SHORE BANCSHARES INC - Quarter Report: 2005 June (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 June 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 xNo o

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes xNo o

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: 5,544,396 issued and outstanding shares of common stock as of August 1, 2005.

INDEX

Part I.	Financial Information

Item 1.	Financial Statements	Page

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

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

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

	Condensed Consolidated Statements of Cash Flows -
	For the six months ended June 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	15

Item 4.	Controls and Procedures	16

Part II.	Other Information

Item 4.	Submission of Matters to a Vote of Security Holders	16

Item 5.	Other Information	16

Item 6.	Exhibits	17

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, except per share amounts)

	June 30,			December 31,
	2005			2004
ASSETS:	(unaudited)

Cash and due from banks	$	25,202		$	22,051
Interest bearing deposits with other banks		848			961
Federal funds sold		22,630			20,539
Investment securities:
Held-to-maturity, at amortized cost (fair value of, $15,052 and
$15,802, respectively)		14,871			15,662
Available for sale, at fair value		105,838			103,434
Loans, less allowance for credit losses ($4,860 and
$4,692, respectively)		610,974			590,766
Insurance premiums receivable		863			386
Premises and equipment, net		14,310			13,070
Accrued interest receivable on loans and investment securities		3,599			3,275
Investment in unconsolidated subsidiary		899			859
Goodwill		11,939			11,939
Other intangible assets		2,074			2,242
Deferred income taxes		1,663			1,543
Other real estate owned		391			391
Other assets		3,694			3,480
TOTAL ASSETS	$	819,795		$	790,598

LIABILITIES:
Deposits:
Noninterest bearing demand	$	104,831		$	102,672
NOW and Super NOW		110,049			112,327
Certificates of deposit $100,000 or more		93,786			91,315
Other time and savings		374,748			352,358
Total Deposits		683,414			658,672
Accrued Interest Payable		833			630
Short term borrowings		28,757			27,106
Long term debt		5,000			5,000
Contingent earn-out payments payable		513			3,313
Other liabilities		3,350			2,901
TOTAL LIABILITIES		721,867			697,622

STOCKHOLDERS’ EQUITY:
Common stock, par value $.01; authorized 35,000,000 shares;
issued and outstanding:
June 30, 2005 5,541,193
December 31, 2004 5,515,198		55			55
Additional paid in capital		28,689			28,017
Retained earnings		69,690			65,182
Accumulated other comprehensive loss		(506	)		(278	)
TOTAL STOCKHOLDERS’ EQUITY		97,928			92,976
TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY	$	819,795		$	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 June 30,					Six months ended June 30,

	2005		2004			2005		2004
INTEREST INCOME
Loans, including fees	$	10,195	$	8,013		$	19,794	$	15,162
Interest and dividends on investment securities:
Taxable		939		1,099			1,809		2,292
Tax-exempt		144		150			293		304
Other interest income		212		83			401		137
Total interest income		11,490		9,345			22,297		17,895

INTEREST EXPENSE
Certificates of deposit, $100,000 or more		787		584			1,512		1,141
Other deposits		1,792		1,569			3,446		3,040
Other interest		181		105			332		205

Total interest expense		2,760		2,258			5,290		4,386

NET INTEREST INCOME		8,730		7,087			17,007		13,509
PROVISION FOR CREDIT LOSSES		180		100			360		205

NET INTEREST INCOME AFTER PROVISION FOR
CREDIT LOSSES		8,550		6,987			16,647		13,304

NONINTEREST INCOME
Service charges on deposit accounts		727		658			1,289		1,153
Gain on sale of securities		—		(2	)		58		14
Insurance agency commissions		1,704		1,499			3,788		3,408
Other noninterest income		607		497			1,065		955

Total noninterest income		3,038		2,652			6,200		5,530

NONINTEREST EXPENSE
Salaries and employee benefits		3,736		3,530			7,715		6,648
Expenses of premises and equipment		637		574			1,292		1,163
Other noninterest expense		1,706		1,482			3,365		2,988

Total noninterest expense		6,079		5,586			12,372		10,799

INCOME BEFORE TAXES ON INCOME		5,509		4,053			10,475		8,035
Federal and state income tax expense		2,008		1,453			3,868		2,919

NET INCOME	$	3,501	$	2,600		$	6,607	$	5,116

Basic earnings per common share	$	.63	$	.47		$	1.20	$	.94
Diluted earnings per common share	$	.63	$	.47		$	1.19	$	.93
Dividends declared per common share	$	.19	$	.18		$	.38	$	.36

