Unassociated Document

EXHIBIT 10.7

EMPLOYMENT AGREEMENT

THIS AGREEMENT is entered into this as of April 1, 2004 (this “Agreement”) by and between The Felton Bank (the “Bank”) and Shore Bancshares, Inc. “Shore Bancshares”, with the Bank, collectively, the “Companies”) and Thomas Evans (the “Employee”).

WHEREAS, Bank is a subsidiary of Midstate Bancorp, Inc., which has merged into Shore Bancshares (the “Merger”); and

WHEREAS, the Employee has been employed by the Bank as President and Chief Executive Officer; and

WHEREAS, the parties hereto desire by writing set forth the continued employment relationship of the Companies and the Employee;

NOW THEREFORE, it is AGREED as follows:

1. The Employee is employed as the President and Chief Executive Officer of The Felton Bank. The Employee shall render administrative and management services to the Companies such as are customarily performed by persons situated in similar executive capacity. The Employee shall also promote, by entertainment or otherwise, as and to the extent permitted by law, the business of the Companies. The Employee’s other duties shall be such as the Boards of Directors of the Companies (the “Boards”) may from time to time reasonably direct, including normal duties of an officer of the Companies.

2. The Companies agree to pay the Employee during the term of this Agreement a salary at the rate of $105,000.00 per annum, in cash not less frequently than twice monthly or at some other reasonable frequency as other employees of the Companies are paid. Such rate of salary, or increased rate of salary, if any, as the case may be, shall be reviewed by the Boards, or by a committee designated by the Boards, no less often than annually and may be increased; which increases may not be unreasonably denied; but not decreased, in such amounts as the Boards in their discretion may decide.

3. The Employee shall be eligible to participate in such discretionary bonuses when and as declared by the Boards.

4. (a) The Employee shall be entitled to participate in any plan of the Companies relating to pension, profit sharing, or other retirement benefits and medical coverage or reimbursement plans the Companies may adopt for the benefit of its employees.

(b) The Employee shall be eligible to participate in any fringe benefits which may be or become applicable to the Companies’ officers including participation in any stock option or incentive plans adopted by the Boards, a reasonable expense account, and any other benefits which are commensurate with the responsibilities and functions to be performed by the Employee under this Agreement.

5. The initial term of employment under this Agreement shall be for 48 months commencing on the date of this Agreement. Upon the expiration of the 48 month initial term of employment, the term of employment shall automatically be extended for another 12 month period and then for successive 12 month periods without further action by the parties, unless either party shall have served notice upon the other 90 days prior to the commencement of any period, of its intention that this Agreement shall terminate at the end of the then current term of employment.

6. (a) The Employee shall devote his full time and best efforts to the performance of his employment under this Agreement. During the term of this Agreement, the Employee shall not, at any time or place, either directly or indirectly, engage in any business or activity in competition with the business affairs or interest of the Companies.

(b) During the term of this Agreement and, in the event of termination prior to expiration of such term, except as otherwise provided in the next sentence, the Employee will not be a director, officer, or employee of, or consultant to, any federal or state financial, institution other than the Companies or their subsidiaries or affiliates, operating within 50 miles of any of the Companies. Such non-compete covenant shall terminate and be of no further force and effect upon the earliest to occur of (i) one year after the expiration date of this Agreement or (ii) one year after termination of the Employee’s employment under Subsection 9(c) or 9(f).

(c) Nothing contained in this Section 6 shall be deemed to prevent or limit the right of the Employee to invest in the capital stock or other securities of any business dissimilar from that of the Companies or, solely as a passive and minority investor in any business.

7. The Employee shall perform his duties under this Agreement in accordance with such reasonable standards expected of employees with comparable positions in comparable organizations and as may be established from time to time by the Boards.

8. At such reasonable times as the Boards shall in their discretion permit, the Employee shall be entitled, without loss of pay, to absent himself voluntarily from the performance of his employment under this Agreement, all such voluntary absences to count as vacation time; provided that:

(a) The Employee shall be entitled to an annual vacation in accordance with the policies as periodically established by the Boards for senior management officials of the Companies, which shall in no event be less than three weeks.

(b) The Employee shall not be entitled to receive any additional compensation from the Companies on account of his failure to take a vacation; nor shall he be entitled to accumulate unused vacation from one fiscal year to the next except to the extent authorized by the Boards for senior management officials of the Companies.

(c) In addition to the aforesaid paid vacations, the Employee shall be entitled without loss of pay, to absent himself voluntarily from the performance of his employment with the Companies for such additional periods of time and for such valid and legitimate reasons as the Boards in their discretion may determine.

(d) In addition, the Employee shall be entitled to an annual sick leave as established by the Boards for senior management officials of the Companies. In the event any sick leave shall not have been used during any year, such leave shall not accrue to subsequent years unless authorized by the Boards. Upon termination of his employment, the Employee shall not be entitled to receive any additional compensation from the Companies for unused sick leave.

9. The Employee’s employment under this Agreement shall be terminated upon the following occurrences:

(a) The death of the Employee during the term of this Agreement, in which event the Employee’s estate shall be entitled to receive the compensation due the Employee through the last day of the calendar month in which the Employee’s death shall have occurred (including any bonus under Section 3, pro rated through the last day of such calendar month, to which the Employee would have been eligible to receive had he been alive when bonuses were next declared), and any vested rights and benefits of the Employee pursuant to any plan of the Companies, whether or not written.

(b) The Boards may terminate the Employee’s employment at any time, but any termination by the Boards other than termination for Cause (defined below), shall not prejudice the Employee’s right to compensation or other benefits as provided for under this Agreement. The Employee shall have no right to receive compensation or other benefits, except at the discretion of the Boards after termination for Cause. Termination for “Cause” shall mean termination for gross negligence or gross neglect or the commission of a felony or gross misdemeanor involving moral turpitude, fraud, dishonesty or willful violation of any law that results in any adverse effect on either of the Companies, or for intentional failure to perform stated duties.

(c) In the event the Employee’s employment under this Agreement is terminated by the Boards without Cause, the Companies shall be obligated to pay the Employee the payment of one-year salary based on the current year salary at the time of termination. Said sum shall be paid in one lump sum within 15 days of the termination.

(d) If the Employee is removed and/or permanently prohibited from participating in the conduct of the Companies’ business by an order issued by the Delaware Commissioner of Financial Regulation, the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System, or other appropriate supervisory agency, obligations under this Agreement shall terminate, as of the effective date of the order, but vested rights of the parties shall not be affected.

(e) The voluntary termination by the Employee during the term of this Agreement with the delivery of no less than 90 days written notice to the Boards, in which case the Employee shall be entitled to receive only his compensation, vested rights, and all employee benefits up to the date of his termination, unless otherwise provided by law.

