand of additional interest income, respectively. These increases were partially offset by a decline in the average balance in taxable investment securities of $32.2 million, or 18.1%, resulting in a decrease of $512 thousand in interest income. When comparing the fourth quarter of 2019 and 2018 on the liability side of the balance sheet, the average balance on interest-bearing deposits increased $107.4 million, or 12.5%, adding $710 thousand of additional interest expense, partially offset by a decrease in the average balance on short-term borrowings of $70.6 million, or 97.4%, decreasing interest expense by $480 thousand. The Company's net interest margin decreased to 3.47% from 3.52% in the third quarter of 2019 and down from 3.58% in the fourth quarter of 2018.

The provision for credit losses was $200 thousand for the three months ended December 31, 2019. The comparable amounts were $200 thousand and $460 thousand for the three months ended September 30, 2019 and December 31, 2018, respectively. The provision for credit losses remained unchanged from the third quarter of 2019 due to stagnant growth within the loan portfolio during such periods. The decrease in the provision for credit losses from the fourth quarter of 2018 was due to a reduction in net charge-offs. Net charge-offs were $131 thousand for the fourth quarter of 2019, $67 thousand for the third quarter of 2019 and $445 thousand for the fourth quarter of 2018. The ratio of annualized net charge-offs to average loans was 0.04% for the fourth quarter of 2019, 0.02% for the third quarter of 2019 and 0.15% for the fourth quarter of 2018. The ratio of the allowance for credit losses to period-end loans was 0.84% at December 31, 2019, slightly lower than the 0.85% at September 30, 2019 and lower than the 0.87% at December 31, 2018.

At December 31, 2019, nonperforming assets were $12.0 million, a decrease of $1.3 million, or 10.0%, when compared to September 30, 2019, primarily due to a decrease in nonaccrual loans of $1.9 million, or 15.5%. Accruing troubled debt restructurings ("TDRs") decreased $87 thousand, or 1.1%, over the same time period. When comparing December 31, 2019 to December 31, 2018, nonperforming assets decreased $6.0 million, or 33.4%, and accruing TDRs decreased $1.2 million, or 13.4%. The decrease in nonperforming assets 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 1.25%, 1.34% and 1.80% at December 31, 2019, September 30, 2019 and December 31, 2018, respectively. In addition, the ratio of accruing TDRs to total loans at December 31, 2019 was 0.60%, compared to 0.61% at September 30, 2019 and 0.72% at December 31, 2018.

Total noninterest income from continuing operations for the fourth quarter of 2019 increased $165 thousand, or 6.5%, when compared to the third quarter of 2019 and increased $582 thousand, or 27.6%, when compared to the fourth quarter of 2018. The increase from the third quarter of 2019 was primarily the result of additional BOLI income earned in the fourth quarter. The increase from the fourth quarter of 2018 was due to additional income from BOLI purchased during 2019, higher loan and bank service fees and the life insurance proceeds.

Total noninterest expense from continuing operations for the fourth quarter of 2019 increased $461 thousand, or 4.9%, when compared to the third quarter of 2019 and increased $629 thousand, or 6.8%, when compared to the fourth quarter of 2018. The increase in noninterest expense compared to the third quarter of 2019 was the result of higher employee benefits due to an increase in medical claims from the Company's self-funded insurance program and an increase in salaries and wages due to accrued bonus and incentive payouts. These increases were partially offset by a decrease in other real estate owned expenses, net of $134 thousand and lower FDIC insurance premiums of $42 thousand. The increase in noninterest expenses from the fourth quarter of 2018 was primarily due to increases in employee benefits from higher medical claims, the addition of supplemental executive retirement plans ("SERPs") during 2019 and data processing, partially offset by lower FDIC insurance premiums, amortization of intangible assets and other real estate owned expenses.

Review of 2019 Financial Results
Net interest income for 2019 was $50.1 million, a decrease of $504 thousand, or 1.0%, when compared to 2018. The decrease was the direct result of an increase in interest expense $4.4 million, or 82.8%, and a decrease in taxable investment securities of $707 thousand, or 16.5%, which were partially offset by increases in interest and fees on loans of $4.1 million, or 7.9%, interest on deposits with other banks of $508 thousand, or 177.6%, and a decrease in interest expense on short-term borrowings of $1.2 million, or 70.6%. The average balance on loans increased $73.2 million, or 6.3%, and the yield on these loans increased 7bps when comparing the periods. This increase in volume and yields on loans was offset by an increase in the average balance of interest-bearing deposits of $64.0 million, or 7.5%, with an associated increase in rates paid on these deposits of 54bps. This resulted in a net interest margin of 3.54% for 2019 compared to 3.74% for 2018.

The provision for credit losses for 2019 and 2018 was $700 thousand and $1.7 million, respectively, while net charge-offs were $536 thousand and $1.1 million, respectively. The decrease in provision for credit losses was the result of improved overall credit quality, lower net charge-offs and lower loan growth for 2019 compared to 2018. The ratio of net charge-offs to average loans was 0.04% for 2019 and 0.10% for 2018.

Total noninterest income from continuing operations for 2019 increased $1.0 million, or 11.2%, when compared to 2018. The increase in noninterest income primarily consisted of increases in BOLI income and higher loan and bank service fees.

