Business context and reporting period
Shore Bancshares, Inc. is a Maryland-based bank holding company whose principal subsidiary, Shore United Bank, operates 21 branches across Maryland, Delaware and Virginia. The unaudited Form 10-Q covers the three months ended March 31, 2019; balance-sheet comparisons are to December 31, 2018. Dollar amounts below are in millions unless noted.
Financial results and condition
| Metric | Q1 2019 / March 31, 2019 | Comparable period / prior year-end |
|---|---|---|
| Net income | $3.754; diluted EPS $0.29 | Q1 2018: $4.058; $0.32 per diluted share |
| Continuing-operations income | $3.828; diluted EPS $0.30 | Q1 2018: $3.462; $0.27 per diluted share |
| Net interest income | $12.394 | Q1 2018: $12.329 |
| Net interest margin | 3.61% | Q1 2018: 3.83%; Q4 2018: 3.58% |
| Noninterest income / expense | $2.188 / $9.343 | Q1 2018: $2.140 / $9.452 |
| Credit-loss provision / net charge-offs | $0.100 / $0.025 | Q1 2018: $0.489 / $0.352 |
| Total assets | $1,485.8 | December 31, 2018: $1,483.1 |
| Loans, gross / allowance | $1,211.7 / $10.4 | December 31, 2018: $1,195.4 / $10.3 |
| Total deposits | $1,237.3 | December 31, 2018: $1,212.3 |
| Cash and cash equivalents | $58.8 | December 31, 2018: $67.2 |
| Borrowings | $30.7 short-term; $15.0 long-term | December 31, 2018: $60.8 short-term; $15.0 long-term |
| Stockholders’ equity | $187.1 | December 31, 2018: $183.2 |
Q1 operating cash flow was $7.7 million, investing cash outflow $9.7 million and financing cash outflow $6.5 million, producing an $8.4 million net decrease in cash. The Bank reported capital ratios of 10.03% leverage, 11.97% Tier 1 risk-based and 12.86% total risk-based, and remained “well-capitalized.”
Material changes versus comparable periods
- Continuing-operations income rose $0.366 million year over year, supported by $0.065 million higher net interest income, $0.048 million higher noninterest income, a $0.389 million lower credit-loss provision and $0.109 million lower noninterest expense. Higher deposit funding costs largely offset growth in loan income; interest expense increased $1.492 million year over year.
- Reported net income fell year over year because discontinued operations recorded a $0.074 million loss in Q1 2019 versus $0.596 million income in Q1 2018. The insurance agency Avon-Dixon was sold on December 31, 2018; the sale generated a $12.736 million net gain in 2018. Residual insurance-subsidiary activity remains in discontinued operations.
- Loans increased $16.4 million from year-end, primarily in construction and commercial real estate. Deposits rose $24.9 million, while short-term borrowings fell $30.1 million, reflecting deposit growth and use of cash received from the insurance sale.
- Nonperforming assets declined to $16.4 million from $18.0 million at year-end; nonaccrual loans were $15.4 million. Nonaccrual loans plus accruing troubled debt restructurings were 1.91% of loans, down from 2.12%.
- Available-for-sale securities’ unrealized losses improved during the quarter, contributing $1.446 million of other comprehensive income. The company adopted the new lease standard on January 1, 2019, recognizing $3.8 million each of right-of-use assets and lease liabilities.
Outlook, risks and contingencies
- The filing provides no quantitative earnings or revenue guidance. Management said it was not aware of demands, commitments, events or uncertainties likely to materially impair future liquidity. Forward-looking statements remain subject to economic conditions, competition, interest-rate movements, legislation and regulation.
- Commercial real estate concentration is a significant risk: non-owner-occupied CRE loans, including construction, were 304.5% of risk-based capital; construction, land and land-development loans were 91.7%. CRE including construction grew 103.6% over three years. Management cited heightened monitoring, underwriting and stress testing; concentration may lead to higher capital requirements or loan sales/participations.
- Liquidity sources include approximately $210.8 million of FHLB credit availability and $15 million in federal funds lines, as well as marketable investments. The $15 million fixed-rate FHLB long-term borrowing bears 2.82% and matures in April 2020.
- Off-balance-sheet commitments to extend credit were $224.7 million and letters of credit $6.8 million. Management stated that many commitments are expected to expire undrawn. The company expects the new expected-credit-loss standard (CECL) to significantly affect its financial statements and credit-loss methodology; implementation work was underway, with parallel model simulation expected in Q2 2019.
- Management reported no material change in market-risk procedures or risk factors from year-end 2018. It reported no legal proceedings expected to have a material adverse effect and concluded disclosure controls were effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether margin pressure from sharply higher deposit costs continues and how loan and core-deposit growth affects funding costs.
- Trends in CRE concentration, nonperforming loans, past-due loans and allowance adequacy; the allowance was 0.86% of period-end loans.
- Actual CECL adoption impact and implementation timing, given management’s expectation of a significant effect.
- Cash generation and liquidity after the reduction in cash, including continued deposit growth, borrowing availability and the April 2020 long-term debt maturity.
- Results and remaining obligations of the discontinued insurance and premium-finance operations, and the comparability of earnings excluding the 2018 insurance-sale gain.