UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended June 30, 2018

 

OR

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ________ to ________

 

Commission file number 0-22345

 

SHORE BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

 

Maryland		52-1974638
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)
28969 Information Lane, Easton, Maryland		21601
(Address of Principal Executive Offices)		(Zip Code)

 

(410) 763-7800

Registrant’s Telephone Number, Including Area Code

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

	Large accelerated filer	¨	Accelerated filer	þ
	Non-accelerated filer	¨	Smaller reporting company	¨
	(Do not check if a smaller reporting company)		Emerging growth company	¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No þ

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 12,748,273 shares of common stock outstanding as of July 31, 2018.

  

 

   

INDEX

 

	Page
Part I. Financial Information	2
Item 1.  Financial Statements	2
Consolidated Balance Sheets –June 30, 2018 (unaudited) and December 31, 2017	2
Consolidated Statements of Income -For the three and six months ended June 30, 2018 and 2017 (unaudited)	3
Consolidated Statements of Comprehensive Income -For the three and six months ended June 30, 2018 and 2017 (unaudited)	4
Consolidated Statements of Changes in Stockholders’ Equity -For the six months ended June 30, 2018 and 2017 (unaudited)	5
Consolidated Statements of Cash Flows -For the six months ended June 30, 2018 and 2017 (unaudited)	6
Notes to Consolidated Financial Statements (unaudited)	7
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
Item 3.  Quantitative and Qualitative Disclosures about Market Risk	46
Item 4.  Controls and Procedures	46
Part II.  Other Information	47
Item 1.  Legal Proceedings	47
Item 1A.  Risk Factors	47
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds	47
Item 3.  Defaults Upon Senior Securities	47
Item 4.  Mine Safety Disclosures	47
Item 5.  Other Information	47
Item 6.  Exhibits	47
Signatures	47
Exhibit Index	48

 

 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

 

SHORE BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share amounts)

 

		June 30,				December 31,
		2018				2017
ASSETS		(Unaudited)
Cash and due from banks		$	19,420			$	21,534
Interest-bearing deposits with other banks			24,059				10,286
Cash and cash equivalents			43,479				31,820
Investment securities:
Available-for-sale, at fair value			175,566				196,955
Held to maturity, at amortized cost - fair value of $6,162 (2018)
and $6,391 (2017)			6,168				6,247
Equity securities, at fair value			652				-
Loans			1,156,884				1,093,514
Less: allowance for credit losses			(10,121	)			(9,781	)
Loans, net			1,146,763				1,083,733
Premises and equipment, net			23,307				23,054
Goodwill			27,618				27,618
Other intangible assets, net			4,369				4,719
Other real estate owned, net			1,569				1,794
Other assets			22,223				17,920
TOTAL ASSETS		$	1,451,714			$	1,393,860
LIABILITIES
Deposits:
Noninterest-bearing		$	326,634			$	328,322
Interest-bearing			848,465				874,459
Total deposits			1,175,099				1,202,781
Short-term borrowings			102,741				21,734
Other liabilities			5,759				5,609
TOTAL LIABILITIES			1,283,599				1,230,124
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share; shares authorized -
35,000,000; shares issued and outstanding - 12,747,182 (including 9,933 unvested
restricted stock) (2018) and 12,688,224 (including 15,913 unvested restricted stock) (2017)			127				127
Additional paid in capital			65,562				65,256
Retained earnings			106,193				99,662
Accumulated other comprehensive (loss)			(3,767	)			(1,309	)
TOTAL STOCKHOLDERS' EQUITY			168,115				163,736
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	1,451,714			$	1,393,860

 

See accompanying notes to Consolidated Financial Statements.

 

 

SHORE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(Dollars in thousands, except per share amounts)

                          

		For Three Months Ended								For Six Months Ended
		June 30,								June 30,
		2018				2017				2018				2017
INTEREST INCOME
Interest and fees on loans		$	12,631			$	10,441			$	24,675			$	19,991
Interest and dividends on investment securities:
Taxable			982				937				2,003				1,764
Tax-exempt			-				1				-				3
Interest on deposits with other banks			61				70				99				138
Total interest income			13,674				11,449				26,777				21,896
INTEREST EXPENSE
Interest on deposits			580				538				1,128				1,049
Interest on short-term borrowings			461				11				687				14
Total interest expense			1,041				549				1,815				1,063
NET INTEREST INCOME			12,633				10,900				24,962				20,833
Provision for credit losses			418				974				907				1,401
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES			12,215				9,926				24,055				19,432
NONINTEREST INCOME
Service charges on deposit accounts			947				878				1,852				1,712
Trust and investment fee income			414				372				814				733
Insurance agency commissions			2,151				2,032				4,845				4,851
Other noninterest income			1,028				897				1,958				1,690
Total noninterest income			4,540				4,179				9,469				8,986
NONINTEREST EXPENSE
Salaries and wages			5,383				4,803				10,856				9,305
Employee benefits			1,369				1,127				2,886				2,367
Occupancy expense			755				629				1,536				1,254
Furniture and equipment expense			275				284				562				517
Data processing			720				1,015				1,617				1,887
Directors' fees			152				102				266				182
Amortization of other intangible assets			239				55				350				88
FDIC insurance premium expense			214				45				419				209
Other real estate owned (income) expense, net			5				108				(41	)			163
Legal and professional			505				702				969				1,362
Other noninterest expenses			1,211				1,329				2,870				2,516
Total noninterest expense			10,828				10,199				22,290				19,850
INCOME BEFORE INCOME TAXES			5,927				3,906				11,234				8,568
Income tax expense			1,536				1,554				2,785				3,416
NET INCOME		$	4,391			$	2,352			$	8,449			$	5,152
Earnings per common share - Basic		$	0.34			$	0.19			$	0.66			$	0.41
Earnings per common share - Diluted			0.34				0.19				0.66				0.41
Dividends paid per common share			0.08				0.05				0.15				0.10

 

See accompanying notes to Consolidated Financial Statements.

 

 

SHORE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(Dollars in thousands)

 

		For Three Months Ended								For Six Months Ended
		June 30,								June 30,
		2018				2017				2018				2017
Net Income		$	4,391			$	2,352			$	8,449			$	5,152
Other comprehensive (loss) income:
Investment securities:
Unrealized holding (losses) gains on available-for-sale-securities			(550	)			723				(3,416	)			1,939
Tax effect			149				(302	)			942				(780	)
Amortization of unrealized loss on securities transferred from
available-for-sale to held-to-maturity			8				8				15				16
Tax effect			(2	)			(4	)			(5	)			(8	)
Net of tax amount			(395	)			425				(2,464	)			1,167
Total other comprehensive (loss) income			(395	)			425				(2,464	)			1,167
Comprehensive income		$	3,996			$	2,777			$	5,985			$	6,319

 

See accompanying notes to Consolidated Financial Statements.

