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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934



For the fiscal year ended December 31, 2004



Commission file number: 000-23847



SHORE FINANCIAL CORPORATION

(Exact
name of Registrant in its charter)



|                                                              |  |                                    
|------------------------------------------------------------- |  | -----------------------------------
|VIRGINIA                                                      |  | 54-1873994                         
|(State or other jurisdiction ofincorporation or organization) |  | (I.R.S. EmployeeIdentification No.)



25020 Shore Parkway,
Onley, Virginia 23418

(Address or principal executive offices) (Zip code)



Issuers telephone number, including area code: (757) 787-1335



Securities registered pursuant to Section 12(b) of the
Act: None



Securities registered pursuant to Section
12(g) of the Act:

Common Stock, $0.33 par value

(Title of Class)



Check whether the
Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 ̈



Check if disclosure of delinquent filers in
response to Item 405 of Regulation S-K is not contained in this form and no disclosure will be contained, to the best of Registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K.  x



Check whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes ̈No  x



On June 30, 2004, the aggregate market value of the 1,703,130 shares of Common Stock of the Registrant outstanding on such date, excluding shares held by affiliates of the Registrant, was approximately $27.1 million.
This figure is based on the closing price of $15.94 per share of the Registrants Common Stock on June 30, 2004.



Indicate the number of shares outstanding of each of the Registrant classes of common stock as of March 11, 2005.



|                              |  |                              
|----------------------------- |  | -----------------------------
|Class                         |  | Outstanding at March 11, 2005
|Common Stock, $0.33 par value |  | 2,070,697                    



DOCUMENTS
INCORPORATED BY REFERENCE



|(1) | Portions of the Registrants definitive proxy statement to be used in conjunction with the Registrants 2005 Annual Meeting of Shareholders are incorporated into Part III
of this Form 10-K.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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PART I



|Item 1. | DESCRIPTION OF BUSINESS
|------- | -----------------------



General



Shore Financial Corporation (the Company) is a Virginia corporation organized in September 1997 by Shore Bank (the Bank) for the purpose of becoming a unitary holding company of the Bank. The
Companys assets primarily consist of its investment in the Bank and approximately $4.3 million in cash and other investments. The business and management of the Company consists of the business and management of the Bank. The Bank is a
Virginia chartered Federal Reserve member commercial bank whose predecessor began business in 1961. The Company and the Bank are headquartered in Onley, Virginia. The Bank operates seven banking offices on the Eastern Shore of Virginia and Maryland,
including the counties of Accomack and Northampton in Virginia and Salisbury/Wicomico County area in Maryland. The Bank has a 24.6% market share of the banking deposits in the Accomack and Northampton Counties in Virginia and 3.2% of the market
share in Wicomico County Maryland, based on June 30, 2004 deposit information. At December 31, 2004, the Company had consolidated assets of $237.7 million, Bank deposits of $192.7 million and stockholders equity of $22.0 million.



The Bank offers a full menu of banking products and services in the
communities it serves. For business customers, the Bank offers checking, cash management, credit card merchant services, and a variety of loan options including operating lines of credit, equipment loans, and real estate loans. For consumers, the
Bank offers a totally free checking account, along with telephone and Internet banking services, check cards, free use of ATMs, and the full compliment of retail banking products. The Bank is a leading real estate lender in its Virginia markets.
During 2004, the Bank opened a mortgage banking division dedicated to offering and selling conforming fixed rate loan products. The mortgage banking division offers a wide variety of residential loans, which are originated on a pre-sold basis to
several investors. The Bank does not securitize these loans.



The Company also offers other services that complement the core financial services offered by the Bank. The Banks subsidiary, Shore Investments, Inc. (Shore Investments), provides non-deposit investment products including
stocks, bonds, mutual funds, and insurance products through the Banks banking centers. During 2004, Shore Investments added a Certified Financial Planner in its Maryland market. Shore Investments has also invested in a Virginia title insurance
company that enables the Bank to offer title insurance policies to its real estate loan customers. The Company also has an affiliate relationship with a trust company in Eastern Virginia that provides a vehicle to offer trust and asset management
services within the Banks markets.



The Bank delivers its
banking services through seven full-service banking centers, six ATMs, the Internet and the telephone. During 2004, the Company completed construction of a new headquarters building in Onley, Virginia that houses its corporate offices and item
processing, check imaging and accounting functions. Eighty-one dedicated employees staff the Companys facilities.



Market Area



The Banks headquarters, operations center, and five banking centers are located in Accomack and Northampton Counties, which together form the
Eastern Shore of Virginia. These two counties run approximately seventy miles from the Maryland state line south and have thousands of miles of coastline on the Chesapeake Bay and its tributaries on the west and the Atlantic Ocean on the east. They
represent the southern portion of the DELMARVA (Delaware-Maryland-Virginia) Peninsula.



The Eastern Shore of Virginia is 20 miles by bridge and tunnel from Hampton Roads, Virginia (Norfolk, Virginia Beach, Portsmouth, Hampton, Suffolk), one of the largest population centers in the country. Tourism and
agriculture, along with poultry and seafood processing are the predominant industries on the Eastern Shore.



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Northamption County, Virginia has experienced significant development in recent years, especially on the
southern end of the county. A planned-unit development named Bay Creek opened in spring 2001 that includes a 3,000-unit gated community, an Arnold Palmer designed golf course and a large marina. Bay Creek continues to generate significant real
estate sales, and construction is underway on a second course designed by golf legend Jack Nicklaus that is expected to open during 2005.



Accomack County, Virginia is the home of NASAs Wallops Island Space Facility and the Regional Space Port Authority, as well as the tourist
destinations of Chincoteague Island and the Assateague National Wildlife Refuge that draws over one million visitors annually. Small pockets of development have also occurred in Accomack County.



The Bank also has two banking centers in Salisbury, Maryland, the crossroads
of the Delmarva Peninsula. Approximately 175,000 people live within a 30-mile radius of Salisbury, which is the regional hub for industry, commerce, health care, recreation and the arts. Salisbury is home to Perdue Farms, Peninsula Regional Medical
Center, and Salisbury University, as well as a vibrant microwave and wireless communications industry. Along with a strong and diversified industrial base, wholesalers, retailers, and service firms serving ten counties in three states have made
Wicomico County a regional supply center for the Eastern Shore of Delaware, Maryland, and Virginia.



Competition



In its
market area, the Bank competes with regional commercial banks and independent community banks with multiple offices on the Eastern Shore. These and certain other non-bank competitors may have much greater financial resources, diversified markets,
and branch networks than the Bank and may be able to offer similar services at varying costs with higher lending limits. With nationwide banking, the Bank also faces the prospect of additional competitors entering its market area.



The Bank faces strong competition both in originating loans and in attracting
deposits. Competition in originating loans comes primarily from commercial banks and mortgage lenders and to a lesser extent consumer finance companies, credit unions, and savings institutions. The Bank competes for loans principally on the basis of
the interest rates and loan fees it charges, the types of loans it originates and the quality of service it provides to borrowers.



The Bank faces substantial competition in attracting deposits from other banks, money market and mutual funds, credit unions, insurance companies and
brokerage houses. The ability of the Bank to attract and retain deposits depends on its ability to provide an investment opportunity that satisfies the requirements of investors as to rate of return, liquidity, risk, convenience and other factors.
The Bank competes for these deposits by offering a variety of deposit accounts at competitive rates, having convenient business hours, and by marketing its position as the only locally-owned independent bank on the Eastern Shore of Virginia, and one
of four in Salisbury/Wicomico, Maryland.



Credit Policies



The principal risk associated with each of the categories of loans in the
Banks portfolio is the creditworthiness of its borrowers. Within each category, such risk is increased or decreased, depending on prevailing economic conditions. The Bank employs extensive written policies and procedures to mitigate credit
risk. The loan portfolio is managed under a specifically defined credit process. This process includes formulation of portfolio management strategy, guidelines for underwriting standards and risk assessment, procedures for ongoing identification and
management of credit deterioration, and regular portfolio reviews to estimate loss exposure and to ascertain compliance with the Banks policies.



In the normal course of business, the Bank makes various commitments and incurs certain contingent liabilities that are disclosed but not reflected in its
annual financial statements, including commitments to extend credit. At December 31, 2004, commitments to extend credit totaled $46.0 million.



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One-to-Four Family Residential Real Estate Lending. The Banks primary lending program
has been the origination of loans secured by one-to-four family residences, virtually all of which are located in its market area. At December 31, 2004, one-to-four family real estate loans aggregated $86.5 million or 48.6% of the Banks gross
loans. The Bank evaluates both the borrowers ability to make principal and interest payments and the value of the property that will secure the loan. Federal law permits the Bank to make loans in amounts of up to 100% of the appraised value of
the underlying real estate. Loans are made with a loan to value up to 90% for conventional mortgage loans on primary residences. The Bank generally originates mortgage loans that have an adjustable rate feature in which the rate changes every one,
three or five years. Most adjustable rate loans are tied to comparable maturity U.S. Treasury Bills. Where loans are not indexed, they generally have a balloon feature. However, the Bank does offer fifteen year fixed rate home equity and purchase
money mortgages on a more restrictive basis and offers conforming fixed rate mortgages through its mortgage banking division. There are unquantifiable risks resulting from potential increased costs to the borrower as a result of repricing.
Accordingly, it is possible that, during periods of rising interest rates, the risk of defaults on adjustable rate mortgages (ARMs) may increase due to the upward adjustment of interest costs to borrowers.



Construction Lending. The Bank makes local construction loans,
primarily residential and small commercial loans. The construction loans are secured by the property for which the loan was obtained. At December 31, 2004, construction loans outstanding were $5.7 million or 3.2% of gross loans. The average life of
a construction loan is less than twelve months and they either reprice daily based on the prime rate or are fixed during the construction period.



Commercial Real Estate Lending. The Bank also originates commercial real estate loans. Various types of commercial real estate secure these
loans, including multifamily residential buildings, commercial buildings and offices, and raw land used for development. At December 31, 2004, commercial real estate loans aggregated $59.4 million or 33.3% of the Banks gross loans. The
interest rates on commercial real estate loans are usually fixed for 1 to 5 years, generally amortize over 5 to 15 years and may have a call provision. The Banks commercial real estate loans are secured by properties in its market area.



In its underwriting of commercial real estate, the Bank may
lend, under federal regulation, up to 100% of the security propertys appraised value, although the Banks loan to appraised value ratio on such properties is 80% or less in most cases. Commercial real estate lending entails significant
additional risk, compared with residential mortgage lending. Commercial real estate loans may involve larger loan balances concentrated with single borrowers or groups of related borrowers. Additionally, the payment experience on loans secured by
income producing properties is typically dependent on the successful operation of a business or a real estate project and thus may be subject to adverse conditions in the real estate market or in the economy generally. The Banks commercial
real estate loan underwriting criteria require an examination of debt service coverage ratios, the borrowers creditworthiness and prior credit history and reputation, and the personal guarantees or endorsements of borrowers.



Commercial Loans. At December 31, 2004, commercial loans
aggregated $8.7 million or 4.9% of the Banks gross loans. Commercial business loans generally have a higher degree of risk than residential mortgage loans, but have commensurably higher yields. To manage these risks, the Bank generally secures
appropriate collateral and carefully monitors the financial condition of its business borrowers. Commercial business loans typically are made on the basis of the borrowers ability to make repayment from the cash flow generated by its business
and are often secured by business assets, such as accounts receivable, equipment and inventory. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business
itself. Further, the collateral for commercial business loans may depreciate over time and cannot be appraised with as much precision as residential real estate. The Bank has a credit review and monitoring system to regularly review the cash flow
and collateral of commercial borrowers.



Consumer
Lending. The Bank offers various secured and unsecured consumer loans, including unsecured personal loans and lines of credit, home equity lines of credit, automobile loans, deposit account loans,



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installment and demand loans, and letters of credit. At December 31, 2004, the Bank had consumer loans of $18.0 million or 10.1% of gross loans. Such loans
are generally made to customers with whom the Bank has a preexisting relationship and are generally in amounts of under $100,000. The Bank originates virtually all of its consumer loans in its market area



Consumer loans may entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans that are unsecured, such as lines of credit, or secured by rapidly depreciable assets such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. The remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition,
consumer loan collections are dependent on the borrowers continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal
and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.



Employees



At December 31, 2004, the Company had 66 full-time and 15 part-time employees. The Company considers relations with its employees to be good.



Regulation and Supervision



Set forth below is a brief description of certain laws and regulations that
relate to the regulation of the Company and the Bank. The descriptions of these laws and regulations, as well as descriptions of laws and regulations contained elsewhere herein, do not purport to be complete and are qualified in their entirety by
reference to applicable laws and regulations.



The Company



General. The Company, as a bank holding
company, is subject to regulation under the Bank Holding Company Act of 1956 (the BHCA) and the regulation, supervision and examination requirements of the Board of Governors of the Federal Reserve System (the Federal
Reserve). Bank holding companies are subject to extensive regulation by the Federal Reserve as set forth in Regulation Y, 12 C.F.R. Part 225. Regulation Y establishes the registration, reporting, examination, applications, acquisitions,
control and divestiture, change in bank control, appraisals, and change in director and senior executive officers requirements applicable to bank holding companies. Regulation Y and the interpretations and rulings issued by the Federal Reserve
thereunder identify various prohibited non-banking activities in which bank holding companies and their subsidiaries may not engage as well as various exempt activities in which a bank holding company and its subsidiaries may engage either with or,
in some cases, without prior Federal Reserve approval. Regulation Y further confirms the authority of the Federal Reserve under the BHCA to impose criminal and civil penalties for violations of the BHCA and the regulations and orders issued
thereunder and to issue cease and desist orders when necessary in connection therewith.



Activities Obligations and Restrictions. There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries that are designed to reduce
potential loss exposure to the depositors of the depository institutions and to the Federal Deposit Insurance Corporation (FDIC) insurance funds. For example, under a policy of the Federal Reserve with respect to bank holding company
operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so absent such policy.



Banking laws also provide that amounts received from the
liquidation or other resolution of any insured depository institution by any receiver must be distributed (after payment of secured claims) to pay the deposit



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liabilities of the institution prior to payment of any other general or unsecured senior liability, subordinated liability, general creditor or stockholder.
This provision would give depositors a preference over general and subordinated creditors and stockholders in the event a receiver is appointed to distribute the asset of any bank or savings bank subsidiaries.



The Corporation is subject to the periodic reporting requirements of the
Securities and Exchange Act of 1934, as amended (the Exchange Act), including the filing of annual, quarterly and other reports with the Securities and Exchange Commission (the SEC). As an Exchange Act reporting company, the
Corporation is directly affected by the Sarbanes-Oxley Act of 2002 and the rules and regulations enacted pursuant thereto (the SOX Act), the corporate responsibility and accounting reform legislation signed into law on July 30, 2002.
Parts of the SOX Act that already are effective include provisions that (i) require that periodic reports containing financial statements that are filed with the SEC be accompanied by Chief Executive Officer and Chief Financial Officer
certifications as to their accuracy and compliance with law; (ii) prohibit public companies, with certain limited exceptions, from making personal loans to their directors or executive officers; (iii) force company Chief Executive Officers and Chief
Financial Officers to forfeit bonuses and profits if company financial statements are restated due to misconduct; (iv) require audit committees to pre-approve all audit and non-audit services provided by an issuers outside auditors, except for
deminimis non-audit services; (v) protect employees of public companies who assist in investigations relating to violations of the federal securities laws from job discrimination; (vi) require companies to disclose in plain English on a rapid
and current basis material changes in their financial condition or operations; (vii) require a public companys Section 16 insiders to make Form 4 filings with the SEC within two business days following the day on which purchases or sales
of the companys equity securities were made; and (viii) increase penalties for existing crimes and create new criminal offenses. Compliance with other provisions will be required after implementing rules and regulations are adopted by the SEC
and the newly created Public Company Accounting Oversight Board (PCAOB) authorized by the SOX Act. Management anticipates that additional expenses incurred in complying with the requirements of the SOX Act and the regulations adopted by
the SEC and the PCAOB may significantly impact earnings in future periods.



The Bank



General. As a state
chartered commercial bank, the Bank is subject to regulation, supervision and examination requirements of the Virginia State Corporation Commissions (SCC) Bureau of Financial Institutions. The Bank is also subject to the
regulation, supervision and examination requirements of the Federal Reserve and the FDIC. State and federal laws also govern the activities in which the Bank may engage, the investments it may make and the aggregate amount of loans that may be
granted to one borrower. Various consumer and compliance laws and regulations also affect the Banks operations. The Federal Reserve and the SCC conduct periodic examinations to test the Banks compliance with various regulatory
requirements. The SCC completed its most recent examination in February 2004, while the Federal Reserve completed a compliance examination of the Bank during November 2002 and a safety and soundness examination during February 2003. Federal and
state laws preclude the Bank from disclosing the results of these examinations.



Insurance of Accounts. The FDIC insures the deposits of the Bank up to the limits set forth under applicable law. A majority of the deposits of the Bank are subject to the deposit insurance assessments
of the Savings Association Insurance Fund (SAIF). However, a portion of the Banks deposits is subject to assessments imposed by the Bank Insurance Fund (BIF). The FDIC equalized the assessment rates for BIF-insured and
SAIF-insured deposits effective January 1, 1998. The assessments imposed on all FDIC deposits for deposit insurance have an effective rate ranging from zero ($2,000 minimum) to 0.27 percent of a banks average assessment base, depending on the
institutions capital position and other supervisory factors.



Regulatory Capital Requirements. The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Generally, the Company and the Bank are required to maintain a
minimum ratio of total capital to risk-weighted assets of 8%. Failure to meet minimum capital



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requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material
effect on the Companys financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of
assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and
other factors.



Quantitative measures established by regulation
to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets
(as defined). Management believes, as of December 31, 2004, that the Company meets all capital adequacy requirements to which it is subject. In fact, at December 31, 2004, the Bank exceeded all of its regulatory capital requirements, with total
capital to risk-weighted assets, tier 1 capital to risk-weighted assets and tier 1 capital to average assets ratios of 12.02%, 10.75% and 8.04%, respectively.



Capital Distributions. The Bank is subject to legal limitations on capital distributions including the payment of dividends, if, after
making such distribution, the institution would become undercapitalized (as such term is used in the statute). For all state member banks of the Federal Reserve seeking to pay dividends, the prior approval of the applicable Federal
Reserve Bank is required if the total of all dividends declared in any calendar year will exceed the sum of the banks net profits for that year and its retained net profits for the preceding two calendar years. Federal law also generally
prohibits a depository institution from making any capital distribution (including payment of a dividend or payment of a management fee to its holding company) if the depository institution would thereafter fail to maintain capital above regulatory
minimums. Federal Reserve member banks are also authorized to limit the payment of dividends by any state member bank if such payment may be deemed to constitute an unsafe or unsound practice. In addition, under Virginia law, no dividend may be
declared or paid that would impair a Virginia chartered banks paid-in capital. The SCC has general authority to prohibit payment of dividends by a Virginia chartered bank if it determines that the limitation is in the public interest and is
necessary to ensure the banks financial soundness.



Financial Modernization Legislation. The Gramm-Leach-Bliley Act of 1999 (GLBA) was signed into law on November 12, 1999. The main purpose of GLBA is to permit greater affiliations within the financial services
industry, primarily banking, securities and insurance. The provisions of GLBA that are believed to be of most significance to the Company are discussed below.



GLBA repeals sections 20 and 32 of the Glass-Steagall Act, which separated commercial banking from investment banking, and substantially amends the
BHCA, which limited the ability of bank holding companies to engage in the securities and insurance businesses. To achieve this purpose, GLBA creates a new type of company, the financial holding company. A financial holding company may
engage in or acquire companies that engage in a broad range of financial services, including



| |  |  | Securities activities such as underwriting, dealing, brokerage, investment and merchant banking; and
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | Insurance underwriting, sales and brokerage activities.
| | - |  | -------------------------------------------------------



A bank holding company may elect to become a financial holding company only if all of its depository institution subsidiaries are well-capitalized,
well-managed and have at least a satisfactory Community Reinvestment Act rating. However, the Company has not elected to be treated as a financial holding company under GLBA at this time.



GLBA, and certain new regulations issued by federal banking agencies, also provide new protections against the transfer and
use by financial institutions of consumers nonpublic personal information. A financial institution must provide to its customers, at the beginning of the customer relationship and annually thereafter, the institutions policies and
procedures regarding the handling of customers nonpublic personal financial information. The new privacy provisions generally prohibit a financial institution from providing a customers



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personal financial information to unaffiliated third parties unless the institution discloses to the customer that the information may be so provided and the
customer is given the opportunity to opt out of such disclosure.



Many of GLBAs provisions, including the customer privacy protection provisions, required the Federal bank regulatory agencies and other regulatory bodies to adopt regulations to implement those respective provisions. Neither the
provisions of GLBA nor the acts implementing regulations, as proposed or adopted, have a material impact on the Companys or the Banks regulatory capital ratios (as discussed above) or ability to continue to operate in a safe and
sound manner.



USA Patriot Act of 2001. In
October 2001, the USA Patriot Act of 2001 (the Patriot Act) was enacted in response to the terrorist attacks in New York, Pennsylvania and Washington, D.C. which occurred on September 11, 2001. The Patriot Act is intended to strengthen
U.S. law enforcements and the intelligence communities abilities to work cohesively to combat terrorism on a variety of fronts. The potential impact of the Patriot Act on financial institutions of all kinds is significant and wide ranging. The
Patriot Act contains sweeping anti-money laundering and financial transparency laws and imposes various regulations, including standards for verifying client identification at account opening, and rules to promote cooperation among financial
institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering.



Reporting Terrorist Activities. The Federal Bureau of Investigation (FBI) has sent, and will send, banking regulatory agencies
lists of the names of persons suspected of involvement in the September 11, 2001 terrorist attacks. The Bank has been requested, and will be requested, to search its records for any relationships or transactions with persons on those lists. If the
ank finds any relationships or transactions, it must file a suspicious activity report and contact the FBI.



The Office of Foreign Assets Control (OFAC), which is a division of the Department of Treasury, is responsible for helping to insure that
United States entities do not engage in transactions with enemies of the United States, as definied by various Executive Orders and Acts of Congress. OFAC has sent, and will send, banking regulatory agencies lists of names of persons and
organizations suspected of aiding, harboring or engaging in terrorist acts. If the Bank finds a name on any transaction, account or wire transfer that is on an OFAC list, it must freeze such account, file a suspicious activity report and notify the
FBI. The Bank has appointed an OFAC compliance officer to oversee the inspection of its accounts and the filing of any notifications. The Bank actively checks high-risk OFAC areas such as new accounts, wire transfers and customer files. The Bank
performs these checks utilizing software, which is updated each time a modification is made to the lists provided by OFAC and other agencies of Specially Designated Nationals and Blocked Persons.



|Item 2. | DESCRIPTION OF PROPERTY
|------- | -----------------------



The Companys main office is located at 25020 Shore Parkway, Onley, Virginia, a two story colonial brick building built in 2004 that houses the
Companys corporate offices and operations center. Through August 2004, the completion date of its main office, the Company leased commercial office space that accommodated the Companys administrative operations and the Banks item
processing function. The Bank operates seven other banking offices (5 in Virginia and 2 in Salisbury, Maryland), owning six of them free of any encumbrances and the other the Bank owns the building free of any encumbrances, but leases the land under
an agreement expiring in 2009, with two remaining five-year renewals.



|Item 3. | LEGAL PROCEEDINGS
|------- | -----------------



In the ordinary course of its operations, the Company is a party to various legal proceedings. Based upon information currently available, management
believes that such legal proceedings, in the aggregate, will not have a material adverse effect on the business, financial condition, or results of operations of the Company.



|Item 4. | SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
|------- | ----------------------------------------------------



No matter was submitted to a vote of security holders during the fourth quarter of 2004.



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PART II



|Item 5. | MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
|------- | --------------------------------------------------------



Market Information



The Companys common stock is listed on the Nasdaq National Market under the symbol SHBK. The following table sets forth the per share
high and low closing prices along with dividends that were paid quarterly on the common stock as reported on the Nasdaq National Market for the periods indicated:



|               |  |      |       |     |   |                   |  |   |      
|-------------- |  | ---- | ----- | --- | - | ----------------- |  | - | -----
|               |  | High |       | Low |   | CashDividendsPaid
|2003           |  |      |       |     |   |                   |  |   |      
|First Quarter  |  | $    | 10.84 |     | $ | 9.88              |  | $ | 0.040
|Second Quarter |  |      | 11.67 |     |   | 10.38             |  |   | 0.040
|Third Quarter  |  |      | 13.75 |     |   | 11.25             |  |   | 0.040
|Fourth Quarter |  |      | 17.46 |     |   | 13.42             |  |   | 0.048
|               |  |      |      
|2004           |  |      |       |     |   |                   |  |   |      
|First Quarter  |  | $    | 17.49 |     | $ | 15.61             |  | $ | 0.050
|Second Quarter |  |      | 17.00 |     |   | 16.05             |  |   | 0.050
|Third Quarter  |  |      | 16.25 |     |   | 15.15             |  |   | 0.060
|Fourth Quarter |  |      | 20.00 |     |   | 15.16             |  |   | 0.060



At February 11, 2005,
there were 2,067,697 shares of common stock outstanding held by 948 stockholders of record.



Dividend Policy



During
December 2003, the Company declared a 20% stock dividend paid on December 31, 2003 to shareholders of record on December 20, 2003. All 2003 dividends per share have been adjusted to reflect December 2003 20% stock dividend. On January 12, 2005, the
Company declared a $0.06 per share quarterly cash dividend paid on February 1, 2005 to shareholders of record on January 24, 2005. The Company hopes to continue with a quarterly cash dividend on its common stock in the future. Any future
determination as to payment of cash dividends will be at the discretion of the Companys Board of Directors and will depend on the Companys earnings, financial condition, capital requirements and other factors deemed relevant by the Board
of Directors. During the years ended December 31, 2004 and 2003, the Bank did not pay any dividends to the Company.



