SHORE FINANCIAL CORPORATION



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2003 ANNUAL REPORT





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F I N A N C I A L    H I G H L I G H T S



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T A B L E    O F    C O N T E N T S



|                                                |  |   
|----------------------------------------------- |  | --
|                                               
|Report to Shareholders                          |  | 1 
|                                               
|Selected Financial Highlights                   |  | 2 
|                                               
|Corporate Profile                               |  | 3 
|                                               
|Managements Discussion and Analysis            |  | 5 
|                                               
|Report of Independent Auditors                  |  | 26
|                                               
|Consolidated Statements of Financial Condition  |  | 27
|                                               
|Consolidated Statements of Income               |  | 28
|                                               
|Consolidated Statements of Stockholders Equity |  | 29
|                                               
|Consolidated Statements of Cash Flows           |  | 30
|                                               
|Notes to Consolidated Financial Statements      |  | 32
|                                               
|Directors and Officers                          |  | 59
|                                               
|Corporate Information                           |  | 60
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SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Report to Shareholders



On behalf of the Board of Directors and staff of Shore Financial Corporation,
I am pleased to present the annual report for the year ended December 31, 2003, our third consecutive year of record performance.



We started 2003 with excess deposits that were newly acquired from Susquehanna Bank in Salisbury, Maryland. This deposit acquisition presented several
challenges for our banking company. They included integrating systems, accounts, and employees while retaining the new customers with whom we intended to develop long term relationships. We were also challenged by the transaction to effectively
deploy the deposits in order to reduce any negative impact on net interest margin. I am pleased to report that your banking company was up to the challenge and that the acquisition one year later can be deemed a success.



Deposits continued to grow by double digits in the core banking accounts
including noninterest-bearing and interest-bearing transaction accounts. Certificates of deposit, the most costly source of funds, declined during the year. The result was a reduction in the cost of funds without shrinking the balance sheet or
losing customers.



With interest rates remaining at historical
lows, demand for loans was strong, resulting in record loan originations. Loan production was broadly distributed from lower Northampton County, Virginia, which has witnessed unprecedented real estate activity, up to Salisbury, Maryland, where loan
production matched our ambitious expectations. In addition to geographic distribution, loan production was well distributed between residential and commercial real estate and commercial and consumer loans. Loan production drove earnings throughout
the year.



The banking business is all about providing service
while mitigating the risk associated with those services. While the economy has been helpful, we are pleased that for the third consecutive year end, Shore Bank has had no OREO (real estate owned through foreclosure), and that the bank finished the
year with a net recovery on loan write offs. Delinquencies and non-performing loans to total loans are at their best levels in over a decade.



Shore Financial Corporation continues to serve Delmarva as the Eastern Shore of Virginias only Nasdaq traded company. The company is committed to
this community and during 2003 began construction of new corporate offices that will accommodate projected growth through 2013. The new office will replace leased space and will allow the Onley bank branch to be expanded to meet the growing demands
on that facility. The new corporate offices are scheduled for completion in the summer of 2004 and will be the location of the Companys 2005 stockholders meeting.



Thank you for your support of and your confidence in our company. The board and staff will continue to work hard to maintain
that confidence and deliver a reasonable return on your investment. Please email any comments or questions to me at sharvard@shorebank.com.



LOGO

Scott C. Harvard

President and Chief Executive Officer



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SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Selected Financial Highlights



The following selected financial data for the years ended December 31, 2003
and 2002 is derived from the consolidated financial statements of the Company, which have been audited on an annual basis by Goodman and Company, L.L.P. for the years then ended. The selected financial data information should be read in conjunction
with the consolidated financial statements of the Company included elsewhere in this document.



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|                                                                   |  |                          |         |    |      |   |         |  
|------------------------------------------------------------------ |  | ------------------------ | ------- | -- | ---- | - | ------- | -
|                                                                   |  | YEARS ENDED DECEMBER 31, |        
|(IN THOUSANDS, EXCEPT PER SHARE DATA)                              |  | 2003                     |         |    | 2002 |  
|                                                                   | 
|Income Statement Data:                                             |  |                          |         |    |      |   |         |  
|Interest income                                                    |  | $                        | 9,501   |    |      | $ | 9,406   |  
|Interest expense                                                   |  |                          | 3,275   |    |      |   | 3,716   |  
|Net interest income                                                |  |                          | 6,226   |    |      |   | 5,690   |  
|Provision for loan losses                                          |  |                          | 380     |    |      |   | 335     |  
|Noninterest income                                                 |  |                          | 1,889   |    |      |   | 1,375   |  
|Noninterest expense                                                |  |                          | 4,780   |    |      |   | 4,156   |  
|Income taxes                                                       |  |                          | 893     |    |      |   | 802     |  
|                                                                   |  |                          |         |    |      |   |         |  
|Net income                                                         |  | $                        | 2,062   |    |      | $ | 1,772   |  
|                                                                   |  |                          |         |    |      |   |         |  
|Per Share Data:                                                    |  |                          |         |    |      |   |         |  
|Net incomebasic (3)                                               |  | $                        | 1.01    |    |      | $ | 0.87    |  
|Net incomedilutive (3)                                            |  |                          | 1.00    |    |      |   | 0.86    |  
|Cash dividends (3)                                                 |  |                          | 0.17    |    |      |   | 0.12    |  
|Book value at period end                                           |  |                          | 9.80    |    |      |   | 10.73   |  
|Tangible book value at period end                                  |  |                          | 9.51    |    |      |   | 10.35   |  
|Average shares outstanding (000's) (3)                             |  |                          | 2,037   |    |      |   | 2,034   |  
|Balance Sheet Data (period end):                                   |  |                          |         |    |      |   |         |  
|Assets                                                             |  | $                        | 196,550 |    |      | $ | 179,993 |  
|Loans, net of unearned income and allowance                        |  |                          | 140,207 |    |      |   | 116,810 |  
|Securities                                                         |  |                          | 40,611  |    |      |   | 47,183  |  
|Deposits                                                           |  |                          | 158,891 |    |      |   | 158,989 |  
|Stockholders equity                                               |  |                          | 20,201  |    |      |   | 18,218  |  
|Performance Ratios:                                                |  |                          |         |    |      |   |         |  
|Return on average assets                                           |  |                          | 1.11    | %  |      |   | 1.12    | %
|Return on average equity                                           |  |                          | 10.64   | %  |      |   | 10.31   | %
|Net interest margin                                                |  |                          | 3.63    | %  |      |   | 3.82    | %
|Efficiency (1)                                                     |  |                          | 59.70   | %  |      |   | 59.01   | %
|Asset Quality Ratios:                                              |  |                          |         |    |      |   |         |  
|Allowance for loan losses to period end loans                      |  |                          | 1.41    | %  |      |   | 1.35    | %
|Allowance for loan losses to nonaccrual loans                      |  |                          | 362.68  | %  |      |   | 182.37  | %
|Nonperforming assets to period end loans and foreclosed properties |  |                          | 0.39    | %  |      |   | 0.74    | %
|Net charge-offs (recoveries) to average loans                      |  |                          | (0.01   | )% |      |   | 0.05    | %
|Capital and Liquidity Ratios:                                      |  |                          |         |    |      |   |         |  
|Leverage (2)                                                       |  |                          | 10.28   | %  |      |   | 10.12   | %
|Risk-based:                                                        |  |                          |         |    |      |   |         |  
|Tier 1 capital                                                     |  |                          | 14.37   | %  |      |   | 15.02   | %
|Total capital                                                      |  |                          | 15.74   | %  |      |   | 16.24   | %
|Average loans to average deposits                                  |  |                          | 79.78   | %  |      |   | 80.56   | %
|                                                                   | 

|(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 both periods to reflect 20% stock dividend paid by the Company during December 2003.
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SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Corporate Profile



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 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% market share of the banking deposits
in the Accomack and Northampton Counties in Virginia, based on June 30, 2003 deposit information. At December 31, 2003, the Company had consolidated assets of $196.6 million, Bank deposits of $158.9 million and stockholders equity of $20.2 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.

The Company also offers other services that complement the core financial services offered by the Bank. The Company 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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. 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 Bank delivers its banking services through seven full-service banking centers, six ATMs,
the Internet and the telephone. The Bank provides administrative support to its branch network through an operations center located in Accomac, Virginia. The facility houses the Banks item processing, check imaging and accounting functions.
Seventy-five dedicated employees staff the Bank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.

In Northampton County, an Eco-Industrial Park exists adjacent to a deep-water port with railroad access. The park has been recognized nationally as a model for environmentally friendly industrial development. A new
development named Bay Creek opened in spring 2001 that includes a 3,000-unit gated community and an Arnold Palmer designed golf course. In 2003, over $20.0 million in real estate sales occurred in Bay Creek, and construction is underway on a second
course designed by golf legend Jack Nicklaus.



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SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Corporate Profile (continued)



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.

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, and its fastest growing industrial sector is
the 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.



MARKET FOR
REGISTRANTS COMMON STOCK 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 for the common stock as reported on the Nasdaq National Market for the periods indicated, with the amounts being
adjusted for the December 2003 20% stock dividend:



|               |  |             |       |     |   |      
|-------------- |  | ----------- | ----- | --- | - | -----
|              
|               |  | PRICE RANGE
|               |  | HIGH        |       | LOW
|              
|2002           |  |             |       |     |   |      
|First Quarter  |  | $           | 8.25  |     | $ | 7.50 
|Second Quarter |  |             | 9.92  |     |   | 8.00 
|Third Quarter  |  |             | 10.20 |     |   | 8.96 
|Fourth Quarter |  |             | 10.33 |     |   | 9.58 
|               |  |            
|2003           |  |             |       |     |   |      
|First Quarter  |  | $           | 10.84 |     | $ | 9.88 
|Second Quarter |  |             | 11.67 |     |   | 10.38
|Third Quarter  |  |             | 13.75 |     |   | 11.25
|Fourth Quarter |  |             | 17.46 |     |   | 13.42
|              



At February 13, 2004,
there were 2,062,084 shares of common stock outstanding held by 976 stockholders of record.



Dividend Policy



During
the year ended December 31, 2003, the Company paid quarterly cash dividends of $0.042 per share. During December 2003, the Company declared a 20% stock dividend paid on December 31, 2003 to shareholders of record on December 20, 2003. During
February and May of 2002, the Company paid quarterly dividends of $0.025 per share, while during August and November of 2002, the Company paid quarterly dividends of $0.033 per share. All 2003 and 2002 dividends per share have been adjusted to
reflect December 2003 20% stock dividend. On January 14, 2004, the Company declared a $0.05 per share quarterly cash dividend paid on February 2, 2004 to shareholders of record on January 21, 2004. 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, 2003 and 2002, the Bank declared and paid the Company dividends of $0 and $500,000, respectively.



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SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Managements Discussion and Analysis of
Financial Condition and Results of Operations



This section may contain
forward-looking statements, within the meaning of federal securities laws that involve significant risks and uncertainties. Statements herein are based on certain assumptions and analyses by the Company and are factors it believes are
appropriate in the circumstances. Actual results could differ materially from those contained in or implied by such statements for a variety of reasons including, but not limited to: changes in interest rates; changes in accounting principles,
policies, or guidelines; significant changes in economic conditions; significant changes in regulatory requirements; and significant changes in securities markets. Consequently, all forward-looking statements made herein are qualified by these
cautionary statements and the cautionary language in the companys most recent Form 10-KSB report and other documents filed with the Securities and Exchange Commission. Shore Financial Corporation does not undertake to update forward-looking
statements to reflect circumstances or events that occur after the date the forward-looking statements are made.