 

  

SHORE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)

For the Six Months Ended June 30, 2018 and 2017

(Dollars in thousands)

                                

														Accumulated
						Additional								Other				Total
		Common				Paid in				Retained				Comprehensive				Stockholders'
		Stock				Capital				Earnings				Income (Loss)				Equity
Balances, January 1, 2018		$	127			$	65,256			$	99,662			$	(1,309	)		$	163,736
Cumulative effect adjustment (ASU 2016-01)			-				-				(6	)			6				-
Net Income			-				-				8,449				-				8,449
Other comprehensive (loss)			-				-				-				(2,464	)			(2,464	)
Stock-based compensation			-				306				-				-				306
Cash dividends declared							-				(1,912	)			-				(1,912	)
Balances, June 30, 2018		$	127			$	65,562			$	106,193			$	(3,767	)		$	168,115
Balances, January 1, 2017		$	127			$	64,201			$	90,964			$	(993	)		$	154,299
Net Income			-				-				5,152				-				5,152
Other comprehensive income			-				-				-				1,167				1,167
Stock-based compensation			-				590				-				-				590
Cash dividends declared			-				-				(1,268	)			-				(1,268	)
Balances, June 30, 2017		$	127			$	64,791			$	94,848			$	174			$	159,940

 

See accompanying notes to Consolidated Financial Statements.

 

 

SHORE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Dollars in thousands)

             

		For Six Months Ended
		June 30,
		2018				2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income		$	8,449			$	5,152
Adjustments to reconcile net income to net cash provided by operating activities:
Net accretion of acquisition accounting estimates			(310	)			-
Provision for credit losses			907				1,401
Depreciation and amortization			1,030				1,132
Net amortization of securities			339				(18	)
Stock-based compensation expense			306				590
Deferred income tax expense			558				2,783
(Gains) on sales and valuation adjustments on other real estate owned			(55	)			158
Fair value adjustment on equity securities			13				-
Net changes in:
Accrued interest receivable			473				(190	)
Other assets			(4,532	)			(2,123	)
Accrued interest payable			202				(20	)
Other liabilities			(52	)			(1,992	)
Net cash provided by operating activities			7,328				6,873
CASH FLOWS FROM INVESTING ACTIVITES:
Proceeds from maturities and principal payments of investment securities
available for sale			16,979				20,007
Purchases of investment securities available for sale			-				(56,124	)
Purchases of equity securities			(7	)			-
Proceeds from maturities and principal payments of investment securities
held to maturity			91				304
Net change in loans			(63,740	)			(41,323	)
Purchases of premises and equipment			(798	)			(933	)
Proceeds from sales of other real estate owned			280				125
Cash received in branch acquisition (net of cash paid)			-				64,045
Net cash used in investing activities			(47,195	)			(13,899	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net changes in:
Noninterest-bearing deposits			(1,688	)			15,301
Interest-bearing deposits			(25,881	)			(28,988	)
Short-term borrowings			81,007				122
Common stock dividends paid			(1,912	)			(1,268	)
Net cash provided by (used in) financing activities			51,526				(14,833	)
Net increase (decrease) in cash and cash equivalents			11,659				(21,859	)
Cash and cash equivalents at beginning of period			31,820				75,938
Cash and cash equivalents at end of period		$	43,479			$	54,079
Supplemental cash flows information:
Interest paid		$	1,726			$	1,083
Income taxes paid		$	2,825			$	2,000
Unrealized (loss) on securities available for sale		$	(3,416	)		$	(380	)
Amortization of unrealized loss on securities transferred from
available for sale to held to maturity		$	15			$	16

 

See accompanying notes to Consolidated Financial Statements.

 

 

Shore Bancshares, Inc.

Notes to Consolidated Financial Statements

For the Three and Six Months Ended June 30, 2018 and 2017

(Unaudited)

 

Note 1 - Basis of Presentation

 

The consolidated financial statements include the accounts of Shore Bancshares, Inc. and its subsidiaries with all significant intercompany transactions eliminated. The consolidated financial statements conform to accounting principles generally accepted in the United States of America (“GAAP”) and to prevailing practices within the banking industry. The accompanying interim financial statements are unaudited; however, in the opinion of management all adjustments necessary to present fairly the consolidated financial position at June 30, 2018, the consolidated results of income and comprehensive income for the three and six months ended June 30, 2018 and 2017, and changes in stockholders’ equity and cash flows for the six months ended June 30, 2018 and 2017, have been included. All such adjustments are of a normal recurring nature. The amounts as of December 31, 2017 were derived from the 2017 audited financial statements. The results of operations for the three and six months ended June 30, 2018 are not necessarily indicative of the results to be expected for any other interim period or for the full year. This Quarterly Report on Form 10-Q should be read in conjunction with the Annual Report of Shore Bancshares, Inc. on Form 10-K for the year ended December 31, 2017. For purposes of comparability, certain immaterial reclassifications have been made to amounts previously reported to conform with the current period presentation.

 

When used in these notes, the term “the Company” refers to Shore Bancshares, Inc. and, unless the context requires otherwise, its consolidated subsidiaries.

 

Recent Accounting Standards

 

ASU No. 2016-02, “Leases (Topic 842).” This ASU stipulates that a lessee should recognize the assets and liabilities that arise from leases. All leases create an asset and a liability for the lessee in accordance with FASB Concepts Statement No. 6, Elements of Financial Statement, and, therefore, recognition of those lease assets and lease liabilities represents an improvement over previous GAAP, which did not require lease assets and lease liabilities to be recognized for most leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. When measuring assets and liabilities arising from a lease, a lessee (and a lessor) should include payments to be made in optional periods only if the lessee is reasonably certain to exercise an option to extend the lease or not to exercise an option to terminate the lease. Similarly, optional payments to purchase the underlying asset should be included in the measurement of lease assets and lease liabilities only if the lessee is reasonably certain to exercise that purchase option. In addition, also consistent with the previous leases guidance, a lessee (and a lessor) should exclude most variable lease payments in measuring lease assets and lease liabilities, other than those that depend on an index or a rate or are in substance fixed payments. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. The amendments in this ASU are effective for fiscal years after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Leases and lessors may not apply a full retrospective transition approach. The Company is currently assessing the impact that ASU No. 2016-02 will have on its consolidated financial statements. The Company has put together a team to inventory all leases and accumulate the lease data necessary to apply the amended guidance.

 

ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU will replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The use of forecasted information incorporates more timely information in the estimate of expected credit losses, which will be more decision useful to users of the financial statements. It is not expected that an entity will need to create an economic forecast over the entire contractual life of long-dated financial assets. Therefore, the amendments will allow an entity to revert to historical loss information that is reflective of the contractual term (considering the effect of prepayments) for periods that are beyond the time frame for which the entity is able to develop reasonable and supportable forecasts. The amendments retain many of the disclosure amendments in Accounting Standards Update No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, updated to reflect the change from an incurred loss methodology to an expected credit loss methodology. Credit losses on available-for-sale debt securities should be measured in a manner similar to current GAAP. However, the amendments require that credit losses be presented as an allowance rather than a write-down. For public entities that are U.S. Securities and Exchange Commission (SEC) filers, the amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. All entities may adopt the amendments earlier as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company believes this ASU will have a significant impact on our consolidated financial statements and the method in which we calculate our credit losses, primarily on loans and held to maturity securities. At this time, the Company has established a project management team which is in the process of developing an adoption process and understanding this pronouncement, evaluating the impact of this pronouncement and researching additional software resources that could assist with the implementation.

 

 

ASU No. 2017-04 – In January 2017, FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” The ASU simplifies measurement of goodwill and eliminates Step 2 from the goodwill impairment test. The Company should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. The impairment charge is limited to the amount of goodwill allocated to that reporting unit. The amendments in this update are effective for fiscal years beginning after

December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for goodwill impairment tests performed on testing dates after January 1, 2017. The guidance is not expected to have a significant impact on the Company’s financial positions, results of operations or disclosures. 

