10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________________________

FORM 10-Q

(X)	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2005
OR
( )	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________

Commission file number 0-22345

SHORE BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

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)

(410) 822-1400

Registrant’s Telephone Number, Including Area Code

N/A

Former name, former address and former fiscal year, if changed since last report.

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days Yes X   No ___

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X   No ___

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 5,527,145 issued and outstanding shares of common stock as of April 30, 2005.

INDEX

Part I.	Financial Information
Item 1.	Financial Statements	Page
	Condensed Consolidated Balance Sheets - March 31, 2005 (unaudited) and December 31, 2004	3
	Condensed Consolidated Statements of Income - For the three months ended March 31, 2005 and 2004 (unaudited)	4
	Condensed Consolidated Statements of Changes in Stockholders’ Equity - For the three months ended March 31, 2005 and 2004 (unaudited)	5
	Condensed Consolidated Statements of Cash Flows - For the three months ended March 31, 2005 and 2004 (unaudited)	6
	Notes to Condensed Consolidated Financial Statements (unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	15
Item 4.	Controls and Procedures	16
Part II.	Other Information
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	16
Item 6.	Exhibits	16
Signatures		18
Exhibit List

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PART I - FINANCIAL INFORMATION

Item 1.Financial Statements.

SHORE BANCSHARES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

	March 31,			December 31,
ASSETS:	2005			2004
	(unaudited)
Cash and due from banks	$	22,495		$	22,051
Interest bearing deposits with other banks		898			961
Federal funds sold		34,939			20,539
Investment securities:
Held-to-maturity, at amortized cost (fair value of, $15,374 and $15,802, respectively)		15,391			15,662
Available for sale, at fair value		108,499			103,434
Loans, less allowance for credit losses ($4,758, $4,692, respectively)		591,509			590,766
Insurance premiums receivable		540			386
Premises and equipment, net		13,595			13,070
Accrued interest receivable on loans and investment securities		3,561			3,275
Investment in unconsolidated subsidiary		859			859
Goodwill		11,939			11,939
Other intangible assets		2,158			2,242
Deferred income taxes		2,028			1,543
Other real estate owned		391			391
Other assets		3,689			3,480
TOTAL ASSETS	$	812,491		$	790,598
LIABILITIES:
Deposits:
Noninterest bearing demand	$	103,414		$	102,672
NOW and Super NOW		109,222			112,327
Certificates of deposit $100,000 or more		98,810			91,315
Other time and savings		367,336			352,358
Total Deposits		678,782			658,672
Accrued Interest Payable		812			630
Short term borrowings		28,331			27,106
Long term debt		5,000			5,000
Contingent earn-out payments payable		513			3,313
Income taxes payable		1,225			-
Other liabilities		3,188			2,901
TOTAL LIABILITIES		717,851			697,622
STOCKHOLDERS’ EQUITY:
Common stock, par value $.01; authorized 35,000,000 shares; issued and outstanding:
March 31, 2005 5,527,120 December 31, 2004 5,515,198		55			55
Additional paid in capital		28,426			28,017
Retained earnings		67,240			65,182
Accumulated other comprehensive loss		(1,081	)		(278	)
TOTAL STOCKHOLDERS’ EQUITY		94,640			92,976
TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY	$	812,491		$	790,598

See accompanying notes to Condensed Consolidated Financial Statements.

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SHORE BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(Dollars in thousands, except per share amounts)

	Three months ended March 31,
	2005		2004
INTEREST INCOME
Loans, including fees	$	9,599	$	7,149
Interest and dividends on investment securities:
Taxable		870		1,193
Tax-exempt		149		154
Other interest income		189		54
Total interest income		10,807		8,550
INTEREST EXPENSE
Certificates of deposit, $100,000 or more		725		557
Other deposits		1,654		1,471
Other interest		151		100
Total interest expense		2,530		2,128
NET INTEREST INCOME		8,277		6,422
PROVISION FOR CREDIT LOSSES		180		105
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES		8,097		6,317
NONINTEREST INCOME
Service charges on deposit accounts		562		495
Gain on sale of securities		58		16
Insurance agency commissions		2,084		1,909
Other noninterest income		458		458
Total noninterest income		3,162		2,878
NONINTEREST EXPENSE
Salaries and employee benefits		3,979		3,118
Expenses of premises and equipment		655		589
Other noninterest expense		1,659		1,506
Total noninterest expense		6,293		5,213
INCOME BEFORE TAXES ON INCOME		4,966		3,982
Federal and state income tax expense		1,860		1,466
NET INCOME	$	3,106	$	2,516
Basic earnings per common share	$	.56	$	.47
Diluted earnings per common share	$	.56	$	.46
Dividends declared per common share	$	.19	$	.18

See accompanying notes to Condensed Consolidated Financial Statements.

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SHORE BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)

(Dollars in thousands, except per share amounts)

								Accumulated
			Additional					other			Total
	Common		Paid in		Retained			Comprehensive			Stockholders’
	Stock		Capital		Earnings			Income(loss)			Equity
Balances, January 1, 2004	$	54	$	24,231	$	58,932		$	310		$	83,527
Comprehensive income:
Net income		-		-		2,516			-			2,516
Other comprehensive income, net of tax: Unrealized loss on available for sale securities, net of reclassification adjustment of $242		-		-		-			327			327
Total comprehensive income												2,843
Shares issued		-		189		-			-			189
Cash dividends paid $0.18 per share		-		-		(974	)		-			(974	)
Balances, March 31, 2004	$	54	$	24,420	$	60,474		$	637		$	85,585
Balances, January 1, 2005	$	55	$	28,017	$	65,182		$	(278	)	$	92,976
Comprehensive income:
Net income		-		-		3,106			-			3,106
Other comprehensive income, net of tax: Unrealized loss on available for sale securities, net of reclassification adjustment of $56		-		-		-			(803	)		(803	)
Total comprehensive income												2,303
Shares issued		-		409		-			-			409
Cash dividends paid $0.19 per share		-		-		(1,048	)		-			(1,048	)
Balances, March 31, 2005 $		55	$	28,426	$	67,240		$	(1,081	)	$	94,640

See accompanying Notes to Condensed Consolidated Financial Statements

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SHORE BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Dollars in thousands)

	For the Three Months Ended March 31,
	2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	3,106		$	2,516
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		367			334
Discount accretion on debt securities		(23	)		(30	)
Provision for credit losses		180			105
Gain on sale of securities		(58	)		(16	)
Net changes in:
Insurance premiums receivable		(144	)		199
Accrued interest receivable		(286	)		70
Other assets		(207	)		(1,189	)
Accrued interest payable on deposits		182			12
Accrued expenses		1,512			947
Net cash provided by operating activities		4,629			2,948
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and principal payments of securities available for sale		6,656			21,906
Proceeds from sale of investment securities available for sale		2,010			7,867
Purchase of securities available for sale		(15,002	)		(5,521	)
Proceeds from maturities and principal payments of securities held to maturity		271			453
Purchase of securities held to maturity		-			(1,340	)
Net increase in loans		(923	)		(18,066	)
Purchase of premises and equipment		(757	)		(137	)
Purchase of other real estate owned		-			(60	)
Deferred earn out payment, net of stock issued		(2,400	)		-
Net cash (used in) provided by investing activities		(10,145	)		5,102
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand, NOW, money market and savings deposits		4,811			(18,432	)
Net increase in certificates of deposit		15,299			15,206
Net increase in securities sold under agreement to repurchase		1,225			6,296
Proceeds from issuance of common stock		10			189
Dividends paid		(1,048	)		(974	)
Net cash provided by financing activities		20,297			2,285
NET INCREASE IN CASH AND CASH EQUIVALENTS		14,781			10,335
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		43,551			46,731
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	58,332		$	57,066

See accompanying notes to Condensed Consolidated Financial Statements

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Shore Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

For the Three Months Ended March 31, 2005 and 2004

(Unaudited)

1)