OVERVIEW



The Company continued its streak of record earnings during the year ended December 31, 2003, primarily resulting from another year of strong loan
growth and good asset quality. Net income for the year ended December 31, 2003 was $2.06 million compared to $1.77 million for 2002, an increase of 16.4%. Diluted earnings per share increased 16.3% to $1.00 from the prior years $0.86 per
share. Return on assets (ROA) was 1.11% for the year ended December 31, 2003 compared to 1.12% for the year ended December 31, 2002, while return on average equity (ROE) was 10.64% for 2003 compared to 10.31% for 2002. The Banks net
interest margin was 3.63% during the year ended December 31, 2003, compared to 3.82% during the year ended December 31, 2002. Yields on earning assets continued their decline as a result of the numerous short-term rate reductions by the Federal
Reserve during 2001. However, since the Federal Reserve effected these adjustments, the Banks cost of interest-bearing liabilities has experienced similar declines, primarily resulting from repricing of time deposits and the Banks
increase in lower cost demand deposits. The Companys efficiency ratio was 59.7% for the year compared to 59.0% for 2002. Non-interest expenses increased to $4.78 million from $4.16 million during 2002. This increase primarily resulted from
staffing and other costs associated with the December 2002 deposit acquisition as well as increases in benefits and regulatory expenses.

Total assets grew to $196.6 million, an increase of 9.2% over the $180.0 million at December 31, 2002, driven primarily by a 20.1% increase in gross loans. Total gross loans ended the year at $142.2 million and total deposits ended the
year at $158.9 million, compared to $118.4 million and $159.0 million, respectively, in loans and deposits at December 31, 2002. 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. Commercial loans increased 42.7% during 2003, while residential real estate, construction loans and home equity lines of credit grew 11.6%, 83.4%
and 15.9%, respectively, during the year. Interest-bearing demand and savings deposit accounts grew 18.2% during the year ended December 31, 2003, while noninterest-bearing demand deposits increased 20.1% during the period. Demand and savings
deposits were $82.4 million at December 31, 2003, an increase of 18.7% over amounts existing at December 31, 2002, while time deposits were $76.5 million at December 31, 2003, a decrease of 14.6% over the prior year. Total shareholders
equity grew to $20.2 million at December 31, 2003, a 10.9% increase over total shareholders equity at December 31, 2002.

During 2003,
the Banks loan portfolio continued its strong performance trend. The Bank experienced net loan recoveries during 2003 at a rate of 0.01% of total loans, while the level of nonperforming assets to period end loans was 0.39% at December 31,
2003. The Bank had no other real estate owned (OREO) or other foreclosed assets at December 31, 2003. The Bank maintained an allowance for loan losses to period end loans of 1.41% at the end of 2003.



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SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Managements Discussion and Analysis(continued)



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



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.

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



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 1.98% and 2.63% for the years ended December 31, 2003 and 2002, respectively.



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SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Managements Discussion and Analysis(continued)



Also contributing to lower funding costs was an increase in short-term Federal Home Loan Bank (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 55.9% of average funding liabilities, while it only represented 50.8% of average funding liabilities during 2003.



Net Interest Income



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.



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SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Managements Discussion and Analysis(continued)



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,                                |        
|                                           |  | 2003                                                    |         |   | 2002           |  
|                                           |  | AVERAGEBALANCE                                          |         |   | INCOME/EXPENSE |   | YIELD/RATE |  |      | AVERAGEBALANCE |  |   | INCOME/EXPENSE |   | YIELD/RATE |  
|                                           |  | (IN THOUSANDS)                                          |        
|Assets:                                    |  |                                                         |         |   |                |   |            |  |      |                |  |   |                |   |            |   |       |  |      |  
|Securities (1)                             |  | $                                                       | 42,906  |   |                | $ | 1,729      |  | 4.03 | %              |  | $ | 34,444         |   |            | $ | 1,668 |  | 4.84 | %
|Loans (net of unearned income):            |  |                                                         |         |   |                |   |            |  |      |                |  |   |                |   |            |   |       |  |      |  
|Real estate mortgage                       |  |                                                         | 70,665  |   |                |   | 4,374      |  | 6.19 | %              |  |   | 63,110         |   |            |   | 4,429 |  | 7.02 | %
|Commercial                                 |  |                                                         | 40,791  |   |                |   | 2,553      |  | 6.26 | %              |  |   | 34,891         |   |            |   | 2,442 |  | 7.00 | %
|Home equity lines                          |  |                                                         | 13,720  |   |                |   | 632        |  | 4.61 | %              |  |   | 10,840         |   |            |   | 574   |  | 5.30 | %
|Consumer                                   |  |                                                         | 2,590   |   |                |   | 247        |  | 9.54 | %              |  |   | 3,298          |   |            |   | 310   |  | 9.40 | %
|                                           |  |                                                         |         |   |                |   |            |  |      |                |  |  
|Total loans                                |  |                                                         | 127,766 |   |                |   | 7,806      |  | 6.11 | %              |  |   | 112,139        |   |            |   | 7,755 |  | 6.92 | %
|Interest-bearing deposits in other banks   |  |                                                         | 2,438   |   |                |   | 20         |  | 0.82 | %              |  |   | 3,987          |   |            |   | 48    |  | 1.20 | %
|                                           |  |                                                         |         |   |                |   |            |  |      |                |  |  
|Total earning assets                       |  |                                                         | 173,110 |   |                |   | 9,555      |  | 5.52 | %              |  |   | 150,570        |   |            |   | 9,471 |  | 6.29 | %
|                                           |  |                                                         |         |   |                |   |            |  |      |                |  |  
|Less: allowance for loan losses            |  |                                                         | (1,784  | ) |                |   |            |  |      |                |  |   | (1,456         | ) |            |   |       |  |      |  
|Total nonearning assets                    |  |                                                         | 14,992  |   |                |   |            |  |      |                |  |   | 9,344          |   |            |   |       |  |      |  
|                                           |  |                                                         |         |   |                |   |            |  |      |                |  |   |                |   |            |   |       |  |      |  
|Total assets                               |  | $                                                       | 186,318 |   |                |   |            |  |      |                |  | $ | 158,458        |   |            |   |       |  |      |  
|                                           |  |                                                         |         |   |                |   |            |  |      |                |  |   |                |   |            |   |       |  |      |  
|Liabilities                                |  |                                                         |         |   |                |   |            |  |      |                |  |   |                |   |            |   |       |  |      |  
|Interest-bearing deposits:                 |  |                                                         |         |   |                |   |            |  |      |                |  |   |                |   |            |   |       |  |      |  
|Checking and savings                       |  | $                                                       | 60,461  |   |                | $ | 370        |  | 0.61 | %              |  | $ | 47,175         |   |            | $ | 516   |  | 1.09 | %
|Time deposits                              |  |                                                         | 81,284  |   |                |   | 2,799      |  | 3.44 | %              |  |   | 77,856         |   |            |   | 3,145 |  | 4.04 | %
|                                           |  |                                                         |         |   |                |   |            |  |      |                |  |  
|Total interest-bearing deposits            |  |                                                         | 141,745 |   |                |   | 3,169      |  | 2.24 | %              |  |   | 125,031        |   |            |   | 3,661 |  | 2.93 | %
|FHLB advances                              |  |                                                         | 5,961   |   |                |   | 106        |  | 1.78 | %              |  |   | 1,445          |   |            |   | 55    |  | 3.81 | %
|                                           |  |                                                         |         |   |                |   |            |  |      |                |  |  
|Total interest-bearing liabilities         |  |                                                         | 147,706 |   |                |   | 3,275      |  | 2.22 | %              |  |   | 126,476        |   |            |   | 3,716 |  | 2.94 | %
|                                           |  |                                                         |         |   |                |   |            |  |      |                |  |   |                |   |            |   |       |  |      |  
|Non-interest bearing liabilities:          |  |                                                         |         |   |                |   |            |  |      |                |  |   |                |   |            |   |       |  |      |  
|Demand deposits                            |  |                                                         | 18,397  |   |                |   |            |  |      |                |  |   | 14,160         |   |            |   |       |  |      |  
|Other liabilities                          |  |                                                         | 836     |   |                |   |            |  |      |                |  |   | 638            |   |            |   |       |  |      |  
|                                           |  |                                                         |         |   |                |   |            |  |      |                |  |   |                |   |            |   |       |  |      |  
|Total liabilities                          |  |                                                         | 166,939 |   |                |   |            |  |      |                |  |   | 141,274        |   |            |   |       |  |      |  
|Stockholders' equity                       |  |                                                         | 19,379  |   |                |   |            |  |      |                |  |   | 17,184         |   |            |   |       |  |      |  
|                                           |  |                                                         |         |   |                |   |            |  |      |                |  |   |                |   |            |   |       |  |      |  
|Total liabilities and stockholders' equity |  | $                                                       | 186,318 |   |                |   |            |  |      |                |  | $ | 158,458        |   |            |   |       |  |      |  
|                                           |  |                                                         |         |   |                |   |            |  |      |                |  |   |                |   |            |   |       |  |      |  
|Net interest income (1)                    |  |                                                         |         |   |                | $ | 6,280      |  |      |                |  |   |                |   |            | $ | 5,755 |  |      |  
|                                           |  |                                                         |         |   |                |   |            |  |      |                |  |   |                |   |            |   |       |  |      |  
|Interest rate spread (1)(2)                |  |                                                         |         |   |                |   |            |  | 3.30 | %              |  |   |                |   |            |   |       |  | 3.35 | %
|Net interest margin (1)(3)                 |  |                                                         |         |   |                |   |            |  | 3.63 | %              |  |   |                |   |            |   |       |  | 3.82 | %

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



8



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SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Managements Discussion and Analysis(continued)



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, 2003 COMPARED TODECEMBER 31, 2002CHANGE DUE TO: |   |  | DECEMBER 31, 2002 COMPARED TODECEMBER 31, 2001CHANGE DUE TO: |  
|                                         |  | VOLUME                                                       |   |  | RATE                                                         |   |  | INCREASE(DECREASE) |   |  | VOLUME |   |  | RATE   |   |  | INCREASE(DECREASE) |  
|Assets:                                  |  |                                                              |   |  |                                                              |   |  |                    |   |  |        |   |  |        |   |  |                    |  
|Securities                               |  | 409                                                          |   |  | (348                                                         | ) |  | 61                 |   |  | (11    | ) |  | (310   | ) |  | (321               | )
|Loans (net of unearned income):          |  |                                                              |   |  |                                                              |   |  |                    |   |  |        |   |  |        |   |  |                    |  
|Real estate mortgage                     |  | 531                                                          |   |  | (586                                                         | ) |  | (55                | ) |  | 643    |   |  | (581   | ) |  | 62                 |  
|Commercial                               |  | 413                                                          |   |  | (302                                                         | ) |  | 111                |   |  | 418    |   |  | (488   | ) |  | (70                | )
|Home equity lines                        |  | 153                                                          |   |  | (95                                                          | ) |  | 58                 |   |  | 272    |   |  | (236   | ) |  | 36                 |  
|Consumer                                 |  | (67                                                          | ) |  | 4                                                            |   |  | (63                | ) |  | (103   | ) |  | (52    | ) |  | (155               | )
|                                         |  |                                                              |   |  |                                                              |   |  |                    |   |  |        |   |  |        |   |  |                    |  
|Total loans                              |  | 1,030                                                        |   |  | (979                                                         | ) |  | 51                 |   |  | 1,230  |   |  | (1,357 | ) |  | (127               | )
|Interest-bearing deposits in other banks |  | (19                                                          | ) |  | (9                                                           | ) |  | (28                | ) |  | 26     |   |  | (99    | ) |  | (73                | )
|                                         |  |                                                              |   |  |                                                              |   |  |                    |   |  |        |   |  |        |   |  |                    |  
|Total earning assets                     |  | 1,420                                                        |   |  | (1,336                                                       | ) |  | 84                 |   |  | 1,245  |   |  | (1,766 | ) |  | (521               | )
|                                         |  |                                                              |   |  |                                                              |   |  |                    |   |  |        |   |  |        |   |  |                    |  
|Liabilities                              |  |                                                              |   |  |                                                              |   |  |                    |   |  |        |   |  |        |   |  |                    |  
|Interest-bearing deposits:               |  |                                                              |   |  |                                                              |   |  |                    |   |  |        |   |  |        |   |  |                    |  
|Checking and savings                     |  | 145                                                          |   |  | (291                                                         | ) |  | (146               | ) |  | 171    |   |  | (279   | ) |  | (108               | )
|Time deposits                            |  | 138                                                          |   |  | (484                                                         | ) |  | (346               | ) |  | 160    |   |  | (1,233 | ) |  | (1,073             | )
|                                         |  |                                                              |   |  |                                                              |   |  |                    |   |  |        |   |  |        |   |  |                    |  
|Total interest-bearing deposits          |  | 283                                                          |   |  | (775                                                         | ) |  | (492               | ) |  | 331    |   |  | (1,512 | ) |  | (1,181             | )
|FHLB advances                            |  | 172                                                          |   |  | (121                                                         | ) |  | 51                 |   |  | (5     | ) |  | (27    | ) |  | (32                | )
|                                         |  |                                                              |   |  |                                                              |   |  |                    |   |  |        |   |  |        |   |  |                    |  
|Total interest-bearing liabilities       |  | 455                                                          |   |  | (896                                                         | ) |  | (441               | ) |  | 326    |   |  | (1,539 | ) |  | (1,213             | )
|                                         |  |                                                              |   |  |                                                              |   |  |                    |   |  |        |   |  |        |   |  |                    |  
|Change in net interest income            |  | 965                                                          |   |  | (440                                                         | ) |  | 525                |   |  | 919    |   |  | (227   | ) |  | 692                |  
|                                         |  |                                                              |   |  |                                                              |   |  |                    |   |  |        |   |  |        |   |  |                    |  



Interest Sensitivity



An important element of both earnings performance and the
maintenance of sufficient liquidity is proper management of the 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 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.



