Shore Bancshares, Inc. — 2019 Form 10-K
Business context and period. This annual report covers the year ended December 31, 2019, with comparisons to 2018. Shore Bancshares is a Maryland-based financial holding company whose principal business is community banking through Shore United Bank, serving Maryland, Delaware and Virginia. It sold its Avon-Dixon insurance business on December 31, 2018 and discontinued Mubell premium finance operations; 2018 results therefore include discontinued operations and a sale gain that did not recur in 2019.
Financial performance and condition
| Metric | 2019 | 2018 | Change or context |
|---|---|---|---|
| Net income | $16.2 million | $25.0 million | Down; 2018 included a $9.2 million after-tax gain on the insurance sale. |
| Continuing-operations income | $16.3 million | $15.8 million | Up approximately 3.3%. |
| Diluted EPS | $1.27 | $1.96 | Continuing-operations EPS was $1.28 versus $1.24. |
| Net interest income | $50.1 million | $50.6 million | Down about 1%; tax-equivalent net interest margin was 3.54% versus 3.74%. |
| Interest income / expense | $59.8 million / $9.6 million | $55.9 million / $5.3 million | Higher deposit costs more than offset increased interest income. |
| Noninterest income | $10.0 million | $9.0 million | Up 11.2%, including BOLI income and increased service fees. |
| Noninterest expense | $37.6 million | $36.8 million | Up 2.0%; benefits and data processing costs rose. |
| Provision for credit losses | $0.7 million | $1.7 million | Lower amid improved credit quality and reduced net charge-offs. |
| Total assets | $1.559 billion | $1.483 billion | Up 5.1%. |
| Loans / deposits | $1.249 billion / $1.341 billion | $1.195 billion / $1.212 billion | Loans up 4.5%; deposits up 10.6%. |
| Stockholders’ equity | $192.8 million | $183.2 million | Equity to assets was 12.37% versus 12.35%. |
| Cash and cash equivalents | $95.0 million | $67.2 million | Up $27.7 million. |
| Cash flows | Operating $13.7 million; investing $(45.7) million; financing $59.7 million | Operating $18.3 million; investing $(42.5) million; financing $59.6 million | Cash increased $27.7 million in 2019. |
Credit, capital and liquidity
- Nonperforming assets fell to $12.0 million from $18.0 million; nonaccrual loans were $10.6 million. Accruing troubled debt restructurings were $7.5 million, down from $8.7 million.
- The allowance for credit losses was $10.5 million, or 0.84% of period-end loans; net charge-offs were $0.5 million, or 0.04% of average loans.
- The Bank reported a 13.00% common equity Tier 1 ratio, 13.87% total risk-based capital ratio and 10.64% leverage ratio, and was classified as well capitalized. The holding company was exempt from consolidated capital requirements under the small bank holding company policy.
- Short-term borrowings were $1.2 million, down from $60.8 million; long-term borrowings remained $15.0 million. The long-term FHLB borrowing carries a 2.82% fixed rate and matures in April 2020.
- Year-end loan-to-deposit ratio was 93.1%, compared with 98.6%. Available liquidity included $270.1 million of FHLB credit availability and $15 million in correspondent-bank federal funds lines.
Material changes versus 2018
- Continuing-operations income improved modestly, but reported net income and EPS declined because 2018 included the insurance-sale gain and insurance-business results.
- Net interest margin narrowed as deposit balances and rates paid increased. Deposit interest expense rose to $8.7 million from $3.5 million, while higher loan balances and yields supported interest income.
- Commercial real estate loans increased $63.1 million; construction loans declined $28.3 million. Deposits grew $129.0 million, and year-end brokered deposits were zero versus $22.1 million in 2018.
- Credit quality improved overall, with lower nonperforming assets and net charge-offs. The company also recorded a $3.2 million after-tax improvement in other comprehensive income, primarily reflecting available-for-sale securities gains.
- The company repurchased 242,000 shares in the fourth quarter at an average price of $15.97 per share. Its authorization was up to $10 million; $5.55 million remained available at year-end. Dividends paid were $0.42 per share versus $0.32.
Outlook, commentary and risks
- The filing provides no quantified earnings, revenue or growth guidance. Management anticipated continuing a regular quarterly dividend, subject to operating results, capital, regulation and Board discretion.
- Management cited increased noninterest income and lower credit-loss provisions as supports to continuing-operations earnings, offset by lower net interest income and higher expenses. It described efforts to grow loans, manage funding costs and resolve problem loans.
- Commercial real estate concentration is a notable risk: non-owner-occupied CRE, including construction and land development, was 270.4% of total risk-based capital; construction, land and land development loans were 57.4%. The CRE portfolio had grown 63.0% over the prior 36 months, potentially drawing heightened regulatory scrutiny.
- Interest-rate simulation projected net interest income up 4.5% for an immediate 200-basis-point increase and down 13.2% for a 200-basis-point decrease. Management cautioned that model assumptions may not reflect actual deposit repricing, prepayments or borrower responses.
- Other material risks include dependence on local Maryland and Delaware economies and real estate, competition and deposit pricing, credit losses, liquidity and funding availability, regulation, cyber and third-party service-provider risks, and the transition away from LIBOR after 2021.
- The company purchased $26.5 million of bank-owned life insurance during 2019, principally to offset future employee benefit costs, and introduced supplemental executive retirement plans. It was implementing the expected-credit-loss accounting standard, with adoption anticipated in 2020.
- Management reported effective disclosure controls and internal control over financial reporting; the independent auditor issued unqualified opinions on the financial statements and internal controls. Management said current legal proceedings were not expected to materially affect the company.
Most important facts for investors to verify
- Reconcile ongoing earnings and net interest margin trends, especially the effect of deposit pricing and funding mix on profitability.
- Review CRE concentration, loan growth by category, nonperforming assets, and reserve adequacy as the loan portfolio expands.
- Confirm the April 2020 maturity and refinancing or repayment of the $15 million long-term borrowing, and monitor liquidity and deposit retention.
- Assess the actual expense, returns and benefit-cost offset associated with the BOLI purchase and new executive retirement plans.
- Track remaining share-repurchase authorization, dividend capacity and the Bank’s ability to upstream dividends while maintaining regulatory capital.
- Evaluate the eventual impact of expected-credit-loss accounting adoption and the company’s progress transitioning LIBOR-linked contracts.