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		—		—		5,116			—			5,116

Other comprehensive income, net of tax:
Unrealized loss on available for sale
securities , net of reclassification
adjustment of $242		—		—		—			(1,541	)		(1,541	)

Total comprehensive income		3,575

Shares issued		1		3,719		—			—			3,720

Cash dividends paid $0.36 per share		—		—		(1,964	)		—			(1,964	)

Balances, June 30, 2004	$	55	$	27,950	$	62,084		$	(1,231	)	$	88,858

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

Comprehensive income:
Net income		—		—		6,607			—			6,607

Other comprehensive income, net of tax:
Unrealized loss on available for sale
securities, net of reclassification
adjustment of $56		—		—		—			(228	)		(228	)

Total comprehensive income												6,379

Shares issued		—		672		—			—			672

Cash dividends paid $0.38 per share		—		—		(2,099	)		—			(2,099	)

Balances, June 30, 2005	$	55	$	28,689	$	69,690		$	(506	)	$	97,928

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 Six Months Ended June 30,
	2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	6,607		$	5,116
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization		729			717
Discount accretion on debt securities		(54	)		(51	)
Provision for credit losses		360			205
Gain on sale of securities		(58	)		(14	)
Equity in earnings of unconsolidated subsidiary		(40	)		(20	)
Net changes in:
Insurance premiums receivable		(467	)		202
Accrued interest receivable		(324	)		232
Other assets		(200	)		(689	)
Accrued interest payable on deposits		203			25
Accrued expenses		449			274
Net cash provided by operating activities		7,205			5,997

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and principal payments of securities
available for sale		10,270			39,360
Proceeds from sale of investment securities available for sale		2,010			7,867
Purchase of securities available for sale		(15,028	)		(17,682	)
Proceeds from maturities and principal payments of securities
held to maturity		778			1,287
Purchase of securities held to maturity		—			(1,340	)
Net increase in loans		(20,567	)		(38,627	)
Purchase of premises and equipment		(1,705	)		(697	)
Purchase of other real estate owned		—			(60	)
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		(26,642	)		(9,747	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand, NOW, money market and
savings deposits		8,004			872
Net increase in certificates of deposit		16,737			11,017
Net increase in securities sold under agreement to repurchase		1,651			7,768
Proceeds from issuance of common stock		273			511
Dividends paid		(2,099	)		(1,964	)
Net cash provided by financing activities		24,566			18,204

NET INCREASE IN CASH AND CASH EQUIVALENTS		5,129			14,454
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		43,551			46,731
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	48,680		$	61,185

See accompanying notes to Condensed Consolidated Financial Statements

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Shore Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

For the Six Month Periods Ended June 30, 2005 and 2004

(Unaudited)

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 June 30, 2005, the results of operations for the three- and six-month periods ended June 30, 2005 and 2004, the changes in stockholders’ equity for the six-months ended June 30, 2005 and 2004, and cash flows for the six-month periods ended June 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 six-month periods ended June 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 June 30,				Six Months Ended June 30,
	2005		2004		2005		2004
	(in thousands, except per share data)

Net Income	$	3,501	$	2,600	$	6,607	$	5,116

Weighted Average Shares Outstanding - Basic		5,531		5,496		5,525		5,452

Dilutive securities		35		43		37		46

Weighted Average Shares Outstanding - Diluted		5,566		5,539		5,562		5,498

Net income per common share - Basic	$	0.63	$	0.47	$	1.20	$	.94

Net income per common share - Diluted	$	0.63	$	0.47	$	1.19	$	.93

As of June 30, 2005 and 2004, there were 4,000 shares excluded from the diluted net income 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.

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

	June 30,		December 31,
(Dollars in thousands)	2005		2004
Impaired loans with valuation allowance	$	846	$	1,246
Impaired loans with no valuation allowance		94		223
Total impaired loans	$	940	$	1,469

Allowance for credit losses applicable to impaired loans	$	346	$	442
Allowance for credit losses applicable to other than impaired loans		4,514		4,250
Total allowance for credit losses	$	4,860	$	4,692

