Exhibit 99.3
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
The following unaudited pro forma condensed combined financial information as of March 31, 2023 combines the historical consolidated financial position and results of operations of Shore Bancshares, Inc. (“SHBI”) and The Community Financial Corporation (“TCFC”), as of such date (i) on an actual historical basis and (ii) assuming the completion of the merger at such date using the acquisition method of accounting as prescribed by the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, ASC 805, “Business Combinations” and giving effect to the related pro forma adjustments described in the accompanying notes. The unaudited pro forma condensed consolidated financial information as of March 31, 2023 gives effect to the completion of SHBI’s acquisition of TCFC.
The following unaudited pro forma condensed combined financial information for the three months ended March 31, 2023 combines the historical consolidated financial position and results of operations of SHBI and TCFC for such period, giving effect to the merger as if the merger had become effective at the beginning of the period presented, using the acquisition method of accounting and giving effect to the pro forma adjustments described in the accompanying notes. Although pro forma financial information is not a measurement of performance calculated in accordance with GAAP, SHBI and TCFC believe that pro forma financial information is important because it gives effect to the merger and the transactions referenced above. The manner in which SHBI and TCFC calculate pro forma financial information may differ from similarly titled measures reported by other companies.
The unaudited pro forma condensed combined financial information is provided for informational purposes only and is not necessarily, and should not be assumed to be, an indication of the actual results that would have been achieved had the merger been completed as of the dates indicated or that may be achieved in the future. The unaudited pro forma condensed combined financial information has been derived from and should be read in conjunction with the respective period’s historical consolidated financial statements and the related notes of SHBI and TCFC. The historical consolidated financial statements of SHBI are included in SHBI’s Quarterly Report on Form 10-Q for the three months ended March 31, 2023. The historical consolidated financial statements of TCFC are attached as Exhibit 99.2 in Amendment No. 1 to Current Report on Form 8-K/A filed along with this Exhibit 99.3 on August 7, 2023.
The pro forma information, while helpful in illustrating the financial characteristics of the combined company under one set of assumptions, does not reflect the opportunities to earn additional revenue and does not include certain assumptions as to cost savings and, accordingly, does not attempt to predict or suggest future results. It also does not necessarily reflect what the historical results of the combined company would have been had the companies been combined during the periods presented.
SHORE BANCSHARES, INC. AND THE COMMUNITY FINANCIAL CORP.
Unaudited Pro Forma Condensed Combined Balance Sheet
March 31, 2023
SHBI Historical | TCFC Historical | Transaction Accounting Adjustments | Pro Forma | |||||||||||||||||
(in thousands) | (as reported) | (as reported) | Fair Value | Other | Combined | |||||||||||||||
ASSETS | ||||||||||||||||||||
Cash and due from banks | $ | 23,863 | $ | 11,905 | $ | (4 | ) | A | $ | - | $ | 35,764 | ||||||||