 

ASU No. 2017-08 – In March 2017, the FASB issued ASU No. 2017-08, “Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities.” Under current GAAP, entities normally amortize the premium as an adjustment of yield over the contractual life of the instrument. This guidance shortens the amortization period of certain callable debt securities held at a premium to the earliest call date. This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The adoption of ASU No. 2017-08 is not expected to have a material impact on the Company’s consolidated financial statements.

 

ASU No. 2017-09 – In May 2017, the FASB issued ASU No. 2017-09 “Stock Compensation, Scope of Modification Accounting.” This ASU clarifies when changes to the terms of conditions of a share-based payment award must be accounted for as modifications. Companies will apply the modification accounting guidance if the value, vesting conditions or classification of the award changes. The new guidance should reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as modifications, as the guidance will allow companies to make certain non-substantive changes to awards without accounting for them as modifications. It does not change the accounting for modifications. ASU No. 2017-09 is effective for interim and annual reporting periods beginning after December 15, 2017; early adoption is permitted. ASU No. 2017-09 is not expected to have a material impact on the Company’s consolidated financial statements.

 

ASU 2018-02 – In February 2018, the FASB issued ASU No. 2018-02 “Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” The amendments provide financial statement preparers with an option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded. The amendments are effective for all organizations for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. Organizations should apply the proposed amendments either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The Company has elected to reclassify the stranded income tax effects from the Tax Cuts and Jobs Act in the financial statements for the period ending December 31, 2017. The amount of this reclassification in 2017 was $226 thousand.

 

ASU 2018-03 - In February 2018, the FASB issued ASU 2018-03, “Technical Corrections and Improvements to Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” The amendments provide targeted improvements to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Specifically, the amendments include clarifications related to: measurement elections, transition requirements, and adjustments associated with equity securities without readily determinable fair values; fair value measurement requirements for forward contracts and purchased options on equity securities; presentation requirements for hybrid financial liabilities for which the fair value option has been elected; and measurement requirements for liabilities denominated in a foreign currency for which the fair value option has been elected. The amendments are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after June 15, 2018. Early adoption is permitted. The adoption of ASU No. 2018-03 is not expected to have a material impact on the Company’s consolidated financial statements.

 

 

Note 2 – Business Combination

 

Northwest Bank Branch Acquisition

 

On May 19, 2017, the Bank purchased three branches from Northwest Bank (“NWBI”) located in Arbutus, Elkridge, and Owings Mills, Maryland. Pursuant to the transaction, the Bank acquired $122.9 million in loans and $212.5 million in deposits, as well as the branch premises and equipment. In connection with its purchase of the branches from NWBI, the Bank received a cash payment from NWBI of $64.0 million, which was net of a premium paid on deposits of $17.2 million. In addition to the premium paid on deposits, other costs associated with the acquisition totaled $977 thousand. This acquisition provides the Bank with the opportunity to enhance its footprint in Maryland by extending its branch network across the Chesapeake Bay to the greater Baltimore area communities of Elkridge, Owings Mills and Arbutus.

 

The Company has accounted for the branch purchases under the acquisition method of accounting in accordance with FASB ASC topic 805, “Business Combinations,” whereby the acquired assets and liabilities were recorded by the Bank at their estimated fair values as of their acquisition date.

 

The acquired assets and assumed liabilities of the NWBI branches were measured at estimated fair value. Management made significant estimates and exercised significant judgement in accounting for the acquisition of the NWBI branches. Management evaluated expected cash flows, prepayment speeds and estimated loss factors to measure fair values for loans. Deposits were valued based upon interest rates, original and remaining terms and maturities, as well as current rates for similar funds in the same markets. Premises were based on recent appraised values, whereas equipment was acquired based on the remaining book value from NWBI, which approximated fair value. Management engaged independent outside experts to provide the fair value estimates. Subsequent to the purchase, Management made a measurement period adjustment for deferred taxes related to intangible assets of $291 thousand.

 

The following table provides the purchase price as of the acquisition date of May 19, 2017, the identifiable assets acquired and liabilities assumed at their estimated fair values, and the resulting goodwill of $15.0 million recorded from the acquisition:

 

(in thousands)

 

Purchase Price Consideration:
Cash consideration		$	17,186
Total purchase price for NWBI branch acquisition		$	17,186
Assets acquired at fair value:
Cash and cash equivalents		$	81,231
Loans			122,862
Premises and equipment, net			6,326
Core deposit intangible			3,954
Deferred tax assets			291
Total fair value of assets acquired		$	214,664
Liabilities assumed at fair value:
Deposits		$	212,456
Other liabilities			7
Total fair value of liabilities assumed		$	212,463
Net assets acquired at fair value:		$	2,201
Amount of goodwill resulting from acquisition		$	14,985

 

The total amount of goodwill arising from this transaction of $15.0 million is expected to be deductible for tax purposes, pursuant to section 197 of the Internal Revenue Code.

 

 

Acquired loans

 

The following table outlines the contractually required payments receivable, cash flows we expect to receive, accretable yield and carrying value for all NWBI loans as of the acquisition date.

 

Contractually

Required

Cash Flows

Carrying Value

Payments

Expected To Be

Accretable FMV

of Loans

Receivable

Collected

Adjustments

Receivable

Performing loans acquired

$

125,131

125,131

2,269

$

122,862

 

The Company recorded all loans acquired at the estimated fair value on the purchase date with no carryover of the related allowance for loan losses. The Company only acquired loans which were deemed to be performing loans with no signs of credit deterioration.

 

The Company determined the net discounted value of cash flows on approximately 864 performing loans totaling $125.1 million. The valuation took into consideration the loans’ underlying characteristics, including account types, remaining terms, annual interest rates, interest types, past delinquencies, timing of principal and interest payments, current market rates, loan-to-value ratios, loss exposures, and remaining balances. These performing loans were segregated into pools based on loan and payment type. The effect of this fair valuation process was a net accretable discount adjustment of $2.3 million at acquisition.

 

Note 3 – Earnings Per Share

 

Basic earnings per common share is calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per common share is calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents (stock-based awards). The following table provides information relating to the calculation of earnings per common share:

 

		For the Three Months Ended								For the Six Months Ended
		June 30,								June 30,
(In thousands, except per share data)		2018				2017				2018				2017
Net Income		$	4,391			$	2,352			$	8,449			$	5,152
Weighted average shares outstanding - Basic			12,744				12,681				12,730				12,676
Dilutive effect of common stock equivalents-options			13				21				13				21
Dilutive effect of common stock equivalents-restricted stock units			-				33				-				33
Weighted average shares outstanding - Diluted			12,757				12,735				12,743				12,730
Earnings per common share - Basic		$	0.34			$	0.19			$	0.66			$	0.41
Earnings per common share - Diluted		$	0.34			$	0.19			$	0.66			$	0.41

 

There were no weighted average common stock equivalents excluded from the calculation of diluted earnings per share for the three and six months ended June 30, 2018 and 2017.

 

 

Note 4 – Investment Securities

 

The following table provides information on the amortized cost and estimated fair values of investment securities.

  

						Gross				Gross				Estimated
		Amortized				Unrealized				Unrealized				Fair
(Dollars in thousands)		Cost				Gains				Losses				Value
Available-for-sale securities:
June 30, 2018
U.S. Government agencies		$	42,578			$	7			$	858			$	41,727
Mortgage-backed			138,111				132				4,404				133,839
Total		$	180,689			$	139			$	5,262			$	175,566
December 31, 2017
U.S. Government agencies		$	45,806			$	23			$	497			$	45,332
Mortgage-backed			152,198				157				1,390				150,965
Equity			666				-				8				658
Total		$	198,670			$	180			$	1,895			$	196,955

 

The Company adopted ASU 2016-01 effective January 1, 2018 and equity securities with an aggregate fair value of $652 thousand at June 30, 2018 are presented separately on the balance sheet. The fair value adjustment recorded through earnings totaled $(13) thousand for the six months ended June 30, 2018.