(f) Notwithstanding any other provision of this Agreement to the contrary (except this Subsection 9(f)), the Employee may voluntarily terminate the Employee’s employment within 12 months following a Change in Control of the Companies during the initial 48 month term of this Agreement, and the Employee shall thereupon be entitled to receive the payment of one year salary based on the current year salary at the time of termination, upon the occurrence of any of the following events, or within 90 days thereafter, which have not been consented to in advance by the Employee in writing: (i) a reduction in the Employee’s base compensations in effect on the date of the Change in Control or as the same may be increased from time to time; (ii) the failure by the Companies to continue to provide the Employee with the compensation and benefits provided for under this Agreement, as the same may be changed by mutual agreement from time to time, or with benefits substantially similar to those provided to the Employee under any employee benefit plan in which the Employee is a participant at the time of the Change in Control, or the taking of any action which would materially reduce any of such benefits or deprive the Employee of any material fringe benefit enjoyed by the Employee at the time of the Change in Control; (iii) the assignment to the Employee of duties and responsibilities materially different from those normally associated with the Employee’s position as referenced at Section 1; or (iv) a material diminution or reduction in the Employee’s responsibilities or authority (including reporting responsibilities) in connection with the Employee’s employment with the Companies. Said sum shall be paid in one lump sum within 15 days of the termination.

The term “Change in Control” shall mean any one of the following events: (i) the acquisition of ownership, holding or power to vote more than 25% of the Companies’ voting stock; (ii) the acquisition of the ability to control the election of a majority of the Companies’ directors; (iii) the acquisition of a controlling influence over the management or policies of Companies by any person or by person acting as a “group” within the meaning of Section 12(d) of the Securities Exchange Act of 1934); (iv) the acquisition of control of the Companies within the meaning of 12 C.F.R. Part 5.50 or its applicable equivalent (except in the case of (i), (ii), (iii), or (iv) if this paragraph, the Companies’ mere formation of a holding company shall not itself constitute a Change in Control), or (v) during the period of two consecutive years, individuals (the “Continuing Directors”) who at the beginning of such period constitute the Boards of the Companies (the “Existing Board”) cease for any reason to constitute at least two-thirds thereof, provided that any individual whose election as a member of the Existing Board was approved by a vote of at least two-thirds of the Continuing Directors then in office shall be considered a Continuing Director. For purposes of this paragraph only, the term “person” refers to an individual or a corporation, partnership, trust, association, joint venture, pool, syndicate, sole proprietorship, unincorporated organization or any other form of entity not specifically listed herein.

(g) Any payments made to the Employee pursuant to this Agreement, or otherwise, are subject to, and conditioned upon their compliance with 12 U.S.C. Section 1828(k) and any regulations promulgated thereunder.

(h) As a condition of receiving any payments under paragraph 9(c) or 9(f), Employee shall be required to sign a release and covenant not to sue.

10. (a) The suspension of the Employee from office and/or temporary prohibition from participation in the conduct of the affairs of the Companies pursuant to notice served by the appropriate regulatory agency, unless stayed by appropriate proceedings, shall suspend, as of the date of such service, all obligations of the Companies under the terms of this Agreement.

(b) In the event the charges specified in a notice served as provided in Section 10(a) shall be dismissed, the Companies shall (i) pay the Employee any compensation withheld from the Employee pursuant to the suspension of the Companies’ obligations as required in Section 10(a) and (ii) reinstate the obligations suspended as required in Section 10(a).

11. If the Employee shall become disabled or incapacitated, as determined by the Employee’s physician, to the extent that he is unable to perform the duties provided in Section 1, he shall nevertheless continue to receive the following percentages of his compensation, inclusive of any benefits which may be payable to the Employee under the provisions of any disability insurance in effect for the Employee, under Section 2 for the following periods of disability: 100% for the first 6 months, 75% for the next 12 months, and 50% thereafter for the remainder of the initial term, or any renewal thereof, of this Agreement. Upon returning to active full-time employment, the Employee’s full compensation as set forth in this Agreement shall be reinstated. In the event that the Employee returns to active employment on other than a full-time basis, then his compensation as set forth in Section 2 may be reduced in proportion to the time spent in said employment. If he is again unable to perform the duties provided in Section 1 due to illness or other incapacity, benefits under this Section 11 shall (a) begin again at 100% for the first 6 months if he has been engaged in active full-time employment for more than 12 months immediately prior to such later absence or inability or (b) resume where benefits left off if he has been engaged in active full-time employment for 12 months or less immediately prior to such later absence or inability.

12. (a) This Agreement shall inure to the benefit of and be binding upon any corporate or other successor of the companies which shall acquire, directly or indirectly, by merger, consolidation, purchase, or otherwise, all or substantially all of the assets of the Companies.

(b) Since the Companies are contracting for the unique and personal skills of the Employee, the Employee shall be precluded from assigning or delegating his rights or duties hereunder without first obtaining the written consent of the Companies.

13. In the event a dispute arises over benefits or other provisions under this Agreement, then the parties hereto agree to submit the dispute to non-appealable binding arbitration. The Board of Arbitrators shall consist of three members, with one member selected by the Employee, one member selected by the Companies, and the third member selected by the first two members. The party responsible for the payment of the costs of such arbitration (including any legal fees and expenses incurred by the Employee) shall be determined by the Board. The Board shall be bound by the rules of the American Arbitration Association in making their determination. The parties hereto agree that they and their heirs, personal representatives, successors, and assigns shall be bound by the decision of such Board with respect to any controversy properly submitted to it for determination.

Where a dispute arises as to the Companies’ discharge of the Employee for Cause, such dispute shall likewise be submitted to arbitration as above described and the parties hereto agree to be bound by the decision hereunder.

14. This Agreement supercedes all prior agreements with respect to your employment with the Companies.

15. No amendments or additions to this Agreement shall be valid unless in writing and signed by both parties, except as herein otherwise provided.

16. This Agreement shall be governed in all respects whether as to validity, construction, capacity, performance or otherwise, by the laws of the State of Maryland, except to the extent that Federal law shall be deemed to apply.

17. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity and enforceability of the other provisions hereof.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date written above.

ATTEST:		THE FELTON BANK


/s/ Susan E. Leaverton		/s/ W. Edwin Kee, Jr.
		W. Edwin Kee, Jr., Chairman

ATTEST:		SHORE BANCSHARES, INC.


/s/ Susan E. Leaverton		W. Moorhead Vermilye
		W. Moorhead Vermilye, Chairman

WITNESS:


/s/ Susan E. Leaverton		/s/ Thomas Evans
		Thomas Evans

EXHIBIT 99.1

RISK FACTORS

The following factors may impact the business, financial condition and results of operations of Shore Bancshares, Inc. and should be considered carefully in evaluating an investment in shares of common stock of Shore Bancshares, Inc. Shore Bancshares, Inc. and, as the context requires, its subsidiaries are sometimes referred to in these Risk Factors as “the Company”, “we”, “us”, and “our”.

Our Future Depends on the Successful Growth of Our Subsidiaries

The Company’s primary business activity for the foreseeable future will be to act as the holding company of The Talbot Bank of Easton, Maryland, The Centreville National Bank of Maryland, The Felton Bank, and our other subsidiaries. Therefore, our future profitability will depend on the success and growth of these subsidiaries. In the future, part of our growth may come from buying other banks and buying or establishing other companies. Such entities may not be profitable after they are purchased or established, and they may lose money, particularly at first. A new bank or company may bring with it unexpected liabilities, bad loans, or bad employee relations, or the new bank or company may lose customers.