Equity Compensation Plan Information



The following table summarizes information, as of December 31, 2004, relating to the equity compensation plans of the Company pursuant to which grants of
options to acquire shares of common stock may be granted from time to time.



|                                                       |  |                                                                                      |     |  |                                                                          |       |                                                                                      |        
|------------------------------------------------------ |  | ------------------------------------------------------------------------------------ | --- |  | ------------------------------------------------------------------------ | ----- | ------------------------------------------------------------------------------------ | -------
|                                                       |  | Number of Shares to beIssued Upon Exerciseof Outstanding Options,Warrants and Rights |     |  | Weighted-AverageExercise Price ofOutstanding Options,Warrants and Rights |       | Number of Shares RemainingAvailable for Future IssuanceUnder Equity CompensationPlan
|Equity compensation plans approved by shareholders (1) |  | 92,899                                                                               | (2) |  | $                                                                        | 10.12 |                                                                                      | 240,900
|Equity compensation plans not approved by shareholders |  |                                                                                     |     |  |                                                                          |      |                                                                                      |       
|Total                                                  |  | 92,899                                                                               |     |  | $                                                                        | 10.12 |                                                                                      | 240,900

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|(1) | These plans are the Companys 1992 Stock Option Plan and 2001 Stock Incentive Plan.
|--- | -----------------------------------------------------------------------------------



|(2) | Consists of options granted pursuant to the Companys stock incentive plans.
|--- | ----------------------------------------------------------------------------



9



---

|Item 6. | SELECTED FINANCIAL DATA
|------- | -----------------------



|                                                                   |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|------------------------------------------------------------------ |  | ------------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                                   |  | Years Ended December 31,              |        
|                                                                   |  | 2004                                  |         |   | 2003 |   |         | 2002 |  |   | 2001    |   |  | 2000 |        
|                                                                   |  | (In thousands, except per share data) |        
|Income Statement Data:                                             |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Interest income                                                    |  | $                                     | 10,697  |   |      | $ | 9,501   |      |  | $ | 9,406   |   |  | $    | 9,917   |   |  | $ | 9,834   |  
|Interest expense                                                   |  |                                       | 3,275   |   |      |   | 3,275   |      |  |   | 3,716   |   |  |      | 4,929   |   |  |   | 5,041   |  
|Net interest income                                                |  |                                       | 7,422   |   |      |   | 6,226   |      |  |   | 5,690   |   |  |      | 4,988   |   |  |   | 4,793   |  
|Provision for loan losses                                          |  |                                       | 419     |   |      |   | 380     |      |  |   | 335     |   |  |      | 310     |   |  |   | 212     |  
|Noninterest income                                                 |  |                                       | 1,920   |   |      |   | 1,889   |      |  |   | 1,375   |   |  |      | 1,251   |   |  |   | 1,013   |  
|Noninterest expense                                                |  |                                       | 5,559   |   |      |   | 4,780   |      |  |   | 4,156   |   |  |      | 3,882   |   |  |   | 3,680   |  
|Income taxes                                                       |  |                                       | 1,011   |   |      |   | 893     |      |  |   | 802     |   |  |      | 616     |   |  |   | 601     |  
|                                                                   |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net income                                                         |  | $                                     | 2,353   |   |      | $ | 2,062   |      |  | $ | 1,772   |   |  | $    | 1,431   |   |  | $ | 1,313   |  
|                                                                   |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                                                   |  |                                       |         |   |     
|Per Share Data:                                                    |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net incomebasic (3)                                               |  | $                                     | 1.14    |   |      | $ | 1.01    |      |  | $ | 0.87    |   |  | $    | 0.68    |   |  | $ | 0.60    |  
|Net incomedilutive (3)                                            |  |                                       | 1.12    |   |      |   | 1.00    |      |  |   | 0.86    |   |  |      | 0.68    |   |  |   | 0.60    |  
|Cash dividends (3)                                                 |  |                                       | 0.22    |   |      |   | 0.17    |      |  |   | 0.12    |   |  |      | 0.12    |   |  |   | 0.08    |  
|Book value at period end                                           |  |                                       | 10.64   |   |      |   | 9.80    |      |  |   | 10.73   |   |  |      | 9.58    |   |  |   | 8.50    |  
|Tangible book value at period end                                  |  |                                       | 10.39   |   |      |   | 9.51    |      |  |   | 10.35   |   |  |      | 9.56    |   |  |   | 8.48    |  
|Average shares outstanding (000s) (3)                             |  |                                       | 2,062   |   |      |   | 2,037   |      |  |   | 2,034   |   |  |      | 2,083   |   |  |   | 2,190   |  
|                                                                   |  |                                       |         |   |     
|Balance Sheet Data (period end):                                   |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Assets                                                             |  | $                                     | 237,689 |   |      | $ | 196,550 |      |  | $ | 179,993 |   |  | $    | 142,851 |   |  | $ | 139,814 |  
|Loans, net of unearned income and allowance                        |  |                                       | 175,995 |   |      |   | 140,207 |      |  |   | 116,810 |   |  |      | 104,096 |   |  |   | 91,345  |  
|Securities                                                         |  |                                       | 38,972  |   |      |   | 40,611  |      |  |   | 47,183  |   |  |      | 28,058  |   |  |   | 38,751  |  
|Deposits                                                           |  |                                       | 192,737 |   |      |   | 158,891 |      |  |   | 158,989 |   |  |      | 125,314 |   |  |   | 115,890 |  
|Stockholders equity                                               |  |                                       | 21,959  |   |      |   | 20,201  |      |  |   | 18,218  |   |  |      | 16,261  |   |  |   | 15,436  |  
|                                                                   |  |                                       |         |   |     
|Performance Ratios:                                                |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Return on average assets                                           |  |                                       | 1.08    | % |      |   | 1.11    | %    |  |   | 1.12    | % |  |      | 1.02    | % |  |   | 0.99    | %
|Return on average equity                                           |  |                                       | 11.01   | % |      |   | 10.64   | %    |  |   | 10.31   | % |  |      | 9.08    | % |  |   | 9.04    | %
|Net interest margin                                                |  |                                       | 3.72    | % |      |   | 3.63    | %    |  |   | 3.82    | % |  |      | 3.77    | % |  |   | 3.85    | %
|Efficiency (1)                                                     |  |                                       | 59.47   | % |      |   | 59.70   | %    |  |   | 59.01   | % |  |      | 62.45   | % |  |   | 63.48   | %
|                                                                   |  |                                       |         |   |     
|Asset Quality Ratios:                                              |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Allowance for loan losses to period end loans                      |  |                                       | 1.35    | % |      |   | 1.41    | %    |  |   | 1.35    | % |  |      | 1.26    | % |  |   | 1.44    | %
|Allowance for loan losses to nonaccrual loans                      |  |                                       | 253.05  | % |      |   | 362.68  | %    |  |   | 182.37  | % |  |      | 248.78  | % |  |   | 105.95  | %
|Nonperforming assets to period end loans and foreclosed properties |  |                                       | 0.53    | % |      |   | 0.39    | %    |  |   | 0.74    | % |  |      | 0.51    | % |  |   | 1.37    | %
|Net charge-offs (recoveries) to average loans                      |  |                                       | 0.01    | % |      |   | (0.01   | )%   |  |   | 0.05    | % |  |      | 0.33    | % |  |   | 0.04    | %
|                                                                   |  |                                       |         |   |     
|Capital and Liquidity Ratios:                                      |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Leverage (2)                                                       |  |                                       | 9.24    | % |      |   | 10.28   | %    |  |   | 10.12   | % |  |      | 11.38   | % |  |   | 11.04   | %
|Risk-based:                                                        |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Tier 1 capital                                                     |  |                                       | 12.74   | % |      |   | 14.37   | %    |  |   | 15.02   | % |  |      | 15.67   | % |  |   | 17.24   | %
|Total capital                                                      |  |                                       | 14.14   | % |      |   | 15.74   | %    |  |   | 16.24   | % |  |      | 16.89   | % |  |   | 18.46   | %
|Average loans to average deposits                                  |  |                                       | 87.60   | % |      |   | 79.78   | %    |  |   | 80.56   | % |  |      | 78.33   | % |  |   | 77.43   | %

---

|(1) | Computed by dividing noninterest expense, net of nonrecurring expenses, by the sum of net interest income and noninterest income, net of security gains and losses.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Computed as a percentage of stockholders equity to period end assets.
|--- | ----------------------------------------------------------------------



|(3) | Earnings per share, dividends per share and average share data adjusted in periods prior to 2004 to reflect 20% stock dividend paid by the Company during December 2003.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



10



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|Item 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------



This Form 10-K, including information incorporated by reference into this Form 10-K, contains certain forward-looking
statements. For this purpose any statements contained in this Form 10-K that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, words such as may, will,
expect, believe, anticipate, estimate or continue or comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks
and uncertainties, and actual results may differ materially depending on a variety of factors.



Overview



The Company
continued its trend of strong earnings growth during the year ended December 31, 2004, primarily resulting from double-digit loan growth and good asset quality. Net income for the year ended December 31, 2004 was $2.35 million, compared to $2.06
million for 2003, an increase of 14.1%. Diluted earnings per share increased 12.0% in 2004 to $1.12 per share, compared to $1.00 in 2003. Return on assets (ROA) was 1.08% for the year ended December 31, 2004, compared to 1.11% for the year ended
December 31, 2003, while return on average equity (ROE) was 11.01% for 2004, compared to 10.64% for 2003. The Banks net interest margin was 3.72% during the year ended December 31, 2004 compared to 3.63% during the year ended December 31,
2003. Yields on earning assets continued to adjust down during the year, but had leveled off by year-end as a result of several rounds of interest rate tightening by the Federal Reserve late in 2004. The Banks cost of interest-bearing
liabilities experienced similar declines during 2004, but also began to flatten by year-end. The Companys efficiency ratio was 59.5% for the year compared to 59.7% for 2003. Non-interest expenses increased to $5.56 million from $4.78 million
during 2003. This increase reflects additional costs associated with opening a new facility that combined operations and corporate offices, upgrading the Companys computer systems which included new hardware, software, and additional security
protection and growing the Companys ancillary service offerings by expanding its investment subsidiary, Shore Investments Inc., through the addition of a Certified Financial Planner in the Companys Maryland market and by starting a
mortgage banking division within the Bank dedicated to originating and selling conforming fixed rate loan products.



Spearheaded by a 25.5% growth in gross loans, total assets grew to $237.7 million at December 31, 2004, an increase of 20.9% over the $196.6 million at
December 31, 2003. Total gross loans ended the year at $178.2 million, compared to $142.0 million at December 31, 2003, while total deposits ended the year at $192.7 million, compared $158.9 million at December 31, 2003. The Banks commercial
loan portfolio experienced the largest percentage growth during the year with an increase of 41.3% since December 2003, while mortgage loans (including construction loans) also experienced double-digit growth with an increase of 20.6%. On the
deposit side, noninterest-bearing deposits represented the largest percentage growth at 28.7% since December 2003, while lower-costing interest-bearing transaction accounts increased 25.1% during the period. Total shareholders equity grew to
$22.0 million at December 31, 2004, an 8.7% increase over the $20.2 million in equity at December 31, 2003.



During 2004, the quality of the Banks loan portfolio continued to be strong. The Bank experienced net loan charge-offs of $17,000 during 2004 at a
rate of 0.01% of total loans, while the level of nonperforming assets to period end loans was 0.53% at December 31, 2004. The Bank had no other real estate owned (OREO) or other foreclosed assets at December 31, 2004. The Bank maintained
an allowance for loan losses to period end loans of 1.35% at the end of 2004.



11



---

Results of Operation



General



Net interest income is the major component of the Companys earnings and is equal to the amount by which interest income exceeds interest expense.
Interest income is derived from interest-earning assets composed primarily of loans and securities. Interest expense results from interest-bearing liabilities, primarily consisting of deposits and short-term borrowings. Changes in the volume and mix
of these assets and liabilities, as well as changes in the yields earned and rates paid, determine changes in net interest income. Net interest margin is calculated by dividing net interest income by average earning assets and represents the
Companys net yield on its earning assets.



Interest Income



2004 Compared to 2003



During the year ended December 31, 2004, the Company earned $10.7 million in
interest income, compared to the $9.5 million earned for the year ended December 31, 2003. The Company overcame declining portfolio loan rates by growing loans 25.5% during the year, resulting in the 12.6% increase in interest income. Additionally,
the Company increased its loan to deposit ratio from 79.8% in 2003 to 87.6% in 2004, thus improving the mix of interest earning assets.



Securities yielded 4.07% during the year ended December 31, 2004, compared to 4.03% for the year ended December 31, 2003. Average securities declined by
$3.7 million to $39.2 million during 2004 compared to $42.9 million during 2003. This decrease resulted from the heavy loan demand experienced during the year absorbing most excess liquidity and the fewer investment opportunities that existed.



Loans yielded 5.71% during the year ended December 31, 2004,
compared to 6.11% during 2003. Average total loans increased $32.4 million, or 25.4%, to $160.2 million during 2004 from $127.8 million during 2003. The banks average commercial loan portfolio experienced the largest percentage growth during
the year with an increase of 43.9% since December 2003, while average mortgage loans (including construction loans) also experienced double-digit growth with an increase of 18.2%. Average consumer loans (including home equity lines) were $17.9
million for the year ended December 31, 2004, an increase of 10.0% over the $16.3 million average outstanding during the year ended December 31, 2003. A vibrant loan market, driven by low interest rates and a strong real estate market, and seasoned
loan producers significantly contributed to the loan growth success of 2004.



2003 Compared to 2002



During the year ended
December 31, 2003, the Company earned $9.5 million in interest income, as compared to the $9.4 million earned for the year ended December 31, 2002. While the low interest rate policy maintained by the Federal Reserve during 2001 continued to impact
net interest income, the Company was able to realize an increase in this area by growing total loans 20.1%. Additionally, the Company was successful in redeploying a significant portion of the $16.8 million in funds received through its 2002 deposit
acquisition from investment securities to loans. Consequently, average loans outstanding increased $15.6 million, while average investment securities only increased $8.5 million.



Securities yielded 4.03% during the year ended December 31, 2003, compared to 4.84% for the year ended December 31, 2002.
Average securities increased to $42.9 million during 2003, compared to an average balance of $34.4 million for the 2002 period. As a result of the December 2002 deposit acquisition, the Company began 2003 with $47.2 million in investment securities.
However, loan demand and flat deposit levels resulted in a net decrease in investment securities during the year.



12



---

Loans yielded 6.11% during the year ended December 31, 2003, compared to 6.92% for the year ended
December 31, 2002. Average total loans increased 13.9% to $127.8 million during 2003 from $112.1 million for the 2002 period. The Bank experienced significant growth in several areas of its loan portfolio during 2003, with double-digit increases in
commercial loans, residential real estate loans, construction loans and home equity lines of credit during the year. Average commercial loans increased to $40.8 million, an increase of 16.9% over the $34.9 million average outstanding balance during
2002. On the retail side, average residential real estate loans (including construction loans) increased to $70.7 million, or 12.0% over the $63.1 million average outstanding for 2002, while average consumer loans (including home equity lines) were
$16.3 million for the year ended December 31, 2003, an increase of 15.4% over the $14.1 million average outstanding during the year ended December 31, 2002. More seasoned loan producers and a ripe lending environment significantly contributed to the
loan growth success of 2003.



Interest Expense



2004 Compared to 2003



Even with double-digit growth in deposits, interest expense was flat at $3.3 million during the year ended December 31,
2004, as compared to 2003. Average interest-bearing liabilities increased 16.6% to $172.3 million during the year ended December 31, 2004, as compared to $147.7 million during 2003, while the cost of interest-bearing liabilities decreased 32 basis
points from 2.22% during 2003 to 1.90% during 2004. Total average deposits, including noninterest-bearing demand deposits, increased 14.2% to $182.9 million during the year ended December 31, 2004 from $160.1 million during 2003. The Companys
cost of funds (including demand deposits) was 1.68% during 2004, compared to 1.97% for the year ended December 31, 2003.



Several factors contributed to interest expense remaining flat in spite of increased volumes, primarily related to the growth mix that occurred during the
year. Average checking and savings account balances increased $14.1 million during 2004 and the cost of these funds for the year was 63 basis points, representing only a 2 basis point increase over the prior year. Average time deposit balances
increased $3.8 million, but the cost of these deposits decreased 43 basis points to 3.01% for the year. The dependence on time deposit funding continued to decline with average time deposits representing 43.5% of average funding liabilities during
2004 compared to 48.9% during 2003. Also benefiting the Companys cost of funds is the continued growth in demand deposits. During 2004, average demand deposits grew $4.8 million or 26.2% over 2003 balances, representing a significant pool of
noninterest-bearing deposits to fund asset growth. The Bank also placed a heavier reliance on Federal Home Loan Bank (FHLB) borrowings during 2004 with the average balance increasing by $6.7 million. However, the increase in overnight
rates that occurred during 2004 caused the cost of these borrowings to increase by 19 basis points to 1.97% during the year.



2003 Compared to 2002



Interest expense continued to ride the rate curve down during 2003. Interest expense was $3.3 million during the year ended December 31, 2003, a decrease
of 11.9% as compared to $3.7 million for 2002. Average interest-bearing liabilities increased 16.84% to $147.7 million during 2003 from $126.5 million for the prior year, while the cost of interest-bearing liabilities decreased 72 basis points from
2.94% during 2002 to 2.22% during 2003. Total average deposits, including noninterest-bearing demand deposits, increased 15.1% to $160.1 million during the year ended December 31, 2003 from $139.2 million during 2002. Factoring in
noninterest-bearing demand deposits, the Companys cost of funds was 1.97% and 2.64% for the years ended December 31, 2003 and 2002, respectively. Also contributing to lower funding costs was an increase in short-term FHLB borrowings. Average
FHLB borrowings increased to $6.0 million during 2003, compared to $1.4 million for 2002, while the average cost of these funds decreased from 3.81% to 1.78% for the periods. Although funding costs continued to benefit from the lower interest rate
environment during the period, it also benefited from a change in the Companys funding mix. During 2002, average time deposits represented 55.4% of average funding liabilities, while it only represented 48.9% of average funding liabilities
during 2003.



13



---

Net Interest Income



2004 Compared to 2003



The Company continued to improve its net interest margin during 2004. Helped by strong loan demand and rising rates during the second half of the year,
the Companys net interest margin increased from 3.63% during 2003 to 3.72% during 2004. As illustrated by the its interest sensitivity analysis, the Company remains asset sensitive, an advantageous position during a period of rising rates like
we have experienced since June 2004. These factors, in conjunction with the continued improvement in the Banks funding mix, contributed to net interest income increasing 19.2% to $7.4 million during the year ended December 31, 2004 as compared
to $6.2 million in 2003.



2003 Compared to 2002



The Company entered 2003 coming off a deposit acquisition that created the
need to effectively invest $16.8 million in acquired deposits into income-producing assets. As a result, the Company began 2003 with a net interest margin of 3.33%, posing quite a challenge for the year. However, the deployment of these funds into
higher-yielding loan assets and the management of deposit mix enabled the Company to increase its margin to 3.74% during the fourth quarter of 2003 and 3.63% for the year. These factors, along with 20.1% loan growth and changes in the funding mix,
contributed to net interest income increasing 9.4% to $6.2 million during the year ended December 31, 2003 as compared to $5.7 million in 2002.



14



---

The following tables illustrate average balances of total interest-earning assets and total
interest-bearing liabilities for the periods indicated, showing the average distribution of assets, liabilities, stockholders equity and the related income, expense, and corresponding weighted average yields and costs. The average balances
used in these tables and other statistical data were calculated using daily average balances.



Average Balances, Income and Expenses, Yields and Rates



|                                           |  |                          |         |   |                |   |            |      |      |                |  |   |                |   |            |   |       |                |      |   |                |   |            |   |  |   |       |  |      |  
|------------------------------------------ |  | ------------------------ | ------- | - | -------------- | - | ---------- | ---- | ---- | -------------- |  | - | -------------- | - | ---------- | - | ----- | -------------- | ---- | - | -------------- | - | ---------- | - |  | - | ----- |  | ---- | -
|                                           |  | Years Ended December 31, |        
|                                           |  | 2004                     |         |   | 2003           |   |            | 2002 |     
|                                           |  | AverageBalance           |         |   | Income/Expense |   | Yield/Rate |      |      | AverageBalance |  |   | Income/Expense |   | Yield/Rate |   |       | AverageBalance |      |   | Income/Expense |   | Yield/Rate |  
|                                           |  | (In Thousands)           |        
|Assets:                                    |  |                          |         |   |                |   |            |      |      |                |  |   |                |   |            |   |       |                |      |   |                |   |            |   |  |   |       |  |      |  
|Securities (1)                             |  | $                        | 39,192  |   |                | $ | 1,595      |      | 4.07 | %              |  | $ | 42,906         |   |            | $ | 1,729 |                | 4.03 | % |                | $ | 34,444     |   |  | $ | 1,668 |  | 4.84 | %
|Loans (net of unearned income):            |  |                          |         |   |                |   |            |      |      |                |  |   |                |   |            |   |       |                |      |   |                |   |            |   |  |   |       |  |      |  
|Real estate mortgage                       |  |                          | 83,558  |   |                |   | 4,732      |      | 5.66 | %              |  |   | 70,665         |   |            |   | 4,374 |                | 6.19 | % |                |   | 63,110     |   |  |   | 4,429 |  | 7.02 | %
|Commercial                                 |  |                          | 58,693  |   |                |   | 3,480      |      | 5.93 | %              |  |   | 40,791         |   |            |   | 2,553 |                | 6.26 | % |                |   | 34,891     |   |  |   | 2,442 |  | 7.00 | %
|Home equity lines                          |  |                          | 15,473  |   |                |   | 718        |      | 4.64 | %              |  |   | 13,720         |   |            |   | 632   |                | 4.61 | % |                |   | 10,840     |   |  |   | 574   |  | 5.30 | %
|Consumer                                   |  |                          | 2,476   |   |                |   | 220        |      | 8.89 | %              |  |   | 2,590          |   |            |   | 247   |                | 9.54 | % |                |   | 3,298      |   |  |   | 310   |  | 9.40 | %
|                                           |  |                          |         |   |                |   |            |      |      |                |  |   |                |   |            |   |       |                |      |   |                |   |            |   |  |   |       |  |      |  
|Total loans                                |  |                          | 160,200 |   |                |   | 9,150      |      | 5.71 | %              |  |   | 127,766        |   |            |   | 7,806 |                | 6.11 | % |                |   | 112,139    |   |  |   | 7,755 |  | 6.92 | %
|Interest-bearing deposits in other banks   |  |                          | 2,152   |   |                |   | 25         |      | 1.16 | %              |  |   | 2,438          |   |            |   | 20    |                | 0.82 | % |                |   | 3,987      |   |  |   | 48    |  | 1.20 | %
|                                           |  |                          |         |   |                |   |            |      |      |                |  |   |                |   |            |   |       |                |      |   |                |   |            |   |  |   |       |  |      |  
|Total earning assets                       |  |                          | 201,544 |   |                |   | 10,770     |      | 5.34 | %              |  |   | 173,110        |   |            |   | 9,555 |                | 5.52 | % |                |   | 150,570    |   |  |   | 9,471 |  | 6.29 | %
|                                           |  |                          |         |   |                |   |            |      |      |                |  |   |                |   |            |   |       |                |      |   |                |   |            |   |  |   |       |  |      |  
|Less: allowance for loan losses            |  |                          | (2,196  | ) |                |   |            |      |      |                |  |   | (1,784         | ) |            |   |       |                |      |   |                |   | (1,456     | ) |  |   |       |  |      |  
|Total nonearning assets                    |  |                          | 18,021  |   |                |   |            |      |      |                |  |   | 14,992         |   |            |   |       |                |      |   |                |   | 9,344      |   |  |   |       |  |      |  
|                                           |  |                          |         |   |                |   |            |      |      |                |  |   |                |   |            |   |       |                |      |   |                |   |            |   |  |   |       |  |      |  
|Total assets                               |  | $                        | 217,369 |   |                |   |            |      |      |                |  | $ | 186,318        |   |            |   |       |                |      |   |                | $ | 158,458    |   |  |   |       |  |      |  
|                                           |  |                          |         |   |                |   |            |      |      |                |  |   |                |   |            |   |       |                |      |   |                |   |            |   |  |   |       |  |      |  
|Liabilities                                |  |                          |         |   |                |   |            |      |      |                |  |   |                |   |            |   |       |                |      |   |                |   |            |   |  |   |       |  |      |  
|Interest-bearing deposits:                 |  |                          |         |   |                |   |            |      |      |                |  |   |                |   |            |   |       |                |      |   |                |   |            |   |  |   |       |  |      |  
|Checking and savings                       |  | $                        | 74,536  |   |                | $ | 467        |      | 0.63 | %              |  | $ | 60,461         |   |            | $ | 370   |                | 0.61 | % |                | $ | 47,175     |   |  | $ | 516   |  | 1.09 | %
|Time deposits                              |  |                          | 85,123  |   |                |   | 2,559      |      | 3.01 | %              |  |   | 81,284         |   |            |   | 2,799 |                | 3.44 | % |                |   | 77,856     |   |  |   | 3,145 |  | 4.04 | %
|                                           |  |                          |         |   |                |   |            |      |      |                |  |   |                |   |            |   |       |                |      |   |                |   |            |   |  |   |       |  |      |  
|Total interest-bearing deposits            |  |                          | 159,659 |   |                |   | 3,026      |      | 1.90 | %              |  |   | 141,745        |   |            |   | 3,169 |                | 2.24 | % |                |   | 125,031    |   |  |   | 3,661 |  | 2.93 | %
|                                           |  |                          |         |   |                |   |            |      |     
|FHLB advances                              |  |                          | 12,627  |   |                |   | 249        |      | 1.97 | %              |  |   | 5,961          |   |            |   | 106   |                | 1.78 | % |                |   | 1,445      |   |  |   | 55    |  | 3.81 | %
|                                           |  |                          |         |   |                |   |            |      |      |                |  |   |                |   |            |   |       |                |      |   |                |   |            |   |  |   |       |  |      |  
|Total interest-bearing liabilities         |  |                          | 172,286 |   |                |   | 3,275      |      | 1.90 | %              |  |   | 147,706        |   |            |   | 3,275 |                | 2.22 | % |                |   | 126,476    |   |  |   | 3,716 |  | 2.94 | %
|                                           |  |                          |         |   |                |   |            |      |      |                |  |   |                |   |            |   |       |                |      |   |                |   |            |   |  |   |       |  |      |  
|Non-interest bearing liabilities:          |  |                          |         |   |                |   |            |      |      |                |  |   |                |   |            |   |       |                |      |   |                |   |            |   |  |   |       |  |      |  
|Demand deposits                            |  |                          | 23,215  |   |                |   |            |      |      |                |  |   | 18,397         |   |            |   |       |                |      |   |                |   | 14,160     |   |  |   |       |  |      |  
|Other liabilities                          |  |                          | 499     |   |                |   |            |      |      |                |  |   | 836            |   |            |   |       |                |      |   |                |   | 638        |   |  |   |       |  |      |  
|                                           |  |                          |         |   |                |   |            |      |      |                |  |   |                |   |            |   |       |                |      |   |                |   |            |   |  |   |       |  |      |  
|Total liabilities                          |  |                          | 196,000 |   |                |   |            |      |      |                |  |   | 166,939        |   |            |   |       |                |      |   |                |   | 141,274    |   |  |   |       |  |      |  
|Stockholders equity                       |  |                          | 21,369  |   |                |   |            |      |      |                |  |   | 19,379         |   |            |   |       |                |      |   |                |   | 17,184     |   |  |   |       |  |      |  
|                                           |  |                          |         |   |                |   |            |      |      |                |  |   |                |   |            |   |       |                |      |   |                |   |            |   |  |   |       |  |      |  
|Total liabilities and stockholders equity |  | $                        | 217,369 |   |                |   |            |      |      |                |  | $ | 186,318        |   |            |   |       |                |      |   |                | $ | 158,458    |   |  |   |       |  |      |  
|                                           |  |                          |         |   |                |   |            |      |      |                |  |   |                |   |            |   |       |                |      |   |                |   |            |   |  |   |       |  |      |  
|Net interest income (1)                    |  |                          |         |   |                | $ | 7,495      |      |      |                |  |   |                |   |            | $ | 6,280 |                |      |   |                |   |            |   |  | $ | 5,755 |  |      |  
|                                           |  |                          |         |   |                |   |            |      |      |                |  |   |                |   |            |   |       |                |      |   |                |   |            |   |  |   |       |  |      |  
|Interest rate spread (1)(2)                |  |                          |         |   |                |   |            |      | 3.44 | %              |  |   |                |   |            |   |       |                | 3.30 | % |                |   |            |   |  |   |       |  | 3.35 | %
|Net interest margin (1)(3)                 |  |                          |         |   |                |   |            |      | 3.72 | %              |  |   |                |   |            |   |       |                | 3.63 | % |                |   |            |   |  |   |       |  | 3.82 | %

---

|(1) | Presented on a tax equivalent basis. The tax equivalent adjustment to net interest income was $73,000, $54,000 and $65,000 for the years ended December 31, 2004, 2003 and 2002,
respectively.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Interest rate spread is the average yield earned on earning assets less the average rate incurred on interest-bearing liabilities.
|--- | ----------------------------------------------------------------------------------------------------------------------------------



|(3) | Net interest margin is derived by dividing net interest income by average total earning assets.
|--- | -----------------------------------------------------------------------------------------------



15



---

The following table describes the impact on the interest income of the Company resulting from changes in
average balances and average rates for the periods indicated. The change in interest due to the mixture of volume and rate has been allocated solely to rate changes.



Volume and Rate Analysis



|                                         |  |                                               |   |  |                                               |   |  |                                               |   |  |        |   |  |        |   |  |                    |   |  |        |   |  |        |   |  |                    |  
|---------------------------------------- |  | --------------------------------------------- | - |  | --------------------------------------------- | - |  | --------------------------------------------- | - |  | ------ | - |  | ------ | - |  | ------------------ | - |  | ------ | - |  | ------ | - |  | ------------------ | -
|                                         |  | Years Ended                                   |  
|                                         |  | December 31, 2004compared toDecember 31, 2003 |   |  | December 31, 2003compared toDecember 31, 2002 |   |  | December 31, 2002compared toDecember 31, 2001 |  
|                                         |  | Change Due To:                                |   |  | Change Due To:                                |   |  | Change Due To:                                |  
|                                         |  | Volume                                        |   |  | Rate                                          |   |  | Increase(Decrease)                            |   |  | Volume |   |  | Rate   |   |  | Increase(Decrease) |   |  | Volume |   |  | Rate   |   |  | Increase(Decrease) |  
|Assets:                                  |  |                                               |   |  |                                               |   |  |                                               |   |  |        |   |  |        |   |  |                    |   |  |        |   |  |        |   |  |                    |  
|Securities                               |  | (150                                          | ) |  | 16                                            |   |  | (134                                          | ) |  | 409    |   |  | (348   | ) |  | 61                 |   |  | (11    | ) |  | (310   | ) |  | (321               | )
|Loans (net of unearned income):          |  |                                               |   |  |                                               |   |  |                                               |   |  |        |   |  |        |   |  |                    |   |  |        |   |  |        |   |  |                    |  
|Real estate mortgage                     |  | 798                                           |   |  | (440                                          | ) |  | 358                                           |   |  | 531    |   |  | (586   | ) |  | (55                | ) |  | 643    |   |  | (581   | ) |  | 62                 |  
|Commercial                               |  | 1,121                                         |   |  | (194                                          | ) |  | 927                                           |   |  | 413    |   |  | (302   | ) |  | 111                |   |  | 418    |   |  | (488   | ) |  | (70                | )
|Home equity lines                        |  | 81                                            |   |  | 5                                             |   |  | 86                                            |   |  | 153    |   |  | (95    | ) |  | 58                 |   |  | 272    |   |  | (236   | ) |  | 36                 |  
|Consumer                                 |  | (11                                           | ) |  | (16                                           | ) |  | (27                                           | ) |  | (67    | ) |  | 4      |   |  | (63                | ) |  | (103   | ) |  | (52    | ) |  | (155               | )
|                                         |  |                                               |   |  |                                               |   |  |                                               |   |  |        |   |  |        |   |  |                    |   |  |        |   |  |        |   |  |                    |  
|Total loans                              |  | 1,989                                         |   |  | (645                                          | ) |  | 1,344                                         |   |  | 1,030  |   |  | (979   | ) |  | 51                 |   |  | 1,230  |   |  | (1,357 | ) |  | (127               | )
|Interest-bearing deposits in other banks |  | (2                                            | ) |  | 7                                             |   |  | 5                                             |   |  | (19    | ) |  | (9     | ) |  | (28                | ) |  | 26     |   |  | (99    | ) |  | (73                | )
|                                         |  |                                               |   |  |                                               |   |  |                                               |   |  |        |   |  |        |   |  |                    |   |  |        |   |  |        |   |  |                    |  
|Total earning assets                     |  | 1,837                                         |   |  | (622                                          | ) |  | 1,215                                         |   |  | 1,420  |   |  | (1,336 | ) |  | 84                 |   |  | 1,245  |   |  | (1,766 | ) |  | (521               | )
|                                         |  |                                               |   |  |                                               |   |  |                                               |   |  |        |   |  |        |   |  |                    |   |  |        |   |  |        |   |  |                    |  
|Liabilities                              |  |                                               |   |  |                                               |   |  |                                               |   |  |        |   |  |        |   |  |                    |   |  |        |   |  |        |   |  |                    |  
|Interest-bearing deposits:               |  |                                               |   |  |                                               |   |  |                                               |   |  |        |   |  |        |   |  |                    |   |  |        |   |  |        |   |  |                    |  
|Checking and savings                     |  | 86                                            |   |  | 11                                            |   |  | 97                                            |   |  | 145    |   |  | (291   | ) |  | (146               | ) |  | 171    |   |  | (279   | ) |  | (108               | )
|Time deposits                            |  | 132                                           |   |  | (372                                          | ) |  | (240                                          | ) |  | 138    |   |  | (484   | ) |  | (346               | ) |  | 160    |   |  | (1,233 | ) |  | (1,073             | )
|                                         |  |                                               |   |  |                                               |   |  |                                               |   |  |        |   |  |        |   |  |                    |   |  |        |   |  |        |   |  |                    |  
|Total interest-bearing deposits          |  | 218                                           |   |  | (361                                          | ) |  | (143                                          | ) |  | 283    |   |  | (775   | ) |  | (492               | ) |  | 331    |   |  | (1,512 | ) |  | (1,181             | )
|FHLB advances                            |  | 119                                           |   |  | 24                                            |   |  | 143                                           |   |  | 172    |   |  | (121   | ) |  | 51                 |   |  | (5     | ) |  | (27    | ) |  | (32                | )
|                                         |  |                                               |   |  |                                               |   |  |                                               |   |  |        |   |  |        |   |  |                    |   |  |        |   |  |        |   |  |                    |  
|Total interest-bearing liabilities       |  | 336                                           |   |  | (336                                          | ) |  |                                              |   |  | 455    |   |  | (896   | ) |  | (441               | ) |  | 326    |   |  | (1,539 | ) |  | (1,213             | )
|                                         |  |                                               |   |  |                                               |   |  |                                               |   |  |        |   |  |        |   |  |                    |   |  |        |   |  |        |   |  |                    |  
|Change in net interest income            |  | 1,501                                         |   |  | (286                                          | ) |  | 1,215                                         |   |  | 965    |   |  | (440   | ) |  | 525                |   |  | 919    |   |  | (227   | ) |  | 692                |  
|                                         |  |                                               |   |  |                                               |   |  |                                               |   |  |        |   |  |        |   |  |                    |   |  |        |   |  |        |   |  |                    |  



Interest Sensitivity



Management evaluates interest rate sensitivity
periodically through the use of an asset/liability management reporting model. Using this model, management determines the overall magnitude of interest sensitivity risk and then formulates policies governing asset generation and pricing, funding
sources and pricing, and off-balance-sheet commitments in order to reduce sensitivity risk. These decisions are based on managements outlook regarding future interest rate movements, the state of the local and national economy, and other
financial and business risk factors.