The consolidated financial statements include the accounts of Shore Bancshares, Inc. (the “Company”) and its subsidiaries with all significant intercompany transactions eliminated. The consolidated financial statements conform to accounting principles generally accepted in the United States of America and to prevailing practices within the banking industry. The accompanying interim financial statements are unaudited; however, in the opinion of management all adjustments necessary to present fairly the financial position at March 31, 2005, the results of operations for the three-month periods ended March 31, 2005 and 2004, and cash flows for the three-month periods ended March 31, 2005 and 2004, have been included. All such adjustments are of a normal recurring nature. The amounts as of December 31, 2004 were derived from audited financial statements. The results of operations for the three-month period ended March 31, 2005 are not necessarily indicative of the results to be expected for the full year. This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

2)

Year to date basic earnings per share is derived by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. The diluted earnings per share calculation is derived by dividing net income by the weighted average number of shares outstanding during the period, adjusted for the dilutive effect of outstanding options and warrants. Information relating to the calculation of earnings per share is summarized as follows:

	Three Months Ended March 31,
	2005		2004
	(in thousands, except per share data)
Net Income	$	3,106	$	2,516
Weighted Average Shares Outstanding - Basic		5,520		5,408
Dilutive securities		50		66
Weighted Average Shares Outstanding - Dilutive		5,570		5,474
Net income per common share - Basic	$	0.56	$	0.47
Net income per common share - Dilutive	$	0.56	$	0.46

There were no antidilutive stock options excluded from the calculation of earnings per share for the three months ended March 31, 2005 and 2004.

3) Under the provisions of Statements of Financial Accounting Standards (SFAS) Nos. 114 and 118, "Accounting by Creditors for Impairment of a Loan," a loan is considered impaired if it is probable that the Company will not collect all principal and interest payments according to the loan’s contracted terms. The impairment of a loan is measured at the present value of expected future cash flows using the loan’s effective interest rate, or at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. Interest income generally is not recognized on specific impaired loans unless the likelihood of further loss is remote. Interest payments received on such loans are applied as a reduction of the loans principal balance. Interest income on other nonaccrual loans is recognized only to the extent of interest payments received.

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Information with respect to impaired loans and the related valuation allowance is shown below:

	March 31,		December 31,
(Dollars in thousands)	2005		2004
Impaired loans with valuation allowance	$	1,116	$	1,246
Impaired loans with no valuation allowance		-		223
Total impaired loans	$	1,116	$	1,469
Allowance for credit losses applicable to impaired loans	$	456	$	442
Allowance for credit losses applicable to other than impaired loans		4,302		4,250
Total allowance for credit losses	$	4,758	$	4,692
Interest income on impaired loans recorded on the cash basis	$	98	$	11

	Impaired loans do not include groups of smaller balance homogenous loans such as residential mortgage and consumer installment loans that are evaluated collectively for impairment. Reserves for probable credit losses related to these loans are based upon historical loss ratios and are included in the allowance for credit losses.
4)	In the normal course of business, to meet the financial needs of its customers, the Company’s bank subsidiaries are parties to financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit and standby letters of credit. At March 31, 2005, total commitments to extend credit were approximately $165,957,000. Outstanding letters of credit were approximately $20,093,000 at March 31, 2005.
5)	The Company has adopted the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-based Compensation” and related interpretations in accounting for its stock compensation plans. No compensation expense related to the plans was recorded during the three-month periods ended March 31, 2005 and 2004. If the Company had elected to recognize compensation cost based on fair value at the vesting dates for awards under the plans consistent with the method prescribed by SFAS No. 123, net income and earnings per share would have been changed to the pro forma amounts as follows (dollars in thousands, except per share data):

	Three-month period Ended March 31,
	2005			2004
Net income:
As reported	$	3,106		$	2,516
Less pro forma stock-based compensation expense determined under the fair value method, net of related tax effects		(29	)		(32	)
Pro forma net income	$	3,077		$	2,484
Basic net income per share:
As reported	$	.56		$	.47
Pro forma		.56			.46
Diluted earnings per share
As reported		.56		$	.46
Pro forma		.55			.45

6) The Company operates two primary businesses: Community Banking and Insurance Products and Services. Through the Community Banking business, the Company provides services to consumers and small businesses on the Eastern Shore of Maryland and Delaware through its 14-branch network. Community banking activities include small business services, retail brokerage, and consumer banking products and services. Loan products available to consumers include mortgage, home equity, automobile, marine, and installment loans, credit cards and other secured and unsecured personal lines of credit. Small business lending includes commercial mortgages, real estate development loans, equipment and operating loans, as well as secured and unsecured lines of credit, credit cards, accounts receivable financing arrangements, and merchant card services.

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Through the Insurance Products and Services business, the Company provides a full range of insurance products and services to businesses and consumers in the Company’s market areas. Products include property and casualty, life, marine, individual health and long-term care insurance. Pension and profit sharing plans and retirement plans for executives and employees are available to suit the needs of individual businesses.

Selected financial information by line of business for the three months ended March 31 is included in the following table:

	Community			Insurance products			Parent			Intersegment			Consolidated
(In thousands)	banking			and services			Company(a)			Transactions			Total
2005
Net Interest income	$	8,276		$	-		$	1		$	-		$	8,277
Provision for credit losses		180			-			-			-			180
Net interest income after provision		8,096			-			1			-			8,097
Noninterest income		1,055			2,150			704			(747	)		3,162
Noninterest expense		4,725			1,630			685			(747	)		6,293
Income before taxes		4,426			520			20			-			4,966
Income tax expense		1,647			206			7			-			1,860
Net income	$	2,779		$	314		$	13		$	-		$	3,106
Intersegment revenue(expense)	$	(648	)	$	(32	)	$	680		$	-		$	-
Average assets	$	785,264		$	7,713		$	3,514		$	-		$	796,491
2004
Net Interest income	$	6,421		$	-		$	1		$	-		$	6,422
Provision for credit losses		105			-			-			-			105
Net interest income after provision		6,316			-			1			-			6,317
Noninterest income		856			1,998			514			(490	)		2,878
Noninterest expense		3,817			1,335			551			(490	)		5,213
Income before taxes		3,355			663			(36	)		-			3,982
Income tax expense		1,224			256			(14	)		-			1,466
Net income	$	2,131		$	407			(22	)		-		$	2,516
Intersegment revenue(expense)	$	(440	)	$	(50	)	$	490		$	-		$	-
Average assets	$	692,476		$	7,492		$	3,392		$	-		$	703,360

(a)  Amount included in Parent Company relates to services provided to subsidiaries by the Company and rental income.

7) On April 1, 2004, the Company completed its merger with Midstate Bancorp, Inc., a Delaware bank holding company (“Midstate Bancorp”). Pursuant to the merger agreement, each share of common stock of Midstate Bancorp was converted into the right to receive (i) $31.00 in cash, plus (ii) 0.8732 shares of the common stock of the Corporation, with cash being paid in lieu of fractional shares at the rate of $33.83 per share. The Company paid $2,953,710 in cash and issued 82,786 shares of common stock to stockholders of Midstate Bancorp in connection with the Merger. The Company recorded approximately $2,636,000 of Goodwill and $968,000 of other intangible assets as a result of the acquisition.

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Information

Portions of this Quarterly Report on Form 10-Q contain forward-looking statements within the meaning of The Private Securities

Litigation Reform Act of 1995. Statements that are not historical in nature, including statements that include the words “anticipate,” “estimate,” “should,” expect,” “believe,” “intend,” and similar expressions, are expressions about the Company's confidence,

policies, and strategies, the adequacy of capital levels, and liquidity and are not guarantees of future performance. Such forward-looking statements involve certain risks and uncertainties, including economic conditions, competition in the geographic and business areas in which the Company operates, inflation, fluctuations in interest rates, legislation, and governmental regulation. These risks and uncertainties are described in more detail in Exhibit 99.1 “Risk Factors” to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. Actual results may differ materially from such forward-looking statements, and the Company assumes no obligation to update forward-looking statements at any time.