9



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SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Managements Discussion and Analysis(continued)



The Company 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.

The following table presents the Companys interest sensitivity position at December 31, 2003.
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, 2003             |       
|                                                                            |  | WITHIN90 DAYS                 |        |    | 91-365DAYS |   |        | 1 TO 5YEARS |  |   | OVER 5YEARS |   |  | TOTAL |        
|                                                                            |  | (IN THOUSANDS)                |       
|Interest-Earning Assets:                                                    |  |                               |        |    |            |   |        |             |  |   |             |   |  |       |         |   |  |   |         |  
|Loans (1)                                                                   |  | $                             | 36,848 |    |            | $ | 17,688 |             |  | $ | 68,677      |   |  | $     | 18,996  |   |  | $ | 142,209 |  
|Securities                                                                  |  |                               | 1,008  |    |            |   | 4,067  |             |  |   | 28,176      |   |  |       | 7,360   |   |  |   | 40,611  |  
|Money market and other short term securities                                |  |                               | 1,424  |    |            |   |       |             |  |   |            |   |  |       |        |   |  |   | 1,424   |  
|Other earning assets                                                        |  |                               |       |    |            |   | 3,145  |             |  |   |            |   |  |       |        |   |  |   | 3,145   |  
|                                                                            |  |                               |        |   
|Total earning assets                                                        |  | $                             | 39,280 |    |            | $ | 24,900 |             |  | $ | 96,853      |   |  | $     | 26,356  |   |  | $ | 187,389 |  
|                                                                            |  |                               |        |   
|Cumulative earning assets                                                   |  | $                             | 39,280 |    |            | $ | 64,180 |             |  | $ | 161,033     |   |  | $     | 187,389 |   |  | $ | 187,389 |  
|                                                                            |  |                               |        |   
|Interest-Bearing Liabilities:                                               |  |                               |        |    |            |   |        |             |  |   |             |   |  |       |         |   |  |   |         |  
|Money market savings                                                        |  | $                             | 16,599 |    |            |   |       |             |  |   |            |   |  |       |        |   |  | $ | 16,599  |  
|Interest checking (2)                                                       |  |                               |       |    |            |   |       |             |  |   | 24,658      |   |  |       |        |   |  |   | 24,658  |  
|Savings (2)                                                                 |  |                               | 630    |    |            |   | 1,278  |             |  |   | 20,199      |   |  |       |        |   |  |   | 22,107  |  
|Certificates of deposit                                                     |  |                               | 9,284  |    |            |   | 24,900 |             |  |   | 40,867      |   |  |       | 1,442   |   |  |   | 76,493  |  
|FHLB advances                                                               |  |                               | 16,200 |    |            |   |       |             |  |   |            |   |  |       | 683     |   |  |   | 16,883  |  
|                                                                            |  |                               |        |   
|Total interest-bearing liabilities                                          |  | $                             | 42,713 |    |            | $ | 26,178 |             |  | $ | 85,724      |   |  | $     | 2,125   |   |  | $ | 156,740 |  
|                                                                            |  |                               |        |   
|Cumulative interest-bearing liabilities                                     |  |                               | 42,713 |    |            |   | 68,891 |             |  |   | 154,615     |   |  |       | 156,740 |   |  |   | 156,740 |  
|                                                                            |  |                               |        |   
|Period gap                                                                  |  | $                             | (3,433 | )  |            | $ | (1,278 | )           |  | $ | 11,129      |   |  | $     | 24,231  |   |  | $ | 30,649  |  
|Cumulative gap                                                              |  | $                             | (3,433 | )  |            | $ | (4,711 | )           |  | $ | 6,418       |   |  | $     | 30,649  |   |  | $ | 30,649  |  
|Ratio of cumulative interest-earning assets to interest-bearing liabilities |  |                               | 91.96  | %  |            |   | 93.16  | %           |  |   | 104.15      | % |  |       | 119.55  | % |  |   | 119.55  | %
|Ratio of cumulative gap to total earning assets                             |  |                               | (1.83  | )% |            |   | (2.51  | )%          |  |   | 3.42        | % |  |       | 16.36   | % |  |   | 16.36   | %



|(1) |  | Includes nonaccrual loans of $552,000, which are spread throughout the categories.
|--- |  | ----------------------------------------------------------------------------------

|(2) |  | Management has determined that interest checking and savings accounts, excluding $1.9 million 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 category.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(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



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. Checking ac
-



10



---



SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Managements Discussion and Analysis(continued)



counts generate fees including insufficient funds, check printing, cashiers checks, service charges, ATM, check cards and others. These fees are core earnings that are
not interest sensitive and have provided a stable source of income for the Bank. 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



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 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) increased to $142.2 million at December 31, 2003, a 20.1% increase over the $118.4 million outstanding
at December 31, 2002. Gross loan production of approximately $75.0 million resulted in growth across most categories of the Banks loan portfolio during 2003. Commercial loans increased 42.7% during 2003, while residential real estate,
construction loans and home equity lines of credit grew 11.6%, 83.4% and 15.9%, respectively, during the year.



11



---



SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Managements Discussion and Analysis(continued)



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



|                               |  |                |         |   |      |   |         |  
|------------------------------ |  | -------------- | ------- | - | ---- | - | ------- | -
|                               |  | LOAN PORTFOLIO |        
|                               |  | DECEMBER 31    |        
|                               |  | 2003           |         |   | 2002 |  
|                               |  | (IN THOUSANDS) |        
|Residential mortgage           |  | $              | 72,339  |   |      | $ | 66,637  |  
|Commercial mortgage            |  |                | 39,621  |   |      |   | 28,841  |  
|Commercialother               |  |                | 8,568   |   |      |   | 4,921   |  
|Real estate construction (1)   |  |                | 4,005   |   |      |   | 2,184   |  
|Home equity lines of credit    |  |                | 14,951  |   |      |   | 12,905  |  
|Consumer                       |  |                | 2,508   |   |      |   | 2,720   |  
|                               |  |                |         |   |      |   |         |  
|Total loans                    |  |                | 141,992 |   |      |   | 118,208 |  
|Less:                          |  |                |         |   |      |   |         |  
|Deferred loan (fees) cost, net |  |                | 217     |   |      |   | 205     |  
|Allowance for loan losses      |  |                | (2,002  | ) |      |   | (1,603  | )
|                               |  |                |         |   |      |   |         |  
|Net loans                      |  | $              | 140,207 |   |      | $ | 116,810 |  
|                               |  |                |         |   |      |   |         |  



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



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,                 |  
|                            |  | 2003                         |   |  | 2002   |  
|Residential mortgage        |  | 50.95                        | % |  | 56.37  | %
|Commercial mortgage         |  | 27.90                        | % |  | 24.40  | %
|Commercialother            |  | 6.03                         | % |  | 4.16   | %
|Real estate construction    |  | 2.82                         | % |  | 1.85   | %
|Home equity lines of credit |  | 10.53                        | % |  | 10.92  | %
|Consumer                    |  | 1.77                         | % |  | 2.30   | %
|                            |  |                              |   |  |        |  
|Total loans                 |  | 100.00                       | % |  | 100.00 | %
|                            |  |                              |   |  |        |  



The following table
presents the maturities of selected loans outstanding at December 31, 2003.



|                                         |  |                                       |        |              |   |               |  |              |        |           |   |              |  |       |       |  |   |   |  |   |        
|---------------------------------------- |  | ------------------------------------- | ------ | ------------ | - | ------------- |  | ------------ | ------ | --------- | - | ------------ |  | ----- | ----- |  | - | - |  | - | -------
|                                         |  | MATURITY SCHEDULE OF PERIOD END LOANS
|                                         |  | DECEMBER 31, 2003                    
|                                         |  | 1 YEAR OR LESS                        |        | 1 TO 5 YEARS |   | AFTER 5 YEARS |  |             
|                                         |  | FIXEDRATE                             |        | VARIABLERATE |   | FIXEDRATE     |  | VARIABLERATE |        | FIXEDRATE |   | VARIABLERATE |  | TOTAL
|                                         |  | (IN THOUSANDS)                       
|Residential and commercial mortgages (1) |  | $                                     | 7,105  |              | $ | 35,455        |  | $            | 24,005 |           | $ | 36,775       |  | $     | 8,621 |  | $ |  |  | $ | 111,961
|Commercialother                         |  |                                       | 2,117  |              |   | 4,124         |  |              | 2,041  |           |   | 171          |  |       | 115   |  |   |  |  |   | 8,568  
|Real estate construction                 |  |                                       | 4,005  |              |   |              |  |              |       |           |   |             |  |       |      |  |   |  |  |   | 4,005  
|Home equity lines of credit              |  |                                       |       |              |   | 14,951        |  |              |       |           |   |             |  |       |      |  |   |  |  |   | 14,951 
|Consumer                                 |  |                                       | 1,249  |              |   | 111           |  |              | 1,011  |           |   | 0            |  |       | 136   |  |   |  |  |   | 2,507  
|                                         |  |                                       |        |              |   |               |  |              |        |           |   |              |  |       |       |  |   |   |  |   |        
|Total                                    |  | $                                     | 14,476 |              | $ | 54,641        |  | $            | 27,057 |           | $ | 36,946       |  | $     | 8,872 |  | $ |  |  | $ | 141,992
|                                         |  |                                       |        |              |   |               |  |              |        |           |   |              |  |       |       |  |   |   |  |   |        

|(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.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



12



---



SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Managements Discussion and Analysis(continued)



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 $40.6 million at December 31, 2003, compared to $47.2 million at December 31, 2002. Decreases in securities primarily resulted from increased loan demand 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:



|                                                 |  |                      |        |      |   |       
|------------------------------------------------ |  | -------------------- | ------ | ---- | - | ------
|                                                 |  | SECURITIES PORTFOLIO
|                                                 |  | DECEMBER 31,        
|                                                 |  | 2003                 |        | 2002
|Amortized Cost:                                  |  |                      |        |      |   |       
|U.S. Treasury and other U.S. government agencies |  | $                    | 22,308 |      | $ | 28,926
|Tax-exempt municipal bonds                       |  |                      | 3,944  |      |   | 2,774 
|Mortgage-backed securities                       |  |                      | 2,583  |      |   | 3,002 
|Adjustable rate loan funds                       |  |                      | 1,990  |      |   | 1,942 
|FHLMC stock                                      |  |                      | 232    |      |   | 232   
|Preferred stock                                  |  |                      | 1,707  |      |   | 2,156 
|Trust preferred stock                            |  |                      | 150    |      |   | 400   
|Corporate bonds                                  |  |                      | 4,035  |      |   | 5,558 
|Other equity securities                          |  |                      | 2,437  |      |   | 1,249 
|                                                 |  |                      |        |      |   |       
|Total securities                                 |  | $                    | 39,386 |      | $ | 46,239
|                                                 |  |                      |        |      |   |       



13



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SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Managements Discussion and Analysis(continued)



