Executive Summary

Q2 2014 EPS was $0.13 on net income of $1.305M, up sharply year over year ($0.04 on $0.361M) and modestly above Q1 ($0.15 on $1.258M), as lower credit costs and stable NIM offset softer fee income seasonality .
Credit quality improved further: nonperforming assets fell 19% sequentially to $19.4M (1.82% of assets) and nonaccrual loans declined $4.0M (21%) from Q1; allowance/loans stepped down to 1.28% from 1.43% on better portfolio metrics .
Capital strengthened materially after a 4.14M share offering at $8.25, lifting equity/assets to 12.91% from 9.97% in Q1; $20M of proceeds were down-streamed to Talbot Bank to meet regulatory capital goals .
Noninterest income fell 5% q/q on insurance commission seasonality but rose 14% y/y; sale of the wholesale insurance subsidiary (TSGIA) closed June 6, with a $114k gain recorded and an overall positive impact on regulatory capital ratios .

What Went Well and What Went Wrong

What Went Well
- Continued earnings momentum: net income increased to $1.305M (EPS $0.13) vs $0.361M a year ago; NIM held essentially flat sequentially at 3.49% (vs 3.50% in Q1) .
- Credit clean-up continued: nonperforming assets fell to $19.4M (1.82% of assets), and nonaccrual loans declined $4.0M (21%) q/q; net charge-offs remained manageable at $1.943M .
- Capital inflection: public equity raise boosted equity/assets to 12.91%, with management noting “additional capital strength”; $20M contributed to the bank subsidiary .
- Quote: “We are pleased to report improved earnings… [and] our credit profile continues to improve with nonaccrual loans declining $4.0 million… [and] total stockholders’ equity to total assets increased to 12.91%” – Lloyd L. “Scott” Beatty, Jr., CEO .
What Went Wrong
- Core spread income pressure y/y: net interest income declined to $8.447M vs $9.001M in Q2’13 on lower loan volumes and yields; NIM down 11 bps y/y to 3.49% .
- Fee income seasonality: noninterest income decreased 5.4% q/q to $4.528M due to lower insurance commissions following Q1 contingency payments (typical timing) .
- Operating costs mixed: noninterest expense rose 1.6% y/y on higher loan collection costs; net charge-offs increased q/q to $1.943M from $1.631M, though improved vs $2.712M a year ago .

Financial Results

Metric	Q2 2013	Q1 2014	Q2 2014
Net Interest Income ($M)	$9.001	$8.323	$8.447
Noninterest Income ($M)	$3.962	$4.788	$4.528
Total Net Revenue ($M) = NII + Noninterest	$12.963	$13.111	$12.975
Provision for Credit Losses ($M)	$2.700	$0.975	$0.950
Noninterest Expense ($M)	$9.759	$10.115	$9.917
Income Before Taxes ($M)	$0.504	$2.021	$2.108
Net Income ($M)	$0.361	$1.258	$1.305
Diluted EPS ($)	$0.04	$0.15	$0.13
Net Interest Margin (%)	3.60%	3.50%	3.49%
Return on Avg Assets (%)	0.13%	0.49%	0.50%
Efficiency Ratio – GAAP (%)	75.13%	77.01%	76.30%

Balance Sheet and Credit KPIs (period-end unless noted)

Metric	Q2 2013	Q1 2014	Q2 2014
Total Assets ($B)	$1.054	$1.050	$1.065
Loans, net ($M)	$766.5	$693.6	$700.6
Deposits ($M)	$922.1	$929.4	$913.5
Equity/Assets (%)	10.77%	9.97%	12.91%
Tangible Eq./Tangible Assets (%)	9.39%	8.58%	11.81%
NPA / Assets (%)	3.91%	2.28%	1.82%
Allowance for Credit Losses / Loans (%)	2.01%	1.43%	1.28%
Net Charge-offs ($M)	$2.712	$1.631	$1.943
Avg Loans ($M)	$785.4	$707.7	$708.7

Noninterest Income Breakdown (Q2 2014)

Component	Q2 2013	Q1 2014	Q2 2014
Service Charges on Deposits ($M)	$0.600	$0.558	$0.602
Trust & Investment Fees ($M)	$0.393	$0.431	$0.455
Insurance Agency Commissions ($M)	$2.633	$3.077	$2.536
Other Noninterest Income ($M)	$0.729	$0.722	$0.935 (incl. $0.114 TSGIA gain)

Notes:

Weighted average diluted shares increased to 10.024M in Q2 (from ~8.47M in Q1 and ~8.47M in Q2’13), depressing per-share metrics following the equity offering .
The company sold wholesale insurance subsidiary TSGIA on June 6; gain recorded in “Other” and write-offs of intangibles/DTAs improved regulatory capital ratios .