A Majority of Our Business is Concentrated in Maryland; A Significant Amount of Our Business is Concentrated in Real Estate Lending

A majority of our customers are Maryland residents. Therefore, a decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose loan portfolios are geographically diverse. Further, our bank subsidiaries make many real estate secured loans, which are in greater demand when interest rates are low and economic conditions are good. Even when economic conditions are good and interest rates are low, these conditions may not continue. Additionally, the market values of the real estate securing these loans may deteriorate, and we may lose money if a borrower fails to repay a real estate loan.

Our Bank Subsidiaries May Experience Loan Losses in Excess of Their Allowances

The risk of credit losses on loans varies with, among other things, general economic conditions, the type of loan being made, the creditworthiness of the borrower over the term of the loan and, in the case of a collateralized loan, the value and marketability of the collateral for the loan. Management bases the allowance for loan losses upon, among other things, historical experience, an evaluation of economic conditions and regular reviews of delinquencies and loan portfolio quality. Based upon such factors, management makes various assumptions and judgments about the ultimate collectability of the loan portfolio and provides an allowance for loan losses based upon a percentage of the outstanding balances and for specific loans when their ultimate collectability is considered questionable. If management’s assumptions and judgments prove to be incorrect and the allowance for loan losses is inadequate to absorb future losses, or if the bank regulatory authorities, as a part of their examination process, require our bank subsidiaries to increase their respective allowance for loan losses, our earnings and capital could be significantly and adversely affected. Although management uses the best information available to make determinations with respect to the allowance for loan losses, future adjustments may be necessary if economic conditions differ substantially from the assumptions used or adverse developments arise with respect to our non-performing or performing loans. Material additions to the allowance for loan losses of one of our bank subsidiaries would result in a decrease in that bank’s net income and capital and could have a material adverse effect on us.

Interest Rates and Other Economic Conditions Will Impact Our Results of Operations

Results of operations for financial institutions, including the Company and its subsidiaries, may be materially and adversely affected by changes in prevailing economic conditions, including declines in real estate values, rapid changes in interest rates and the monetary and fiscal policies of the federal government. Our profitability is in part a function of the spread between the interest rates earned on assets and the interest rates paid on deposits and other interest-bearing liabilities (i.e., net interest income), including advances from the Federal Home Loan Bank of Atlanta. Interest rate risk arises from mismatches (i.e., the interest sensitivity gap) between the dollar amount of repricing or maturing assets and liabilities and is measured in terms of the ratio of the interest rate sensitivity gap to total assets. More assets repricing or maturing than liabilities over a given time period is considered asset-sensitive and is reflected as a positive gap, and more liabilities repricing or maturing than assets over a given time period is considered liability-sensitive and is reflected as negative gap. An asset-sensitive position (i.e., a positive gap) could enhance earnings in a rising interest rate environment and could negatively impact earnings in a falling interest rate environment, while a liability-sensitive position (i.e., a negative gap) could enhance earnings in a falling interest rate environment and negatively impact earnings in a rising interest rate environment. Fluctuations in interest rates are not predictable or controllable. We have attempted to structure our asset and liability management strategies to mitigate the impact on net interest income of changes in market interest rates, but there can be no assurance that these attempts will be successful in the event of such changes.

Our Ability to Pay Dividends is Limited

Holders of shares of common stock of Shore Bancshares, Inc. are entitled to dividends if, when, and as declared by our Board of Directors out of funds legally available for that purpose. Our current ability to pay dividends to stockholders is largely dependent upon the receipt of dividends from our bank subsidiaries. Both federal and state laws impose restrictions on the ability of banks to pay dividends. Federal law prohibits the payment of a dividend by an insured depository institution if the depository institution is considered “undercapitalized” or if the payment of the dividend would make the institution “undercapitalized”. For a Maryland state-chartered bank, dividends may be paid out of undivided profits or, with the prior approval of the Maryland Commissioner of Financial Regulation (the “Maryland Commissioner”), from surplus in excess of 100% of required capital stock. If, however, the surplus of a Maryland bank is less than 100% of its required capital stock, then cash dividends may not be paid in excess of 90% of net earnings. National banking associations are generally limited, subject to certain exceptions, to paying dividends out of undivided profits. For a Delaware state-chartered bank, dividends may be paid out of net profits, but only if its surplus fund is equal to or greater than 50% of its required capital stock. If a Delaware bank’s surplus is less than 100% of capital stock when it declares a dividend, then it must carry 25% of its net profits of the preceding period for which the dividend is paid to its surplus fund until the surplus amounts to 100% of its capital stock. In addition to these specific restrictions, bank regulatory agencies also have the ability to prohibit proposed dividends by a financial institution that would otherwise be permitted under applicable regulations if the regulatory body determines that such distribution would constitute an unsafe or unsound practice. Because of these limitations, there can be no guarantee that our Board of Directors will declare dividends in any fiscal quarter.

The Market Value of Our Investments Could Decline

As of December 31, 2004, we had classified 87% of our investment securities as available-for-sale pursuant to Statement of Financial Accounting Standards No. 115 (“SFAS 115”) relating to accounting for investments. SFAS 115 requires that unrealized gains and losses in the estimated value of the available-for-sale portfolio be “marked to market” and reflected as a separate item in stockholders’ equity (net of tax) as accumulated other comprehensive income. The remaining investment securities are classified as held-to-maturity in accordance with SFAS 115, and are stated at amortized cost.

In the past, gains on sales of investment securities have not been a significant source of income for us. There can be no assurance that future market performance of our investment portfolio will enable us to realize income from sales of securities. Stockholders’ equity will continue to reflect the unrealized gains and losses (net of tax) of these investments. There can be no assurance that the market value of our investment portfolio will not decline, causing a corresponding decline in stockholders’ equity.

Management believes that several factors will affect the market values of our investment portfolio. These include, but are not limited to, changes in interest rates or expectations of changes, the degree of volatility in the securities markets, inflation rates or expectations of inflation and the slope of the interest rate yield curve (the yield curve refers to the differences between shorter-term and longer-term interest rates; a positively sloped yield curve means shorter-term rates are lower than longer-term rates). Also, the passage of time will affect the market values of our investment securities, in that the closer they are to maturing, the closer the market price should be to par value. These and other factors may impact specific categories of the portfolio differently, and management cannot predict the effect these factors may have on any specific category.

The Banking Industry is Heavily Regulated; Significant Regulatory Changes Could Adversely Affect Our Operations

Our operations are and will be affected by current and future legislation and by the policies established from time to time by various federal and state regulatory authorities. The Company is subject to supervision by the FRB; the Talbot Bank of Easton, Maryland is subject to supervision and periodic examination by the Maryland Commissioner and the Federal Deposit Insurance Corporation (“FDIC”); The Centreville National Bank of Maryland is subject to supervision and periodic examination by the Office of the Comptroller of the Currency and the FDIC; and The Felton Bank is subject to supervision and periodic examination by the Delaware State Bank Commissioner and the FDIC. Banking regulations, designed primarily for the safety of depositors, may limit a financial institution’s growth and the return to its investors by restricting such activities as the payment of dividends, mergers with or acquisitions by other institutions, investments, loans and interest rates, interest rates paid on deposits, expansion of branch offices, and the offering of securities or trust services. Our bank subsidiaries are also subject to capitalization guidelines established by federal law and could be subject to enforcement actions to the extent that those banks are found by regulatory examiners to be undercapitalized. It is not possible to predict what changes, if any, will be made to existing federal and state legislation and regulations or the effect that such changes may have on our future business and earnings prospects, as well as those of our bank subsidiaries. Management also cannot predict the nature or the extent of the effect on our business and earnings of future fiscal or monetary policies, economic controls, or new federal or state legislation. Further, the cost of compliance with regulatory requirements may adversely affect our ability to operate profitably.

