8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported): February 2, 2006

SHORE BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

Maryland	0-22345	52-1974638
(State or other jurisdiction of	(Commission file number)	(IRS Employer
incorporation or organization)		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 or Former Address, if Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligations of the registrant under any of the following provisions:

࿳Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

࿳Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

࿳Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

࿳Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

ITEM 1.01.Entry Into a Material Definitive Agreement.

In accordance with the “Frequently Asked Questions” bulletin posted by the staff of the Division of Corporation Finance of the Securities and Exchange Commission (the “SEC”) on November 23, 2004, Shore Bancshares, Inc. (the “Company”) is disclosing the following information that the SEC may deem to be material definitive agreements with the Company’s directors:

On February 2, 2006, the Company’s Board of Directors, upon the recommendation of its Personnel Committee, increased the annual retainers and meeting fees paid to directors. Prior to these increases, each director received an annual retainer of $3,000 and a meeting fee of $250 for each Board meeting and committee meeting attended. Effective immediately, the annual retainer paid to the Chairman of the Board will increase to $10,000 and the annual retainer paid to each other director will increase to $5,000. The fees paid for attending meetings (both of the Board and its committees) will increase to $500 for committee chairpersons and $300 for all other directors.

ITEM 2.02.Results of Operation and Financial Condition.

On February 7, 2006, the Company issued a press release describing the Company’s financial results for the quarter and year ended December 31, 2005, a copy of which is furnished herewith as Exhibit 99.1.

The information contained in this Item 2.02 and in Exhibit 99.1 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing.

ITEM 7.01.Regulation FD Disclosure.

On February 2, 2006, the Company’s Board of Directors authorized the Company to repurchase up to 165,000 shares of its common stock over a period not to exceed 60 months. Shares may be repurchased in the open market or in privately negotiated transactions at such times and in such amounts per transaction as the President of the Company determines to be appropriate, subject to Board oversight. The Company intends to use the repurchased shares to fund the Company’s employee benefit plans and for other general corporate purposes. The total number of shares authorized for repurchase under the program represents approximately 3% of the Company’s 5,556,985 issued and outstanding shares at December 31, 2005.

ITEM 9.01.Financial Statements and Exhibits.

(c) Exhibit 10.1 Changes to Director Compensation Arrangements (filed herewith).

Exhibit 99.1 Press Release dated February 7, 2006 (furnished herewith).

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	SHORE BANCSHARES, INC.
Dated: February 8, 2006	By:	/s/ W. Moorhead Vermilye
		W. Moorhead Vermilye
		President and CEO

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EXHIBIT INDEX

Exhibit

Number Description

10.1 Changes to Director Compensation Arrangements (filed herewith).

99.1 Press Release dated February 7, 2006 (furnished herewith).

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EX-10.1

EXHIBIT 10.1

Changes to Director Compensation Arrangements

On February 2, 2006, the Board of Directors of Shore Bancshares, Inc., upon the recommendation of its Personnel Committee, increased the annual retainers and meeting fees paid to directors. Prior to these increases, each director received an annual retainer of $3,000 and a meeting fee of $250 for each Board meeting and committee meeting attended. Effective immediately, the annual retainer paid to the Chairman of the Board will increase to $10,000 and the annual retainer paid to each other director will increase to $5,000. The fees paid for attending meetings (both of the Board and its committees) will increase to $500 for committee chairpersons and $300 for all other directors.

EX-99.1

Exhibit 99.1

Shore Bancshares, Inc.

18 E. Dover Street

Easton, Maryland 21601

Phone 410-822-1400

PRESS RELEASE

Shore Bancshares Reports Fourth Quarter and 2005 Earnings

Easton, Maryland (02/07/2006)- Shore Bancshares, Inc. (NASDAQ - SHBI) reported fourth quarter earnings of $3.1 million or $0.56 per diluted share, an increase of 43.6% over the $2.1 million or $0.39 per diluted share for the fourth quarter of 2004. Net income for the year ended December 31, 2005 was $12.9 million or $2.32 per diluted share, representing a 26.1% increase over the $10.2 million or $1.84 per diluted share earned during 2004.