An important element of
the Companys asset/liability management process is monitoring its interest sensitivity gap. The interest sensitivity gap is the difference between interest sensitive assets and interest sensitive liabilities at a specific time interval. A gap
is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities, and is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate
sensitive assets during a given period. Generally, during a period of rising interest rates, a negative gap within shorter maturities would adversely affect net interest income, while a positive gap within shorter maturities would result in an
increase in net interest income. Conversely, during a period of falling interest rates, a negative gap within shorter maturities



16



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would result in an increase in net interest income while a positive gap within shorter maturities would have the opposite effect. This gap can be managed by
repricing assets or liabilities, by selling investments available for sale, by replacing an asset or liability at maturity, or by adjusting the interest rate during the life of an asset or liability. Matching the amounts of assets and liabilities
maturing in the same time interval helps to hedge the risk and minimize the impact on net interest income in periods of rising or falling interest rates.



The following table presents the Companys interest sensitivity position at December 31, 2004. This one-day position, which continually is changing,
is not necessarily indicative of the Companys position at any other time.



Interest Sensitivity Analysis



|                                                                            |  |                   |        |    |            |   |         |             |  |   |             |   |  |       |         |   |  |   |         |  
|--------------------------------------------------------------------------- |  | ----------------- | ------ | -- | ---------- | - | ------- | ----------- |  | - | ----------- | - |  | ----- | ------- | - |  | - | ------- | -
|                                                                            |  | December 31, 2004 |       
|                                                                            |  | Within90 Days     |        |    | 91-365Days |   |         | 1 to 5Years |  |   | Over 5Years |   |  | Total |        
|                                                                            |  | (In Thousands)    |       
|Interest-Earning Assets:                                                    |  |                   |        |    |            |   |         |             |  |   |             |   |  |       |         |   |  |   |         |  
|Loans (1)                                                                   |  | $                 | 52,071 |    |            | $ | 38,622  |             |  | $ | 79,553      |   |  | $     | 7,996   |   |  | $ | 178,242 |  
|Securities                                                                  |  |                   | 3,079  |    |            |   | 9,006   |             |  |   | 19,401      |   |  |       | 7,485   |   |  |   | 38,971  |  
|Money market and other short term securities                                |  |                   | 3,149  |    |            |   |        |             |  |   |            |   |  |       |        |   |  |   | 3,149   |  
|Other earning assets                                                        |  |                   |       |    |            |   |        |             |  |   |            |   |  |       | 3,280   |   |  |   | 3,280   |  
|                                                                            |  |                   |        |    |            |   |         |             |  |   |             |   |  |       |         |   |  |   |         |  
|Total earning assets                                                        |  | $                 | 58,299 |    |            | $ | 47,628  |             |  | $ | 98,954      |   |  | $     | 18,761  |   |  | $ | 223,642 |  
|                                                                            |  |                   |        |    |            |   |         |             |  |   |             |   |  |       |         |   |  |   |         |  
|Cumulative earning assets                                                   |  | $                 | 58,299 |    |            | $ | 105,927 |             |  | $ | 204,881     |   |  | $     | 223,642 |   |  | $ | 223,642 |  
|                                                                            |  |                   |        |    |            |   |         |             |  |   |             |   |  |       |         |   |  |   |         |  
|                                                                            |  |                   |        |    |           
|Interest-Bearing Liabilities:                                               |  |                   |        |    |            |   |         |             |  |   |             |   |  |       |         |   |  |   |         |  
|Money market savings                                                        |  | $                 | 28,356 |    |            | $ |        |             |  | $ |            |   |  | $     |        |   |  | $ | 28,356  |  
|Interest checking (2)                                                       |  |                   |       |    |            |   |        |             |  |   | 24,658      |   |  |       |        |   |  |   | 24,658  |  
|Savings (2)                                                                 |  |                   | 141    |    |            |   | 114     |             |  |   |            |   |  |       | 22,387  |   |  |   | 22,642  |  
|Certificates of deposit                                                     |  |                   | 18,377 |    |            |   | 31,644  |             |  |   | 37,931      |   |  |       | 1,028   |   |  |   | 88,980  |  
|FHLB advances                                                               |  |                   | 16,350 |    |            |   | 5,000   |             |  |   |            |   |  |       | 617     |   |  |   | 21,967  |  
|                                                                            |  |                   |        |    |            |   |         |             |  |   |             |   |  |       |         |   |  |   |         |  
|Total interest-bearing liabilities                                          |  | $                 | 63,224 |    |            | $ | 36,758  |             |  | $ | 62,589      |   |  | $     | 24,032  |   |  | $ | 186,603 |  
|                                                                            |  |                   |        |    |            |   |         |             |  |   |             |   |  |       |         |   |  |   |         |  
|Cumulative interest-bearing liabilities                                     |  |                   | 63,224 |    |            |   | 99,982  |             |  |   | 162,571     |   |  |       | 186,603 |   |  |   | 186,603 |  
|                                                                            |  |                   |        |    |            |   |         |             |  |   |             |   |  |       |         |   |  |   |         |  
|Period gap                                                                  |  | $                 | (4,925 | )  |            | $ | 10,870  |             |  | $ | 36,365      |   |  | $     | (5,271  | ) |  | $ | 37,039  |  
|Cumulative gap                                                              |  | $                 | (4,925 | )  |            | $ | 5,945   |             |  | $ | 42,310      |   |  | $     | 37,039  |   |  | $ | 37,039  |  
|Ratio of cumulative interest-earning assets to interest-bearing liabilities |  |                   | 92.21  | %  |            |   | 105.95  | %           |  |   | 126.03      | % |  |       | 119.85  | % |  |   | 119.85  | %
|Ratio of cumulative gap to total earning assets                             |  |                   | (2.20  | %) |            |   | 2.66    | %           |  |   | 18.92       | % |  |       | 16.56   | % |  |   | 16.56   | %

---

|(1) | Includes nonaccrual loans of $950,000, which are spread throughout the categories.
|--- | ----------------------------------------------------------------------------------



|(2) | Management has determined that interest checking and savings accounts, excluding $255,000 in savings accounts with more frequent rate adjustment terms, are not sensitive to changes
in related market rates and, therefore, they are placed in the 1 to 5 years and over 5 years categories, respectively.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | All securities without specific maturities are included in the 1 to 5 years category since they are not considered as sensitive to interest rate changes.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------



Noninterest Income



2004 Compared to 2003



During the year ended December 31, 2004, noninterest income increased to $1.92 million from $1.89 million in 2003. Excluding
gains on sales of securities of $148,100 and $269,400 for the years ended December 31, 2004 and 2003, respectively, noninterest income increased 9.5% to $1.77 million during 2004, as compared to $1.62 million for the 2003 year-end period. A 14.7%
increase in deposit account fees generated from strong



17



---

consumer and commercial deposit growth represented the primary factor driving noninterest income growth during the year. These accounts generate fees
including insufficient funds, check printing, cashiers checks, service charges, ATM, check cards and others, several of which experienced double-digit growth during 2004. These fees are core earnings that are not interest sensitive and have provided
a stable source of income for the Bank. Additionally, the Company took steps to expand its ancillary service offerings and improve its noninterest income by expanding its investment subsidiary, Shore Investments Inc., through the addition of a
Certified Financial Planner in the Companys Maryland market and by starting a mortgage banking division within the Bank dedicated to originating and selling conforming fixed rate loan products. The Company began to benefit from fees generated
by these services during the last quarter of 2004 and anticipates additional growth in future periods.



2003 Compared to 2002



During 2003, the Company experienced continued growth in noninterest income. Noninterest income increased 37.4% to $1.89 million during the year ended December 31, 2003, compared to $1.37 million for the year ended December 31, 2002. The
Company experienced increases in most areas of noninterest income, including deposit account fees, investment brokerage commissions, gains on sales of securities and other noninterest income. Consumer and commercial checking accounts continue to
grow, resulting in increased fee income. Deposit account fees for 2003 increased 6.7% to $1.12 million, compared to $1.04 million for 2002. Shore Investments, the Banks investment subsidiary, more than doubled revenues in 2003 over 2002
through its sale of nondeposit investment products, resulting in a 157.5% increase in commission income. The Company took advantage of some of the gains in its investment portfolio during the year by selling several investment securities. These
sales resulted in gains of $269,400, representing an increase of $247,700 over the prior year. Additionally, the Bank benefited from cash surrender value growth in its Bank-Owned Life Insurance (BOLI) asset, resulting in $145,000 in
other noninterest income.



Noninterest Expense



2004 Compared to 2003



Noninterest expense for the year ended December 31, 2004 increased 16.4% to $5.56 million, as compared to $4.78 million
during the 2003 period. The 2004 amounts reflect additional costs associated with opening a new facility that combined operations and corporate offices and with upgrading the companys computer systems which included new hardware, software, and
additional security protection. Related occupancy and equipment expenses increased 16.8% to $1.40 million during 2004, compared to $1.20 million for 2003, while data processing increased 45.6% to $680,800 during the year, compared to $467,700 for
the prior year. Increases in employee compensation and benefits expense and professional and regulatory fees accounted for the remaining expense growth. Compensation and benefits increased by 11.1% to $2.46 million during the year ended December 31,
2004, as compared to $2.21 million for the year ended December 31, 2003, while other noninterest expense, which includes professional fees, increased 6.6% to $828,800 in 2004, as compared to $777,800 in 2003. Advertising and promotion expenses
increased 71.7% to $162,300 during the year ended December 31, 2004, as compared to $94,500 for the 2003 period, primarily due to various internal and external promotions run during the year to generate loan and deposit growth. The Companys
efficiency ratio remained strong during 2004 at 59.47%, down slightly from prior years ratio of 59.70%.



2003 Compared to 2002



During the year ended December 31, 2003, noninterest expense increased 15.0% to $4.8 million, compared to $4.2 million for the year ended December 31, 2002. The Companys efficiency ratio remained strong when compared to peers at
59.7%, up slightly from prior years ratio of 59.0%.



Factors contributing to the increase in noninterest expense include increased employee compensation and benefits expense, impacted by a 24.0% rise in health insurance costs over the 2002 periods, ongoing costs associated with the 2002
deposit acquisition and increased regulatory and compliance costs. Compensation and



18



---

benefits increased by 17.0% to $2.21 million during the year ended December 31, 2003, when compared to $1.89 million for the year ended December 31, 2002.
Occupancy and equipment expenses increased of 7.1% to $1.20 million during 2003, compared to $1.12 million for 2002, with 2003 amounts being impacted by a full year of expense related to a 2002 branch expansion as opposed to a partial year in 2002.
Data processing increased 4.7% to $467,700 during the year, compared to $446,800 for the prior year, while advertising expenses decreased 13.7% to $94,500 during the year ended December 31, 2003, as compared to $109,500 for the 2002 period,
primarily due to nonrecurring 2002 marketing and promotional efforts related to the Susquehanna transaction and the new Internet banking product. Deposit insurance premiums were flat during 2003 as compared to 2002, while other expenses increased
38.3% to $777,800, compared to $562,200 for the 2002 period. Increased regulatory and compliance costs and expenses associated with the Banks internet banking product accounted for the majority of the increase in other noninterest expense.



Financial Condition



Loan Portfolio



The Banks loan portfolio is comprised of real estate mortgage loans, construction loans, commercial loans, home
equity loans, and consumer loans. The primary market areas in which the Bank originates loans are the counties of Accomack and Northampton, Virginia and Salisbury/Wicomico County, Maryland.



Total loans (excluding allowances and deferred loan costs and fees) increased
to $178.2 million at December 31, 2004, a 25.5% increase over the $142.0 million outstanding at December 31, 2003. Gross loan production of approximately $97.0 million resulted in growth across most categories of the Banks loan portfolio
during 2004. Commercial loans increased 41.3% during 2004, while residential real estate (including construction loans) and home equity lines of credit grew 20.6% and 4.2%, respectively, during the year.



The following table summarizes the composition of the Banks loan
portfolio at the dates indicated.



Loan Portfolio



|                               |  |                |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  
|------------------------------ |  | -------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------ | -
|                               |  | December 31,   |        
|                               |  | 2004           |         |   | 2003 |   |         | 2002 |  |   | 2001    |   |  | 2000 |        
|                               |  | (In Thousands) |        
|Residential mortgage           |  | $              | 86,537  |   |      | $ | 72,339  |      |  | $ | 66,637  |   |  | $    | 47,205  |   |  | $ | 47,167 |  
|Commercial mortgage            |  |                | 59,414  |   |      |   | 39,621  |      |  |   | 28,841  |   |  |      | 26,366  |   |  |   | 21,765 |  
|Commercialother               |  |                | 8,673   |   |      |   | 8,568   |      |  |   | 4,921   |   |  |      | 10,079  |   |  |   | 5,056  |  
|Real estate construction (1)   |  |                | 5,658   |   |      |   | 4,005   |      |  |   | 2,184   |   |  |      | 1,051   |   |  |   | 923    |  
|Home equity lines of credit    |  |                | 15,581  |   |      |   | 14,951  |      |  |   | 12,905  |   |  |      | 8,912   |   |  |   | 6,529  |  
|Consumer                       |  |                | 2,378   |   |      |   | 2,508   |      |  |   | 2,720   |   |  |      | 11,670  |   |  |   | 11,097 |  
|                               |  |                |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  
|Total loans                    |  |                | 178,241 |   |      |   | 141,992 |      |  |   | 118,208 |   |  |      | 105,283 |   |  |   | 92,537 |  
|Less:                          |  |                |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  
|Deferred loan (fees) cost, net |  |                | 158     |   |      |   | 217     |      |  |   | 205     |   |  |      | 139     |   |  |   | 144    |  
|Allowance for loan losses      |  |                | (2,404  | ) |      |   | (2,002  | )    |  |   | (1,603  | ) |  |      | (1,326  | ) |  |   | (1,336 | )
|                               |  |                |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  
|Net loans                      |  | $              | 175,995 |   |      | $ | 140,207 |      |  | $ | 116,810 |   |  | $    | 104,096 |   |  | $ | 91,345 |  
|                               |  |                |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  

---

|(1) | Amounts are disclosed net of loans in process of approximately $4.2 million, $3.1 million, $2.3 million, $1.6 million and $1.4 million for 2004, 2003, 2002, 2001 and 2000,
respectively.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



19



---

The following table sets forth the composition of the Banks loan portfolio by percentage at the
dates indicated.



Loan Portfolio by Percentage



|                            |  |              |   |  |        |   |  |        |   |  |        |   |  |        |  
|--------------------------- |  | ------------ | - |  | ------ | - |  | ------ | - |  | ------ | - |  | ------ | -
|                            |  | December 31, |  
|                            |  | 2004         |   |  | 2003   |   |  | 2002   |   |  | 2001   |   |  | 2000   |  
|Residential mortgage        |  | 48.55        | % |  | 50.95  | % |  | 56.37  | % |  | 44.84  | % |  | 50.97  | %
|Commercial mortgage         |  | 33.33        | % |  | 27.90  | % |  | 24.40  | % |  | 25.04  | % |  | 23.52  | %
|Commercialother            |  | 4.87         | % |  | 6.03   | % |  | 4.16   | % |  | 9.57   | % |  | 5.46   | %
|Real estate construction    |  | 3.18         | % |  | 2.82   | % |  | 1.85   | % |  | 1.00   | % |  | 1.00   | %
|Home equity lines of credit |  | 8.74         | % |  | 10.53  | % |  | 10.92  | % |  | 8.47   | % |  | 7.06   | %
|Consumer                    |  | 1.33         | % |  | 1.77   | % |  | 2.30   | % |  | 11.08  | % |  | 11.99  | %
|                            |  |              |   |  |        |   |  |        |   |  |        |   |  |        |  
|Total loans                 |  | 100.00       | % |  | 100.00 | % |  | 100.00 | % |  | 100.00 | % |  | 100.00 | %
|                            |  |              |   |  |        |   |  |        |   |  |        |   |  |        |  



The following table
presents the maturities of selected loans outstanding at December 31, 2004.



Maturity Schedule of Loans



|                                         |  |                   |        |                                     |   |                     |  |              |        |                |   |         |  |   |        |  |   |       
|---------------------------------------- |  | ----------------- | ------ | ----------------------------------- | - | ------------------- |  | ------------ | ------ | -------------- | - | ------- |  | - | ------ |  | - | ------
|                                         |  | December 31, 2004
|                                         |  | Due inone year    |        | Due after oneyear throughfive years |   | Due afterfive years |  | Totals       |        | After one year
|                                         |  |                   |        |                                     |   | FixedRate           |  | VariableRate
|                                         |  | (In Thousands)   
|Residential and commercial mortgages (1) |  | $                 | 20,799 |                                     | $ | 38,001              |  | $            | 87,151 |                | $ | 145,951 |  | $ | 29,307 |  | $ | 95,845
|Commercialother                         |  |                   | 3,111  |                                     |   | 5,276               |  |              | 287    |                |   | 8,674   |  |   | 2,612  |  |   | 2,951 
|Real estate construction                 |  |                   | 5,658  |                                     |   |                    |  |              |       |                |   | 5,658   |  |   |       |  |   |      
|Home equity lines of credit              |  |                   | 15,581 |                                     |   |                    |  |              |       |                |   | 15,581  |  |   |       |  |   |      
|Consumer                                 |  |                   | 915    |                                     |   | 986                 |  |              | 477    |                |   | 2,378   |  |   | 1,463  |  |   |      
|                                         |  |                   |        |                                     |   |                     |  |              |        |                |   |         |  |   |        |  |   |       
|Total                                    |  | $                 | 46,064 |                                     | $ | 44,263              |  | $            | 87,915 |                | $ | 178,241 |  | $ | 33,382 |  | $ | 98,796
|                                         |  |                   |        |                                     |   |                     |  |              |        |                |   |         |  |   |        |  |   |       

---

|(1) | Includes mortgages with terms that include 3-year, 5-year and 7-year balloon payment features in the 1 to 5 years and after 5 years fixed rate category.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------



Securities



When securities are purchased, they are classified as securities held to maturity if management has the positive intent and
the Company has the ability to hold them until maturity. These investment securities are carried at cost adjusted for amortization of premium and accretion of discounts. Unrealized losses in the portfolio are not recognized unless management of the
Company believes that other than a temporary decline has occurred. Securities held for indefinite periods of time and not intended to be held to maturity are classified as available for sale at the time of purchase. Securities available for sale are
recorded at fair value. The net unrealized holding gain or loss on securities available for sale, net of deferred income taxes, is included in other comprehensive income as a separate component of stockholders equity. A decline in the fair
value of any securities available for sale below cost, that is deemed other than temporary, is charged to earnings and results in a new cost basis for the security. Cost of securities sold is determined on the basis of specific identification. The
Company holds no securities classified as trading.



Investment Securities. The carrying value of investment securities (effected for all applicable fair value adjustments) amounted to $39.0 million at December 31, 2004, compared to $40.6 million and $47.2 million at December
31, 2003 and 2002, respectively. Decreases in securities primarily resulted from increased loan



20



---

demand during 2004 and 2003 and flat deposit levels during 2003. The comparison of amortized cost to fair value is shown in Note 3 of the notes to the
financial statements. Note 3 also provides an analysis of gross unrealized gains and losses of investment securities. Investment securities consist of the following:



Available for Sale Securities Portfolio



|                                                 |  |                          |        |      |   |        |  |   |       
|------------------------------------------------ |  | ------------------------ | ------ | ---- | - | ------ |  | - | ------
|                                                 |  | Years Ended December 31,
|                                                 |  | 2004                     |        | 2003 |   | 2002  
|Amortized Cost:                                  |  |                          |        |      |   |        |  |   |       
|U.S. Treasury and other U.S. government agencies |  | $                        | 22,208 |      | $ | 22,308 |  | $ | 23,922
|Tax-exempt municipal bonds                       |  |                          | 3,849  |      |   | 3,944  |  |   | 2,774 
|Mortgage-backed securities                       |  |                          | 1,941  |      |   | 2,583  |  |   | 3,002 
|Corporate bonds                                  |  |                          | 3,021  |      |   | 4,035  |  |   | 5,558 
|Adjustable rate loan funds                       |  |                          | 1,590  |      |   | 1,990  |  |   | 1,942 
|FHLMC stock                                      |  |                          | 232    |      |   | 232    |  |   | 232   
|Preferred stock                                  |  |                          | 1,707  |      |   | 1,707  |  |   | 2,156 
|Trust preferred stock                            |  |                          | 75     |      |   | 150    |  |   | 400   
|Other equity securities                          |  |                          | 3,399  |      |   | 2,437  |  |   | 1,250 
|                                                 |  |                          |        |      |   |        |  |   |       
|Total securities                                 |  | $                        | 38,022 |      | $ | 39,386 |  | $ | 41,236
|                                                 |  |                          |        |      |   |        |  |   |       



Securities
Available for Sale. Securities available for sale are used as part of the Companys interest rate risk management strategy and may be sold in response to changes in interest rates, changes in prepayment risk, liquidity needs, the
need to increase regulatory capital and other factors. The fair value of securities available for sale totaled $37.4 million at December 31, 2004, compared to $39.6 million and $41.5 million at December 31, 2003 and 2002, respectively. The
comparison of fair market value to amortized cost is shown in Note 3 of the notes to the financial statements. Note 3 also provides an analysis of gross unrealized gains and losses of securities available for sale. The following summarizes available
for sale securities for the respective periods.



Securities
Available for Sale



|                                                 |  |                          |        |      |   |        |  |   |       
|------------------------------------------------ |  | ------------------------ | ------ | ---- | - | ------ |  | - | ------
|                                                 |  | Years Ended December 31,
|                                                 |  | 2004                     |        | 2003 |   | 2002  
|Fair Value:                                      |  |                          |        |      |   |        |  |   |       
|U.S. Treasury and other U.S. government agencies |  | $                        | 22,322 |      | $ | 22,688 |  | $ | 24,446
|Tax-exempt municipal bonds                       |  |                          | 3,892  |      |   | 4,030  |  |   | 2,881 
|Mortgage-backed securities                       |  |                          | 1,938  |      |   | 2,577  |  |   | 3,013 
|Corporate bonds                                  |  |                          | 3,177  |      |   | 4,312  |  |   | 5,883 
|Adjustable rate loan funds                       |  |                          | 1,569  |      |   | 1,936  |  |   | 1,856 
|FHLMC stock                                      |  |                          | 310    |      |   | 245    |  |   | 248   
|Preferred stock                                  |  |                          | 1,735  |      |   | 1,795  |  |   | 1,995 
|Trust preferred stock                            |  |                          | 171    |      |   | 338    |  |   | 560   
|Other equity securities                          |  |                          | 3,857  |      |   | 2,690  |  |   | 1,298 
|                                                 |  |                          |        |      |   |        |  |   |       
|Total securities                                 |  | $                        | 38,971 |      | $ | 40,611 |  | $ | 42,180
|                                                 |  |                          |        |      |   |        |  |   |       



21



---

The following table sets forth the maturity distribution and weighted average yields of the securities
portfolio at December 31, 2004. The weighted average yields are calculated on the basis of carrying value of the investment portfolio and on the interest income of investments adjusted for amortization of premium and accretion of discount.



Maturities of Investments



|                                                    |  |                    |        |                 |                  |                      |  |      |               |  |                 |   |                      |   |   |  |   |  
|--------------------------------------------------- |  | ------------------ | ------ | --------------- | ---------------- | -------------------- |  | ---- | ------------- |  | --------------- | - | -------------------- | - | - |  | - | -
|                                                    |  | Available-for-Sale |        |                 | Held-to-Maturity |                     
|                                                    |  | AmortizedCost      |        | FairMarketValue |                  | WeightedAverageYield |  |      | AmortizedCost |  | FairMarketValue |   | WeightedAverageYield |  
|U.S. Government Agencies and other U.S. securities: |  |                    |        |                 |                  |                      |  |      |               |  |                 |   |                      |   |   |  |   |  
|Within one year                                     |  | $                  | 6,641  |                 | $                | 6,633                |  | 2.78 | %             |  | $               |  |                      | $ |  |  | 0 | %
|After one year to five years                        |  |                    | 13,608 |                 |                  | 13,682               |  | 3.68 | %             |  |                 |  |                      |   |  |  | 0 | %
|After five years                                    |  |                    | 1,959  |                 |                  | 2,007                |  | 4.63 | %             |  |                 |  |                      |   |  |  | 0 | %
|                                                    |  |                    |        |                 |                  |                      |  |      |               |  |                 |   |                      |   |   |  |   |  
|Total                                               |  |                    | 22,208 |                 |                  | 22,322               |  | 3.49 | %             |  |                 |  |                      |   |  |  | 0 | %
|                                                    |  |                    |        |                 |                  |                      |  |      |               |  |                 |   |                      |   |   |  |   |  
|Municipal Securities:                               |  |                    |        |                 |                  |                      |  |      |               |  |                 |   |                      |   |   |  |   |  
|Within one year                                     |  |                    | 85     |                 |                  | 86                   |  | 6.52 | %             |  |                 |  |                      |   |  |  | 0 | %
|After one year to five years                        |  |                    | 1,000  |                 |                  | 1,019                |  | 5.68 | %             |  |                 |  |                      |   |  |  | 0 | %
|After five years                                    |  |                    | 2,764  |                 |                  | 2,787                |  | 5.29 | %             |  |                 |  |                      |   |  |  | 0 | %
|                                                    |  |                    |        |                 |                  |                      |  |      |               |  |                 |   |                      |   |   |  |   |  
|                                                    |  |                    | 3,849  |                 |                  | 3,892                |  | 5.42 | %             |  |                 |  |                      |   |  |  | 0 | %
|                                                    |  |                    |        |                 |                  |                      |  |      |               |  |                 |   |                      |   |   |  |   |  
|Mortgage Backed Securities:                         |  |                    |        |                 |                  |                      |  |      |               |  |                 |   |                      |   |   |  |   |  
|Within one year                                     |  |                    |       |                 |                  |                     |  | 0    | %             |  |                 |  |                      |   |  |  | 0 | %
|After one year to five years                        |  |                    | 536    |                 |                  | 529                  |  | 3.83 | %             |  |                 |  |                      |   |  |  | 0 | %
|After five years                                    |  |                    | 1,405  |                 |                  | 1,409                |  | 4.79 | %             |  |                 |  |                      |   |  |  | 0 | %
|                                                    |  |                    |        |                 |                  |                      |  |      |               |  |                 |   |                      |   |   |  |   |  
|                                                    |  |                    | 1,941  |                 |                  | 1,938                |  | 4.52 | %             |  |                 |  |                      |   |  |  | 0 | %
|                                                    |  |                    |        |                 |                  |                      |  |      |               |  |                 |   |                      |   |   |  |   |  
|Corporate Bonds:                                    |  |                    |        |                 |                  |                      |  |      |               |  |                 |   |                      |   |   |  |   |  
|Within one year                                     |  |                    | 1,009  |                 |                  | 1,029                |  | 5.20 | %             |  |                 |  |                      |   |  |  | 0 | %
|After one year to five years                        |  |                    | 2,012  |                 |                  | 2,148                |  | 6.50 | %             |  |                 |  |                      |   |  |  | 0 | %
|After five years                                    |  |                    |       |                 |                  |                     |  | 0    | %             |  |                 |  |                      |   |  |  | 0 | %
|                                                    |  |                    |        |                 |                  |                      |  |      |               |  |                 |   |                      |   |   |  |   |  
|                                                    |  |                    | 3,021  |                 |                  | 3,177                |  | 6.07 | %             |  |                 |  |                      |   |  |  | 0 | %
|                                                    |  |                    |        |                 |                  |                      |  |      |               |  |                 |   |                      |   |   |  |   |  
|Other Securities:                                   |  |                    |        |                 |                  |                      |  |      |               |  |                 |   |                      |   |   |  |   |  
|No stated maturity                                  |  |                    | 7,003  |                 |                  | 7,642                |  | 4.40 | %             |  |                 |  |                      |   |  |  | 0 | %
|                                                    |  |                    |        |                 |                  |                      |  |      |               |  |                 |   |                      |   |   |  |   |  
|Total securities                                    |  | $                  | 38,022 |                 | $                | 38,971               |  | 4.11 | %             |  | $               |  |                      | $ |  |  | 0 | %
|                                                    |  |                    |        |                 |                  |                      |  |      |               |  |                 |   |                      |   |   |  |   |  



22



---

Deposits



The Bank depends on deposits to fund its lending activities, generate fee income opportunities, and create a captive market for loan products. The table
below presents a history of average deposits and the rates paid on interest-bearing deposit accounts for the periods indicated.