Introduction

The following discussion and analysis is intended as a review of significant factors affecting the financial condition and results of operations of Shore Bancshares, Inc. and its consolidated subsidiaries for the periods indicated. This discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and related notes presented in this report, as well as the audited consolidated financial statements and related notes included in the Annual Report of Shore Bancshares, Inc. on Form 10-K for the year ended December 31, 2004. Unless the context clearly suggests otherwise, references to the Company in this report are to Shore Bancshares, Inc. and its consolidated subsidiaries.

Shore Bancshares, Inc. is the largest independent financial holding company located on the Eastern Shore of Maryland. It is the parent company of The Talbot Bank of Easton, Maryland located in Easton, Maryland (“Talbot Bank”), The Centreville National Bank of Maryland located in Centreville, Maryland (“Centreville National Bank”) and The Felton Bank, located in Felton, Delaware (“Felton Bank”) (collectively, the “Banks”). The Banks operate 14 full service branches in Kent, Queen Anne’s, Talbot, Caroline and Dorchester Counties in Maryland and Kent County, Delaware. The Company offers a full range of insurance products and services to its customers through The Avon-Dixon Agency, LLC, Elliott Wilson Insurance, LLC, and Mubell Finance, LLC (collectively, the “Insurance Agency”) and investment advisory services through Wye Financial Services, LLC, all of which are wholly-owned subsidiaries of the Company. The shares of the Company’s common stock are listed on the Nasdaq SmallCap Market under the symbol “SHBI.”

The Company maintains an Internet site at www.shbi.net on which it makes available free of charge its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to the foregoing as soon as reasonably practicable after these reports are electronically filed with, or furnished to, the Securities and Exchange Commission.

Critical Accounting Policies

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The financial information contained within the financial statements is, to a significant extent, financial information contained that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning of income, recognizing an expense, recovering an asset or relieving a liability.

The Company believes its most critical accounting policy relates to the allowance for credit losses. The allowance for credit losses is an estimate of the losses that may be sustained in the loan portfolio. The allowance is based on two basic principles of accounting: (i) SFAS No. 5, Accounting for Contingencies, which requires that losses be accrued when they are probable of occurring and estimable, and (ii) SFAS No. 114, Accounting by Creditors for Impairment of a Loan, which requires that losses be accrued based on the differences between the loan balance and the value of collateral, present value of future cash flows or values that are observable in the secondary market. Management uses many factors, including economic conditions and trends, the value and adequacy of collateral, the volume and mix of the loan portfolio, and internal loan processes of the Company in determining the inherent loss that may be present in the Company’s loan portfolio. Actual losses could differ significantly from Management’s estimates. In addition, GAAP itself may change from one previously acceptable method to another. Although the economics of transactions would be the same, the timing of events that would impact the transactions could change.

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Management has significant discretion in making the adjustments inherent in the determination of the provision and allowance for credit losses, including in connection with the valuation of collateral, the borrower’s prospects of repayment, and in establishing allowance factors on the formula allowance and unallocated allowance components of the allowance. The establishment of allowance factors is a continuing exercise, based on Management’s continuing assessment of the totality of all factors, including, but not limited to, as delinquencies, loss history, trends in volume and terms of loans, effects of changes in lending policy, the experience and depth of Management, national and local economic trends, concentrations of credit, quality of loan review system and the effect of external factors such as competition and regulatory requirements, and their impact on the portfolio, and allowance factors may change from period to period, resulting in an increase or decrease in the amount of the provision or allowance, based upon the same volume and classification of loans. Changes in allowance factors will have a direct impact on the amount of the provision, and a corresponding effect on net income. Errors in Management’s perception and assessment of these factors and their impact on the portfolio could result in the allowance not being adequate to cover losses in the portfolio, and may result in additional provisions or charge-offs.

Three basic components comprise the Company’s allowance for credit losses: (i) a specific allowance; (ii) a formula allowance; and (iii) a nonspecific allowance. Each component is determined based on estimates that can and do change when the actual events occur. The specific allowance is used to individually allocate an allowance to loans identified as impaired. An impaired loan may show deficiencies in the borrower’s overall financial condition, payment history, support available from financial guarantors and/or the fair market value of collateral. When a loan is identified as impaired, a specific allowance is established based on the Company’s assessment of the loss that may be associated with the individual loan. The formula allowance is used to estimate the loss on internally risk rated loans, exclusive of those identified as impaired. Loans identified as special mention, substandard, doubtful and loss, as well as impaired, are segregated from performing loans. Remaining loans are then grouped by type (commercial, commercial real estate, construction, home equity or consumer). Each loan type is assigned an allowance factor based on Management’s estimate of the risk, complexity and size of individual loans within a particular category. Classified loans are assigned higher allowance factors than non-rated loans due to Management’s concerns regarding collectibility or Management’s knowledge of particular elements regarding the borrower. Allowance factors grow with the worsening of the internal risk rating. The nonspecific formula is used to estimate the loss of non-classified loans stemming from more global factors such as delinquencies, loss history, trends in volume and terms of loans, effects of changes in lending policy, the experience and depth of Management, national and local economic trends, concentrations of credit, quality of loan review system and the effect of external factors such as competition and regulatory requirements. The nonspecific allowance captures losses whose impact on the portfolio have occurred but have yet to be recognized in either the formula or specific allowance.

OVERVIEW

Net income for the quarter ended March 31, 2005 was $3,106,000, or diluted earnings per share of $.56, compared to $2,516,000, or diluted earnings per share of $.46, for the first quarter of 2004. Annualized return on average assets was 1.56% for the first three months of 2005, compared to 1.43% for the same period in 2004. Annualized return on average stockholders’ equity was 13.29% and 11.87% for the three months ended March 31, 2005 and 2004, respectively.

RESULTS OF OPERATIONS

Net Interest Income

Net interest income for the quarter ended March 31, 2005 was $8,277,000, compared to $6,422,000 for the same period last year, representing a 28.9% increase. This increase is attributable primarily to increases in earning assets, mostly loans, and increases in yields on earning assets for the period, which resulted in increased interest income. Total interest income increased by $2,257,000 for the three-month period ended March 31, 2005 when compared to the same period last year. Approximately $966,000 of the increase in the Company’s total interest income represents interest income of Felton Bank, which the Company acquired on April 1, 2004.

The Company’s net interest margin was 4.51% for the three months ended March 31, 2005, which is 56 basis points higher than one year ago. The Company continued to increase its volume of earning assets, which averaged $741,417,000 for the three months ended March 31, 2005, compared to $659,929,000 for the same period in 2004. Approximately $60,699,000 of the growth resulted from the acquisition of Felton Bank. Average loans totaled $593,013,000 for the three-month period ended March 31, 2005, a $107,583,000 increase over the same period in 2004. The yield on earning assets increased 64 basis points from 5.24% to 5.88% for the three-month period ended March 31, 2005 when compared to the same period in 2004.

The overall yield on loans for the three months ended March 31, 2005 was 6.48%, compared to 5.90% for the same period in 2004. The yield on investment securities for the first quarter of 2005 declined to 3.74% from 3.77% for the same period in 2004, and the average balance of investment securities for the first quarter of 2005 decreased by $34,243,000 to $117,138,000 when compared to the first quarter of 2004.

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Total interest expense for the three months ended March 31, 2005 was $2,530,000, an increase of $402,000 or 18.9% over the three-month period ended March 31, 2004. An increased volume of interest bearing deposits is the primary reason for the increased expense. The Felton Bank contributed $48,296,000 toward the increased volume of interest bearing liabilities, generating approximately $239,000 in interest expense for the three-month period ended March 31, 2005. Rates paid for certificates of deposit and short-term borrowings increased as a result of higher short-term interest rates and increased competition for deposits. The average balance of interest bearing deposits increased by $58,486,000 for the three months ended March 31, 2005 when compared to the same period in 2004. The overall rate paid for interest bearing deposits increased 8 basis points to 1.68% as a result of higher rates paid for certificates of deposit. For the three months ended March 31, 2005, the average balance of certificates of deposits, including those $100,000 or more, increased by $24,963,000 when compared to the same period last year, and the average rate paid for those certificates of deposit increased 10 basis points to 2.93%. Comparing the first quarter of 2005 to the same period in 2004, interest bearing demand deposits increased by approximately $7,883,000 and money management and savings deposits increased by $25,640,000. In addition to the volume of deposits attributable to the Felton Bank, the Company’s growth was achieved through normal operations.

