Shore Bancshares, Inc. — 2023 Form 10-K
Reporting period: Year ended December 31, 2023; comparisons are to 2022. This is an annual filing, not a standalone fourth-quarter report. Shore is a community bank holding company operating primarily in Maryland, Delaware and Virginia through Shore United Bank and related businesses.
Business context and significant transaction
On July 1, 2023, Shore completed its acquisition of The Community Financial Corporation (TCFC) for approximately $153.6 million in stock and other consideration. The acquisition added approximately $2.4 billion in assets, including $1.8 billion in loans and $2.1 billion in deposits, and expanded Shore’s footprint in Southern Maryland and Virginia. Shore recognized an $8.8 million bargain purchase gain. Because the acquisition was completed midyear, reported results include TCFC only from the acquisition date and are not fully comparable with 2022.
Key financial metrics
| Metric | 2023 | 2022 |
|---|---|---|
| Total assets, year-end | $6.01 billion | $3.48 billion |
| Total loans, year-end | $4.64 billion | $2.56 billion |
| Total deposits, year-end | $5.39 billion | $3.01 billion |
| Net interest income | $135.3 million | $101.3 million |
| Provision for credit losses | $31.0 million | $1.9 million |
| Noninterest income | $33.2 million | $23.1 million |
| Noninterest expense | $123.3 million | $80.3 million |
| Net income | $11.2 million | $31.2 million |
| Diluted earnings per share | $0.42 | $1.57 |
| Net interest margin, tax-equivalent | 3.11% | 3.15% |
| Return on average assets | 0.24% | 0.90% |
| Return on average common equity | 2.54% | 8.76% |
Interest income rose 88%, largely from the larger acquired loan portfolio and higher loan yields. Interest expense rose 528%, reflecting higher deposit costs and more interest-bearing deposits. The company reported $22.7 million of cash provided by operating activities, $172.3 million provided by investing activities and $121.9 million provided by financing activities. Cash and cash equivalents increased $316.9 million to $372.4 million.
At year-end, total borrowings were $72.3 million, comprising $43.1 million of subordinated debt and $29.2 million of trust preferred debentures; there were no FHLB advances outstanding. Stockholders’ equity was $511.1 million, or 8.50% of assets. The Bank’s regulatory capital ratios were 10.02% CET1, 10.02% Tier 1 risk-based capital, 11.27% total risk-based capital and 8.33% Tier 1 leverage; the Bank was categorized as well capitalized.
Available liquidity was approximately $1.3 billion, including $372.4 million of cash, $344.8 million of unpledged securities, $659.0 million of FHLB borrowing capacity and $45.0 million of correspondent-bank lines. Estimated uninsured deposits were $1.05 billion, or 19.5% of deposits; $156.1 million was secured by pledged collateral.
Material changes and unusual items
- Net income fell 64% year over year. Management attributed the decline primarily to higher credit-loss provision and merger-related costs, partly offset by increased net interest income.
- Merger-related expenses were $17.4 million, versus $2.1 million in 2022. Total noninterest expense also includes $6.1 million of intangible amortization.
- The $8.8 million bargain purchase gain boosted noninterest income. Shore also recorded a $2.2 million loss on sales of acquired securities; proceeds from selling those securities helped repay higher-cost wholesale funding.
- Shore adopted the CECL expected-credit-loss standard on January 1, 2023, reducing opening retained earnings by $7.8 million net of tax. The year-end allowance for credit losses was $57.4 million, or 1.24% of loans, compared with $16.6 million, or 0.65%, at year-end 2022. The 2023 provision included acquisition and methodology effects.
- Deposits grew 79% and loans grew 82%, principally because of TCFC. Time deposits increased substantially; $1.04 billion of time deposits were scheduled to mature within one year.
- Unrealized losses were $10.4 million on available-for-sale securities and $55.5 million on held-to-maturity securities at year-end. Management attributed these losses primarily to interest-rate changes and reported no identified credit loss on the AFS portfolio.
Outlook, commentary and principal risks
The filing provides no specific quantitative earnings or revenue guidance. Management said integration, process streamlining, operational efficiencies and expense reduction remain priorities, while describing loan growth as moderate in the current economic environment. It anticipates continuing a regular quarterly cash dividend, subject to board approval and financial, regulatory and contractual conditions; the 2023 dividend was $0.12 per quarter.
- Credit and concentration risk: Non-owner-occupied CRE was 382.6% of Bank Tier 1 capital plus allowance for credit losses; construction, land and land-development loans were 56.7% of that measure. CRE growth over the prior 36 months was substantially affected by TCFC. Office CRE totaled $541.6 million. Management described heightened monitoring and stress testing; concentrations could bring added supervisory scrutiny or capital requirements.
- Asset quality: Nonaccrual loans rose to $12.8 million from $1.9 million, and nonperforming assets to $13.7 million from $3.9 million. The allowance estimate depends on forecasts, model inputs and management judgments.
- Funding and interest-rate risk: Uninsured and concentrated municipal deposits, deposit repricing, competition for funding and market disruption could affect liquidity and margins. The company’s 12-month model estimated net interest income would decline 15.6% under a parallel 400-basis-point rate increase. Economic value of equity sensitivity exceeded board limits in the +300- and +400-basis-point scenarios.
- Internal controls: Management and the auditor concluded internal control over financial reporting was ineffective at year-end due to material weaknesses in review controls over selected allowance-model inputs and deferred-tax balances. Management said the identified ACL data-validation issue did not require a restatement or materially affect the year-end allowance. Remediation was in progress, with completion targeted before year-end 2024 for the ACL weakness and with the first-quarter 2024 Form 10-Q for the deferred-tax weakness. TCFC, representing about 39.9% of consolidated assets at acquisition, was excluded from the year-end control assessment.
- Other risks and contingencies: The Bank provides services to state-licensed cannabis businesses, although cannabis remains illegal under federal law. Those customers held approximately $310.2 million of deposits and $73.7 million of loans at year-end; no related contingency accrual was recorded. The company also cites cybersecurity, regulatory, economic, acquisition-integration and local real-estate risks. Management did not expect current legal proceedings to materially affect financial condition or results.
Most important facts for investors to verify
- Progress and independent validation of remediation for both material weaknesses, including the ACL model inputs and deferred-tax controls.
- Post-acquisition trends in net income, core expenses, net interest margin and deposit costs after separating acquisition effects and unusual items.
- CRE and office loan performance, risk-rating migrations, collateral values, delinquencies and allowance adequacy.
- Deposit stability and concentration, uninsured and reciprocal deposit levels, time-deposit maturities and available contingent liquidity.
- Actual results against management’s integration and efficiency plans, and any changes to capital, dividend or regulatory requirements.
The independent auditor issued an unqualified opinion on the consolidated financial statements, but an adverse opinion on internal control over financial reporting.