Average Deposits and Average Rates Paid



|                                |  |                          |         |             |      |   |                |      |             |  |      |                |  |             |         |  |      |  
|------------------------------- |  | ------------------------ | ------- | ----------- | ---- | - | -------------- | ---- | ----------- |  | ---- | -------------- |  | ----------- | ------- |  | ---- | -
|                                |  | Years Ended December 31, |        
|                                |  | 2004                     |         |             | 2003 |   |                | 2002 |            
|                                |  | AverageBalance           |         | AverageRate |      |   | AverageBalance |      | AverageRate |  |      | AverageBalance |  | AverageRate |        
|Interest-bearing deposits:      |  |                          |         |             |      |   |                |      |             |  |      |                |  |             |         |  |      |  
|Checking and savings            |  | $                        | 74,536  |             | 0.63 | % |                | $    | 60,461      |  | 0.61 | %              |  | $           | 47,175  |  | 1.09 | %
|Certificates of deposit:        |  |                          |         |             |      |   |                |      |             |  |      |                |  |             |         |  |      |  
|Less than $100,000              |  |                          | 67,812  |             | 2.97 | % |                |      | 66,404      |  | 3.39 | %              |  |             | 64,393  |  | 4.90 | %
|$100,000 and over               |  |                          | 17,311  |             | 3.27 | % |                |      | 14,880      |  | 3.68 | %              |  |             | 13,463  |  | 4.02 | %
|                                |  |                          |         |             |      |   |                |      |             |  |      |                |  |             |         |  |      |  
|Total interest-bearing deposits |  |                          | 159,659 |             | 1.90 | % |                |      | 141,745     |  | 2.24 | %              |  |             | 125,031 |  | 2.93 | %
|                                |  |                          |         |             |      |  
|Noninterest-bearing deposits    |  |                          | 23,215  |             | 0    | % |                |      | 18,397      |  | 0    | %              |  |             | 14,160  |  | 0    | %
|                                |  |                          |         |             |      |   |                |      |             |  |      |                |  |             |         |  |      |  
|Total average deposits          |  | $                        | 182,874 |             | 1.65 | % |                | $    | 160,142     |  | 1.98 | %              |  | $           | 139,191 |  | 2.63 | %
|                                |  |                          |         |             |      |   |                |      |             |  |      |                |  |             |         |  |      |  



Deposits averaged
$182.9 million during the year ended December 31, 2004, an increase of 14.2% and 31.4% over the $160.1 million and $139.2 million during 2003 and 2002, respectively. Interest-bearing demand deposits accounted for the largest portion of the increase,
followed by noninterest-bearing demand deposits.



The following
table is a summary of the maturity distribution of certificates of deposit in amounts of $100,000 or more as of December 31, 2004.



Maturities of CDs of $100,000 or More



|                              |  |                   |        |         |        |  
|----------------------------- |  | ----------------- | ------ | ------- | ------ | -
|                              |  | December 31, 2004 |       
|                              |  | Amount            |        | Percent |       
|Three months or less          |  | $                 | 3,340  |         | 17.49  | %
|Over three months to one year |  |                   | 7,473  |         | 39.13  | %
|Over one year to five years   |  |                   | 8,287  |         | 43.39  | %
|Over five years               |  |                   |       |         | 0      | %
|                              |  |                   |        |         |        |  
|Total                         |  | $                 | 19,100 |         | 100.00 | %
|                              |  |                   |        |         |        |  



Capital Resources



Capital represents funds, earned or obtained, over
which banks can exercise greater control in comparison with deposits and borrowed funds. The adequacy of the Companys capital is reviewed by management on an ongoing basis with reference to the size, composition, and quality of the
Companys resources and consistent with regulatory requirements and industry standards. Management seeks to maintain a capital structure that will support anticipated asset growth and absorb potential losses.



Banking regulations established to ensure capital adequacy require the
Company and the Bank to maintain minimum amounts and ratios of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital to average assets (as defined). Management believes, as of December
31, 2004, that the Company meets all capital adequacy requirements to which it is subject.



23



---

The following table details the components of Tier 1 and Tier 2 capital and related ratios for the
periods indicated.



Analysis of Capital



|                                                  |  |                |         |   |      |   |         |  
|------------------------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | -
|                                                  |  | December 31,   |        
|                                                  |  | 2004           |         |   | 2003 |  
|                                                  |  | (In Thousands) |        
|Tier 1 Capital:                                   |  |                |         |   |      |   |         |  
|Common stock                                      |  | $              | 681     |   |      | $ | 680     |  
|Additional paid-in capital                        |  |                | 8,199   |   |      |   | 8,165   |  
|Retained earnings                                 |  |                | 12,494  |   |      |   | 10,595  |  
|Accumulated other comprehensive income            |  |                | 585     |   |      |   | 761     |  
|                                                  |  |                |         |   |      |   |         |  
|Total capital (GAAP)                              |  |                | 21,959  |   |      |   | 20,201  |  
|Less: Intangibles                                 |  |                | (526    | ) |      |   | (588    | )
|Net unrealized gain on debt and equity securities |  |                | (585    | ) |      |   | (761    | )
|                                                  |  |                |         |   |      |   |         |  
|Total Tier 1 capital                              |  |                | 20,848  |   |      |   | 18,852  |  
|                                                  |  |               
|Tier 2 Capital:                                   |  |                |         |   |      |   |         |  
|Allowable allowances for loan losses              |  |                | 2,007   |   |      |   | 1,597   |  
|Net unrealized gains on equity securities         |  |                | 289     |   |      |   | 205     |  
|                                                  |  |                |         |   |      |   |         |  
|Total Tier 2 capital                              |  | $              | 23,144  |   |      | $ | 20,654  |  
|                                                  |  |                |         |   |      |   |         |  
|Risk-weighted assets                              |  | $              | 163,642 |   |      | $ | 131,213 |  
|                                                  |  |               
|Capital Ratios (1):                               |  |                |         |   |      |   |         |  
|Tier 1 risk-based capital ratio                   |  |                | 12.74   | % |      |   | 14.37   | %
|Total risk-based capital ratio                    |  |                | 14.14   | % |      |   | 15.74   | %
|Tier 1 capital to average adjusted total assets   |  |                | 9.62    | % |      |   | 10.15   | %

---

|(1) | The required minimum capital ratios for capital adequacy purposes, as defined collectively by the federal banking agencies, for Tier 1 risk-based capital, total risk-based capital,
and Tier 1 capital to average adjusted assets was 4.0%, 8.0% and 4.0%, respectively. To be considered well capitalized under federal prompt corrective action regulations, these same required ratios are 6.0%, 10.0% and 5.0%, respectively.
See Note 11 of the notes to the financial statements for a detail of the capital ratios.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Asset Quality



Allowance for loan losses. The allowance for loan losses represents an amount management believes is adequate to provide for probable loan losses inherent in the loan portfolio. Management evaluates the allowance
for loan losses on a regular basis using a methodology that considers various risk factors in accordance with SFAS No. 5, Accounting for Contingencies. This methodology includes analyzing historical loan losses, current trends in
delinquencies and charge-offs, the opinions of our regulators, changes in the size and composition of the loan portfolio and industry data. However, risks of future losses cannot be quantified precisely or attributed to particular loans or classes
of loans. Because those risks are influenced by general economic trends as well as conditions affecting individual borrowers, managements judgment of the allowance is necessarily approximate and imprecise. The allowance is also subject to
regulatory examinations and determinations as to adequacy, which may take into account such factors as the methodology used to calculate the allowance and the size of the allowance in comparison to peer banks identified by regulatory agencies.



24



---

Set forth below is a table detailing the allowance for loan losses for the periods indicated.



Allowance for Loan Losses



|                                                                           |  |                          |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|-------------------------------------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------ | - |  | - | ------ | -
|                                                                           |  | Years Ended December 31, |       
|                                                                           |  | 2004                     |        |   | 2003 |   |        | 2002 |  |   | 2001   |   |  | 2000 |       
|                                                                           |  | (In Thousands)           |       
|Balance, beginning of period                                               |  | $                        | 2,002  |   |      | $ | 1,603  |      |  | $ | 1,326  |   |  | $    | 1,336  |   |  | $ | 1,163  |  
|Loans charged off:                                                         |  |                          |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Commercial                                                                 |  |                          | (11    | ) |      |   |       |      |  |   |       |   |  |      |       |   |  |   | (7     | )
|Real estate mortgage                                                       |  |                          |       |   |      |   | (4     | )    |  |   |       |   |  |      | (282   | ) |  |   |       |  
|Consumer                                                                   |  |                          | (27    | ) |      |   | (24    | )    |  |   | (83    | ) |  |      | (53    | ) |  |   | (85    | )
|                                                                           |  |                          |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total loans charged-off                                                    |  |                          | (38    | ) |      |   | (28    | )    |  |   | (83    | ) |  |      | (335   | ) |  |   | (92    | )
|                                                                           |  |                          |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Recoveries:                                                                |  |                          |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Commercial                                                                 |  |                          | 11     |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   | 38     |  
|Real estate mortgage                                                       |  |                          |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Consumer                                                                   |  |                          | 10     |   |      |   | 47     |      |  |   | 25     |   |  |      | 15     |   |  |   | 15     |  
|                                                                           |  |                          |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total recoveries                                                           |  |                          | 21     |   |      |   | 47     |      |  |   | 25     |   |  |      | 15     |   |  |   | 53     |  
|                                                                           |  |                          |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Net recoveries (charge-offs)                                               |  |                          | (17    | ) |      |   | 19     |      |  |   | (58    | ) |  |      | (320   | ) |  |   | (39    | )
|Provision for loan losses                                                  |  |                          | 419    |   |      |   | 380    |      |  |   | 335    |   |  |      | 310    |   |  |   | 212    |  
|                                                                           |  |                          |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Balance, end of period                                                     |  | $                        | 2,404  |   |      | $ | 2,002  |      |  | $ | 1,603  |   |  | $    | 1,326  |   |  | $ | 1,336  |  
|                                                                           |  |                          |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Allowance for loan losses to loans outstanding at end of period            |  |                          | 1.35   | % |      |   | 1.41   | %    |  |   | 1.35   | % |  |      | 1.26   | % |  |   | 1.44   | %
|                                                                           |  |                          |        |   |     
|Allowance for loan losses to nonaccrual loans outstanding at end of period |  |                          | 253.05 | % |      |   | 362.68 | %    |  |   | 182.37 | % |  |      | 248.78 | % |  |   | 105.95 | %
|                                                                           |  |                          |        |   |     
|Net charge-offs (recoveries) to average loans outstanding during period    |  |                          | 0.01   | % |      |   | (0.01  | )%   |  |   | 0.05   | % |  |      | 0.33   | % |  |   | 10.04  | %



As in recent years,
the Banks charge-offs during 2004 continued to be minimal. With the exception of 2001, charge-offs have primarily occurred in the consumer loan category over the past five years. During 2001, the Bank experienced a $160,000 charge-off relating
to the insufficient collateral on two loans foreclosed on during the year. During 2004, the Bank obtained possession of additional property owned by this borrower. During 2005, the Bank sold the property at foreclosure, but the borrower subsequently
filed for bankruptcy so the sale is not final. Final resolution should result in substantial recovery of the deficiency.



The Banks loan portfolio continues to evolve from primarily residential real estate mortgages to one with a significant emphasis in commercial and
consumer loans. Increased competition in the real estate mortgage arena and the desire to diversify contributed to this shift in lending and customer relationships. However, with this change comes increased risk associated with potential loan
losses. The allowance for loan losses as a percentage of period end loans has been between 1.26 and 1.41% over the past five years, while the ratio of the allowance for loan losses as a percentage of nonaccrual loans outstanding has ranged from
105.95% to 362.68%. Based on these factors, management believes that allowances for losses existing at December 31, 2004 are sufficient to cover any anticipated or unanticipated losses on loans outstanding in accordance with SFAS No. 5,
Accounting for Contingencies.



25



---

An allocation of the allowance for loan losses in dollars and as a percent of the total allowance is
provided in the following tables. Because all of these factors are subject to change, the allocation is not necessarily predictive of future loan losses in the indicated categories.



Allocation of Allowance for Loan Losses



|             |  |                         |       |                            |             |   |                         |          |                            |  |       |                         |  |                            |     |  |       |  
|------------ |  | ----------------------- | ----- | -------------------------- | ----------- | - | ----------------------- | -------- | -------------------------- |  | ----- | ----------------------- |  | -------------------------- | --- |  | ----- | -
|             |  | Commercial              |       |                            | Real Estate |   |                         | Consumer |                           
|             |  | Allowancefor LoanLosses |       | Percentageof LoanAllowance |             |   | Allowancefor LoanLosses |          | Percentageof LoanAllowance |  |       | Allowancefor LoanLosses |  | Percentageof LoanAllowance |    
|             |  | (In Thousands)          |      
|December 31, |  |                         |       |                            |             |   |                         |          |                            |  |       |                         |  |                            |     |  |       |  
|2004         |  | $                       | 1,556 |                            | 64.73       | % |                         | $        | 242                        |  | 10.07 | %                       |  | $                          | 606 |  | 25.20 | %
|2003         |  | $                       | 1,175 |                            | 58.69       | % |                         |          | 278                        |  | 13.89 | %                       |  |                            | 549 |  | 27.42 | %
|2002         |  | $                       | 684   |                            | 42.67       | % |                         |          | 249                        |  | 15.53 | %                       |  |                            | 670 |  | 41.80 | %
|2001         |  | $                       | 497   |                            | 37.48       | % |                         |          | 268                        |  | 20.21 | %                       |  |                            | 561 |  | 42.31 | %
|2000         |  | $                       | 581   |                            | 43.49       | % |                         |          | 262                        |  | 19.61 | %                       |  |                            | 493 |  | 36.90 | %



The following table
details information concerning nonaccrual and past due loans, as well as foreclosed assets.



Nonperforming Assets



|                                                                     |  |                |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|-------------------------------------------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------ | - |  | - | ------ | -
|                                                                     |  | December 31,   |       
|                                                                     |  | 2004           |        |   | 2003 |   |        | 2002 |  |   | 2001   |   |  | 2000 |       
|                                                                     |  | (In Thousands) |       
|Nonaccrual loans:                                                    |  |                |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Commercial                                                           |  | $              | 374    |   |      | $ | 126    |      |  | $ |       |   |  | $    |       |   |  | $ | 13     |  
|Real estate mortgage                                                 |  |                | 272    |   |      |   | 321    |      |  |   | 677    |   |  |      | 453    |   |  |   | 1,180  |  
|Home equity lines of credit                                          |  |                | 120    |   |      |   | 28     |      |  |   |       |   |  |      | 22     |   |  |   | 25     |  
|Consumer                                                             |  |                | 184    |   |      |   | 77     |      |  |   | 202    |   |  |      | 58     |   |  |   | 43     |  
|                                                                     |  |                |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total nonaccrual loans                                               |  |                | 950    |   |      |   | 552    |      |  |   | 879    |   |  |      | 533    |   |  |   | 1,261  |  
|Other real estate owned                                              |  |                |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   | 5      |  
|                                                                     |  |                |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total nonperforming assets                                           |  | $              | 950    |   |      | $ | 552    |      |  | $ | 879    |   |  | $    | 533    |   |  | $ | 1,266  |  
|                                                                     |  |                |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Loans past due 90 or more days accruing interest                     |  |                |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Allowance for loan losses to nonaccrual loans                        |  |                | 253.05 | % |      |   | 362.68 | %    |  |   | 182.37 | % |  |      | 248.78 | % |  |   | 105.95 | %
|Nonperforming assets to period end loans and other real estate owned |  |                | 0.53   | % |      |   | 0.39   | %    |  |   | 0.74   | % |  |      | 0.51   | % |  |   | 1.37   | %



Total nonperforming
assets consist of nonaccrual loans and foreclosed properties that are not producing income for the Bank. The Banks policy is that whenever a loan reaches 90 days delinquent interest accruals are suspended until six months after the loan
becomes current again. In recent years, the Bank has experienced strong asset quality in its loan portfolio. Low interest rates and an exuberant real estate market have created a vibrant lending environment and provided borrowers the opportunity to
finance larger purchases at lower costs. Accordingly, trends in total nonperforming assets and the related ratios have been relatively positive for the periods presented.



At December 31, 2004, there were no loans identified by the Bank as impaired under the established accounting guidelines.
Accordingly, no specific allowances were provided with respect to impaired loans at December 31, 2004. Included in nonaccrual loans at December 31, 2003 and 2002 is one impaired loan to the same borrower with a balance of $126,000 and $368,000,
respectively. The balance was partially paid and brought current during 2003. However, the borrower was unable to meet the remaining obligation and, consequently, filed for bankruptcy protection. The Bank entered into an agreement with the
bankruptcy trustee to sell the collateral during the first



26



---

quarter of 2004. Proceeds from these sales were sufficient to satisfy all principal and interest amounts due. At December 31, 2001, there were no loans
identified by the Bank as impaired under the established accounting guidelines, as compared to December 31, 2000 when there were loans totaling $267,000 identified by the Bank as impaired. Amounts identified at December 31, 2000 were to the same
borrower and the Bank foreclosed on assets collateralizing these loans during 2001. Upon foreclosure, the Bank wrote the assets down by $160,000.



In conjunction with the methodology described above to calculate the allowance for loan losses, the Bank closely monitors individual loans that are deemed
to be potential problem loans. Loans are viewed as potential problem loans when possible credit problems of borrowers or industry trends cause management to have doubts as to the ability of such borrowers to comply with current repayment terms.
Those loans are subject to regular management attention, and their status is reviewed on a regular basis. In instances where management determines that a specific allowance should be set, the Bank takes such action as deemed appropriate.



As of December 31, 2004, all loans 60 days or more delinquent, including
nonperforming loans, totaled $1.36 million. Additionally, other performing loans totaling $3.15 million existed that were current, but had other potential weaknesses that management considers to warrant additional monitoring. All loans in these
categories are subject to constant management attention, and their status is reviewed on a regular basis. These loans are generally secured by residential and commercial real estate and equipment with appraised values that exceed the remaining
principal balances on such loans.



Liquidity; Asset Management



Liquidity represents the Companys ability to
meet present and future obligations through the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest-bearing deposits with banks, federal funds sold,
investments maturing within one year, and investments that are categorized as available-for-sale. The Companys ability to obtain deposits and purchase funds at favorable rates impacts its liability liquidity. As a result of the Companys
management of liquid assets and the ability to generate liquidity through liability funding, management believes that the Company maintains overall liquidity that is sufficient to satisfy its depositors requirements and meet its
customers credit needs.



The table below summarizes the
Companys balance sheet liquidity position for the periods presented. Additionally, alternative sources of liquidity are available to the Company including its capacity to borrow additional funds when the need arises. The Bank has an available
line of credit with the FHLB for up to 13% of Bank assets, or approximately $30.6 million at December 31, 2004. However, the Bank may request an increase in this borrowing capacity from the FHLB. At December 31, 2004 the Bank had sufficient
collateral pledged to borrow a total of approximately $83.0 million from the FHLB. The borrowing capacity is subject to certain collateral requirements as stipulated in the FHLB borrowing agreement. Additionally, the Bank maintains other available
borrowing arrangements $8.4 million. Based on these factors, the Company maintains sufficient liquidity to meet anticipated needs.



Summary of Liquid Assets



|                                                         |  |                        |         |   |      |   |         |      |  |   |         |  
|-------------------------------------------------------- |  | ---------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                         |  | December 31,           |        
|                                                         |  | 2004                   |         |   | 2003 |   |         | 2002 | 
|                                                         |  | (Dollars in Thousands) |        
|                                                         |  |                        |        
|Cash and due from banks                                  |  | $                      | 9,415   |   |      | $ | 5,794   |      |  | $ | 7,535   |  
|Held-to-maturity securities due within one year          |  |                        |        |   |      |   |        |      |  |   | 5,004   |  
|Available-for-sale securities                            |  |                        | 38,971  |   |      |   | 39,580  |      |  |   | 41,491  |  
|                                                         |  |                        |         |   |      |   |         |      |  |   |         |  
|Total liquid assets                                      |  | $                      | 48,386  |   |      | $ | 45,374  |      |  | $ | 54,030  |  
|                                                         |  |                        |         |   |      |   |         |      |  |   |         |  
|Deposits and other liabilities                           |  | $                      | 215,730 |   |      | $ | 176,349 |      |  | $ | 161,776 |  
|                                                         |  |                        |         |   |      |   |         |      |  |   |         |  
|Ratio of liquid assets to deposits and other liabilities |  |                        | 22.43   | % |      |   | 25.73   | %    |  |   | 33.40   | %
|                                                         |  |                        |         |   |      |   |         |      |  |   |         |  



Total cash and cash
equivalents were $9.4 million at December 31, 2004, compared to $5.8 million and $7.5 million at December 31, 2003 and 2002, respectively. Net cash flows from operating activities were $3.5 million



27



---

for the year ended December 31, 2004, compared to $2.5 million and $2.3 million for the years ended December 31, 2003 and 2002, respectively. This
fluctuation primarily resulted from net income growth and other changes in normal operating activities during the periods.



Net cash flows from investing activities were $38.3 million during the year ended December 31, 2004, compared to $18.6 million and $18.7 million during
the years ended December 31, 2003 and 2002, respectively. Fueled by low rates and a vibrant real estate market, net loan originations were strong during 2004 with an increase of $12.5 million and $23.2 million over 2003 and 2002, respectively. This
resulted in other investment activities being greatly limited during 2004 and 2003.



Net cash flows from financing activities were $38.5 million for the year ended December 31, 2004, representing an increase of $24.1 million and $21.2 million over 2003 and 2002, respectively. Deposit growth, led by
demand deposits, represented the most significant portion of this increase at $33.8 million in new cash flows, as compared to being flat in 2003 and up $16.3 million in 2002. The Bank benefited from deposit relationships obtained in conjunction with
new loan business and implemented several promotions during the year to generate new deposit relationships. Additionally, net proceeds from FHLB borrowings were $5.1 million in 2004, as compared to $14.7 million and $1.3 million during 2003 and
2002, respectively. Increased borrowings during 2004 were required to fund liquidity shortfalls created by the strong loan demand.



The Bank occasionally finds it necessary to borrow funds on a short-term basis due to fluctuations in loan and deposit levels. The Bank has several
arrangements whereby it may borrow funds overnight and on terms. As discussed above, the Bank currently has borrowing capacity of approximately $83.0 million, provided it meets all borrowing guidelines with the FHLB. At December 31, 2004, the Bank
had $22.0 million in outstanding FHLB advances, compared to $16.9 million at December 31, 2003.



The following table details information concerning the Banks short-term borrowings for the periods presented.



Summary of Borrowed Funds



|                                                                                 |  |                        |        |   |      |   |        |      |  |   |        |  
|-------------------------------------------------------------------------------- |  | ---------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                 |  | December 31,           |       
|                                                                                 |  | 2004                   |        |   | 2003 |   |        | 2002 | 
|                                                                                 |  | (Dollars in thousands) |       
|Actual period end balances                                                       |  | $                      | 21,350 |   |      | $ | 16,200 |      |  | $ | 1,400  |  
|Monthly average balance of short-term borrowings outstanding during the period   |  | $                      | 6,915  |   |      | $ | 5,250  |      |  | $ | 5,250  |  
|Weighted-average interest rate on monthly average short-term borrowings          |  |                        | 1.72   | % |      |   | 1.27   | %    |  |   | 1.27   | %
|Maximum month-end balance of shortterm borrowings outstanding during the period |  | $                      | 21,350 |   |      | $ | 16,200 |      |  | $ | 16,200 |  



Contractual Obligations, Contingent
Liabilities and Commitments



The following table
summarizes the Companys significant contractual obligations, contingent liabilities and certain other commitments outstanding at December 31, 2004:



Contractual Obligations, Contingent Liabilities and Commitments



|                                                                                                                |  |                        |        |                 |   |           |  |           |    |                  |   |    |  |   |    
|--------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------ | --------------- | - | --------- |  | --------- | -- | ---------------- | - | -- |  | - | ---
|                                                                                                                |  | Payments Due By Period
|Contractual Obligations                                                                                         |  | Total                  |        | Less Than1 Year |   | 1-3 Years |  | 3-5 Years |    | More Than5 Years
|                                                                                                                |  | (Dollars in Thousands)
|Operating lease obligations                                                                                     |  | $                      | 120    |                 | $ | 24        |  | $         | 48 |                  | $ | 48 |  | $ |   
|Other long-term liabilities reflected on the Companys balance sheet under GAAP Federal Home Loan Bank Advances |  |                        | 21,967 |                 |   | 21,350    |  |           |   |                  |   |   |  |   | 617
|Other commitments                                                                                               |  |                        |        |                 |   |           |  |           |    |                  |   |    |  |   |    
|Standby letters of credit                                                                                       |  |                        | 812    |                 |   | 812       |  |           |   |                  |   |   |  |   |   
|Commitments to extend credit                                                                                    |  |                        | 46,043 |                 |   | 46,043    |  |           |   |                  |   |   |  |   |   
|                                                                                                                |  |                        |        |                 |   |           |  |           |    |                  |   |    |  |   |    
|Total contractual obligations                                                                                   |  | $                      | 68,942 |                 | $ | 68,229    |  | $         | 48 |                  | $ | 48 |  | $ | 617
|                                                                                                                |  |                        |        |                 |   |           |  |           |    |                  |   |    |  |   |    



28



---

Return on Equity and Assets



The following table summarizes ratios considered to be significant indicators of the Companys profitability and
financial condition during the periods indicated.



Return on
Equity and Assets



|                                      |  |                         |   |  |       |   |  |       |  
|------------------------------------- |  | ----------------------- | - |  | ----- | - |  | ----- | -
|                                      |  | Year Ended December 31, |  
|                                      |  | 2004                    |   |  | 2003  |   |  | 2002  |  
|Return on average assets              |  | 1.08                    | % |  | 1.11  | % |  | 1.12  | %
|Return on average equity              |  | 11.01                   | % |  | 10.64 | % |  | 10.31 | %
|Average equity to average asset ratio |  | 9.83                    | % |  | 10.40 | % |  | 10.84 | %
|Dividend payout ratio                 |  | 19.30                   | % |  | 16.83 | % |  | 13.79 | %



Critical Accounting Policies and
Judgments



The accounting principles followed by the
Company and the methods of applying these principles conform with generally accepted accounting principles and to general practices within the banking industry. Our most critical accounting policies require managements judgment to ascertain
the valuation of assets, liabilities, commitments and contingencies. These policies require the use of subjective and complex estimates, assumptions and judgments, which are based on information available as of the date of the financial statements
and are important to our reported financial condition and results of operations. Accordingly, as this information changes, our financial statements could reflect different estimates, assumptions and judgments and as such have a greater possibility
of producing results that could be materially different than originally reported.



The allowance for loan losses is established and maintained at levels management deems adequate to cover losses inherent in the loan portfolio, based upon our evaluation of the risks in the portfolio and changes in
the nature and volume of loan activity. Management determines loan loss estimates by analyzing historical loan losses, current trends in delinquencies and charge-offs, the opinions of our regulators, changes in the size and composition of the loan
portfolio and industry data. Additionally, we consider the impact of economic events, the outcome of which is uncertain. While we use the best information available in establishing the allowance, actual economic conditions differing significantly
from our assumptions in determining the loan loss valuation allowance may result in future adjustments, or regulators may require adjustments based upon information available to them at the time of their examinations. Although we believe that our
allowance for loan losses is adequate and properly recorded in our financial statements, differing economic conditions or alternate methods of estimation could result in materially different amounts of loan losses.



The estimation of fair value is significant to several of our assets,
including available-for-sale (AFS) investment securities and real estate owned (REO). AFS securities are recorded at fair value, while REO is generally recorded at the lower of cost or fair value (less estimated selling costs). Fair values can be
volatile and may be influenced by a number of factors, including market interest rates, prepayment speeds, discount rates and market conditions, among others. Since these factors can change significantly and rapidly, fair values are difficult to
predict and are subject to material changes, which could impact our financial condition.



Impact of Accounting Pronouncements



In December 2003, the FASB issued a revision of FASB Interpretation 46, Consolidation of Variable Interest Entities, and Interpretation of ARB No. 51 (FIN 46). FIN 46 provides a new framework for identifying
variable interest entities (VIEs) and determining when a company should include the assets, liabilities, noncontrolling interests and results of activities of a VIE in its consolidated financial statements. FASB has since revised FIN 46. As revised,
FIN 46 was effective beginning in the first quarter of 2004 for all VIEs (other than what are commonly referred to as special purpose entities, VIEs of small business issuers, and VIEs of nonpublic entities). As the Company does not currently
utilize VIEs or so called special purpose entities, this pronouncement did not have a material impact on the Companys results of operations or financial position.



The FASB issued FASB Statement No. 123 (Revised 2004), Share-Based Payment(SFAS 123R) during December
2004. SFAS 123R requires that compensation cost relating to stockbased payment transactions be



29



---

recognized in financial statements. That cost will be measured based on the fair value of the instruments issued. Public entities (other than those filing as
small business issuers) are required to apply SFAS 123R as of the first interim or annual reporting period that begins after June 15, 2005. The scope of SFAS 123R includes stock options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. SFAS 123R replaces SFAS 123 and supersedes APB 25.SFAS 123, originally issued in 1995, preferred the fair-value-based method of accounting for stock-based compensation, but permitted
the continued application of the guidance in Opinion 25, provided that the footnotes to the financial statements disclosed what net income would have been had the preferable fair-value-based method been used.