Federal funds sold | - | 2,290 | - | - | 2,290 | |||||||||||||||
Interest-bearing deposits with other banks | 13,846 | 13,297 | - | - | 27,143 | |||||||||||||||
Cash and cash equivalents | 37,709 | 27,492 | (4 | ) | - | 65,197 | ||||||||||||||
Investment securities: | ||||||||||||||||||||
Available-for-sale, at fair value | 81,525 | 463,949 | - | - | 545,474 | |||||||||||||||
Held to maturity, at amortized cost | 549,096 | - | - | (500 | ) | B | 548,596 | |||||||||||||
Equity securities, at fair value | 1,258 | 4,380 | - | - | 5,638 | |||||||||||||||
Restricted securities | 15,067 | 2,388 | - | - | 17,455 | |||||||||||||||
Loans held for sale, at fair value | 3,514 | - | - | - | 3,514 | |||||||||||||||
Loans | 2,668,681 | 1,844,321 | (117,798 | ) | C | 5,155 | C | 4,400,359 | ||||||||||||
Less: allowance for credit losses | (28,464 | ) | (23,515 | ) | 23,515 | D | (20,869 | ) | D | (49,333 | ) | |||||||||
Loans, net | 2,640,217 | 1,820,806 | (94,283 | ) | (15,714 | ) | 4,351,026 | |||||||||||||
Premises and equipment, net | 50,516 | 20,987 | 8,131 | E | - | 79,634 | ||||||||||||||
Goodwill | 63,266 | 10,835 | (10,835 | ) | F | - | 63,266 | |||||||||||||
Other intangible assets, net | 5,106 | 550 | 48,098 | G | - | 53,754 | ||||||||||||||
Other real estate owned, net | 179 | - | - | - | 179 | |||||||||||||||
Mortgage servicing rights, at fair value | 5,310 | - | - | - | 5,310 | |||||||||||||||
Right-of-use assets | 9,344 | 5,817 | (1,827 | ) | H | - | 13,334 | |||||||||||||
Cash surrender value on life insurance | 59,711 | 40,019 | - | - | 99,730 | |||||||||||||||
Other assets | 31,876 | 31,313 | 14,358 | I | 10,936 | I | 88,483 | |||||||||||||
TOTAL ASSETS | $ | 3,553,694 | $ | 2,428,536 | $ | (36,362 | ) | $ | (5,278 | ) | $ | 5,940,590 | ||||||||
LIABILITIES | ||||||||||||||||||||
Deposits: | ||||||||||||||||||||
Noninterest-bearing | $ | 808,679 | $ | 599,763 | $ | - | $ | - | $ | 1,408,442 | ||||||||||
Interest-bearing | 2,185,883 | 1,554,560 | (6,450 | ) | J | - | 3,733,993 | |||||||||||||
Total deposits | 2,994,562 | 2,154,323 | (6,450 | ) | - | 5,142,435 | ||||||||||||||
Advances from FHLB - short-term | 131,500 | 21,500 | - | - | 153,000 | |||||||||||||||
Subordinated debt | 43,150 | 31,580 | (2,954 | ) | K | (500 | ) | B | 71,276 | |||||||||||
Total borrowings | 174,650 | 53,080 | (2,954 | ) | (500 | ) | 224,276 | |||||||||||||
Lease liabilities | 9,642 | 6,114 | (2,124 | ) | H | - | 13,632 | |||||||||||||
Other liabilities | 13,202 | 16,213 | - | 26,346 | L | 55,761 | ||||||||||||||
TOTAL LIABILIITIES | 3,192,056 | 2,229,730 | (11,528 | ) | 25,846 | 5,436,104 | ||||||||||||||
COMMITMENTS AND CONTINGENCIES | ||||||||||||||||||||
STOCKHOLDERS' EQUITY | ||||||||||||||||||||
Common stock | 199 | 57 | 77 | M | - | 333 | ||||||||||||||
Additional paid in capital | 201,736 | 98,246 | 54,735 | N | - | 354,717 | ||||||||||||||
Retained earnings | 167,864 | 138,573 | (117,716 | ) | O | (31,124 | ) | O | 157,597 | |||||||||||
Accumulated other comprehensive loss | (8,161 | ) | (37,896 | ) | 37,896 | P | - | (8,161 | ) | |||||||||||
Unearned ESOP shares | - | (174 | ) | 174 | Q | - | - | |||||||||||||
TOTAL STOCKHOLDERS' EQUITY | 361,638 | 198,806 | (24,834 | ) | (31,124 | ) | 504,486 | |||||||||||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 3,553,694 | $ | 2,428,536 | $ | (36,362 | ) | $ | (5,278 | ) | $ | 5,940,590 |
The accompanying notes are an integral part of the unaudited pro forma condensed combined financial information.
SHORE BANCSHARES, INC. AND THE COMMUNITY FINANCIAL CORP.
