Shore Bancshares, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Shore Bancshares operates community banking and insurance businesses on Maryland’s and Delaware’s Eastern Shore. Unless noted otherwise, amounts below are in millions of dollars.
Financial results and key metrics
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net interest income | $9.00 | $9.03 | $17.48 | $18.23 |
| Provision for credit losses | $2.70 | $3.53 | $4.85 | $11.90 |
| Noninterest income | $3.96 | $4.58 | $8.45 | $9.15 |
| Noninterest expense | $9.76 | $9.66 | $20.25 | $20.16 |
| Net income (loss) | $0.36 | $0.29 | $0.58 | $(2.74) |
| Diluted earnings (loss) per share | $0.04 | $0.03 | $0.07 | $(0.32) |
- Tax-equivalent net interest margin was 3.60% in Q2, compared with 3.36% a year earlier and 3.30% in Q1 2013. First-half margin was 3.45%, versus 3.39% in the prior-year period.
- Management reported Q2 annualized return on average assets of 0.13% and return on average equity of 1.27%. First-half figures were 0.11% and 1.03%, respectively.
- At June 30, total assets were $1.054 billion, loans $782.2 million, deposits $922.1 million, short-term borrowings $10.1 million, and stockholders’ equity $113.6 million. No long-term debt was reported.
- Cash and cash equivalents were $124.5 million, down from $200.2 million at year-end 2012. Available-for-sale securities were $95.3 million, down from $145.5 million. The filing reports $15.5 million of short-term correspondent-bank lines and reverse-repurchase capacity and about $49.9 million of FHLB credit availability.
- First-half cash flows: $10.1 million provided by operating activities, $45.0 million provided by investing activities, and $130.8 million used in financing activities. Cash and cash equivalents declined $75.7 million.
Material changes versus comparable periods
- First-half earnings turned positive from a $2.74 million loss in 2012, primarily because the provision for credit losses fell $7.05 million. This improvement was partly offset by lower net interest income and noninterest income.
- Q2 net income rose $68,000 year over year. A $825,000 lower credit-loss provision was partly offset by a $615,000 decline in noninterest income.
- Q2 noninterest income included a $1.306 million loss on terminating interest-rate caps and a $913,000 gain on securities sales. Insurance commissions also increased year over year. These items materially affected comparability.
- Management attributed better Q2 net interest margin partly to reduced funding costs and a $308,000 nonrecurring loan-income adjustment related to a troubled debt restructuring. Loan yields and average earning assets were lower year over year.
- Deposits declined $127.2 million, or 12.1%, from year-end, mainly as the company exited the Promontory Insured Network Deposits Program and reduced time deposits. The company said it exited the program fully in Q2 to reduce excess liquidity.
- Loans declined $2.9 million from year-end. Nonperforming assets decreased to $91.5 million from $96.9 million, but remained 11.60% of loans plus other real estate owned. Nonaccrual loans were $34.8 million; accruing troubled debt restructurings were $50.3 million.
- Net charge-offs were $2.7 million in Q2 and $5.1 million for the first half, compared with $4.1 million and $13.2 million in the respective 2012 periods. The allowance for credit losses was $15.7 million, or 2.00% of average loans for the first half.
- Unrealized losses on available-for-sale securities contributed to a $1.03 million first-half other comprehensive loss and reduced accumulated other comprehensive income to a $321,000 loss.
Outlook, risks, contingencies and unusual items
- Regulatory consent order: Effective May 24, 2013, Talbot Bank became subject to an FDIC and Maryland regulatory order requiring, among other actions, asset-quality and loan-policy measures, enhanced board oversight, progress reporting, and minimum capital ratios. The order restricts dividends or fees from Talbot Bank to the parent without prior written regulatory consent.
- At June 30, Talbot Bank’s leverage ratio was 8.26%, above the order’s 8% minimum, but its total risk-based capital ratio was 11.77%, below the required 12%. Management expected compliance with that ratio by September 30, 2013. The filing also states that Talbot Bank was in compliance with the order; investors should reconcile that statement with the reported ratio and target date.
- At the consolidated company level, capital ratios exceeded regulatory minimums: Tier 1 risk-based 12.43%, total risk-based 13.69%, and leverage 9.21%.
- The loan portfolio is concentrated in real estate: construction and commercial real estate together were about 54.4% of loans. Management cited weak local real estate and construction markets, a soft regional economy, limited high-quality loan opportunities, and continuing problem-loan resolution as concerns. It said it was cautiously optimistic that regional real estate values were stabilizing.
- Management considered the allowance adequate at June 30 but cautioned that actual losses may differ from estimates. It intends to continue resolving problem loans and charging off nonperforming assets as appropriate.
- The company had $130.9 million of commitments to extend credit and letters of credit outstanding. Management said the commitments generally are expected to expire without being drawn, but they represent potential funding needs.
- The company suspended quarterly cash dividends in May 2012 and reported no dividends paid in the first half of 2013. Management disclosed no material change in market-risk procedures or risk factors and no legal proceedings believed likely to have a material adverse effect. Disclosure controls were assessed as effective.
- Forward-looking statements are subject to economic, competition, interest-rate, legislative, and regulatory risks. The filing provides no specific earnings or revenue guidance.
Important facts for investors to verify
- Talbot Bank’s progress toward the 12% total risk-based capital requirement, including the expected September 30, 2013 compliance date and any regulatory updates.
- Whether deposit outflows and the exit from the insured-deposit program have stabilized, and the effect on liquidity, funding costs, and loan capacity.
- Credit trends in the real-estate-heavy loan book: nonaccrual loans, troubled restructurings, charge-offs, collateral values, and allowance adequacy.
- How much future earnings depend on nonrecurring items, including the hedge-termination loss, securities-sale gains, and the loan-income adjustment.
- Whether the company can sustain positive earnings and improve loan growth while managing regulatory requirements and its suspended dividend.