SHORE BANCSHARES INC - Quarter Report: 2005 September (Form 10-Q)

Unassociated Document

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 September 30, 2005

o	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		(I.R.S. 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, 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 o

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

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

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: 5,546,494 issued and outstanding shares of common stock as of November 1, 2005.

Table of Contents

INDEX

		Page

Part I.	Financial Information	3

Item 1.	Financial Statements	3

	Condensed Consolidated Balance Sheets - September 30, 2005 (unaudited) and December 31, 2004	3

	Condensed Consolidated Statements of Income - For the three and nine months ended September 30, 2005 and 2004 (unaudited)	4

	Condensed Consolidated Statements of Changes in Stockholders’ Equity - For the nine months ended September 30, 2005 and 2004 (unaudited)	5

	Condensed Consolidated Statements of Cash Flows - For the nine months ended September 30, 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	16

Item 4.	Controls and Procedures	17

Part II.	Other Information

Item 6.	Exhibits	18

Signatures		19

Exhibit List		20

-2-

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

SHORE BANCSHARES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share amounts)


	September 30,			December 31,
ASSETS:	2005			2004
	(unaudited)
Cash and due from banks	$	27,329		$	22,051
Interest bearing deposits with other banks		4,418			961
Federal funds sold		36,814			20,539
Investment securities:
Held-to-maturity, at amortized cost (fair value of, $14,889 and $15,802, respectively)		14,852			15,662
Available for sale, at fair value		111,912			103,434
Loans, less allowance for credit losses ($4,980 and $4,692, respectively)		606,859			590,766
Insurance premiums receivable		372			386
Premises and equipment, net		14,200			13,070
Accrued interest receivable on loans and investment securities		3,993			3,275
Investment in unconsolidated subsidiary		915			859
Goodwill		11,939			11,939
Other intangible assets		1,990			2,242
Deferred income taxes		1,724			1,543
Other real estate owned		337			391
Other assets		3,998			3,480
TOTAL ASSETS	$	841,652		$	790,598

LIABILITIES:
Deposits:
Noninterest bearing demand	$	110,538		$	102,672
NOW and Super NOW		110,909			112,327
Certificates of deposit $100,000 or more		105,841			91,315
Other time and savings		374,683			352,358
Total Deposits		701,971			658,672
Accrued Interest Payable		951			630
Short term borrowings		29,832			27,106
Long term debt		5,000			5,000
Contingent earn-out payments payable		513			3,313
Other liabilities		3,705			2,901
TOTAL LIABILITIES		741,972			697,622

STOCKHOLDERS’ EQUITY:
Common stock, par value $.01; authorized 35,000,000 shares; issued and outstanding:
September 30, 2005 5,546,446
December 31, 2004 5,515,198		55			55
Additional paid in capital		28,789			28,017
Retained earnings		71,668			65,182
Accumulated other comprehensive loss		(832	)		(278	)
TOTAL STOCKHOLDERS’ EQUITY		99,680			92,976
TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY	$	841,652		$	790,598

See accompanying notes to Condensed Consolidated Financial Statements.

-3-

Table of Contents

SHORE BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(Dollars in thousands, except per share amounts)


	Three months ended					Nine months ended
	September 30,					September 30,
	2005		2004			2005		2004
INTEREST INCOME
Loans, including fees	$	10,779	$	8,657		$	30,573	$	23,819
Interest and dividends on investment securities:
Taxable		979		1,088			2,788		3,380
Tax-exempt		142		146			435		450
Other interest income		336		90			737		227
Total interest income		12,236		9,981			34,533		27,876

INTEREST EXPENSE
Certificates of deposit, $100,000 or more		935		589			2,447		1,730
Other deposits		2,034		1,568			5,480		4,608
Other interest		202		120			534		325
Total interest expense		3,171		2,277			8,461		6,663

NET INTEREST INCOME		9,065		7,704			26,072		21,213
PROVISION FOR CREDIT LOSSES		220		165			580		370

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES		8,845		7,539			25,492		20,843