                                 

Held-to-maturity securities:
June 30, 2018
U.S. Government agencies		$	1,766			$	-			$	10			$	1,756
States and political subdivisions			1,402				24				-				1,426
Other Debt securities (1)			3,000				-				20				2,980
Total		$	6,168			$	24			$	30			$	6,162
December 31, 2017
U.S. Government agencies		$	1,844			$	21			$	-			$	1,865
States and political subdivisions			1,403				47				-				1,450
Other Debt securities (1)			3,000				76				-				3,076
Total		$	6,247			$	144			$	-			$	6,391

 

(1)

On December 15, 2016, the Company bought $3.0 million in subordinated notes with a fixed to floating rate of 6.5% from a local regional bank which it intends to hold to maturity of December 30, 2026.

 

 

The following tables provide information about gross unrealized losses and fair value by length of time that the individual securities have been in a continuous unrealized loss position at June 30, 2018 and December 31, 2017.

 

		Less than								More than
		12 Months								12 Months								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
(Dollars in thousands)		Value				Losses				Value				Losses				Value				Losses
June 30, 2018
Available-for-sale securities:
U.S. Government agencies		$	34,287			$	702			$	6,845			$	156			$	41,132			$	858
Mortgage-backed			90,504				2,813				35,001				1,591				125,505				4,404
Total		$	124,791			$	3,515			$	41,846			$	1,747			$	166,637			$	5,262
Held-to-maturity securities:
U.S. Government agencies		$	2,979			$	20			$	1,756			$	10			$	4,735			$	30

 

		Less than								More than
		12 Months								12 Months								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
(Dollars in thousands)		Value				Losses				Value				Losses				Value				Losses
December 31, 2017
Available-for-sale securities:
U.S. Government agencies		$	37,550			$	453			$	5,956			$	44			$	43,506			$	497
Mortgage-backed			96,622				700				28,215				690				124,837				1,390
Equity securities			-				-				666				8				666				8
Total		$	134,172			$	1,153			$	34,837			$	742			$	169,009			$	1,895

 

All of the securities with unrealized losses in the portfolio have modest duration risk, low credit risk, and minimal losses when compared to total amortized cost. The unrealized losses on debt securities that exist are the result of market changes in interest rates since original purchase. Because the Company does not intend to sell these securities and it is not more likely than not that the Company will be required to sell these securities before recovery of their amortized cost bases, which may be at maturity for debt securities, the Company considers the unrealized losses to be temporary. There were eighty-two available-for-sale securities and two held-to-maturity security in an unrealized loss position at June 30, 2018.

 

The following table provides information on the amortized cost and estimated fair values of investment securities by maturity date at June 30, 2018.

 

		Available for sale								Held to maturity
		Amortized								Amortized
(Dollars in thousands)		Cost				Fair Value				Cost				Fair Value
Due in one year or less		$	8,001			$	7,975			$	-			$	-
Due after one year through five years			34,608				33,748				901				918
Due after five years through ten years			51,945				50,293				3,501				3,488
Due after ten years			86,135				83,550				1,766				1,756
Total		$	180,689			$	175,566			$	6,168			$	6,162

 

The maturity dates for debt securities are determined using contractual maturity dates.

 

 

Note 5 – Loans and Allowance for Credit Losses

 

The Company makes residential mortgage, commercial and consumer loans to customers primarily in Talbot County, Queen Anne’s County, Kent County, Caroline County, Dorchester County, Baltimore County and Howard County in Maryland, Kent County, Delaware and Accomack County, Virginia. The following table provides information about the principal classes of the loan portfolio at June 30, 2018 and December 31, 2017.

 

(Dollars in thousands)		June 30, 2018				December 31, 2017
Construction		$	137,318			$	125,746
Residential real estate			407,278				399,190
Commercial real estate			497,707				464,887
Commercial			108,229				97,284
Consumer			6,352				6,407
Total loans			1,156,884				1,093,514
Allowance for credit losses			(10,121	)			(9,781	)
Total loans, net		$	1,146,763			$	1,083,733

 

Loans are stated at their principal amount outstanding net of any purchase premiums, deferred fees and costs. Loans included deferred costs, net of deferred fees, of $719 thousand and discounts on acquired loans of $1.7 million at June 30, 2018. Loans included deferred costs, net of deferred fees, of $609 thousand and discounts on acquired loans of $1.8 million at December 31, 2017. Interest income on loans is accrued at the contractual rate based on the principal amount outstanding. Fees charged and costs capitalized for originating loans are being amortized substantially on the interest method over the term of the loan. A loan is placed on nonaccrual (i.e., interest income is no longer accrued) when it is specifically determined to be impaired or when principal or interest is delinquent for 90 days or more, unless the loan is well secured and in the process of collection. Any unpaid interest previously accrued on those loans is reversed from income.

 

Interest payments received on nonaccrual loans are applied as a reduction of the loan principal balance unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.

 

A loan is considered impaired if it is probable that the Company will not collect all principal and interest payments according to the loan’s contractual terms. An impaired loan may show deficiencies in the borrower’s overall financial condition, payment history, support available from financial guarantors and/or the fair market value of collateral. The impairment of a loan is measured at the present value of expected future cash flows using the loan’s effective interest rate, or at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. Generally, the Company measures impairment on such loans by reference to the fair value of the collateral. Once the amount of impairment has been determined, the uncollectible portion is charged off. Income on impaired loans is recognized on a cash basis, and payments are first applied against the principal balance outstanding (i.e., placing impaired loans on nonaccrual status). Generally, interest income is not recognized on impaired loans unless the likelihood of further loss is remote. The allowance for credit losses may include specific reserves related to impaired loans. Specific reserves remain until charge offs are made. Impaired loans do not include groups of smaller balance homogenous loans such as residential mortgage and consumer installment loans that are evaluated collectively for impairment. Reserves for probable credit losses related to these loans are based on historical loss ratios and are included in the formula portion of the allowance for credit losses. See additional discussion under the caption “Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

A loan is considered a troubled debt restructuring (“TDR”) if a borrower is experiencing financial difficulties and a creditor has granted a concession. Concessions may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules and other actions intended to minimize potential losses. Loans are identified to be restructured when signs of impairment arise such as borrower interest rate reduction request, slowness to pay, or when an inability to repay becomes evident. The terms being offered are evaluated to determine if they are more liberal than those that would be indicated by policy or industry standards for similar, untroubled credits. In those situations where the terms or the interest rates are considered to be more favorable than industry standards or the current underwriting guidelines of the Company’s banking subsidiary, Shore United Bank (the “Bank”), the loan is classified as a TDR. All loans designated as TDRs are considered impaired loans and may be on either accrual or nonaccrual status. In instances where the loan has been placed on nonaccrual status, six consecutive months of timely payments are required prior to returning the loan to accrual status.