Interest income on impaired loans recorded on the cash basis	$	102	$	11

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 June 30, 2005, total commitments to extend credit were approximately $164,209,000. Outstanding letters of credit were approximately $19,521,000 at June 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 six-month periods ended June 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 June 30,						Six-Month Period Ended June 30,
	2005			2004			2005			2004
Net income:
As reported	$	3,501		$	2,600		$	6,607		$	5,116
Less pro forma stock-based compensation
expense determined under the fair value
method, net of related tax effects		(7	)		(5	)		(36	)		(11	)
Pro forma net income	$	3,494		$	2,595		$	6,571		$	5,105

Basic net income per share:
As reported	$	.63		$	.47		$	1.20		$	.94
Pro forma		.63			.47			1.19			.94

Diluted earnings per share
As reported	$	.63		$	.47		$	1.19		$	.93
Pro forma		.63			.47			1.18			.93

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 15-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 six months ended June 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	$	17,005		$	—		$	2		$	—		$	17,007
Provision for credit losses		360			—			—			—			360
Net interest income after provision		16,645			—			2			—			16,647
Noninterest income		2,359			3,908			1,376			(1,443	)		6,200
Noninterest expense		9,361			3,002			1,452			(1,443	)		12,372
Income before taxes		9,643			906			(74	)		—			10,475
Income tax expense		3,539			358			(29	)		—			3,868
Net income	$	6,104		$	548		$	(45	)	$	—		$	6,607

Intersegment revenue(expense)	$	(1,221	)	$	(86	)	$	1,307		$	—		$	—
Average assets	$	792,963		$	8,892		$	3,471		$	—		$	805,326

2004

Net Interest income	$	13,508		$	—		$	1		$	—		$	13,509
Provision for credit losses		205			—			—			—			205
Net interest income after provision		13,303			—			1			—			13,304
Noninterest income		1,956			3,537			1,132			(1,095	)		5,530
Noninterest expense		8,011			2,766			1,117			(1,095	)		10,799
Income before taxes		7,248			771			16			—			8,035
Income tax expense		2,608			305			6			—			2,919
Net income	$	4,640		$	466			10			—		$	5,116

Intersegment revenue(expense)	$	(978	)	$	(102	)	$	1,080		$	—		$	—
Average assets	$	755,625		$	6,830		$	3,289		$	—		$	765,744

(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.

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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 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.

The Company 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 15 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 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.

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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 June 30, 2005 was $3,501,000, or diluted earnings per share of $.63, compared to $2,600,000, or diluted earnings per share of $.47, for the second quarter of 2004. Net income for the six months ended June 30, 2005 was $6,607,000, a $1,491,000 increase over the same period in 2004. On a per share basis, diluted earnings for the six months ended June 30, 2005 were $1.19, compared to $.93 for the same period last year. Annualized return on average assets was 1.64% for the six months ended June 30, 2005, compared to 1.34% for the same period in 2004. Annualized return on average stockholders’ equity was 13.88% and 11.29% for the six months ended June 30, 2005 and 2004, respectively.

RESULTS OF OPERATIONS

Net Interest Income

Net interest income for the three- and six-month periods ended June 30, 2005 was $8,730,000 and $17,007,000, respectively, an increase of $1,643,000, or 23.2%, and $3,498,000, or 25.9%, respectively, when compared to the same periods last year. These increases are attributable to a $31,705,000 increase in average earning assets, concentrated in loans, and an overall increase in yields on earning assets. Total interest income increased by $2,145,000 and $4,402,000 for the three- and six-month periods ended June 30, 2005, respectively, when compared to the same periods last year.

The Company’s net interest margin was 4.60% for the six months ended June 30, 2005, which is 77 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 $746,990,000 for the six months ended June 30, 2005, compared to $715,285,000 for the same period in 2004. Average loans totaled $598,290,000 for the six-month period ended June 30, 2005, a $64,293,000 increase over the same period in 2004. The yield on earning assets for the six-month period ended June 30, 2005 increased 97 basis points to 6.02% from 5.05% for the same period last year.

The overall yield on loans for the six months ended June 30, 2005 was 6.62%, compared to 5.68% for the same period in 2004. The yield on investment securities for the first six months of 2005 increased slightly to 3.77% from 3.63% for the same period in 2004, and the average balance of investment securities for the six-month period ended June 30, 2005 decreased by $32,101,000 to $119,455,000 when compared to the same period in 2004.

