Business context and reporting period
Shore Bancshares, Inc. (NASDAQ: SHBI), parent of Shore United Bank, filed this unaudited Form 10-Q for the quarter ended March 31, 2021. The company operates a community banking and wealth-management business, with 22 branches across Maryland, Delaware and Virginia. Unless stated otherwise, dollar amounts below are in millions.
Financial and operating performance
- Earnings: Net income was $4.0 million, or $0.34 per diluted share, versus $3.1 million and $0.25 per share in Q1 2020. Net income increased about 28% year over year. Income before tax was $5.4 million; income tax expense was $1.4 million.
- Interest income and margin: Net interest income was $13.8 million, up from $12.5 million. Net interest margin was 3.00%, down from 3.48% a year earlier and 3.08% in Q4 2020. Management attributed the margin pressure in part to about $100 million of excess liquidity; it estimated the margin would have been 3.17% without that liquidity.
- Other income and expenses: Noninterest income was $2.6 million, up 8.7% year over year. Noninterest expense was $10.5 million, up 1.4%. Provision for credit losses was $425,000, compared with $350,000 in Q1 2020 and $1.1 million in Q4 2020.
- Cash flow: Operating cash flow was $3.9 million, compared with $4.5 million in Q1 2020. Cash and cash equivalents increased $40.2 million during the quarter to $227.1 million; the increase was primarily funded by deposit growth. Investing activities used $63.9 million, including $61.4 million of held-to-maturity securities purchases and $10.1 million invested in bank-owned life insurance.
- Balance sheet and liquidity: Total assets were $2.04 billion, up from $1.93 billion at year-end 2020. Deposits rose 5.9% to $1.80 billion. Loans were $1.46 billion, up $7.3 million from year-end. The allowance for credit losses was $14.3 million, or 0.98% of loans (1.07% excluding PPP loans). Management said available liquidity sources had not been needed.
- Debt and capital: Borrowings totaled $28.0 million, including $24.5 million of subordinated debt and $3.5 million in repurchase agreements; there were no FHLB advances outstanding. The Bank was classified as well-capitalized, with a 9.49% Tier 1 leverage ratio and 14.45% total risk-based capital ratio.
- Credit quality and commitments: Nonperforming assets were $6.3 million, or 0.43% of loans and OREO; nonaccrual loans were $4.9 million. Accruing troubled debt restructurings were $6.5 million. Off-balance-sheet commitments to extend credit and letters of credit totaled $251.9 million.
Material changes versus comparable periods
- Year-over-year earnings benefited from higher net interest income and noninterest income, partly offset by higher noninterest expense. Deposit interest expense fell, while subordinated-debt interest expense increased following the 2020 debt issuance.
- Loan balances grew modestly, primarily as $54.8 million of second-round PPP originations were largely offset by $52.2 million of first-round PPP forgiveness. PPP loans outstanding totaled $129.1 million.
- Credit quality indicators were mixed: nonaccrual loans declined from $5.5 million at year-end, while loans 90 days past due and still accruing increased to $1.2 million from $804,000. There were no net charge-offs or recoveries in Q1 2021.
- Available-for-sale securities declined to $124.1 million from $139.6 million at year-end, while held-to-maturity securities increased to $125.9 million from $65.7 million. Accumulated other comprehensive income fell to $747,000, reflecting an after-tax securities valuation loss.
Outlook, management commentary and risks
- Management said the loan pipeline remained strong and expected it to support double-digit annualized loan growth in 2021, notwithstanding first-quarter payoffs. This is management’s expectation, not formal financial guidance.
- The company agreed to acquire Severn Bancorp, Inc. under a transaction providing Severn shareholders 0.6207 Shore shares and $1.59 cash per Severn share. Closing was expected in Q3 2021, subject to regulatory and shareholder approvals. Shore repurchases were suspended pending the merger; management expected to maintain the quarterly dividend, while noting pandemic-related capital deterioration could constrain future dividends.
- COVID-19’s longer-term effects remained uncertain, including possible borrower repayment difficulties, weaker collateral values, operational disruptions and pressure on loan demand and margins. At quarter-end, $16.1 million of loans remained on payment deferral, down from $221.1 million in loans for which deferrals had been executed during the quarter.
- Commercial real estate is a significant concentration: non-owner-occupied CRE, including construction, represented 303.2% of risk-based capital. Management cited enhanced risk monitoring and underwriting; concentration-related requirements could necessitate additional capital or loan participations.
- The Bank reported limited LIBOR exposure: 28 loans, or 7.9% of the loan portfolio. Management planned migration to SOFR and noted uncertainty around the replacement rate. Management considered the credit-loss allowance adequate; actual pandemic effects and related estimates may change. No legal proceedings were identified as likely to have a material adverse impact.
Most important facts for investors to verify
- Whether the Severn acquisition received required approvals, closed on the expected timeline, and achieved anticipated strategic and financial benefits.
- Whether the forecast loan growth materialized, particularly after PPP forgiveness, and how excess cash and deposits were redeployed.
- Whether net interest margin stabilized as excess liquidity was invested and deposit costs changed.
- Whether borrower performance, deferred loans, CRE exposures and the allowance for credit losses developed as expected, including the effect of COVID-19.
- Whether capital, liquidity, dividend plans and the suspended share-repurchase program changed after the reporting date.