“This has been a very good year for our Company, as we reported substantial increases in net income for both the final quarter and the full twelve months,” said W. Moorhead Vermilye, President and CEO of Shore Bancshares, Inc. “There was good growth in our local economy and loan demand remained strong throughout 2005. The net interest margin at year-end was solid at 4.69%, up from 4.1% at the end of 2004. Our efficiency ratio (GAAP-based) was 54.13% at year-end, a 5% improvement over the prior year. These factors enabled us to continue to expand our core community banking business and we believe we are well-positioned for 2006.”

“Our Board is confident in the ongoing strength of our markets, as well as our ability to sustain the momentum we have developed via healthy organic growth,” said Vermilye. “We are the leading independent community banking organization headquartered on the Del-Mar-Va Peninsula. As we manage the organization for growth and profitability to further build the franchise, we also intend to focus on efforts aimed at improving shareholder value during the coming year.”

The Company’s return on average assets for the year ended December 31, 2005 was 1.51%, compared to 1.32% for the year ended December 31, 2004. The return on average stockholders’ equity was 13.20% for the year ended December 31, 2005, compared to 11.17% for the prior year.

Return on average assets was 1.48% for the fourth quarter of 2005, compared to 1.10% for the fourth quarter of 2004. Return on Average stockholders’ equity was 12.48% for the fourth quarter of 2005, compared to 9.29% for the fourth quarter of 2004.

At December 31, 2005, total assets were $851.6 million, total deposits were $705 million, and total stockholders’ equity was $101.4 million. The increase in total assets of 7.7% since December 31, 2004 was related primarily to loan growth. Loans increased 5.4% during 2005 totaling $627.5 million at December 31, 2005. Deposit growth was the primary funding source for asset growth during the year, although the Company utilized federal home loan bank borrowings during the fourth quarter of 2005 to fund asset growth in excess of deposit growth.

The provision for credit losses for the three- and twelve-month periods ended December 31, 2005 was $230,000 and $810,000, respectively, compared to $561,000 and $931,000, respectively, for the same periods in 2004. Net charge-offs were $266,000 and $725,000 for the years ended December 31, 2005 and 2004, respectively. Management believes that the provision for credit losses and the resulting allowance are adequate at December 31, 2005.

Financial Results for the Fourth Quarter

Net interest income for the fourth quarter of 2005 was $9.4 million, which represents an increase of 16.7 % over the $8.1 million earned during the same period last year. Higher loan yields resulted in an increase in the net interest margin from 4.09% in 2004 to 4.41% in 2005. The market for deposits remained competitive throughout the fourth quarter resulting in higher rates paid for interest bearing deposits.

Noninterest income for the fourth quarter of 2005 increased $761,000 when compared to the fourth quarter of 2004. In 2004, the Company recorded an impairment loss of $658,000 related to certain securities held in the investment portfolio. Excluding the impairment loss, noninterest income for the fourth quarter of 2005 increased $103,000 over the income for the fourth quarter of 2004 as a result of increased service charges on deposit accounts.

Noninterest expense for the fourth quarter of 2005 increased $616,000 when compared to the fourth quarter of 2004. The increase is primarily the result of increased salaries and benefits costs of $482,000. Salary and benefit increases are the result of higher incentive compensation cost and increased staffing for a new branch and trust operations that began in July 2005. Other operating cost increases totaling $133,000 were related to overall growth of the Company.

Financial Results for the Year

Net interest income for the year ended December 31, 2005 totaled $35.5 million, an increase of 21.2% or $6.2 million when compared to the same period of last year. The increases in net interest income resulted from increases in the volume of and yield on earning assets.

Interest expense for the year ended December 31, 2005 increased $2.9 million or 32.1% when compared to the year ended December 31, 2004. The increases are attributable to both an increase in the volume of interest bearing deposits when compared to the same period last year and an increase in the rate paid for interest bearing deposits. The overall rate paid for interest bearing deposits was 1.94% and 1.55% for the years ended December 31, 2005 and 2004, respectively.

The Company’s net interest margin was 4.69% for the year ended December 31, 2005, compared to 4.1% for the same period in 2004. The Company increased its volume of earning assets to $763.2 million during the year ended December 31, 2005, compared to $722.5 million for 2004. The average yield on earning assets for 2005 was 6.25%, compared to 5.35% for 2004.

Noninterest income was $11.5 million for the year ended December 31, 2005, compared to $10.2 million for the year ended December 31, 2004, an increase of $1.3 million or 12.5%. Excluding the effect of an impairment loss of $658,000 on certain equity securities in 2004, noninterest income increased $617,000. An increase in service charges on deposit accounts of $408,000 was the primary reason for the increase.

