Shore Bancshares, Inc. — Q3 2021 Form 10-Q
Business context and reporting period. Shore Bancshares is a Maryland-based bank holding company operating Shore United Bank, with branches in Maryland, Delaware and Virginia and trust and wealth management services. This unaudited filing reports the quarter and nine months ended September 30, 2021; balance-sheet comparisons are against December 31, 2020. Figures below are in millions of dollars unless otherwise noted.
Financial performance and condition
| Metric | Q3 2021 | Comparable period / change |
|---|---|---|
| Net interest income | $15.6 | $13.3 in Q3 2020; up 17.4% |
| Net interest margin | 2.99% | 3.17% in Q3 2020; 2.91% in Q2 2021 |
| Provision for credit losses | $0.3 | $1.5 in Q3 2020 |
| Noninterest income | $2.9 | $2.6 in Q3 2020 |
| Noninterest expense | $11.9 | $9.8 in Q3 2020; includes $0.5 of merger-related expense |
| Net income / diluted EPS | $4.6 / $0.39 | $3.4 / $0.27 in Q3 2020 |
- For the first nine months, net interest income was $43.5 versus $38.8 in 2020; net income was $12.6 versus $11.8; diluted EPS was $1.08 versus $0.95. Noninterest income rose to $8.4 from $7.7, while noninterest expense increased to $33.3 from $27.8 and included $0.9 of merger-related costs.
- Nine-month net interest margin was 2.97%, down from 3.35%. Management attributed pressure to lower earning-asset yields and excess liquidity; Q3 margin would have been 3.31% excluding approximately $200 million of excess liquidity.
- Total assets were $2,260.8, up from $1,933.3 at year-end 2020. Loans were $1,494.9, up 2.8%; excluding PPP loans, management reported loan growth of 9.2%. Deposits rose 18.7% to $2,018.1, which management linked partly to stimulus payments, new accounts and municipal balances.
- Cash and cash equivalents were $310.9, versus $186.9 at year-end. Nine-month operating cash flow was $15.6; investing activities used $206.5 and financing activities provided $314.8. Cash increased $123.9, compared with a $61.5 increase in the first nine months of 2020.
- Stockholders’ equity was $201.6, up 3.4% from year-end. The Bank’s September 30 capital ratios were 9.04% Tier 1 leverage, 12.90% common equity Tier 1 and Tier 1 risk-based, and 13.94% total risk-based; the Bank was reported well-capitalized.
- Borrowings totaled $28.0, principally $24.5 of subordinated debt net of issuance costs and $3.5 in repurchase agreements. The subordinated notes have a 5.375% fixed rate through September 2025 and mature in 2030.
Material changes and notable items
- Q3 net income increased $1.2 year over year, chiefly from higher net interest income and lower credit-loss provision, partly offset by $2.1 higher noninterest expense. The nine-month increase in net income was $0.8, despite $5.5 higher noninterest expense.
- The allowance for credit losses was $15.5, or 1.04% of period-end loans (1.07% excluding PPP loans), compared with $13.9 and 0.95% at year-end 2020. Nine-month net recoveries were $0.3, versus net charge-offs of $0.6 in 2020. Nonperforming assets declined to $4.4 from $6.3; nonaccrual loans were $3.5.
- Commercial real estate loans were $663.9, or 44.4% of loans. Non-owner-occupied CRE, including construction, equaled 301.6% of total risk-based capital; management described heightened monitoring and stress testing. It warned this concentration could entail higher capital requirements and affect shareholder returns.
- PPP lending totaled 2,454 loans for $196.3 at origination. Outstanding PPP balances fell to $41.5 from $122.8 at year-end as loans were forgiven or repaid. No COVID-related loan deferrals remained at September 30, after $221.1 of balances had received deferrals since the pandemic began.
- The securities portfolio increased to $360.2, primarily from $214.2 of held-to-maturity purchases. Available-for-sale securities had $1.3 of gross unrealized losses; accumulated other comprehensive income declined to $0.2 from $1.5 at year-end. Management attributed unrealized losses to interest-rate changes and considered them temporary.
Outlook, commentary and risks
- There is no specific earnings or financial guidance in the provided filing text. Management expected to maintain the quarterly cash dividend, citing capital strength, while noting pandemic effects could constrain future dividend capacity. The quarterly dividend was $0.12 per share.
- The Severn Bancorp acquisition closed October 31, 2021, after quarter-end. Severn had approximately $1.3 billion in assets, $950.0 million in deposits and $589.6 million in loans at closing. Total consideration was approximately $169.8 million, comprising stock and cash. Management expects the deal to expand the company’s Annapolis and Anne Arundel County presence and add mortgage-banking capabilities.
- Management identified ongoing COVID-19 uncertainty, including borrower repayment capacity, economic conditions, asset values, loan demand and operational disruption. Other key exposures include interest-rate changes, CRE concentration, cybersecurity and liquidity fluctuations as stimulus-related and municipal deposits move.
- The company had limited LIBOR exposure: 26 loans, representing 7.6% of the loan portfolio. Management planned migration to SOFR and noted uncertainty about replacement-rate volatility. The company was preparing to adopt the expected-credit-loss standard, with implementation required after December 15, 2022 for smaller reporting companies.
- Management reported no material change in market-risk procedures or risk factors since year-end 2020, no legal proceedings believed likely to have a material adverse effect, and effective disclosure controls as of September 30, 2021.
Important facts for investors to verify
- Severn acquisition accounting, integration progress, expected synergies and the effect of the added assets, loans and deposits on capital and earnings.
- Credit performance and reserve adequacy as loan growth continues, especially in CRE and construction; also monitor delinquency, nonaccrual and criticized-loan trends.
- Deposit stability and the company’s ability to deploy excess liquidity into loans without further weakening net interest margin.
- PPP forgiveness and fee accretion effects on loan balances and interest income, and the timing and impact of expected-credit-loss standard adoption.
- Interest-rate exposure, unrealized securities losses and the effect of the planned LIBOR-to-SOFR transition.