Loans comprised 78% and 73.6% of total average earning assets at March 31, 2005 and 2004, respectively.

Analysis of Interest Rates and Interest Differentials.

The following table presents the distribution of the average consolidated balance sheets, interest income/expense, and annualized yields earned and rates paid through the first quarter of 2005:

	March 31, 2005						March 31, 2004
	Average		Income		Yield		Average		Income		Yield
(Dollars in thousands)	Balance		Expense		Rate		Balance		Expense		Rate
Earning Assets
Investment securities	$	117,138	$	1,094		3.74%	$	151,381	$	1,427		3.77%
Loans		593,013		9,608		6.48%		485,430		7,157		5.90%
Interest bearing deposits		988		5		2.03%		9,375		21		0.88%
Federal funds sold		30,278		184		2.43%		13,743		34		0.98%
Total earning assets		741,417		10,891		5.88%		659,929		8,639		5.24%
Noninterest earning assets		55,074						43,431
Total Assets	$	796,491					$	703,360
Interest bearing liabilities
Interest bearing deposits	$	566,086		2,379		1.68%	$	507,600		2,027		1.60%
Short term borrowing		23,928		88		1.48%		22,445		38		0.67%
Long term debt		5,000		63		5.03%		5,000		63		5.03%
Total interest bearing liabilities		595,014		2,530		1.70%		535,045		2,128		1.59%
Noninterest bearing liabilities		108,013						83,518
Stockholders’ equity		93,464						84,797
Total liabilities and stockholders’ equity	$	796,491					$	703,360
Net interest spread			$	8,361		4.18%			$	6,511		3.65%
Net interest margin						4.51%						3.95%

(1) All amounts are reported on a tax equivalent basis computed using the statutory federal income tax rate exclusive of the

alternative minimum tax rate of 35% and nondeductible interest expense.

(2) Average loan balances include nonaccrual loans.

(3) Interest income on loans includes amortized loan fees, net of costs, for each loan category and yield calculations are stated to include all.

Noninterest Income

Noninterest income for the three months ended March 31, 2005 increased by $284,000 when compared to the same period last year to $3,162,000. Approximately $80,000 of this increase relates to noninterest income of Felton Bank and $175,000 relates to an increase in insurance agency commissions. The Company recognized gains on sales of securities of $58,000 during the first three months of 2005, compared to a gain of $16,000 for the same period in 2004.

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Noninterest Expense

Total noninterest expense for the first quarter of 2005 was $6,293,000, an increase of $1,080,000 when compared to the same period in 2004. The operation of Felton Bank represented $504,000 of this increase, with the remainder attributable to the overall growth of the Company. For the three months ended March 31, 2005, salaries and benefits expense increased by $861,000, occupancy expense increased by $66,000 and other noninterest expense increased by $153,000, when compared to the same period in 2004.

Income Taxes

The effective tax rate for the three months ended March 31, 2005 was 37.5%, compared to 36.8% for the same period last year. Management believes that there have been no changes in tax law or to the Company’s tax structure that are likely to have a future material impact on the Company’s effective tax rate.

ANALYSIS OF FINANCIAL CONDITION

Loans

Loans, net of unearned income, totaled $596,267,000 at March 31, 2005, an increase of $809,000 since December 31, 2004. Average loans, net of unearned income, increased by $107,583,000 or 22.2% since December 31, 2004 to $593,013,000, compared to an increase of $38,179,000 or 8.5% for the same period last year.

Allowance for Credit Losses

The Company has established an allowance for credit losses, which is increased by provisions charged against earnings and recoveries of previously charged-off debts. The allowance is decreased by current period charge-off of uncollectible debts. Management evaluates the adequacy of the allowance for credit losses on a quarterly basis and adjusts the provision for credit losses based upon this analysis. The evaluation of the adequacy of the allowance for credit losses is based on a risk rating system of individual loans, as well as on a collective evaluation of smaller balance homogenous loans based on factors such as past credit loss experience, local economic trends, nonperforming and problem loans, and other factors which may impact collectibility. A loan is placed on nonaccrual when it is specifically determined to be impaired and principal and interest is delinquent for 90 days or more. Please refer to the discussion above under the caption “Critical Accounting Policies” for an overview of the underlying methodology Management employs on a quarterly basis to maintain the allowance.

The provision for credit losses for the three-month period ended March 31, 2005 was $180,000 compared to $105,000 for the same period in 2004. Despite a decline in nonaccrual loans, Management did not decrease the specific allowance associated with those loans, based on its evaluation of each borrower’s ability to repay and the value of the underlying loan collateral. The increased provision is the result of increases in both the formula allowance and nonspecific allowance components. Growth of the loan portfolio and Management’s assessment of factors used in calculating the nonspecific allowance contributed to the increased provision. The Company continues to maintain strong underwriting guidelines, and Management believes that the local economy remains stable and that collateral values have increased as a result of the strength of the local real estate economy. Each of these factors has had a positive effect on the quality of the Company’s loan portfolio. The Company’s historical charge-off ratios are much lower than those of similarly sized institutions according to the most recent FDIC quarterly banking profile. Net charge-offs were $114,000 for the three-month period ended March 31, 2005, compared to $225,000 for the same period last year. Since December 31, 2004, nonaccrual loans have declined by $353,000 to $1,116,000. Loans past due 90 days and still accruing decreased by $1,823,000 since December 31, 2004, totaling $1,146,000 at March 31, 2005. The decline in loans past due is primarily attributable to a real estate loan which was paid in full during the first quarter of 2005. The Company’s ratio of nonperforming assets, including other real estate owned, remains low. The allowance for credit losses as a percentage of average loans was .80% at March 31, 2005, compared to .81% at March 31, 2004. Based on Management’s quarterly evaluation of the adequacy of the allowance for credit losses, it believes that the allowance for credit losses and the related provision are adequate at March 31, 2005.

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The following table presents a summary of the activity in the allowance for credit losses:

	Three months Ended March 31,
(Dollars in thousands)	2005			2004
Allowance balance - beginning of year	$	4,692		$	4,060
Charge-offs:
Commercial and other		94			271
Real estate		-			-
Consumer		35			14
Totals		129			285
Recoveries:
Commercial		6			9
Real estate		1			19
Consumer		8			32
Totals		15			60
Net charge-offs		114			225
Provision for credit losses		180			105
Allowance balance-ending	$	4,758		$	3,940
Average loans outstanding during period	$	593,013		$	485,430
Net charge-offs (annualized) as a percentage of average loans outstanding during period		.08	%		.19	%
Allowance for credit losses at period end as a percentage of average loans		.80	%		.81	%

Because the Company’s loans are predominately secured by real estate, weaknesses in the local real estate market may have a material adverse effect on collateral values. The Company has a concentration of construction and land development loans. At March 31, 2005, the balance of such loans was $109,836,000 or 18.4% of total outstanding loans, compared to $97,021,000 or 16.3% at December 31, 2004. The Company does not engage in foreign lending activities.

Nonperforming Assets

The following table summarizes past due and nonperforming assets of the Company (in thousands):

	March 31,		December 31,
Nonperforming Assets:	2005		2004
Nonaccrual loans	$	1,116	$	1,469
Other real estate owned		391		391
		1,507		1,860
Past due loans still accruing		1,146		2,969
Total nonperforming and past due loans	$	2,653	$	4,829

Investment Securities

Investment securities increased by $4,794,000 during the three-month period ended March 31, 2005 when compared to December 31, 2004 to $123,890,000. The yields on bonds purchased during the first quarter of 2005 are similar to the yields on bonds that either matured or were called during this period. The average balance of investment securities was $117,138,000 for the three-months ended March 31, 2005, compared to $151,381,000 for the same period in 2004. The tax equivalent yields on investment securities were 3.74% and 3.77% for the three-month periods ended March 31, 2005 and 2004, respectively.

