Shore Bancshares, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are with December 31, 2017. Amounts are in U.S. dollars; financial statement amounts are generally in thousands unless stated otherwise.
Business context
Shore Bancshares is a Maryland-based financial holding company operating Shore United Bank, insurance businesses and trust services across Maryland, Delaware and Virginia. The company reported two primary segments: Community Banking and Insurance Products and Services. Its 2017 purchase of three Northwest Bank branches contributed acquired loans and deposits to the current-period business.
Financial performance and position
| Metric | Q1 2018 / March 31, 2018 | Comparable period / prior balance |
|---|---|---|
| Net income | $4.058 million; diluted EPS $0.32 | Q1 2017: $2.800 million; diluted EPS $0.22 |
| Interest income | $13.103 million | Q1 2017: $10.447 million |
| Net interest income | $12.329 million | Q1 2017: $9.933 million |
| Net interest margin, tax-equivalent | 3.83% | Q1 2017: 3.71%; Q4 2017: 3.81% |
| Noninterest income / expense | $4.929 million / $11.462 million | Q1 2017: $4.807 million / $9.651 million |
| Provision for credit losses | $489,000 | Q1 2017: $427,000 |
| Total assets | $1.422 billion | December 31, 2017: $1.394 billion |
| Loans, net of allowance | $1.110 billion | December 31, 2017: $1.084 billion |
| Total deposits | $1.177 billion | December 31, 2017: $1.203 billion |
| Short-term borrowings | $72.993 million | December 31, 2017: $21.734 million |
| Stockholders’ equity | $164.977 million | December 31, 2017: $163.736 million |
Net cash provided by operating activities was $2.201 million, versus $3.843 million in Q1 2017. Cash and cash equivalents increased $10.175 million during the quarter to $41.995 million; management attributed the increase mainly to short-term borrowings. Investing activities used $16.712 million, including $26.678 million of net loan growth. Financing activities provided $24.686 million.
The allowance for credit losses was $9.918 million, or 0.89% of period-end loans. Net charge-offs were $352,000 (0.13% annualized of average loans). Regulatory capital ratios at March 31, 2018 were 9.95% Tier 1 leverage, 11.90% common equity Tier 1, 11.90% Tier 1 risk-based and 12.80% total risk-based for the company; management said capital remained “well-capitalized.” No long-term debt balance is separately reported in the supplied filing text.
Material changes versus comparable periods
- Net income increased 45% year over year. Management cited higher net interest income, a lower federal corporate tax rate and modestly higher noninterest income, partly offset by higher operating expenses.
- Net interest income rose $2.396 million year over year, primarily reflecting loan growth, including the Northwest branch acquisition and organic growth. Interest expense rose $260,000, with higher average interest-bearing deposits and substantially greater short-term borrowings.
- Noninterest expense increased $1.811 million year over year, mainly from operating additional branches, employee benefits and salary increases. Noninterest income rose $122,000.
- The effective tax rate was 23.5%, versus 39.9% in Q1 2017 and 51.2% in Q4 2017. The federal corporate tax rate reduction from 35% to 21% benefited Q1 2018; Q4 2017 also included a one-time deferred-tax remeasurement.
- Loans increased $26.4 million from year-end, while deposits declined $25.7 million. Management attributed deposit declines partly to seasonal municipal outflows and customers seeking higher time-deposit rates; short-term borrowing rose to fund loan growth.
- Available-for-sale securities had $4.699 million of gross unrealized losses at March 31, versus $1.895 million at year-end. The filing attributes the losses primarily to interest-rate market changes and considers them temporary; accumulated other comprehensive loss widened to $3.378 million.
Outlook, risks, contingencies and unusual items
- Outlook: The filing provides no specific earnings or financial guidance. Management said it was not aware of events or uncertainties likely to materially affect its ability to maintain satisfactory liquidity. Results for this quarter are not necessarily indicative of full-year results.
- Credit and concentration risk: Nonperforming assets rose to $8.639 million from $7.404 million at year-end, primarily as nonaccrual loans increased; nonaccrual loans were $7.009 million. Management identified a $2.0 million commercial real estate customer as a significant contributor. Accruing troubled debt restructurings declined to $9.726 million. Two previously restructured loans totaling $533,000 defaulted during the quarter; no new TDRs were recorded.
- Commercial real estate: Construction and commercial real estate loans were $130.5 million and $477.8 million, respectively. Non-owner-occupied CRE loans, including construction, land and land development, equaled 294.3% of risk-based capital; the portfolio had grown 94.2% over 36 months. Management described heightened monitoring and underwriting practices. The filing warns concentration could require higher capital and adversely affect shareholder returns.
- Liquidity: The Bank reported $15 million in correspondent-bank federal funds lines and reverse-repurchase availability, plus approximately $156.7 million of FHLB credit availability at March 31, 2018. FHLB availability was down from $205.6 million at year-end; qualifying real estate loans are pledged under the borrowing arrangements.
- Off-balance-sheet commitments: Commitments to extend credit totaled $232.787 million and letters of credit $7.419 million, or $240.206 million combined. The filing notes that commitments may expire undrawn and do not necessarily represent future cash requirements.
- Accounting and other items: The company said adoption of revenue-recognition guidance had no material impact. It expects the new expected-credit-loss standard (CECL) to significantly affect its financial statements and credit-loss methodology, and was assessing implementation. No material adverse legal proceedings were identified; management reported no material change in risk factors or internal controls.
Important facts for investors to verify
- Whether loan growth can be funded without continued reliance on increased short-term borrowings, and how deposit levels and funding costs evolve.
- Performance and risk in CRE and construction lending, including the reported concentration measures and the $2.0 million nonaccrual CRE relationship.
- Trends in nonaccrual loans, TDRs, charge-offs and allowance adequacy, particularly as the loan portfolio grows.
- The persistence of earnings improvement after separating the lower tax rate and other period-specific effects from underlying operating performance.
- The effect of market rates on securities valuation and accumulated other comprehensive loss, alongside progress and estimated impact of CECL implementation.