Shore Bancshares, Inc. — 2013 Form 10-K
Reporting period: Year ended December 31, 2013; comparisons are primarily with 2012. Shore Bancshares is a Maryland-based financial holding company operating community banks and insurance businesses across Maryland’s Eastern Shore and Delaware.
Financial performance and condition
| Metric | 2013 | 2012 |
|---|---|---|
| Total interest income | $41.4 million | $45.9 million |
| Net interest income | $34.9 million | $35.3 million |
| Net interest margin | 3.48% | 3.23% |
| Provision for credit losses | $27.8 million | $27.7 million |
| Noninterest income | $17.5 million | $15.8 million |
| Noninterest expense | $40.7 million | $39.6 million |
| Net loss | $9.6 million; $1.14 per share | $9.6 million; $1.14 per share |
| Net cash from operating activities | $19.8 million | $21.4 million |
| Assets | $1.054 billion | $1.186 billion |
| Loans | $711.9 million | $785.1 million |
| Deposits | $933.5 million | $1.049 billion |
| Stockholders’ equity | $103.3 million | $114.0 million |
| Long-term debt | None at year-end | None at year-end |
Return on average assets was -0.89%, return on average equity was -8.64%, and the efficiency ratio was 77.59%. Cash and cash equivalents declined $69.1 million to $131.1 million. Financing activities used $119.4 million, primarily reflecting a $134.6 million net reduction in interest-bearing deposits; investing activities provided $30.5 million. Year-end short-term borrowings were $10.1 million, consisting of repurchase agreements.
Material changes and unusual items
- Talbot Bank agreed to sell assets with $45.0 million of book value for $25.2 million. The portfolio included nonaccrual loans, troubled debt restructurings, classified performing loans and other real estate owned. The transaction resulted in a $19.6 million loan charge-off and a total pretax loss of approximately $19.8 million. $3.5 million of loans intended for sale remained held for sale at year-end.
- Net loan charge-offs rose to $33.1 million from $26.0 million; the 2013 provision included $19.6 million to replenish the allowance for the asset-sale charge-off. The allowance ended at $10.7 million, or 1.40% of average loans, versus $16.0 million, or 1.96%, in 2012.
- Reported nonperforming assets, excluding loans held for sale, declined to $18.7 million from $44.6 million, and accruing TDRs declined to $26.1 million from $52.4 million. Management attributed much of the improvement to the asset sale.
- Net interest income fell $463,000, but margin improved as Shore exited the Promontory insured deposit program and terminated associated interest-rate caps. Noninterest income rose $1.7 million, led by insurance commissions and securities gains; noninterest expense increased $1.1 million, including higher FDIC premiums and branding-related marketing costs.
- Deposits fell 11.0%, principally reflecting the exit from the insured deposit program and a reduction in time deposits. Noninterest-bearing demand deposits increased $18.8 million.
Regulatory matters, outlook and risks
- Talbot Bank consent order: Effective May 24, 2013, the FDIC and Maryland regulator required, among other measures, minimum capital ratios of 8% leverage and 12% total risk-based capital. At December 31, Talbot Bank reported 4.98% and 8.17%, respectively, below those order requirements. It submitted a capital plan identifying operating earnings, possible parent-company capital support and other capital-raising alternatives. The order also restricts dividends and certain brokered deposits and remains in effect until modified or terminated.
- Under prompt-corrective-action categories, Talbot Bank was classified as adequately capitalized and CNB as well capitalized. The parent company reported ratios of 10.09% Tier 1 risk-based capital, 11.34% total risk-based capital and 7.03% leverage. CNB paid $1.9 million in dividends to the parent in 2013; Talbot Bank could not pay dividends without regulatory consent.
- Management said asset-sale and workout efforts had positioned the company to pursue higher-quality loan growth. It expected to continue resolving remaining problem loans and TDRs. No quantified earnings or revenue guidance is provided.
- Key risks include concentrated real-estate lending and geographic exposure, further credit losses, compliance with the Talbot Bank order and capital needs, deposit and funding availability, interest-rate sensitivity, and the effects of regulatory changes. Management reported $19.1 million of deferred tax assets with no valuation allowance, relying on expected future taxable income and tax-planning strategies.
- At year-end, cash and available-for-sale securities provided liquidity; additional stated availability included $15.5 million in correspondent-bank lines and approximately $46.9 million from the FHLB. Management said it knew of no demands or uncertainties expected to materially impair satisfactory liquidity.
- The company reported that internal control over financial reporting was effective; the independent auditor gave unqualified opinions on the financial statements and internal controls. Management did not expect current litigation to have a material effect.
Important facts for investors to verify
- Talbot Bank’s progress toward the consent-order capital targets, the timing and source of any required capital, and whether regulators amend or lift the order.
- Whether the remaining $3.5 million of held-for-sale loans is sold, and the ultimate realized proceeds and credit costs from the asset sale and remaining problem assets.
- Whether credit quality and charge-offs continue to improve after the portfolio reduction, and whether the $10.7 million allowance remains adequate.
- Whether the company can stabilize deposits, rebuild loan balances profitably and generate earnings sufficient to support its capital and liquidity position.
- The realizability of the $19.1 million deferred tax asset, which depends on future taxable income, and the impact of unrealized securities losses on equity.