Total noninterest expense from continuing operations for 2019 increased $726 thousand, or 2.0%, when compared to the same period in 2018. The increase in noninterest expenses were primarily due to higher employee benefits of $1.3 million, data processing of $459 thousand, legal and professional fees of $242 thousand and other noninterest expenses of $265 thousand, partially offset by decreases in salaries and wages of $1.1 million, amortization of intangible assets of $261 thousand and FDIC insurance premiums of $427 thousand.

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 & 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.

Shore Bancshares, Inc. Financial Highlights (Unaudited) (Dollars in thousands, except per share data)
	For the Three Months Ended								For the Year Ended
	December 31,								December 31,
	2019			2018			Change		2019			2018			Change
PROFITABILITY FOR THE PERIOD
Net interest income	$	12,764		$	12,726		0.3	%	$	50,131		$	50,635		(1.0)	%
Provision for credit losses		200			460		(56.5)			700			1,674		(58.2)
Noninterest income		2,694			2,112		27.6			10,020			9,013		11.2
Noninterest expense		9,845			9,216		6.8			37,557			36,831		2.0
Income from continuing operations before income taxes		5,413			5,162		4.9			21,894			21,143		3.6
Income tax expense		1,399			1,309		6.9			5,610			5,380		4.3
Income from continuing operations	$	4,014		$	3,853		4.2		$	16,284		$	15,763		3.3

(Loss) Income from discontinued operations before income taxes		—			104		(100.0)			(113)			1,421		(108.0)
Gain on sale of insurance agency		—			12,736		(100.0)			—			12,736		(100.0)
Income tax expense (benefit)		—			4,599		(100.0)			(27)			4,923		(100.5)
(Loss) Income from discontinued operations		—			8,241		(100.0)			(86)			9,234		(100.9)
Net income	$	4,014		$	12,094		(66.8)		$	16,198		$	24,997		(35.2)

From Continuing Operations:
Return on average assets		1.03	%		1.04	%	(1)	bp		1.09	%		1.10	%	(1)	bp
Return on average equity		8.24			8.83		(59)			8.56			9.34		(78)
Return on average tangible equity (1)		9.43			11.34		(191)			9.84			12.00		(216)
Net interest margin		3.47			3.58		(11)			3.54			3.74		(20)
Efficiency ratio - GAAP		63.69			62.11		158			62.44			61.75		69
Efficiency ratio - Non-GAAP (1)		62.58			60.18		240			61.27			60.18		109

PER SHARE DATA
Basic net income per common share
Income from continuing operations	$	0.32		$	0.30		6.7	%	$	1.28		$	1.24		3.2	%
(Loss) Income from discontinued operations		—			0.65		(100.0)			(0.01)			0.72		(101.4)
Net income	$	0.32		$	0.95		(66.3)		$	1.27		$	1.96		(35.2)
Diluted net income per common share
Income from continuing operations	$	0.32		$	0.30		6.7		$	1.28		$	1.24		3.2
(Loss) Income from discontinued operations		—			0.65		(100.0)			(0.01)			0.72		(101.4)
Net income	$	0.32		$	0.95		(66.3)		$	1.27		$	1.96		(35.2)

Dividends paid per common share	$	0.12		$	0.09		33.3		$	0.42		$	0.32		31.3
Book value per common share at period end		15.42			14.37		7.3
Tangible book value per common share at period end (1)		13.84			12.77		8.4
Market value at period end		17.36			14.54		19.4
Market range:
High		17.90			18.32		(2.3)			17.90			20.09		(10.9)
Low		15.01			12.95		15.9			14.00			12.95		8.1

AVERAGE BALANCE SHEET DATA
Loans	$	1,246,355		$	1,189,504		4.8	%	$	1,226,361		$	1,153,169		6.3	%
Investment securities		145,544			177,700		(18.1)			156,383			189,879		(17.6)
Earning assets		1,463,490			1,385,368		5.6			1,422,688			1,357,755		4.8
Assets		1,553,017			1,463,839		6.1			1,498,903			1,435,914		4.4
Deposits		1,334,047			1,197,445		11.4			1,266,302			1,180,288		7.3
Stockholders' equity		193,239			173,214		11.6			190,139			168,782		12.7

CREDIT QUALITY DATA
Net charge-offs	$	131		$	445		(70.6)	%	$	536		$	1,112		(51.8)	%

Nonaccrual loans	$	10,590		$	16,655		(36.4)
Loans 90 days past due and still accruing		1,326			139		854.0
Other real estate owned		74			1,222		(93.9)
Total nonperforming assets		11,990			18,016		(33.4)
Accruing troubled debt restructurings (TDRs)		7,501			8,663		(13.4)
Total nonperforming assets and accruing TDRs	$	19,491		$	26,679		(26.9)


CAPITAL AND CREDIT QUALITY RATIOS
Period-end equity to assets		12.37	%		12.35	%	2	bp
Period-end tangible equity to tangible assets (1)		11.24			11.13		11

Annualized net charge-offs to average loans		0.04			0.15		(11)			0.04	%		0.10	%	(6)	bp

Allowance for credit losses as a percent of:
Period-end loans		0.84			0.87		(3)
Nonaccrual loans		99.22			62.10		3,712
Nonperforming assets		87.63			57.41		3,022
Accruing TDRs		140.07			119.39		2,068
Nonperforming assets and accruing TDRs		53.91			38.77		1,514

As a percent of total loans:
Nonaccrual loans		0.85			1.39		(54)
Accruing TDRs		0.60			0.72		(12)
Nonaccrual loans and accruing TDRs		1.45			2.12		(67)

As a percent of total loans+other real estate owned:
Nonperforming assets		0.96			1.51		(55)
Nonperforming assets and accruing TDRs		1.56			2.23		(67)

As a percent of total assets:
Nonaccrual loans		0.68			1.12		(44)
Nonperforming assets		0.77			1.21		(44)
Accruing TDRs		0.48			0.58		(10)
Nonperforming assets and accruing TDRs		1.25			1.80		(55)
(1) See the reconciliation table.

