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

	28969 Information Lane, Easton, Maryland	21601
	(Address of Principal Executive Offices)	(Zip Code)

Title of Each Class:		Name of Each Exchange on Which Registered:
Common stock, par value $.01 per share		Nasdaq Global Select Market

Large accelerated filer ¨

Accelerated filer ¨

Non-accelerated filer ¨

Smaller Reporting Company þ

Part I
Item 1.	Business	4
Item 1A.	Risk Factors	16
Item 1B.	Unresolved Staff Comments	25
Item 2.	Properties	25
Item 3.	Legal Proceedings	26
Item 4.	Mine Safety Disclosures	26
Part II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and
	Issuer Purchases of Equity Securities	27
Item 6.	Selected Financial Data	29
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	46
Item 8.	Financial Statements and Supplementary Data	46
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	87
Item 9A.	Controls and Procedures	87
Item 9B.	Other Information	87
Part III
Item 10.	Directors, Executive Officers and Corporate Governance	87
Item 11.	Executive Compensation	88
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	88
Item 13.	Certain Relationships and Related Transactions, and Director Independence	88
Item 14.	Principal Accountant Fees and Services	88
Part IV
Item 15.	Exhibits and Financial Statement Schedules	89
SIGNATURES		90
EXHIBIT LIST		91

·

general economic conditions, whether national or regional, and conditions in the lending markets in which we participate that may have an adverse effect on the demand for our loans and other products, our credit quality and related levels of nonperforming assets and loan losses, and the value and salability of the real estate that we own or that is the collateral for our loans;

·

results of examinations of us by our regulators, including the possibility that our regulators may, among other things, require us to increase our reserve for loan losses or to write-down assets;

·

changing bank regulatory conditions, policies or programs, whether arising as new legislation or regulatory initiatives, that could lead to restrictions on activities of banks generally, or our subsidiary banks in particular, more restrictive regulatory capital requirements, increased costs, including deposit insurance premiums, regulation or prohibition of certain income producing activities or changes in the secondary market for loans and other products;

·

changes in market rates and prices may adversely impact the value of securities, loans, deposits and other financial instruments and the interest rate sensitivity of our balance sheet;

·

our liquidity requirements could be adversely affected by changes in our assets and liabilities;

·

the effect of legislative or regulatory developments, including changes in laws concerning taxes, banking, securities, insurance and other aspects of the financial services industry;

·

competitive factors among financial services organizations, including product and pricing pressures and our ability to attract, develop and retain qualified banking professionals;

·

the growth and profitability of non-interest or fee income being less than expected;

·

the effect of changes in accounting policies and practices, as may be adopted by the Financial Accounting Standards Board, the Securities and Exchange Commission (the “SEC”), the Public Company Accounting Oversight Board and other regulatory agencies; and

·

the effect of fiscal and governmental policies of the United States federal government.

	3

Item 1.

Business.

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	5

	6

 

	8

	9

	10

	11

·

Applying a 150% risk weight instead of a 100% risk weight for certain high volatility commercial real estate acquisition, development and construction loans.

·

Assigning a 150% risk weight to loans (other than residential mortgage) that are 90 days or more past due or on nonaccrual.

·

Providing for a 20% credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable, currently at 0%.

	12

	13

	14

	15

•

Economic conditions that negatively affect housing prices and the job market may result in further deterioration in credit quality of our loan portfolio, and such deterioration in credit quality could have a negative impact on our business;

•

Market developments may affect consumer confidence levels and may cause adverse changes in payment patterns, causing increases in delinquencies and default rates on loans and other credit facilities;

•

Demand for our products and services may decline;

•

Collateral for loans made by us may decline in value, in turn reducing a client's borrowing power, and reducing the value of assets and collateral associated with our loans held for investment;

	16

•

Our loan customers may not repay their loans according to their terms and any collateral securing payment may be insufficient to fully compensate us for the outstanding balance of the loan plus the costs we incur disposing of the collateral;

•

The processes we use to estimate the allowance for loan losses may no longer be reliable because they rely on complex judgments, including forecasts of economic conditions, which may no longer be capable of accurate estimation;

•

A reduction in the size, spending or employment levels of the federal, state and/or local governments in the Washington, DC metropolitan area could have a negative effect on the economy of the region, on our customers, and on real estate prices;

•

Continued turmoil in the market, and loss of confidence in the banking system, could require the Banks to pay higher interest rates to obtain deposits to meet the needs of their depositors and borrowers, resulting in reduced margin and net interest income. If conditions worsen significantly, it is possible that banks such as the Banks may be unable to meet the needs of their depositors and borrowers, which could, in the worst case, result in the Banks being placed into receivership; and

•

Compliance with increased regulation of the banking industry may increase our costs, limit our ability to pursue business opportunities, and divert management efforts.