NONINTEREST INCOME
Service charges on deposit accounts		788		658			2,077		1,811
Gain on sale of securities		–		(13	)		58		1
Insurance agency commissions		1,206		1,577			4,994		4,985
Other noninterest income		564		492			1,629		1,447
Total noninterest income		2,558		2,714			8,758		8,244

NONINTEREST EXPENSE
Salaries and employee benefits		3,965		3,519			11,680		10,167
Expenses of premises and equipment		695		594			1,986		1,757
Other noninterest expense		1,733		1,571			5,099		4,559
Total noninterest expense		6,393		5,684			18,765		16,483

INCOME BEFORE TAXES		5,010		4,569			15,485		12,604
Federal and state income tax expense		1,868		1,634			5,736		4,553
NET INCOME	$	3,142	$	2,935		$	9,749	$	8,051

Basic earnings per common share	$	0.57	$	0.53		$	1.76	$	1.47
Diluted earnings per common share	$	0.56	$	0.53		$	1.75	$	1.46
Dividends declared per common share	$	0.21	$	0.18		$	0.59	$	0.54

See accompanying notes to Condensed Consolidated Financial Statements.

-4-

Table of Contents

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		–		–		8,051			–			8,051

Other comprehensive income, net of tax:
Unrealized loss on available for sale securities , net of reclassification adjustment of $242		–		–		–			(435	)		(435	)
Total comprehensive income												7,616

Shares issued		1		3,740		–			–			3,741
Cash dividends paid $0.54 per share		–		–		(2,955	)		–			(2,955	)
Balances, September 30, 2004	$	55	$	27,971	$	64,028		$	(125	)	$	91,929

Balances, January 1, 2005	$	55	$	28,017	$	65,182		$	(278	)	$	92,976

Comprehensive income:
Net income		–		–		9,749			–			9,749

Other comprehensive income, net of tax:
Unrealized loss on available for sale securities, net of reclassification adjustment of $56		–		–		–			(554	)		(554	)
Total comprehensive income												9,195

Shares issued		–		772		–			–			772
Cash dividends paid $0.59 per share		–		–		(3,263	)		–			(3,263	)
Balances, September 30, 2005	$	55	$	28,789	$	71,668		$	(832	)	$	99,680

See accompanying Notes to Condensed Consolidated Financial Statements

-5-

Table of Contents

SHORE BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Dollars in thousands)


	For the Nine Months Ended
	September 30,
	2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	9,749		$	8,051
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,076			1,092
Discount accretion on debt securities		(91	)		(90	)
Provision for credit losses		580			370
Deferred income taxes		167			–
Gain on sale of securities		(58	)		(1	)
Deferred gain on sale of premise and equipment		(176	)		–
Valuation on other real estate owned		54			–
Equity in earnings of unconsolidated subsidiary		(56	)		(20	)
Net changes in:
Insurance premiums receivable		24			649
Accrued interest receivable		(718	)		(21	)
Other assets		(527	)		(23	)
Accrued interest payable on deposits		321			(47	)
Accrued expenses		805			69
Net cash provided by operating activities		11,150			10,029

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and principal payments of securities available for sale		13,724			52,607
Proceeds from sale of investment securities available for sale		2,010			13,931
Purchase of securities available for sale		(25,080	)		(31,224	)
Proceeds from maturities and principal payments of securities held to maturity		792			1,911
Purchase of securities held to maturity		–			(2,056	)
Net increase in loans		(16,673	)		(63,295	)
Proceeds from sale of premise and equipment		912			–
Purchase of premises and equipment		(2,559	)		(1,113	)
Purchase of other real estate owned		–			(117	)
Proceeds from sale of investment in unconsolidated subsidiary		–			380
Acquisition net of stock issued		–			(235	)
Deferred earn out payment, net of stock issued		(2,400	)		–
Net cash used in investing activities		(29,274	)		(29,211	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand, NOW, money market and savings deposits		6,444			9,887
Net increase in certificates of deposit		36,854			(2,914	)
Net increase in short term borrowings		2,726			9,867
Proceeds from issuance of common stock		373			533
Dividends paid		(3,263	)		(2,955	)
Net cash provided by financing activities		43,134			14,418

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		25,010			(4,764	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		43,551			46,731
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	68,561		$	41,967

