THE CORPORATE LIBRARY

Related Party Transactions and Outside Related Director Information

Shore Bancshares, Inc. (SHBI)

3/25/2006 Proxy Information

During the past year Talbot Bank, Centreville National Bank, and Felton Bank have had banking transactions in the ordinary course of their businesses with their directors and officers and with the associates of such persons on substantially the same terms, including interest rates, collateral, and repayment terms on loans, as those prevailing at the same time for comparable transactions with others. The extensions of credit by Talbot Bank, Centreville National Bank, and Felton Bank to these persons have not and do not currently involve more than the normal risk of collectability or present other unfavorable features.

On April 1, 2004, the Company completed its merger with Midstate Bancorp pursuant to which the Company paid a total of $2,953,710 in cash and 82,786 shares of its Common Stock in exchange for all of the outstanding shares of Midstate Bancorp common stock. At the time of the merger, Mr. Kee was the Chairman of the Board of Midstate Bancorp and Mr. Evans was the President and Chief Executive Officer of Midstate Bancorp and its subsidiary, Felton Bank. By virtue of their ownership of shares of Midstate Bancorp common stock at the time of the merger, Mr. Kee received approximately $46,872 in cash and 1,320 shares of Common Stock as merger consideration and Mr. Evans received approximately $62,000 in cash and 1,746 shares of Common Stock as merger consideration. As part of the merger, the Company and Mr. Evans entered into a four-year employment agreement under which Mr. Evans is to serve as the President/CEO of Felton Bank and receive an annual salary of $105,000 (subject to annual adjustment), discretionary bonuses, fringe benefits, and participation in the pension, profit sharing, retirement, equity and incentive compensation plans and vacation generally available to other officers of the Company’s subsidiaries.

On November 1, 2002, Avon-Dixon purchased substantially all of the assets of W.M. Freestate & Son, Inc. (“W.M. Freestate”), an insurance producer firm that was owned by Mark M. Freestate. Under the terms of the acquisition agreement, Avon-Dixon agreed to make a deferred payment (earn-out) to W.M. Freestate of between $0 and $512,500 on or before December 16, 2005. The formula pursuant to which this payment is to be calculated was negotiated in good faith by the parties and is a function of the pre-acquisition income of W.M. Freestate and the post-acquisition income of the acquired business through December 31, 2004. The Company has determined that W.M. Freestate is entitled to the maximum deferred payment of $512,500. Because W.M. Freestate was dissolved on or about December 26, 2002, the deferred payment will be paid directly to Mr. Freestate. Under Mr. Freestate’s employment agreement with Avon-Dixon, he serves as an insurance producer and is entitled to certain insurance commissions as follows: (i) 32% of the commissions received on the commercial insurance business of W.M. Freestate that existed at the time of the acquisition; (ii) 50% of commissions received on the life insurance business he places; (iii) 32% of commissions received on the commercial insurance business he places; (iv) 50% of the first-year commissions received on personal lines insurance business he places; and (v) 20% of first-year commissions received on all insurance business that Mr. Freestate refers to another Avon-Dixon employee.