During December 2004, the FASB issued FASB Statement No. 153, Exchanges of
Nonmonetary AssetsAn Amendment of APB Opinion No. 29(SFAS 153). SFAS 153 amends APB Opinion No. 29, Accounting for Nonmonetary Transactions,originally issued in 1973. The standard is based on the
principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Previously, Opinion 29 required that the accounting for an exchange of a productive asset for a similar productive asset or an
equivalent interest in the same or similar productive asset should be based on the recorded amount of the asset relinquished. The provisions in SFAS 153 are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June
15,2005. Early application is permitted and companies must apply the standard prospectively. The adoption of this standard is not expected to have a material impact on the Banks consolidated results of operations or financial condition
in the foreseeable future.



Effects of Inflation



The Company believes that its net interest income and results of operations
have not been significantly affected by inflation during the years ended December 31, 2004, 2003 and 2002.



|Item 7a. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- | ----------------------------------------------------------



The Company uses a third party provider to perform computer modeling methodologies that assist in determining the overall magnitude of interest
sensitivity risk. Based on these methodologies, management formulates policies governing asset generation and pricing, funding sources and pricing, and off-balance-sheet commitments in order to reduce sensitivity risk. These decisions are based on
managements outlook regarding future interest rate movements, the state of the local and national economy, and other financial and business risk factors.



The modeling methodologies used measure interest rate sensitivity by analyzing the potential impact on net interest income under various interest rate
scenarios. Normally, one such scenario would assume a hypothetical 200 basis point instantaneous and parallel shift in the yield curve in interest rates. However, management adjusted this scenario during 2004 to account for the relatively low
interest rates existing during the period caused the likelihood of a 200 basis point instantaneous and parallel decline in interest rates decline to be remote. Accordingly, management modeled the impact of a 100 basis point decline in interest rates
and a 200 basis point increase in interest rates at December 31, 2004. A 100 basis point instantaneous and parallel decrease in the yield curve in interest rates would cause net interest income to decrease by $84,000, while a 200 basis point
instantaneous and parallel increase in the yield curve in interest rates would cause net interest income to increase by $77,000.



The computer model uses standard algebraic formula for calculating present value. The calculation discounts the future cash flows of the Companys
portfolio of interest rate sensitive instruments to present value utilizing techniques designed to approximate current market rates for securities, current offering rates for loans, and the cost of alternative funding for the given maturity of
deposits and then assumes an instantaneous and parallel shift in these rates. The difference between these numbers represents the resulting hypothetical change in the fair value of interest rate sensitive instruments.



As with any modeling techniques, certain limitations and shortcomings are
inherent in the Companys methodology. Significant assumptions must be made in the calculation including: (1) no growth in volume or balance sheet mix; (2) constant market interest rates reflecting the average rate from the last month of the
given quarter; and (3) pricing spreads to market rates derived from an historical analysis, or from assumptions by instrument type. Additionally, the computations do not contemplate certain actions management could undertake in response to changes
in interest rates.



30



---

|Item 8. | FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
|------- | ------------------------------------------



SHORE FINANCIAL CORPORATION



Consolidated Statements of Financial Condition



|                                                                                                                                         |  |             |             |      |   |            
|---------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ----------- | ---- | - | -----------
|                                                                                                                                         |  | December 31
|                                                                                                                                         |  | 2004        |             | 2003
|ASSETS                                                                                                                                   |  |             |             |      |   |            
|Cash (including interestearning deposits of approximately $3,149,300 and $1,424,100, respectively)                                      |  | $           | 9,415,000   |      | $ | 5,793,800  
|Investment securities:                                                                                                                   |  |             |             |      |   |            
|Held-to-maturity (fair value of $0 and $0, respectively)                                                                                 |  |             |            |      |   |           
|Available-for-sale (amortized cost of $36,437,500 and $38,354,800, respectively)                                                         |  |             | 37,386,500  |      |   | 39,579,800 
|Other investments, at cost                                                                                                               |  |             | 1,584,600   |      |   | 1,031,200  
|Loans receivable, net                                                                                                                    |  |             | 175,995,200 |      |   | 140,206,600
|Premises and equipment, net                                                                                                              |  |             | 8,024,900   |      |   | 4,986,900  
|Other assets                                                                                                                             |  |             | 5,282,300   |      |   | 4,952,000  
|                                                                                                                                         |  |             |             |      |   |            
|                                                                                                                                         |  | $           | 237,688,500 |      | $ | 196,550,300
|                                                                                                                                         |  |             |             |      |   |            
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                     |  |             |             |      |   |            
|Deposits:                                                                                                                                |  |             |             |      |   |            
|Interest-bearing                                                                                                                         |  | $           | 168,242,100 |      | $ | 139,857,000
|Noninterest-bearing                                                                                                                      |  |             | 24,495,000  |      |   | 19,033,700 
|                                                                                                                                         |  |             |             |      |   |            
|Total deposits                                                                                                                           |  |             | 192,737,100 |      |   | 158,890,700
|Advances from Federal Home Loan Bank                                                                                                     |  |             | 21,966,700  |      |   | 16,883,300 
|Other liabilities                                                                                                                        |  |             | 1,025,700   |      |   | 575,100    
|                                                                                                                                         |  |             |             |      |   |            
|Total liabilities                                                                                                                        |  |             | 215,729,500 |      |   | 176,349,100
|                                                                                                                                         |  |             |             |      |   |            
|Stockholders equity                                                                                                                     |  |             |             |      |   |            
|Preferred stock, par value $1 per share, 500,000 shares authorized; none issued and outstanding                                          |  |             |            |      |   |           
|Common stock, par value $.33 per share, 5,000,000 shares authorized; 2,063,284 and 2,061,724 shares issued and outstanding,
respectively |  |             | 680,900     |      |   | 680,400    
|Additional capital                                                                                                                       |  |             | 8,199,000   |      |   | 8,164,600  
|Retained earnings                                                                                                                        |  |             | 12,494,400  |      |   | 10,595,300 
|Accumulated other comprehensive income                                                                                                   |  |             | 584,700     |      |   | 760,900    
|                                                                                                                                         |  |             |             |      |   |            
|Total stockholders equity                                                                                                               |  |             | 21,959,000  |      |   | 20,201,200 
|                                                                                                                                         |  |             |             |      |   |            
|                                                                                                                                         |  | $           | 237,688,500 |      | $ | 196,550,300
|                                                                                                                                         |  |             |             |      |   |            



The accompanying
notes are an integral part of these financial statements.



31



---

SHORE FINANCIAL CORPORATION



Consolidated Statements of Income



|                                                    |  |                          |            |      |   |           |  |   |          
|--------------------------------------------------- |  | ------------------------ | ---------- | ---- | - | --------- |  | - | ---------
|                                                    |  | Years Ended December 31,
|                                                    |  | 2004                     |            | 2003 |   | 2002     
|Interest and dividend income                        |  |                          |            |      |   |           |  |   |          
|Loans                                               |  | $                        | 9,150,300  |      | $ | 7,806,000 |  | $ | 7,754,700
|Investments                                         |  |                          |            |      |   |           |  |   |          
|Taxable interest                                    |  |                          | 1,247,600  |      |   | 1,402,400 |  |   | 1,329,600
|Tax-exempt interest                                 |  |                          | 140,800    |      |   | 104,100   |  |   | 125,700  
|Dividends                                           |  |                          | 158,800    |      |   | 189,000   |  |   | 196,100  
|                                                    |  |                          |            |      |   |           |  |   |          
|Total interest and dividend income                  |  |                          | 10,697,500 |      |   | 9,501,500 |  |   | 9,406,100
|                                                    |  |                          |            |      |   |           |  |   |          
|Interest expense                                    |  |                          |            |      |   |           |  |   |          
|Deposits                                            |  |                          | 3,025,900  |      |   | 3,168,800 |  |   | 3,660,800
|FHLB/other advances                                 |  |                          | 249,300    |      |   | 106,200   |  |   | 55,500   
|                                                    |  |                          |            |      |   |           |  |   |          
|Total interest expense                              |  |                          | 3,275,200  |      |   | 3,275,000 |  |   | 3,716,300
|                                                    |  |                          |            |      |   |           |  |   |          
|Net interest income                                 |  |                          | 7,422,300  |      |   | 6,226,500 |  |   | 5,689,800
|                                                    |  |                          |           
|Provision for loan losses                           |  |                          | 418,800    |      |   | 380,400   |  |   | 335,300  
|                                                    |  |                          |            |      |   |           |  |   |          
|Net interest income after provision for loan losses |  |                          | 7,003,500  |      |   | 5,846,100 |  |   | 5,354,500
|                                                    |  |                          |            |      |   |           |  |   |          
|Noninterest income                                  |  |                          |            |      |   |           |  |   |          
|Deposit account fees                                |  |                          | 1,279,500  |      |   | 1,115,100 |  |   | 1,044,700
|Loan fees                                           |  |                          | 93,400     |      |   | 104,000   |  |   | 123,200  
|Commissions on investment brokerage sales           |  |                          | 119,400    |      |   | 140,100   |  |   | 54,400   
|Gains on sales of securities                        |  |                          | 148,100    |      |   | 269,400   |  |   | 21,700   
|Other                                               |  |                          | 279,400    |      |   | 260,600   |  |   | 130,500  
|                                                    |  |                          |            |      |   |           |  |   |          
|Total noninterest income                            |  |                          | 1,919,800  |      |   | 1,889,200 |  |   | 1,374,500
|                                                    |  |                          |            |      |   |           |  |   |          
|Noninterest expense                                 |  |                          |            |      |   |           |  |   |          
|Compensation and employee benefits                  |  |                          | 2,459,300  |      |   | 2,213,800 |  |   | 1,891,400
|Occupancy and equipment                             |  |                          | 1,403,200  |      |   | 1,201,800 |  |   | 1,122,400
|Data processing                                     |  |                          | 680,800    |      |   | 467,700   |  |   | 446,800  
|Advertising and promotion                           |  |                          | 162,300    |      |   | 94,500    |  |   | 109,500  
|Federal insurance premium                           |  |                          | 25,400     |      |   | 24,600    |  |   | 23,100   
|Other                                               |  |                          | 828,800    |      |   | 777,800   |  |   | 562,200  
|                                                    |  |                          |            |      |   |           |  |   |          
|Total noninterest expense                           |  |                          | 5,559,800  |      |   | 4,780,200 |  |   | 4,155,400
|                                                    |  |                          |            |      |   |           |  |   |          
|Income before income taxes                          |  |                          | 3,363,500  |      |   | 2,955,100 |  |   | 2,573,600
|                                                    |  |                          |           
|Income taxes                                        |  |                          | 1,010,700  |      |   | 893,000   |  |   | 801,800  
|                                                    |  |                          |            |      |   |           |  |   |          
|Net income                                          |  | $                        | 2,352,800  |      | $ | 2,062,100 |  | $ | 1,771,800
|                                                    |  |                          |            |      |   |           |  |   |          
|Earnings Per Common Share:                          |  |                          |            |      |   |           |  |   |          
|Basic                                               |  | $                        | 1.14       |      | $ | 1.01      |  | $ | 0.87     
|                                                    |  |                          |            |      |   |           |  |   |          
|Diluted                                             |  | $                        | 1.12       |      | $ | 1.00      |  | $ | 0.86     
|                                                    |  |                          |            |      |   |           |  |   |          



The accompanying
notes are an integral part of these financial statements.



32



---

SHORE FINANCIAL CORPORATION



Consolidated Statement of Stockholders Equity



|                                                                                              |  |                 |   |  |             |         |   |                   |   |           |                  |  |   |                                            |   |  |       |          |   |  |   |            |  
|--------------------------------------------------------------------------------------------- |  | --------------- | - |  | ----------- | ------- | - | ----------------- | - | --------- | ---------------- |  | - | ------------------------------------------ | - |  | ----- | -------- | - |  | - | ---------- | -
|                                                                                              |  | Number ofShares |   |  | CommonStock |         |   | AdditionalCapital |   |           | RetainedEarnings |  |   | AccumulatedOtherComprehensiveIncome (Loss) |   |  | Total |         
|Balance, December 31, 2001                                                                    |  | 1,697,667       |   |  |             | 560,200 |   |                   |   | 2,677,200 |                  |  |   | 12,859,600                                 |   |  |       | 163,800  |   |  |   | 16,260,800 |  
|Common stock cash dividends declared                                                          |  |                |   |  |             |        |   |                   |   |          |                  |  |   | (237,200                                   | ) |  |       |         |   |  |   | (237,200   | )
|Exercise of stock options                                                                     |  | 3,150           |   |  |             | 1,000   |   |                   |   | 24,000    |                  |  |   |                                           |   |  |       |         |   |  |   | 25,000     |  
|Repurchase of common stock                                                                    |  | (5,000          | ) |  |             | (1,600  | ) |                   |   | (46,700   | )                |  |   |                                           |   |  |       |         |   |  |   | (48,300    | )
|Comprehensive income                                                                          |  |                |   |  |             |        |   |                   |   |          |                  |  |   | 1,771,800                                  |   |  |       | 445,400  |   |  |   | 2,217,200  |  
|                                                                                              |  |                 |   |  |             |         |   |                   |   |           |                  |  |   |                                            |   |  |       |          |   |  |   |            |  
|Balance, December 31, 2002                                                                    |  | 1,695,817       |   |  |             | 559,600 |   |                   |   | 2,654,500 |                  |  |   | 14,394,200                                 |   |  |       | 609,200  |   |  | $ | 18,217,500 |  
|Common stock cash dividend declared                                                           |  |                |   |  |             |        |   |                   |   |          |                  |  |   | (340,400                                   | ) |  |       |         |   |  |   | (340,400   | )
|Twenty Percent Common stock dividend declared                                                 |  | 341,657         |   |  |             | 112,800 |   |                   |   | 5,407,800 |                  |  |   | (5,520,600                                 | ) |  |       |         |   |  |   |           |  
|Exercise of stock options, net of 9,750 existing shares exchanged in lieu of exercise payment |  | 24,250          |   |  |             | 8,000   |   |                   |   | 102,300   |                  |  |   |                                           |   |  |       |         |   |  |   | 110,300    |  
|Comprehensive income                                                                          |  |                |   |  |             |        |   |                   |   |          |                  |  |   | 2,062,100                                  |   |  |       | 151,700  |   |  |   | 2,213,800  |  
|                                                                                              |  |                 |   |  |             |         |   |                   |   |           |                  |  |   |                                            |   |  |       |          |   |  |   |            |  
|Balance, December 31, 2003                                                                    |  | 2,061,724       |   |  | $           | 680,400 |   |                   | $ | 8,164,600 |                  |  | $ | 10,595,300                                 |   |  | $     | 760,900  |   |  | $ | 20,201,200 |  
|Common stock cash dividend declared                                                           |  |                |   |  |             |        |   |                   |   |          |                  |  |   | (453,700                                   | ) |  |       |         |   |  |   | (453,700   | )
|Exercise of stock options                                                                     |  | 1,560           |   |  |             | 500     |   |                   |   | 13,500    |                  |  |   |                                           |   |  |       |         |   |  |   | 14,000     |  
|Tax benefit associated with the exercise of stock options                                     |  |                |   |  |             |        |   |                   |   | 20,900    |                  |  |   |                                           |   |  |       |         |   |  |   | 20,900     |  
|Comprehensive income (loss)                                                                   |  |                |   |  |             |        |   |                   |   |          |                  |  |   | 2,352,800                                  |   |  |       | (176,200 | ) |  |   | 2,176,600  |  
|                                                                                              |  |                 |   |  |             |         |   |                   |   |           |                  |  |   |                                            |   |  |       |          |   |  |   |            |  
|Balance, December 31, 2004                                                                    |  | 2,063,284       |   |  | $           | 680,900 |   |                   | $ | 8,199,000 |                  |  | $ | 12,494,400                                 |   |  | $     | 584,700  |   |  | $ | 21,959,000 |  
|                                                                                              |  |                 |   |  |             |         |   |                   |   |           |                  |  |   |                                            |   |  |       |          |   |  |   |            |  



The accompanying
notes are an integral part of these financial statements.



33



---

SHORE FINANCIAL CORPORATION



Consolidated Statements of Cash Flows



|                                                                               |  |                          |             |   |      |   |             |      |  |   |             |  
|------------------------------------------------------------------------------ |  | ------------------------ | ----------- | - | ---- | - | ----------- | ---- |  | - | ----------- | -
|                                                                               |  | Years Ended December 31, |            
|                                                                               |  | 2004                     |             |   | 2003 |   |             | 2002 | 
|Cash flows from operating activities                                           |  |                          |             |   |      |   |             |      |  |   |             |  
|Net income                                                                     |  | $                        | 2,352,800   |   |      | $ | 2,062,100   |      |  | $ | 1,771,800   |  
|Adjustments to reconcile to net cash provided by operating activities:         |  |                          |             |   |      |   |             |      |  |   |             |  
|Provision for loan losses                                                      |  |                          | 418,800     |   |      |   | 380,400     |      |  |   | 335,300     |  
|Depreciation and amortization                                                  |  |                          | 576,400     |   |      |   | 411,300     |      |  |   | 347,100     |  
|Amortization of premium and accretion of discount on securities, net           |  |                          | 70,800      |   |      |   | 94,500      |      |  |   | 62,800      |  
|Gain on sale of investment securities                                          |  |                          | (148,100    | ) |      |   | (269,400    | )    |  |   | (4,900      | )
|Loss on disposal of fixed assets                                               |  |                          | 700         |   |      |   | 600         |      |  |   | 9,500       |  
|Gain on sale of repossessed assets                                             |  |                          |            |   |      |   |            |      |  |   | (11,700     | )
|(Gain) loss on noncash donation                                                |  |                          | (4,000      | ) |      |   |            |      |  |   | 9,400       |  
|Increase in cash surrender value of life insurance                             |  |                          | (135,500    | ) |      |   | (145,000    | )    |  |   |            |  
|Tax benefit of stock options                                                   |  |                          | 20,900      |   |      |   |            |      |  |   |            |  
|Changes in:                                                                    |  |                          |             |   |      |   |             |      |  |   |             |  
|Deferred loan fees                                                             |  |                          | 32,800      |   |      |   | (12,400     | )    |  |   | (65,100     | )
|Other assets                                                                   |  |                          | (157,500    | ) |      |   | 15,300      |      |  |   | (314,700    | )
|Other liabilities                                                              |  |                          | 450,600     |   |      |   | (61,400     | )    |  |   | 141,500     |  
|                                                                               |  |                          |             |   |      |   |             |      |  |   |             |  
|Net cash flows from operating activities                                       |  |                          | 3,478,700   |   |      |   | 2,476,000   |      |  |   | 2,281,000   |  
|                                                                               |  |                          |             |   |      |   |             |      |  |   |             |  
|Cash flows from investing activities                                           |  |                          |             |   |      |   |             |      |  |   |             |  
|Purchase of available-for-sale securities                                      |  |                          | (4,482,900  | ) |      |   | (4,502,800  | )    |  |   | (22,657,800 | )
|Proceeds from maturities, sales and calls of available-for-sale securities     |  |                          | 6,481,500   |   |      |   | 6,873,600   |      |  |   | 7,198,300   |  
|Purchase of held-to-maturity securities                                        |  |                          |            |   |      |   |            |      |  |   | (6,982,400  | )
|Proceeds from maturities, prepayments and calls of held-to-maturity securities |  |                          |            |   |      |   | 5,000,000   |      |  |   | 4,000,000   |  
|Purchase of other investments                                                  |  |                          | (553,400    | ) |      |   | (342,600    | )    |  |   | (53,300     | )
|Loan originations, net of repayments                                           |  |                          | (36,240,200 | ) |      |   | (23,764,800 | )    |  |   | (13,050,200 | )
|Purchase of Bank-Owned Life Insurance                                          |  |                          |            |   |      |   |            |      |  |   | (3,000,000  | )
|Purchase of premises and equipment                                             |  |                          | (3,552,600  | ) |      |   | (1,885,100  | )    |  |   | (1,047,600  | )
|Acquisition of branch deposits, net                                            |  |                          |            |   |      |   |            |      |  |   | 16,771,000  |  
|Proceeds from sale of real estate owned, net of costs                          |  |                          |            |   |      |   |            |      |  |   | 127,600     |  
|                                                                               |  |                          |             |   |      |   |             |      |  |   |             |  
|Net cash flows from investing activities                                       |  |                          | (38,347,600 | ) |      |   | (18,621,700 | )    |  |   | (18,694,400 | )
|                                                                               |  |                          |             |   |      |   |             |      |  |   |             |  



34



---

SHORE FINANCIAL CORPORATION



Consolidated Statements of Cash Flows



|                                                                    |  |                          |             |   |      |   |             |      |  |   |             |  
|------------------------------------------------------------------- |  | ------------------------ | ----------- | - | ---- | - | ----------- | ---- |  | - | ----------- | -
|                                                                    |  | Years Ended December 31, |            
|                                                                    |  | 2004                     |             |   | 2003 |   |             | 2002 | 
|Cash flows from financing activities                                |  |                          |             |   |      |   |             |      |  |   |             |  
|Net increase in demand deposits                                     |  | $                        | 21,478,200  |   |      | $ | 13,000,500  |      |  |   | 15,011,300  |  
|Net increase (decrease) in time deposits                            |  |                          | 12,368,200  |   |      |   | (13,099,100 | )    |  |   | 1,258,300   |  
|Proceeds from FHLB advances                                         |  |                          | 64,852,000  |   |      |   | 51,700,000  |      |  |   | 12,300,000  |  
|Repayments of FHLB advances                                         |  |                          | (59,768,600 | ) |      |   | (36,966,700 | )    |  |   | (10,966,700 | )
|Repurchase of common stock                                          |  |                          |            |   |      |   |            |      |  |   | (48,300     | )
|Proceeds from exercise of stock options                             |  |                          | 14,000      |   |      |   | 110,300     |      |  |   | 25,000      |  
|Payment of dividends on common stock                                |  |                          | (453,700    | ) |      |   | (340,400    | )    |  |   | (237,200    | )
|                                                                    |  |                          |             |   |      |   |             |      |  |   |             |  
|Net cash flows from financing activities                            |  |                          | 38,490,100  |   |      |   | 14,404,600  |      |  |   | 17,342,400  |  
|                                                                    |  |                          |             |   |      |   |             |      |  |   |             |  
|Change in cash and cash equivalents                                 |  |                          | 3,621,200   |   |      |   | (1,741,100  | )    |  |   | 929,000     |  
|Cash and cash equivalents, beginning of period                      |  |                          | 5,793,800   |   |      |   | 7,534,900   |      |  |   | 6,605,900   |  
|                                                                    |  |                          |             |   |      |   |             |      |  |   |             |  
|Cash and cash equivalents, end of period                            |  | $                        | 9,415,000   |   |      | $ | 5,793,800   |      |  | $ | 7,534,900   |  
|                                                                    |  |                          |             |   |      |   |             |      |  |   |             |  
|                                                                    |  |                          |            
|Supplemental disclosure of cash flow information                    |  |                          |             |   |      |   |             |      |  |   |             |  
|Cash paid during the period for interest                            |  | $                        | 3,167,200   |   |      | $ | 3,284,000   |      |  | $ | 3,678,600   |  
|Cash paid during the period for income taxes                        |  | $                        | 1,010,700   |   |      | $ | 1,040,000   |      |  | $ | 965,000     |  
|                                                                    |  |                          |            
|Supplemental schedule of noncash investing and financing activities |  |                          |             |   |      |   |             |      |  |   |             |  
|Transfers from loans to real estate acquired through foreclosure    |  | $                        |            |   |      | $ |            |      |  | $ | 116,000     |  
|Declaration of 20% common stock dividend                            |  | $                        |            |   |      | $ | 5,520,600   |      |  | $ |            |  



The accompanying
notes are an integral part of these financial statements.



35



---

SHORE FINANCIAL CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1ORGANIZATION AND BUSINESS



Shore Financial Corporation (the Company) is a Virginia corporation organized in September 1997 by Shore Bank (the Bank) for the
purpose of becoming a unitary holding company of the Bank. The Company became a unitary holding company of the Bank on March 16, 1998. The business and management of the Company consists of the business and management of the Bank. The Bank became a
Virginia chartered, Federal Reserve member, commercial bank on March 31, 1998. Previously, the Bank was a federally chartered savings bank. The Company and the Bank are headquartered on the Eastern Shore in Onley, Virginia.



The Companys assets primarily consist of approximately $4.3 million in
cash and investments and its investment in the Bank. Currently, the Company does not participate in any other activities outside of controlling the Bank. The Bank provides a full range of banking services to individual and corporate customers
through its seven banking offices located on the Eastern Shore of Virginia and Maryland, including the counties of Accomack and Northampton, Virginia, and the Salisbury/Wicomico County area in Maryland. The Companys common stock became
publicly traded in August 1997, upon completing its subscription rights and initial public offerings, which included the sale of 431,250 shares of common stock.



Shore Investments, Inc. (Shore Investments), a subsidiary of the Bank, engages in financial activities supporting the Banks
operations. These activities include, but are not limited to, the selling of investment and insurance products. The Banks subsidiary is invested in a title insurance agency and an investment company while the Company is invested in a trust
company, all of which provide services to banking customers.



NOTE
2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



Basis of Presentation and Consolidation



The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, the Bank and Shore Investments. All significant intercompany balances and transactions have been eliminated in consolidation.



Estimates



The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the valuation of real
estate owned.



Advertising



The Company expenses advertising costs as they are incurred.



Investment Securities



Investments in debt securities classified as held-to-maturity are stated at
cost, adjusted for amortization of premiums and accretion of discounts using the interest method. Management has a positive intent and ability to hold these securities to maturity and, accordingly, adjustments are not made for temporary declines in
their market value below amortized cost. Investments in debt and equity securities classified as trading, if any, are stated at fair value. Unrealized holding gains and losses for trading securities are included in the statement of



36



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SHORE FINANCIAL CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)



income. The Company had no such securities during the periods reported in the financial statements. All other investment securities with readily determinable
fair values are classified as available-for-sale. Unrealized holding gains and losses on available-for-sale securities are excluded from earnings and reported, net of tax effect, in other comprehensive income until realized.



Investments in Federal Home Loan Bank of Atlanta, Federal Reserve Bank,
Community Bankers Bank and Maryland Financial Bank stock are stated at cost, as these securities are restricted and do not have readily determinable fair values.



Gains and losses on the sale of securities are determined using the specific identification method. Other-than-temporary
declines in the fair value of individual held-to-maturity and available-for-sale securities below their cost, if any, are included in earnings as realized losses.



Loans Receivable



Loans receivable consist of real estate loans secured by first deeds of trust on single-family residences, other residential property, commercial property
and land located primarily in an area known as the Eastern Shore of Virginia and Maryland, as well as secured and unsecured consumer and commercial loans.



Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their
outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain
direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.



The Bank places loans on nonaccrual status after being delinquent greater than 90 days, or earlier, if the loans have developed inherent problems prior to
being 90 days delinquent that indicate payments of principal or interest will not be made in full. Whenever the accrual of interest is stopped, a specific allowance is established through a charge to income for previously accrued but uncollected
interest income. Thereafter, interest is recognized only as cash is received until six months after the loan is brought current.



The valuation allowance for estimated losses on loans consists of specific, general and unallocated components. The specific component relates to loans
that are classifies as doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is
lower than the carrying value of the loan. The general component covers non-classified loans and is based on a number of factors including the Banks write-off history, the composition if its loan portfolio, nonperforming loan levels, the
market, the historical allowance levels maintained by peer community banks engaged in commercial lending and other qualitative factors. An unallocated component is maintained to cover uncertainties that could affect managements estimate of
probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating the specific and general losses in the portfolio. In the opinion of
management, the present allowance is adequate to absorb reasonably foreseeable loan losses. Additions to the allowance are reflected in current operations. Charge-offs to the allowance are made when the loan is considered uncollectible or is
transferred to real estate acquired in settlement of loans.



A
loan is considered impaired when it is probable that the Bank will be unable to collect all principal and interest amounts according to the contractual terms of the loan agreement. A performing loan may be considered



37



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SHORE FINANCIAL CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)



impaired. The allowance for loan losses related to loans identified as impaired is primarily based on the excess of the loans current outstanding
principal balance over the estimated fair value of the related collateral. For a loan that is not collateral-dependent, the allowance is recorded at the amount by which the outstanding principal balance exceeds the current best estimate of the
future cash flows on the loan discounted at the loans original effective interest rate. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual
consumer and residential loans for impairment disclosures.



For
impaired loans that are on nonaccrual status, cash payments received are generally applied to reduce the outstanding principal balance. However, all or a portion of a cash payment received on a nonaccrual loan may be recognized as interest income to
the extent allowed by the loan contract, assuming management expects to fully collect the remaining principal balance on the loan.



Credit Related Financial Instruments



In the ordinary course of business, the Bank has entered into commitments to extend credit, including commitments under home equity lines of credit,
overdraft protection arrangements, commercial lines of credit, and standby letters of credit. Such financial instruments are recorded when they are funded.



Transfers of Financial Assets



Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to
be surrendered when (1) the assets have been isolated from the Bank, (2) the transferee obtains the right (free of conditions that restrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Bank does
not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.



Real Estate Owned



Real estate acquired through foreclosure is initially recorded at the lower of fair value or the loan balance at date of foreclosure.
Subsequently, property that is held for resale is carried at the lower of cost or fair value minus estimated selling costs. Costs relating to the development and improvement of property are capitalized, whereas those relating to holding the property
are charged to expense.



Management periodically performs
valuations, and an allowance for losses is established by a charge to operations if the carrying value of a property exceeds its fair value minus estimated selling costs.



Premises and Equipment



Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed using accelerated and
straight-line methods over the estimated useful lives of the respective assets. Estimated useful lives are as follows:



|                                |  |               
|------------------------------- |  | --------------
|Buildings                       |  | 25 to 40 years
|Furniture and equipment         |  | 5 to 15 years 
|Computer equipment and software |  | 3 to 5 years  
|Automobiles                     |  | 3 to 5 years  



38



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SHORE FINANCIAL CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)



Income Taxes



Deferred income taxes payable represent the cumulative tax effect from temporary differences in the recognition of taxable
or deductible amounts for income tax and financial reporting purposes.