See accompanying notes to Condensed Consolidated Financial Statements

-6-

Table of Contents

Shore Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

For the Nine Month Periods Ended September 30, 2005 and 2004

(Unaudited)

The consolidated financial statements include the accounts of Shore Bancshares, Inc. and its subsidiaries (collectively referred to in these Notes as the “Company”) 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 September 30, 2005, the results of operations for the three- and nine-month periods ended September 30, 2005 and 2004, the changes in stockholders’ equity for the nine-months ended September 30, 2005 and 2004, and cash flows for the nine-month periods ended September 30, 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 and nine-month periods ended September 30, 2005 are not necessarily indicative of the results to be expected for any other interim period or 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.

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 stock options. Information relating to the calculation of earnings per share is summarized as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2005		2004		2005		2004
	(in thousands, except per share data)

Net Income	$	3,142	$	2,935	$	9,749	$	8,051

Weighted Average Shares Outstanding - Basic		5,545		5,513		5,532		5,472
Dilutive securities		33		44		34		45
Weighted Average Shares Outstanding - Diluted		5,578		5,557		5,566		5,517

Net income per common share – Basic	$	0.57	$	0.53	$	1.76	$	1.47

Net income per common share – Diluted	$	0.56	$	0.53	$	1.75	$	1.46

As of September 30, 2005 and 2004, there were 4,000 shares excluded from the diluted earnings per share computations because the option price exceeded the average market price and therefore, their effect would be anti-dilutive.

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.

-7-

Table of Contents

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

(Dollars in thousands)	September 30, 2005		December 31, 2004

Impaired loans with valuation allowance	$	880	$	1,246
Impaired loans with no valuation allowance		4		223
Total impaired loans	$	884	$	1,469

Allowance for credit losses applicable to impaired loans	$	495	$	442
Allowance for credit losses applicable to other than impaired loans		4,485		4,250
Total allowance for credit losses	$	4,980	$	4,692

Interest income on impaired loans recorded on the cash basis	$	102	$	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.

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 September 30, 2005, total commitments to extend credit were approximately $196,529,000. Outstanding letters of credit were approximately $17,786,000 at September 30, 2005.

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- and nine-month periods ended September 30, 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					Nine-Month Period Ended
	September 30,					September 30,
	2005			2004		2005			2004
Net income:
As reported	$	3,142		$	2,935	$	9,749		$	8,051
Less pro forma stock-based compensation expense determined under the fair value method, net of related tax effects		(8	)		–		(44	)		(29	)
Pro forma net income	$	3,134		$	2,935	$	9,705		$	8,022

Basic earnings per share:
As reported	$	0.57		$	0.53	$	1.76		$	1.47
Pro forma		0.57			0.53		1.75			1.47

Diluted earnings per share
As reported	$	0.56		$	0.53	$	1.75		$	1.46
Pro forma		0.56			0.53		1.74			1.45

-8-

Table of Contents

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 in Delaware through its 16-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.

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 nine months ended September 30 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	$	26,069		$	–		$	3		$	–		$	26,072
Provision for credit losses		580			–			–			–			580
Net interest income after provision		25,489			–			3			–			25,492
Noninterest income		3,687			5,155			2,014			(2,098	)		8,758
Noninterest expense		14,300			4,433			2,130			(2,098	)		18,765
Income before taxes		14,876			722			(113	)		–			15,485
Income tax expense		5,495			286			(45	)		–			5,736
Net income	$	9,381		$	436		$	(68	)	$	–		$	9,749

Intersegment revenue(expense)	$	(1,776	)	$	(86	)	$	1,862		$	–		$	–
Average assets	$	802,086		$	9,683		$	3,456		$	–		$	815,225

2004

Net Interest income	$	21,212			–		$	1		$	–		$	21,213
Provision for credit losses		370			–			–			–			370
Net interest income after provision		20,842			–			1			–			20,843
Noninterest income		3,055			5,148			1,679			(1,638	)		8,244
Noninterest expense		12,254			4,182			1,685			(1,638	)		16,483
Income before taxes		11,643			966			(5	)		–			12,604
Income tax expense		4,173			382			(2	)		–			4,553
Net income	$	7,470		$	584			(3	)		–		$	8,051

Intersegment revenue(expense)	$	(1,461	)	$	(138	)	$	1,599		$	–		$	–
Average assets	$	761,981		$	6,527		$	3,273		$	–		$	771,781

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

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.