  

 

All loans classified as TDRs which are restructured and accrue interest under revised terms require a full and comprehensive review of the borrower’s financial condition, capacity for repayment, realistic assessment of collateral values, and the assessment of risk entered into any workout agreement. Current financial information on the borrower, guarantor, and underlying collateral is analyzed to determine if it supports the ultimate collection of principal and interest. For commercial loans, the cash flows are analyzed, both for the underlying project and globally. For consumer loans, updated salary, credit history and cash flow information is obtained. Current market conditions are also considered. Following a full analysis, the determination of the appropriate loan structure is made.

 

In the normal course of banking business, risks related to specific loan categories are as follows:

 

Construction loans – Construction loans are offered primarily to builders and individuals to finance the construction of single family dwellings. In addition, the Bank periodically finances the construction of commercial projects. Credit risk factors include the borrower’s ability to successfully complete the construction on time and within budget, changing market conditions which could affect the value and marketability of projects, changes in the borrower’s ability or willingness to repay the loan and potentially rising interest rates which can impact both the borrower’s ability to repay and the collateral value.

 

Residential real estate – Residential real estate loans are typically made to consumers and are secured by residential real estate. Credit risk arises from the borrower’s continuing financial stability, which can be adversely impacted by job loss, divorce, illness, or personal bankruptcy, among other factors. Also impacting credit risk would be a shortfall in the value of the residential real estate in relation to the outstanding loan balance in the event of a default or subsequent liquidation of the real estate collateral.

 

Commercial real estate – Commercial real estate loans consist of both loans secured by owner occupied properties and non-owner occupied properties where an established banking relationship exists and involves investment properties for warehouse, retail, and office space with a history of occupancy and cash flow. These loans are subject to adverse changes in the local economy and commercial real estate markets. Credit risk associated with owner occupied properties arises from the borrower’s financial stability and the ability of the borrower and the business to repay the loan. Non-owner occupied properties carry the risk of a tenant’s deteriorating credit strength, lease expirations in soft markets and sustained vacancies which can adversely impact cash flow.

 

Commercial – Commercial loans are secured or unsecured loans for business purposes. Loans are typically secured by accounts receivable, inventory, equipment and/or other assets of the business. Credit risk arises from the successful operation of the business which may be affected by competition, rising interest rates, regulatory changes and adverse conditions in the local and regional economy.

 

Consumer – Consumer loans include home equity loans and lines, installment loans and personal lines of credit. Credit risk is similar to residential real estate loans above as it is subject to the borrower’s continuing financial stability and the value of the collateral securing the loan.

 

 

The following tables include impairment information relating to loans and the allowance for credit losses as of June 30, 2018 and December 31, 2017.

 

						Residential				Commercial
(Dollars in thousands)		Construction				real estate				real estate				Commercial				Consumer				Total
June 30, 2018
Loans individually
evaluated for impairment		$	3,969			$	5,692			$	6,383			$	333			$	-			$	16,377
Loans collectively
evaluated for impairment			133,349				401,586				491,324				107,896				6,352				1,140,507
Total loans		$	137,318			$	407,278			$	497,707			$	108,229			$	6,352			$	1,156,884
Allowance for credit
losses allocated to:
Loans individually
evaluated for impairment		$	443			$	201			$	38			$	29			$	-			$	711
Loans collectively
evaluated for impairment			2,150				1,949				2,807				2,181				323				9,410
Total allowance		$	2,593			$	2,150			$	2,845			$	2,210			$	323			$	10,121

  

						Residential				Commercial
(Dollars in thousands)		Construction				real estate				real estate				Commercial				Consumer				Total
December 31, 2017
Loans individually
evaluated for impairment		$	6,975			$	6,018			$	4,967			$	337			$	-			$	18,297
Loans collectively
evaluated for impairment			118,771				393,172				459,920				96,947				6,407				1,075,217
Total loans		$	125,746			$	399,190			$	464,887			$	97,284			$	6,407			$	1,093,514
Allowance for credit
losses allocated to:
Loans individually
evaluated for impairment		$	500			$	239			$	33			$	33			$	-			$	805
Loans collectively
evaluated for impairment			1,960				2,045				2,561				2,208				202				8,976
Total allowance		$	2,460			$	2,284			$	2,594			$	2,241			$	202			$	9,781

  

 

The following tables provide information on impaired loans and any related allowance by loan class as of June 30, 2018 and December 31, 2017. The difference between the unpaid principal balance and the recorded investment is the amount of partial charge-offs that have been taken.

 

						Recorded				Recorded								Quarter-to-date				Year-to-date
		Unpaid				investment				investment								average				average
		principal				with no				with an				Related				recorded				recorded
(Dollars in thousands)		balance				allowance				allowance				allowance				investment				investment
June 30, 2018
Impaired nonaccrual loans:
Construction		$	3,093			$	201			$	2,781			$	392			$	2,982			$	2,987
Residential real estate			1,838				1,589				-				-				1,590				1,504
Commercial real estate			2,500				1,853				-				-				1,853				1,286
Commercial			425				-				333				29				332				344
Consumer			-				-				-				-				-				-
Total		$	7,856			$	3,643			$	3,114			$	421			$	6,757			$	6,121
Impaired accruing TDRs:
Construction		$	987			$	55			$	932			$	51			$	291			$	1,634
Residential real estate			4,103				1,710				2,393				201				4,839				4,565
Commercial real estate			4,530				1,604				2,926				38				4,541				4,596
Commercial			-				-				-				-				-				-
Consumer			-				-				-				-				-				-
Total		$	9,620			$	3,369			$	6,251			$	290			$	9,671			$	10,795
Total impaired loans:
Construction		$	4,080			$	256			$	3,713			$	443			$	3,273			$	4,621
Residential real estate			5,941				3,299				2,393				201				6,429				6,069
Commercial real estate			7,030				3,457				2,926				38				6,394				5,882
Commercial			425				-				333				29				332				344
Consumer			-				-				-				-				-				-
Total		$	17,476			$	7,012			$	9,365			$	711			$	16,428			$	16,916

 

  

																		June 30, 2017
						Recorded				Recorded								Quarter-to-date				Year-to-date
		Unpaid				investment				investment								average				average
		principal				with no				with an				Related				recorded				recorded
(Dollars in thousands)		balance				allowance				allowance				allowance				investment				investment
December 31, 2017
Impaired nonaccrual loans:
Construction		$	3,100			$	182			$	2,821			$	459			$	3,153			$	3,435
Residential real estate			1,620				1,482				-				-				3,870				3,940
Commercial real estate			795				149				-				-				670				696
Commercial			425				-				337				33				115				57
Consumer			-				-				-				-				66				82
Total		$	5,940			$	1,813			$	3,158			$	492			$	7,874			$	8,210
Impaired accruing TDRs:
Construction		$	3,972			$	3,038			$	934			$	41			$	4,040			$	4,111
Residential real estate			4,536				2,042				2,494				239				3,409				3,585
Commercial real estate			4,818				4,084				734				33				4,869				4,888
Commercial			-				-				-				-				-				-
Consumer			-				-				-				-				-				-
Total		$	13,326			$	9,164			$	4,162			$	313			$	12,318			$	12,584
Total impaired loans:
Construction		$	7,072			$	3,220			$	3,755			$	500			$	7,193			$	7,546
Residential real estate			6,156				3,524				2,494				239				7,279				7,525
Commercial real estate			5,613				4,233				734				33				5,539				5,584
Commercial			425				-				337				33				115				57
Consumer			-				-				-				-				66				82
Total		$	19,266			$	10,977			$	7,320			$	805			$	20,192			$	20,794

 

 

The following tables provide a roll-forward for troubled debt restructurings as of June 30, 2018 and June 30, 2017.

