Shore Bancshares, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Shore Bancshares is a Maryland-based bank holding company whose subsidiary, Shore United Bank, operates 22 branches across Maryland, Delaware, and Virginia. Unless noted, dollar figures below are in millions.
Financial performance and condition
| Metric | Q3 2020 | Comparable period |
|---|---|---|
| Net interest income | $13.3 | $12.7 in Q3 2019; $13.0 in Q2 2020 |
| Provision for credit losses | $1.5 | $0.2 in Q3 2019; $1.0 in Q2 2020 |
| Noninterest income | $2.6 | $2.5 in Q3 2019 |
| Noninterest expense | $9.8 | $9.4 in Q3 2019 |
| Net income | $3.4; diluted EPS $0.27 | $4.2 and $0.33 in Q3 2019; $5.3 and $0.43 in Q2 2020 |
| Net interest margin | 3.17% | 3.52% in Q3 2019; 3.41% in Q2 2020 |
- For the first nine months, net income was $11.8 million versus $12.2 million in 2019; diluted EPS was $0.95 in both periods. Net interest income rose to $38.8 million from $37.4 million, while provision expense increased to $2.85 million from $0.5 million. Nine-month net interest margin was 3.35%, down from 3.56%.
- At September 30, total assets were $1.83 billion, loans were $1.424 billion, deposits were $1.594 billion, and stockholders’ equity was $198.9 million. Since year-end 2019, loans increased 14.0% and deposits 18.8%. Loan growth included $126.7 million of PPP lending.
- Cash and cash equivalents were $156.5 million, up from $95.0 million at year-end 2019. Nine-month operating cash flow was $9.6 million; investing activities used $202.5 million and financing activities provided $254.4 million.
- Total borrowings were $25.4 million, including $24.4 million of subordinated debt net of issuance costs; the $15 million FHLB long-term advance outstanding at year-end was repaid in April. The August issuance was $25 million of 5.375% fixed-to-floating subordinated notes due 2030.
- The Bank reported well-capitalized status. At September 30, its Tier 1 leverage, common equity Tier 1, Tier 1 risk-based, and total risk-based capital ratios were 10.07%, 13.31%, 13.31%, and 14.30%, respectively.
Material changes and notable items
- Q3 net income declined year over year, mainly as higher credit-loss provision and noninterest expense more than offset improved net interest income. Compared with Q2 2020, the company attributed lower earnings primarily to a $2.2 million increase in noninterest expense, along with higher provision and lower noninterest income.
- Management said the Q3 net interest margin was pressured by approximately $100 million of excess liquidity, including deposits associated with PPP proceeds and customer liquidity needs. It estimated the margin would have been 3.37% excluding that excess liquidity.
- The company repurchased 288,400 shares in Q3 for $3.1 million, at an average $10.56 per share. It reported that the existing $10 million repurchase program was fully used by October 26, 2020.
- Q2 included a $347,000 gain on sales and calls of investment securities; there were no such sales in Q3. The company paid dividends of $0.12 per share in Q3, compared with $0.10 in Q3 2019.
Outlook, risks, and contingencies
- The filing provides no specific earnings or revenue guidance. Management said it expects to maintain the quarterly cash dividend based on its capital position, while cautioning that pandemic effects could limit future dividend capacity.
- COVID-19 impacts remain uncertain. Management identified possible borrower stress, higher delinquencies and credit losses, declining real estate collateral values, deposit and liquidity changes, lower loan demand, margin pressure from low interest rates, operational and cybersecurity risks, and possible goodwill impairment.
- The company had executed principal and/or interest deferrals on $221.1 million of loans during the first nine months; $12.9 million remained deferred at quarter-end. These short-term modifications were not treated as troubled debt restructurings under the cited relief provisions and regulatory guidance. PPP participation totaled 1,488 loans and approximately $126.7 million through August 8.
- Commercial real estate concentration is a key exposure: non-owner-occupied commercial real estate, including construction, was 291.2% of total risk-based capital, and the broader commercial real estate portfolio including construction had grown 52.1% over three years. Management cited heightened monitoring and underwriting practices.
- Management’s September qualitative goodwill assessment found no impairment was more likely than not; a full annual assessment was planned for Q4. No material adverse legal proceedings were reported. The filing states the Bank had not needed to use its available external liquidity sources; these included $15 million in correspondent-bank federal funds lines and FHLB borrowing capacity supported by pledged collateral.
Important facts for investors to verify
- Whether remaining loan deferrals, PPP forgiveness and customer use of PPP funds affect deposits, loan growth, and credit performance.
- Whether pandemic-related borrower stress leads to higher provisions, delinquencies, nonaccrual loans, or collateral losses; the allowance was $12.8 million, or 0.90% of total loans and 0.98% excluding PPP loans.
- Whether excess liquidity can be deployed into loans or securities without further weighing on net interest margin, and how margins respond to interest-rate changes.
- How the commercial real estate concentration and the planned Q4 goodwill assessment develop, and whether capital or dividend decisions change.
- The effects of the new subordinated debt, share repurchases, and remaining capital and liquidity needs on returns to shareholders.