We Operate in a Competitive Market

We operate in a competitive environment, competing for loans, deposits, insurance products and customers with commercial banks, savings associations and other financial entities. Competition for deposits comes primarily from other commercial banks, savings associations, credit unions, money market and mutual funds and other investment alternatives. Competition for loans comes primarily from other commercial banks, savings associations, mortgage banking firms, credit unions and other financial intermediaries. Competition for other products, such as insurance and securities products, comes from other banks, securities and brokerage companies, insurance companies, insurance agents and brokers, and other nonbank financial service providers in our market areas. Many of these competitors are much larger in terms of total assets and capitalization, have greater access to capital markets, and/or offer a broader range of financial services than those offered by us. In addition, banks with a larger capitalization and financial intermediaries not subject to bank regulatory restrictions have larger lending limits and are thereby able to serve the needs of larger customers. Finally, our growth and profitability will depend upon our ability to attract and retain skilled managerial, marketing and technical personnel. Competition for qualified personnel in the financial services industry is intense, and there can be no assurance that we will be successful in attracting and retaining such personnel.

We May be Subject to Claims

We may from time to time be subject to claims from customers for losses due to alleged breaches of fiduciary duties, errors and omissions of employees, officers and agents, incomplete documentation, the failure to comply with applicable laws and regulations, or many other reasons. Also, our employees may knowingly or unknowingly violate laws and regulations. Management may not be aware of any violations until after their occurrence. This lack of knowledge may not insulate us from liability. Claims and legal actions may result in legal expenses and liabilities that may reduce our profitability and hurt our financial condition.

The Shares of Our Common Stock are Not Heavily Traded

The shares of common stock of Shore Bancshares, Inc. are listed on the Nasdaq Small Cap Market and are not heavily traded. Stock that is not heavily traded can be more volatile than stock trading in an active public market. Factors such as our financial results, the introduction of new products and services by us or our competitors, and various factors affecting the banking industry generally may have a significant impact on the market price of the shares our common stock. Management cannot predict the extent to which an active public market for our common stock will develop or be sustained in the future. In recent years, the stock market has experienced a high level of price and volume volatility, and market prices for the stock of many companies have experienced wide price fluctuations that have not necessarily been related to their operating performance. Therefore, our stockholders may not be able to sell their shares at the volumes, prices, or times that they desire.

The Shares of Our Common Stock are Not Insured

Investments in the shares of common stock of Shore Bancshares, Inc. are not deposits and are not insured against loss by the government.

We May be Adversely Affected by Recent Legislation

The federal Gramm-Leach-Bliley Act (“GLBA”) was signed into law on November 12, 1999. Among other things, this law repeals restrictions on banks affiliating with securities firms. It also permits bank holding companies that become financial holding companies to engage in additional financial activities, including insurance and securities underwriting and agency activities, merchant banking, and insurance company portfolio investment activities that are currently not permitted for bank holding companies. GLBA may have the result of increasing the competition that the Company faces from larger banks and other companies. It is not possible to predict the full effect that GLBA will have on us. In addition, recent changes in other federal banking laws facilitate interstate branching and merger activity among banks. Such changes may result in an even greater degree of competition in the banking industry, and we may be brought into competition with institutions with which we do not presently compete. From time to time other changes are proposed to laws affecting the banking industry, and these changes could have a material effect on our business and prospects. Our future profitability may be adversely affected by increased competition resulting from this legislation.

We May Not be Able to Keep Pace with Developments in Technology

We use various technologies in our business, including telecommunication, data processing, computers, automation, internet-based banking, and debit cards. Technology changes rapidly. Our ability to compete successfully with other banks and non-bank entities may depend on whether we can exploit technological changes. We may not be able to exploit technological changes, and any investment we do make may not make us more profitable.

Our Articles of Incorporation and Bylaws and Maryland Law May Discourage a Corporate Takeover

The Amended and Restated Articles of Incorporation and Amended and Restated Bylaws of Shore Bancshares, Inc. contain certain provisions designed to enhance the ability of the Board of Directors to deal with attempts to acquire control of Shore Bancshares, Inc. These provisions provide for the classification of the Board into three classes; directors of each class generally serve for staggered three-year periods. No director may be removed except for cause and then only by a vote of at least two-thirds of the total eligible stockholder votes. In addition, Maryland law contains anti-takeover provisions that apply to Shore Bancshares, Inc. Although these provisions do not preclude a takeover, they may have the effect of discouraging a future takeover attempt which would not be approved by the Board of Directors, but pursuant to which stockholders might receive a substantial premium for their shares over then-current market prices. As a result, stockholders who might desire to participate in such a transaction might not have the opportunity to do so. Such provisions will also render the removal of the Board of Directors and of management more difficult and, therefore, may serve to perpetuate current management. As a result of the foregoing, such provisions could potentially adversely affect the market price of the shares of common stock of Shore Bancshares, Inc.

Maryland		52-1974638
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)


18 East Dover Street, Easton, Maryland		21601
(Address of Principal Executive Offices)		(Zip Code)

Part I
Item 1.	Business	2
Item 2.	Properties	10
Item 3.	Legal Proceedings	11
Item 4.	Submission of Matters to a Vote of Security Holders	11

Part II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and
	Issuer Purchases of Equity Securities	11
Item 6.	Selected Financial Data	13
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	28
Item 8.	Financial Statements and Supplementary Data	29
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	57
Item 9A.	Controls and Procedures	57
Item 9B.	Other Information	60

Part III
Item 10.	Directors and Executive Officers of the Registrant	60
Item 11.	Executive Compensation	60
Item 12.	Security Ownership of Certain Beneficial Owners and Management and
	Related Stockholder Matters	60
Item 13.	Certain Relationships and Related Transactions	60
Item 14.	Principal Accountant Fees and Services	60

Part IV
Item 15.	Exhibits and Financial Statement Schedules	60

SIGNATURES		62

EXHIBIT LIST		63

			% of
Kent County, Maryland	Deposits		Total
	(in thousands)
Peoples Bank of Kent County, Maryland	$	151,157		35.42	%
The Chestertown Bank of Maryland		139,383		32.66
Chesapeake Bank and Trust Co.		60,560		14.19
Branch Banking & Trust		32,887		7.71
The Centreville National Bank of Maryland		23,032		5.40
SunTrust Bank		19,711		4.62
Total	$	426,730		100.00	%

			% of
Queen Anne’s County, Maryand	Deposits		Total
	(in thousands)
The Queenstown Bank of Maryland	$	247,925		41.40	%
The Centreville National Bank of Maryland		174,370		29.12
Bank of America, National Association		58,161		9.71
The Chestertown Bank of Maryland		45,447		7.59
M&T		35,304		5.90
BankAnnapolis		21,346		3.56
Branch Banking & Trust		16,326		2.72
Total	$	598,879		100.00	%

