KBRA Affirms Ratings for Shore Bancshares, Inc.

KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3 for Easton, Maryland-based Shore Bancshares, Inc. (NASDAQ: SHBI) (“Shore”). In addition, KBRA affirms the deposit and senior unsecured debt ratings of BBB+, the subordinated debt rating of BBB, and the short-term deposit and debt ratings of K2 for its subsidiary, Shore United Bank, N.A. The Outlook for all long-term ratings is Stable.

The ratings recognize Shore’s solidified presence and market share in its footprint, specifically among locally headquartered banks in MD, which has supported a favorable funding profile with core deposits representing 86% of total funding and a solid NIB component at 30% of total deposits. Although the operating footprint is relatively concentrated, KBRA recognizes that the focus on its local communities has resulted in management’s deep knowledge/expertise, which has been a catalyst for the solid deposit market share. We also acknowledge the strong underlying demographics in MD, including a low level of unemployment, and the presence of governmental entities/contractors that also help support the local economies. Earnings through 9M24 were negatively impacted by a $4.3 million credit card fraud loss in 1Q24, though core ROA is tracking close to historical levels at ~90 bps. Additionally, while core NIM tracks below peers at 2.84% for 3Q34 due to lower loan yields, NIM is well positioned to benefit from recent and potential future rate cuts with ~85% of CDs set to mature over the next twelve months combined with ~12% of deposits indexed to fed funds. Moreover, earnings are supported by a respectable level of noninterest income, and management is focused on pursuing revenue synergies between both institutions following the merger-of-equals (MOE) with The Community Financial Corporation, Inc. (“TCFC”) in 3Q23. SHBI has a conservative and credit focused management team with prudent underwriting standards, evidenced by sound credit performance in recent periods, including minimal NPAs and NCOs, as well as a lower levels of classified/criticized loans. We note that investor CRE exposure remains higher than peers at 357% of total risk-based capital as of 3Q24; however, this should decrease over time as capital metrics return closer to pre-merger levels. Additionally, investor office exposure remains slightly elevated at 8% of total loans, the majority of which are located in suburban markets with ~42% being government contractors or medical tenants, which we view as lower risk. While capital metrics have tracked below peers in recent quarters following the merger with TCFC, CET1 has increased 60 bps since YE23 to 9.3%, and management remains committed to rebuilding capital, targeting approximately 10% by YE25.

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