Guidance Changes

Metric	Period	Previous Guidance	Current Guidance	Change
Company Guidance	2014	Not provided	Not provided	No formal guidance disclosed in releases/8-Ks

No explicit quantitative guidance (revenue, margins, OpEx, tax rate, dividends) was provided in the Q2 2014 press release/8-K; dividends per share were $0.00 in Q2 and YTD .

Earnings Call Themes & Trends

No Q2 2014 earnings call transcript was found in the document set; themes below reflect management narratives across the last two press releases and prior quarter materials.

Topic	Q4 2013 (Q-2)	Q1 2014 (Q-1)	Q2 2014 (Current)	Trend
Credit clean-up and nonperformers	Asset Sale drove large Q3’13 charges; Q4 provision normalized; focus on reducing charge-offs and nonaccruals	Lower credit costs; nonperforming assets up modestly vs YE due to one CRE nonaccrual, but down sharply y/y	Nonperforming assets down 19% q/q; nonaccruals -$4.0M (21%) q/q, -56% y/y	Improving
Capital actions	Equity/assets 9.80% at YE; branding/strategic initiatives completed	Equity/assets 9.97%; tangible equity/tangible assets 8.58%	Equity/assets 12.91% post-offering; $20M downstreamed to bank	Strengthening
Net interest margin/loan yields	NIM 3.47% in Q4; loan balances declining	NIM improved to 3.50% (exit of IND program helped deposit costs)	NIM 3.49% (stable q/q), still below 3.60% y/y on lower loan volumes/yields	Stable q/q; soft y/y
Deposit strategy/liquidity	Fully exited IND program; deposit mix shift away from higher-cost balances	Deposits down y/y from IND exit; time deposits reduced excess liquidity	Deposits down 2.1% YTD; mix shift toward money market/savings	Managing mix/costs
Insurance operations	Normal operations; higher marketing costs in 2013	Insurance commissions seasonality (contingency payments in Q1)	TSGIA sold; small gain in Q2; positive for regulatory capital	Simplifying footprint

Management Commentary

“We are pleased to report improved earnings over the linked quarter and the second quarter of 2013… our credit profile continues to improve with nonaccrual loans declining $4.0 million… Due to the success of the stock sale, our total stockholders’ equity to total assets increased to 12.91% at June 30, 2014” – Lloyd L. “Scott” Beatty, Jr., President & CEO .
Q1 set-up: “Much of this improvement is due to lower credit-related expenses as a result of the Asset Sale… With the Asset Sale, we are able to re-emphasize our focus on healthy loan originations and overall business development” .
Context from YE: “The completion of the Asset Sale in the third quarter resulted in a much lower provision for credit losses in the fourth quarter and was the principal driver of our results” .

Q&A Highlights

No Q2 2014 earnings call transcript was available in the document set; no Q&A themes could be extracted from primary transcripts [Search attempted, none found].

Estimates Context

Wall Street consensus (S&P Global) for Q2 2014 EPS and revenue was not available at the time of retrieval due to access limitations; the company’s 8-K/press release did not cite consensus, and we therefore cannot present a definitive beat/miss analysis for Q2 2014 based on S&P Global consensus .
Prior quarter commentary did not include formal forward guidance; given the meaningful share issuance in Q2, per-share estimate frameworks likely need to reflect the higher diluted share count (weighted average diluted shares ~10.0M in Q2 vs ~8.5M prior) .

Key Takeaways for Investors

Credit normalization remains the core earnings driver: provision fell to $0.95M (from $2.70M y/y) as nonperformers declined; sustainment of this trajectory supports further ROTCE improvement .
Capital now an asset, not a constraint: equity/assets at 12.91% post-offer de-risks regulatory concerns and provides capacity for organic growth once loan demand improves .
Spread revenues face volume headwinds: NIM is stable q/q at 3.49%, but lower loan balances/yields keep net interest income below year-ago levels; re-accelerating loan growth is the swing factor .
Fee income cadence is seasonal: Q1 insurance contingency commissions lifted fees; Q2 reverted; with TSGIA divested, composition modestly shifts toward core banking and remaining insurance/trust lines .
Operating discipline improving: GAAP efficiency ratio improved sequentially to 76.30% as costs eased post-divestiture and collections volatility moderated .
Watch asset quality ratios and charge-offs: NPA/Assets at 1.82% and allowance/loans at 1.28% reflect progress; maintaining low NCOs is key to preserving capital momentum .
Per-share metrics reset: the larger share base (weighted diluted ~10.0M) will dampen EPS optics near-term, but capital flexibility positions SHBI for medium-term balance sheet growth .

Additional context and events within Q2:

Public offering including full over-allotment raised net proceeds of ~$31.7M; $20M contributed to Talbot Bank .
Sale of TSGIA closed June 6; $0.114M gain recognized in Q2 other income; write-offs of intangibles/DTAs improved regulatory capital ratios without material impact on results .

SHORE BANCSHARES INC (SHBI)·Q2 2014 Earnings Summary