			% of
Caroline County, Maryland	Deposits		Total
	(in thousands)
Provident State Bank of Preston, Maryland	$	108,042		32.18	%
Peoples Bank of Maryland		90,468		26.95
Branch Banking & Trust		46,572		13.87
The Centreville National Bank of Maryland		38,823		11.57
M& T		28,328		8.44
Bank of America, National Association		16,068		4.79
Easton Bank & Trust		7,390		2.20
Total	$	335,691		100.00	%

			% of
Talbot County, Maryland	Deposits		Total
	(in thousands)
The Talbot Bank of Easton, Maryland	$	352,887		42.72	%
St. Michaels Bank		170,186		20.60
Easton Bank & Trust		83,825		10.15
Bank of America, National Association		79,673		9.65
SunTrust Bank		45,332		5.49
M&T		29,957		3.63
Branch Banking & Trust		25,262		3.06
First Mariner Bank		19,263		2.33
The Queenstown Bank of Maryland		14,836		1.80
Chevy Chase Bank		4,824		0.57
Total	$	826,045		100.00	%

			% of
Dorchester County, Maryland	Deposits		Total
	(in thousands)
The National Bank of Cambridge	$	161,898		32.69	%
Bank of the Eastern Shore		146,050		29.49
Hebron Savings Bank		48,137		9.72
Provident State Bank of Preston, Maryland		31,529		6.37
Bank of America, National Association		29,154		5.89
Branch Banking & Trust		26,697		5.39
M&T		23,681		4.78
SunTrust Bank		14,665		2.96
The Talbot Bank of Easton, Maryland		13,371		2.71
Total	$	495,182		100.00	%

Kent County, Delaware	Deposits		Total
	(in thousands)
Wilmington Trust	$	416,313		30.25	%
Citizens Bank		271,354		19.72
PNC Bank Delaware		230,623		16.76
First NB of Wyoming		181,573		13.19
Wachovia Bank of Delaware		111,679		8.12
Artisans Bank		56,970		4.14
The Felton Bank		53,280		3.87
County Bank		35,467		2.58
Wilmington Savings Fund Society		12,616		0.92
Fort Sill National Bank		6,275		0.45
Total	$	1,376,150		100.00	%

The Talbot Bank of Easton, Maryland
Main Office 18 East Dover Street Easton, Maryland 21601	Tred Avon Square Branch 210 Marlboro Road Easton, Maryland 21601	St. Michaels Branch 1013 South Talbot Street St. Michaels, Maryland 21663

Elliott Road Branch 8275 Elliott Road Easton, Maryland 21601	Cambridge Branch 2745 Dorchester Square Cambridge, Maryland 21613	Sunburst Branch 424 Dorchester Avenue Cambridge, Maryland 21613

	ATMs
Memorial Hospital at Easton 219 South Washington Street Easton, Maryland 21601	Sailwinds Amoco 511 Maryland Avenue Cambridge, Maryland 21613	Talbottown 218 North Washington Street Easton, Maryland 21601

The Centreville National Bank of Maryland
Main Office 109 North Commerce Street Centreville, Maryland 21617	Route 213 South Branch 2609 Centreville Road Centreville, Maryland 21617	Stevensville Branch 408 Thompson Creek Road Stevensville, Maryland 21666

Kent Branch 305 East High Street Chestertown, Maryland 21620	Hillsboro Branch 21913 Shore Highway Hillsboro, Maryland 21641	Denton Branch 850 South 5^th Street Denton, Maryland 21629

Chester Branch 300 Castle Marina Road Chester, Maryland 21619		ATM Queenstown Harbor Golf Links Queenstown, Maryland 21658

The Felton Bank
Main Office 120 West Main Street Felton, Delaware 19943	Milford Branch 648 North West Front Street Routes 14 & 113 Milford, Delaware 19963

The Avon-Dixon Agency, LLC
Easton Office 106 North Harrison Street Easton, Maryland 21601	Grasonville Office 301 Saddler Road Grasonville, Maryland 21638	Centreville Office 195 Lawyers Row Centreville, Maryland 21617

Elliott-Wilson Insurance, LLC	Mubell Finance, LLC	Wye Financial Services, LLC
106 North Harrison Street Easton, Maryland 21601	106 North Harrison Street Easton, Maryland 21601	17 East Dover Street, Suite 101 Easton, Maryland 21601

	2004						2003
	Price Range				Dividends		Price Range				Dividends
	High		Low		Paid		High		Low		Paid
First Quarter	$	39.45	$	30.37	$	.18	$	35.74	$	23.60	$	.15
Second Quarter		32.72		25.15		.18		36.61		28.00		.17
Third Quarter		29.70		25.25		.18		40.59		29.50		.17
Fourth Quarter		37.01		29.05		.18		44.00		35.45		.17
					$	.72					$	.66

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants, and rights (a)		Weighted-average exercise price of outstanding options, warrants, and rights (b)		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
Equity compensation plans approved by security holders (1)(2)		85,225	$	14.05		74,156
Equity compensation plans not approved by security holders (3)		0	$	0		3,491
Total		85,225	$	14.05		77,647

	Years Ended December 31,
(Dollars in thousands, except per shares data)	2004			2003			2002			2001			2000

RESULTS OF OPERATIONS:
Interest income	$	38,291		$	34,339		$	36,306		$	38,938		$	39,480
Interest expense		9,010			9,743			12,438			17,061			17,888
Net interest income		29,281			24,596			23,868			21,877			21,592
Provision for credit losses		931			335			356			226			437
Net interest income after provision for credit losses		28,350			24,261			23,512			21,651			21,155
Noninterest income		10,224			9,845			5,968			2,646			3,104
Noninterest expenses		22,535			19,344			15,960			12,026			11,904
Income before taxes		16,039			14,762			13,520			12,271			12,355
Income taxes		5,841			5,266			4,730			4,277			4,398
NET INCOME	$	10,198		$	9,496		$	8,790		$	7,994		$	7,957

PER SHARE DATA:
Net income - basic	$	1.86		$	1.77		$	1.64		$	1.50		$	1.50
Net income - diluted		1.84			1.74			1.62			1.49			1.48
Dividends paid		.72			.66			.60			.60			.52
Book value (at year end)		16.86			15.47			14.52			13.31			12.21
Tangible book value (at year end) (1)		14.29			14.06			13.08			13.03			11.91

FINANCIAL CONDITION (at year end):
Assets	$	790,598		$	705,379		$	654,066		$	582,403		$	553,097
Deposits		658,672			592,409			545,192			487,470			464,485
Total loans, net of unearned income
and allowance for credit losses		590,766			470,895			435,422			388,516			378,307
Stockholders’ equity		92,976			83,527			78,028			70,971			65,024

PERFORMANCE RATIOS (for the year):
Return on average assets		1.32	%		1.40	%		1.42	%		1.42	%		1.52	%
Return on average stockholders’ equity		11.17	%		11.70	%		11.79	%		11.70	%		12.98	%
Net interest margin		4.10	%		3.91	%		4.12	%		4.15	%		4.40	%
Efficiency ratio(2)		57.04	%		56.17	%		53.49	%		49.04	%		48.20	%
Dividend payout ratio		38.71	%		37.29	%		36.59	%		40.00	%		34.66	%
Average stockholders’ equity to average total assets		11.79	%		11.96	%		12.00	%		12.16	%		11.68	%