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Total interest expense for the three and six months ended June 30, 2005 was $2,760,000 and $5,290,000, respectively, an increase of $502,000 and $904,000, respectively, over the same periods in 2004. An increased volume of interest bearing deposits is the primary reason for the increased expense. The average balance of interest bearing deposits increased by $20,172,000 for the six months ended June 30, 2005 when compared to the same period in 2004. The overall rate paid for interest bearing deposits increased 22 basis points to 1.74% 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 six months ended June 30, 2005, the average balance of certificates of deposits, including those $100,000 or more, increased by $7,795,000 when compared to the same period last year, and the average rate paid for those certificates of deposit increased 39 basis points to 3.03%. Comparing the first six months of 2005 to the same period in 2004, average interest bearing demand deposits increased by approximately $3,309,000 and average money management and savings deposits increased by $9,068,000.

Loans comprised 80.1% and 74.7% of total average earning assets for the six-months ended June 30, 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 six months of 2005:

	Six Months ended June 30, 2005							Six Months ended June 30, 2004
	Average		Income		Yield			Average		Income		Yield
(Dollars in thousands)	Balance		Expense		Rate			Balance		Expense		Rate
Earning Assets
Investment securities	$	119,455	$	2,253		3.77	%	$	151,556	$	2,752		3.63	%
Loans		598,290		19,812		6.62	%		533,997		15,178		5.68	%
Interest bearing deposits		951		11		2.39	%		7,589		34		0.90	%
Federal funds sold		28,294		390		2.75	%		22,143		103		0.93	%
Total earning assets		746,990		22,466		6.02	%		715,285		18,067		5.05	%
Noninterest earning assets		58,336							50,459
Total Assets	$	805,326						$	765,744
Interest bearing liabilities
Interest bearing deposits	$	570,778		4,958		1.74	%	$	550,606		4,181		1.52	%
Short term borrowing		24,416		207		1.70	%		24,187		80		0.66	%
Long term debt		5,000		125		5.00	%		5,000		125		5.03	%
Total interest bearing liabilities		600,194		5,290		1.76	%		579,793		4,386		1.51	%
Noninterest bearing liabilities		109,949							95,288
Stockholders’ equity		95,183							90,663
Total liabilities and stockholders’ equity	$	805,326						$	765,744
Net interest spread			$	17,176		4.26	%			$	13,681		3.54	%
Net interest margin						4.60	%						3.83	%

(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 increased $386,000 and $670,000 for the three- and six-month periods ended June 30, 2005, respectively, when compared to the same periods in 2004. The three- and six-month increases are attributable to increased service charges on deposit accounts of $69,000 and $136,000, respectively, and increases in insurance agency commissions of $205,000 and $380,000, respectively. The Company recognized gains on sales of securities of $58,000 during the first six months of 2005, compared to a gain of $14,000 for the same period in 2004.

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Noninterest Expense

Total noninterest expense for the three-month period ended June 30, 2005 was $6,079,000, compared to $5,586,000 for the same period last year. For the six months ended June 30, 2005, total noninterest expense was $12,372,000, an increase of $1,573,000 over the same period last year. Approximately $504,000 of the six-month increase relates to the operation of Felton Bank, which was acquired on April 1, 2004, and the remainder relates to increases in salaries and benefits expense of $767,000, premises and equipment expense of $76,000 and other operating expense $226,000 associated with a new branch opened in the fourth quarter of 2004 and overall growth of the Company.

Income Taxes

The effective tax rate for the three- and six-month periods ended June 30, 2005 was 36.5% and 36.9%, respectively, compared to 35.8% and 36.3%, respectively, for the same periods 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 $615,834,000 at June 30, 2005, an increase of $20,376,000 since December 31, 2004. Average loans, net of unearned income, totaled $598,290,000 for the six months ended June 30, 2005, a $64,293,000 increase when compared to 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 that Management employs on a quarterly basis to maintain the allowance.

The provision for credit losses for the three- and six-month periods ended June 30, 2005 was $180,000 and $360,000, respectively, compared to $100,000 and $205,000, respectively, for the same periods of 2004. The Company has experienced a decline in nonaccrual and past due loans since December 31, 2004; however, Management decided to not significantly decrease the specific allowance associated with those loans because of 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 $78,000 and $192,000 for the three- and six-month periods ended June 30, 2005, respectively, compared to $135,000 and $360,000, respectively, for the same periods in 2004. Since December 31, 2004, nonaccrual loans have declined by $529,000 to $940,000. Loans past due 90 days and still accruing decreased by $2,174,000 since December 31, 2004, totaling $795,000 at June 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 .81% at June 30, 2005 and 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 June 30, 2005.