Noninterest expenses totaled $25.4 million for 2005, compared to $22.5 for 2004, an increase of $2.9 million or 12.9%. The primary component of the increase is a $2 million increase in salaries and benefits resulting from increased staffing costs for new branches opened in 2004 and 2005, the full year effect of Felton Bank, which was acquired on April 1, 2004, general increases associated with growth of the Company and incentive compensation paid during the year. Other noninterest expenses, including occupancy and equipment expense and data processing have increased due to the overall growth of the Company.

Shore Bancshares Information

Shore Bancshares, Inc. is a financial holding company headquartered in Easton, Maryland and is the largest independent bank holding company located on Maryland’s Eastern Shore. It is the parent company of three banks, The Talbot Bank of Easton, Maryland, The Centreville National Bank of Maryland, and The Felton Bank; two insurance producer firms, The Avon-Dixon Agency, LLC and Elliott Wilson Insurance, LLC; an insurance premium finance company, Mubell Finance, LLC; and a registered investment adviser firm, Wye Financial Services, LLC.

Forward-Looking Statements

This press release may contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements present management's expectations, beliefs, plans and objectives regarding future financial performance, and assumptions or judgments concerning such performance. Any discussions contained in this press release, except to the extent that they contain historical facts, are forward-looking and accordingly involve estimates, assumptions, judgments and uncertainties. There are a number of factors that could cause actual results or outcomes to differ materially from those addressed in the forward-looking statements. Such factors are detailed in Exhibit 99.1 to the Annual Report of Shore Bancshares, Inc. on Form 10-K for the year ended December 31, 2004.

For further information contact: W. Moorhead Vermilye, President and CEO

Shore Bancshares, Inc.

Financial Highlights

(Dollars in thousands, except per share data)	Three Months Ended									Year Ended
	December 31,									December 31,
	2005			2004			% Change			2005			2004			% Change
PROFITABILITY FOR THE PERIOD:
Net interest income	$	9,413		$	8,068			16.7	%	$	35,485		$	29,281			21.2	%
Provision for loan and lease losses		230			561			-59.0	%		810			931			-13.0	%
Noninterest income		2,740			1,979			38.5	%		11,498			10,223			12.5	%
Noninterest expense		6,667			6,051			10.2	%		25,431			22,534			12.9	%
Income before income taxes		5,256			3,435			53.0	%		20,742			16,039			29.3	%
Net income	$	3,138		$	2,147			46.2	%	$	12,888		$	10,198			26.4	%
Return on average assets		1.48	%		1.10	%		35.0	%		1.51	%		1.32	%		18.9	%
Return on average equity		12.48	%		9.29	%		34.4	%		13.20	%		11.17	%		18.1	%
Net interest margin		4.41	%		4.09	%		7.8	%		4.69	%		4.10	%		14.1	%
Efficiency ratio - GAAP based		54.86	%		60.23	%		-8.9	%		54.13	%		57.04	%		-5.1	%
PER SHARE DATA:
Basic net income	$	0.57		$	0.39			46.2	%	$	2.33		$	1.86			25.3	%
Diluted net income	$	0.56		$	0.39			43.6	%	$	2.32		$	1.84			26.1	%
Dividends declared	$	0.21		$	0.18			16.7	%	$	0.80		$	0.72			11.1	%
Book Value	$	18.26		$	16.86			8.3	%	$	18.26		$	16.86			8.3	%
Tangible book value	$	15.76		$	14.29			10.3	%	$	15.76		$	14.29			10.3	%
Average fully diluted shares		5,575,462			5,561,261			0.3	%		5,561,756			5,530,158			0.6	%
AT PERIOD-END:
Assets	$	851,638		$	790,598			7.7	%	$	851,638		$	790,598			7.7	%
Deposits	$	704,958		$	658,672			7.0	%	$	704,958		$	658,672			7.0	%
Loans and leases	$	627,463		$	595,458			5.4	%	$	627,463		$	595,458			5.4	%
Securities	$	121,070		$	119,096			1.7	%	$	121,070		$	119,096			1.7	%
Stockholders' equity	$	101,448		$	92,976			9.1	%	$	101,448		$	92,976			9.1	%
CAPITAL AND CREDIT QUALITY RATIOS:
Average equity to average assets		11.86	%		11.81	%					11.86	%		11.79	%
Allowance for loan and lease losses to loans and leases		0.83	%		0.79	%					0.83	%		0.79	%
Nonperforming assets to total assets		0.13	%		0.24	%					0.13	%		0.24	%
Annualized net (charge-offs) recoveries to average loans		0.02	%		(0.19	)%					(0.04	)%		(0.13	)%

Shore Bancshares, Inc.