(Dollars in thousands)	2004								2003								2002
	Average			Interest		Yield/			Average			Interest		Yield/			Average			Interest		Yield/
	Balance			(1)		Rate			Balance			(1)		Rate			Balance			(1)		Rate

Earning Assets:
Investment securities:
Taxable	$	126,835		$	4,359		3.44	%	$	118,104		$	4,332		3.67	%		115,012		$	5,641		4.91	%
Non-taxable		15,593			909		5.83			14,739			914		6.20			11,058			733		6.63
Loans (2)(3)		555,259			33,065		5.95			457,491			28,981		6.33			423,771			29,646		7.00
Interest bearing deposits		4,737			46		.98			19,602			202		1.03			9,849			149		1.52
Federal funds sold		20,066			255		1.27			28,335			301		1.06			27,410			453		1.65
Total earning assets		722,490			38,634		5.35	%		638,271			34,730		5.44	%		587,100			36,622		6.24	%
Cash and due from banks		23,190								18,436								16,757
Other assets		33,685								26,130								21,550
Allowance for credit losses		(4,485	)							(4,190	)							(4,266	)
Total assets	$	774,880							$	678,647							$	621,141
Interest bearing liabilities:
Demand	$	110,614		$	409		.37	%	$	101,227		$	504		.50	%		91,939		$	762		.83	%
Savings		195,842			1,394		.71			153,721			1,388		.90			126,947			1,809		1.43
Certificates of deposit $100,000 or more		86,450			2,346		2.71			91,194			2,503		2.74			87,761			3,032		3.45
Other time		159,612			4,393		2.75			145,035			4,918		3.39			145,539			6,340		4.36
Interest bearing deposits		552,518			8,542		1.55			491,177			9,313		1.90			452,186			11,943		2.64
Short-term borrowings		25,590			215		0.84			23,071			178		0.77			20,986			243		1.16
Long-term debt		5,000			253		5.05			5,000			252		5.04			5,000			252		5.04
Total interest bearing liabilities		583,108			9,010		1.55	%		519,248			9,743		1.88	%		478,172			12,438		2.60	%
Noninterest bearing deposits		95,627								73,910								65,067
Other liabilities		4,819								4,308								3,357
Stockholders’ equity		91,326								81,181								74,545
Total liabilities and stockholders’ equity	$	774,880							$	678,647							$	621,141
Net interest spread				$	29,624		3.80	%				$	24,987		3.56	%				$	24,184		3.64	%
Net interest margin							4.10	%							3.91	%							4.12	%

	2004 over (under) 2003									2003 over (under) 2002
	Total			Caused By						Total			Caused By
(Dollars in thousands)	Variance			Rate			Volume			Variance			Rate			Volume

Interest income from earning assets:
Interest Bearing Deposits	$	(156	)	$	(15	)	$	(141	)	$	53		$	(95	)	$	148
Federal funds sold		(46	)		63			(109	)		(152	)		(161	)		9
Taxable investment securities		27			(281	)		308			(1,309	)		(1,421	)		112
Non-taxable investment securities		(5	)		(55	)		50			181			(52	)		233
Loans		4,084			(1,782	)		5,866			(665	)		(2,785	)		2,120
Total interest income		3,904			(2,070	)		5,974			(1,892	)		(4,514	)		2,622

Interest expense on deposits
and borrowed funds:
Interest bearing demand		(95	)		(131	)		36			(258	)		(307	)		49
Savings deposits		6			(321	)		327			(421	)		(697	)		276
Time deposits		(682	)		(962	)		280			(1,951	)		(2,030	)		79
Short-term borrowings		37			14			23			(65	)		(88	)		23
Long term debt		1			-			1			-			-			-
Total interest expense		(733	)		(1,400	)		667			(2,695	)		(3,122	)		427
Net interest income	$	4,637		$	(670	)	$	5,307		$	803		$	(1,392	)	$	2,195

	Years Ended								Change from Prior Year
									2004/03						2003/02
(Dollars in thousands)	2004			2003			2002		Amount			Percent			Amount			Percent

Service charges on deposit accounts	$	2,470		$	1,929		$	1,915	$	541			28.1	%	$	14			0.7	%
Other service charges and fees		1,170			648			582		522			80.4			66			11.3
Gain on sale of securities		41			448			26		(407	)		(90.8	)		422			1,623.1
Other than temporary impairment of securities		(657	)		(132	)		-		(525	)		398.1			(132	)		(100.0	)
Earnings from unconsolidated subsidiaries		26			37			40		(11	)		(29.2	)		(3	)		7.5
Insurance agency commissions		6,383			6,037			2,872		346			5.7			3,165			110.2
Other noninterest income		791			878			533		(87	)		(9.9	)		345			64.7
Total	$	10,224		$	9,845		$	5,968	$	379			3.8	%	$	3,877			65.0	%

	Years Ended						Change from Prior Year
							2004/03						2003/02
(Dollars in thousands)	2004		2003		2002		Amount			Percent			Amount		Percent

Salaries and employee benefits	$	13,760	$	12,243	$	9,573	$	1,517			12.4	%	$	2,670		27.9	%
Occupancy and equipment		2,427		2,034		1,758		393			19.3			276		15.7
Data processing		1,310		955		889		355			37.1			66		7.4
Directors’ fees		553		569		472		(16	)		(2.8	)		97		20.6
Amortization of other intangible assets		306		216		129		90			42.1			87		67.4
Other operating expenses		4,178		3,327		3,139		851			25.6			188		6.0
Total	$	22,534	$	19,344	$	15,960	$	3,190			16.5	%	$	3,384		21.2	%

	1 Year or Less					1-5 Years					5-10 Years					Over 10 Years
	Carrying		Average			Carrying		Average			Carrying		Average			Carrying		Average
(Dollars in thousand)	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield

Held to Maturity:
Obligations of states and
political subdivisions (1)	$	1,010		4.29	%	$	4,566		3.64	%	$	7,130		3.97	%	$	2,952		3.60	%
Mortgage backed securities		4		8.81	%		-		-			-		-			-		-
Total Held to Maturity	$	1,014		4.29	%	$	4,566		3.64	%	$	7,130		3.97	%	$	2,952		3.60	%

Available for Sale:
U.S. government agencies	$	7,491	2.26	%	$	63,968	3.14	%	$	3,010	4.10	%	$	-	-	%
Mortgage backed securities		656	4.57			15,037	3.67			2,050	4.55			6,670	4.37
Equity securities		-	-			- -	-			-	4,552			3.20
Total Available for Sale	$	8,147	2.27	%	$	79,005	3.42	%	$	5,060	4.23	%	$	11,222	3.51	%

	December 31,
(Dollars in thousands)	2004		2003		2002		2001		2000
Commercial, financial and agricultural	$	73,757	$	64,419	$	61,962	$	58,953	$	54,642
Real estate - construction		97,021		36,640		25,354		20,255		18,587
Real estate - mortgage		406,053		356,881		335,037		293,921		291,136
Consumer		18,627		17,015		17,186		19,577		18,141
Total Loans	$	595,458	$	474,955	$	439,539	$	392,706	$	382,506

			Maturing
	Maturing		After one		Maturing
	Within		But Within		After Five
	One Year		Five Years		Years		Total