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	24

 

	25

 

Item 4.

Mine Safety Disclosures.

	26

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

	Registrar & Transfer Company
	10 Commerce Drive
	Cranford, New Jersey 07016
	Investor Relations:  1-800-368-5948
	E-mail for investor inquiries: info@rtco.com.
	www.rtco.com

	27

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	30

	31

	32

	33

	34

Income Taxes

	35

	36

	37

	38

	39

	40

	41

	42

	43

	44

	45

Management’s Report on Internal Control over Financial Reporting	47
Report of Independent Registered Public Accounting Firm	48
Consolidated Balance Sheets	49
Consolidated Statements of Operations	50
Consolidated Statements of Comprehensive Loss	51
Consolidated Statements of Changes in Stockholders’ Equity	52
Consolidated Statements of Cash Flows	53
Notes to Consolidated Financial Statements	55

	46

March 20, 2014
/s/ Lloyd L. Beatty, Jr.		/s/ George S. Rapp
Lloyd L. Beatty, Jr.		George S. Rapp
President and Chief Executive Officer		Vice President and Chief Financial Officer
(Principal Executive Officer)		(Principal Accounting Officer)

	47

	48

 

	50

	51

 

	52

 

	53

   

	55

	56

Premises and Equipment

	57

Basic and Diluted Earnings Per Common Share

Transfers of Financial Assets

	58

	59

	60

 

	62

NOTE 3.  LOANS AND ALLOWANCE FOR CREDIT LOSSES

	63

	64

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	66

	67

 
   
   

NOTE 6.  GOODWILL AND OTHER INTANGIBLE ASSETS

 

NOTE 10.  SHORT-TERM BORROWINGS

	71

NOTE 11.  BENEFIT PLANS

	72

NOTE 13.  DEFERRED COMPENSATION

	73

	74

 

	76

 

 

NOTE 19.  FAIR VALUE MEASUREMENTS

	77

 

	78

	79

 

NOTE 20.  DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

 

	80

	81

 

NOTE 21.  FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

NOTE 22.  CONTINGENCIES

	82

 

	83

	84

 

NOTE 24.  QUARTERLY FINANCIAL RESULTS (unaudited)

	85

 

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

Item 9A.

Controls and Procedures.

Item 9B.

Other Information.

Item 10.

Directors, Executive Officers and Corporate Governance.

·

Election of Directors (Proposal 1);

·

Continuing Directors;

·

Executive Officers;

·

Qualifications of Director Nominees and Continuing Directors;

·

Section 16(a) Beneficial Ownership Reporting Compliance; and

·

Corporate Governance Matters (under the heading, “Board Committees”).

	87

Item 11.

Executive Compensation.

·

Executive Compensation

·

Director Compensation

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

(1)

In addition to stock options and stock appreciation rights, the 2006 Plan permits the grant of stock awards, stock units, and performance units, and the shares available for issuance shown in column (c) may be granted pursuant to such awards. Subject to the anti-dilution provisions of the Omnibus Plan, the maximum number of shares of restricted stock that may be granted to any participant in any calendar year is 45,000; the maximum number of restricted stock units that may be granted to any one participant in any calendar year is 45,000; and the maximum dollar value of performance units that may be granted to any one participant in any calendar year is $1,500,000. As of December 31, 2013, the Company has granted 84,608 shares of restricted stock that are not reflected in column (a) of this table.

Item 13.

Certain Relationships and Related Transactions, and Director Independence.

Item 14.

Principal Accountant Fees and Services.

	88

Item 15.

Exhibits and Financial Statement Schedules.

 

		Shore Bancshares, Inc.
Date:	March 20, 2014	By:	/s/ Lloyd L. Beatty, Jr.
			Lloyd L. Beatty, Jr.
			President and Chief Executive Officer

	/s/ Herbert L. Andrew, III		/s/ Blenda W. Armistead
	Herbert L. Andrew, III, Director		Blenda W. Armistead, Director
	March 20, 2014		March 20, 2014
	/s/David J. Bates		/s/ Lloyd L. Beatty, Jr.
	David J. Bates, Director		Lloyd L. Beatty, Jr., Director
	March 20, 2014		March 20, 2014
	/s/ James A. Judge		/s/ Neil R. LeCompte
	James A. Judge, Director		Neil R. LeCompte, Director
	March 20, 2014		March 20, 2014
	/s/ Frank E. Mason, III		/s/ Christopher F. Spurry
	Frank E. Mason, III, Director		Christopher F. Spurry, Director
	March 20, 2014		March 20, 2014
	/s/ F. Winfield Trice, Jr		/s/ W. Moorhead Vermilye.
	F. Winfield Trice, Jr., Director		W. Moorhead Vermilye, Director
	March 20, 2014		March 20, 2014
	/s/ John H. Wilson		/s/ George S. Rapp
	John H. Wilson, Director		Vice President and Chief Financial Officer
	March 20, 2014		(Principal Accounting Officer)
			March 20, 2014