 

		1/1/2018																								6/30/2018
		TDR				New				Disbursements				Charge				Reclassifications/								TDR				Related
(Dollars in thousands)		Balance				TDRs				(Payments)				offs				Transfer In/(Out)				Payoffs				Balance				Allowance
For six months ended
June 30, 2018
Accruing TDRs
Construction		$	3,972			$	-			$	(6	)		$	(379	)		$	-			$	(2,600	)		$	987			$	-
Residential real estate			4,536				-				(42	)			-				(154	)			(237	)			4,103				-
Commercial real estate			4,818				-				(69	)			-				-				(219	)			4,530				-
Commercial			-				-				-				-				-				-				-				-
Consumer			-				-				-				-				-				-				-				-
Total		$	13,326			$	-			$	(117	)		$	(379	)		$	(154	)		$	(3,056	)		$	9,620			$	-
Nonaccrual TDRs
Construction		$	2,878			$	-			$	(40	)		$	-			$	-			$	-			$	2,838			$	392
Residential real estate			-				-				-				-				154				-				154				-
Commercial real estate			83				-				-				-				-				-				83				-
Commercial			337				-				(4	)			-				-				-				333				29
Consumer			-				-				-				-				-				-				-				-
Total		$	3,298			$	-			$	(44	)		$	-			$	154			$	-			$	3,408			$	421
Total		$	16,624			$	-			$	(161	)		$	(379	)		$	-			$	(3,056	)		$	13,028			$	421

  

		1/1/2017																								6/30/2017
		TDR				New				Disbursements				Charge				Reclassifications/								TDR				Related
(Dollars in thousands)		Balance				TDRs				(Payments)				offs				Transfer In/(Out)				Payoffs				Balance				Allowance
For six months ended
June 30, 2017
Accruing TDRs
Construction		$	4,189			$	-			$	(18	)		$	-			$	-			$	(134	)		$	4,037			$	13
Residential real estate			3,875				-				(102	)			(89	)			-				(450	)			3,234				145
Commercial real estate			4,936				-				(83	)			-				-				-				4,853				75
Commercial			-				-				-				-				-				-				-				-
Consumer			-				-				-				-				-				-				-				-
Total		$	13,000			$	-			$	(203	)		$	(89	)		$	-			$	(584	)		$	12,124			$	233
Nonaccrual TDRs
Construction		$	3,818			$	-			$	(872	)		$	-			$	(108	)		$	-			$	2,838			$	580
Residential real estate			1,603				-				(44	)			-				-				-				1,559				110
Commercial real estate			83				-				-				-				-				-				83				-
Commercial			-				345				-				-				-				-				345				-
Consumer			-				-				-				-				-				-				-				-
Total		$	5,504			$	345			$	(916	)		$	-			$	(108	)		$	-			$	4,825			$	690
Total		$	18,504			$	345			$	(1,119	)		$	(89	)		$	(108	)		$	(584	)		$	16,949			$	923

  

  

The following tables provide information on loans that were modified and considered TDRs during the six months ended June 30, 2018 and June 30, 2017.

 

						Premodification				Postmodification
						outstanding				outstanding
		Number of				recorded				recorded				Related
(Dollars in thousands)		contracts				investment				investment				allowance
TDRs:
For six months ended
June 30, 2018
Construction			-			$	-			$	-			$	-
Residential real estate			-				-				-				-
Commercial real estate			-				-				-				-
Commercial			-				-				-				-
Consumer			-				-				-				-
Total			-			$	-			$	-			$	-
For six months ended
June 30, 2017
Construction			-			$	-			$	-			$	-
Residential real estate			-				-				-				-
Commercial real estate			1				760				755				-
Commercial			1				462				345				-
Consumer			-				-				-				-
Total			2			$	1,222			$	1,100			$	-

 

During the six months ended June 30, 2018, there were no new TDR’s or previously recorded TDR’s which were modified.

 

The following tables provide information on TDRs that defaulted within twelve months of restructuring during the six months ended June 30, 2018 and June 30, 2017. Generally, a loan is considered in default when principal or interest is past due 90 days or more, the loan is placed on nonaccrual, the loan is charged off, or there is a transfer to OREO or repossessed assets.

 

		Number of				Recorded				Related
(Dollars in thousands)		contracts				investment				allowance
TDRs that subsequently defaulted:
For six months ended
June 30, 2018
Construction			1			$	379			$	-
Residential real estate			1				154				-
Commercial real estate			-				-				-
Commercial			-				-				-
Consumer			-				-				-
Total			2			$	533			$	-
For six months ended
June 30, 2017
Construction			-			$	-			$	-
Residential real estate			1				89				-
Commercial real estate			-				-				-
Commercial			-				-				-
Consumer			-				-				-
Total			1			$	89			$	-

 

 

Management uses risk ratings as part of its monitoring of the credit quality in the Company’s loan portfolio. The Company added pass/watch credits to an existing pool that included loans that are risk rated as special mention and substandard to be collectively evaluated for impairment for both quantitative and qualitative factors at December 31, 2017. The Company believes that attributing additional reserves to this pool of loans better reflects the perceived risk for the total loan portfolio going forward, due to the significant organic loan growth over the past 24 months, the increase in pass/watch rated credits, and increasing balances/concentrations in certain segments of the loan portfolio. Loans that are identified as special mention, substandard or doubtful are adversely rated. These loans and the pass/watch loans are are assigned higher qualitative factors than favorably rated loans in the calculation of the formula portion of the allowance for credit losses. At June 30, 2018, there were no nonaccrual loans classified as special mention or doubtful and $6.8 million of nonaccrual loans were identified as substandard. Similarly, at December 31, 2017, there were no nonaccrual loans classified as special mention or doubtful and $5.0 million of nonaccrual loans were identified as substandard.

 

The following tables provide information on loan risk ratings as of June 30, 2018 and December 31, 2017.

 

										Special
(Dollars in thousands)		Pass/Performing				Pass/Watch				Mention				Substandard				Doubtful				Total
June 30, 2018
Construction		$	102,435			$	31,647			$	-			$	3,236			$	-			$	137,318
Residential real estate			363,423				35,838				3,934				4,083				-				407,278
Commercial real estate			377,521				106,739				5,474				7,973				-				497,707
Commercial			83,047				24,159				648				375				-				108,229
Consumer			5,794				555				-				3				-				6,352
Total		$	932,220			$	198,938			$	10,056			$	15,670			$	-			$	1,156,884

 

										Special
(Dollars in thousands)		Pass/Performing				Pass/Watch				Mention				Substandard				Doubtful				Total
December 31, 2017
Construction		$	88,836			$	30,674			$	-			$	6,236			$	-			$	125,746
Residential real estate			355,575				34,973				4,456				4,186				-				399,190
Commercial real estate			342,051				109,041				7,420				6,375				-				464,887
Commercial			72,440				24,102				308				434				-				97,284
Consumer			5,260				1,147				-				-				-				6,407
Total		$	864,162			$	199,937			$	12,184			$	17,231			$	-			$	1,093,514

 

The following tables provide information on the aging of the loan portfolio as of June 30, 2018 and December 31, 2017.