Commercial, financial and agricultural	$	68,461	$	92,637	$	14,786	$	175,884
Real estate - construction		49,858		46,403		760		97,021
Real estate - mortgage		63,248		131,813		108,862		303,923
Consumer		8,693		7,835		2,102		18,630
Total	$	190,260	$	278,688	$	126,510	$	595,458

Rate Terms:
Fixed-Interest Rate Loans	$	63,529	$	152,217	$	46,531	$	262,277
Adjustable-Interest Rate Loans		126,731		126,471		79,979		333,181
Total	$	190,260	$	278,688	$	126,510	$	595,458

(Dollars in thousands)	Average Balances
	2004				2003				2002
Noninterest-bearing demand	$	95,627	14.75	%	$	73,910	13.08	%	$	65,067	12.58	%
Interest bearing deposits
NOW and Super NOW		110,614	17.07			101,227	17.91			91,938	17.77
Savings		48,875	7.54			40,726	7.21			35,885	6.93
Money management		146,967	22.68			112,995	20.00			91,063	17.61
Certificates of Deposit and other
time deposits less than $100,000		159,612	24.62			145,035	25.66			145,539	28.14
Certificates of Deposit $100,000 or more		86,450	13.34			91,194	16.14			87,761	16.97
	$	648,145	100.00	%	$	565,087	100.00	%	$	517,253	100.00	%

Three months or less	$	10,532
Over three through twelve month		41,734
Over twelve months		39,049
	$	91,315

							Regulatory
(Dollars in thousands)	2004			2003			Requirements
Tier 1 capital	$	82,385		$	75,421
Tier 2 capital		4,844			4,170
Total capital, less deductions	$	87,229		$	79,591
Risk-adjusted assets	$	629,225		$	492,326
Risk-based capital ratios:
Tier 1		13.04	%		15.32	%		4.0	%
Total capital		13.86	%		16.17	%		8.0	%

Total Capital	$	82,385		$	75,421
Total adjusted assets	$	772,140		$	703,223
Leverage capital ratio		10.67	%		10.73	%		4.0	%

				3 Months			1 Year						Non-
	Within			through			through			After			Sensitive
December 31, 2004	3 Months			12 Months			5 Years			5 Years			Funds			Total
(Dollars in Thousands)
ASSETS:
Loans	$	316,924		$	56,115		$	181,350		$	41,068		$	(4,691	)	$	590,766
Investment securities		575			7,271			72,736			37,447			1,067			119,096
Interest bearing deposits with other banks		961			-			-			-			-			961
Federal funds sold		20,539			-			-			-			-			20,539
Other assets		-			-			-			-			59,236			59,236
Total Assets	$	338,999		$	63,386		$	254,086		$	78,515		$	55,612		$	790,598
LIABILITIES:
Certificates of deposit $100,000 and over	$	10,532		$	41,734		$	39,049		$	-		$	-		$	91,315
Other time deposits		19,715			36,057			99,835			-			-			155,607
Savings and money market		196,752			-			-			-			-			196,752
NOW and SuperNOW		112,327			-			-			-			-			112,327
Noninterest bearing demand		-			-			-			-			102,672			102,672
Short-term borrowings		27,106			-			-			-			-			27,106
Long-term debt		-			-			5,000			-			-			5,000
Other liabilities		-			-			-			-			6,843			6,843
STOCKHOLDERS’ EQUITY		-			-			-			-			92,976			92,976
Total Liabilities and Stockholders’ Equity	$	366,432		$	77,791		$	143,884		$	-		$	202,491		$	790,598
Excess	$	(27,433	)	$	(14,405	)	$	110,202		$	78,515		$	(146,879	)	$	-
Cumulative Excess	$	(27,433	)	$	(41,838	)	$	68,364		$	146,879		$	-		$	-
Cumulative Excess as percent of total assets		(3.47	)%		(5.29	)%		8.76	%		18.58	%		-			-

	Immediate Change in Rates
	+200			+100			-100			-200			Policy
	Basis Points			Basis Points			Basis Points			Basis Points			Limit
2004
% Change in Net Interest Income		8.90	%		5.19	%		(6.41	)%		(14.09	)%		+ 25	%
% Change in Fair Value of Capital		2.49	%		1.90	%		(4.08	)%		(10.31	)%		+15	%

2003
% Change in Net Interest Income		8.20	%		5.07	%		(7.39	)%		(14.57	)%		+ 25	%
% Change in Fair Value of Capital		3.42	%		2.44	%		(5.22	)%		(11.17	)%		+15	%

	Within		One to		Three to		Over five
(Dollars in Thousands)	one year		three years		five years		years
Deposits without a stated maturity(a)	$	411,751	$	-	$	-	$	-
Certificates of Deposit(a)		108,037		87,305		51,580		-
Short-term borrowings		27,106		-		-		-
Long-term debt		-		5,000		-		-
Operating Leases		243		170		-		-
Purchase obligations		4,796		-		-		-
Contingent earn-out payments		2,913		-		-		-
	$	555,476	$	92,475	$	51,580	$	-


Report of Independent Registered Public Accounting Firm	30
Consolidated Balance Sheets	31
Consolidated Statements of Income	32
Consolidated Statements of Stockholders’ Equity	33
Consolidated Statements of Cash Flows	34
Notes to Consolidated Financial Statements	36

	2004			2003

ASSETS
Cash and due from banks	$	22,050,846		$	19,391,392
Interest bearing deposits with other banks		960,812			9,897,025
Federal funds sold		20,539,412			17,442,889
Investment securities:
Available for sale - at fair value		103,433,819			144,368,198

Held to maturity - at amortized cost - fair value of (2004) $15,802,385 and (2003) $15,584,968		15,662,077			15,313,009
Loans, less allowance for credit losses (2004) $4,692,202 and (2003) $4,059,964		590,765,937			470,894,601
Insurance premiums receivable		385,923			844,576
Premises and equipment, net		13,069,835			11,301,549
Accrued interest receivable on loans and investment securities		3,275,042			3,041,981
Investment in unconsolidated subsidiary		859,133			1,202,786
Goodwill		11,938,714			5,990,132
Other intangible assets		2,242,367			1,580,902
Deferred income taxes		1,542,544			855,640
Other real estate		390,825			-
Other assets		3,480,229			3,254,315
Total assets	$	790,597,515		$	705,378,995

LIABILITIES
Deposits:
Noninterest bearing demand	$	102,671,672		$	91,669,053
NOW and Super NOW		112,326,736			103,415,076
Certificates of deposit, $100,000 or more		91,315,421			71,385,479
Other time and savings		352,358,525			325,939,805
		658,672,354			592,409,413

Accrued interest payable		630,062			415,185
Short-term borrowings		27,106,241			20,957,294
Long term debt		5,000,000			5,000,000
Contingent earn-out payments payable		3,312,500			-
Other liabilities		2,900,705			3,069,623
Total liabilities		697,621,862			621,851,515

STOCKHOLDERS’ EQUITY

Common stock, par value $.01, authorized 35,000,000 shares; issued and outstanding
(2004) 5,515,198 shares; (2003) 5,400,793 shares		55,152			54,008
Additional paid in capital		28,016,571			24,231,213
Retained earnings		65,182,004			58,932,021
Accumulated other comprehensive (loss) income		(278,074	)		310,238
Total stockholders’ equity		92,975,653			83,527,480
Total liabilities and stockholders’ equity	$	790,597,515		$	705,378,995