Unaudited Pro Forma Condensed Combined Income Statement
For the Period Ended March 31, 2023
SHBI Historical | TCFC Historical | Transaction Accounting Adjustments | Pro Forma | |||||||||||||||||
(in thousands) | (as reported) | (as reported) | Fair Value | Other | Combined | |||||||||||||||
INTEREST INCOME | ||||||||||||||||||||
Interest and fees on loans | $ | 30,828 | $ | 23,116 | $ | 2,300 | R | $ | - | $ | 56,244 | |||||||||
Interest and dividends on investment securities: | ||||||||||||||||||||
Taxable | 4,064 | 3,876 | - | - | 7,940 | |||||||||||||||
Tax-exempt | 7 | 116 | - | - | 123 | |||||||||||||||
Interest on deposits with other banks | 163 | 156 | - | - | 319 | |||||||||||||||
Total interest income | 35,062 | 27,264 | 2,300 | - | 64,626 | |||||||||||||||
INTEREST EXPENSE | ||||||||||||||||||||
Interest on deposits | 7,281 | 6,729 | 1,310 | S | - | 15,320 | ||||||||||||||
Interest on short-term borrowings | 1,361 | 998 | - | - | 2,359 | |||||||||||||||
Interest on long-term borrowings | 756 | 469 | 127 | T | - | 1,352 | ||||||||||||||
Total interest expense | 9,398 | 8,196 | 1,437 | - | 19,031 | |||||||||||||||
NET INTEREST INCOME | 25,664 | 19,068 | 863 | - | 45,595 | |||||||||||||||
Provision for credit losses | 1,213 | 652 | - | 15,714 | D | 17,579 | ||||||||||||||
NET INTERST INCOME AFTER PROVISION FOR CREDIT LOSSES | 24,451 | 18,416 | 863 | (15,714 | ) | 28,016 | ||||||||||||||
NONINTEREST INCOME | ||||||||||||||||||||
Service charges on deposit accounts | 1,213 | 546 | - | - | 1,759 | |||||||||||||||
Trust and investment fee income | 432 | - | - | - | 432 | |||||||||||||||
Interchange credits | 1,212 | 523 | - | - | 1,735 | |||||||||||||||
Mortgage-banking revenue | 977 | 1 | - | - | 978 | |||||||||||||||
Title Company revenue | 137 | - | - | - | 137 | |||||||||||||||
Other noninterest income | 1,363 | 379 | - | - | 1,742 | |||||||||||||||
Total noninterest income | 5,334 | 1,449 | - | - | 6,783 | |||||||||||||||
NONINTEREST EXPENSE | ||||||||||||||||||||
Compensation and benefits | 11,605 | 5,481 | - | - | 17,086 | |||||||||||||||
Occupancy expense | 1,619 | 847 | 55 | U | - | 2,521 | ||||||||||||||
Furniture and equipment expense | 534 | 177 | - | - | 711 | |||||||||||||||
Data processing | 1,798 | 1,037 | - | - | 2,835 | |||||||||||||||
Amortization of intangible assets | 441 | 84 | 2,376 | V | - | 2,901 | ||||||||||||||
FDIC insurance premium expense | 371 | 180 | - | - | 551 | |||||||||||||||
Other real estate owned expenses, net | (1 | ) | - | - | - | (1 | ) | |||||||||||||
Legal and professional fees | 750 | 835 | - | - | 1,585 | |||||||||||||||
Merger-related expenses | 691 | 259 | - | (941 | ) | W | 9 | |||||||||||||
Other noninterest expenses | 3,085 | 1,270 | - | - | 4,355 | |||||||||||||||
Total noninterest expense | 20,893 | 10,170 | 2,431 | (941 | ) | 32,553 | ||||||||||||||
Income before income tax expense | 8,892 | 9,695 | (1,568 | ) | (14,773 | ) | 2,246 | |||||||||||||
Income tax expense (benefit) | 2,435 | 2,368 | (408 | ) | X | (3,841 | ) | X | 554 | |||||||||||
NET INCOME | $ | 6,457 | $ | 7,327 | $ | (1,160 | ) | $ | (10,932 | ) | $ | 1,692 | ||||||||
Earnings per common share - Basic | $ | 0.32 | $ | 1.30 | $ | 0.05 | ||||||||||||||
Earnings per common share - Diluted | $ | 0.32 | $ | 1.30 | $ | 0.05 | ||||||||||||||
Weighted average shares outstanding - Basic | 19,886 | 5,652 | 7,510 | Y | 33,048 | |||||||||||||||
Weighted average shares outstanding - Diluted | 19,886 | 5,656 | 7,515 | Y | 33,057 |
The accompanying notes are an integral part of the unaudited pro forma condensed combined financial information.
NOTE A — BASIS OF PRESENTATION
On December 14, 2022, SHBI entered into the merger agreement with TCFC. In accordance with the merger agreement, TCFC was merged with and into SHBI on July 1, 2023. At the effective time of the merger, TCFC ceased to exist and SHBI survived and continued to exist as a Maryland corporation. Each outstanding share of common stock of TCFC was converted into 2.3287 shares of SHBI common stock, with an amount in cash, without interest, paid in lieu of fractional shares.