 

		Accruing
						30-59 days				60-89 days				Greater than				Total
(Dollars in thousands)		Current				past due				past due				90 days				past due				Nonaccrual				Total
June 30, 2018
Construction		$	134,152			$	184			$	-			$	-			$	184			$	2,982			$	137,318
Residential real estate			405,042				433				214				-				647				1,589				407,278
Commercial real estate			493,503				1,130				1,221				-				2,351				1,853				497,707
Commercial			107,836				60				-				-				60				333				108,229
Consumer			6,329				21				2				-				23				-				6,352
Total		$	1,146,862			$	1,828			$	1,437			$	-			$	3,265			$	6,757			$	1,156,884
Percent of total loans			99.1	%			0.2	%			0.1	%			-	%			0.3	%			0.6	%			100.0	%

 

		Accruing
						30-59 days				60-89 days				Greater than				Total
(Dollars in thousands)		Current				past due				past due				90 days				past due				Nonaccrual				Total
December 31, 2017
Construction		$	122,475			$	268			$	-			$	-			$	268			$	3,003			$	125,746
Residential real estate			394,653				1,589				1,045				421				3,055				1,482				399,190
Commercial real estate			460,998				1,061				2,461				218				3,740				149				464,887
Commercial			96,774				173				-				-				173				337				97,284
Consumer			6,395				6				6				-				12				-				6,407
Total		$	1,081,295			$	3,097			$	3,512			$	639			$	7,248			$	4,971			$	1,093,514
Percent of total loans			98.8	%			0.3	%			0.3	%			0.1	%			0.7	%			0.5	%			100.0	%

 

 

The following tables provide a summary of the activity in the allowance for credit losses allocated by loan class for the three and six months ended June 30, 2018 and June 30, 2017. Allocation of a portion of the allowance to one loan class does not preclude its availability to absorb losses in other loan classes.

 

						Residential				Commercial
(Dollars in thousands)		Construction				real estate				real estate				Commercial				Consumer				Unallocated				Total
For three months ended
June 30, 2018
Allowance for credit losses:
Beginning Balance		$	2,541			$	2,359			$	2,643			$	2,027			$	217			$	-			$	9,787
Charge-offs			-				(41	)			-				(126	)			(14	)			-				(181	)
Recoveries			6				73				8				10				-				-				97
Net charge-offs			6				32				8				(116	)			(14	)			-				(84	)
Provision			46				(241	)			194				299				120				-				418
Ending Balance		$	2,593			$	2,150			$	2,845			$	2,210			$	323			$	-			$	10,121

  

						Residential				Commercial
(Dollars in thousands)		Construction				real estate				real estate				Commercial				Consumer				Unallocated				Total
For three months ended
June 30, 2017
Allowance for credit losses:
Beginning Balance		$	2,290			$	2,131			$	2,912			$	1,338			$	256			$	-			$	8,927
Charge-offs			(25	)			(100	)			-				(706	)			(15	)			-				(846	)
Recoveries			9				10				8				42				8				-				77
Net charge-offs			(16	)			(90	)			8				(664	)			(7	)			-				(769	)
Provision			75				55				(118	)			978				(16	)			-				974
Ending Balance		$	2,349			$	2,096			$	2,802			$	1,652			$	233			$	-			$	9,132

 

 

						Residential				Commercial
(Dollars in thousands)		Construction				real estate				real estate				Commercial				Consumer				Unallocated				Total
For six months ended
June 30, 2018
Allowance for credit losses:
Beginning Balance		$	2,460			$	2,284			$	2,594			$	2,241			$	202			$	-			$	9,781
Charge-offs			(379	)			(179	)			-				(126	)			(24	)			-				(708	)
Recoveries			15				86				18				22				-				-				141
Net charge-offs			(364	)			(93	)			18				(104	)			(24	)			-				(567	)
Provision			497				(41	)			233				73				145				-				907
Ending Balance		$	2,593			$	2,150			$	2,845			$	2,210			$	323			$	-			$	10,121

  

						Residential				Commercial
(Dollars in thousands)		Construction				real estate				real estate				Commercial				Consumer				Unallocated				Total
For six months ended
June 30, 2017
Allowance for credit losses:
Beginning Balance		$	2,787			$	1,953			$	2,610			$	1,145			$	231			$	-			$	8,726
Charge-offs			(54	)			(323	)			-				(771	)			(15	)			-				(1,163	)
Recoveries			16				21				19				100				12				-				168
Net charge-offs			(38	)			(302	)			19				(671	)			(3	)			-				(995	)
Provision			(400	)			445				173				1,178				5				-				1,401
Ending Balance		$	2,349			$	2,096			$	2,802			$	1,652			$	233			$	-			$	9,132

 

Foreclosure Proceedings

Consumer mortgage loans collateralized by residential real estate property that were in the process of foreclosure totaled $154 thousand and $530 thousand as of June 30, 2018 and December 31, 2017, respectively. There were no residential properties included in the balance of other real estate owned at June 30, 2018 or December 31, 2017.

 

All TDRs were in compliance with their modified terms, with the exception of one loan which transferred to nonaccrual as of June 30, 2018. The TDRs which are in compliance with their modified terms had no further commitments associated with them as of June 30, 2018 and December 31, 2017.

 

 

Note 6 – Goodwill and Other Intangibles

 

The following table provides information on the significant components of goodwill and other acquired intangible assets at June 30, 2018 and December 31, 2017. On May 19, 2017, the Bank acquired three branches located in Arbutus, Owings Mills and Elkridge, Maryland from NWBI. The purchase of these branches resulted in core deposit intangibles of $4.0 million and goodwill of $15.0 million.

 

June 30, 2018
																		Weighted
		Gross				Accumulated								Net				Average
		Carrying				Impairment				Accumulated				Carrying				Remaining Life
(Dollars in thousands)		Amount				Charges				Amortization				Amount				(in years)
Goodwill		$	30,922			$	(2,637	)		$	(667	)		$	27,618				-
Other intangible assets
Amortizable
Employment agreements		$	440			$	-			$	(440	)		$	-				-
Insurance expirations			1,270				-				(1,270	)			-				-
Customer relationships			795				(95	)			(508	)			192				4.1
Core deposit intangible			3,954				-				(557	)			3,397				5.2
			6,459				(95	)			(2,775	)			3,589
Unamortizable
Trade name			780				-				-				780				-
Total other intangible assets		$	7,239			$	(95	)		$	(2,775	)		$	4,369

 

December 31, 2017
																		Weighted
		Gross				Accumulated								Net				Average
		Carrying				Impairment				Accumulated				Carrying				Remaining Life
(Dollars in thousands)		Amount				Charges				Amortization				Amount				(in years)
Goodwill		$	30,922			$	(2,637	)		$	(667	)		$	27,618				-
Other intangible assets
Amortizable
Employment agreements		$	440			$	-			$	(440	)		$	-				-
Insurance expirations			1,270				-				(1,270	)			-				-
Customer relationships			795				(95	)			(484	)			216				4.6
Core deposit intangible			3,954				-				(231	)			3,723				9.4
			6,459				(95	)			(2,425	)			3,939
Unamortizable
Trade name			780				-				-				780				-
			780				-				-				780
Total other intangible assets		$	7,239			$	(95	)		$	(2,425	)		$	4,719

 

The aggregate amortization expense was $350 thousand and $88 thousand for the six months ended June 30, 2018 and June 30, 2017, respectively.

 

 

At June 30, 2018, estimated future remaining amortization for amortizing intangibles within the years ending December 31, is as follows:

 

(Dollars in thousands)
2018		$	667
2019			622
2020			550
2021			475
2022			391
2023			288
Thereafter			596
Total amortizing intangible assets		$	3,589

 

Note 7 – Other Assets

 

The Company had the following other assets at June 30, 2018 and December 31, 2017.