										Accumulated
				Additional						Other			Total
	Common			Paid in			Retained			Comprehensive			Stockholders’
	Stock			Capital			Earnings			Income (Loss)			Equity
Balances, January 1, 2002	$	53,330		$	23,039,084		$	47,411,873		$	466,346		$	70,970,633
Comprehensive income:
Net income		-			-			8,790,144			-			8,790,144
Other comprehensive income, net of tax:
Unrealized gain on available for
sale securities, net of reclassification
adjustment of $(416)		-			-			-			685,490			685,490

Total comprehensive income		9,475,634

Shares repurchased and retired		(12	)		(20,832	)		-			-			(20,844	)
Shares issued in purchase accounting acquisitions		390			799,610			-			-			800,000
Shares issued for employee stock
based awards and related tax effects		13			19,746			-			-			19,759
Cash dividends paid $.60 per share		-			-			(3,217,282	)		-			(3,217,282	)

Balances, December 31, 2002		53,721			23,837,608			52,984,735			1,151,836			78,027,900
Comprehensive income:
Net income		-			-			9,495,695			-			9,495,695
Other comprehensive income, net of tax:
Unrealized loss on available for
sale securities, net of reclassification adjustment
of $(104,509)		-			-			-			(841,598	)		(841,598	)
Total comprehensive income														8,654,097

Shares issued for employee stock
based awards and related tax effects		287			393,605			-			-			393,892
Cash dividends paid $.66 per share		-			-			(3,548,409	)		-			(3,548,409	)

Balances, December 31, 2003		54,008			24,231,213			58,932,021			310,238			83,527,480
Comprehensive income:
Net income		-			-			10,198,201			-			10,198,201
Other comprehensive income, net of tax:
Unrealized loss on available for
sale securities, net of reclassification
adjustment of $225,865		-			-			-			(588,312	)		(588,312	)
Total comprehensive income		-			-			-			-			9,609,889
Shares issued for employee stock
based awards and related tax effects		316			577,805			-			-			578,121
Shares issued for purchase accounting acquisition		828			3,207,553			-			-			3,208,381
Cash dividends paid $.72 per share		-			-			(3,948,218	)		-			(3,948,218	)
Balances, December 31, 2004	$	55,152		$	28,016,571		$	65,182,004		$	(278,074	)	$	92,975,653

	Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
Available for sale securities:	Cost		Gains		Losses		Value
December 31, 2004:
Obligations of U.S. Government agencies and corporations	$	74,961,442	$	46,913	$	539,525	$	74,468,830
Other securities:
Mortgage backed securities		24,379,611		199,610		165,979		24,413,242
Federal Home Loan Bank stock		1,614,100		-		-		1,614,100
Federal Reserve Bank stock		302,250		-		-		302,250
Federal Home Loan Mortgage Corporation
Cumulative preferred stock		2,342,500		-		-		2,342,500
Equity securities		284,180		8,717		-		292,897
	$	103,884,083	$	255,240	$	705,504	$	103,433,819
December 31, 2003:
Obligations of U.S. Government agencies and corporations	$	103,936,791	$	542,450	$	215,488	$	104,263,753
Other securities:
Mortgage backed securities		30,195,164		553,683		153,979		30,594,868
Federal Home Loan Bank stock		2,469,400		-		-		2,469,400
Federal Reserve Bank stock		302,250		-		-		302,250
Federal Home Loan Mortgage Corporation
Cumulative preferred stock		5,972,500		32,500		247,500		5,757,500
Equity securities		978,641		1,786		-		980,427
	$	143,854,746	$	1,130,419	$	616,967	$	144,368,198

Held to Maturity securities:
December 31, 2004
Obligations of states and political subdivisions	$	15,658,414	$	219,019	$	79,047	$	15,798,386
Mortgage backed securities		3,663		336		-		3,999
	$	15,662,077	$	219,355	$	79,047	$	15,802,385
December 31, 2003
Obligations of states and political subdivisions	$	15,307,658	$	323,029	$	51,600	$	15,579,087
Mortgage backed securities		5,351		530		-		5,881
	$	15,313,009	$	323,559	$	51,600	$	15,584,968

	Continuous unrealized losses existing for:
			Less than 12		12 Months		Total Unrealized
Held-to-Maturity:	Fair Value		Months		or More		Losses

Obligations of states and political subdivisions	$	5,770,037	$	31,906	$	47,141	$	79,047

	2004			2003
Real estate loans:
Construction and land development	$	97,010,075		$	36,639,173
Secured by farmland		18,740,634			14,401,354
Secured by residential properties		240,594,157			221,309,705
Secured by non-farm, nonresidential properties		147,207,463			121,338,281
Loans to farmers (loans to finance agricultural production and other loans)		4,495,116			3,518,341
Commercial and industrial loans		68,163,985			60,153,828
Loans to individuals for household, family, and other personal expenditures		18,485,816			16,498,761
Obligations of states and political subdivisions in the United States, tax-exempt		1,082,824			1,060,363
All other loans		133,156			159,063
		595,913,226			475,078,869
Net deferred loan fees/costs		(455,087	)		(124,304	)
		595,458,139			474,954,565
Allowance for credit losses		(4,692,202	)		(4,059,964	)
	$	590,765,937		$	470,894,601

	2004			2003
Land	$	3,313,344		$	2,928,862
Buildings and land improvements		10,628,881			9,279,151
Furniture and equipment		6,013,936			5,403,013
		19,956,161			17,611,026
Accumulated depreciation		(6,886,326	)		(6,309,477	)
	$	13,069,835		$	11,301,549

2005	$	243,280
2006		139,690
2007		29,867
2008 and thereafter		-
Total minimum lease payments	$	412,837

	December 31
	2004			2003		2002

Balance, beginning of year	$	1,202,786		$	1,165,567	$	1,125,567
Sale of stock		(379,490	)		-		-
Equity in net income		35,837			37,219		40,000

Balance, end of year	$	859,133		$	1,202,786	$	1,165,567

	2004								2003
							Weighted								Weighted
	Gross				Net		Average		Gross				Net		Average
	Carrying		Accumulated		Carrying		Remaining		Carrying		Accumulated		Carrying		Remaining
	Amount		Amortization		Amount		Life		Amount		Amortization		Amount		Life

Goodwill	$	12,605,832	$	667,118	$	11,938,714		-	$	6,657,250	$	667,118	$	5,990,132		-
Core Deposit Intangible		968,000		90,748		877,252		7.3		-		-		-
Unidentifiable intangible
resulting from branch acquisitions		104,144		89,685		14,459		2.1		104,144		82,742		21,402		3.1
Insurance expirations		1,270,000		216,778		1,053,222		12.4		1,270,000		132,111		1,137,889		13.4
Other identifiable intangibles		620,883		323,449		297,434		2.4		620,883		199,272		421,611		3.4
Total	$	15,568,859	$	1,387,778	$	14,181,081			$	8,652,277	$	1,081,243	$	7,571,034

Due in one year or less	$	108,037,000
Due in one to three years		87,305,000
Due in three to five years		51,580,000
	$	246,922,000