Shore Bancshares, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Shore Bancshares is a Maryland-based bank holding company whose principal subsidiary, Shore United Bank, operates 21 branches across Maryland, Delaware, and Virginia. Unless otherwise noted, financial amounts below are in millions of dollars; the filing presents amounts in thousands.
Financial performance and condition
- Third-quarter earnings: Net income was $4.206 million, or $0.33 per diluted share, versus $4.454 million, or $0.35 per share, in Q3 2018. Continuing-operations income was $4.214 million versus $4.256 million.
- Nine-month earnings: Net income was $12.184 million, or $0.95 per diluted share, versus $12.903 million, or $1.01, in 2018. Continuing-operations income rose to $12.270 million from $11.910 million.
- Revenue and margin: Net interest income was $12.680 million in Q3, down from $12.947 million; noninterest income increased to $2.529 million from $2.465 million. Nine-month net interest income was $37.367 million versus $37.909 million, while noninterest income rose to $7.326 million from $6.901 million. Tax-equivalent net interest margin was 3.52% for Q3 versus 3.76% a year earlier, and 3.56% for the first nine months versus 3.79%.
- Expenses and credit costs: Q3 noninterest expense was $9.384 million, compared with $9.310 million; provision for credit losses was $0.200 million versus $0.307 million. For nine months, noninterest expense was $27.712 million versus $27.615 million, and provision was $0.500 million versus $1.214 million.
- Loans and deposits: At September 30, loans were $1.235 billion, up $39.7 million, or 3.3%, from year-end 2018. Deposits were $1.325 billion, up $113.2 million, or 9.3%. Commercial real estate loans were $558.7 million, or 45.2% of total loans; construction loans were $116.4 million, or 9.4%.
- Asset quality: Allowance for credit losses was $10.438 million, 0.85% of loans, versus 0.87% at year-end 2018. Nine-month net charge-offs were $0.405 million versus $0.667 million. Nonperforming assets declined to $13.316 million from $18.016 million at year-end; nonaccrual loans were $12.530 million. Accruing troubled debt restructurings were $7.588 million.
- Cash flow: Cash and cash equivalents increased $36.1 million in the first nine months to $103.4 million. Operating cash flow was $9.3 million, investing cash outflow was $38.4 million, and financing cash inflow was $65.3 million. Investing included $14.6 million of bank-owned life insurance purchases and $39.8 million of net loan growth; financing included $113.3 million of net deposit growth and a $43.5 million reduction in short-term borrowings.
- Funding, liquidity, and capital: Short-term borrowings fell to $17.3 million from $60.8 million; long-term borrowings remained $15.0 million, with a fixed 2.82% rate and April 2020 maturity. The Bank reported approximately $243.6 million of FHLB credit availability and $15 million of correspondent-bank federal funds lines. Stockholders’ equity was $194.0 million. Shore United Bank remained well-capitalized, with a 10.65% Tier 1 leverage ratio and 13.70% total risk-based capital ratio.
Material changes and management commentary
- Q3 continuing-operations income was slightly lower year over year, mainly because deposit interest expense increased, partly offset by higher loan interest income and noninterest income and lower credit-loss provision. Nine-month continuing-operations income improved, reflecting higher noninterest income and lower provision, partly offset by higher funding costs.
- Deposit costs rose materially: the average rate paid on interest-bearing deposits was 0.98% in Q3 2019 versus 0.36% in Q3 2018. Management said growth in core deposits supported loan funding and reduced reliance on more costly short-term borrowings.
- On December 31, 2018, the Company sold Avon-Dixon Agency and discontinued Mubell Finance. The sale generated $25.2 million of net cash proceeds and a 2018 net disposal gain of $12.7 million. Discontinued operations contributed a Q3 2019 loss of $8,000 and a nine-month loss of $86,000, compared with income of $198,000 and $993,000 in the comparable 2018 periods.
- Management attributed lower nonperforming assets from year-end partly to repayment of two residential relationships after collateral sales. It said a $7.5 million nonaccrual loan added in late 2018 was not expected to result in further losses and stated that the allowance was adequate.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or revenue guidance. Management reported no known demands or uncertainties likely to materially impair liquidity and said market-risk exposure and related procedures had not materially changed since year-end 2018.
- Management highlighted commercial real estate concentration: non-owner-occupied CRE, including construction, was 276.0% of risk-based capital, and the CRE portfolio including construction had grown 91.6% over three years. The Company cited heightened monitoring and underwriting, but warned concentration could require additional capital or loan sales/participations and adversely affect shareholder returns.
- Credit risks include borrower repayment capacity, local economic and property-market conditions, interest-rate changes, vacancies, and collateral values. Total past-due loans increased to $9.7 million from $3.9 million at year-end; management attributed the increase to collection timing and said it did not indicate a negative credit trend.
- The Company was preparing for the expected credit-loss standard (CECL), collecting historical data and running parallel model simulations; the financial impact was still being assessed. The filing also discusses other upcoming accounting standards, with no material effect expected for certain disclosure-only changes.
- The Board authorized a stock repurchase program of up to $10 million for 2019–2020. The Company repurchased 36,700 shares in Q3 at an average $15.21 per share. The program may be limited or ended at any time.
- The Company was evaluating whether to adopt the optional community bank leverage ratio framework. No material legal proceedings were identified, and management reported no material changes to previously disclosed risk factors. Disclosure controls were deemed effective as of September 30, 2019.
Investor verification points
- Track deposit pricing and net interest margin as funding costs rise and rates change.
- Review CRE concentration, related capital requirements, and portfolio performance, particularly non-owner-occupied and construction exposures.
- Monitor nonaccrual loans, past-due balances, charge-offs, and the adequacy of the allowance.
- Confirm the April 2020 maturity and refinancing or repayment plan for the $15 million FHLB borrowing.
- Assess CECL implementation assumptions and potential adoption impact when quantified; also verify any decision on the CBLR framework.
- Evaluate ongoing repurchases and the effect of executive retirement-plan costs on expenses and shareholder returns.