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 $39.6
million at December 31, 2003, compared to $41.5 million at December 31, 2002. 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
|                                                 |  | DECEMBER 31,                 
|                                                 |  | 2003                          |        | 2002
|Fair Value:                                      |  |                               |        |      |   |       
|U.S. Treasury and other U.S. government agencies |  | $                             | 22,688 |      | $ | 24,446
|Tax-exempt municipal bonds                       |  |                               | 4,030  |      |   | 2,881 
|Mortgage-backed securities                       |  |                               | 2,577  |      |   | 3,013 
|Adjustable rate loan funds                       |  |                               | 1,936  |      |   | 1,856 
|FHLMC stock                                      |  |                               | 245    |      |   | 248   
|Preferred stock                                  |  |                               | 1,795  |      |   | 1,995 
|Trust preferred stock                            |  |                               | 338    |      |   | 560   
|Corporate bonds                                  |  |                               | 4,312  |      |   | 5,883 
|Other equity securities                          |  |                               | 1,659  |      |   | 609   
|                                                 |  |                               |        |      |   |       
|Total securities                                 |  | $                             | 39,580 |      | $ | 41,491
|                                                 |  |                               |        |      |   |       



The following table
sets forth the maturity distribution and weighted average yields of the securities portfolio at December 31, 2003. 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 |  
|                                                 |  | DECEMBER 31, 2003         |  
|                                                 |  | HELD TO MATURITY          |   |           | AVAILABLE FOR SALE |                     
|                                                 |  | AMORTIZEDCOST             |   | FAIRVALUE |                    | WEIGHTEDAVERAGEYIELD |  |      | AMORTIZEDCOST |  | FAIRVALUE |        | WEIGHTEDAVERAGEYIELD |  
|U.S. Treasury and other U.S. government agencies |  |                           |   |           |                    |                      |  |      |               |  |           |        |                      |   |        |  |      |  
|Within one year                                  |  | $                         |  |           | $                  |                     |  | 0.00 | %             |  | $         | 3,998  |                      | $ | 4,067  |  | 3.78 | %
|After one year to five years                     |  |                           |  |           |                    |                     |  | 0.00 | %             |  |           | 16,356 |                      |   | 16,633 |  | 3.68 | %
|After five years                                 |  |                           |  |           |                    |                     |  | 0.00 | %             |  |           | 1,954  |                      |   | 1,988  |  | 4.31 | %
|                                                 |  |                           |   |           |                    |                      |  |      |               |  |           |        |                      |   |        |  |      |  
|Total                                            |  |                           |  |           |                    |                     |  |      |               |  |           | 22,308 |                      |   | 22,688 |  |      |  
|                                                 |  |                           |   |           |                    |                      |  |      |               |  |           |        |                      |   |        |  |      |  
|Other Securities:                                |  |                           |   |           |                    |                      |  |      |               |  |           |        |                      |   |        |  |      |  
|Within one year                                  |  |                           |  |           |                    |                     |  | 0.00 | %             |  |           | 1,000  |                      |   | 1,007  |  | 6.00 | %
|After one year to five years                     |  |                           |  |           |                    |                     |  | 0.00 | %             |  |           | 4,215  |                      |   | 4,540  |  | 6.80 | %
|After five years                                 |  |                           |  |           |                    |                     |  | 0.00 | %             |  |           | 5,347  |                      |   | 5,372  |  | 5.69 | %
|Adjustable Rate Mortgage Fund                    |  |                           |  |           |                    |                     |  | 0.00 | %             |  |           | 1,555  |                      |   | 1,544  |  | 2.11 | %
|Adjustable Rate Commercial                       |  |                           |   |           |                    |                      |  |      |               |  |           |        |                      |   |        |  |      |  
|Loan Fund                                        |  |                           |  |           |                    |                     |  |      |               |  |           | 435    |                      |   | 392    |  | 2.89 | %
|                                                 |  |                           |   |           |                    |                      |  |      |               |  |           |        |                      |   |        |  |      |  
|Total                                            |  |                           |  |           |                    |                     |  |      |               |  |           | 12,552 |                      |   | 12,855 |  |      |  
|                                                 |  |                           |   |           |                    |                      |  |      |               |  |           |        |                      |   |        |  |      |  
|Total securities                                 |  | $                         |  |           | $                  |                     |  |      |               |  | $         | 34,860 |                      | $ | 35,543 |  |      |  
|                                                 |  |                           |   |           |                    |                      |  |      |               |  |           |        |                      |   |        |  |      |  



14



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SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Managements Discussion and Analysis(continued)



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,                |        
|                                |  | 2003                                    |         |             | 2002 |  
|                                |  | AVERAGEBALANCE                          |         | AVERAGERATE |      |   | AVERAGEBALANCE |   | AVERAGERATE | 
|Interest-bearing deposits:      |  |                                         |         |             |      |   |                |   |             |  |      |  
|Checking and savings            |  | $                                       | 60,461  |             | 0.61 | % |                | $ | 47,175      |  | 1.09 | %
|Certificates of deposit:        |  |                                         |         |             |      |   |                |   |             |  |      |  
|Less than $100,000              |  |                                         | 66,404  |             | 3.39 | % |                |   | 64,393      |  | 4.90 | %
|$100,000 and over               |  |                                         | 14,880  |             | 3.68 | % |                |   | 13,463      |  | 4.02 | %
|                                |  |                                         |         |             |      |   |                |   |             |  |      |  
|Total interest-bearing deposits |  |                                         | 141,745 |             | 2.24 | % |                |   | 125,031     |  | 2.93 | %
|Noninterest-bearing deposits    |  |                                         | 18,397  |             |      |   |                |   | 14,160      |  |      |  
|                                |  |                                         |         |             |      |   |                |   |             |  |      |  
|Total average deposits          |  | $                                       | 160,142 |             |      |   |                | $ | 139,191     |  |      |  
|                                |  |                                         |         |             |      |   |                |   |             |  |      |  



Deposits averaged
$160.1 million during the year ended December 31, 2003, an increase of 15.0% over the $139.2 million during the year ended December 31, 2002. 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, 2003.



|                              |  |                                        |        |         |        |  
|----------------------------- |  | -------------------------------------- | ------ | ------- | ------ | -
|                              |  | MATURITIES OF CD'S OF $100,000 OR MORE |       
|                              |  | DECEMBER 31, 2003                      |       
|                              |  | AMOUNT                                 |        | PERCENT |       
|Three months or less          |  | $                                      | 954    |         | 6.58   | %
|Over three months to one year |  |                                        | 4,816  |         | 33.23  | %
|Over one year to five years   |  |                                        | 8,522  |         | 58.81  | %
|Over five years               |  |                                        | 200    |         | 1.38   | %
|                              |  |                                        |        |         |        |  
|Total                         |  | $                                      | 14,492 |         | 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 (as defined) to average assets (as defined). Management believes, as of December 31, 2003, that the Company meets all capital adequacy
requirements to which it is subject.



15



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SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Managements Discussion and Analysis(continued)



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,        |        
|                                                  |  | 2003                |         |   | 2002 |  
|                                                  |  | (IN THOUSANDS)      |        
|Tier 1 Capital:                                   |  |                     |         |   |      |   |         |  
|Common stock                                      |  | $                   | 680     |   |      | $ | 560     |  
|Additional paid-in capital                        |  |                     | 8,165   |   |      |   | 2,654   |  
|Retained earnings                                 |  |                     | 10,595  |   |      |   | 14,394  |  
|Accumulated other comprehensive income            |  |                     | 761     |   |      |   | 609     |  
|                                                  |  |                     |         |   |      |   |         |  
|Total capital (GAAP)                              |  |                     | 20,201  |   |      |   | 18,217  |  
|Less: Intangibles                                 |  |                     | (588    | ) |      |   | (650    | )
|Net unrealized gain on debt and equity securities |  |                     | (761    | ) |      |   | (609    | )
|Net unrealized losses on equity securities        |  |                     |        |   |      |   | (41     | )
|                                                  |  |                     |         |   |      |   |         |  
|Total Tier 1 capital                              |  |                     | 18,852  |   |      |   | 16,917  |  
|                                                  |  |                    
|Tier 2 Capital:                                   |  |                     |         |   |      |   |         |  
|Allowable allowances for loan losses              |  |                     | 1,597   |   |      |   | 1,366   |  
|Net unrealized gains on equity securities         |  |                     | 205     |   |      |   | 8       |  
|                                                  |  |                     |         |   |      |   |         |  
|Total Tier 2 capital                              |  | $                   | 20,654  |   |      | $ | 18,291  |  
|                                                  |  |                     |         |   |      |   |         |  
|Risk-weighted assets                              |  | $                   | 131,213 |   |      | $ | 112,642 |  
|                                                  |  |                    
|Capital Ratios (1):                               |  |                     |         |   |      |   |         |  
|Tier 1 risk-based capital ratio                   |  |                     | 14.37   | % |      |   | 15.02   | %
|Total risk-based capital ratio                    |  |                     | 15.74   | % |      |   | 16.24   | %
|Tier 1 capital to average adjusted total assets   |  |                     | 10.15   | % |      |   | 10.72   | %



|(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. The Banks focus on diversifying its loan portfolio by emphasizing and expanding its commercial and consumer lending programs generally involves greater risk than residential mortgage
lending. Considering this shift in lending emphasis, management in recent years has provided for probable loan losses, which may result from the greater inherent risk present in these loan products, by increasing its allowance for loan losses in
accordance with SFAS No. 5, Accounting for Contingencies. 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.



16



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SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Managements Discussion and Analysis(continued)



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



|                                                                           |  |                           |        |   |      |   |        |   
|-------------------------------------------------------------------------- |  | ------------------------- | ------ | - | ---- | - | ------ | --
|                                                                           |  | ALLOWANCE FOR LOAN LOSSES |       
|                                                                           |  | YEARS ENDED DECEMBER 31,  |       
|                                                                           |  | 2003                      |        |   | 2002 |  
|                                                                           |  | (IN THOUSANDS)            |       
|Balance, beginning of period                                               |  | $                         | 1,603  |   |      | $ | 1,326  |   
|Loans charged off:                                                         |  |                           |        |   |      |   |        |   
|Commercial                                                                 |  |                           |       |   |      |   |       |   
|Real estate mortgage                                                       |  |                           | (4     | ) |      |   |       |   
|Consumer                                                                   |  |                           | (24    | ) |      |   | (83    | ) 
|                                                                           |  |                           |        |   |      |   |        |   
|Total loans charged-off                                                    |  |                           | (28    | ) |      |   | (83    | ) 
|                                                                           |  |                           |        |   |      |   |        |   
|Recoveries:                                                                |  |                           |        |   |      |   |        |   
|Commercial                                                                 |  |                           |       |   |      |   |       |   
|Real estate mortgage                                                       |  |                           |       |   |      |   |       |   
|Consumer                                                                   |  |                           | 47     |   |      |   | 25     |   
|                                                                           |  |                           |        |   |      |   |        |   
|Total recoveries                                                           |  |                           | 47     |   |      |   | 25     |   
|                                                                           |  |                           |        |   |      |   |        |   
|Net recoveries (charge-offs)                                               |  |                           | 19     |   |      |   | (58    | ) 
|Provision for loan losses                                                  |  |                           | 380    |   |      |   | 335    |   
|                                                                           |  |                           |        |   |      |   |        |   
|Balance, end of period                                                     |  | $                         | 2,002  |   |      | $ | 1,603  |   
|                                                                           |  |                           |        |   |      |   |        |   
|Allowance for loan losses to loans outstanding at end of period            |  |                           | 1.41   | % |      |   | 1.35   | % 
|Allowance for loan losses to nonaccrual loans outstanding at end of period |  |                           | 362.68 | % |      |   | 182.37 | % 
|Net recoveries (charge-offs) to average loans outstanding during period    |  |                           | 0.01   | % |      |   | (0.05  | )%



For the year ended
December 31, 2003, the Bank experienced net recoveries of $19,000, compared to net charge-offs of $58,000 for the year ended December 31, 2002. The Banks charge-offs during 2003 continued to be minimal with the majority of them for consumer
loans. One previously written-off Bank loan was partially repaid resulting in the net recovery position for the year. Charge-offs during 2002 primarily related to various consumer and real estate loans that were either deemed uncollectible or
foreclosed on with the collateral subsequently sold. The decrease in charge-offs positively impacted the ratio of net charge-offs to average loans outstanding during the period, which was a 0.01% during the year ended December 31, 2003, compared to
negative 0.05% during 2002.