On September 23, 2005, the Company finalized a Sale-Leaseback transaction with an unrelated third party in respect of the property located in Felton, Delaware that is used by Felton Bank for its main office location. As part of this transaction, the Company entered into a 20-year leaseback calling for annual rent of $84,525. The gain on the sale portion of the transaction of approximately $176,000 has been deferred and will be recognized over the life of the lease.

-9-

Table of Contents

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 Management’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 Shore Bancshares, Inc. and its subsidiaries operate, 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 Annual Report of Shore Bancshares, Inc. on Form 10-K for the year ended December 31, 2004. Actual results may differ materially from such forward-looking statements, and Management 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 the Company 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 elsewhere in this report, as well as the audited consolidated financial statements and related notes included in the Company’s Annual Report 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” and collectively with Talbot Bank and Centreville National Bank, the “Banks”). The Banks operate 16 full service branches in Kent, Queen Anne’s, Talbot, Caroline and Dorchester Counties in Maryland and in Kent County, Delaware. During the third quarter of 2005, Centreville National Bank established a trust department and now offers various fiduciary services to the Company’s customers. The Company additionally 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 Capital 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 requires us to make estimates, assumptions, and judgments that affect the reported amount of assets, liabilities, revenues and expenses. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported.

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.

-10-

Table of Contents

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 September 30, 2005 was $3,142,000, or diluted earnings per share of $.56, compared to $2,935,000, or diluted earnings per share of $.53, for the third quarter of 2004. Net income for the nine months ended September 30, 2005 was $9,749,000, a $1,698,000 increase over the same period in 2004. On a per share basis, diluted earnings for the nine months ended September 30, 2005 were $1.75, compared to $1.46 for the same period last year. Annualized return on average assets was 1.59% for the nine months ended September 30, 2005, compared to 1.39% for the same period in 2004. Annualized return on average stockholders’ equity was 13.06% and 11.85% for the nine months ended September 30, 2005 and 2004, respectively.

RESULTS OF OPERATIONS

Net Interest Income

Net interest income for the three- and nine-month periods ended September 30, 2005 was $9,065,000 and $26,072,000, respectively, an increase of $1,361,000, or 17.7%, and $4,859,000, or 22.9%, respectively, when compared to the same periods last year. These increases are attributable to a $35,664,000 increase in average earning assets, concentrated in loans, and an overall increase in yields on earning assets. Total interest income increased by $2,255,000 and $6,657,000 for the three- and nine-month periods ended September 30, 2005, respectively, when compared to the same periods last year.

-11-

Table of Contents

The Company’s net interest margin was 4.65% for the nine months ended September 30, 2005, which is 67 basis points higher than the net interest margin for the same period last year. The Company continued to increase its volume of earning assets, which averaged $755,586,000 for the nine months ended September 30, 2005, compared to $719,922,000 for the same period in 2004. Average loans totaled $602,836,000 for the nine-month period ended September 30, 2005, a $58,691,000 increase over the same period in 2004. This growth was funded with maturities in the investment portfolio and increased customer deposits. The yield on earning assets for the nine-month period ended September 30, 2005 increased 93 basis points to 6.14% from 5.21% for the same period last year. Increasing short term interest rates and a shift in the mix of earning assets from investment securities, which have lower overall yields than loans, to loans is the reason for this increase.

The overall yield on loans for the nine months ended September 30, 2005 was 6.77%, compared to 5.84% for the same period in 2004. The yield on investment securities for the first nine months of 2005 increased slightly to 3.80% from 3.67% for the same period in 2004, and the average balance of investment securities for the nine-month period ended September 30, 2005 decreased by $26,605,000 to $120,979,000 when compared to the same period in 2004. Investment portfolio maturities during the first nine months of 2005 were used primarily to fund loan growth, so growth in the overall portfolio yield has been small.

