Shore Bancshares, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Unaudited consolidated results; comparison is with Q1 2019 unless otherwise noted. Shore Bancshares is a Maryland-based bank holding company operating Shore United Bank, with branches in Maryland, Delaware and Virginia.
Financial performance and position
| Metric | Q1 2020 / March 31, 2020 | Comparable period / prior date |
|---|---|---|
| Interest income | $14.686 million | $14.660 million, Q1 2019 |
| Net interest income | $12.518 million | $12.394 million, Q1 2019 |
| Net interest margin, tax-equivalent | 3.48% | 3.61%, Q1 2019; 3.47%, Q4 2019 |
| Noninterest income | $2.352 million | $2.188 million, Q1 2019 |
| Noninterest expense | $10.349 million | $9.343 million, Q1 2019 |
| Provision for credit losses | $350,000 | $100,000, Q1 2019 |
| Net income / diluted EPS | $3.118 million / $0.25 | $3.754 million / $0.29, Q1 2019 |
| Operating cash flow | $4.463 million | $7.735 million, Q1 2019 |
| Cash and cash equivalents | $96.251 million | $94.971 million, Dec. 31, 2019 |
| Total assets | $1.571 billion | $1.559 billion, Dec. 31, 2019 |
| Total loans / allowance | $1.277 billion / $10.378 million | $1.249 billion / $10.507 million, Dec. 31, 2019 |
| Total deposits | $1.349 billion | $1.341 billion, Dec. 31, 2019 |
| Borrowings | $2.162 million short-term; $15.0 million long-term | $1.226 million short-term; $15.0 million long-term, Dec. 31, 2019 |
| Stockholders’ equity | $195.694 million | $192.802 million, Dec. 31, 2019 |
Net cash increased $1.280 million in Q1 2020, versus a decrease of $8.406 million in Q1 2019. Long-term FHLB debt of $15 million carried a fixed 2.82% rate and matured in April 2020. The filing describes $15 million in federal funds lines and other available liquidity sources; management said these had not been needed as of the report.
Material changes and credit quality
- Net income fell 17% year over year. Higher noninterest expense (up $1.006 million) and provision expense (up $250,000) more than offset growth in net interest income and noninterest income.
- Loan balances grew $28.3 million, or 2.3%, from year-end, led by commercial real estate, construction and consumer lending. Deposits increased $7.5 million.
- Net charge-offs were $479,000, compared with $25,000 in Q1 2019. Nonaccrual loans rose to $11.540 million from $10.590 million at year-end; nonperforming assets were $12.299 million. Allowance coverage was 0.81% of period-end loans, versus 0.84% at year-end.
- Commercial real estate was 47.8% of loans and construction loans 8.6%. Non-owner-occupied commercial real estate, including construction, equaled 284.9% of risk-based capital; the portfolio had grown 75.2% over three years. Management reports heightened monitoring and stress testing.
- Bank regulatory capital ratios remained well-capitalized at March 31: 10.92% Tier 1 leverage, 13.02% common equity Tier 1 and Tier 1 risk-based, and 13.85% total risk-based.
Outlook, COVID-19 and other notable items
- Management said the pandemic’s duration and financial effects could not be reasonably estimated and may materially affect future earnings, cash flows and financial condition. Risks include borrower stress, falling real estate collateral values, higher credit losses, reduced net interest margin following rate cuts, and potential goodwill impairment.
- By March 31, the Company had deferred principal and/or interest on $131 million of outstanding loans. Through April 30, it reported additional deferrals of $138 million. These temporary modifications were not treated as TDRs under applicable relief guidance. Management expects the pandemic and related guidance to affect financial statements, but said the effect could not yet be quantified.
- PPP lending began in April. The MD&A reports more than 1,100 loans totaling approximately $117.8 million through April 30; a note separately reports more than 1,000 loans totaling $114 million. These figures differ within the filing and merit reconciliation.
- About 50% of the workforce was working remotely; branches remained open with adjusted service and safety measures. Management said it expected to maintain quarterly cash dividends given capital strength, while warning that capital deterioration could limit future dividends. Share repurchases were suspended until further notice.
- A Q1 qualitative goodwill assessment identified no impairment; goodwill was $17.518 million. Management cautioned that worsening economic conditions could prompt future impairment charges.
- No specific earnings or financial guidance is provided. Management said it would continue reassessing credit reserves as economic information and portfolio effects became clearer.
- The Bank had limited LIBOR exposure: 14 loans, or 2.6% of the portfolio. Management planned to migrate affected loans to SOFR. Management reported effective disclosure controls and no material legal proceedings expected to adversely affect results.
Investor facts to verify
- Reconcile the filing’s two reported PPP totals through April 30 ($114 million versus $117.8 million).
- Confirm repayment, renewal or replacement of the $15 million FHLB borrowing that matured in April 2020.
- Track subsequent loan deferrals, borrower performance, nonaccrual loans, charge-offs and allowance needs as pandemic impacts emerge.
- Monitor commercial real estate concentration, collateral values and capital requirements, as well as the sustainability of dividends and suspended repurchases.
- Assess the effect of lower rates on net interest margin and earnings; Q1 margin was 3.48%, below the year-earlier 3.61%.