Executive Summary

Q1 2014 delivered net income of $1.26M ($0.15 diluted EPS), up from $1.18M ($0.14) in Q4 2013 and materially higher than $0.22M ($0.03) in Q1 2013, aided by higher noninterest income and lower noninterest expense; net interest margin improved to 3.50% from 3.47% in Q4 and 3.30% YoY .
Credit costs rose sequentially: provision for credit losses increased to $0.98M from $0.47M in Q4 due to higher charge-offs and nonaccruals, though YoY provision fell sharply from $2.15M; net charge-offs were $1.63M vs. $1.05M in Q4 and $2.41M YoY .
Asset quality improved meaningfully vs. prior year following the 2013 Asset Sale, with nonperforming assets at $23.9M (down 40% YoY) and accruing TDRs at $25.3M (down 52% YoY), but nonperforming assets rose 7.9% q/q on one new nonaccrual CRE loan .
Shares ended Q1 at $9.51 (+3.1% q/q; +40.1% YoY), as investors reacted to cleaner credit trends and improving margin; equity/assets rose to 9.97% (from 9.80% at year-end) supporting capital strength .
Consensus estimates for Q1 2014 were unavailable from S&P Global at time of request; thus, no EPS or “revenue” beat/miss comparison for Q1. Notably, management said Q4 2013 net income was “ahead of consensus estimates,” highlighting narrative improvement exiting FY13 .

What Went Well and What Went Wrong

What Went Well

Noninterest income increased sequentially by $573K and YoY by $298K, driven primarily by higher insurance agency commissions and seasonal contingency payments received in Q1 .
Net interest margin strengthened to 3.50% (vs. 3.47% in Q4 and 3.30% in Q1 2013) helped by fewer reversals of nonaccrual income and the prior exit from the IND Program and related caps, which lowered deposit costs .
Management emphasized improved earnings and the ability to refocus on healthy loan originations post-Asset Sale: “With the Asset Sale, we are able to re-emphasize our focus on healthy loan originations and overall business development…” .

What Went Wrong

Provision for credit losses rose to $975K from $474K in Q4 2013, reflecting increased loan charge-offs and nonaccrual loans sequentially; net charge-offs rose to $1.63M vs. $1.05M in Q4 .
Nonperforming assets increased 7.9% q/q to $23.9M due to the addition of a nonaccrual CRE loan; nonaccrual loans to total assets rose to 1.83% from 1.72% in Q4 .
Loan balances declined $8.3M q/q (-1.2%), and deposits fell $4.0M q/q, with a mix shift away from noninterest-bearing and time deposits toward money market, savings, and interest-bearing demand deposits, indicating lingering growth headwinds in a slowly improving local economy .

Financial Results

Note: For banks, “Revenue” is not a single GAAP line item; we present Net Interest Income and Noninterest Income as top-line components.

Metric	Q1 2013	Q3 2013	Q4 2013	Q1 2014
Total Interest Income ($USD thousands)	10,607	10,755	9,807	9,455
Net Interest Income ($USD thousands)	8,477	9,001	8,570	8,323
Provision for Credit Losses ($USD thousands)	2,150	22,460	474	975
Noninterest Income ($USD thousands)	4,490	3,962	4,215	4,788
Noninterest Expense ($USD thousands)	10,491	9,759	10,468	10,115
Net Income ($USD thousands)	222	361	1,175	1,258
Diluted EPS ($)	0.03	0.04	0.14	0.15
Net Interest Margin (%)	3.30	3.60	3.47	3.50
Efficiency Ratio - GAAP (%)	80.74	75.13	81.72	77.01
Efficiency Ratio - Non-GAAP (%)	80.17	74.45	81.14	76.44

Segment/Line Item Breakdown (Noninterest Income):

Component ($USD thousands)	Q1 2013	Q4 2013	Q1 2014
Service charges on deposit accounts	572	599	558
Trust and investment fee income	390	429	431
Insurance agency commissions	2,813	2,477	3,077
Other noninterest income	715	710	722
Total Noninterest Income	4,490	4,215	4,788

Key Banking KPIs:

KPI	Q1 2013	Q4 2013	Q1 2014
Loans (period-end, $USD thousands)	785,753	711,919	703,637
Deposits (period-end, $USD thousands)	970,159	933,468	929,444
Nonperforming Assets ($USD thousands)	40,201	22,196	23,949
Accruing TDRs ($USD thousands)	52,545	26,088	25,333
Allowance for Credit Losses / Loans (%)	2.00	1.51	1.43
Net Charge-offs ($USD thousands)	2,406	1,050	1,631
Annualized Net Charge-offs / Avg Loans (%)	1.25	0.58	0.93
Equity / Assets (%)	10.35	9.80	9.97
Market Value at Period End ($)	6.79	9.22	9.51

Guidance Changes

Metric	Period	Previous Guidance	Current Guidance	Change
None provided	Q1 2014	N/A	N/A	N/A

Management did not issue quantitative guidance for revenue, margins, OpEx, tax rate, or dividends in Q1 2014 materials .