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

	Six months Ended June 30,
(Dollars in thousands)	2005			2004
Allowance balance - beginning of year	$	4,692		$	4,060
Charge-offs:
Commercial and other		169			404
Real estate		—			—
Consumer		59			52
Totals		228			456
Recoveries:
Commercial		12			37
Real estate		1			19
Consumer		23			40
Totals		36			96
Net charge-offs		192			360
Allowance of acquired institution		—			426
Provision for credit losses		360			205
Allowance balance - end of period	$	4,860		$	4,331

Average loans outstanding during period	$	598,290		$	533,997
Net charge-offs (annualized) as a percentage of
average loans outstanding during period		.02	%		.13	%
Allowance for credit losses at period end as a
percentage of average loans		.81	%		.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 June 30, 2005, the balance of such loans was $121,708,000 or 19.8% 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):

	June 30,		December 31,
Nonperforming Assets:	2005		2004
Nonaccrual loans	$	940	$	1,469
Other real estate owned		391		391
		1,331		1,860
Past due loans still accruing		795		2,969
Total nonperforming and past due loans	$	2,126	$	4,829

Investment Securities

Investment securities totaled $120,709,000 at June 30, 2005, an increase of $1,613,000 when compared to December 31, 2004. The yields on bonds purchased during the six-month period ended June 30, 2005 were higher that the yields on bonds that either matured or were called during this period. The average balance of investment securities was $119,455,000 for the six months ended June 30, 2005, compared to $151,556,000 for the same period in 2004. The tax equivalent yields on investment securities for the six-month periods ended June 30, 2005 and 2004 were 3.77% and 3.63%, respectively.

Deposits

Total deposits at June 30, 2005 were $683,414,000, compared to $658,672,000 at December 31, 2004. Certificates of deposit of $100,000 or more declined $5,024,000 during the second quarter of 2005 after an increase of $7,495,000 during the first quarter of 2005. These fluctuations are primarily the result of deposit activities of a single municipal depositor. Since December 31, 2004, money market and savings deposits have increased by $8,123,000 and other certificates of deposit have increased by $14,267,000.

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Borrowed Funds

Short-term borrowings at June 30, 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 June 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 $45 million at June 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 $97.9 million at June 30, 2005, which represents an increase of 5.3% since December 31, 2004. Accumulated other comprehensive loss, which consists solely of net unrealized losses on investment securities available for sale, increased by $228,000 during the first six months of 2005, resulting in accumulated other comprehensive loss of $506,000 at June 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 June 30, 2005 to the minimum regulatory requirements is presented below:

	Actual			Minimum Requirements
Tier 1 risk-based capital		13.23	%		4.00	%
Total risk-based capital		14.01	%		8.00	%
Leverage ratio		10.72	%		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 June 30, 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
June 30, 2005
% Change in Net Interest Income	9.25%	5.21%	(5.96)%	(12.90)%	± 25%
% Change in Fair Value of Capital	3.42%	2.31%	(3.75)%	(9.32)%	± 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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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 June 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 second 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 4. Submission of Matters to Vote of Security Holders.

At the Company’s Annual Meeting of Shareholders held on April 27, 2005, the stockholders elected one individual to serve as Director until the 2007 Annual Meeting of Stockholders, four individuals to serve as Director until the 2008 Annual Meeting of Stockholders, and one individual to serve until the 2006 Annual Meeting of Stockholders. The Company submitted these matters to a vote through the solicitation of proxies. The results of the elections are as follows:

Class I Nominee (Term expires 2007)	For		Withheld		Abstain		Broker Non-Votes
Thomas H. Evans		4,206,463		9,436		—		—

Class II Nominees (Term expires 2008)

Herbert L. Andrew, III		4,209,219		6,680		—		—
Blenda W. Armistead		4,204,279		11,620		—		—
Mark M. Freestate		4,207,341		8,558		—		—
Neil R. LeCompte		4,207,196		8,703		—		—

Class III Nominees ( Term expires 2006)
W. Edwin Kee, Jr.		4,186,446		29,453		—		—

Item 5. Other Information.

On June 1, 2005, the Office of the Comptroller of the Currency authorized Centreville National Bank’s to exercise trust powers.

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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).

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 (incorporated by reference to exhibit 10.11 of the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2005).

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: August 9, 2005	By:	/s/ W. Moorhead Vermilye
		W. Moorhead Vermilye
		President and Chief Executive Officer




Date: August 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

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).