Shore Bancshares, Inc. Consolidated Balance Sheets (Unaudited) (In thousands, except per share data)
					December 31, 2019
		December 31,		December 31,	compared to
	2019		2018		December 31, 2018
ASSETS
Cash and due from banks	$	18,465	$	16,294	13.3	%
Interest-bearing deposits with other banks		76,506		50,931	50.2
Cash and cash equivalents		94,971		67,225	41.3

Investment securities available for sale (at fair value)		122,791		154,432	(20.5)
Investment securities held to maturity		8,786		6,043	45.4
Equity securities, at fair value		1,342		1,269	5.8
Restricted securities		4,190		6,476	(35.3)

Loans		1,248,654		1,195,355	4.5
Less: allowance for credit losses		(10,507)		(10,343)	1.6
Loans, net		1,238,147		1,185,012	4.5

Premises and equipment, net		23,821		22,711	4.9
Goodwill		17,518		17,518	—
Other intangible assets, net		2,252		2,857	(21.2)
Other real estate owned, net		74		1,222	(93.9)
Right of use assets, net		4,771		—	—
Other assets		40,572		17,678	129.5
Assets of discontinued operations		—		633	(100.0)

Total assets	$	1,559,235	$	1,483,076	5.1

LIABILITIES
Noninterest-bearing deposits	$	356,618	$	330,466	7.9
Interest-bearing deposits		984,716		881,875	11.7
Total deposits		1,341,334		1,212,341	10.6

Short-term borrowings		1,226		60,812	(98.0)
Long-term borrowings		15,000		15,000	—
Lease liabilities		4,792		—	—
Accrued expenses and other liabilities		4,081		8,415	(51.5)
Liabilities of discontinued operations		—		3,323	(100.0)
Total liabilities		1,366,433		1,299,891	5.1

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
Common stock, par value $0.01; authorized 35,000,000 shares		125		127	(1.6)
Additional paid in capital		61,045		65,434	(6.7)
Retained earnings		131,425		120,574	9.0
Accumulated other comprehensive income (loss)		207		(2,950)	107.0
Total stockholders' equity		192,802		183,185	5.2

Total liabilities and stockholders' equity	$	1,559,235	$	1,483,076	5.1

Period-end common shares outstanding		12,500		12,749	(2.0)
Book value per common share	$	15.42	$	14.37	7.3

Shore Bancshares, Inc. Consolidated Statements of Income (Unaudited) (In thousands, except per share data)
	For the Three Months Ended							For the Year Ended
	December 31,						December 31,
	2019		2018		% Change		2019		2018		% Change
INTEREST INCOME
Interest and fees on loans	$	14,043	$	13,452	4.4	%	$	55,391	$	51,332	7.9	%
Interest on investment securities:
Taxable		827		1,339	(38.2)			3,582		4,289	(16.5)
Interest on deposits with other banks		295		103	186.4			794		286	177.6
Total interest income		15,165		14,894	1.8			59,767		55,907	6.9

INTEREST EXPENSE
Interest on deposits		2,287		1,577	45.0			8,726		3,531	147.1
Interest on short-term borrowings		6		486	(98.8)			481		1,636	(70.6)
Interest on long-term borrowings		108		105	2.9			429		105	—
Total interest expense		2,401		2,168	10.7			9,636		5,272	82.8

NET INTEREST INCOME		12,764		12,726	0.3			50,131		50,635	(1.0)
Provision for credit losses		200		460	(56.5)			700		1,674	(58.2)

NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES		12,564		12,266	2.4			49,431		48,961	1.0

NONINTEREST INCOME
Service charges on deposit accounts		958		1,045	(8.3)			3,910		3,879	0.8
Trust and investment fee income		382		360	6.1			1,522		1,557	(2.2)
Other noninterest income		1,354		707	91.5			4,588		3,577	28.3
Total noninterest income		2,694		2,112	27.6			10,020		9,013	11.2

NONINTEREST EXPENSE
Salaries and wages		4,002		3,999	0.1			15,413		16,535	(6.8)
Employee benefits		1,662		797	108.5			5,283		4,001	32.0
Occupancy expense		702		649	8.2			2,758		2,622	5.2
Furniture and equipment expense		286		236	21.2			1,107		950	16.5
Data processing		989		844	17.2			3,790		3,331	13.8
Directors' fees		137		145	(5.5)			479		556	(13.8)
Amortization of intangible assets		144		269	(46.5)			605		866	(30.1)
FDIC insurance premium expense		(42)		159	(126.4)			344		771	(55.4)
Other real estate owned expenses, net		(1)		228	(100.4)			425		353	20.4
Legal and professional fees		568		603	(5.8)			2,223		1,981	12.2
Other noninterest expenses		1,398		1,287	8.6			5,130		4,865	5.4
Total noninterest expense		9,845		9,216	6.8			37,557		36,831	2.0