Total interest expense for the three and nine months ended September 30, 2005 was $3,171,000 and $8,461,000, respectively, an increase of $894,000 and $1,798,000, respectively, over the same periods in 2004. The increase in interest expense resulted primarily from an increased volume of interest bearing deposits during the period and increases in the rates paid on interest bearing liabilities. The market for deposits is very competitive and the Company has responded by offering higher overall rates for deposits, especially time deposits. The average balance of interest bearing deposits increased by $24,137,000 for the nine months ended September 30, 2005 when compared to the same period in 2004. The overall rate paid for interest bearing deposits increased 30 basis points to 1.83% as a result of higher rates paid for certificates of deposit. 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. For the nine months ended September 30, 2005, the average balance of certificates of deposits, including those $100,000 or more, increased by $9,854,000 when compared to the same period last year, and the average rate paid for those certificates of deposit increased 71 basis points to 3.32%. Comparing the first nine months of 2005 to the same period in 2004, average interest bearing demand deposits increased by approximately $905,000 and average money management and savings deposits increased by $6,717,000.

Loans comprised 79.8% and 75.6% of total average earning assets for the nine-months ended September 30, 2005 and 2004, respectively.

-12-

Table of Contents

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 nine months of 2005:

	Nine Months ended September 30, 2005							Nine Months ended September 30, 2004
	Average		Income		Yield			Average		Income		Yield
(Dollars in thousands)	Balance		Expense		Rate			Balance		Expense		Rate
Earning Assets
Investment securities	$	120,979	$	3,446		3.80	%	$	147,584	$	4,065		3.67	%
Loans		602,836		30,602		6.77	%		544,145		23,842		5.84	%
Interest bearing deposits		961		20		2.71	%		6,229		46		0.98	%
Federal funds sold		30,810		716		3.10	%		21,964		182		1.11	%
Total earning assets		755,586		34,784		6.14	%		719,922		28,135		5.21	%
Noninterest earning assets		59,638							51,859
Total Assets	$	815,224						$	771,781

Interest bearing liabilities
Interest bearing deposits	$	577,546		7,927		1.83	%	$	553,409		6,338		1.53	%
Short term borrowing		24,736		345		1.86	%		25,251		137		0.72	%
Long term debt		5,000		189		5.03	%		5,000		188		5.04	%
Total interest bearing liabilities		607,282		8,461		1.86	%		583,660		6,663		1.52	%
Noninterest bearing liabilities		111,444							97,522
Stockholders’ equity		96,498							90,599
Total liabilities and stockholders’ equity	$	815,224						$	771,781
Net interest spread			$	26,323		4.28	%			$	21,472		3.69	%
Net interest margin						4.65	%						3.98	%

(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 declined $156,000 in the third quarter of 2005 when compared to the same period in 2004. The primary reason for the decline is a reduction in insurance agency commissions. During the third quarter of 2004 the Insurance Agency recognized a one-time commission of approximately $135,000, which contributed to the decline in insurance agency commissions when compared to 2005. Also, the Company converted its billing system during the third quarter of 2005 and customers are now billed directly by the insurance company providing coverage. Under this converted system, the Company receives commission income after the insurance company completes the billing process. The effect of this new system is that commission income is now recognized later than it was recognized a year ago. Service charges on deposit accounts continue to grow as a result of enhanced product offerings to customers. For the nine-month period ended September 30, 2005, noninterest income increased $514,000 as a result of a $266,000 increased service charges on deposit accounts, a gain on sale of securities of $57,000 and increased income from mortgage originations and sales of investment products.

Noninterest Expense

Total noninterest expense for the three-month period ended September 30, 2005 was $6,393,000, compared to $5,684,000 for the same period last year. For the nine months ended September 30, 2005, total noninterest expense was $18,765,000, an increase of $2,282,000 over the same period last year. Increases in salaries and benefits expense for the quarter ($446,000) and nine months ($1,513,000) relate to an increase in the number of employees, an increase in incentive compensation cost and overall salary and benefit cost increases for the year. Increases in premises and equipment expense for the quarter ($101,000) and nine months ($229,000) as well as other noninterest expense for the quarter ($162,000) and nine months ($540,000) relate to the operation of new branch facilities opened in 2004, a new branch facility opening in the fourth quarter of 2005, and overall growth of the Company, including the start-up costs associated with the establishment of Centreville National Bank’s trust department, which began operations during the third quarter of 2005.