Prior to July 1, 1996, in computing federal income taxes, savings banks that met certain definitional tests and other conditions prescribed by the Internal Revenue Code were allowed, within limitations, to deduct from taxable income an
allowance for bad debts based on actual loss experience, a percentage of taxable income before such deduction or an amount based on a percentage of eligible loans. The applicable percentage of taxable income used for the bad debt deduction was 8%.
Effective July 1, 1996, the percentage of taxable income method and the percentage of eligible loans method for determining the bad debt deduction are no longer available. At December 31, 2004, the cumulative bad debt reserve, upon which no taxes
have been paid on tax returns, was approximately $1.2 million. Of this amount, $783,000 represents that portion of the cumulative bad debt reserve for which financial statement income taxes have not been provided, in accordance with FASB Statement
No. 109, Accounting for Income Taxes.



The Small
Business Job Protection Act of 1996 (the Act) repealed the percentage of taxable income method of computing bad debt reserves, and required the recapture into taxable income of excess reserves, on a taxable basis over six
years. Excess reserves are defined in general, as the excess of the balance of the tax bad debt reserve (using the percentage of taxable income method) as of the close of the last tax year beginning before January 1, 1996 over the balance of the
reserve as of the close of the last tax year beginning before January 1, 1988. For the Bank, the applicable tax years for measuring excess reserves were June 30, 1996 and June 30, 1988, respectively. As a result of the Act, the Bank recaptured into
taxable income, for tax return purposes only, approximately $497,000 ratably over six years.



Earnings Per Common Share



Basic Earnings Per Share (EPS) excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue common stock were exercised, converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Potential common
shares that may be issued by the Company relate solely to outstanding stock options, and are determined using the treasury stock method.



Comprehensive Income



Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets
and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.



Segment Reporting



Public business enterprises are required to report information about
operating segments in annual financial statements, and selected information about operating segments in financial reports issued to shareholders. Operating segments are components of an enterprise about which separate financial information is
available, and evaluated regularly by management in deciding how to allocate resources and in assessing performance. Generally, financial information is required to be reported on the basis that it is used internally for evaluating segment
performance and deciding how to allocate resources to segments.



39



---

SHORE FINANCIAL CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)



Derivative Instruments and Hedging Transactions



SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that
an entity recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. The Company did not hold derivatives during the periods reported on in the consolidated
financial statements.



On March 13, 2002, the Financial
Accounting Standards Board (FASB) determined that loan commitments related to the acquisition or origination of mortgage loans that will be held for sale must be accounted for as derivative instruments, effective for fiscal quarter
beginning after April 20, 2002. Accordingly, the Company adopted such accounting on July 1, 2002. The Company did not hold any mortgage loans for sale during the periods reported on in the consolidated financial statements.



Cash and Cash Equivalents



Cash equivalents include currency, balances due from banks, interest-earning
deposits with maturities of ninety days or less and federal funds sold.



The Company is required to maintain reserves with the Federal Reserve Bank. The aggregate daily average reserves required for the final reporting period was $25,000 for the years ended December 31, 2004 and 2003, which was satisfied by the
Company.



Goodwill and Other Intangibles



The Company adopted Statement of Financial Standards
No. 142, Goodwill and Other Intangible Assets (SFAS 142), effective January 1, 2002. Accordingly, goodwill is no longer subject to amortization over its estimated useful life, but is subject to an annual assessment for impairment
by applying a fair value based test. Additionally, under SFAS 142, acquired intangible assets are separately recognized if the benefit of the asset can be sold, transferred, licensed, rented, or exchanged, and amortized over their useful life.
Branch acquisition transactions were outside the initial scope of SFAS 142 and, accordingly, intangible assets related to such transactions continued to amortize upon the adoption of SFAS 142. However, in October 2002, the FASB issued Statement No.
147, Acquisitions of Certain Financial Institutionsan amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9. This statement amends previous interpretative guidance on the application of the purchase method of
accounting to acquisitions of financial institutions, and requires the application of FASB Statement No. 141, Business Combinations, and FASB No. 142 to branch acquisitions if such transactions meet the definition of a business combination.



Management has evaluated the deposit acquisition that occurred
in 2002. The acquisition of the Susquehanna Bank deposits in the Salisbury, Maryland market do not qualify as a business combination and the intangible asset related to this deposit acquisition will continue to be amortized over the estimated useful
life of the deposits acquired.



Stock Compensation Plans



Statement of Financial Accounting Standards (SFAS)
No. 123, Accounting for Stock-Based Compensation, encourages all entities to adopt a fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured at the grant date based on the value of
the award and is recognized over the service period, which is usually the vesting period. However, it also allows an entity to continue to measure



40



---

SHORE FINANCIAL CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)



compensation cost for those plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, whereby compensation cost is the excess, if any, of the quoted market price of the stock at the grant date (or other measurement date) over the amount an employee must pay to acquire the stock. Stock
options issued under the Companys stock option plans have no intrinsic value at the grant date, and under Opinion No. 25 no compensation cost is recognized for them. The Company has elected to continue with the accounting methodology in
Opinion No. 25 and, as a result, has provided pro forma disclosures of the net income and earnings per share and other disclosures, as if the fair value based method of accounting had been applied.



Statement of Financial Accounting Standards (SFAS) No. 148, Accounting for
Stock-Based CompensationTransition and Disclosurean amendment of SFAS 123, Accounting for Stock-Based Compensation, was issued by the Financial Accounting Standards Board (FASB) in December, 2002. SFAS 148 provides alternative
methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation. SFAS 148 also amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Accordingly, the Company has incorporated such disclosures, but is still assessing the recognition
provisions of the Standard.



|                                                                                                                                    |  |                                               |           |   |      |   |           |      |  |   |           |  
|----------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                                                                                                                    |  | Years Ended December 31,                      |          
|                                                                                                                                    |  | 2004                                          |           |   | 2003 |   |           | 2002 | 
|                                                                                                                                    |  | (Dollars in thousands, except per share data) |          
|Net income, as reported                                                                                                             |  | $                                             | 2,352,800 |   |      | $ | 2,062,100 |      |  | $ | 1,771,800 |  
|Deduct:                                                                                                                             |  |                                               |           |   |      |   |           |      |  |   |           |  
|Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                                               | (60,200   | ) |      |   | (57,800   | )    |  |   | (40,300   | )
|                                                                                                                                    |  |                                               |           |   |      |   |           |      |  |   |           |  
|Pro forma net income                                                                                                                |  | $                                             | 2,292,600 |   |      | $ | 2,004,300 |      |  | $ | 1,731,500 |  
|                                                                                                                                    |  |                                               |           |   |      |   |           |      |  |   |           |  
|Earnings per share:                                                                                                                 |  |                                               |           |   |      |   |           |      |  |   |           |  
|Basicas reported                                                                                                                   |  | $                                             | 1.14      |   |      | $ | 1.01      |      |  | $ | 0.87      |  
|                                                                                                                                    |  |                                               |           |   |      |   |           |      |  |   |           |  
|Basicpro forma                                                                                                                     |  | $                                             | 1.11      |   |      | $ | 0.98      |      |  | $ | 0.85      |  
|                                                                                                                                    |  |                                               |           |   |      |   |           |      |  |   |           |  
|                                                                                                                                    |  |                                               |          
|Dilutedas reported                                                                                                                 |  | $                                             | 1.12      |   |      | $ | 1.00      |      |  | $ | 0.86      |  
|                                                                                                                                    |  |                                               |           |   |      |   |           |      |  |   |           |  
|Dilutedpro forma                                                                                                                   |  | $                                             | 1.09      |   |      | $ | 0.97      |      |  | $ | 0.84      |  
|                                                                                                                                    |  |                                               |           |   |      |   |           |      |  |   |           |  



The fair value of each
option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:



|                        |  |                          |   |  |       |   |  |       |  
|----------------------- |  | ------------------------ | - |  | ----- | - |  | ----- | -
|                        |  | Years Ended December 31, |  
|                        |  | 2004                     |   |  | 2003  |   |  | 2002  |  
|Dividend yield          |  | 1.50                     | % |  | 1.50  | % |  | 1.50  | %
|Expected life           |  | 5.9                      |   |  | 5.9   |   |  | 5.9   |  
|Expected volatility     |  | 25.00                    | % |  | 22.56 | % |  | 22.56 | %
|Risk-free interest rate |  | 3.50                     | % |  | 3.22  | % |  | 3.22  | %



Accounting for
Long-Lived Assets



Effective January 1, 2002, the
Company adopted FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The statement addresses financial accounting and reporting for the impairment



41



---

SHORE FINANCIAL CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Concluded)



or disposal of long-lived assets. The statement specifies criteria for classifying assets as held for sale. The adoption of this statement did not have a
material impact on the Companys financial condition and results of operations.



Guarantees



FASB
Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees (FIN 45), requires that a liability be recognized, at inception, for the fair value of certain guarantees and for the ongoing
obligation, if any, to perform over the term of the guarantee. The recognition provisions of FIN 45 are effective for certain guarantees modified or issued after December 31, 2002. The adoption of FIN 45 did not have a material impact on the
Companys results of operation or financial condition.



Reclassifications



Certain
reclassifications of the prior years information have been made to conform to the December 31, 2004 presentation.



Accounting Changes



In December 2003, the FASB issued a revision of FASB Interpretation 46, Consolidation of Variable Interest Entities, and Interpretation of ARB No.
51 (FIN 46). FIN 46 provides a new framework for identifying variable interest entities (VIEs) and determining when a company should include the assets, liabilities, noncontrolling interests and results of activities of a VIE in its consolidated
financial statements. FASB has since revised FIN 46. As revised, FIN 46 was effective beginning in the first quarter of 2004 for all VIEs (other than what are commonly referred to as special purpose entities, VIEs of small business issuers, and VIEs
of nonpublic entities). As the Company does not currently utilize VIEs or so called special purpose entities, this pronouncement did not have a material impact on the Companys results of operations or financial position.



The FASB issued FASB Statement No. 123 (Revised 2004), Share-Based Payment(SFAS 123R) during December 2004. SFAS 123R requires that compensation cost relating to stock-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the instruments
issued. Public entities (other than those filing as small business issuers) are required to apply SFAS 123R as of the first interim or annual reporting period that begins after June 15, 2005. The scope of SFAS 123R includes stock options, restricted
share plans, performance-based awards, share appreciation rights, and employee share purchase plans. SFAS 123R replaces SFAS 123 and supersedes APB 25.SFAS 123, originally issued in 1995, preferred the fair-value-based method of accounting
for stock-based compensation, but permitted the continued application of the guidance in Opinion 25, provided that the footnotes to the financial statements disclosed what net income would have been had the preferable fair-value-based method been
used.



During December 2004, the FASB issued FASB Statement No.
153, Exchanges of Nonmonetary AssetsAn Amendment of APB Opinion No. 29 (SFAS 153). SFAS 153 amends APB Opinion No. 29, Accounting for Nonmonetary Transactions, originally issued in 1973. The standard is based
on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Previously, Opinion 29 required that the accounting for an exchange of a productive asset for a similar productive asset or an
equivalent interest in the same or similar productive asset should be based on the recorded amount of the asset relinquished. The provisions in SFAS 153 are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June
15, 2005. Early application is permitted and companies must apply the standard prospectively. The adoption of this standard is not expected to have a material impact on the Companys consolidated results of operations or financial condition in
the foreseeable future.



42



---

SHORE FINANCIAL CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 3INVESTMENT SECURITIES



A summary of the amortized cost and estimated fair values of investment securities is as follows:



|                                                    |  |               |            |                      |   |                       |  |   |                     |   |  |   |           
|--------------------------------------------------- |  | ------------- | ---------- | -------------------- | - | --------------------- |  | - | ------------------- | - |  | - | ----------
|                                                    |  | AmortizedCost |            | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | EstimatedFair Value
|December 31, 2004                                   |  |               |            |                      |   |                       |  |   |                     |   |  |   |           
|                                                    |  |               |            |                     
|Held-to-maturity                                    |  |               |            |                      |   |                       |  |   |                     |   |  |   |           
|United States government and agency obligations     |  | $             |           |                      | $ |                      |  | $ |                    |   |  | $ |          
|                                                    |  |               |            |                      |   |                       |  |   |                     |   |  |   |           
|Available-for-sale                                  |  |               |            |                      |   |                       |  |   |                     |   |  |   |           
|Debt securities:                                    |  |               |            |                      |   |                       |  |   |                     |   |  |   |           
|United States government and agency obligations     |  |               | 22,208,400 |                      |   | 150,200               |  |   | (37,000             | ) |  |   | 22,321,600
|Tax-exempt municipal bonds                          |  |               | 3,848,900  |                      |   | 42,900                |  |   |                    |   |  |   | 3,891,800 
|Corporate bonds                                     |  |               | 3,021,000  |                      |   | 156,200               |  |   |                    |   |  |   | 3,177,200 
|Mortgage-backed securities                          |  |               | 1,940,800  |                      |   | 3,500                 |  |   | (6,800              | ) |  |   | 1,937,500 
|Adjustable Rate Mortgage Fund                       |  |               | 1,589,900  |                      |   |                      |  |   | (21,100             | ) |  |   | 1,568,800 
|                                                    |  |               |            |                      |   |                       |  |   |                     |   |  |   |           
|Total debt securities                               |  |               | 32,609,000 |                      |   | 352,800               |  |   | (64,900             | ) |  |   | 32,896,900
|                                                    |  |               |            |                      |   |                       |  |   |                     |   |  |   |           
|Marketable equity securities:                       |  |               |            |                      |   |                       |  |   |                     |   |  |   |           
|Federal Home Loan Mortgage Corporation common stock |  |               | 232,400    |                      |   | 77,100                |  |   |                    |   |  |   | 309,500   
|Citigroup preferred stock                           |  |               | 1,032,900  |                      |   | 30,400                |  |   |                    |   |  |   | 1,063,300 
|MBNA preferred stock                                |  |               | 131,400    |                      |   | 500                   |  |   |                    |   |  |   | 131,900   
|Consolidated Edison preferred stock                 |  |               | 543,000    |                      |   |                      |  |   | (3,000              | ) |  |   | 540,000   
|Commonwealth Bankshares trust preferred stock       |  |               | 75,000     |                      |   | 96,200                |  |   |                    |   |  |   | 171,200   
|Other equity securities                             |  |               | 1,813,800  |                      |   | 459,900               |  |   |                    |   |  |   | 2,273,700 
|                                                    |  |               |            |                      |   |                       |  |   |                     |   |  |   |           
|Total marketable equity securities                  |  |               | 3,828,500  |                      |   | 664,100               |  |   | (3,000              | ) |  |   | 4,489,600 
|                                                    |  |               |            |                      |   |                       |  |   |                     |   |  |   |           
|                                                    |  |               | 36,437,500 |                      |   | 1,016,900             |  |   | (67,900             | ) |  |   | 37,386,500
|                                                    |  |               |            |                      |   |                       |  |   |                     |   |  |   |           
|Other investment securities:                        |  |               |            |                      |   |                       |  |   |                     |   |  |   |           
|Federal Home Loan Bank Stock                        |  |               | 1,376,500  |                      |   |                      |  |   |                    |   |  |   | 1,376,500 
|Federal Reserve Bank Stock                          |  |               | 124,800    |                      |   |                      |  |   |                    |   |  |   | 124,800   
|Community Bankers Bank                             |  |               | 63,300     |                      |   |                      |  |   |                    |   |  |   | 63,300    
|Maryland Financial Bank                             |  |               | 20,000     |                      |   |                      |  |   |                    |   |  |   | 20,000    
|                                                    |  |               |            |                      |   |                       |  |   |                     |   |  |   |           
|                                                    |  |               | 1,584,600  |                      |   |                      |  |   |                    |   |  |   | 1,584,600 
|                                                    |  |               |            |                      |   |                       |  |   |                     |   |  |   |           
|                                                    |  | $             | 38,022,100 |                      | $ | 1,016,900             |  | $ | (67,900             | ) |  | $ | 38,971,100
|                                                    |  |               |            |                      |   |                       |  |   |                     |   |  |   |           



43



---

SHORE FINANCIAL CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 3INVESTMENT SECURITIES (Continued)



|                                                    |  |               |            |                      |   |                       |  |   |                     |   |  |   |           
|--------------------------------------------------- |  | ------------- | ---------- | -------------------- | - | --------------------- |  | - | ------------------- | - |  | - | ----------
|                                                    |  | AmortizedCost |            | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | EstimatedFair Value
|December 31, 2003                                   |  |               |            |                      |   |                       |  |   |                     |   |  |   |           
|                                                    |  |               |            |                     
|Held-to-maturity                                    |  |               |            |                      |   |                       |  |   |                     |   |  |   |           
|United States government and agency obligations     |  | $             |           |                      | $ |                      |  | $ |                    |   |  | $ |          
|                                                    |  |               |            |                      |   |                       |  |   |                     |   |  |   |           
|                                                    |  |               |            |                     
|Available-for-sale                                  |  |               |            |                      |   |                       |  |   |                     |   |  |   |           
|Debt securities:                                    |  |               |            |                      |   |                       |  |   |                     |   |  |   |           
|United States government and agency obligations     |  |               | 22,307,500 |                      |   | 380,900               |  |   |                    |   |  |   | 22,688,400
|Tax-exempt municipal bonds                          |  |               | 3,943,500  |                      |   | 86,600                |  |   |                    |   |  |   | 4,030,100 
|Corporate bonds                                     |  |               | 4,034,800  |                      |   | 277,600               |  |   |                    |   |  |   | 4,312,400 
|Mortgage-backed securities                          |  |               | 2,583,300  |                      |   |                      |  |   | (6,200              | ) |  |   | 2,577,100 
|Adjustable Rate Mortgage Fund                       |  |               | 1,553,700  |                      |   |                      |  |   | (10,000             | ) |  |   | 1,543,700 
|Adjustable Rate Commercial Loan Fund                |  |               | 435,500    |                      |   |                      |  |   | (43,900             | ) |  |   | 391,600   
|                                                    |  |               |            |                      |   |                       |  |   |                     |   |  |   |           
|Total debt securities                               |  |               | 34,858,300 |                      |   | 745,100               |  |   | (60,100             | ) |  |   | 35,543,300
|                                                    |  |               |            |                      |   |                       |  |   |                     |   |  |   |           
|                                                    |  |               |            |                     
|Marketable equity securities:                       |  |               |            |                      |   |                       |  |   |                     |   |  |   |           
|Federal Home Loan Mortgage Corporation common stock |  |               | 232,400    |                      |   | 12,500                |  |   |                    |   |  |   | 244,900   
|Citigroup preferred stock                           |  |               | 1,032,900  |                      |   | 64,800                |  |   |                    |   |  |   | 1,097,700 
|MBNA preferred stock                                |  |               | 131,400    |                      |   |                      |  |   | (300                | ) |  |   | 131,100   
|Consolidated Edison preferred stock                 |  |               | 543,000    |                      |   | 23,400                |  |   |                    |   |  |   | 566,400   
|Commonwealth Bankshares trust preferred stock       |  |               | 150,000    |                      |   | 187,800               |  |   |                    |   |  |   | 337,800   
|Other equity securities                             |  |               | 1,406,800  |                      |   | 256,300               |  |   | (4,500              | ) |  |   | 1,658,600 
|                                                    |  |               |            |                      |   |                       |  |   |                     |   |  |   |           
|Total marketable equity securities                  |  |               | 3,496,500  |                      |   | 544,800               |  |   | (4,800              | ) |  |   | 4,036,500 
|                                                    |  |               |            |                      |   |                       |  |   |                     |   |  |   |           
|                                                    |  |               | 38,354,800 |                      |   | 1,289,900             |  |   | (64,900             | ) |  |   | 39,579,800
|                                                    |  |               |            |                      |   |                       |  |   |                     |   |  |   |           
|                                                    |  |               |            |                     
|Other investment securities:                        |  |               |            |                      |   |                       |  |   |                     |   |  |   |           
|Federal Home Loan Bank Stock                        |  |               | 844,200    |                      |   |                      |  |   |                    |   |  |   | 844,200   
|Federal Reserve Bank Stock                          |  |               | 124,800    |                      |   |                      |  |   |                    |   |  |   | 124,800   
|Community Bankers Bank                             |  |               | 42,200     |                      |   |                      |  |   |                    |   |  |   | 42,200    
|Maryland Financial Bank                             |  |               | 20,000     |                      |   |                      |  |   |                    |   |  |   | 20,000    
|                                                    |  |               |            |                      |   |                       |  |   |                     |   |  |   |           
|                                                    |  |               | 1,031,200  |                      |   |                      |  |   |                    |   |  |   | 1,031,200 
|                                                    |  |               |            |                      |   |                       |  |   |                     |   |  |   |           
|                                                    |  | $             | 39,386,000 |                      | $ | 1,289,900             |  | $ | (64,900             | ) |  | $ | 40,611,000
|                                                    |  |               |            |                      |   |                       |  |   |                     |   |  |   |           



44



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SHORE FINANCIAL CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 3INVESTMENT SECURITIES (Continued)



The amortized cost and estimated fair value of debt securities at December 31, 2004 by contractual
maturity, are shown below:



|                                       |  |               |            |           |   |           
|-------------------------------------- |  | ------------- | ---------- | --------- | - | ----------
|                                       |  | AmortizedCost |            | FairValue
|Held-to-maturity                       |  |               |            |           |   |           
|Due in one year or less                |  | $             |           |           | $ |          
|Due after one year through five years  |  |               |           |           |   |          
|Due after five years through ten years |  |               |           |           |   |          
|Due after ten years                    |  |               |           |           |   |          
|Mortgage-backed securities             |  |               |           |           |   |          
|                                       |  |               |            |           |   |           
|                                       |  |               |           |           |   |          
|                                       |  |               |            |           |   |           
|Available-for-sale                     |  |               |            |           |   |           
|Due in one year or less                |  |               | 7,734,900  |           |   | 7,747,600 
|Due after one year through five years  |  |               | 16,620,900 |           |   | 16,848,700
|Due after five years through ten years |  |               | 5,258,400  |           |   | 5,323,400 
|Due after ten years                    |  |               | 1,404,900  |           |   | 1,408,400 
|Adjustable Rate Mortgage Fund          |  |               | 1,589,900  |           |   | 1,568,800 
|                                       |  |               |            |           |   |           
|                                       |  |               | 32,609,000 |           |   | 32,896,900
|                                       |  |               |            |           |   |           
|                                       |  | $             | 32,609,000 |           | $ | 32,896,900
|                                       |  |               |            |           |   |           



At December 31, 2004
and 2003, investment securities with a carrying value of approximately $1.6 million and $1.0 million, respectively, were pledged as collateral for public deposits.



For the years ended December 31, 2004, 2003 and 2002, proceeds from the sales of securities available for sale amounted to
$1.0 million, $1.7 million and $4.1 million, respectively. Gross realized gains amounted to $182,000, $288,000 and $188,000, respectively, while gross realized losses were $34,000, $19,000 and $166,000, respectively. The tax provision applicable to
these net realized gains and losses amounted to $50,000, $91,000 and $7,000, respectively.



45



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SHORE FINANCIAL CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 3INVESTMENT SECURITIES (Concluded)



The following table summarizes the Companys investments gross unrealized losses and fair
value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2004.



|                                                    |  |                     |            |                  |                   |         |           |       |                  |           |  |           |         |                  |  |   |            |  |   |         |  
|--------------------------------------------------- |  | ------------------- | ---------- | ---------------- | ----------------- | ------- | --------- | ----- | ---------------- | --------- |  | --------- | ------- | ---------------- |  | - | ---------- |  | - | ------- | -
|                                                    |  | Less Than 12 Months |            |                  | 12 Months or More |         |           | Total |                 
|Description of Securities                           |  | FairValue           |            | UnrealizedLosses |                   |         | FairValue |       | UnrealizedLosses |           |  | FairValue |         | UnrealizedLosses | 
|United States government and agency obligations     |  | $                   | 12,049,600 |                  | $                 | (37,000 | )         |       | $                |          |  | $         |        |                  |  | $ | 12,049,600 |  | $ | (37,000 | )
|Tax-exempt municipal bonds                          |  |                     |           |                  |                   |        |           |       |                  |          |  |           |        |                  |  |   |           |  |   |        |  
|Corporate bonds                                     |  |                     |           |                  |                   |        |           |       |                  |          |  |           |        |                  |  |   |           |  |   |        |  
|Mortgage-backed securities                          |  |                     |           |                  |                   |        |           |       |                  | 529,100   |  |           | (6,800  | )                |  |   | 529,100    |  |   | (6,800  | )
|Adjustable Rate Mortgage Fund                       |  |                     |           |                  |                   |        |           |       |                  | 1,568,800 |  |           | (21,100 | )                |  |   | 1,568,800  |  |   | (21,100 | )
|                                                    |  |                     |            |                  |                   |         |           |       |                  |           |  |           |         |                  |  |   |            |  |   |         |  
|Subtotal, debt securities                           |  |                     | 12,049,600 |                  |                   | (37,000 | )         |       |                  | 2,097,900 |  |           | (27,900 | )                |  |   | 14,147,500 |  |   | (64,900 | )
|                                                    |  |                     |            |                  |                   |         |           |       |                  |           |  |           |         |                  |  |   |            |  |   |         |  
|Federal Home Loan Mortgage Corporation common stock |  |                     |           |                  |                   |        |           |       |                  |          |  |           |        |                  |  |   |           |  |   |        |  
|Preferred stock                                     |  |                     | 540,000    |                  |                   | (3,000  | )         |       |                  |          |  |           |        |                  |  |   | 540,000    |  |   | (3,000  | )
|Trust preferred stock                               |  |                     |           |                  |                   |        |           |       |                  |          |  |           |        |                  |  |   |           |  |   |        |  
|Other equity securities                             |  |                     |           |                  |                   |        |           |       |                  |          |  |           |        |                  |  |   |           |  |   |        |  
|Other investment securities, all equity             |  |                     |           |                  |                   |        |           |       |                  |          |  |           |        |                  |  |   |           |  |   |        |  
|                                                    |  |                     |            |                  |                   |         |           |       |                  |           |  |           |         |                  |  |   |            |  |   |         |  
|Subtotal, equity securities                         |  |                     | 540,000    |                  |                   | (3,000  | )         |       |                  |          |  |           |        |                  |  |   | 540,000    |  |   | (3,000  | )
|                                                    |  |                     |            |                  |                   |         |           |       |                  |           |  |           |         |                  |  |   |            |  |   |         |  
|Total temporarily impaired securities               |  | $                   | 12,589,600 |                  | $                 | (40,000 | )         |       | $                | 2,097,900 |  | $         | (27,900 | )                |  | $ | 14,687,500 |  | $ | (67,900 | )
|                                                    |  |                     |            |                  |                   |         |           |       |                  |           |  |           |         |                  |  |   |            |  |   |         |  



46



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SHORE FINANCIAL CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 4LOANS RECEIVABLE



Loans receivable are summarized below:



|                                         |  |              |             |   |      |   |             |  
|---------------------------------------- |  | ------------ | ----------- | - | ---- | - | ----------- | -
|                                         |  | December 31, |            
|                                         |  | 2004         |             |   | 2003 |  
|Real estate loans:                       |  |              |             |   |      |   |             |  
|Conventional mortgage:                   |  |              |             |   |      |   |             |  
|Secured by one-to-four family residences |  | $            | 64,488,500  |   |      | $ | 59,943,100  |  
|Commercial mortgages                     |  |              | 59,414,400  |   |      |   | 39,620,700  |  
|Land                                     |  |              | 22,048,300  |   |      |   | 12,395,200  |  
|Short-term construction                  |  |              | 9,882,100   |   |      |   | 7,117,900   |  
|Home equity lines of credit              |  |              | 15,580,800  |   |      |   | 14,951,400  |  
|Consumer loans                           |  |              | 2,378,200   |   |      |   | 2,508,400   |  
|Commercial loans:                        |  |              |             |   |      |   |             |  
|Secured                                  |  |              | 5,999,500   |   |      |   | 5,286,200   |  
|Unsecured                                |  |              | 2,674,300   |   |      |   | 3,281,800   |  
|                                         |  |              |             |   |      |   |             |  
|Total loans                              |  |              | 182,466,100 |   |      |   | 145,104,700 |  
|                                         |  |             
|Less:                                    |  |              |             |   |      |   |             |  
|Loans in process                         |  |              | 4,224,400   |   |      |   | 3,112,500   |  
|Deferred loan fees (costs), net          |  |              | (158,000    | ) |      |   | (216,900    | )
|Allowance for loan losses                |  |              | 2,404,500   |   |      |   | 2,002,500   |  
|                                         |  |              |             |   |      |   |             |  
|                                         |  | $            | 175,995,200 |   |      | $ | 140,206,600 |  
|                                         |  |              |             |   |      |   |             |  



The allowance for loan
losses is summarized below:



|                               |  |                          |           |   |      |   |           |  |   |           |  
|------------------------------ |  | ------------------------ | --------- | - | ---- | - | --------- |  | - | --------- | -
|                               |  | Years Ended December 31, |          
|                               |  | 2004                     |           |   | 2003 |   | 2002      | 
|Balance at beginning of period |  | $                        | 2,002,500 |   |      | $ | 1,603,200 |  | $ | 1,325,900 |  
|Provision charged to expense   |  |                          | 418,800   |   |      |   | 380,400   |  |   | 335,300   |  
|(Charge-offs) recoveries, net  |  |                          | (16,800   | ) |      |   | 18,900    |  |   | (58,000   | )
|                               |  |                          |           |   |      |   |           |  |   |           |  
|Balance at end of the period   |  | $                        | 2,404,500 |   |      | $ | 2,002,500 |  | $ | 1,603,200 |  
|                               |  |                          |           |   |      |   |           |  |   |           |  



There were no impaired
loans at December 31, 2004. Impaired loans were $126,000 and $368,000 at December 31, 2003 and 2002, respectively. The impaired loans at December 31, 2003 and 2002 were with one borrower. The balance was partially paid and brought current during
2003. However, the borrower was unable to meet the remaining obligation and, consequently, filed for bankruptcy protection. The Bank entered into an agreement with the bankruptcy trustee to sell the collateral during the first quarter of 2004.
Proceeds from these sales were sufficient to satisfy all principal and interest amounts due. Accordingly, no specific allowances were provided with respect to impaired loans at December 31, 2003 and 2002. For the years ended December 31, 2004, 2003
and 2002, the average recorded investment in impaired loans was $30,000, $187,000 and $31,000, respectively, and interest income recognized on impaired loans, all on the cash basis, was $11,000, $18,000 and $0, respectively. No additional funds are
committed to be advanced in connection with impaired loans. At December 31, 2004, nonaccrual loans were $950,000 and no loans existed that are past due 90 days or more and still accruing interest.