Deposits

Total deposits at March 31, 2005 were $678,782,000, compared to $658,672,000 at December 31, 2004. Certificates of deposit of $100,000 or more increased by $7,495,000 during the first quarter of 2005, primarily as a result of increased deposits of one municipal depositor. Since December 31, 2004, money market and savings deposits have increased by $7,173,000 and other certificates of deposit have increased by $7,804,000.

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Borrowed Funds

Short-term borrowings at March 31, 2005 and 2004 consisted of securities sold under agreements to repurchase. The Company also had a convertible advance from the Federal Home Loan Bank of Atlanta in the amount of $5,000,000 at March 31, 2005 and 2004. The advance is due in March 2006.

Liquidity and Capital Resources

The Company derives liquidity through increased customer deposits, maturities in the investment portfolio, loan repayments and income from earning assets. To the extent that deposits are not adequate to fund customer loan demand, liquidity needs can be met in the short-term funds markets through arrangements with correspondent banks. Talbot Bank and Centreville National Bank are also members of the Federal Home Loan Bank of Atlanta to which they have pledged collateral sufficient to permit additional borrowing of up to approximately $59 million at March 31, 2005. Management is not aware of any trends or demands, commitments, events or uncertainties that are likely to materially affect the Company’s future ability to maintain liquidity at satisfactory levels.

Total stockholders’ equity was $94.6 million at March 31, 2005, which represents an increase of 1.8% since December 31, 2004. Accumulated other comprehensive loss, which consists solely of net unrealized losses on investment securities available for sale, increased by $803,000 during the first quarter of 2005, resulting in accumulated other comprehensive loss of $1,081,000 at March 31, 2005.

Bank regulatory agencies have adopted various capital standards for financial institutions, including risk-based capital standards. The primary objectives of the risk-based capital framework are to provide a more consistent system for comparing capital positions of financial institutions and to take into account the different risks among financial institutions’ assets and off-balance sheet items.

Risk-based capital standards have been supplemented with requirements for a minimum Tier 1 capital to assets ratio (leverage ratio). In addition, regulatory agencies consider the published capital levels as minimum levels and may require a financial institution to maintain capital at higher levels.

A comparison of the Company’s capital ratios as of March 31, 2005 to the minimum regulatory requirements is presented below:

		Minimum
	Actual	Requirements
Tier 1 risk-based capital	12.97%	4.00%
Total risk-based capital	13.75%	8.00%
Leverage ratio	10.47%	4.00%

Item 3.Quantitative and Qualitative Disclosures about Market Risk.

The Company’s principal market risk exposure is to fluctuating interest rates. The Company utilizes a simulation model to quantify the effect that hypothetical plus or minus 200 and 100 basis point changes in rates would have on net interest income and the fair value of capital. The model takes into consideration the effect of call features of investments as well as repayments of loans in periods of declining rates. When actual changes in interest rates occur, the changes in interest earning assets and interest bearing liabilities may differ from the assumptions used in the model. As of March 31, 2005 and December 31, 2004, the model produced the following sensitivity profile for net interest income and the fair value capital:

	Immediate Change in Rates
	+200	+100	-100	-200	Policy
	Basis Points	Basis Points	Basis Points	Basis Points	Limit
March 31, 2005
% Change in Net Interest Income	9.93%	5.55%	(6.26)%	(14.02)%	+ 25%
% Change in Fair Value of Capital	4.10%	2.72%	(4.26)%	(10.73)%	+ 15%
December 31, 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%

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Further information regarding market risk and the Company’s objectives and strategies in managing market risk is set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Market Risk Management”.

Item 4.Controls and Procedures.

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports filed under the Securities Exchange Act of 1934 with the SEC, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in those rules and forms, and that such information is accumulated and communicated to Management, including the Chief Executive Officer (“CEO”) and the Principal Accounting Officer (“PAO”), as appropriate, to allow for timely decisions regarding required disclosure. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

An evaluation of the effectiveness of these disclosure controls as of March 31, 2005 was carried out under the supervision and with the participation of Management, including the CEO and the PAO. Based on that evaluation, the Company’s management, including the CEO and the PAO, has concluded that the Company’s disclosure controls and procedures are effective.

During the first quarter of 2005, there was no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II - OTHER INFORMATION

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

On February 25, 2005, the Company issued 11,448 unregistered shares of its common stock, par value $.01 per share (the “Shares”), to The Avon-Dixon Agency, Inc. (“ADA”) as part of the deferred payment (earn-out) required by that certain Asset Purchase Agreement dated December 21, 2001 between the Company and ADA (the “Agreement”). Under the Agreement, the Company purchased substantially all of the assets of ADA and its subsidiaries on May 1, 2002 and agreed to make the deferred payment to ADA, the exact amount of which was to be based on the performance of the purchased assets through December 31, 2004. The Company was required to pay 85.71% of the deferred payment in cash and 14.29% in shares of the Company’s common stock. Based on the performance of the purchased assets, the deferred payment totaled $2,800,000. The Shares represented $400,120 of the deferred payment, based on a per share price of $34.95 calculated by reference to the average of the daily last reported trades in shares of the Company’s common tock during the 60 calendar day period ending on February 14, 2005. The deferred payment was allocated entirely to goodwill. The offer and sale of the Shares to ADA were exempt from registration under Section 4(2) of the Securities Act of 1933, as amended.

Item 6.Exhibits.

3.1	Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed on December 14, 2000).
3.2	Amended and Restated By-Laws (incorporated by reference to Exhibit 3.2 of the Company’s Form 8-K filed on December 14, 2000).
10.1	Form of Employment Agreement with W. Moorhead Vermilye (incorporated by reference to Appendix XIII of Exhibit 2.1 of the Company’s Form 8-K filed on July 31, 2000).

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10.2	Form of Employment Agreement with Daniel T. Cannon (incorporated by reference to Appendix XIII of Exhibit 2.1 of the Company’s Form 8-K filed on July 31, 2000).
10.3	Form of Employment Agreement between The Avon-Dixon Agency, LLC and Kevin P. LaTulip (incorporated by reference to Exhibit 10.3 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2002).
10.4	Form of Executive Supplemental Retirement Plan Agreement between The Centreville National Bank of Maryland and Daniel T. Cannon (incorporated by reference to Exhibit 10.4 of the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2003).
10.5	Form of Life Insurance Endorsement Method Split Dollar Plan Agreement between The Centreville National Bank of Maryland and Daniel T. Cannon (incorporated by reference to Exhibit 10.5 of the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2003).
10.6	Employment Agreement between The Avon-Dixon Agency, LLC and Steven Fulwood (incorporated by reference to Exhibit 10.6 of the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2004).
10.7	Employment Agreement between The Felton Bank and Thomas H. Evans (incorporated by reference to Exhibit 10.7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2004).
10.8	1998 Employee Stock Purchase Plan, as amended (incorporated by reference to Appendix A of the Company’s definitive Proxy Statement on Schedule 14A for the 2003 Annual Meeting of Stockholders filed on March 31, 2003).
10.9	1998 Stock Option Plan (incorporated by reference to Exhibit 10 of the Company’s Registration Statement on Form S-8 filed with the SEC on September 25, 1998 (Registration No. 333-64319)).
10.10	Talbot Bancshares, Inc. Employee Stock Option Plan (incorporated by reference to Exhibit 10 of the Company’s Registration Statement on Form S-8 filed May 4, 2001 (Registration No. 333-60214)).
10.11	Separation Agreement and General Release between The Avon-Dixon Agency, LLC and Steven Fulwood (filed herewith).
31.1	Certifications of the CEO pursuant to Section 302 of the Sarbanes-Oxley Act (filed herewith).
31.2	Certifications of the PAO pursuant to Section 302 of the Sarbanes-Oxley Act (filed herewith).
32.1	Certification of the CEO pursuant to 18 U.S.C. § 1350 (furnished herewith).
32.2	Certification of the PAO pursuant to 18 U.S.C. § 1350 (furnished herewith).