 

(Dollars in thousands)		June 30, 2018				December 31, 2017
Restricted securities		$	7,578			$	3,735
Accrued interest receivable			3,029				3,502
Deferred income taxes			2,327				1,935
Prepaid expenses			1,324				1,475
Cash surrender value on life insurance			3,666				3,637
Other assets			4,299				3,636
Total		$	22,223			$	17,920

 

 

The following table provides information on significant components of the Company’s deferred tax assets and liabilities as of June 30, 2018 and December 31, 2017.

 

		June 30,				December 31,
(Dollars in thousands)		2018				2017
Deferred tax assets:
Allowance for credit losses		$	2,745			$	2,625
Reserve for off-balance sheet commitments			81				81
Net operating loss carry forward			400				741
Write-downs of other real estate owned			183				212
Deferred income			132				95
Unrealized losses on available-for-sale securities			1,409				460
Unrealized losses on available-for-sale securities transferred to held to maturity			15				20
Other			437				635
Total deferred tax assets			5,402				4,869
Deferred tax liabilities:
Depreciation			363				408
Amortization on loans FMV adjustment			69				84
Acquisition accounting adjustments			2,157				1,994
Deferred capital gain on branch sale			204				207
Other			282				241
Total deferred tax liabilities			3,075				2,934
Net deferred tax assets		$	2,327			$	1,935

 

The Company’s deferred tax assets consist of gross net operating loss carryovers for state tax purposes of $6.0 million that will be used to offset taxable income in future periods. The Company’s state net operating loss carryovers will begin to expire in the year ending December 31, 2026 with limited amounts available through December 31, 2034.

 

No valuation allowance on these deferred tax assets was recorded at June 30, 2018 and December 31, 2017 as management believes it is more likely than not that all deferred tax assets will be realized. 

 

Note 8 – Other Liabilities

 

The Company had the following other liabilities at June 30, 2018 and December 31, 2017.

 

(Dollars in thousands)		June 30, 2018				December 31, 2017
Accrued interest payable		$	267			$	65
Other accounts payable			3,747				4,286
Deferred compensation liability			1,061				1,219
Other liabilities			684				39
Total		$	5,759			$	5,609

  

Note 9 - Stock-Based Compensation

 

At the 2016 annual meeting, stockholders approved the Shore Bancshares, Inc. 2016 Stock and Incentive Plan (“2016 Equity Plan”), replacing the Shore Bancshares, Inc. 2006 Stock and Incentive Plan (“2006 Equity Plan”), which expired on that date. The Company may issue shares of common stock or grant other equity-based awards pursuant to the 2016 Equity Plan. Stock-based awards granted to date generally are time-based, vest in equal installments on each anniversary of the grant date and range over a one- to five-year period of time, and, in the case of stock options, expire 10 years from the grant date. As part of the 2016 Equity Plan, a performance equity incentive award program, known as the “Long-term incentive plan” allows participating officers of the Company to earn incentive awards of performance share/restricted stock units if certain pre-determined targets are achieved at the end of a three-year performance cycle. Stock-based compensation expense based on the grant date fair value is recognized ratably over the requisite service period for all awards and reflects forfeitures as they occur. The 2016 Equity Plan originally reserved 750,000 shares of common stock for grant, and 654,482 shares remained available for grant at June 30, 2018.

 

 

The following tables provide information on stock-based compensation expense for the three and six months ended June 30, 2018 and 2017.

 

		For Three Months Ended								For Six Months Ended
		June 30,								June 30,
(Dollars in thousands)		2018				2017				2018				2017
Stock-based compensation expense		$	163			$	173			$	306			$	590
Excess tax benefits related to stock-based
compensation			11				11				146				13

 

		As of
		June 30,
(Dollars in thousands)			2018				2017
Unrecognized stock-based compensation
expense		$	677			$	354
Weighted average period unrecognized
expense is expected to be recognized			1.0	years			1.1	years

 

The following table summarizes restricted stock award activity for the Company under the 2016 Equity Plan for the six months ended June 30, 2018.

 

		Six Months Ended June 30, 2018
						Weighted Average
		Number of				Grant Date
		Shares				Fair Value
Nonvested at beginning of period			15,913			$	15.39
Granted			13,511				18.68
Vested			(19,491	)			16.00
Cancelled			-				-
Nonvested at end of period			9,933			$	14.75

 

The fair value of restricted stock awards that vested during the first six months of 2018 and 2017 was $312 thousand and $287 thousand, respectively.

 

Restricted stock units (RSUs) are similar to restricted stock, except the recipient does not receive the stock immediately, but instead receives it upon the terms and conditions of the Company’s long-term incentive plans which are subject to performance milestones achieved at the end of a three-year period. Each RSU cliff vests at the end of the three-year period and entitles the recipient to receive one share of common stock on a specified issuance date. The recipient does not have any stockholder rights, including voting rights, with respect to the shares underlying awarded RSUs until the recipient becomes the holder of those shares.

 

During 2018, the Company entered into a long-term incentive program agreement with officers of the Company and its subsidiaries to award RSUs based on a performance metric to be achieved as of December 31, 2020. Assuming the performance metric is achieved, these awards will cliff vest on this date, in which the final number of common shares to be issued will be determined. The range of RSUs which could potentially be awarded at the end of the performance cycle is between 13,188 shares and 52,769 shares, assuming a certain performance metric is met. The table below presents management’s evaluation of the probable number of common stock awards to be issued at the end of the performance cycle.

 

During 2017, the Company entered into a long-term incentive program agreement with officers of the Company and its subsidiaries to award RSUs based on a performance metric to be achieved as of December 31, 2019. Assuming the performance metric is achieved, these awards will cliff vest on this date, in which the final number of common shares to be issued will be determined. The range of RSUs which could potentially be awarded at the end of the performance cycle is between 12,703 shares and 50,830 shares, assuming a certain performance metric is met. The table below presents management’s evaluation of the probable number of common stock awards to be issued at the end of the performance cycle.

 

During 2016, the Company entered into a long-term incentive program agreement with officers of the Company and its subsidiaries to award RSUs based on a performance metric to be achieved as of December 31, 2018. Assuming the performance metric is achieved, these awards will cliff vest on this date, in which the final number of common shares to be issued will be determined. The range of RSUs which could potentially be awarded at the end of the performance cycle is between 12,214 shares and 48,871 shares, assuming a certain performance metric is met. In addition, two members of the long-term incentive plan from 2015 forfeited their RSUs due to leaving the Company before the end of the vesting period. The table below presents management’s evaluation of the probable number of common stock awards to be issued at the end of the performance cycle.

 

 

The following table summarizes restricted stock units activity based on management’s evaluation of the probable number of common stock awards to be issued at the end of the performance cycle for the Company under the 2016 Equity Plan for the six months ended June 30, 2018.

  

		Six Months Ended June 30, 2018
						Weighted Average
		Number of				Grant Date
		Shares				Fair Value
Outstanding at beginning of period			90,266			$	12.08
Granted			26,381				17.36
Vested			(40,423	)			9.49
Forfeited			(16,308	)			11.68
Outstanding at end of period			59,916			$	15.38

 

The fair value of restricted stock units that vested during the first six months of 2018 and 2017 was $695 thousand and $287 thousand, respectively.

 

The following table summarizes stock option activity for the Company under the 2016 Equity Plan for the six months ended June 30, 2018.

 

		Six Months Ended June 30, 2018
						Weighted Average
		Number of				Grant Date
		Shares