47



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SHORE FINANCIAL CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 5PREMISES AND EQUIPMENT



Premises and equipment are summarized as follows:



|                              |  |              |            |   |      |   |            |  
|----------------------------- |  | ------------ | ---------- | - | ---- | - | ---------- | -
|                              |  | December 31, |           
|                              |  | 2004         |            |   | 2003 |  
|Land                          |  | $            | 714,500    |   |      | $ | 714,500    |  
|Buildings                     |  |              | 7,034,000  |   |      |   | 3,395,700  |  
|Furniture and fixtures        |  |              | 2,178,400  |   |      |   | 1,687,400  |  
|Computer equipment & software |  |              | 698,200    |   |      |   | 731,700    |  
|Automobiles                   |  |              | 89,100     |   |      |   | 94,400     |  
|Construction in process       |  |              | 37,500     |   |      |   | 962,800    |  
|                              |  |              |            |   |      |   |            |  
|                              |  |              | 10,751,700 |   |      |   | 7,586,500  |  
|Lessaccumulated depreciation |  |              | (2,726,800 | ) |      |   | (2,599,600 | )
|                              |  |              |            |   |      |   |            |  
|                              |  | $            | 8,024,900  |   |      | $ | 4,986,900  |  
|                              |  |              |            |   |      |   |            |  



Depreciation expense
for the years ended December 31, 2004, 2003 and 2002 amounted to $511,300, $369,800 and $344,400, respectively.



NOTE 6DEPOSITS



Deposits accounts are summarized below:



|                              |  |              |             |      |   |            
|----------------------------- |  | ------------ | ----------- | ---- | - | -----------
|                              |  | December 31,
|                              |  | 2004         |             | 2003
|Demand deposits:              |  |              |             |      |   |            
|Noninterest-bearing           |  | $            | 24,495,000  |      | $ | 19,033,700 
|                              |  |              |             |      |   |            
|Interest-bearing:             |  |              |             |      |   |            
|Savings accounts              |  |              | 22,641,600  |      |   | 21,647,200 
|Checking accounts             |  |              | 28,264,700  |      |   | 25,287,300 
|Money market deposit accounts |  |              | 28,355,500  |      |   | 16,429,700 
|                              |  |              |             |      |   |            
|Total interest-bearing        |  |              | 79,261,800  |      |   | 63,364,200 
|                              |  |              |             |      |   |            
|Total demand deposits         |  |              | 103,756,800 |      |   | 82,397,900 
|                              |  |             
|Time deposits                 |  |              | 88,980,300  |      |   | 76,492,800 
|                              |  |              |             |      |   |            
|                              |  | $            | 192,737,100 |      | $ | 158,890,700
|                              |  |              |             |      |   |            



The aggregate amount
of certificates of deposit with a minimum denomination of $100,000 was approximately $19.5 million and $14.5 million at December 31, 2004 and 2003, respectively.



Time deposits outstanding at December 31, 2004 mature as follows:



|                    |  |   |           
|------------------- |  | - | ----------
|Within one year     |  | $ | 49,930,000
|One to two years    |  |   | 8,692,000 
|Two to three years  |  |   | 12,003,000
|Three to four years |  |   | 12,752,000
|Four to five years  |  |   | 4,548,000 
|Thereafter          |  |   | 1,055,300 
|                    |  |   |           
|                    |  | $ | 88,980,300
|                    |  |   |           



48



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SHORE FINANCIAL CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 7FAIR VALUE OF FINANCIAL INSTRUMENTS



The estimated fair values of the Banks financial instruments as of December 31, 2004 and 2003 are as follows:



|                                        |  |                |         |           |   |        
|--------------------------------------- |  | -------------- | ------- | --------- | - | -------
|                                        |  | CarryingAmount |         | FairValue
|                                        |  | (in thousands)
|December 31, 2004                       |  |                |         |           |   |        
|                                        |  |               
|Financial assets                        |  |                |         |           |   |        
|Cash and cash equivalents               |  | $              | 9,415   |           | $ | 9,415  
|Securities                              |  | $              | 38,971  |           | $ | 38,971 
|Loans, net of allowance for loan losses |  | $              | 175,995 |           | $ | 178,835
|Accrued interest receivable             |  | $              | 921     |           | $ | 921    
|Financial liabilities                   |  |                |         |           |   |        
|Deposits                                |  | $              | 192,737 |           | $ | 192,753
|Advances from Federal Home Loan Bank    |  | $              | 21,967  |           | $ | 21,981 
|Accrued interest payable                |  | $              | 164     |           | $ | 164    
|Unrecognized financial instruments      |  |                |         |           |   |        
|Commitments to extend credit            |  |                | N/A     |           |   | N/A    
|                                        |  |               
|December 31, 2003                       |  |                |         |           |   |        
|                                        |  |               
|Financial assets                        |  |                |         |           |   |        
|Cash and cash equivalents               |  | $              | 5,794   |           | $ | 5,794  
|Securities                              |  | $              | 40,611  |           | $ | 40,611 
|Loans, net of allowance for loan losses |  | $              | 140,207 |           | $ | 141,248
|Accrued interest receivable             |  | $              | 827     |           | $ | 827    
|Financial liabilities                   |  |                |         |           |   |        
|Deposits                                |  | $              | 158,891 |           | $ | 159,960
|Advances from Federal Home Loan Bank    |  | $              | 16,883  |           | $ | 16,889 
|Accrued interest payable                |  | $              | 56      |           | $ | 56     
|Unrecognized financial instruments      |  |                |         |           |   |        
|Commitments to extend credit            |  |                | N/A     |           |   | N/A    



The following methods
and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value.



Cash and cash equivalents



For cash and cash equivalents, the carrying amount is a reasonable estimate of fair value.



Securities



Fair values are based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market
prices for similar securities. For restricted securities without readily determinable values, the carrying amount is considered a reasonable estimate of fair value.



Loan receivables



The fair value of loans is estimated by discounting future cash flows, using market rates at which similar loans would be made to borrowers with similar
remaining maturities. This calculation ignores loan fees and certain factors affecting the interest rates charged on various loans, such as the borrowers creditworthiness and compensating balances, and dissimilar types of real estate held as
collateral.



49



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SHORE FINANCIAL CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 7FAIR VALUE OF FINANCIAL INSTRUMENTS (Concluded)



Deposit liabilities



The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at
the balance sheet date. The fair value of fixed-maturity certificates of deposit is estimated by discounting remaining maturities amounts using market rates for similar replacement funding sources.



Accrued interest receivable and payable



The carrying amounts of accrued interest receivable and payable approximate
their fair values.



Advances from Federal Home Loan Bank



The carrying value of advances from the Federal Home Loan
Bank due within ninety days from the balance sheet date approximates fair value. For those borrowings that mature beyond ninety days, the fair value of the borrowing is estimated by discounting future cash flows, using the current rates at which
similar borrowings would be obtained from the Federal Home Loan Bank with similar remaining maturities.



Commitments to extend credit



The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of
the agreements and the present creditworthiness of the borrowers. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. Because of the competitive nature of the
marketplace, loan fees vary greatly with no fees charged in many cases. Therefore, management has concluded no value should be assigned.



NOTE 8ADVANCES FROM FEDERAL HOME LOAN BANK



Borrowings (advances) from the Federal Home Loan Bank (FHLB) are scheduled to mature as follows:



|                    |  |              |            |      |   |           
|------------------- |  | ------------ | ---------- | ---- | - | ----------
|                    |  | December 31,
|                    |  | 2004         |            | 2003
|Within one year     |  | $            | 21,350,000 |      | $ | 16,200,000
|One to two years    |  |              |           |      |   |          
|More than two years |  |              | 616,700    |      |   | 683,300   
|                    |  |              |            |      |   |           
|                    |  | $            | 21,966,700 |      | $ | 16,883,300
|                    |  |              |            |      |   |           



Information regarding
FHLB advances is summarized below:



|                                                    |  |                          |            |      |   |           
|--------------------------------------------------- |  | ------------------------ | ---------- | ---- | - | ----------
|                                                    |  | Years Ended December 31,
|                                                    |  | 2004                     |            | 2003
|Monthly average balance of borrowings outstanding   |  | $                        | 12,626,600 |      | $ | 5,961,400 
|Maximum month-end balance of borrowings outstanding |  | $                        | 21,966,700 |      | $ | 16,883,300



The weighted average
interest rate on advances was 1.97%, 1.78% and 3.81% for the years ended December 31, 2004, 2003 and 2002, respectively. These advances are collateralized by the Banks investment in FHLB stock, qualifying real estate loans with a principal
balance of approximately $81.6 million, and government agency securities with a fair market value of approximately $18.6 million held under a specific collateral agreement. The Bank has an available line of credit with the FHLB for up to 13% of Bank
assets, or approximately $30.6 million at December 31, 2004. However, the Bank may request an increase in this borrowing capacity from the FHLB. At December 31, 2004 the Bank had sufficient collateral pledged to borrow a total of approximately $83.0
million from the FHLB. The borrowing capacity is subject to certain collateral requirements as stipulated in the FHLB borrowing agreement.



50



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SHORE FINANCIAL CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 9OTHER NONINTEREST INCOME AND EXPENSE



Other noninterest income and expense consists of the following:



|                                            |  |                          |         |      |   |         |  |   |        
|------------------------------------------- |  | ------------------------ | ------- | ---- | - | ------- |  | - | -------
|                                            |  | Years Ended December 31,
|                                            |  | 2004                     |         | 2003 |   | 2002   
|Other noninterest income                    |  |                          |         |      |   |         |  |   |        
|Credit life commissions                     |  | $                        | 9,700   |      | $ | 5,100   |  | $ | 11,400 
|Income from real estate held for investment |  |                          | 41,400  |      |   | 26,200  |  |   | 15,200 
|Safe deposit box rental                     |  |                          | 21,600  |      |   | 19,900  |  |   | 19,200 
|Increase in BOLI cash surrender value       |  |                          | 135,500 |      |   | 145,000 |  |   |       
|Gain on sale of fixed assets                |  |                          | 2,100   |      |   |        |  |   | 8,100  
|Gain on sale of real estate owned           |  |                          |        |      |   |        |  |   | 12,800 
|Miscellaneous fees and commissions          |  |                          | 69,100  |      |   | 64,400  |  |   | 63,800 
|                                            |  |                          |         |      |   |         |  |   |        
|                                            |  | $                        | 279,400 |      | $ | 260,600 |  | $ | 130,500
|                                            |  |                          |         |      |   |         |  |   |        
|                                            |  |                          |        
|Other noninterest expense                   |  |                          |         |      |   |         |  |   |        
|Education and seminars                      |  | $                        | 30,100  |      | $ | 31,900  |  | $ | 29,700 
|Personnel costs                             |  |                          | 55,800  |      |   | 58,900  |  |   | 54,400 
|Travel                                      |  |                          | 23,400  |      |   | 20,000  |  |   | 16,600 
|Courier cost                                |  |                          | 27,900  |      |   | 27,600  |  |   | 21,700 
|Legal and professional fees                 |  |                          | 216,500 |      |   | 195,400 |  |   | 138,600
|Supervisory fees                            |  |                          | 40,800  |      |   | 38,400  |  |   | 36,000 
|Loan costs                                  |  |                          | 51,500  |      |   | 56,400  |  |   | 46,500 
|ATM/VISA check card fees                    |  |                          | 79,400  |      |   | 82,500  |  |   | 61,100 
|Internet banking fees                       |  |                          | 105,600 |      |   | 70,000  |  |   | 16,500 
|Insurance                                   |  |                          | 36,500  |      |   | 33,300  |  |   | 34,400 
|Bank service charges                        |  |                          | 69,100  |      |   | 60,900  |  |   | 53,500 
|Deposit account write-offs                  |  |                          | 79,000  |      |   | 66,600  |  |   | 39,200 
|REO property expense                        |  |                          | 2,400   |      |   | 700     |  |   | 7,900  
|Loss on sale of fixed assets                |  |                          | 700     |      |   | 600     |  |   |       
|Miscellaneous                               |  |                          | 10,100  |      |   | 34,600  |  |   | 6,100  
|                                            |  |                          |         |      |   |         |  |   |        
|                                            |  | $                        | 828,800 |      | $ | 777,800 |  | $ | 562,200
|                                            |  |                          |         |      |   |         |  |   |        



51



---

SHORE FINANCIAL CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 10INCOME TAXES



The provision for income taxes (benefit) is summarized below:



|         |  |                          |           |      |   |         |      |  |   |         |  
|-------- |  | ------------------------ | --------- | ---- | - | ------- | ---- |  | - | ------- | -
|         |  | Years Ended December 31, |          
|         |  | 2004                     |           | 2003 |   |         | 2002 | 
|Current  |  |                          |           |      |   |         |      |  |   |         |  
|Federal  |  | $                        | 960,900   |      | $ | 971,100 |      |  | $ | 866,200 |  
|State    |  |                          | 11,700    |      |   | 12,000  |      |  |   | 9,000   |  
|         |  |                          |           |      |   |         |      |  |   |         |  
|         |  |                          | 972,600   |      |   | 983,100 |      |  |   | 875,200 |  
|         |  |                          |           |      |   |         |      |  |   |         |  
|Deferred |  |                          |           |      |   |         |      |  |   |         |  
|Federal  |  |                          | 38,100    |      |   | (90,100 | )    |  |   | (73,400 | )
|State    |  |                          |          |      |   |        |      |  |   |        |  
|         |  |                          |           |      |   |         |      |  |   |         |  
|         |  |                          | 38,100    |      |   | (90,100 | )    |  |   | (73,400 | )
|         |  |                          |           |      |   |         |      |  |   |         |  
|Total    |  |                          |           |      |   |         |      |  |   |         |  
|Federal  |  |                          | 999,000   |      |   | 881,000 |      |  |   | 792,800 |  
|State    |  |                          | 11,700    |      |   | 12,000  |      |  |   | 9,000   |  
|         |  |                          |           |      |   |         |      |  |   |         |  
|         |  | $                        | 1,010,700 |      | $ | 893,000 |      |  | $ | 801,800 |  
|         |  |                          |           |      |   |         |      |  |   |         |  



|                                                 |  |              |         |   |      |   |          |  
|------------------------------------------------ |  | ------------ | ------- | - | ---- | - | -------- | -
|                                                 |  | December 31, |        
|                                                 |  | 2004         |         |   | 2003 |  
|Deferred tax asset                               |  |              |         |   |      |   |          |  
|Bad debts and other provisions                   |  | $            | 818,000 |   |      | $ | 681,000  |  
|                                                 |  |              |         |   |      |   |          |  
|Total deferred tax asset                         |  |              | 818,000 |   |      |   | 681,000  |  
|                                                 |  |              |         |   |      |   |          |  
|Deferred tax liability                           |  |              |         |   |      |   |          |  
|FHLB stock                                       |  |              | 70,000  |   |      |   | 70,000   |  
|Depreciation                                     |  |              | 460,000 |   |      |   | 287,000  |  
|Unrealized gain on securities available for sale |  |              | 322,000 |   |      |   | 417,000  |  
|Other                                            |  |              | 13,600  |   |      |   | 11,500   |  
|                                                 |  |              |         |   |      |   |          |  
|Total deferred tax liability                     |  |              | 865,600 |   |      |   | 785,500  |  
|                                                 |  |              |         |   |      |   |          |  
|Net deferred tax liability                       |  | $            | (47,600 | ) |      | $ | (104,500 | )
|                                                 |  |              |         |   |      |   |          |  



The differences
between expected federal and state income tax expense at statutory rates to actual income tax expense are summarized as follows:



|                                             |  |                          |           |   |      |   |           |      |  |   |         |  
|-------------------------------------------- |  | ------------------------ | --------- | - | ---- | - | --------- | ---- |  | - | ------- | -
|                                             |  | Years Ended December 31, |          
|                                             |  | 2004                     |           |   | 2003 |   |           | 2002 | 
|Federal income tax expenseat statutory rate |  | $                        | 1,144,000 |   |      | $ | 1,005,000 |      |  | $ | 875,000 |  
|Tax effect of:                               |  |                          |           |   |      |   |           |      |  |   |         |  
|Tax exempt interest income                   |  |                          | (57,000   | ) |      |   | (43,000   | )    |  |   | (47,000 | )
|BOLI cash surrender value increase           |  |                          | (46,000   | ) |      |   | (49,000   | )    |  |   |        |  
|Dividends received deduction                 |  |                          | (38,000   | ) |      |   | (27,000   | )    |  |   | (32,400 | )
|Other, net                                   |  |                          | 7,700     |   |      |   | 7,000     |      |  |   | 6,200   |  
|                                             |  |                          |           |   |      |   |           |      |  |   |         |  
|                                             |  | $                        | 1,010,700 |   |      | $ | 893,000   |      |  | $ | 801,800 |  
|                                             |  |                          |           |   |      |   |           |      |  |   |         |  



52



---

SHORE FINANCIAL CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 11STOCKHOLDERS EQUITY



The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Companys financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Company and its banking subsidiary must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.



Quantitative measures established by regulation to ensure capital adequacy
require the Company and its banking subsidiary to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital to average
assets (as defined). Management believes, as of December 31, 2004, that the Company and the Bank meet all capital adequacy requirements to which they are subject.



As of December 31, 2004, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as
well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are
no conditions or events since that notification that management believes have changed the Banks category. The Company and the Banks actual capital amounts and ratios are presented in the table.



|                                          |  |                        |        |       |                              |   |        |                                                               |        |  |      |        |  |       |        |  |       |  
|----------------------------------------- |  | ---------------------- | ------ | ----- | ---------------------------- | - | ------ | ------------------------------------------------------------- | ------ |  | ---- | ------ |  | ----- | ------ |  | ----- | -
|                                          |  | Actual                 |        |       | For CapitalAdequacy Purposes |   |        | To Be WellCapitalized UnderPrompt CorrectiveAction Provisions |       
|                                          |  | Amount                 |        | Ratio |                              |   | Amount |                                                               | Ratio  |  |      | Amount |  | Ratio |       
|                                          |  | (Dollars in Thousands) |       
|As of December 31, 2004:                  |  |                        |        |       |                              |   |        |                                                               |        |  |      |        |  |       |        |  |       |  
|Total Capital (to Risk-Weighted Assets):  |  |                        |        |       |                              |   |        |                                                               |        |  |      |        |  |       |        |  |       |  
|Consolidated                              |  | $                      | 23,144 |       | 14.14                        | % |        | $                                                             | 13,091 |  | 8.00 | %      |  | $     | N/A    |  | N/A   |  
|Shore Bank                                |  |                        | 19,257 |       | 12.02                        | % |        |                                                               | 12,815 |  | 8.00 | %      |  |       | 16,018 |  | 10.00 | %
|                                          |  |                        |        |       |                              |  
|Tier 1 Capital (to Risk-Weighted Assets): |  |                        |        |       |                              |   |        |                                                               |        |  |      |        |  |       |        |  |       |  
|Consolidated                              |  | $                      | 20,848 |       | 12.74                        | % |        | $                                                             | 6,546  |  | 4.00 | %      |  | $     | N/A    |  | N/A   |  
|Shore Bank                                |  |                        | 17,220 |       | 10.75                        | % |        |                                                               | 6,407  |  | 4.00 | %      |  |       | 9,611  |  | 6.00  | %
|                                          |  |                        |        |       |                              |  
|Tier 1 Capital (to Average Assets):       |  |                        |        |       |                              |   |        |                                                               |        |  |      |        |  |       |        |  |       |  
|Consolidated                              |  | $                      | 20,848 |       | 9.62                         | % |        | $                                                             | 8,672  |  | 4.00 | %      |  | $     | N/A    |  | N/A   |  
|Shore Bank                                |  |                        | 17,220 |       | 8.04                         | % |        |                                                               | 8,571  |  | 4.00 | %      |  |       | 10,713 |  | 5.00  | %
|                                          |  |                        |        |       |                              |  
|As of December 31, 2003:                  |  |                        |        |       |                              |   |        |                                                               |        |  |      |        |  |       |        |  |       |  
|Total Capital (to Risk-Weighted Assets):  |  |                        |        |       |                              |   |        |                                                               |        |  |      |        |  |       |        |  |       |  
|Consolidated                              |  | $                      | 20,654 |       | 15.74                        | % |        | $                                                             | 10,497 |  | 8.00 | %      |  | $     | N/A    |  | N/A   |  
|Shore Bank                                |  |                        | 16,487 |       | 12.95                        | % |        |                                                               | 10,187 |  | 8.00 | %      |  |       | 12,734 |  | 10.00 | %
|                                          |  |                        |        |       |                              |  
|Tier 1 Capital (to Risk-Weighted Assets): |  |                        |        |       |                              |   |        |                                                               |        |  |      |        |  |       |        |  |       |  
|Consolidated                              |  | $                      | 18,852 |       | 14.37                        | % |        | $                                                             | 5,249  |  | 4.00 | %      |  | $     | N/A    |  | N/A   |  
|Shore Bank                                |  |                        | 14,884 |       | 11.69                        | % |        |                                                               | 5,093  |  | 4.00 | %      |  |       | 7,640  |  | 6.00  | %
|                                          |  |                        |        |       |                              |  
|Tier 1 Capital (to Average Assets):       |  |                        |        |       |                              |   |        |                                                               |        |  |      |        |  |       |        |  |       |  
|Consolidated                              |  | $                      | 18,852 |       | 9.76                         | % |        | $                                                             | 7,723  |  | 4.00 | %      |  | $     | N/A    |  | N/A   |  
|Shore Bank                                |  |                        | 14,884 |       | 7.89                         | % |        |                                                               | 7,542  |  | 4.00 | %      |  |       | 9,428  |  | 5.00  | %



53



---

SHORE FINANCIAL CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 11STOCKHOLDERS EQUITY (Concluded)



Federal and state banking regulations place certain restrictions on dividends paid and loans or
advances made by the Bank to the Company. The total amount of dividends that may be paid at any date is generally limited to the retained earnings (as defined) for the Bank for the current and past two years, and loans or advances are limited to 10
percent of the Banks capital stock and surplus on a secured basis. In addition, dividends paid by the Bank to the Company would be prohibited if the effect thereof would cause the Banks capital to be reduced below applicable minimum
capital requirements.



At December 31, 2004, the Banks
retained earnings available for the payment of dividends was $4.2 million. Accordingly, $13.8 million of the Companys equity in the net assets of the Bank was restricted at December 31, 2004. Funds available for loans or advances by the Bank
to the Company amounted to $400,000.



During the year ended
December 31, 2004, the Company paid quarterly cash dividends of $0.05 per share for the first and second quarters and $0.06 per share for the third and fourth quarters. During the year ended December 31, 2003, the Company paid quarterly cash
dividends of $0.04 per share for the first three quarters and $0.048 per share in the fourth quarter. During December 2003, the Company declared a 20% stock dividend paid on December 31, 2003 to shareholders of record on December 20, 2003. During
the first and second quarters of 2002, the Company paid quarterly dividends of $0.025 per share, while during third and fourth quarters of 2002, the Company paid quarterly dividends of $0.033 per share. All 2003 and 2002 dividends per share have
been adjusted to reflect the December 2003 20% stock dividend. On January 12, 2005, the Company declared a $0.06 per share quarterly cash dividend paid on February 1, 2005 to shareholders of record on January 24, 2005.



During June 2001, the Company approved the repurchase of 85,000 additional
shares of common stock on the open market. Under this plan, the Company has repurchased 54,700 shares of common stock at an average price of $9.03 per share, of which 5,000 shares were repurchased during 2002 at $9.61 per share.



During October 2001, the Companys Board of Directors approved a
Dividend Reinvestment Plan (DRIP Plan) whereby shareholders may elect to have cash dividends paid by the Company reinvested in its common stock, subject to certain limitations. Shareholders may also make optional cash payments to
purchase additional shares of the Companys common stock. The DRIP Plan document details the plan and was sent to each shareholder during November 2001.



NOTE 12EMPLOYEE BENEFIT PLANS



401k Profit Sharing Plan



The Companys 401k Profit Sharing Plan Trust (the Plan) provides for retirement, death and disability benefits. An employee becomes
eligible for participation in the Plan on the first day of the month following their ninety day anniversary date with the Company. However, an employee must be employed on the last day of the year to be eligible for profit sharing under the Plan.



Employees may elect to defer 2%-15% of their compensation,
with the Company making matching contributions equal to 100% of the first 3% of compensation deferred, and 50% of the next 3%. Matching contributions made by the Company under the Plan totaled approximately $66,300, $66,600 and $54,200 for the years
ended December 31, 2004, 2003 and 2002, respectively. The Company may also elect to make discretionary contributions to the Plan. Accordingly, $96,000, $78,000 and $70,000 of such contributions were made during the years ended December 31, 2004,
2003 and 2002, respectively.



54



---

SHORE FINANCIAL CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 12EMPLOYEE BENEFIT PLANS (Continued)



Stock Option Plans



The Company currently has one stock option plan for employees in effectthe 2001 Stock Incentive Plan (the 2001 Plan). The 1992 Stock
Option Plan expired. But certain options deemed earned are still exercisable. The Companys 2001 Plan is designed to attract and retain qualified personnel in key positions, provide employees with a proprietary interest in the Company as an
incentive to contribute to the success of the Company and the Bank and reward employees for outstanding performance and the attainment of targeted goals. The 2001 Plan provides for the grant of incentive stock options intended to comply with the
requirements of Section 422 of the Internal Revenue Code of 1986 (incentive stock options), as well as nonqualified stock options.



The 2001 Plan, approved by the Companys shareholders on April 17, 2001, provides up to 324,000 shares of common stock (as adjusted for the December
2003 20% stock dividend) for granting restricted stock awards and stock options in the form of incentive stock options and nonstatutory stock options to employees of the Company. The 2001 Plan also provides for the granting of restricted stock
awards. The 2001 Plan expires on April 16, 2011.



The 2001 Plan
is administered by a committee formed by the Companys Board of Directors, each member of which is a nonemployee director as defined in Rule 16b-3 under the Securities Exchange Act of 1934. The 2001 Plan is in effect for a period of
ten years from the date of adoption by the Board of Directors.



Under the 2001 Plan, the committee determines which employees will be granted options, whether such options will be incentive or nonqualified options, the number of shares subject to each option, whether such options may be exercised by
delivering other shares of common stock and when such options become exercisable. In general, the per share exercise price of an incentive stock option shall be at least equal to the fair market value of a share of common stock on the date the
option is granted. The per share exercise price of a nonqualified stock option shall be not less than 50% of the fair market value of a share of common stock on the date the option is granted.



Stock options shall become vested and exercisable in the manner specified by
the committee. In general, each stock option or portion thereof shall be exercisable at any time on or after it vests and is exercisable for periods of up to 10 years after its date of grant. Stock options are nontransferable except by will or the
laws of descent and distribution.



The committee also
determines which employees will be awarded restricted stock and the number of shares to be awarded. The value of the restricted stock is to be at least equal to the fair market value of the common stock on the date the stock is granted. No shares of
restricted stock have been awarded.



During the years ended
December 31, 2004, 2003 and 2002, the Company granted 15,172, 15,367 and 15,600 incentive stock options under the 2001 Plan at an average exercise price of $16.20, $10.68 and $8.02, respectively, and granted 8,350, 7,260 and 6,780 nonqualified stock
options under the 2001 plan at an average exercise price of $16.20, $10.68 and $8.02, respectively.



55



---

SHORE FINANCIAL CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 12EMPLOYEE BENEFIT PLANS (Concluded)



Profit Sharing Plan



The following table represents options outstanding under the Stock Option Plan:



|                                               |  |                          |  |                               |       |         |        |                               |   |         |  |                               |  |   |     
|---------------------------------------------- |  | ------------------------ |  | ----------------------------- | ----- | ------- | ------ | ----------------------------- | - | ------- |  | ----------------------------- |  | - | ----
|                                               |  | Years Ended December 31,
|                                               |  | 2004                     |  | 2003                          |       | 2002   
|                                               |  | Options                  |  | Weighted-AverageExercisePrice |       | Options |        | Weighted-AverageExercisePrice |   | Options |  | Weighted-AverageExercisePrice
|Outstandingbeginning of year                  |  | 72,007                   |  | $                             | 7.84  |         | 88,260 |                               | $ | 7.27    |  | 72,300                        |  | $ | 6.99
|Granted                                        |  | 23,522                   |  |                               | 16.20 |         | 22,627 |                               |   | 10.68   |  | 22,380                        |  |   | 8.02
|Exercised                                      |  | 1,560                    |  |                               | 8.99  |         | 37,200 |                               |   | 7.36    |  | 3,780                         |  |   | 6.59
|Forfeited                                      |  | 1,070                    |  |                               | 13.33 |         | 1,680  |                               |   | 11.33   |  | 2,640                         |  |   | 6.02
|                                               |  |                          |  |                               |       |         |        |                               |   |         |  |                               |  |   |     
|Outstandingend of year                        |  | 92,899                   |  | $                             | 10.12 |         | 72,007 |                               | $ | 7.84    |  | 88,260                        |  | $ | 7.27
|                                               |  |                          |  |                               |       |         |        |                               |   |         |  |                               |  |   |     
|Exercisableend of year                        |  | 92,899                   |  | $                             | 10.12 |         | 72,007 |                               | $ | 7.84    |  | 88,260                        |  | $ | 7.27
|                                               |  |                          |  |                               |       |         |        |                               |   |         |  |                               |  |   |     
|Weighted average fair value of options granted |  |                          |  | $                             | 3.91  |         |        |                               | $ | 1.78    |  |                               |  | $ | 1.80
|                                               |  |                          |  |                               |       |         |        |                               |   |         |  |                               |  |   |     



During 2003, 9,750
shares of outstanding common stock were exchanged in lieu of payment towards the exercise price of 22,039 of the total shares exercised during the year. During 2004 and 2002, no outstanding shares were exchanged towards the exercise of stock
options.