Income from continuing operations before income taxes		5,413		5,162	4.9			21,894		21,143	3.6
Income tax expense		1,399		1,309	6.9			5,610		5,380	4.3

Income from continuing operations		4,014		3,853	4.2			16,284		15,763	3.3

(Loss) income from discontinued operations before income taxes		—		104	(100.0)			(113)		1,421	(108.0)
Gain on sale of insurance agency		—		12,736	(100.0)			—		12,736	(100.0)
Income tax (benefit) expense		—		4,599	(100.0)			(27)		4,923	(100.5)

(Loss) Income from discontinued operations		—		8,241	(100.0)			(86)		9,234	(100.9)

NET INCOME	$	4,014	$	12,094	(66.8)		$	16,198	$	24,997	(35.2)

Weighted average shares outstanding - basic		12,588		12,749	(1.3)			12,725		12,739	(0.1)
Weighted average shares outstanding - diluted		12,593		12,766	(1.4)			12,730		12,753	(0.2)

Basic net income per common share
Income from continuing operations	$	0.32	$	0.30	6.7		$	1.28	$	1.24	3.2
(Loss) Income from discontinued operations		—		0.65	(100.0)			(0.01)		0.72	(101.4)
Net income	$	0.32	$	0.95	(66.3)		$	1.27	$	1.96	(35.2)

Diluted net income per common share
Income from continuing operations	$	0.32	$	0.30	6.7		$	1.28	$	1.24	3.2
(Loss) Income from discontinued operations		—		0.65	(100.0)			(0.01)		0.72	(101.4)
Net income	$	0.32	$	0.95	(66.3)		$	1.27	$	1.96	(35.2)

Dividends paid per common share		0.12		0.09	33.3			0.42		0.32	31.3

Shore Bancshares, Inc. Consolidated Average Balance Sheets (Unaudited) (Dollars in thousands)
	For the Three Months Ended								For the Year Ended
	December 31,								December 31,
	2019				2018				2019				2018
	Average		Yield/		Average		Yield/		Average		Yield/		Average		Yield/
	balance		rate		balance		rate		balance		rate		balance		rate
Earning assets
Loans (1), (2), (3)	$	1,246,355	4.48	%	$	1,189,504	4.50	%	$	1,226,361	4.53	%	$	1,153,169	4.46	%
Investment securities
Taxable		145,544	2.27			177,700	2.46			156,383	2.29			189,879	2.26
Interest-bearing deposits		71,591	1.63			18,164	2.25			39,944	1.99			14,707	1.94
Total earning assets		1,463,490	4.12	%		1,385,368	4.20	%		1,422,688	4.21	%		1,357,755	4.13	%
Cash and due from banks		20,382				18,204				18,241				17,327
Other assets		79,586				70,858				68,399				71,110
Allowance for credit losses		(10,441)				(10,591)				(10,425)				(10,278)
Total assets	$	1,553,017			$	1,463,839			$	1,498,903			$	1,435,914


Interest-bearing liabilities
Demand deposits	$	284,193	0.76	%	$	218,519	0.53	%	$	252,907	0.69	%	$	215,600	0.32	%
Money market and savings deposits		397,662	0.51			378,163	0.68			389,000	0.72			378,344	0.27
Brokered deposits		8,135	2.15			22,816	2.17			16,369	2.37			14,844	2.12
Certificates of deposit $100,000 or more		126,411	1.85			97,023	0.94			113,017	1.63			98,331	0.67
Other time deposits		149,197	1.58			141,702	0.80			146,344	1.35			146,492	0.57
Interest-bearing deposits		965,598	0.94			858,223	0.73			917,637	0.95			853,611	0.41
Short-term borrowings		1,889	1.26			72,462	2.66			18,453	2.61			77,311	2.12
Long-term borrowings		15,000	2.86			14,348	2.89			15,000	2.86			3,616	2.89
Total interest-bearing liabilities		982,487	0.97	%		945,033	0.91	%		951,090	1.01	%		934,538	0.56	%
Noninterest-bearing deposits		368,449				339,222				348,665				326,677
Accrued expenses and other liabilities		8,842				6,370				9,009				5,917
Stockholders' equity		193,239				173,214				190,139				168,782
Total liabilities and stockholders' equity	$	1,553,017			$	1,463,839			$	1,498,903			$	1,435,914

Net interest spread			3.15	%			3.29	%			3.20	%			3.57	%
Net interest margin			3.47	%			3.58	%			3.54	%			3.74	%
(1) All amounts are reported on a tax-equivalent basis computed using the statutory federal income tax rate of 21.0%, exclusive of the alternative minimum tax rate and nondeductible interest expense. (2) Average loan balances include nonaccrual loans. (3) Interest income on loans includes amortized loan fees, net of costs and accretion of discounts on acquired loans, which are included in the yield calculations.