The allowance for loan losses at December 31, 2003 was $2.0 million, compared to $1.6 million at December 31,
2002. 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 Bank considers its write-off history, the composition if its loan portfolio,
nonperforming loan levels, the market and the historical allowance levels maintained by peer community banks engaged in commercial lending in determining adequate loan loss reserves. The allowance for loan losses as a percentage of period end loans
equaled 1.41% at December 31, 2003, compared to 1.35% at December 31, 2002. The ratio of the allowance for loan losses as a percentage of nonaccrual loans outstanding increased at December 31, 2003 to 362.68%, compared to 182.37% at December 31,
2002. This increase primarily was attributable to a $327,000 decrease in nonaccrual loans from December 31, 2002 to December 31, 2003. Management believes that allowances for losses existing at December 31, 2003 are sufficient to cover any
anticipated or unanticipated losses on loans outstanding in accordance with SFAS No. 5, Accounting for Contingencies.



17



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SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Managements Discussion and Analysis(continued)



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 LOAN LOSSES                |       | PERCENTAGEOF LOAN ALLOWANCE |             |   | ALLOWANCEFOR LOAN LOSSES |          | PERCENTAGEOF LOAN ALLOWANCE |  |       | ALLOWANCEFOR LOAN LOSSES |  | PERCENTAGEOF LOAN ALLOWANCE |    
|             |  |      |  | (IN THOUSANDS)                          |      
|December 31, |  |      |  |                                         |       |                             |             |   |                          |          |                             |  |       |                          |  |                             |     |  |       |  
|             |  | 2003 |  | $                                       | 1,175 |                             | 58.70       | % |                          | $        | 278                         |  | 13.90 | %                        |  | $                           | 549 |  | 27.40 | %
|             |  | 2002 |  | $                                       | 684   |                             | 42.67       | % |                          |          | 249                         |  | 15.53 | %                        |  |                             | 670 |  | 41.80 | %



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



|                                                                     |  |                      |        |   |      |   |        |  
|-------------------------------------------------------------------- |  | -------------------- | ------ | - | ---- | - | ------ | -
|                                                                     |  | NONPERFORMING ASSETS |       
|                                                                     |  | DECEMBER 31,         |       
|                                                                     |  | 2003                 |        |   | 2002 |  
|                                                                     |  | (IN THOUSANDS)       |       
|Nonaccrual loans:                                                    |  |                      |        |   |      |   |        |  
|Commercial                                                           |  | $                    | 126    |   |      | $ |       |  
|Real estate mortgage                                                 |  |                      | 321    |   |      |   | 677    |  
|Home equity lines of credit                                          |  |                      | 28     |   |      |   |       |  
|Consumer                                                             |  |                      | 77     |   |      |   | 202    |  
|                                                                     |  |                      |        |   |      |   |        |  
|Total nonaccrual loans                                               |  |                      | 552    |   |      |   | 879    |  
|Other real estate owned                                              |  |                      |       |   |      |   |       |  
|                                                                     |  |                      |        |   |      |   |        |  
|Total nonperforming assets                                           |  | $                    | 552    |   |      | $ | 879    |  
|                                                                     |  |                      |        |   |      |   |        |  
|Loans past due 90 or more days accruing interest                     |  |                      |       |   |      |   |       |  
|Allowance for loan losses to nonaccrual loans                        |  |                      | 362.68 | % |      |   | 182.37 | %
|Nonperforming assets to period end loans and other real estate owned |  |                      | 0.39   | % |      |   | 0.74   | %



Total nonperforming
assets, which consist of nonaccrual loans and foreclosed properties, net of allowance for other real estate losses, were $552,000 at December 31, 2003, compared to $879,000 at December 31, 2002. At December 31, 2003 and 2002, the Bank had no loans
past due more than 90 days that were still accruing interest. 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. As to the nonaccrual loans
at December 31, 2003 and 2002, approximately $17,000 and $27,000, respectively, of interest income would have been recognized during the year then ended if interest thereon had been accrued.

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 has entered into an agreement with the
bankruptcy trustee to sell the collateral during the first quarter of 2004. Proceeds from these sales should be 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.



18



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SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Managements Discussion and Analysis(continued)



The ratio of nonperforming assets to period end loans and foreclosed properties is also detailed within the table above. This ratio decreased to 0.39% at
December 31, 2003, compared to 0.74% at December 31, 2002, primarily due to the decrease in nonperforming loans discussed above.

The Bank
closely monitors 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, 2003, all loans 60 days or more delinquent, including nonperforming loans, totaled
$762,600. Additionally, other performing loans totaling $1.66 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 determines 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.



|                                                         |  |                          |         |   |      |   |         |  
|-------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | -
|                                                         |  | SUMMARY OF LIQUID ASSETS |        
|                                                         |  | DECEMBER 31,             |        
|                                                         |  | 2003                     |         |   | 2002 |  
|Cash and due from banks                                  |  | $                        | 5,794   |   |      | $ | 7,535   |  
|Held-to-maturity securities due within one year          |  |                          |        |   |      |   | 5,004   |  
|Available-for-sale securities                            |  |                          | 39,580  |   |      |   | 41,491  |  
|                                                         |  |                          |         |   |      |   |         |  
|Total liquid assets                                      |  | $                        | 45,374  |   |      | $ | 54,030  |  
|                                                         |  |                          |         |   |      |   |         |  
|Deposits and other liabilities                           |  | $                        | 176,349 |   |      | $ | 161,776 |  
|                                                         |  |                          |         |   |      |   |         |  
|Ratio of liquid assets to deposits and other liabilities |  |                          | 25.73   | % |      |   | 33.40   | %
|                                                         |  |                          |         |   |      |   |         |  



The summary above
indicates sufficient liquidity to meet anticipated needs. Alternative sources of liquidity available to the Company include the 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 $25.2 million at December 31, 2003. The borrowing capacity is subject to certain collateral requirements as stipulated in the FHLB borrowing agreement. Additionally, the Bank has borrowing arrangements
with the Community Bankers Bank and Allfirst Bank of $6.9 million and $1.5 million, respectively. At December 31, 2003 the Bank had sufficient collateral pledged to borrow a total of approximately $19.7 million from the FHLB.



19



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SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Managements Discussion and Analysis(continued)



Total cash and cash equivalents were $5.8 million at December 31, 2003, compared to $7.5 million at December 31, 2002. Net cash flows from operating
activities were $2.5 million for the year ended December 31, 2003, compared to $2.3 million for the year ended December 31, 2002. This increase primarily resulted from net income growth and other changes in normal operating activities during the
periods.

Net cash flows from investing activities were $18.6 million during the year ended December 31, 2003, compared to $18.7 million
during the year ended December 31, 2002. Net loan originations in 2003 were $10.7 million higher than 2002, but other investment activities were greatly limited during 2003 due to flat deposit growth. In contrast, deposit growth of $16.3 million and
the $16.8 million in cash received in conjunction with the Susquehanna branch deposit acquisition generated more than adequate liquidity to fund net loan originations of $13.1 million, invest in securities and purchase the BOLI product during 2002.

Net cash flows from financing activities were $14.4 million for the year ended December 31, 2003, compared to $17.3 million for the year
ended December 31, 2002. This decrease primarily resulted from the lack of deposit growth partially offset by additional borrowings from the FHLB during 2003, compared to 2002 when deposit growth was $16.3 million.

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 $19.7 million, with the ability to increase this capacity to $25.2 million by providing additional collateral (mortgage
loans and investments) and meeting other guidelines with the FHLB. At December 31, 2003, the Bank had $16.9 million in outstanding FHLB advances, compared to $2.2 million at December 31, 2002.

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



|                                                                                |  |                           |                        |   |      |   |       |  
|------------------------------------------------------------------------------- |  | ------------------------- | ---------------------- | - | ---- | - | ----- | -
|                                                                                |  | SUMMARY OF BORROWED FUNDS |                       
|                                                                                |  | DECEMBER 31,              |                       
|                                                                                |  | 2003                      |                        |   | 2002 |  
|                                                                                |  |                           | (DOLLARS IN THOUSANDS) |  
|Monthly average balance of short-term borrowingsoutstanding during the period   |  | $                         | 5,250                  |   |      | $ | 662   |  
|Weighted-average interest rate on monthly averageshort-term borrowings          |  |                           | 1.27                   | % |      |   | 1.89  | %
|Maximum month-end balance of short-term borrowingsoutstanding during the period |  | $                         | 16,200                 |   |      | $ | 4,100 |  



20



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SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Managements Discussion and Analysis(continued)



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, 2003:



|                                                                                                                              |  |                        |        |                  |   |           |  |           |    |                  |   |    |  |   |    
|----------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------ | ---------------- | - | --------- |  | --------- | -- | ---------------- | - | -- |  | - | ---
|                                                                                                                              |  | PAYMENTS DUE BY PERIOD
|CONTRACTURAL OBLIGATIONS                                                                                                      |  | TOTAL                  |        | LESS THAN 1 YEAR |   | 1-3 YEARS |  | 3-5 YEARS |    | MORE THAN5 YEARS
|                                                                                                                              |  | (DOLLARS IN THOUSANDS)
|Operating lease obligations                                                                                                   |  | $                      | 130    |                  | $ | 46        |  | $         | 63 |                  | $ | 21 |  | $ |   
|Other long-term liabilities reflected on the    Company's balance sheet under
GAAP            Federal Home Loan Bank Advances |  |                        | 16,883 |                  |   | 16,200    |  |           |   |                  |   |   |  |   | 683
|Other commitments    Outstanding commitments
for            construction of operations facility                               |  |                        | 2,200  |                  |   | 2,200     |  |           |   |                  |   |   |  |   |   
|Standby letters of credit                                                                                                     |  |                        | 617    |                  |   | 617       |  |           |   |                  |   |   |  |   |   
|Commitments to extend credit                                                                                                  |  |                        | 38,669 |                  |   | 38,669    |  |           |   |                  |   |   |  |   |   
|                                                                                                                              |  |                        |       
|Total contractural obligations                                                                                                |  | $                      | 58,499 |                  | $ | 57,732    |  | $         | 63 |                  | $ | 21 |  | $ | 683
|                                                                                                                              |  |                        |       



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,     |  
|                                      |  | 2003                        |   |  | 2002  |  
|Return on average assets              |  | 1.11                        | % |  | 1.12  | %
|Return on average equity              |  | 10.64                       | % |  | 10.31 | %
|Average equity to average asset ratio |  | 10.40                       | % |  | 10.84 | %



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



21



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SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Managements Discussion and Analysis(continued)



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 June of 2001 and 2002, the FASB issued Statement No. 143,
Accounting for Asset Retirement Obligations (FASB No. 143), and Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities(FASB No. 146), respectively. FASB No. 143 addresses financial accounting requirements
for obligations associated with the retirement of tangible long-lived assets, and FASB No. 146 requires the recognition of a liability, when incurred, for a cost associated with an exit or disposal activity. The resultant obligations and liabilities
should be recognized at fair value. The provisions of these statements were first effective in 2003. The adoption of these statements did not have a material impact on the Companys results of operations or financial condition.

In January 2003, the FASB issued 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 is effective beginning in the first quarter of 2004 for all VIEs (other than what is 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, management does not expect this pronouncement to have a material impact on the Companys results of operations or financial position
in the foreseeable future.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities (SFAS 149), which amends and clarifies the accounting and reporting requirements for derivative instruments and hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The
requirements of this Statement are effective for contracts entered into or modified after June 30, 2003. Furthermore, the requirements of this Statement are to be applied prospectively. The adoption of this Standard is currently not expected to
have a material impact on the Companys consolidated results of operations or financial position.

In May 2003, the FASB issued SFAS
No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (SFAS 150). SFAS 150 initiates standards for how an issuer categorizes and evaluates certain financial instruments that display
characteristics similar to liabilities and equity in its statement of financial position. The Statement is effective for financial instruments entered into or modified after May 31, 2003, and was otherwise effective at the beginning of the first
interim period beginning after June 15, 2003. The adoption of this Standard did not have a material impact on the consolidated financial statements.

