Shore Bancshares, Inc. — FY 2022 Form 10-K
Reporting period: Year ended December 31, 2022; comparisons are with FY 2021. This is an annual filing, not a standalone fourth-quarter earnings report. Shore is a Maryland-based financial holding company operating Shore United Bank, N.A., a community bank, and a title company, with mortgage, trust and wealth-management activities.
Financial performance and position
| Metric | FY 2022 / year-end | FY 2021 / comparison |
|---|---|---|
| Net income | $31.2 million | $15.4 million |
| Diluted earnings per share | $1.57 | $1.17 |
| Net interest income (GAAP) | $101.3 million | $64.1 million |
| Net interest margin (tax-equivalent) | 3.15% | 2.94% |
| Noninterest income | $23.1 million | $13.5 million |
| Noninterest expense | $80.3 million | $56.8 million |
| Provision for credit losses | $1.9 million | $(0.4) million |
| Total assets | $3.477 billion | $3.460 billion |
| Total loans, gross | $2.556 billion | $2.119 billion |
| Total deposits | $3.010 billion | $3.026 billion |
| Stockholders’ equity | $364.3 million | $350.7 million |
- Net income more than doubled, principally as net interest income rose $37.2 million and noninterest income rose $9.6 million. Higher costs, including salaries, benefits and other operating expenses, partly offset the gains. FY 2022 included a full year of Severn Bancorp operations following its October 2021 acquisition.
- Loan growth and higher asset yields lifted net interest income; the tax-equivalent net interest margin increased 21 basis points. Average interest-bearing deposit costs also rose as rates increased.
- Net cash provided by operating activities was $52.6 million, compared with cash used of $7.5 million in 2021. Investing activities used $581.6 million, largely reflecting loan growth and purchases of held-to-maturity securities. Cash and cash equivalents fell $528.1 million to $55.5 million.
- At year-end, total borrowings were $83.1 million: $40.0 million of short-term FHLB advances and $43.1 million of subordinated debt. FHLB borrowing capacity was approximately $298.7 million; the Bank also had $15 million in correspondent-bank credit lines. The loan-to-deposit ratio increased to 85.0% from 70.0%.
- Regulatory capital remained above minimums. The Company’s CET1, total risk-based capital and leverage ratios were 11.62%, 13.91% and 9.52%; the Bank’s corresponding ratios were 12.82%, 13.47% and 9.92%. The Bank was classified as well capitalized.
- The Company paid $9.5 million in common dividends in 2022, or $0.48 per share. Its stated quarterly dividend was $0.12 per share.
Material changes and notable items
- Loans grew 20.6% to $2.556 billion. Management reported 41.1% growth in legacy loans excluding PPP and acquired loans. Cash was redeployed into loans and securities; investment securities rose $128.3 million to $655.4 million.
- Deposits declined $16.5 million overall. Interest-bearing checking increased $170.0 million, while money market and savings, noninterest-bearing, and time deposits decreased by $85.7 million, $65.5 million and $35.2 million, respectively.
- Available-for-sale securities had a $9.0 million net unrealized loss at year-end, versus a $56,000 net unrealized gain in 2021. Held-to-maturity securities had amortized cost of $559.5 million and estimated fair value of $494.6 million. Management attributed unrealized losses principally to interest-rate changes, not credit concerns, and said it did not intend to sell the securities or expect to be required to sell before recovery.
- Nonperforming assets increased to $3.9 million from $3.0 million, mainly due to loans 90 days past due and still accruing. Accruing troubled debt restructurings declined to $4.4 million from $5.7 million. Net recoveries were $774,000; the allowance for credit losses was $16.6 million.
- Commercial real estate concentration is material: non-owner-occupied CRE, including construction, land and development loans, equaled 290.4% of risk-based capital; construction, land and development loans alone equaled 69.8%. CRE loans increased 117.7% over the preceding 36 months.
- Management estimated adoption of the CECL expected-credit-loss standard on January 1, 2023 would reduce opening retained earnings by approximately $7 million to $9 million, subject to final calculation. The filing says this capital effect may be phased in over three years under regulatory rules.
Outlook, risks and contingencies
- Pending TCFC merger: The December 2022 agreement provides for TCFC shareholders to receive 2.3287 Shore shares per share, with Shore shareholders expected to own approximately 60% of the combined company. Required regulatory approvals and waivers had been received; shareholder approvals and other customary closing conditions remained. Closing was expected late in Q2 or early Q3 2023. TCFC had more than $2.4 billion in assets at year-end. Integration, execution, employee and customer retention, cost savings, and transaction expenses are key uncertainties; a termination under certain circumstances could require a $10.5 million fee to TCFC.
- No earnings or revenue guidance: The filing provides no numerical operating forecast. Management said it believed liquidity was satisfactory and did not know of demands or uncertainties expected to materially impair liquidity.
- Interest-rate and funding risk: The filing describes the effect of rapid rate changes on margins, deposit pricing, borrowers and securities values. The modeled change in net interest income at year-end ranged from a 2.6% decrease for a 100-basis-point increase to an 11.7% decrease for a 400-basis-point increase. These are model estimates, not forecasts, and depend on assumptions about repricing and customer behavior.
- Geographic and credit exposure: Lending is concentrated in Maryland and Delaware and heavily secured by real estate. Recession, persistent inflation, weaker property values, higher borrowing costs or borrower stress could increase losses and pressure earnings or capital. The allowance estimate involves significant management judgment; the qualitative allowance was identified as the audit’s critical audit matter.
- Uninsured deposits and banking-sector stress: Estimated uninsured deposits were $871.5 million at year-end. The filing, signed March 30, 2023, discusses the March 2023 failures of Silicon Valley Bank and Signature Bank and notes uncertainty around industry liquidity and uninsured deposits.
- Cannabis banking: Shore expanded its program in 2022 to include medical and adult-use licensees in other states, while cannabis remained illegal under federal law. Cannabis customers represented approximately $131.7 million of deposits (4.4% of deposits) and $54.9 million of loans (2.2% of gross loans); 2022 interest and noninterest income were approximately $4.9 million and $2.0 million. The Company had not accrued for potential federal enforcement actions.
- Other matters: The filing identifies cybersecurity and third-party service-provider risks, regulatory and deposit-insurance costs, climate-related risks, and the LIBOR transition. Management said current legal proceedings were not expected to materially affect financial condition or results. The independent auditor issued an unqualified opinion on the financial statements; management concluded internal control over financial reporting was effective, but the auditor did not provide an attestation on internal controls.
Investor verification priorities
- Track deposit levels, uninsured-deposit mix, deposit pricing and liquidity capacity, particularly given the 85% loan-to-deposit ratio and reduced cash balance.
- Review securities duration, unrealized losses, pledged collateral and the ability to avoid realizing losses if liquidity needs rise.
- Monitor CRE concentration, loan growth, delinquencies, nonperforming assets, allowance adequacy and the final CECL transition adjustment.
- Verify TCFC merger approvals, closing timing, integration costs, realized savings and any effect on capital, dividends or shareholder ownership.
- Assess the impact of higher rates on funding costs, net interest margin, borrower repayment and modeled interest-rate sensitivity.
- Follow federal and state developments affecting cannabis banking and the Company’s related deposit and income exposure.