The pro forma allocation of the purchase price reflected in the pro forma condensed combined financial information is subject to adjustment and may vary from the actual purchase price allocation. Adjustments may include, but not be limited to, changes in (i) TCFC’s balance sheet through the effective time of the merger and (ii) the underlying values of the assets acquired and liabilities assumed.
The unaudited pro forma condensed combined financial information of SHBI’s financial condition and results of operations, including per share data, are presented after giving effect to the merger. The pro forma financial information assumes that the merger with TCFC was consummated on March 31, 2023, for purposes of the unaudited pro forma condensed combined balance sheet and for purposes of the pro forma condensed combined statement of income, as if it had been effective during the entire period presented. Certain reclassifications have been made to the historical financial statement presentations of TCFC to conform to the presentation in SHBI’s financial statements.
The merger will be accounted for by SHBI using the acquisition method of accounting; accordingly, the difference between the purchase price as compared to the estimated fair value of the assets acquired (including identifiable intangible assets) and liabilities has been reflected as a preliminary bargain purchase gain. The pro forma financial information includes estimated adjustments to record the assets and liabilities of TCFC at their respective fair values and represents management’s estimates based on available information. The pro forma adjustments included herein may be revised as additional information becomes available and as additional analysis is performed.
NOTE B — PRO FORMA ADJUSTMENTS
The following pro forma adjustments have been reflected in the unaudited pro forma condensed combined financial information. All adjustments are based on current valuations, estimates, and assumptions. In conjunction with the merger, SHBI has engaged an independent third-party valuation firm to determine the fair value of certain assets acquired and liabilities assumed. Actual fair values recorded as of the acquisition date may differ from the estimated fair values presented.
(Dollars in thousands)
(A) | Cash consideration (cash in lieu for fractional shares). |
(B) | Adjustment to effectively settle subordinated debt held by SHBI of TCFC. |
(C) | Adjustment to acquired TCFC loans: |
To reverse unaccreted discounts or premiums related to net loan origination fees and costs | $ | 3,057 | ||
To record fair value related to the credit component of the loan portfolio | (20,869 | ) | ||
To record fair value related to the interest rate component of the loan portfolio | (99,986 | ) | ||
Total fair value adjustments to loans | $ | (117,798 | ) | |
To record the purchased credit deteriorated loan CECL gross-up | $ | 5,155 | ||
Total transaction accounting adjustments to loans | $ | 5,155 |
(D) | Adjustment of $23,515 to eliminate TCFC's allowance for credit losses. |
Transaction accounting adjustments to allowance for credit losses: | ||||
Increase in the allowance for credit losses for gross-up for estimate of lifetime credit losses for purchased credit deteriorated ("PCD") loans | $ | (5,155 | ) | |
Provision for estimated lifetime credit losses for non-PCD loans to be recorded immediately following consummation of the merger | (15,714 | ) | ||
Total transaction accounting adjustments to allowance for credit losses | $ | (20,869 | ) |
(E) | Adjustments to reflect preliminary estimate of fair value of premises and equipment. |
(F) | Adjustment to eliminate TCFC's historical goodwill. |
(G) | Adjustments to eliminate TCFC's historical intangible assets of $550 thousand and to record estimated core deposit and customer relationship intangibles associated with the merger of $48,648. |
(H) | Adjustment to reflect preliminary fair value of right of use assets of $(1,827) and lease liabilities of $(2,124). |
(I) | Adjustments to other assets: |
Deferred taxes on acquisition accounting adjustments | $ | 26,863 | ||
Deferred taxes on the core deposit intangible | (12,505 | ) | ||
Total fair value adjustments to other assets | $ | 14,358 | ||
Deferred tax asset to record the income tax effect on provision for credit losses for non-PCD loans | $ | 4,086 | ||
Tax impact of merger-related expenses included in (L) below | 6,850 | |||
Total transaction accounting adjustments to other assets | $ | 10,936 |
An estimated blended federal and state tax rate of 26% was used. | |