In December 2003, the FASB issued a revision to FASB Statement No. 132, Employers Disclosures about Pensions and Other Postretirement Benefits(FASB No. 132). This revision does not change the measurement recog
-



22



---



SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Managements Discussion and Analysis(continued)



nition aspects for pension and other postretirement benefit plans. However, it does revise employers disclosures to include more information about the plan assets,
obligations to pay benefits and funding obligations. These disclosures are effective for the 2003 financial statements. Accordingly, the Company has incorporated such disclosures where applicable.

The FASBs Emerging Issues Task Force (EITF) has been considering the rules that govern other-than-temporary impairment of securities and, while
consensus has not been reached on a model for the recognition of other-than-temporary impairment, consensus was reached on new disclosure requirements related to unrealized losses on investment securities. The new disclosure requirements apply to
marketable equity and debt securities accounted for under Financial Accounting Board Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, and are required for inclusion in annual reports with fiscal years ended
after December 15, 2003. Accordingly, the Company has incorporated such disclosures.



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.



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, 2003 and 2002.



23



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---





2003

Financial Statements







SHORE FINANCIAL

CORPORATION AND

SUBSIDIARIES









25



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SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Report of Independent Auditors



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, 2003 and 2002, and the related consolidated statements of income, stockholders' equity, and cash flows for the years then ended. 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 auditing standards generally accepted in the United States of America. 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 Subsidiaries as of December 31,
2003 and 2002, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.



LOGO

Norfolk, Virginia

January 16, 2004



26



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SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Consolidated Statements of Financial
Condition



December 31, 2003 and 2002



|                                                                                                                                         |  |      |             |      |   |            
|---------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | ---- | - | -----------
|                                                                                                                                        
|                                                                                                                                         |  | 2003 |             | 2002
|                                                                                                                                        
|ASSETS                                                                                                                                   |  |      |             |      |   |            
|Cash (including interestearning deposits ofapproximately $1,424,100 and $2,532,000, respectively)                                       |  | $    | 5,793,800   |      | $ | 7,534,900  
|Investment securities:                                                                                                                   |  |      |             |      |   |            
|Held-to-maturity (fair value of $0 and $5,069,500, respectively)                                                                         |  |      |            |      |   | 5,003,800  
|Available-for-sale (amortized cost of $38,354,800 and $40,546,900, respectively)                                                         |  |      | 39,579,800  |      |   | 41,490,900 
|Federal Home Loan Bank stock, at cost                                                                                                    |  |      | 844,200     |      |   | 542,700    
|Federal Reserve Bank stock, at cost                                                                                                      |  |      | 124,800     |      |   | 124,800    
|Community Bankers' Bank stock, at cost                                                                                                   |  |      | 42,200      |      |   | 21,100     
|Maryland Financial Bank                                                                                                                  |  |      | 20,000      |      |   |           
|Loans receivable, net                                                                                                                    |  |      | 140,206,600 |      |   | 116,809,800
|Premises and equipment, net                                                                                                              |  |      | 4,986,900   |      |   | 3,472,200  
|Other assets                                                                                                                             |  |      | 4,952,000   |      |   | 4,993,100  
|                                                                                                                                         |  |      |            
|                                                                                                                                         |  | $    | 196,550,300 |      | $ | 179,993,300
|                                                                                                                                         |  |      |            
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                     |  |      |             |      |   |            
|Deposits:                                                                                                                                |  |      |             |      |   |            
|Interest-bearing                                                                                                                         |  | $    | 139,857,000 |      | $ | 143,220,500
|Noninterest-bearing                                                                                                                      |  |      | 19,033,700  |      |   | 15,768,800 
|                                                                                                                                         |  |      |            
|Total Deposits                                                                                                                           |  |      | 158,890,700 |      |   | 158,989,300
|Advances from Federal Home Loan Bank                                                                                                     |  |      | 16,883,300  |      |   | 2,150,000  
|Other liabilities                                                                                                                        |  |      | 575,100     |      |   | 636,500    
|                                                                                                                                         |  |      |            
|Total liabilities                                                                                                                        |  |      | 176,349,100 |      |   | 161,775,800
|                                                                                                                                         |  |      |             |      |   |            
|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; 2,061,724 and 1,695,817 shares issued and outstanding,
respectively |  |      | 680,400     |      |   | 559,600    
|Additional capital                                                                                                                       |  |      | 8,164,600   |      |   | 2,654,500  
|Retained earnings, substantially restricted                                                                                              |  |      | 10,595,300  |      |   | 14,394,200 
|Accumulated other comprehensive income                                                                                                   |  |      | 760,900     |      |   | 609,200    
|                                                                                                                                         |  |      |            
|Total stockholders' equity                                                                                                               |  |      | 20,201,200  |      |   | 18,217,500 
|                                                                                                                                         |  |      |            
|                                                                                                                                         |  | $    | 196,550,300 |      | $ | 179,993,300
|                                                                                                                                         |  |      |            





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



27



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SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Consolidated Statements of Income

Years Ended December 31, 2003 and 2002



|                                                    |  |      |           |      |   |          
|--------------------------------------------------- |  | ---- | --------- | ---- | - | ---------
|                                                   
|                                                    |  | 2003 |           | 2002
|                                                   
|Interest and dividend income                        |  |      |           |      |   |          
|Loans                                               |  | $    | 7,806,000 |      | $ | 7,754,700
|Investments                                         |  |      |           |      |   |          
|Taxable interest                                    |  |      | 1,402,400 |      |   | 1,329,600
|Tax-exempt interest                                 |  |      | 104,100   |      |   | 125,700  
|Dividends                                           |  |      | 189,000   |      |   | 196,100  
|                                                    |  |      |          
|Total interest and dividend income                  |  |      | 9,501,500 |      |   | 9,406,100
|                                                    |  |      |          
|Interest expense                                    |  |      |           |      |   |          
|Deposits                                            |  |      | 3,168,800 |      |   | 3,660,800
|FHLB advances                                       |  |      | 106,200   |      |   | 55,500   
|                                                    |  |      |          
|Total interest expense                              |  |      | 3,275,000 |      |   | 3,716,300
|                                                    |  |      |          
|Net interest income                                 |  |      | 6,226,500 |      |   | 5,689,800
|Provision for loan losses                           |  |      | 380,400   |      |   | 335,300  
|                                                    |  |      |          
|Net interest income after provision for loan losses |  |      | 5,846,100 |      |   | 5,354,500
|                                                    |  |      |          
|Noninterest income                                  |  |      |           |      |   |          
|Deposit account fees                                |  |      | 1,115,100 |      |   | 1,044,700
|Loan fees                                           |  |      | 104,000   |      |   | 123,200  
|Commissions on investment brokerage sales           |  |      | 140,100   |      |   | 54,400   
|Gains on sales/donations of securities              |  |      | 269,400   |      |   | 21,700   
|Other                                               |  |      | 260,600   |      |   | 130,500  
|                                                    |  |      |          
|Total noninterest income                            |  |      | 1,889,200 |      |   | 1,374,500
|                                                    |  |      |          
|Noninterest expense                                 |  |      |           |      |   |          
|Compensation and employee benefits                  |  |      | 2,213,800 |      |   | 1,891,400
|Occupancy and equipment                             |  |      | 1,201,800 |      |   | 1,122,400
|Data processing                                     |  |      | 467,700   |      |   | 446,800  
|Advertising                                         |  |      | 94,500    |      |   | 109,500  
|Federal insurance premium                           |  |      | 24,600    |      |   | 23,100   
|Other                                               |  |      | 777,800   |      |   | 562,200  
|                                                    |  |      |          
|Total noninterest expense                           |  |      | 4,780,200 |      |   | 4,155,400
|                                                    |  |      |          
|Income before income taxes                          |  |      | 2,955,100 |      |   | 2,573,600
|Income taxes                                        |  |      | 893,000   |      |   | 801,800  
|                                                    |  |      |          
|Net income                                          |  | $    | 2,062,100 |      | $ | 1,771,800
|                                                    |  |      |          
|Cash Dividends Declared Per Share                   |  | $    | 0.17      |      | $ | 0.12     
|                                                    |  |      |          
|Earnings Per Common Share:                          |  |      |           |      |   |          
|Basic                                               |  | $    | 1.01      |      | $ | 0.87     
|                                                    |  |      |          
|Diluted                                             |  | $    | 1.00      |      | $ | 0.86     
|                                                    |  |      |          





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



28



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SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Consolidated Statement of Stockholders'
Equity

Years Ended December 31, 2003 and 2002



|                                                                                              |  |                |   |  |             |         |   |                   |   |           |                  |  |   |                                     |   |       |   |         |  |   |            |  
|--------------------------------------------------------------------------------------------- |  | -------------- | - |  | ----------- | ------- | - | ----------------- | - | --------- | ---------------- |  | - | ----------------------------------- | - | ----- | - | ------- |  | - | ---------- | -
|                                                                                              |  | NUMBEROFSHARES |   |  | COMMONSTOCK |         |   | ADDITIONALCAPITAL |   |           | RETAINEDEARNINGS |  |   | ACCUMULATEDOTHERCOMPREHENSIVEINCOME |   | TOTAL |  
|                                                                                              | 
|Balance, December 31, 2001                                                                    |  | 1,697,667      |   |  | $           | 560,200 |   |                   | $ | 2,677,200 |                  |  | $ | 12,859,600                          |   |       | $ | 163,800 |  | $ | 16,260,800 |  
|Common stock cash dividend 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 |  
|                                                                                              |  |                |  









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



29



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SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Consolidated Statements of Cash Flows

Years Ended December 31, 2003 and 2002



|                                                                           |  |      |             |   |      |   |             |  
|-------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | -
|                                                                           | 
|                                                                           |  | 2003 |             |   | 2002 |  
|                                                                           | 
|Cash flows from operating activities                                       |  |      |             |   |      |   |             |  
|Net income                                                                 |  | $    | 2,062,100   |   |      | $ | 1,771,800   |  
|Adjustments to reconcile to net cash provided by operating activities:     |  |      |             |   |      |   |             |  
|Provision for loan losses                                                  |  |      | 380,400     |   |      |   | 335,300     |  
|Depreciation and amortization                                              |  |      | 411,300     |   |      |   | 347,100     |  
|Amortization of premium and accretion of discount on securities, net       |  |      | 94,500      |   |      |   | 62,800      |  
|Gain on sale of investment securities                                      |  |      | (269,400    | ) |      |   | (4,900      | )
|Loss on disposal of fixed assets                                           |  |      | 600         |   |      |   | 9,500       |  
|Gain on sale of repossessed assets                                         |  |      |            |   |      |   | (11,700     | )
|Loss on noncash donation                                                   |  |      |            |   |      |   | 9,400       |  
|Increase in cash surrender value of life insurance                         |  |      | (145,000    | ) |      |   |            |  
|Changes in:                                                                |  |      |             |   |      |   |             |  
|Deferred loan fees                                                         |  |      | (12,400     | ) |      |   | (65,100     | )
|Other assets                                                               |  |      | 15,300      |   |      |   | (314,700    | )
|Other liabilities                                                          |  |      | (61,400     | ) |      |   | 141,500     |  
|                                                                           |  |      |             |   |      |   |             |  
|Net cash flows from operating activities                                   |  |      | 2,476,000   |   |      |   | 2,281,000   |  
|                                                                           |  |      |             |   |      |   |             |  
|                                                                           |  |      |             |   |      |   |             |  
|Cash flows from investing activities                                       |  |      |             |   |      |   |             |  
|Purchase of available-for-sale securities                                  |  |      | (4,502,800  | ) |      |   | (22,657,800 | )
|Proceeds from maturities, sales and calls of available-for-sale securities |  |      | 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 Federal Home Loan Bank stock                                   |  |      | (301,500    | ) |      |   | (32,200     | )
|Purchase of Community Bankers' Bank stock                                  |  |      | (21,100     | ) |      |   | (21,100     | )
|Purchase of Maryland Financial Bank stock                                  |  |      | (20,000     | ) |      |   |            |  
|Loan originations, net of repayments                                       |  |      | (23,764,800 | ) |      |   | (13,050,200 | )
|Purchase of Bank-Owned Life Insurance                                      |  |      |            |   |      |   | (3,000,000  | )
|Purchase of premises and equipment                                         |  |      | (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                                   |  |      | (18,621,700 | ) |      |   | (18,694,403 | )
|                                                                           |  |      |             |   |      |   |             |  

