Shore Bancshares, Inc. Financial Highlights By Quarter (Unaudited) (Dollars in thousands, except per share data)
	4th Quarter			3rd Quarter			2nd Quarter			1st Quarter			4th Quarter			Q4 2019		Q4 2019
	2019			2019			2019			2019			2018			compared to		compared to
	Q4 2019			Q3 2019			Q2 2019			Q1 2019			Q4 2018			Q3 2019		Q4 2018
PROFITABILITY FOR THE PERIOD
Taxable-equivalent net interest income	$	12,808		$	12,724		$	12,334		$	12,428		$	12,756		0.7	%	0.4	%
Less: Taxable-equivalent adjustment		44			44			41			34			30		—		46.7
Net interest income		12,764			12,680			12,293			12,394			12,726		0.7		0.3
Provision for credit losses		200			200			200			100			460		—		(56.5)
Noninterest income		2,694			2,529			2,609			2,188			2,112		6.5		27.6
Noninterest expense		9,845			9,384			8,985			9,343			9,216		4.9		6.8
Income from continuing operations before income taxes		5,413			5,625			5,717			5,139			5,162		(3.8)		4.9
Income tax expense		1,399			1,411			1,489			1,311			1,309		(0.9)		6.9
Income from continuing operations		4,014			4,214			4,228			3,828			3,853		(4.7)		4.2

(Loss) Income from discontinued operations before income taxes		—			(10)			(4)			(99)			104		100.0		(100.0)
Gain on sale of insurance agency		—			—			—			—			12,736		—		—
Income tax expense (benefit)		—			(2)			—			(25)			4,599		100.0		(100.0)
(Loss) Income from discontinued operations		—			(8)			(4)			(74)			8,241		100.0		(100.0)

Net income	$	4,014		$	4,206		$	4,224		$	3,754		$	12,094		(4.6)		(66.8)

From Continuing Operations:
Return on average assets		1.03	%		1.10	%		1.16	%		1.06	%		1.04	%	(7)	bp	(1)	bp
Return on average equity		8.24			8.66			8.97			8.39			8.83		(42)		(59)
Return on average tangible equity (1)		9.43			9.90			10.31			9.72			11.34		(47)		(191)
Net interest margin		3.47			3.52			3.54			3.61			3.58		(5)		(11)
Efficiency ratio - GAAP		63.69			61.70			60.29			64.07			62.11		199		158
Efficiency ratio - Non-GAAP (1)		62.58			60.58			59.09			62.81			60.18		200		240

PER SHARE DATA
Basic net income per common share
Income from continuing operations	$	0.32		$	0.33		$	0.33		$	0.30		$	0.30		(3.0)	%	6.7	%
(Loss) Income from discontinued operations		—			—			—			(0.01)			0.65		—		(100.0)
Net income	$	0.32		$	0.33		$	0.33		$	0.29		$	0.95		(3.0)		(66.3)
Diluted net income per common share
Income from continuing operations	$	0.32		$	0.33		$	0.33		$	0.30		$	0.30		(3.0)		6.7
(Loss) Income from discontinued operations		—			—			—			(0.01)			0.65		—		(100.0)
Net income	$	0.32		$	0.33		$	0.33		$	0.29		$	0.95		(3.0)		(66.3)

Dividends paid per common share		0.12			0.10			0.10			0.10			0.09		20.0		33.3
Book value per common share at period end		15.42			15.22			14.97			14.64			14.37		1.3		7.3
Tangible book value per common share at period end (1)		13.84			13.66			13.40			13.06			12.77		1.3		8.4
Market value at period end		17.36			15.41			16.34			14.91			14.54		12.7		19.4
Market range:
High		17.90			17.00			16.48			16.11			18.32		5.3		(2.3)
Low		15.01			14.90			14.84			14.00			12.95		0.7		15.9

AVERAGE BALANCE SHEET DATA
Loans	$	1,246,355		$	1,235,374		$	1,221,215		$	1,201,913		$	1,189,504		0.9	%	4.8	%
Investment securities		145,544			155,324			159,878			165,009			177,700		(6.3)		(18.1)
Earning assets		1,463,490			1,432,252			1,399,418			1,394,728			1,385,368		2.2		5.6
Assets		1,553,017			1,513,790			1,468,093			1,460,291			1,463,839		2.6		6.1
Deposits		1,334,047			1,280,057			1,233,951			1,215,702			1,197,445		4.2		11.4
Stockholders' equity		193,239			193,120			189,101			184,972			173,214		0.1		11.6

CREDIT QUALITY DATA
Net charge-offs	$	131		$	67		$	313		$	25		$	445		95.5	%	(70.6)	%

Nonaccrual loans	$	10,590		$	12,530		$	14,592		$	15,360		$	16,655		(15.5)		(36.4)
Loans 90 days past due and still accruing		1,326			712			439			47			139		86.2		854.0
Other real estate owned		74			74			524			979			1,222		—		(93.9)
Total nonperforming assets	$	11,990		$	13,316		$	15,555		$	16,386		$	18,016		(10.0)		(33.4)

Accruing troubled debt restructurings (TDRs)	$	7,501		$	7,588		$	7,768		$	7,828		$	8,663		(1.1)		(13.4)

Total nonperforming assets and accruing TDRs	$	19,491		$	20,904		$	23,323		$	24,214		$	26,679		(6.8)		(26.9)