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Shore Bancshares, Inc.
Date: May 9, 2005	By:	/s/ W. Moorhead Vermilye
		W. Moorhead Vermilye
		President and Chief Executive Officer

Date: May 9, 2005	By:	/s/ Susan E. Leaverton
		Susan E. Leaverton, CPA
		Treasurer and Principal Accounting Officer

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EXHIBIT INDEX

Exhibit
Number	Description
3.1	Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed on December 14, 2000).
3.2	Amended and Restated By-Laws (incorporated by reference to Exhibit 3.2 of the Company’s Form 8-K filed on December 14, 2000).
10.1	Form of Employment Agreement with W. Moorhead Vermilye (incorporated by reference to Appendix XIII of Exhibit 2.1 of the Company’s Form 8-K filed on July 31, 2000).
10.2	Form of Employment Agreement with Daniel T. Cannon (incorporated by reference to Appendix XIII of Exhibit 2.1 of the Company’s Form 8-K filed on July 31, 2000).
10.3	Form of Employment Agreement between The Avon-Dixon Agency, LLC and Kevin P. LaTulip (incorporated by reference to Exhibit 10.3 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2002).
10.4	Form of Executive Supplemental Retirement Plan Agreement between The Centreville National Bank of Maryland and Daniel T. Cannon (incorporated by reference to Exhibit 10.4 of the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2003).
10.5	Form of Life Insurance Endorsement Method Split Dollar Plan Agreement between The Centreville National Bank of Maryland and Daniel T. Cannon (incorporated by reference to Exhibit 10.5 of the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2003).
10.6	Employment Agreement between The Avon-Dixon Agency, LLC and Steven Fulwood (incorporated by reference to Exhibit 10.6 of the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2004).
10.7	Employment Agreement between The Felton Bank and Thomas H. Evans (incorporated by reference to Exhibit 10.7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2004).
10.8	1998 Employee Stock Purchase Plan, as amended (incorporated by reference to Appendix A of the Company’s definitive Proxy Statement on Schedule 14A for the 2003 Annual Meeting of Stockholders filed on March 31, 2003).
10.9	1998 Stock Option Plan (incorporated by reference to Exhibit 10 of the Company’s Registration Statement on Form S-8 filed with the SEC on September 25, 1998 (Registration No. 333-64319)).
10.10	Talbot Bancshares, Inc. Employee Stock Option Plan (incorporated by reference to Exhibit 10 of the Company’s Registration Statement on Form S-8 filed May 4, 2001 (Registration No. 333-60214)).
10.11	Separation Agreement and General Release between The Avon-Dixon Agency, LLC and Steven Fulwood (filed herewith).
31.1	Certifications of the CEO pursuant to Section 302 of the Sarbanes-Oxley Act (filed herewith).
31.2	Certifications of the PAO pursuant to Section 302 of the Sarbanes-Oxley Act (filed herewith).
32.1	Certification of the CEO pursuant to 18 U.S.C. § 1350 (furnished herewith).
32.2	Certification of the PAO pursuant to 18 U.S.C. § 1350 (furnished herewith).

EX-10.11

EXHIBIT 10.11

SEVERANCE AGREEMENT AND GENERAL RELEASE

SEVERANCE AGREEMENT AND GENERAL RELEASE ("Agreement") made and executed as of March 21, 2005 by and between Avon Dixon Agency, LLC and its corporate parent, affiliates, and subsidiaries (the "Company") and Steven Fulwood ("Employee") residing at 8885 High Banks Drive, Easton, Maryland 21601.

W I T N E S S E T H

WHEREAS, Employee was employed by the Company pursuant to an Employment Agreement dated as of April 1, 2004 (the "Employment Agreement") through March 8, 2005("Termination Date"); and

WHEREAS, the Company terminated Employee's employment on March 8, 2005; and

WHEREAS, the parties desire to settle certain differences between them, including, but not limited to, any differences that might arise or be related to the Employment Agreement, the Employee's employment and the termination thereof.

NOW, THEREFORE, in consideration of the premises and mutual promises herein contained, it is agreed as follows:

1. TERMINATION OF EMPLOYMENT AGREEMENT. The parties acknowledge and agree that this Agreement terminates and supercedes all of the provisions of the Employment Agreement. Employee agrees and understands that Employee is not authorized to perform any work for, or to represent himself to others as an Employee of the Company after the Termination Date.

2. EMPLOYEE'S REPRESENTATIONS. The Employee represents that he has not filed any claims, complaints, charges or lawsuits (collectively "Actions") against the Company and any parent, subsidiary and related corporations and divisions of any of them, and the members, owners, stockholders, predecessors, successors, assigns, agents, directors, officers, employees and representatives of any of them with any governmental agency, arbitrator, or any court with respect to his employment or separation from employment, and that he will not do so at any time hereafter; provided, however, this clause shall not limit the Employee from filing a lawsuit for the sole purpose of enforcing his rights under this Agreement.

3. ACKNOWLEDGMENT OF PAYMENT AND RECEIPT. The parties acknowledge that all payments for wages and benefits due to the Employee have been paid by the Company and received by the Employee, and that there are no further obligations of the Company to the Employee.

4. PAYMENTS AND BENEFITS TO EMPLOYEE NOT REQUIRED BY LAW OR CONTRACT. In full settlement of all Claims as hereinafter defined in Section 9.A ("Release of the Company"), and in consideration of the promises contained in this Agreement, the Company shall provide the following to the Employee (hereinafter collectively referred to as "Settlement Benefits"):

A. Provided that Employee is not in breach of his representations, warranties, covenants or obligations under this Agreement: i) a lump sum of $21,100 for unused vacation, subject to withholding for applicable taxes and other amounts, payable on March 31, 2005, subject to Section 12 hereof; and ii) a severance payment in the amount of $35,166.67, which shall be payable to Employee over a period of two months commencing as of the Termination Date, payable, subject to Section 12 hereof, in equal amounts in accordance with the Company's payroll practices, and subject to withholding for applicable taxes and other amounts.

B. All Company medical and life insurance benefits shall terminate as of the date Company’s payment obligations cease pursuant to Section 4.A hereof and Employee shall not be entitled to any benefits hereafter, except as otherwise expressly provided in this Agreement or as otherwise required by law (e.g. COBRA). Nothing contained herein shall be construed to provide Employee with an entitlement to benefits greater than any other Company employee, and Employee acknowledges the right of Company to modify or reduce benefit programs to employees generally from time to time and in its sole discretion. Employee further understands that this Agreement waives any rights of Employee under any incentive, restricted stock, deferred compensation or bonus plan. Nothing contained in this Agreement shall affect any pension rights which Employee has.

C. The Company shall respond to any request for a reference from a prospective employer by providing a neutral reference consisting of only the Employee's dates of employment and position.

5. NO RE-EMPLOYMENT. The Employee acknowledges and agrees that the Company and any of its subsidiaries, affiliates or related companies are under no legal or contractual duty to re-employ, rehire or retain him in any capacity and that he will not apply for re-employment with the Company or any of its subsidiaries, affiliates or related companies in any capacity. Without limiting the generality of the foregoing, Employee will not reapply and the Company and its subsidiaries, affiliates or related companies will have no legal or contractual duty to hire or retain the Employee in any capacity, whether as an employee, consultant, director, independent contractor, distributor, broker, finder or in any other commercial relationship.

6. NO DENIGRATION.

A.The Employee shall not denigrate or defame the Company, its subsidiaries, affiliates and related companies and their respective past, present or future officers, directors, employees or agents, or cause any negative publicity to be disseminated about the Company, its subsidiaries, affiliates and related companies and their respective past, present or future officers, directors, employees or agents and their respective products and services either orally or in writing. Without limiting the generality of the foregoing, Employee shall not, without the Company's prior written consent, in any manner disclose, divulge or discuss his tenure, relationship and performance with the Company and its subsidiaries, affiliates or related companies; provided, that, Employee shall be permitted to disclose the dates of his employment with the Company, his position and responsibilities and, only in connection with interviews for full-time employment, Employee shall be permitted to disclose only facts that the Company has publicly disclosed.