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



30



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SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Consolidated Statements of Cash Flows

Years Ended December 31, 2003 and 2002



|                                                                    |  |      |             |   |      |   |             |  
|------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | -
|                                                                    |  | 2003 |             |   | 2002 |  
|                                                                    | 
|Cash flows from financing activities                                |  |      |             |   |      |   |             |  
|Net increase in demand deposits                                     |  | $    | 13,000,500  |   |      | $ | 15,011,300  |  
|Net increase (decrease) in time deposits                            |  |      | (13,099,100 | ) |      |   | 1,258,300   |  
|Proceeds from FHLB advances                                         |  |      | 51,700,000  |   |      |   | 12,300,000  |  
|Repayments of FHLB advances                                         |  |      | (36,966,700 | ) |      |   | (10,966,700 | )
|Repurchase of common stock                                          |  |      |            |   |      |   | (48,300     | )
|Proceeds from exercise of stock options                             |  |      | 110,300     |   |      |   | 25,000      |  
|Payment of dividends on common stock                                |  |      | (340,400    | ) |      |   | (237,200    | )
|                                                                    |  |      |             |  
|Net cash flows from financing activities                            |  |      | 14,404,600  |   |      |   | 17,342,400  |  
|                                                                    |  |      |             |  
|Change in cash and cash equivalents                                 |  |      | (1,741,100  | ) |      |   | 929,000     |  
|Cash and cash equivalents, beginning of period                      |  |      | 7,534,900   |   |      |   | 6,605,900   |  
|                                                                    |  |      |             |  
|Cash and cash equivalents, end of period                            |  | $    | 5,793,800   |   |      | $ | 7,534,900   |  
|                                                                    |  |      |             |  
|                                                                    |  |     
|Supplemental disclosure of cash flow information                    |  |      |             |   |      |   |             |  
|Cash paid during the period for interest                            |  | $    | 3,284,000   |   |      | $ | 3,678,600   |  
|Cash paid during the period for income taxes                        |  | $    | 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.



31



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SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements

December 31, 2003 and 2002



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., 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, Inc. 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



32



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SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements

December 31, 2003 and 2002 (continued)



value. Unrealized holding gains and losses for trading securities are included in the statement of 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 either 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 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 ex
-



33



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SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements

December 31, 2003 and 2002 (continued)



ceeds 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  



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 de
-



34



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SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements

December 31, 2003 and 2002 (continued)



duction 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, 2003, 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 is recapturing 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.



Derivative Instruments and Hedging Transactions



Effective January 1, 2001, the Company adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, in accounting for derivative and hedging activities. This statement 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.



35



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SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements

December 31, 2003 and 2002 (continued)



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 for the final reporting period was $25,000 for both years ended December 31, 2003 and 2002.



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 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.



36



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SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements

December 31, 2003 and 2002 (continued)



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, |          
|                                                                                                                                |  | 2003                     |           |   | 2002 |  
|(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)                                                                                   |  |                          |           |   |      |   |           |  
|                                                                                                                                |  |                         
|Net income, as reported                                                                                                         |  | $                        | 2,062,100 |   |      | $ | 1,771,800 |  
|Deduct:                                                                                                                         |  |                          |           |   |      |   |           |  
|Total stock-based employeecompensation expensedetermined under fair valuebased method for all awards,net of related tax effects |  |                          | (57,800   | ) |      |   | (40,300   | )
|                                                                                                                                |  |                          |           |   |      |   |           |  
|Pro forma net income                                                                                                            |  | $                        | 2,004,300 |   |      | $ | 1,731,500 |  
|                                                                                                                                |  |                          |           |   |      |   |           |  
|Earnings per share:                                                                                                             |  |                          |           |   |      |   |           |  
|                                                                                                                                |  |                         
|Basicas reported                                                                                                               |  | $                        | 1.01      |   |      | $ | 0.87      |  
|                                                                                                                                |  |                          |           |   |      |   |           |  
|Basicpro forma                                                                                                                 |  | $                        | 0.98      |   |      | $ | 0.85      |  
|                                                                                                                                |  |                          |           |   |      |   |           |  
|                                                                                                                                |  |                         
|Dilutedas reported                                                                                                             |  | $                        | 1.00      |   |      | $ | 0.86      |  
|                                                                                                                                |  |                          |           |   |      |   |           |  
|Dilutedpro forma                                                                                                               |  | $                        | 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, |  
|                        |  | 2003                     |   |  | 2002  |  
|Dividend yield          |  | 1.50                     | % |  | 1.50  | %
|Expected life           |  | 5.9                      |   |  | 5.9   |  
|Expected volatility     |  | 22.56                    | % |  | 22.56 | %
|Risk-free interest rate |  | 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 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.



37



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SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements

December 31, 2003 and 2002 (continued)



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 year information have been made to conform to the December 31, 2003 presentation.



Accounting Changes



In June of 2001 and 2002, the FASB issued Statement No. 143, Accounting for Asset Retirement Obligations (FASB
No. 143), and Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities(FASB No. 146), respectively. FASB No. 143 addresses financial accounting requirements for obligations associated with the retirement of
tangible long-lived assets, and FASB No. 146 requires the recognition of a liability, when incurred, for a cost associated with an exit or disposal activity. The resultant obligations and liabilities should be recognized at fair value. The
provisions of these statements were first effective in 2003. The adoption of these statements did not have a material impact on the Companys results of operations or financial condition.

In January 2003, the FASB issued 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 is effective beginning in the first quarter of 2004 for all VIEs (other than what is 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, management does not expect this pronouncement to have a material impact on the Companys results of operations or financial position in
the foreseeable future.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities (SFAS 149), which amends and clarifies the accounting and reporting requirements for derivative instruments and hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The
requirements of this Statement are effective for contracts entered into or modified after June 30, 2003. Furthermore, the requirements of this Statement are to be applied prospectively. The adoption of this Standard is currently not expected to have
a material impact on the Companys consolidated results of operations or financial position.

In May 2003, the FASB issued SFAS No.
150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (SFAS 150). SFAS 150 initiates standards for how an issuer categorizes and evaluates certain financial instruments that display
characteristics similar to liabilities and equity in its statement of financial position. The Statement is effective for financial instruments entered into or modified after May 31, 2003, and was otherwise effective at the beginning of the first
interim period beginning after June 15, 2003. The adoption of this Standard did not have a material impact on the consolidated financial statements.

In December 2003, the FASB issued a revision to FASB Statement No. 132, Employers Disclosures about Pensions and Other Postretirement Benefits(FASB No. 132). This revision does not change the measurement recognition aspects
for pension and other postretirement benefit plans. However, it does revise employers disclosures to include more information about the plan assets, obligations to pay benefits and funding obligations. These dis
-



38



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SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements

December 31, 2003 and 2002 (continued)



closures are effective for the 2003 financial statements. Accordingly, the Company has incorporated such disclosures where applicable.

The FASBs Emerging Issues Task Force (EITF) has been considering the rules that govern other-than-temporary impairment of securities and, while
consensus has not been reached on a model for the recognition of other-than-temporary impairment, consensus was reached on new disclosure requirements related to unrealized losses on investment securities. The new disclosure requirements apply to
marketable equity and debt securities accounted for under Financial Accounting Board Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, and are required for inclusion in annual reports with fiscal years ended
after December 15, 2003. Accordingly, the Company has incorporated such disclosures.



NOTE 3



INVESTMENT SECURITIES



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



|                                                   |  |                |            |                        |   |                         |  |   |                      |   |  |   |           
|-------------------------------------------------- |  | -------------- | ---------- | ---------------------- | - | ----------------------- |  | - | -------------------- | - |  | - | ----------
|December 31, 2003                                  |  | AMORTIZED COST |            | GROSS UNREALIZED GAINS |   | GROSS UNREALIZED LOSSES |  |   | ESTIMATED FAIR VALUE
|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 MortgageCorporation 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
|                                                   |  |                |            |                        |   |                         |  |   |                      |  



39



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SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements

December 31, 2003 and 2002 (continued)



|                                                   |  |                |            |                        |   |                         |  |   |                      |   |  |   |           
|-------------------------------------------------- |  | -------------- | ---------- | ---------------------- | - | ----------------------- |  | - | -------------------- | - |  | - | ----------
|December 31, 2002                                  |  | AMORTIZED COST |            | GROSS UNREALIZED GAINS |   | GROSS UNREALIZED LOSSES |  |   | ESTIMATED FAIR VALUE
|Held-to-maturity                                   |  |                |            |                        |   |                         |  |   |                      |   |  |   |           
|United States government and agency obligations    |  | $              | 5,003,800  |                        | $ | 65,700                  |  | $ |                     |   |  | $ | 5,069,500 
|                                                   |  |                |            |                        |   |                         |  |   |                      |  
|Available-for-sale                                 |  |                |            |                        |   |                         |  |   |                      |   |  |   |           
|Debt securities:                                   |  |                |            |                        |   |                         |  |   |                      |   |  |   |           
|United States government and agency obligations    |  |                | 23,921,800 |                        |   | 524,600                 |  |   | (200                 | ) |  |   | 24,446,200
|Tax-exempt municipal bonds                         |  |                | 2,774,300  |                        |   | 106,400                 |  |   |                     |   |  |   | 2,880,700 
|Corporate bonds                                    |  |                | 5,557,800  |                        |   | 325,500                 |  |   |                     |   |  |   | 5,883,300 
|Mortgage-backed securities                         |  |                | 3,001,500  |                        |   | 12,200                  |  |   | (700                 | ) |  |   | 3,013,000 
|Adjustable Rate Mortgage Fund                      |  |                | 1,519,900  |                        |   | 800                     |  |   |                     |   |  |   | 1,520,700 
|Adjustable Rate Commercial Loan Fund               |  |                | 422,300    |                        |   |                        |  |   | (87,800              | ) |  |   | 334,500   
|                                                   |  |                |            |                        |   |                         |  |   |                      |  
|Total debt securities                              |  |                | 37,197,600 |                        |   | 969,500                 |  |   | (88,700              | ) |  |   | 38,078,400
|                                                   |  |                |            |                        |   |                         |  |   |                      |  
|Marketable equity securities:                      |  |                |            |                        |   |                         |  |   |                      |   |  |   |           
|Federal Home Loan MortgageCorporation common stock |  |                | 232,400    |                        |   | 15,600                  |  |   |                     |   |  |   | 248,000   
|Citigroup preferred stock                          |  |                | 1,032,900  |                        |   |                        |  |   | (35,900              | ) |  |   | 997,000   
|MBNA preferred stock                               |  |                | 580,200    |                        |   |                        |  |   | (55,900              | ) |  |   | 524,300   
|Consolidated Edison preferred stock                |  |                | 543,000    |                        |   |                        |  |   | (69,000              | ) |  |   | 474,000   
|Commonwealth Bankshares trust preferred stock      |  |                | 400,000    |                        |   | 160,000                 |  |   |                     |   |  |   | 560,000   
|Other equity securities                            |  |                | 560,800    |                        |   | 53,700                  |  |   | (5,300               | ) |  |   | 609,200   
|                                                   |  |                |            |                        |   |                         |  |   |                      |   |  |   |           
|Total marketable equity securities                 |  |                | 3,349,300  |                        |   | 229,300                 |  |   | (166,100             | ) |  |   | 3,412,500 
|                                                   |  |                |            |                        |   |                         |  |   |                      |  
|                                                   |  |                | 40,546,900 |                        |   | 1,198,800               |  |   | (254,800             | ) |  |   | 41,490,900
|                                                   |  |                |            |                        |   |                         |  |   |                      |  
|Other investment securities:                       |  |                |            |                        |   |                         |  |   |                      |   |  |   |           
|Federal Home Loan Bank Stock                       |  |                | 542,700    |                        |   |                        |  |   |                     |   |  |   | 542,700   
|Federal Reserve Bank Stock                         |  |                | 124,800    |                        |   |                        |  |   |                     |   |  |   | 124,800   
|Community Bankers Bank                            |  |                | 21,100     |                        |   |                        |  |   |                     |   |  |   | 21,100    
|                                                   |  |                |            |                        |   |                         |  |   |                      |   |  |   |           
|                                                   |  |                | 688,600    |                        |   |                        |  |   |                     |   |  |   | 688,600   
|                                                   |  |                |            |                        |   |                         |  |   |                      |  
|                                                   |  | $              | 46,239,300 |                        | $ | 1,264,500               |  | $ | (254,800             | ) |  | $ | 47,249,000
|                                                   |  |                |            |                        |   |                         |  |   |                      |  