Consolidated Balance Sheets

(Dollars in thousands, except per share data)

	December 31,
	2005			2004
ASSETS
Cash and due from banks	$	28,990		$	22,051
Federal funds sold		25,401			20,539
Interest-bearing deposits with banks		13,068			961
Investments available-for-sale (at fair value)		106,160			103,434
Investments held-to-maturity		14,911			15,662
Total loans and leases		627,463			595,458
Less: allowance for loan and lease losses		(5,236	)		(4,692	)
Net loans and leases		622,227			590,766
Premises and equipment, net		15,187			13,070
Accrued interest receivable		3,897			3,275
Goodwill		11,939			11,939
Other intangible assets, net		1,906			2,242
Other assets		7,952			6,659
Total assets	$	851,638		$	790,598
LIABILITIES
Noninterest-bearing deposits	$	113,244		$	102,672
Interest-bearing deposits		591,714			556,000
Total deposits		704,958			658,672
Short-term borrowings		35,848			27,106
Other long-term borrowings		4,000			5,000
Accrued interest payable and other liabilities		5,384			6,844
Total liabilities		750,190			697,622
STOCKHOLDER'S EQUITY
Common stock -- par value $.01; shares authorized 35,000,000; shares issued and outstanding (2005) 5,556,985, (2004) 5,515,198		56			55
Additional paid in capital		29,013			28,017
Retained earnings		73,642			65,182
Accumulated other comprehensive income		(1,263	)		(278	)
Total stockholder's equity		101,448			92,976
Total liabilities and stockholder's equity	$	851,638		$	790,598

Shore Bancshares, Inc.

Consolidated Statements of Income

(Dollars in thousand, except per share data)

	Three Months Ended						Twelve Months Ended
	December 31,						December 31,
	2005			2004			2005		2004
Interest Income:
Interest and fees on loans and leases	$	11,275		$	9,215		$	41,848	$	33,034
Interest on deposits with banks		91			1			111		46
Interest and dividends on securities:
Taxable		1,002			974			3,790		4,354
Exempt from federal income taxes		142			152			577		602
Interest on federal funds sold		341			73			1,058		255
Total interest income		12,851			10,415			47,384		38,291
Interest expense:
Interest on deposits		3,176			2,205			11,103		8,542
Interest on short-term borrowings		221			79			692		215
Interest on long-term borrowings		41			63			104		253
Total interest expense		3,438			2,347			11,899		9,010
Net interest income		9,413			8,068			35,485		29,281
Provision for loan and lease losses		230			561			810		931
Net interest income after provision for loan and lease losses		9,183			7,507			34,675		28,350
Noninterest income:
Securities gains (losses)		(54	)		42			4		41
Recognized loss on impairment of securities		0			(658	)		0		(658	)
Service charges on deposit accounts		801			659			2,878		2,470
Insurance agency commissions		1,390			1,398			6,384		6,383
Other income		603			538			2,232		1,987
Total noninterest income		2,740			1,979			11,498		10,223
Noninterest expenses:
Salaries and employee benefits		4,075			3,593			15,755		13,760
Occupancy expense of premises		394			381			1,542		1,448
Equipment expenses		272			288			1,110		979
Data processing		363			322			1,414		1,310
Directors' fees		153			135			590		553
Amortization of intangible assets		84			84			337		306
Other expenses		1,326			1,248			4,683		4,178
Total noninterest expense		6,667			6,051			25,431		22,534
Income before income taxes		5,256			3,435			20,742		16,039
Income tax expense		2,118			1,288			7,854		5,841
Net income	$	3,138		$	2,147		$	12,888	$	10,198
Basic net income per share	$	0.57		$	0.39		$	2.33	$	1.86
Diluted net income per share	$	0.56		$	0.39		$	2.32	$	1.84
Dividends declared per share	$	0.21		$	0.18		$	0.80	$	0.72