Shore Bancshares, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter ended September 30, 2023; comparisons are primarily with Q3 and the first nine months of 2022. Dollar amounts are in millions unless otherwise stated. The July 1 acquisition of The Community Financial Corporation (TCFC) materially changed the company’s scale, so current and prior-period results are not directly comparable.
Business context and key results
Shore Bancshares is a Maryland-based bank holding company operating Shore United Bank, with banking, trust and wealth management, and title services. The TCFC merger expanded its footprint and added 11 branches. At September 30, 2023, total assets were $5.71 billion.
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net interest income | $45.6 | $27.3 | $93.8 | $74.4 |
| Provision for credit losses | $28.2 | $0.7 | $30.1 | $1.5 |
| Noninterest income | $18.3 | $5.3 | $29.0 | $17.2 |
| Noninterest expense | $47.2 | $18.9 | $89.7 | $59.3 |
| Net income (loss) | $(6.4) | $9.7 | $4.1 | $22.8 |
| Diluted EPS | $(0.19) | $0.49 | $0.17 | $1.15 |
Q3 net interest margin was 3.35%, compared with 3.38% a year earlier and 2.68% in Q2 2023. Excluding acquired-loan accretion, Q3 margin was 2.96%, up from 2.64% in Q2. Nine-month margin was 3.12%, versus 3.09% in 2022. Q3 return on average assets was (0.44%); the efficiency ratio was 73.73%.
Financial position, liquidity and capital
- Loans and assets: Gross loans were $4.62 billion, up 80.7% from year-end 2022, principally due to TCFC. Commercial real estate was 49.5% of loans. The allowance for credit losses (ACL) was $57.1 million, or 1.24% of loans, versus $16.6 million, or 0.65%, at year-end 2022.
- Deposits and liquidity: Deposits were $5.11 billion, up 69.7% from year-end. Cash and cash equivalents were $108.7 million. Management reported approximately $1.1 billion of available liquidity, including $954.4 million of secured borrowing capacity and $35.0 million of unsecured credit lines. Uninsured deposits, net of pledged collateral, were $864.6 million, or 16.92% of deposits; available liquidity was 127% of that amount. Brokered deposits were $111.0 million, or 2.2% of deposits.
- Debt: Total borrowings were $72.0 million, comprising subordinated debt and trust preferred securities; there were no FHLB advances at quarter-end.
- Cash flow: For the first nine months, operating cash flow was $(13.4) million, investing cash flow was $216.5 million, and financing cash flow was $(150.0) million. Cash increased $53.2 million to $108.7 million, with securities-sale proceeds a key source of investing cash.
- Capital: The company reported a 7.00% tangible common equity ratio and regulatory capital ratios above stated minimums; the Bank was considered well capitalized. Tangible book value per share was $11.80, down from $14.83 at Q2, reflecting merger-related dilution.
Material changes and unusual items
- The TCFC acquisition was valued at approximately $153.6 million and added about $2.4 billion of assets at closing. The company recorded a provisional $12.2 million bargain purchase gain. Acquired loans carried a $120.9 million fair-value discount; the purchase accounting remains subject to measurement-period adjustments.
- Q3 included $14.9 million of merger-related expenses, a $2.2 million loss on sales of acquired securities, and a $28.2 million credit-loss provision. The provision included approximately $20.1 million related to acquired loans, $7.3 million from a change in the legacy loan-loss methodology, and $0.8 million from quarterly activity. These items, alongside higher operating costs, drove the quarterly loss despite higher net interest income and the bargain purchase gain.
- The company sold most of TCFC’s acquired available-for-sale securities for about $434.2 million in proceeds and used $380.0 million to reduce higher-cost FHLB advances and brokered deposits. Management attributed the Q3 sequential margin improvement partly to this balance-sheet restructuring.
- CECL adoption on January 1, 2023 reduced opening retained earnings by approximately $7.8 million, net of tax. Management also revised its credit-loss model after the merger, increasing the allowance on legacy loans by $7.3 million.
Outlook, commentary and risks
The filing provides no quantified earnings or revenue guidance. Management said integration priorities include streamlining processes, pursuing operating efficiencies and reducing noninterest expense. It expects acquired-loan fair-value discounts to accrete into income as loans mature, but actual results depend on credit performance and other factors. Management considered the ACL adequate at September 30, 2023.
- Credit and concentration: Nonperforming assets were $11.3 million, or 0.20% of assets, versus $3.9 million at year-end 2022. Nonaccrual loans were $9.0 million. Non-owner-occupied CRE was $2.1 billion, or 394.5% of Bank Tier 1 capital plus ACL; management disclosed heightened monitoring and stress-testing practices. Office CRE loans totaled $520.7 million.
- Funding: Interest-bearing deposits and certificates of deposit grew substantially, while deposit costs rose amid higher market rates. $894.4 million of certificates of deposit mature within one year. Three municipal deposit relationships totaled $406.4 million.
- Interest-rate and securities risk: Management identifies interest-rate fluctuations as its primary market risk. The HTM portfolio had a fair value of $445.7 million versus $523.1 million carrying value. AFS securities had $13.9 million of unrealized losses; the company reported no credit impairment and said it intended to hold the securities and was not more likely than not to be required to sell them before recovery.
- Cannabis banking: Customers in the cannabis industry held approximately $175.5 million in deposits and $76.2 million in loans. Although these customers operate in compliance with applicable state law, the activity remains illegal under federal law. The company had not accrued for potential consequences of federal action.
- Other: The company disclosed ordinary-course litigation but did not expect current proceedings to materially affect its financial condition, results or liquidity. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Assess post-merger earnings excluding the provisional bargain purchase gain, merger costs, securities-sale loss, credit provision and acquired-loan accretion; verify whether integration savings materialize.
- Review credit trends and the assumptions behind the $57.1 million ACL, including CRE and office exposure, acquired-loan marks, delinquencies and classified assets.
- Monitor deposit pricing, uninsured and concentrated deposits, certificate maturities, and the continued availability of reported liquidity sources.
- Track capital and tangible book value after merger dilution, and confirm the timing and amount of acquired-loan discount accretion.
- Follow final purchase-accounting adjustments, securities portfolio values and the legal and regulatory exposure related to cannabis banking.