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B.Company agrees it shall not denigrate or defame Employee, or cause any negative publicity to be disseminated about Employee.

7. CONFIDENTIALITY OF AGREEMENT.

A. The Employee shall keep the terms and conditions of this Agreement confidential except as may be required by law, and except that the Employee may discuss this Agreement with his attorney, if any, his accountant, Financial adviser or members of his immediate family residing with him, provided, in all cases, each such person agrees to keep the information confidential and not to disclose it to others. Employee recognizes that his breach of this confidentiality provision would result in a material breach of this Agreement. As it would be difficult to quantify the damages suffered by the Company from such breach, in the event of such breach, the Employee agrees to pay to the Company, as liquidated damages, an amount equal to the payments received hereunder by the Employee.

B. The Company shall keep the terms and conditions of this Agreement confidential except as may be required by law, rule or regulation, including the rules of a national securities exchange, except as is necessary or desirable in connection with the operation of its business or its financial disclosures and except as may be necessary in connection with any legal, administrative or regulatory proceedings.

8. EMPLOYEE'S AGREEMENTS AND REPRESENTATIONS. The Employee's right to receive the Settlement Benefits set forth in Section 4 above are specifically contingent on the following agreements and representations:

A. The Employee agrees that he will not attempt to gain access to the Avon Dixon Agency LLC or any of its insurance affiliates or subsidiaries (collectively “Avon Dixon”) offices or to contact Avon Dixon employees, consultants, directors, shareholders, customers, and other parties that have direct or indirect relationships with Avon Dixon , provided, however, that if the Employee has a bona fide business reason to contact Avon Dixon or any related party, such contact shall be made exclusively through Lloyd L. “Scott” Beatty or his designee. The provisions of this Section 8.A shall not restrict Employee from having contact with Avon Dixon personnel with whom Employee has developed a personal relationship, provided that such contact is purely social, no business directly or indirectly relating to the Company is discussed. The provisions of this Section 8.A shall not restrict Employee from banking with Company or utilizing financial services offered to the general public by Company.

B. The Employee acknowledges and represents that he has no Company property in his possession or control, nor has he disposed of any Company property since the Termination Date.

C. Without limiting the generality of Section 8.B hereof, the Employee represents, warrants and covenants that he has returned all Company credit cards, repaid all bonds, deposits and other amounts previously paid by or posted by the Company for Employee's benefit, and returned all Company property. Subject to Section 12 hereof, the parties hereto agree that Employee's payment obligation to the Company at signing shall be netted against the Company's payment obligation to Employee under Section 4.A hereof from the Termination Date to the date hereof. The Employee further acknowledges that he is no longer eligible to receive any perquisites for his benefit, and that the Company has terminated lease payments made by the Company in respect of any cars used by Employee, including insurance and related car payments. The Employee further represents and warrants that all charges for expense reimbursements submitted by Employee and all charges paid by the Company on Employee's behalf have been for valid and proper Company-related business expenses, and in the event of any breach of this representation, the Company shall have the right, among other things, to set-off the amount of any such improper charges against the Company's payment obligations to Employee hereunder.

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D. The Employee agrees that he will not solicit, encourage or otherwise cause any employee, consultant or customer of the Company to terminate his/her employment or business relationship with Company.

E. The Employee will make himself available at the Company's request as reasonably necessary to assist in transition and ongoing business issues.

F. If Company reasonably believes Employee is not in compliance with this Agreement, the Employee agrees to provide a written certification, upon Company’s request, that he is in compliance with all of his obligations under this Agreement. In the event that such certificate is not provided by the time specified, but not less than five (5) days, the Company shall provide written notice to Employee that such notice is past due, and that such certificate must be provided to the Company no later than 10 days from the original due date. For so long as the Company has not received such certificate, the Company shall be relieved from fulfilling any of its obligations under this Agreement including, without limitation, making any Settlement Benefits available to Employee. In the event that such certificate has not been received by the Company after expiration of the extended time period provided herein, then Employee shall be in default of his obligation hereunder. The Employee further represents and warrants that he has been in such compliance with all of his obligations under this Agreement, including for the period from the Termination Date to and including the date hereof.

9. GENERAL RELEASE.

A.Release of the Company. In consideration of the Settlement Benefits provided hereunder, and the covenants, obligations and undertakings of the Company hereunder, the Employee irrevocably, unconditionally and generally releases, acquits and forever discharges the Company, any related corporation, entity and affiliate of each of the foregoing, and each of its members, owners, stockholders, predecessors, successors, assigns, agents, directors, officers, employees and representatives, and all persons acting by, through, under or in concert with any of them (collectively "Releasees") from any and all claims, charges, complaints, liabilities, obligations, promises, agreements, controversies, damages, actions, causes of action, suits, rights, demands, costs, losses, debts and expenses (including attorneys' fees and costs actually incurred) of any nature whatsoever (collectively, "Claims"), and arising out of or relating to any matter or thing whatsoever including, but not limited to, any and all Claims whatsoever arising from the Employment Agreement and the Employee's employment with and termination from the Company (including without limitation, wrongful discharge and breach of contract), any and all Claims arising from federal, state or local statute or regulation (including without limitation Title VII of the Civil Rights Act of 1964, as amended, Americans with Disabilities Act, Age Discrimination in Employment Act, Family & Medical Leave Act, Fair Labor Standards Act, state and local laws against discrimination, state and local wage and hour and state and local labor laws), and any and all Claims arising under common law, whether in contract or in tort. Excluded from the scope of this Release of the Company are the Company's obligations under this Agreement and the Company's indemnity obligations under the Maryland General Corporation Law and the by-laws of the Company for the benefit of officers and directors, provided that all applicable conditions to such indemnification have been satisfied. The Company shall make available to Employee any director and officer insurance policy coverage that had been maintained during Employee's employment with the Company, provided Employee has satisfied all coverage requirements.

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B.Release of the Employee. In consideration of the covenants, obligations and undertakings of Employee hereunder, the Company irrevocably, unconditionally and generally releases, acquits and forever discharges the Employee from any and all claims, charges, complaints, liabilities, obligations, promises, agreements, controversies, damages, actions, causes of action, suits, rights, demands, costs, losses, debts and expenses (including attorneys’ fees and costs actually incurred) of any nature whatsoever (collectively, “Claims”), and arising out of or relating to any matter or thing whatsoever including, but not limited to, any and all Claims whatsoever arising from the Employment Agreement and the Employee’s employment with the Company, any and all Claims arising from federal, state or local statute or regulation, and any and all Claims arising under common law, whether in contract or in tort. Excluded from the scope of this Release of the Employee are the Employee’s obligations under this Agreement, and Claims related to fraud or criminal malfeasance attributable to Employee discovered after the date of this Agreement.

C. The scope of the release above given is from the beginning of the world through the date of this Agreement and binds the Employee, his, heirs, distributees, successors, assigns, estate and representatives, and the Company, its successors and assigns.

10. COMPLETE AGREEMENT, NO REPRESENTATIONS, NO MODIFICATION. All prior understandings between the parties are merged herein; no representations or promises have been made by either the Company or the Employee to the other unless set forth herein;and any modification or termination of this Agreement must be in writing signed by the party to be charged.

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11. ACKNOWLEDGMENT OF STATUTORY NOTICE. The Employee acknowledges that before execution of this Agreement, he received a copy of this Agreement with a cover letter from the Company advising: (a) that he has the right, and is encouraged, to consult an attorney with regard to this Agreement and (b) that he had twenty-one (21) days to consider the Agreement and (c) that once the Agreement was signed, he could revoke it during the immediate seven (7) days following the signing of this Agreement. Employee acknowledges that he has been represented by [illegible], with respect to the negotiation and execution of this Agreement. The Employee further acknowledges that notwithstanding his right to consider this Agreement for 21 days, if he has signed this Agreement sooner than the expiration of said 21 days, he has done so knowingly and voluntarily, and expressly waives his right to consider this Agreement for the balance of the 21 days.