-13-

Table of Contents

Income Taxes

The effective tax rate for the three- and nine-month periods ended September 30, 2005 was 37.3% and 37.0%, respectively, compared to 35.8% and 36.1%, respectively, for the same periods last year. Management believes that there have been no changes in applicable tax laws 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 $611,839,000 at September 30, 2005, an increase of $16,381,000 since December 31, 2004. The growth in loans since year end is attributable to an increase in real estate mortgage loans of $20,512,000 or 4.3%. Average loans, net of unearned income, totaled $602,836,000 for the nine months ended September 30, 2005, a $58,691,000 increase when compared to the same period last year. The Company's market demand for loans remained strong through the third quarter of 2005.

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. An overview of the methodology employed by Management on a quarterly basis to maintain the allowance is found above under the caption “Critical Accounting Policies”.

The provision for credit losses for the three- and nine-month periods ended September 30, 2005 was $220,000 and $580,000, respectively, compared to $165,000 and $370,000, respectively, for the same periods of 2004. The Company has experienced a decline in nonaccrual and past due loans since December 31, 2004; however, the specific allowance associated with those loans has increased slightly as a result of Management’s 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 appreciated 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 $99,000 and $292,000 for the three- and nine-month periods ended September 30, 2005, respectively, compared to $95,000 and $454,000, respectively, for the same periods in 2004. Since December 31, 2004, nonaccrual loans have declined by $585,000 to $884,000. Loans past due 90 days and still accruing decreased by $2,310,000 since December 31, 2004, totaling $659,000 at September 30, 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 to total loans, including other real estate owned, remains low. The allowance for credit losses as a percentage of average loans was .83% at September 30, 2005 and .85% at December 31, 2004. Based on its quarterly evaluation of the adequacy of the allowance for credit losses, Management believes that the allowance for credit losses and the related provision are adequate at September 30, 2005.

-14-

Table of Contents

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

	Nine months Ended
	September 30,
(Dollars in thousands)	2005			2004

Allowance balance - beginning of year	$	4,692		$	4,060
Charge-offs:
Commercial and other		254			448
Real estate		–			50
Consumer		110			92
Totals		364			590
Recoveries:
Commercial		15			64
Real estate		1			19
Consumer		56			53
Totals		72			136
Net charge-offs		292			454
Allowance of acquired institution		–			426
Provision for credit losses		580			370
Allowance balance – end of period	$	4,980		$	4,402

Average loans outstanding during period	$	602,836		$	544,145

Net charge-offs (annualized) as a percentage of average loans outstanding during period		0.02	%		0.11	%

Allowance for credit losses at period end as a percentage of average loans		0.83	%		0.81	%

Because the Company’s loans are predominately secured by real estate, weaknesses in the local real estate markets relevant to the Company may have a material adverse effect on collateral values. The Company has a concentration of construction and land development loans in its market areas. At September 30, 2005, the balance of such loans was $127,249,000 or 20.8% 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):

	September 30,		December 31,
Nonperforming Assets:	2005		2004
Nonaccrual loans	$	884	$	1,469
Other real estate owned		337		391
		1,221		1,860
Past due loans still accruing		659		2,969
Total nonperforming and past due loans	$	1,880	$	4,829

Investment Securities

Investment securities totaled $126,764,000 at September 30, 2005, an increase of $7,668,000 when compared to December 31, 2004. The tax equivalent yield on investment securities for the nine-month period ended September 30, 2005 increased to 3.80% from 3.67% for the same period last year. This slight increase was the result of yields on bonds purchased during the nine-month period ended September 30, 2005 that were higher than those on bonds that matured during the period.

Deposits

Total deposits at September 30, 2005 were $701,971,000, an increase of $43,299,000 when compared to total deposits at December 31, 2004. Noninterest bearing demand account balances increased approximately $7,867,000, certificates of deposit $100,000 or more increased $14,526,000, and other time deposits increased $22,329,000 during the first nine months of 2005 when compared to the same period last year, while NOW and SuperNOW accounts declined $1,418,000.