(J) | Adjustment to reflect preliminary estimate of fair value of interest-bearing deposits with maturities. |
(K) | Adjustment to reflect preliminary estimate of fair value of subordinated debt and trust preferred securities. |
(L) | Adjustments to other liabilities: |
Contract Termination/Conversion | $ | 4,428 | ||
Personnel | 11,600 | |||
Professional Fees | 9,176 | |||
Other Integration | 1,142 | |||
Total transaction accounting adjustments to other liabilities | $ | 26,346 |
(M) | Adjustments to common stock: |
To reflect elimination of TCFC's historical common stock | $ | (57 | ) | |
To reflect issuance of SHBI common stock consideration at par value | 134 | |||
Total fair value adjustments to common stock | $ | 77 |
(N) | Adjustments to paid in capital: |
To reflect elimination of TCFC's historical additional paid in capital | $ | (98,246 | ) | |
To reflect issuance of SHBI common stock consideration in excess of par value | 152,981 | |||
Total fair value adjustments to paid in capital | $ | 54,735 |
(O) | Adjustments to retained earnings: |
To eliminate TCFC's historical retained earnings | $ | (138,573 | ) | |
To reflect preliminary bargain purchase gain | 20,857 | |||
Total fair value adjustments to retained earnings | $ | (117,716 | ) | |
To reflect the after-tax effect of the provision for credit losses for non-PCD loans | $ | (11,628 | ) | |
To reflect estimated merger expenses, net of taxes | (19,496 | ) | ||
Total transaction accounting adjustments to retained earnings | $ | (31,124 | ) |
(P) | Adjustment to accumulated other comprehensive (loss), to reflect elimination of TCFC's accumulated other comprehensive loss. |
(Q) | Adjustment to reflect elimination of TCFC's unearned ESOP shares. |
(R) | Estimated accretion of fair value adjustments on loans acquired from TCFC over their expected lives using the level yield method. |
(S) | Estimated amortization of discounts on time deposits acquired from TCFC over their expected lives. |
(T) | Estimated net amortization on the subordinated debt and Trust Preferred Securities of TCFC over their expected lives. |
(U) | Estimated adjustment to depreciation expense as a result of fair value adjustments. |
(V) | Estimated amortization of the core deposit intangible using the sum-of-years-digits method. |
(W) | Adjustment to remove historical merger related costs incurred through March 31, 2023 for the TCFC acquisition. Costs not eliminated through this adjustment relate to a prior acquisition of SHBI. |
(X) | Adjustment to income tax expense as a result of the transaction accounting adjustments. An estimated blended federal and state tax rate of 26% was used. |
(Y) | Adjustments to weighted average common shares outstanding to eliminate TCFC's shares and to record SHBI shares issued in connection with the merger based on the exchange ratio of 2.3287. |
NOTE C — PRELIMINARY PURCHASE PRICE ALLOCATION
The following table sets forth a preliminary allocation of the estimated total purchase price to the fair value of the identifiable assets and liabilities to be acquired from TCFC and the pro forma preliminary bargain purchase gain generated from the transaction (unaudited, dollars in thousands):
(in thousands) | ||||||||
Purchase Price: | ||||||||
Shore Bancshares, Inc. common stock paid at closing price of $11.56 as of June 30, 2023 | $ | 152,612 | ||||||
Effective settlement of pre-existing debt (1) | 500 | |||||||
Cash consideration (cash in lieu for fractional shares) | 4 | |||||||
Fair value of converted share-based payment awards (2) | 499 | |||||||
Total pro forma purchase price | $ | 153,615 | ||||||
Fair value of assets acquired: | ||||||||
Cash and cash equivalents | $ | 27,488 | ||||||
Total securities | 470,717 | |||||||
Loans, net | 1,726,523 | |||||||
Premises and equipment | 29,118 | |||||||
Core deposit intangible | 48,648 | |||||||
Other assets | 89,680 | |||||||
Total assets | $ | 2,392,174 | ||||||
Fair value of liabilities assumed: | ||||||||
Deposits | 2,147,873 | |||||||
Total debt | 49,626 | |||||||
Other liabilities | 20,203 | |||||||
Total liabilities | $ | 2,217,702 | ||||||
Net assets acquired | $ | 174,472 | ||||||
Preliminary pro forma bargain purchase gain | $ | (20,857 | ) |
(1) | SHBI held $500,000 in subordinated debt of TCFC. For the purposes of the pro forma analysis, the debt was effectively settled. |
(2) | Represents the product of the number of TCFC share-based payment awards outstanding and the equity exchange ratio, further multiplied by the average price per share of SHBI common stock of $11.56 and the ratio of the completed service period relative to the total service period of the underlying awards. |