CAPITAL AND CREDIT QUALITY RATIOS
Period-end equity to assets		12.37	%		12.42	%		12.85	%		12.59	%		12.35	%	(5)	bp	2	bp
Period-end tangible equity to tangible assets (1)		11.24			11.29			11.66			11.39			11.13		(5)		11

Annualized net charge-offs to average loans		0.04			0.02			0.10			0.01			0.15		2		(11)

Allowance for credit losses as a percent of:
Period-end loans		0.84			0.85			0.83			0.86			0.87		(1)		(3)
Nonaccrual loans		99.22			83.30			70.62			67.83			62.10		1,592		3,712
Nonperforming assets		87.63			78.39			66.25			63.58			57.41		924		3,022
Accruing TDRs		140.07			137.56			132.66			133.09			119.39		251		2,068
Nonperforming assets and accruing TDRs		53.91			49.93			44.18			43.02			38.77		398		1,514

As a percent of total loans:
Nonaccrual loans		0.85			1.01			1.18			1.27			1.39		(16)		(54)
Accruing TDRs		0.60			0.61			0.63			0.65			0.72		(1)		(12)
Nonaccrual loans and accruing TDRs		1.45			1.63			1.80			1.91			2.12		(18)		(67)

As a percent of total loans+other real estate owned:
Nonperforming assets		0.96			1.08			1.25			1.35			1.51		(12)		(55)
Nonperforming assets and accruing TDRs		1.56			1.69			1.88			2.00			2.23		(13)		(67)

As a percent of total assets:
Nonaccrual loans		0.68			0.80			0.98			1.03			1.12		(12)		(44)
Nonperforming assets		0.77			0.85			1.04			1.10			1.21		(8)		(44)
Accruing TDRs		0.48			0.49			0.52			0.53			0.58		(1)		(10)
Nonperforming assets and accruing TDRs		1.25			1.34			1.56			1.63			1.80		(9)		(55)
(1) See the reconciliation table.

Shore Bancshares, Inc. Consolidated Statements of Income By Quarter (Unaudited) (In thousands, except per share data)
											Q4 2019		Q4 2019
											compared to		compared to
	Q4 2019		Q3 2019		Q2 2019		Q1 2019		Q4 2018		Q3 2019		Q4 2018
INTEREST INCOME
Interest and fees on loans	$	14,043	$	14,100	$	13,749	$	13,499	$	13,452	(0.4)	%	4.4	%
Interest on investment securities:
Taxable		827		870		887		998		1,339	(4.9)		(38.2)
Interest on deposits with other banks		295		223		113		163		103	32.3		186.4
Total interest income		15,165		15,193		14,749		14,660		14,894	(0.2)		1.8

INTEREST EXPENSE
Interest on deposits		2,287		2,288		2,204		1,947		1,577	(0.0)		45.0
Interest on short-term borrowings		6		117		145		213		486	(94.9)		(98.8)
Interest on long-term borrowings		108		108		107		106		105	—		2.9
Total interest expense		2,401		2,513		2,456		2,266		2,168	(4.5)		10.7

NET INTEREST INCOME		12,764		12,680		12,293		12,394		12,726	0.7		0.3
Provision for credit losses		200		200		200		100		460	—		(56.5)

NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES		12,564		12,480		12,093		12,294		12,266	0.7		2.4

NONINTEREST INCOME
Service charges on deposit accounts		958		990		1,028		934		1,045	(3.2)		(8.3)
Trust and investment fee income		382		383		385		372		360	(0.3)		6.1
Other noninterest income		1,354		1,156		1,196		882		707	17.1		91.5
Total noninterest income		2,694		2,529		2,609		2,188		2,112	6.5		27.6

NONINTEREST EXPENSE
Salaries and wages		4,002		3,853		3,792		3,766		3,999	3.9		0.1
Employee benefits		1,662		1,299		1,068		1,254		797	27.9		108.5
Occupancy expense		702		697		668		691		649	0.7		8.2
Furniture and equipment expense		286		263		295		263		236	8.7		21.2
Data processing		989		972		919		910		844	1.7		17.2
Directors' fees		137		140		116		86		145	(2.1)		(5.5)
Amortization of intangible assets		144		144		155		162		269	—		(46.5)
FDIC insurance premium expense		(42)		—		181		205		159	—		(126.4)
Other real estate owned expenses, net		(1)		133		60		233		228	(100.8)		(100.4)
Legal and professional fees		568		495		559		601		603	14.7		(5.8)
Other noninterest expenses		1,398		1,388		1,172		1,172		1,287	0.7		8.6
Total noninterest expense		9,845		9,384		8,985		9,343		9,216	4.9		6.8

Income from continuing operations before income taxes		5,413		5,625		5,717		5,139		5,162	(3.8)		4.9
Income tax expense		1,399		1,411		1,489		1,311		1,309	(0.9)		6.9

Income from continuing operations		4,014		4,214		4,228		3,828		3,853	(4.7)		4.2

(Loss) Income from discontinued operations before income taxes		—		(10)		(4)		(99)		104	100.0		(100.0)
Gain on sale of insurance agency		—		—		—		—		12,736	—		(100.0)
(Loss) Income tax expense (benefit)		—		(2)		—		(25)		4,599	100.0		(100.0)

(Loss) Income from discontinued operations		—		(8)		(4)		(74)		8,241	100.0		(100.0)