Other information pertaining to options outstanding
at December 31, 2004 is as follows:



|                           |  |                     |  |                                                  |  |                              |       |                   |        |                              |   |      
|-------------------------- |  | ------------------- |  | ------------------------------------------------ |  | ---------------------------- | ----- | ----------------- | ------ | ---------------------------- | - | -----
|                           |  | Options Outstanding |  | Options Exercisable                             
|Range of Exercise Prices   |  | NumberOutstanding   |  | Weighted AverageRemainingContractual Life(Years) |  | WeightedAverageExercisePrice |       | NumberExercisable |        | WeightedAverageExercisePrice
|$6.02  $16.20             |  | 92,899              |  | 5.98                                             |  | $                            | 10.12 |                   | 92,899 |                              | $ | 10.12
|                           |  |                     |  |                                                  |  |                              |       |                   |        |                              |   |      
|Outstanding at end of year |  | 92,899              |  |                                                  |  |                              |       |                   | 92,899 |                              |   |      
|                           |  |                     |  |                                                  |  |                              |       |                   |        |                              |   |      



NOTE 13RELATED PARTY
TRANSACTIONS



In the normal course of business, the Bank
makes loans to directors, officers and other related parties. Loans to employees are made on substantially the same terms as those prevailing at the time for comparable transactions with other borrowers, except that the interest rate is reduced by a
stated amount for primary residence loans, as long as such person remains employed by the Bank. A summary of related party loan activity for the periods indicated is as follows:



|                           |  |   |            |  
|-------------------------- |  | - | ---------- | -
|Balance, December 31, 2003 |  | $ | 2,051,000  |  
|Originations/Disbursements |  |   | 2,555,000  |  
|Repayments                 |  |   | (1,238,000 | )
|                           |  |   |            |  
|Balance, December 31, 2004 |  | $ | 3,368,000  |  
|                           |  |   |            |  



The Bank has a lease
agreement with the Banks former Chairman of the Board of Directors to lease a lot at Four Corners Plaza, Onley, Virginia, for $2,000 per month expiring in 2009 with two five-year renewals. Each renewal will be at the option of the Bank and the
leases will be based on the previous lease rate, after being adjusted for changes in the consumer price index.



56



---

SHORE FINANCIAL CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 13RELATED PARTY TRANSACTIONS (Concluded)



Through January 2003, the Bank had a lease agreement with a Maryland general partnership, of which a
related party is a general partner, providing for the use of commercial office space to facilitate the Banks downtown Salisbury, Maryland branch location. The lease term began in September 1997 and was renewed during August 2002. The agreement
originally provided for three five-year renewal periods at the Banks option and monthly lease amounts during the lease term were $2,250. However, pursuant to the Banks purchase option within the lease agreement, it purchased the building
from the general partnership during early 2003 for $680,000. Accordingly, lease payments related to this lease ceased during early 2003.



NOTE 14COMMITMENTS AND CONTINGENCIES AND OTHER RELATED PARTY TRANSACTIONS



Minimum future lease payments for these operating leases are as follows:



|                          |  |   |        
|------------------------- |  | - | -------
|Years Ending December 31, |  |   |        
|2005                      |  | $ | 24,100 
|2006                      |  | $ | 24,100 
|2007                      |  | $ | 24,100 
|2008                      |  | $ | 24,100 
|2009                      |  | $ | 24,100 
|                          |  |   |        
|                          |  | $ | 120,500
|                          |  |   |        



Rental expense under
operating leases was $47,600, $56,100 and $78,600 for the years ended December 31, 2004, 2003 and 2002, respectively.



The Company is a party to credit related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of
its customers. These financial instruments include commitments to extend credit, standby letters of credit and commercial letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated balance sheets. The Companys exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in making commitments as it does for
on-balance-sheet instruments.



Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Bank evaluates each
customers credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on managements credit evaluation of the counter party. Collateral held varies but
may include single-family residences, other residential property, commercial property and land. At December 31, 2004 and 2003, the Bank had outstanding commitments to originate loans, including outstanding construction loan commitments, with
variable interest rates of approximately $9.0 million and $14.4 million, respectively. In addition, unused lines of credit, primarily at variable rates, amounted to approximately $37.0 million and $24.2 million at December 31, 2004 and 2003,
respectively. Standby letters of credit at December 31, 2004 and 2003 were $812,000 and $617,000, respectively. The distribution of commitments to extend credit approximates the distribution of loans outstanding.



In the normal course of business, the Bank has entered into employment
agreements with some of its key executives. The Company may terminate the employment agreements with proper notice as specified in the agreements. Termination without cause (as defined in the agreement) entitles the executive to base salary and
benefits for a specified period of time from the date of termination, depending on the agreement.



57



---

SHORE FINANCIAL CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 14COMMITMENTS AND CONTINGENCIES AND OTHER RELATED PARTY TRANSACTIONS
(Concluded)



The Bank has an agreement with a service company whereby the latter furnishes data processing
services to the Bank. The contract was last renewed during January 2002 for an additional 60 months that is similar to the previous agreement and to those entered into by other entities in the financial institution industry. The costs represent
normal operating costs to the Bank.



Shore Investments Inc. had
an agreement with a registered broker-dealer to sell investment products. However, this agreement was terminated during 2003 and a new agreement was entered into with another registered broker-dealer. The terms of the new agreement are similar to
those under the prior agreement. The agreement has no expiration date, but can be terminated by either party with ninety days notice.



Various legal claims also arise from time to time in the normal course of business that, in the opinion of management, will have no material effect on the
Companys consolidated financial statements.



NOTE 15EARNINGS PER
SHARE RECONCILIATION



The following is a reconciliation of
the numerators and denominators of the basic and diluted earnings per share computations.



|                                                  |  |                          |           |      |   |           |  |   |          
|------------------------------------------------- |  | ------------------------ | --------- | ---- | - | --------- |  | - | ---------
|                                                  |  | Years Ended December 31,
|                                                  |  | 2004                     |           | 2003 |   | 2002     
|Net income (numerator, basic and diluted)         |  | $                        | 2,352,800 |      | $ | 2,062,100 |  | $ | 1,771,800
|Weighted average shares outstanding (denominator) |  |                          | 2,062,400 |      |   | 2,036,300 |  |   | 2,034,100
|                                                  |  |                          |           |      |   |           |  |   |          
|Earnings per common sharebasic                   |  | $                        | 1.14      |      | $ | 1.01      |  | $ | 0.87     
|                                                  |  |                          |           |      |   |           |  |   |          
|Effect of dilutive securities:                    |  |                          |           |      |   |           |  |   |          
|                                                  |  |                          |          
|Weighted average shares outstanding               |  |                          | 2,062,400 |      |   | 2,036,300 |  |   | 2,034,100
|Effect of stock options                           |  |                          | 33,800    |      |   | 31,900    |  |   | 17,600   
|                                                  |  |                          |           |      |   |           |  |   |          
|Diluted average shares outstanding (denominator)  |  |                          | 2,096,200 |      |   | 2,068,200 |  |   | 2,051,700
|                                                  |  |                          |           |      |   |           |  |   |          
|Earnings per common shareassuming dilution       |  | $                        | 1.12      |      | $ | 1.00      |  | $ | 0.86     
|                                                  |  |                          |           |      |   |           |  |   |          



NOTE 16BRANCH DEPOSIT
ACQUISITION



On December 13, 2002, the Bank acquired
certain assets and assumed certain liabilities of the Salisbury, Maryland branch of Susquehanna Bank, a wholly-owned subsidiary of Susquehanna Bankshares Inc. The approximate fair value of the net assets acquired and deposit liabilities assumed
amounted to $50,000 and $17.5 million, respectively. The Bank realized proceeds of approximately $16.8 million from the transaction, net of a deposit premium intangible of $620,000. The Bank is amortizing this intangible over ten years. During the
years ended December 31, 2004, 2003 and 2002, the Bank realized amortization expense of $62,000, $62,000 and $0, respectively, on this asset.



NOTE 17PARENT COMPANY



Since its inception, the Companys business activities have been limited to investment activities related to the Bank and its excess cash. Dividends
and management fees from the Bank and investment income represent the only sources of funds for the Company. Certain restrictions exist that limit the amount of dividends the Bank may declare without obtaining regulatory approval. At December 31,
2004, the Bank had approximately $4.2 million available to declare in dividends under existing regulatory guidelines.



58



---

SHORE FINANCIAL CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 17PARENT COMPANY (Continued)



The Companys primary costs consist of its employees compensation expense, board of
directors expenses, public reporting requirements and annual fees associated with being a public company. During the years ended December 31, 2004, 2003 and 2002, the Bank paid the Company management fees of $410,000, $430,000 and $0,
respectively, for its proportion of operating costs.



The Companys condensed balance sheets as of December 31, 2004 and 2003, and the related condensed statements of income and cash flows for years ended December 31, 2004, 2003 and 2002 are provided below:



Condensed Balance Sheets



|                                           |  |              |            |      |   |           
|------------------------------------------ |  | ------------ | ---------- | ---- | - | ----------
|                                           |  | December 31,
|                                           |  | 2004         |            | 2003
|Assets                                     |  |              |            |      |   |           
|Cash and due from banks                    |  | $            | 372,000    |      | $ | 304,000   
|Securities available-for-sale              |  |              | 3,960,000  |      |   | 3,975,000 
|Investment in Shore Bank                   |  |              | 17,991,000 |      |   | 15,989,000
|Other assets                               |  |              | 131,000    |      |   | 404,000   
|                                           |  |              |            |      |   |           
|Total assets                               |  | $            | 22,454,000 |      | $ | 20,672,000
|                                           |  |              |            |      |   |           
|                                           |  |             
|Liabilities and Stockholders Equity       |  |              |            |      |   |           
|Liabilities                                |  | $            | 495,000    |      | $ | 471,000   
|Stockholders equity                       |  |              | 21,959,000 |      |   | 20,201,000
|                                           |  |              |            |      |   |           
|Total liabilities and stockholders equity |  | $            | 22,454,000 |      | $ | 20,672,000
|                                           |  |              |            |      |   |           



Condensed Statements of Income



|                                                                                |  |                          |           |      |   |           |  |   |          
|------------------------------------------------------------------------------- |  | ------------------------ | --------- | ---- | - | --------- |  | - | ---------
|                                                                                |  | Years Ended December 31,
|                                                                                |  | 2004                     |           | 2003 |   | 2002     
|Income                                                                          |  |                          |           |      |   |           |  |   |          
|Dividends from Shore Bank                                                       |  | $                        |          |      | $ |          |  | $ | 500,000  
|Management Fees                                                                 |  |                          | 410,000   |      |   | 430,000   |  |   |         
|Investment income                                                               |  |                          | 162,000   |      |   | 151,000   |  |   | 178,000  
|Gain on sales of securities                                                     |  |                          | 149,000   |      |   | 262,000   |  |   |         
|                                                                                |  |                          |           |      |   |           |  |   |          
|Total income                                                                    |  |                          | 721,000   |      |   | 843,000   |  |   | 678,000  
|                                                                                |  |                          |           |      |   |           |  |   |          
|Expenses                                                                        |  |                          |           |      |   |           |  |   |          
|Compensation and benefits                                                       |  |                          | 418,000   |      |   | 400,000   |  |   |         
|Directors fees                                                                 |  |                          | 77,000    |      |   | 59,000    |  |   | 55,000   
|Accounting and professional fees                                                |  |                          | 75,000    |      |   | 102,000   |  |   | 81,000   
|Other                                                                           |  |                          | 72,000    |      |   | 73,000    |  |   | 64,000   
|                                                                                |  |                          |           |      |   |           |  |   |          
|Total expenses                                                                  |  |                          | 642,000   |      |   | 634,000   |  |   | 200,000  
|                                                                                |  |                          |           |      |   |           |  |   |          
|Income before income taxes and equity in undistributed net income of subsidiary |  |                          | 79,000    |      |   | 209,000   |  |   | 478,000  
|Income tax expense                                                              |  |                          |          |      |   | 26,000    |  |   | 10,000   
|                                                                                |  |                          |           |      |   |           |  |   |          
|Income before equity in undistributed net income of subsidiary                  |  |                          | 79,000    |      |   | 183,000   |  |   | 468,000  
|Equity in undistributed net income of subsidiary (1)                            |  |                          | 2,274,000 |      |   | 1,879,000 |  |   | 1,304,000
|                                                                                |  |                          |           |      |   |           |  |   |          
|Net income                                                                      |  | $                        | 2,353,000 |      | $ | 2,062,000 |  | $ | 1,772,000
|                                                                                |  |                          |           |      |   |           |  |   |          



59



---

SHORE FINANCIAL CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 17PARENT COMPANY (Concluded)



Condensed Statements of Cash Flows



|                                                    |  |                          |            |   |      |   |            |      |  |   |            |  
|--------------------------------------------------- |  | ------------------------ | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                    |  | Years Ended December 31, |           
|                                                    |  | 2004                     |            |   | 2003 |   |            | 2002 | 
|Operating Activities                                |  |                          |            |   |      |   |            |      |  |   |            |  
|Net income                                          |  | $                        | 2,353,000  |   |      | $ | 2,062,000  |      |  | $ | 1,772,000  |  
|Equity in undistributed net income of subsidiary    |  |                          | (2,274,000 | ) |      |   | (1,879,000 | )    |  |   | (1,304,000 | )
|Other non-cash transactions                         |  |                          | 10,000     |   |      |   |           |      |  |   | 8,000      |  
|Gain on sale of securities                          |  |                          | (149,000   | ) |      |   | (262,000   | )    |  |   |           |  
|Tax benefit from stock options                      |  |                          | 20,900     |   |      |   |           |      |  |   |           |  
|Change in other assets                              |  |                          | 7,000      |   |      |   | (101,000   | )    |  |   | (1,000     | )
|Change in other liabilities                         |  |                          | (12,900    | ) |      |   | 138,000    |      |  |   | 68,000     |  
|                                                    |  |                          |            |   |      |   |            |      |  |   |            |  
|Cash flows from operating activities                |  |                          | (45,000    | ) |      |   | (42,000    | )    |  |   | 543,000    |  
|                                                    |  |                          |            |   |      |   |            |      |  |   |            |  
|Investing Activities                                |  |                          |            |   |      |   |            |      |  |   |            |  
|Proceeds from sale of available-for-sale securities |  |                          | 885,000    |   |      |   | 1,024,000  |      |  |   |           |  
|Purchase of available-for-sale securities           |  |                          | (598,000   | ) |      |   | (923,000   | )    |  |   | (107,000   | )
|Purchase of premises and equipment                  |  |                          |           |   |      |   |           |      |  |   | (307,000   | )
|Sale of premises and equipment                      |  |                          | 266,000    |   |      |   |           |      |  |   |           |  
|Other investing activities                          |  |                          |           |   |      |   | 53,000     |      |  |   |           |  
|                                                    |  |                          |            |   |      |   |            |      |  |   |            |  
|Cash flows from investing activities                |  |                          | 553,000    |   |      |   | 154,000    |      |  |   | (414,000   | )
|                                                    |  |                          |            |   |      |   |            |      |  |   |            |  
|Financing Activities                                |  |                          |            |   |      |   |            |      |  |   |            |  
|Proceeds from exercise of common stock options      |  |                          | 14,000     |   |      |   | 110,000    |      |  |   | 25,000     |  
|Repurchase of common stock                          |  |                          |           |   |      |   |           |      |  |   | (48,000    | )
|Payment of dividends on common stock                |  |                          | (454,000   | ) |      |   | (340,000   | )    |  |   | (237,000   | )
|                                                    |  |                          |            |   |      |   |            |      |  |   |            |  
|Cash flows from financing activities                |  |                          | (440,000   | ) |      |   | (230,000   | )    |  |   | (260,000   | )
|                                                    |  |                          |            |   |      |   |            |      |  |   |            |  
|Change in cash and cash equivalents                 |  |                          | 68,000     |   |      |   | (118,000   | )    |  |   | (131,000   | )
|                                                    |  |                          |           
|Cash and cash equivalents, beginning of period      |  |                          | 304,000    |   |      |   | 422,000    |      |  |   | 553,000    |  
|                                                    |  |                          |            |   |      |   |            |      |  |   |            |  
|Cash and cash equivalents, end of period            |  | $                        | 372,000    |   |      | $ | 304,000    |      |  | $ | 422,000    |  
|                                                    |  |                          |            |   |      |   |            |      |  |   |            |  



60



---

SHORE FINANCIAL CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 18QUARTERLY CONDENSED STATEMENTS OF INCOMEUNAUDITED



Quarterly Condensed Statements of IncomeUnaudited



|                                                    |  |                     |           |         |   |              |  |             |           |  |   |          
|--------------------------------------------------- |  | ------------------- | --------- | ------- | - | ------------ |  | ----------- | --------- |  | - | ---------
|                                                    |  | 2004 Quarters Ended
|                                                    |  | March 31            |           | June 30 |   | September 30 |  | December 31
|Total interest and dividend income                  |  | $                   | 2,487,600 |         | $ | 2,543,100    |  | $           | 2,767,100 |  | $ | 2,899,700
|Net interest income after provision for loan losses |  |                     | 1,632,600 |         |   | 1,642,700    |  |             | 1,819,300 |  |   | 1,908,900
|Noninterest income                                  |  |                     | 519,100   |         |   | 459,200      |  |             | 436,400   |  |   | 505,100  
|Noninterest expense                                 |  |                     | 1,278,000 |         |   | 1,292,900    |  |             | 1,393,000 |  |   | 1,595,900
|Income before income taxes                          |  |                     | 873,700   |         |   | 809,000      |  |             | 862,700   |  |   | 818,100  
|Net income                                          |  |                     | 600,800   |         |   | 556,100      |  |             | 593,200   |  |   | 602,700  
|Earnings per common sharediluted                   |  |                     | 0.29      |         |   | 0.26         |  |             | 0.28      |  |   | 0.29     
|Dividends per common share                          |  |                     | 0.05      |         |   | 0.05         |  |             | 0.06      |  |   | 0.06     
|                                                    | 
|                                                    |  | 2003 Quarters Ended
|                                                    |  | March 31            |           | June 30 |   | September 30 |  | December 31
|Total interest and dividend income                  |  | $                   | 2,350,100 |         | $ | 2,371,600    |  | $           | 2,391,600 |  | $ | 2,388,200
|Net interest income after provision for loan losses |  |                     | 1,352,500 |         |   | 1,438,100    |  |             | 1,490,500 |  |   | 1,565,000
|Noninterest income                                  |  |                     | 396,700   |         |   | 506,200      |  |             | 590,600   |  |   | 395,700  
|Noninterest expense                                 |  |                     | 1,126,700 |         |   | 1,155,500    |  |             | 1,206,300 |  |   | 1,291,700
|Income before income taxes                          |  |                     | 622,500   |         |   | 788,800      |  |             | 874,800   |  |   | 669,000  
|Net income                                          |  |                     | 421,300   |         |   | 534,300      |  |             | 592,900   |  |   | 513,600  
|Earnings per common sharediluted                   |  |                     | 0.20      |         |   | 0.26         |  |             | 0.29      |  |   | 0.25     
|Dividends per common share                          |  |                     | 0.04      |         |   | 0.04         |  |             | 0.04      |  |   | 0.05     



NOTE 19SEGMENT INFORMATION



Management determines the Companys operating
segments and evaluates their performance by the markets in which the Bank operates. Currently, the Bank operates in two different geographical markets: Virginia and Maryland. Generally, each market possesses a different customer base and
occasionally requires that management approach product pricing and promotion in different manners. However, products offered in each market are similar. Additionally, the Maryland market represents a newer market to the Bank than does the Virginia
market.



The accounting policies of the segments are the same
as those described in the summary of significant accounting policies. The Company evaluates performance based on net interest income from operations and asset growth within the segments.



61



---

SHORE FINANCIAL CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 19SEGMENT INFORMATION (Concluded)



Since the Company derives a significant portion of its revenues from interest income and interest
expense is the most significant expense, the segments are reported below using net interest income for the periods indicated. The Other column primarily represents the Companys investment activities resulting from excess cash
available within the individual segments. The Elimination column represents intersegment activities and reconciles the segments to the Companys consolidated financial statements.



|                             |  |                |         |          |   |        |  |                                         |        |  |       |         |   |  |   |        
|---------------------------- |  | -------------- | ------- | -------- | - | ------ |  | --------------------------------------- | ------ |  | ----- | ------- | - |  | - | -------
|                             |  | Virginia       |         | Maryland |   | Other  |  | Elimination ofIntersegment Transactions |        |  | Total
|                             |  | (In thousands)
|Net Interest Income:         |  |                |         |          |   |        |  |                                         |        |  |       |         |   |  |   |        
|Year ended December 31, 2004 |  | $              | 5,254   |          | $ | 1,323  |  | $                                       | 1,297  |  | $     | (452    | ) |  | $ | 7,422  
|Year ended December 31, 2003 |  | $              | 4,589   |          | $ | 852    |  | $                                       | 1,591  |  | $     | (805    | ) |  | $ | 6,227  
|Year ended December 31, 2002 |  | $              | 4,136   |          | $ | 737    |  | $                                       | 1,596  |  | $     | (779    | ) |  | $ | 5,690  
|                             |  |                |         |          |  
|Assets:                      |  |                |         |          |   |        |  |                                         |        |  |       |         |   |  |   |        
|December 31, 2004            |  | $              | 178,140 |          | $ | 47,566 |  | $                                       | 53,756 |  | $     | (41,773 | ) |  | $ | 237,689
|December 31, 2003            |  | $              | 150,561 |          | $ | 38,131 |  | $                                       | 50,924 |  | $     | (43,066 | ) |  | $ | 196,550



NOTE 20COMPREHENSIVE INCOME



Total comprehensive income consists of the following for
the years indicated:



|                                  |  |                          |           |   |      |   |           |  |   |          
|--------------------------------- |  | ------------------------ | --------- | - | ---- | - | --------- |  | - | ---------
|                                  |  | Years Ended December 31,
|                                  |  | 2004                     |           |   | 2003 |   | 2002     
|Net income                        |  | $                        | 2,352,800 |   |      | $ | 2,062,100 |  | $ | 1,771,800
|Other comprehensive income (loss) |  |                          | (176,200  | ) |      |   | 151,700   |  |   | 445,400  
|                                  |  |                          |           |   |      |   |           |  |   |          
|Total comprehensive income        |  | $                        | 2,176,600 |   |      | $ | 2,213,800 |  | $ | 2,217,200
|                                  |  |                          |           |   |      |   |           |  |   |          



The components of
other comprehensive income are as follows for the years indicated:



|                                                                     |  |                          |          |   |      |   |          |      |  |   |          |  
|-------------------------------------------------------------------- |  | ------------------------ | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                     |  | Years Ended December 31, |         
|                                                                     |  | 2004                     |          |   | 2003 |   |          | 2002 | 
|Unrealized gains on available-for-sale securities:                   |  |                          |          |   |      |   |          |      |  |   |          |  
|Unrealized holding gains (losses) arising during the period          |  | $                        | (127,900 | ) |      | $ | 550,400  |      |  | $ | 702,900  |  
|Less: reclassification adjustment for (gain) loss included in income |  |                          | (148,100 | ) |      |   | (269,400 | )    |  |   | (21,700  | )
|                                                                     |  |                          |          |   |      |   |          |      |  |   |          |  
|Total other comprehensive income (loss) before tax effect            |  |                          | (276,000 | ) |      |   | 281,000  |      |  |   | 681,200  |  
|                                                                     |  |                          |         
|Tax (effect) benefit                                                 |  |                          | 99,800   |   |      |   | (129,300 | )    |  |   | (235,800 | )
|                                                                     |  |                          |          |   |      |   |          |      |  |   |          |  
|Net unrealized gain (loss)                                           |  | $                        | (176,200 | ) |      | $ | 151,700  |      |  | $ | 445,400  |  
|                                                                     |  |                          |          |   |      |   |          |      |  |   |          |  



62



---

REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM



The Board of Directors and Stockholders

Shore Financial Corporation and Subsidiaries



We have audited the accompanying consolidated statements of financial condition of Shore Financial Corporation and Subsidiaries as of
December 31, 2004 and 2003, and the related consolidated statements of income, stockholders equity, and cash flows for each of the three years in the period ended December 31, 2004. These consolidated financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.



We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.



In our opinion, the
consolidated financial statements referred to above present fairly, in all material respects, the financial position of Shore Financial Corporation and Subsidiariesas of December 31, 2004 and 2003, and the results of their operations
and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.



LOGO

Norfolk, Virginia

January 19, 2005



63



---

|Item 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|------- | ------------------------------------------------------------------------------------



None.



|Item 9a. | CONTROLS AND PROCEDURES
|-------- | -----------------------



Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we have
evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the year. Based on that evaluation, our principal executive officer and principal financial officer have concluded that these controls
and procedures are effective. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.



Disclosure controls and procedures are our controls and other procedures that
are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial
officer, as appropriate, to allow timely decisions regarding required disclosure.



64



---

PART III



|Item 10. | DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
|-------- | ---------------------------------------------------------------------------------------------------------------



The following provides information on Executive Officers who are not
directors of the Company and are not included in the Proxy Statement:



|                 |  |     |  |                                                                                                                                  
|---------------- |  | --- |  | ---------------------------------------------------------------------------------------------------------------------------------
|Name             |  | Age |  | Position                                                                                                                         
|Steven M. Belote |  | 39  |  | Vice President, Chief Financial Officer andSecretary of the Company; Senior Vice Presidentand Chief Financial Officer of the Bank



|Item 11. | EXECUTIVE COMPENSATION
|-------- | ----------------------



|Item 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|-------- | --------------------------------------------------------------



|Item 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
|-------- | ----------------------------------------------



|Item 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES
|-------- | --------------------------------------



Other than as specified above, and pursuant to General Instructions E(3), the information called for by Part III, Items 10. through 14., are incorporated
herein by reference from the Companys definitive proxy statement for the Companys Annual Meeting of Shareholders to be held on April 19, 2005, which was filed with the Securities and Exchange Commission pursuant to Rule 14a-6 on March
21, 2005.



65



---

PART IV



|Item 15. | EXHIBITS AND FORM 8-K
|-------- | ---------------------



|(a) | The following exhibits are filed as part of this Form 10-K and this list includes the Exhibit Index.
|--- | ----------------------------------------------------------------------------------------------------



|     |  |                                                                                                                     
|---- |  | --------------------------------------------------------------------------------------------------------------------
|No.  |  | Description                                                                                                         
|3.1  |  | Articles of Incorporation of Registrant.*                                                                           
|     | 
|3.2  |  | Bylaws of Registrant.*                                                                                              
|     | 
|10.1 |  | Companys 1992 Incentive Stock Option Plan.*                                                                        
|     | 
|10.2 |  | Amended and Restated Employment Agreement between the Company and Scott C. Harvard.***                              
|     | 
|10.3 |  | Management Continuity Agreement between the Company and Scott C. Harvard.***                                        
|     | 
|10.4 |  | Companys 2001 Stock Incentive Plan.****                                                                            
|     | 
|11.0 |  | Earnings Per Share Computation.**                                                                                   
|     | 
|13.0 |  | 2004 Annual Report to Shareholders (filed herewith).                                                                
|     | 
|21.0 |  | Subsidiaries of the RegistrantReference is made to Item 1. Description of Business or the required information.  
|     | 
|31.1 |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (filed herewith)
|     | 
|31.2 |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (filed herewith)
|     | 
|32.1 |  | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (filed herewith)
|     | 
|32.2 |  | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (filed herewith)

---

|* | Incorporated herein by reference from the Companys Registration Statement on Form S-4 (Registration No. 333-35389) filed by the Company with the Commission on September
15, 1997.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|** | Information required herein is incorporated by reference from Note 15 on page 58 of the financial statements attached hereto to this Form 10-K.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------



|*** | Incorporated herein by reference from the Companys Annual Report on Form 10-KSB for the year ended December 31, 2001.
|--- | ----------------------------------------------------------------------------------------------------------------------



|**** | Incorporated herein by reference from the Companys Registration Statement on Form S-8 (Registration No. 333-82838) filed by the Company with the Commission on February 15,
2002.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) | Reports on Form 8-K.
|--- | --------------------



| | 1. | Form 8-K was filed during October 2004 relative to the Companys third quarter earnings release.
| | -- | ------------------------------------------------------------------------------------------------



66



---

SIGNATURES



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



SHORE FINANCIAL CORPORATIONBy:

/s/    SCOTT C. HARVARDScott C. HarvardPresident and Chief Executive OfficerDated: March 18, 2005




Pursuant to the
requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.



|                                                |  |                                                             |  |               
|----------------------------------------------- |  | ----------------------------------------------------------- |  | --------------
|Signature                                       |  | Capacity                                                    |  | Date          
|                                                |  |                                                            
|/s/    HENRY P. CUSTIS,
JR.Henry P. Custis, Jr. |  | Chairman of the Board and Director                          |  | March 18, 2005
|                                                |  |                                                            
|/s/    SCOTT C.
HARVARDScott C.
Harvard         |  | President (Principal Executive Officer) and Director        |  | March 18, 2005
|                                                |  |                                                            
|/s/    STEVEN M.
BELOTESteven M.
Belote         |  | Vice President (Principal Financial and Accounting Officer) |  | March 18, 2005
|                                                |  |                                                            
|/s/    TERRELL E.
BOOTHETerrell E.
Boothe       |  | Director                                                    |  | March 18, 2005
|                                                |  |                                                            
|/s/    D. PAGE ELMORED. Page Elmore             |  | Director                                                    |  | March 18, 2005
|                                                |  |                                                            
|/s/    RICHARD F. HALL,
IIIRichard F. Hall, III |  | Director                                                    |  | March 18, 2005
|                                                |  |                                                            
|/s/    LLOYD J. KELLAM,
IIILloyd J. Kellam, III |  | Director                                                    |  | March 18, 2005
|                                                |  |                                                            
|/s/    L. DIXON
LEATHERBURYL. Dixon
Leatherbury |  | Director                                                    |  | March 18, 2005



67