	90

Exhibit No.		Description
3.1(i)		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)
3.1(ii)		Articles Supplementary relating to the Fixed Rate Cumulative Perpetual Preferred Stock, Series A (incorporated by reference Exhibit 4.1 of the Company’s Form 8-K filed on January 13, 2009)
3.1(iii)		Articles Supplementary relating to the reclassification of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, as common stock (incorporated by reference Exhibit 3.1(i) of the Company’s Form 8-K filed on June 17, 2009)
3.2(i)		Amended and Restated By-Laws (incorporated by reference to Exhibit 3.2(i) of the Company’s Form 10-K for the year ended December 31, 2010)
3.2(ii)		First Amendment to Amended and Restated By-Laws (incorporated by reference to Exhibit 3.2(ii) of the Company’s Form 10-K for the year ended December 31, 2010)
3.2(iii)		Second Amendment to Amended and Restated By-Laws (incorporated by reference to Exhibit 3.2(iii) of the Company’s Form 10-K for the year ended December 31, 2010)
3.2(iv)		Third Amendment to Amended and Restated By-Laws (incorporated by reference to Exhibit 3.2(iv) of the Company’s Form 10-K for the year ended December 31, 2010)
10.1		Amended and Restated Employment Agreement, dated June 16, 2011, between the Company and W. Moorhead Vermilye (incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q/A for the quarter ended June 30, 2011 filed on November 14, 2011).
10.2		Employment Agreement, dated June 16, 2011, between the Company and Lloyd L. Beatty, Jr. (incorporated by reference to Exhibit 10.2 of the Company’s Form 10-Q/A for the quarter ended June 30, 2011 filed on November 14, 2011)
10.3		Amended Summary of Compensation Arrangement for William W. Duncan, Jr. (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on February 14, 2007, as amended by Form 8-K/A filed on May 3, 2007)
10.4		Summary of Compensation Arrangement between Centreville National Bank and F. Winfield Trice, Jr. (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on August 13, 2007)
10.5		Employment Agreement between The Avon-Dixon Agency, LLC and Mark M. Freestate (incorporated by reference to Exhibit 10.6 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2006)
10.6		Shore Bancshares, Inc. Management Incentive Plan (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on April 21, 2010)
10.7		Shore Bancshares, Inc. Amended and Restated Executive Deferred Compensation Plan (incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed on February 14, 2007)
10.8		Deferral Election, Investment Designation, and Beneficiary Designation Forms under the Shore Bancshares, Inc. Amended and Restated Executive Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K filed on October 2, 2006)
10.9		Form of Centreville National Bank of Maryland Director Indexed Fee Continuation Plan Agreement with Messrs. Freestate and Pierson (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on December 12, 2006)
10.10		Form of Amended and Restated Director Indexed Fee Continuation Plan Agreement between Centreville National Bank and Messrs. Freestate and Pierson (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed on January 7, 2009)

	91

10.11		Form of Centreville National Bank Life Insurance Endorsement Split Dollar Plan Agreement with Messrs. Freestate and Pierson (incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K filed on December 12, 2006)
10.12		Talbot Bank of Easton, Maryland Supplemental Deferred Compensation Plan (incorporated by reference to Exhibit 10.7 of the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2005)
10.13		First Amendment to The Talbot Bank of Easton, Maryland Supplemental Deferred Compensation Plan for the benefit of W. Moorhead Vermilye (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on January 7, 2009)
10.14		Talbot Bank of Easton, Maryland Supplemental Deferred Compensation Plan Trust Agreement (incorporated by reference to Exhibit 10.7 of the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2005)
10.15		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))
10.16		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))
10.17		Shore Bancshares, Inc. 2006 Stock and Incentive Compensation Plan (incorporated by reference to Appendix A of the Company’s 2006 definitive proxy statement filed on March 24, 2006)
10.18		Form of Restricted Stock Award Agreement under the 2006 Stock and Incentive Compensation Plan (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on April 11, 2007)
21		Subsidiaries of the Company (included in the “BUSINESS—General” section of Item 1 of Part I of this Annual Report on Form 10-K)
23		Consent of Stegman & Company (filed herewith)
31.1		Certifications of the PEO 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		Certification pursuant to Section 906 of the Sarbanes-Oxley Act (furnished herewith)

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