Earnings Call Themes & Trends

Note: An earnings call transcript for Q1 2014 was not found via document search; analysis leverages management commentary in Q1 2014 and Q4 2013 press releases.

Topic	Previous Mentions (Q-2: Q3 2013; Q-1: Q4 2013)	Current Period (Q1 2014)	Trend
Credit quality and Asset Sale impact	Q3: $22.46M provision tied to Asset Sale; heavy charge-offs; strategy to resolve problem assets . Q4: Provision fell to $0.47M; nonperforming assets down >50% YoY; “ahead of consensus estimates” .	Provision up to $0.98M on higher charge-offs and nonaccruals; NPA up 7.9% q/q, but NPA and TDRs sharply better YoY due to Asset Sale .	Improving YoY; modest deterioration q/q as cleanup continues.
Net interest margin	Q3: NIM 3.60% aided by deposit cost reductions . Q4: NIM 3.47%; benefit from exiting IND caps .	NIM 3.50% (+3bps q/q, +20bps YoY); fewer reversals of nonaccrual income .	Stable to improving.
Noninterest income (insurance agencies)	Q3: $2.63M commissions; hedge loss impacted total . Q4: $2.48M commissions; sequential decline .	$3.08M commissions; seasonal contingency payments lift Q1 .	Seasonal uptick; stronger run-rate.
Deposits and IND Program exit	Q3/Q4: Continued exits from IND program; lower money market/time deposits; deposit mix shift .	Deposits -$4.0M q/q; shift away from noninterest-bearing/time into MM/savings/IB demand .	Mix optimization; modest contraction persists.
Local economy and loan growth	Q4: Economy improving in retail/small business; construction still anemic .	“Slowly improving local economy is delaying our progress”; loans down $8.3M q/q .	Cautious tone; gradual recovery.

Management Commentary

“We are pleased to report improved earnings over the linked quarter and the first quarter of 2013… With the Asset Sale, we are able to re-emphasize our focus on healthy loan originations and overall business development; however, we still see that the slowly improving local economy is delaying our progress.” — Lloyd L. “Scott” Beatty, Jr., President & CEO .
“We were pleased to report fourth quarter net income which was ahead of consensus estimates… with a substantial portion of our credit problems behind us we can now turn our attention to revenue generation.” — Lloyd L. “Scott” Beatty, Jr. (Q4 context) .

Q&A Highlights

No Q1 2014 earnings call transcript was available in the company document archive; no Q&A themes or clarifications could be analyzed. Searches for “earnings-call-transcript” returned no SHBI results within Q1 2014 [ListDocuments: 0 results for earnings-call-transcript 2014-01-01 to 2014-06-30].
Narrative clarity primarily comes from press releases detailing Asset Sale impacts, sequential credit dynamics, and margin evolution .

Estimates Context

Q1 2014 analyst consensus EPS and revenue estimates were unavailable from S&P Global at time of request due to data access limitations; therefore, no Q1 beat/miss can be determined. Values would be retrieved from S&P Global if available.*
For prior quarter context, management noted Q4 2013 net income was “ahead of consensus estimates,” indicating improved sentiment exiting FY13 .

Key Takeaways for Investors

Earnings quality improved post-Asset Sale: net income rose to $1.26M ($0.15) with margin expansion and lower noninterest expense, despite a sequential uptick in provision; YoY credit metrics are substantially cleaner .
Watch near-term credit prints: nonperforming assets rose 7.9% q/q and net charge-offs increased; allowance/loans dipped to 1.43%—further provisioning may be needed if nonaccruals persist .
Seasonal strength in insurance agencies lifted noninterest income; sustainability into Q2 should be monitored as contingency payments are typically Q1-weighted .
Funding mix continues to optimize post-IND exit, supporting cost of funds and NIM; deposit contraction remains a headwind for asset growth .
Capital remains solid with equity/assets at 9.97%, enabling balance sheet resilience while loan growth is subdued .
Near-term trading: constructive on margin/NII stabilization and improved YoY credit profile; cautious on q/q credit drift and loan contraction.
Medium-term thesis: if credit normalization holds and loan growth resumes with local economic improvement, earnings leverage via lower FDIC premiums and operating efficiency can support further EPS recovery .

References:
All figures and statements are sourced from SHBI Q1 2014 and Q4 2013 8-K press releases and financial highlights: .
Consensus estimates were unavailable from S&P Global; values would be retrieved from S&P Global if accessible.*

SHORE BANCSHARES INC (SHBI)·Q1 2014 Earnings Summary