Shore Bancshares, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are to December 31, 2022. Unless otherwise noted, financial amounts below are in millions of dollars. Shore Bancshares is a Maryland-based bank holding company operating Shore United Bank, Wye Financial Partners and Mid-Maryland Title.
Financial performance and position
| Metric | Q1 2023 / March 31, 2023 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $25.7 | $22.4 in Q1 2022 |
| Net income / diluted EPS | $6.5 / $0.32 | $5.6 / $0.28 in Q1 2022 |
| Net interest margin, tax-equivalent | 3.18% | 2.76% in Q1 2022; 3.35% in Q4 2022 |
| Provision for credit losses | $1.2 | $0.6 in Q1 2022 |
| Total assets | $3,553.7 | $3,477.3 at December 31, 2022 |
| Total loans, gross | $2,668.7 | $2,556.1 at December 31, 2022 |
| Deposits | $2,994.6 | $3,009.8 at December 31, 2022 |
| Cash and cash equivalents | $37.7 | $55.5 at December 31, 2022 |
| Total borrowings | $174.7 | $83.1 at December 31, 2022 |
| Stockholders’ equity | $361.6 | $364.3 at December 31, 2022 |
- Total interest income was $35.1 million and interest expense was $9.4 million. Noninterest income was $5.3 million; noninterest expense was $20.9 million, including $0.7 million of merger-related expenses. Income tax expense was $2.4 million; the effective tax rate was 27.4%.
- Operating cash flow was $11.2 million, investing cash outflow was $103.1 million and financing cash inflow was $74.1 million. Cash and equivalents declined $17.8 million during the quarter, primarily as loan growth absorbed funding.
- The allowance for credit losses on loans was $28.5 million, or 1.07% of period-end loans, versus $16.6 million and 0.65% at year-end 2022. Nonperforming assets were $2.7 million, down from $3.9 million at year-end.
- The Bank and holding company were reported as “well capitalized.” At March 31, the Bank’s common equity Tier 1 ratio was 12.30%, total risk-based capital ratio 13.38%, and leverage ratio 9.64%.
Material changes versus comparable periods
- Year over year, net income rose 15% and diluted EPS increased from $0.28 to $0.32. Net interest income increased about $3.2 million, reflecting higher loan balances and yields; deposit and short-term borrowing costs also rose substantially.
- Tax-equivalent net interest margin improved 42 basis points year over year, but fell 17 basis points from Q4 2022, in part due to increased FHLB short-term borrowing costs.
- Noninterest income fell $0.7 million year over year, principally from lower mortgage-banking and title revenue. Noninterest expense rose $0.6 million excluding merger costs.
- Gross loans increased $112.6 million from year-end; legacy loans excluding PPP grew $142.0 million. Deposits decreased $15.2 million, while short-term FHLB advances increased $91.5 million.
- Adoption of CECL on January 1, 2023 increased the opening loan allowance by $10.8 million and reduced opening retained earnings, net of tax, by approximately $7.8 million. The allowance for held-to-maturity securities was $0.16 million at quarter-end.
Outlook, risks and notable items
- The filing provides no quantified earnings or financial guidance. Management cautions that quarterly results are not necessarily indicative of full-year results. The pending acquisition of The Community Financial Corporation had received required regulatory approvals and waivers; closing was expected in late Q2 or early Q3 2023, subject to remaining customary conditions, including shareholder approvals.
- Management identifies interest-rate movements as its primary market risk. The filing highlights the potential effects of regional-bank stress and deposit-confidence concerns on liquidity, funding costs, loan capacity, margins, capital and share price.
- Commercial real estate is a significant concentration: non-owner-occupied CRE, including construction, land and land development, equaled 290.9% of risk-based capital; that portfolio grew 108% over three years. Management says it uses heightened risk monitoring and stress testing.
- Estimated uninsured deposits were $839.4 million. The company had $131.5 million of FHLB short-term advances, with stated rates of 4.57%–5.07%, and reported $15 million of correspondent-bank federal funds lines.
- The company provides banking services to cannabis businesses whose activities remain illegal under federal law. Those customers accounted for approximately $144.6 million of deposits and $55.2 million of loans at quarter-end. No amount was accrued for potential federal action; the company says the financial impact is uncertain.
- Available-for-sale securities had $11.2 million of gross unrealized losses; held-to-maturity securities had $58.0 million. The company attributed the losses primarily to interest rates, reported no identified credit loss on available-for-sale securities, and stated it intends to hold them and is not likely to be forced to sell before recovery.
- Management reported disclosure controls were effective as of March 31, 2023. It made no material change to internal control over financial reporting beyond changes related to CECL implementation.
Investor verification priorities
- Track deposit levels, uninsured-deposit trends, funding costs and use of FHLB borrowing amid banking-sector confidence risks.
- Review loan growth, CRE concentrations, credit migration and the adequacy of the CECL allowance as forecasts and portfolio conditions change.
- Monitor net interest margin as deposit pricing and borrowing rates adjust, and assess the sustainability of mortgage and other fee income.
- Confirm completion terms, timing, approvals and integration costs for the pending TCFC merger.
- Assess potential legal or regulatory developments affecting cannabis banking and any future implications for deposits, loans or earnings.