NET INCOME	$	4,014	$	4,206	$	4,224	$	3,754	$	12,094	(4.6)		(66.8)

Weighted average shares outstanding - basic		12,588		12,764		12,779		12,769		12,749	(1.4)		(1.3)
Weighted average shares outstanding - diluted		12,593		12,769		12,784		12,773		12,766	(1.4)		(1.4)

Basic net income per common share
Income from continuing operations	$	0.32	$	0.33	$	0.33	$	0.30	$	0.30	(3.0)		6.7
(Loss) Income from discontinued operations		—		—		—		(0.01)		0.65	—		(100.0)
Net income	$	0.32	$	0.33	$	0.33	$	0.29	$	0.95	(3.0)		(66.3)
Diluted net income per common share
Income from continuing operations	$	0.32	$	0.33	$	0.33	$	0.30	$	0.30	(3.0)		6.7
(Loss) Income from discontinued operations		—		—		—		(0.01)		0.65	—		(100.0)
Net income	$	0.32	$	0.33	$	0.33	$	0.29	$	0.95	(3.0)		(66.3)

Dividends paid per common share		0.12		0.10		0.10		0.10		0.09	20.0		33.3

Shore Bancshares, Inc. Consolidated Average Balance Sheets By Quarter (Unaudited) (Dollars in thousands)
																					Average balance
																					Q4 2019		Q4 2019
																					compared to		compared to
	Q4 2019				Q3 2019				Q2 2019				Q1 2019				Q4 2018				Q3 2019		Q4 2018
	Average		Yield/		Average		Yield/		Average		Yield/		Average		Yield/		Average		Yield/
	balance		rate		balance		rate		balance		rate		balance		rate		balance		rate
Earning assets
Loans (1), (2), (3)		1,246,355	4.48	%	$	1,235,374	4.54	%	$	1,221,215	4.53	%	$	1,201,913	4.57	%	$	1,189,504	4.50	%	0.9	%	4.8	%
Investment securities
Taxable		145,544	2.27			155,324	2.24			159,878	2.22			165,009	2.45			177,700	2.46		(6.3)		(18.1)
Interest-bearing deposits		71,591	1.63			41,554	2.13			18,325	2.47			27,806	2.38			18,164	2.25		72.3		294.1
Total earning assets		1,463,490	4.12	%		1,432,252	4.22	%		1,399,418	4.24	%		1,394,728	4.27	%		1,385,368	4.20	%	2.2		5.6
Cash and due from banks		20,382				18,127				17,225				17,196				18,204			12.4		12.0
Other assets		79,586				73,823				61,906				58,756				70,858			7.8		12.3
Allowance for credit losses		(10,441)				(10,412)				(10,456)				(10,389)				(10,591)			0.3		(1.4)
Total assets	$	1,553,017			$	1,513,790			$	1,468,093			$	1,460,291			$	1,463,839			2.6		6.1

Interest-bearing liabilities
Demand deposits	$	284,193	0.76	%	$	252,386	0.70	%	$	234,775	0.65	%	$	239,794	0.61	%	$	218,519	0.53	%	12.6		30.1
Money market and savings deposits		397,662	0.51			389,268	0.67			385,272	0.84			383,738	0.85			378,163	0.68		2.2		5.2
Brokered deposits		8,135	2.15			14,568	2.29			20,866	2.52			22,080	2.37			22,816	2.17		(44.2)		(64.3)
Certificates of deposit $100,000 or more		126,411	1.85			119,200	1.78			107,549	1.54			98,535	1.24			97,023	0.94		6.0		30.3
Other time deposits		149,197	1.58			149,708	1.49			145,900	1.31			140,523	1.02			141,702	0.80		(0.3)		5.3
Interest-bearing deposits		965,598	0.94			925,130	0.98			894,362	0.99			884,670	0.89			858,223	0.73		4.4		12.5
Short-term borrowings		1,889	1.26			17,729	2.64			21,557	2.70			32,984	2.62			72,462	2.66		(89.3)		(97.4)
Long-term borrowings		15,000	2.86			15,000	2.86			15,000	2.86			15,000	2.87			14,348	2.89		—		4.5
Total interest-bearing liabilities		982,487	0.97	%		957,859	1.04	%		930,919	1.06	%		932,654	0.99	%		945,033	0.91	%	2.6		4.0
Noninterest-bearing deposits		368,449				354,927				339,589				331,032				339,222			3.8		8.6
Accrued expenses and other liabilities		8,842				7,884				8,484				11,633				6,370			12.2		38.8
Stockholders' equity		193,239				193,120				189,101				184,972				173,214			0.1		11.6
Total liabilities and stockholders' equity	$	1,553,017			$	1,513,790			$	1,468,093			$	1,460,291			$	1,463,839			2.6		6.1

Net interest spread			3.15	%			3.18	%			3.18	%			3.28	%			3.29	%
Net interest margin			3.47	%			3.52	%			3.54	%			3.61	%			3.58	%
(1) All amounts are reported on a tax-equivalent basis computed using the statutory federal income tax rate of 21.0%, exclusive of the alternative minimum tax rate and nondeductible interest expense.
(2) Average loan balances include nonaccrual loans.
(3) Interest income on loans includes amortized loan fees, net of costs and accretion of discounts on acquired loans, which are included in the yield calculations.