12. RIGHT TO REVOKE. This Agreement may be revoked by the Employee within seven (7) days of its execution by written notice to the Company. In the event that the Employee exercises his right to revoke this Agreement within such 7-day period, the entire Agreement including, without limitation, the Company's obligation to pay the Settlement Benefits, shall be null and void. The Employee's and the Company's payment obligations to each other at the signing of this Agreement shall be deferred until the expiration of the seven (7) day period referred to herein, and such payments shall be due and payable immediately thereafter, provided that such period has expired and Employee has not exercised such right of revocation.

13.TAX CONSEQUENCES. Employee acknowledges that Company has not made representations or warranties of any kind regarding the tax consequence, if any, to any payments made hereunder.

14.COUNTERPART ORIGINALS. This Agreement may be executed in identical counterpart documents each of which shall be deemed an original, but all of which together shall constitute one and the same agreement. Facsimile signatures shall be deemed acceptable and binding on the parties.

15. NOTICE. Any demand, request or notice (collectively "Notice") served pursuant to this Agreement must be written, and may be served personally, or by certified mail, return receipt requested, on a party at the addresses set forth in the opening paragraph of this Agreement, or such different address a party may designate by Notice. Any Notice served upon the Company must be directed to W. Moorhead Vermilye, 18 E. Dover Street, Easton, Maryland 21601. Copies of Notices to Employee shall be directed to Employee at the address set forth above.

16. NO ADMISSION. This Agreement is entered into by the parties for settlement purposes only and does not constitute an admission of wrongdoing of any kind.

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17. RIGHT OF SET-OFF AND LIQUIDATED DAMAGES. In the event that Employee breaches any representation, warranty, covenant or obligation contained in this Agreement, or in the event that the Company in good faith and in its commercially reasonable judgment believes that either (i) Employee has breached any representation, warranty, covenant or obligation contained in this Agreement, then the Company's obligation to pay or otherwise make any Settlement Benefit available to Employee shall terminate, because it would be difficult to quantify the damages suffered by the Company from such breach or conduct, Employee agrees to pay to the Company, as liquidated damages, an amount equal to the payments received hereunder by the Employee, and the Company's obligations under this Agreement shall terminate but Employee's obligations under this Agreement shall remain in full force and effect. In addition, Employee agrees to pay all reasonable attorney fees incurred by Company in enforcing any provision in this Agreement.

18. SEVERABILITY. In the event that any one or more of the provisions contained in this Agreement shall be declared invalid, void or unenforceable, the remainder of the provisions of this Agreement shall remain in full force and effect, and such invalid, void or unenforceable provision shall be interpreted as closely as possible to the manner in which it was written.

19. APPLICABLE LAW. This Agreement has been negotiated in and shall be deemed executed and delivered within the State of Maryland and is made in contemplation of its interpretation and effect being construed in accordance with the laws of the State of Maryland, applicable to contracts fully executed, delivered and performed in the State of Maryland, and it is expressly agreed that it shall be construed in accordance with the laws of the State of Maryland without giving effect to the principles of its conflicts of laws rules. All litigation arising out of or relating to this Agreement or any of the transactions contemplated hereby shall be brought exclusively in the Federal or State courts of the State of Maryland, County of Talbot, and the parties consent to personal jurisdiction therein, and further consent to service by certified mail, return receipt requested.

20. HEADINGS, ETC. The headings and captions contained in this Agreement are for convenience of reference only and in no way define, limit or describe the scope or intent of this Agreement or in any way affect this Agreement. Unless the context otherwise specifically requires, words importing the singular include the plural and vice-versa. The terms "hereunder", "hereto", "herein" and similar terms relate to this entire Agreement not to any particular paragraph or provision of this Agreement.

21. ENTIRE AGREEMENT. This Agreement, including the terms of the Employment Agreement specifically incorporated herein by reference, contains every obligation and understanding between the parties relating to the subject matter hereof and merges all prior discussions, negotiations and agreements between them. None of the parties shall be bound by any agreements, covenants, conditions, definitions, understandings, warranties or representations other than as expressly provided or referred to herein.

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22. KNOWING AND VOLUNTARY AGREEMENT. This Agreement has been entered into after negotiation and review of its terms and conditions by parties under no compulsion to execute and deliver a disadvantageous agreement. No ambiguity or omission in this Agreement shall be construed or resolved against any party on the ground that this Agreement or any of its provisions was drafted or proposed by that party. Employee acknowledges that he has been represented by counsel in the negotiation of this Agreement.

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IN WITNESS WHEREOF, the parties have made and executed this Agreement on the date first set forth above.

THIS IS A RELEASE AND AN AGREEMENT NOT TO SUE. PLEASE READ BEFORE SIGNING.

WITNESS:	EMPLOYEE
	STEVEN FULWOOD
/s/ W. David Morse	/s/ Steven Fulwood	(SEAL)

	COMPANY
	AVON DIXON AGENCY, LLC
/s/ W. David Morse	/s/ W. Moorhead Vermilye	(SEAL)

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STATE OF MARYLAND:

    ss

COUNTY OF TALBOT:

I HEREBY CERTIFY that on this 21 day of March, 2005 before me, the undersigned Notary Public of the State of Maryland in and for the County of Talbot, personally appeared Steven Fulwood, known to me (or satisfactorily proven) to be the person whose name is subscribed to the within instrument and acknowledged that he executed the same for the purposes therein contained.

IN WITNESS MY Hand and Notarial Seal.

/s/ Penny K. Trice	(SEAL)
Notary Public
My Commission Expires: 11-5-2005

STATE OF MARYLAND:

    ss

COUNTY OF TALBOT:

I HEREBY CERTIFY that on this 21 day of March, 2005 before me, the undersigned Notary Public of the State of Maryland in and for the County of Talbot, personally appeared W. Moorhead Vermilye, known to me (or satisfactorily proven) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged that he/she executed the same for the purposes therein contained.

IN WITNESS MY Hand and Notarial Seal.

/s/ Penny K. Trice	(SEAL)
Notary Public
My Commission Expires: 11-5-2005

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EX-31.1

EXHIBIT 31.1

CERTIFICATIONS

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, W. Moorhead Vermilye, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Shore Bancshares, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statement made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the registrant and have:

a.    Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.    Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.    Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.    Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a.    All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.    Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 9, 2005	By:	/s/ W. Moorhead Vermilye
		W. Moorhead Vermilye
		President/Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATIONS

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Susan E. Leaverton, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Shore Bancshares, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statement made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the registrant and have:

a.    Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.    Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.    Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.    Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a.    All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.    Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 9, 2005	By:	/s/ Susan E. Leaverton
		Susan E. Leaverton, CPA
		Treasurer and Principal Accounting Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION OF PERIODIC REPORT

Pursuant to 18 U.S.C. § 1350

Pursuant to, and for purposes only of, 18 U.S.C. § 1350, the undersigned hereby certifies that (i) the Quarterly Report of Shore Bancshares, Inc. on Form 10-Q for the quarter ended March 31, 2005 filed with the Securities and Exchange Commission (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (ii) information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Shore Bancshares, Inc.

Date: May 9, 2005	By:	/s/ W. Moorhead Vermilye
		W. Moorhead Vermilye
		President/Chief Executive Officer

EX-32.2

EXHIBIT 32.2

CERTIFICATION OF PERIODIC REPORT

Pursuant to 18 U.S.C. § 1350

Pursuant to, and for purposes only of, 18 U.S.C. § 1350, the undersigned hereby certifies that (i) the Quarterly Report of Shore Bancshares, Inc. on Form 10-Q for the quarter ended March 31, 2005 filed with the Securities and Exchange Commission (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (ii) information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Shore Bancshares, Inc.

Date: May 9, 2005	By:	/s/ Susan E. Leaverton
		Susan E. Leaverton
		Treasurer/Principal Accounting Officer