-15-

Table of Contents

Borrowed Funds

Short-term borrowings at September 30, 2005 were $29,832,000 and consisted of securities sold under agreements to repurchase and federal funds purchased. At December 31, 2004, short-term borrowings were $27,106,000 and 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 September 30, 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 $80 million at September 30, 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 $99.7 million at September 30, 2005, which represents an increase of 7.2% since December 31, 2004. Accumulated other comprehensive loss, which consists solely of net unrealized losses on investment securities available for sale, increased by $554,000 during the first nine months of 2005, resulting in accumulated other comprehensive loss of $832,000 at September 30, 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 September 30, 2005 to the minimum regulatory requirements is presented below:

			Minimum		Required to be
	Actual		Requirements		Well Capitalized
Tier 1 risk-based capital		13.57%		4.00%		6.00%
Total risk-based capital		14.37%		8.00%		10.00%
Leverage ratio		10.71%		3.00%		5.00%

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 September 30, 2005 and December 31, 2004, the model produced the following sensitivity profile for net interest income and the fair value capital:

-16-

Table of Contents

	Immediate Change in Rates
	+200			+100			-100			-200			Policy
	Basis Points			Basis Points			Basis Points			Basis Points			Limit


September 30, 2005
% Change in Net Interest Income		8.88	%		5.03	%		(5.23	%)		(11.64	%)		+25	%
% Change in Fair Value of Capital		3.29	%		2.27	%		(3.00	%)		(7.76	%)		+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	%

The Company’s objectives and strategies in managing market risk have not materially changed since December 31, 2004 and are discussed in detail 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 September 30, 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 third 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.

-17-

Table of Contents

PART II - OTHER INFORMATION

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 Bylaws (incorporated by reference to Exhibit 3.2 of the Company’s Form 8-K filed on November 9, 2005).

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 with Thomas H. Evans, as amended on November 3, 2005 (incorporated by reference to the Company’s Form 8-K filed on November 9, 2005).

10.4

Separation Agreement and General Release between The Avon-Dixon Agency, LLC and Steven Fulwood (incorporated by reference to exhibit 10.11 of the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2005).

10.5

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).

10.6

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).

10.7

Form of Talbot Bank of Easton, Maryland Supplemental Deferred Compensation Plan (filed herewith).

10.8

Form of Talbot Bank of Easton, Maryland Supplemental Deferred Compensation Plan Trust Agreement (filed herewith).

10.9

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).

10.10

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)).

10.11

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)).

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 Periodic Report by the CEO pursuant to 18 U.S.C. § 1350 (furnished herewith).

32.2

Certification of the Periodic Report by the PAO pursuant to 18 U.S.C. § 1350 (furnished herewith).

-18-

Table of Contents

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: November 8, 2005	By:	/s/ W. Moorhead Vermilye

		W. Moorhead Vermilye President and Chief Executive Officer


Date: November 8, 2005	By:	/s/ Susan E. Leaverton

		Susan E. Leaverton Treasurer and Principal Accounting Officer

-19-

Table of Contents

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 Bylaws (incorporated by reference to Exhibit 3.2 of the Company’s Form 8-K filed on November 9, 2005).

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 with Thomas H. Evans, as amended on November 3, 2005 (incorporated by reference to the Company’s Form 8-K filed on November 9, 2005).

10.4		Separation Agreement and General Release between The Avon-Dixon Agency, LLC and Steven Fulwood (incorporated by reference to exhibit 10.11 of the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2005).

10.5		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).

10.6		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).

10.7		Form of Talbot Bank of Easton, Maryland Supplemental Deferred Compensation Plan (filed herewith).

10.8		Form of Talbot Bank of Easton, Maryland Supplemental Deferred Compensation Plan Trust Agreement (filed herewith).

10.9		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).

10.10		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)).

10.11		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)).

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 Periodic Report by the CEO pursuant to 18 U.S.C. § 1350 (furnished herewith).

32.2		Certification of the Periodic Report by the PAO pursuant to 18 U.S.C. § 1350 (furnished herewith).

-20-