Shore Bancshares, Inc. Reconciliation of Generally Accepted Accounting Principles (GAAP) and Non-GAAP Measures(Unaudited) (In thousands, except per share data)
																YTD			YTD
	Q4 2019			Q3 2019			Q2 2019			Q1 2019			Q4 2018			12/31/2019			12/31/2018

The following reconciles return on average equity and return on average tangible equity from continuing operations (Note 1):

Income from continuing operations	$	4,014		$	4,214		$	4,228		$	3,828		$	3,853		$	16,284		$	15,763
Income from continuing operations - annualized (A)	$	15,925		$	16,719		$	16,958		$	15,525		$	15,286		$	16,284		$	15,763

Net income, excluding net amortization of intangible assets	$	4,121		$	4,321		$	4,344		$	3,949		$	4,054		$	16,735		$	16,408

Net income, excluding net amortization of intangible assets - annualized (B)	$	16,350		$	17,143		$	17,424		$	16,015		$	16,084		$	16,735		$	16,408

Average stockholders' equity (C)	$	193,239		$	193,120		$	189,101		$	184,972		$	173,214		$	190,139		$	168,782
Less: Average goodwill and other intangible assets		(19,846)			(19,991)			(20,138)			(20,281)			(31,410)			(20,059)			(32,003)
Average tangible equity (D)	$	173,393		$	173,129		$	168,963		$	164,691		$	141,804		$	170,080		$	136,779

Return on average equity (GAAP) (A)/(C)		8.24	%		8.66	%		8.97	%		8.39	%		8.83	%		8.56	%		9.34	%
Return on average tangible equity (Non-GAAP) (B)/(D)		9.43	%		9.90	%		10.31	%		9.72	%		11.34	%		9.84	%		12.00	%

The following reconciles GAAP efficiency ratio and non- GAAP efficiency ratio from continuing operations (Note 2):

Noninterest expense (E)	$	9,845		$	9,384		$	8,985		$	9,343		$	9,216		$	37,557		$	36,831
Less: Amortization of intangible assets		(144)			(144)			(155)			(162)			(269)			(605)			(866)
Adjusted noninterest expense (F)	$	9,701		$	9,240		$	8,830		$	9,181		$	8,947		$	36,952		$	35,965

Net interest income (G)		12,764			12,680			12,293			12,394			12,726			50,131			50,635
Add: Taxable-equivalent adjustment		44			44			41			34			30			163			114
Taxable-equivalent net interest income (H)	$	12,808		$	12,724		$	12,334		$	12,428		$	12,756		$	50,294		$	50,749

Noninterest income (I)	$	2,694		$	2,529		$	2,609		$	2,188		$	2,112		$	10,020			9,013
Adjusted noninterest income (J)	$	2,694		$	2,529		$	2,609		$	2,188		$	2,112		$	10,020		$	9,013

Efficiency ratio (GAAP) (E)/(G)+(I)		63.69	%		61.70	%		60.29	%		64.07	%		62.11	%		62.44	%		61.75	%
Efficiency ratio (Non-GAAP) (F)/(H)+(J)		62.58	%		60.58	%		59.09	%		62.81	%		60.18	%		61.27	%		60.18	%

The following reconciles book value per common share and tangible book value per common share (Note 1):

Stockholders' equity (L)	$	192,802		$	193,963		$	191,307		$	187,082		$	183,185
Less: Goodwill and other intangible assets		(19,770)			(19,914)			(20,058)			(20,214)			(20,383)
Tangible equity (M)	$	173,032		$	174,049		$	171,249		$	166,868		$	162,802

Shares outstanding (N)		12,500			12,742			12,780			12,780			12,749

Book value per common share (GAAP) (L)/(N)	$	15.42		$	15.22		$	14.97		$	14.64		$	14.37
Tangible book value per common share (Non-GAAP) (M)/(N)	$	13.84		$	13.66		$	13.40		$	13.06		$	12.77


The following reconciles equity to assets and tangible equity to tangible assets (Note 1):

Stockholders' equity (O)	$	192,802		$	193,963		$	191,307		$	187,082		$	183,185
Less: Goodwill and other intangible assets		(19,770)			(19,914)			(20,058)			(20,214)			(20,383)
Tangible equity (P)	$	173,032		$	174,049		$	171,249		$	166,868		$	162,802

Assets (Q)	$	1,559,235		$	1,561,679		$	1,488,562		$	1,485,799		$	1,483,076
Less: Goodwill and other intangible assets		(19,770)			(19,914)			(20,058)			(20,214)			(20,383)
Tangible assets (R)	$	1,539,465		$	1,541,765		$	1,468,504		$	1,465,585		$	1,462,693

Period-end equity/assets (GAAP) (O)/(Q)		12.37	%		12.42	%		12.85	%		12.59	%		12.35	%
Period-end tangible equity/tangible assets (Non-GAAP) (P)/(R)		11.24	%		11.29	%		11.66	%		11.39	%		11.13	%

Note 1: Management believes that reporting tangible equity and tangible assets more closely approximates the adequacy of capital for regulatory purposes. Note 2: Management believes that reporting the non-GAAP efficiency ratio more closely measures its effectiveness of controlling cash-based operating activities.