40



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SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements

December 31, 2003 and 2002 (continued)



The amortized cost and estimated fair value of debt securities at December 31, 2003 by contractual maturity, are shown below:



|                                       |  |                |            |                      |   |           
|-------------------------------------- |  | -------------- | ---------- | -------------------- | - | ----------
|                                       |  | AMORTIZED COST |            | ESTIMATED FAIR VALUE
|                                       |  |                |           
|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                |  |                | 4,998,400  |                      |   | 5,074,700 
|Due after one year through five years  |  |                | 20,570,300 |                      |   | 21,173,600
|Due after five years through ten years |  |                | 5,546,700  |                      |   | 5,611,400 
|Due after ten years                    |  |                | 1,753,700  |                      |   | 1,748,300 
|Adjustable Rate Mortgage Fund          |  |                | 1,553,700  |                      |   | 1,543,700 
|Adjustable Rate Commercial Loan Fund   |  |                | 435,500    |                      |   | 391,600   
|                                       |  |                |           
|                                       |  |                | 34,858,300 |                      |   | 35,543,300
|                                       |  |                |           
|                                       |  | $              | 34,858,300 |                      | $ | 35,543,300
|                                       |  |                |           



At December 31, 2003
and 2002, investment securities with a carrying value of approximately $1.0 million were pledged as collateral for public deposits.

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



41



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SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements

December 31, 2003 and 2002 (continued)



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, 2003.



|                                                    |  |                     |           |                   |                   |        |            |       |                  |           |  |            |         |                   |  |   |           |  |   |         |  
|--------------------------------------------------- |  | ------------------- | --------- | ----------------- | ----------------- | ------ | ---------- | ----- | ---------------- | --------- |  | ---------- | ------- | ----------------- |  | - | --------- |  | - | ------- | -
|                                                    |  | LESS THAN 12 MONTHS |           |                   | 12 MONTHS OR MORE |        |            | TOTAL |                 
|DESCRIPTION OF SECURITIES                           |  | FAIR VALUE          |           | UNREALIZED LOSSES |                   |        | FAIR VALUE |       | UNREALIZEDLOSSES |           |  | FAIR VALUE |         | UNREALIZED LOSSES | 
|                                                    | 
|United States government and agency obligations     |  | $                   |          |                   | $                 |       |            |       | $                |          |  | $          |        |                   |  | $ |          |  | $ |        |  
|Tax-exempt municipal bonds                          |  |                     |          |                   |                   |       |            |       |                  |          |  |            |        |                   |  |   |          |  |   |        |  
|Corporate bonds                                     |  |                     |          |                   |                   |       |            |       |                  |          |  |            |        |                   |  |   |          |  |   |        |  
|Mortgage-backed securities                          |  |                     | 2,577,100 |                   |                   | (6,200 | )          |       |                  |          |  |            |        |                   |  |   | 2,577,100 |  |   | (6,200  | )
|Adjustable Rate Mortgage Fund                       |  |                     |          |                   |                   |       |            |       |                  | 1,543,700 |  |            | (10,000 | )                 |  |   | 1,543,700 |  |   | (10,000 | )
|Adjustable Rate Commercial Loan Fund                |  |                     |          |                   |                   |       |            |       |                  | 391,600   |  |            | (43,900 | )                 |  |   | 391,600   |  |   | (43,900 | )
|                                                    |  |                     |           |                   |                   |        |            |       |                  |           |  |            |         |                   |  |   |           |  |   |         |  
|Subtotal, debt securities                           |  |                     | 2,577,100 |                   |                   | (6,200 | )          |       |                  | 1,935,300 |  |            | (53,900 | )                 |  |   | 4,512,400 |  |   | (60,100 | )
|                                                    |  |                     |           |                   |                   |        |            |       |                  |           |  |            |         |                   |  |   |           |  |   |         |  
|Federal Home Loan Mortgage Corporation common stock |  |                     |          |                   |                   |       |            |       |                  |          |  |            |        |                   |  |   |          |  |   |        |  
|Preferred stock                                     |  |                     |          |                   |                   |       |            |       |                  |          |  |            |        |                   |  |   |          |  |   |        |  
|Trust preferred stock                               |  |                     |          |                   |                   |       |            |       |                  |          |  |            |        |                   |  |   |          |  |   |        |  
|Other equity securities                             |  |                     | 219,900   |                   |                   | (2,400 | )          |       |                  | 25,400    |  |            | (2,100  | )                 |  |   | 245,300   |  |   | (4,500  | )
|Other investment securities, all equity             |  |                     |          |                   |                   |       |            |       |                  |          |  |            |        |                   |  |   |          |  |   |        |  
|                                                    |  |                     |           |                   |                   |        |            |       |                  |           |  |            |         |                   |  |   |           |  |   |         |  
|Subtotal, equity securities                         |  |                     | 219,900   |                   |                   | (2,400 | )          |       |                  | 25,400    |  |            | (2,100  | )                 |  |   | 245,300   |  |   | (4,500  | )
|                                                    |  |                     |           |                   |                   |        |            |       |                  |           |  |            |         |                   |  |   |           |  |   |         |  
|Total temporarily impaired securities               |  | $                   | 2,797,000 |                   | $                 | (8,600 | )          |       | $                | 1,960,700 |  | $          | (56,000 | )                 |  | $ | 4,757,700 |  | $ | (64,600 | )
|                                                    |  |                     |           |                   |                   |        |            |       |                  |           |  |            |         |                   |  |   |           |  |   |         |  



42



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SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements

December 31, 2003 and 2002 (continued)



NOTE 4



LOANS RECEIVABLE



Loans
receivable are summarized below:



|                                         |  |              |             |   |      |   |             |  
|---------------------------------------- |  | ------------ | ----------- | - | ---- | - | ----------- | -
|                                         |  | DECEMBER 31, |            
|                                         |  | 2003         |             |   | 2002 |  
|Real estate loans:                       |  |              |             |   |      |   |             |  
|Conventional mortgage:                   |  |              |             |   |      |   |             |  
|Secured by one-to-four family residences |  | $            | 59,943,100  |   |      | $ | 53,707,800  |  
|Commercial mortgages                     |  |              | 39,620,700  |   |      |   | 28,840,500  |  
|Land                                     |  |              | 12,395,200  |   |      |   | 12,930,800  |  
|Short-term construction                  |  |              | 7,117,900   |   |      |   | 4,464,700   |  
|Home equity lines of credit              |  |              | 14,951,400  |   |      |   | 12,904,900  |  
|Consumer loans                           |  |              | 2,508,400   |   |      |   | 2,720,200   |  
|Commercial loans:                        |  |              |             |   |      |   |             |  
|Secured                                  |  |              | 5,286,200   |   |      |   | 2,123,600   |  
|Unsecured                                |  |              | 3,281,800   |   |      |   | 2,796,500   |  
|                                         |  |              |             |   |      |   |             |  
|Total loans                              |  |              | 145,104,700 |   |      |   | 120,489,000 |  
|Less:                                    |  |              |             |   |      |   |             |  
|Loans in process                         |  |              | 3,112,500   |   |      |   | 2,280,500   |  
|Deferred loan fees (costs), net          |  |              | (216,900    | ) |      |   | (204,500    | )
|Allowance for loan losses                |  |              | 2,002,500   |   |      |   | 1,603,200   |  
|                                         |  |              |             |   |      |   |             |  
|                                         |  | $            | 140,206,600 |   |      | $ | 116,809,800 |  
|                                         |  |              |             |   |      |   |             |  



The allowance for loan
losses is summarized below:



|                                                  |  |                          |           |      |   |           |  
|------------------------------------------------- |  | ------------------------ | --------- | ---- | - | --------- | -
|                                                  |  | YEARS ENDED DECEMBER 31, |          
|                                                  |  | 2003                     |           | 2002 |  
|Balance at beginning of period                    |  | $                        | 1,603,200 |      | $ | 1,325,900 |  
|Provision charged to expense                      |  |                          | 380,400   |      |   | 335,300   |  
|Recoveries (losses) charged to the allowance, net |  |                          | 18,900    |      |   | (58,000   | )
|                                                  |  |                          |           |      |   |           |  
|Balance at end of the period                      |  | $                        | 2,002,500 |      | $ | 1,603,200 |  
|                                                  |  |                          |           |      |   |           |  



Impaired loans were
$126,000 and $368,000 at December 31, 2003 and 2002, respectively. The impaired loan at December 31, 2003 and 2002 is 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 has entered into an agreement with the bankruptcy trustee to sell the collateral during the first quarter of 2004. Proceeds from these sales should be 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, 2003 and 2002, the average recorded investment in
impaired loans was $187,000 and $31,000, respectively, and interest income recognized on impaired loans, all on the cash basis, was $18,000 and $0, respectively. No additional funds are committed to be advanced in connection with impaired loans. At
December 31, 2003, nonaccrual loans were $552,000 and no loans existed that are past due 90 days or more and still accruing interest.



43



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SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements

December 31, 2003 and 2002 (continued)



NOTE 5



PREMISES AND EQUIPMENT



Premises and equipment are summarized as follows:



|                              |  |              |            |   |      |   |            |  
|----------------------------- |  | ------------ | ---------- | - | ---- | - | ---------- | -
|                              |  | DECEMBER 31, |           
|                              |  | 2003         |            |   | 2002 |  
|Land                          |  | $            | 714,500    |   |      | $ | 714,500    |  
|Buildings                     |  |              | 3,395,700  |   |      |   | 2,752,100  |  
|Furniture and fixtures        |  |              | 1,687,400  |   |      |   | 1,663,600  |  
|Computer equipment            |  |              | 731,700    |   |      |   | 508,500    |  
|Automobiles                   |  |              | 94,400     |   |      |   | 84,800     |  
|Construction in process       |  |              | 962,800    |   |      |   |           |  
|                              |  |              |            |  
|                              |  |              | 7,586,500  |   |      |   | 5,723,500  |  
|Lessaccumulated depreciation |  |              | (2,599,600 | ) |      |   | (2,251,300 | )
|                              |  |              |            |  
|                              |  | $            | 4,986,900  |   |      | $ | 3,472,200  |  
|                              |  |              |            |  



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



NOTE 6



DEPOSITS



Deposits accounts are summarized below:



|                              |  |              |             |      |   |            
|----------------------------- |  | ------------ | ----------- | ---- | - | -----------
|                              |  | DECEMBER 31,
|                              |  | 2003         |             | 2002
|Demand deposits:              |  |              |             |      |   |            
|Noninterest-bearing           |  | $            | 19,033,700  |      | $ | 15,768,800 
|                              |  |              |            
|                              |  |             
|Interest-bearing:             |  |              |             |      |   |            
|Savings accounts              |  |              | 21,647,200  |      |   | 17,828,800 
|Checking accounts             |  |              | 25,287,300  |      |   | 19,089,600 
|Money market deposit accounts |  |              | 16,429,700  |      |   | 16,710,200 
|                              |  |              |            
|Total interest-bearing        |  |              | 63,364,200  |      |   | 53,628,600 
|                              |  |              |            
|Total demand deposits         |  |              | 82,397,900  |      |   | 69,397,400 
|Time deposits                 |  |              | 76,492,800  |      |   | 89,591,900 
|                              |  |              |            
|                              |  | $            | 158,890,700 |      | $ | 158,989,300
|                              |  |              |            



The aggregate amount
of certificates of deposit with a minimum denomination of $100,000 was approximately $14.5 million and $17.1 million at December 31, 2003 and 2002, respectively.



44



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SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements

December 31, 2003 and 2002 (continued)



Time deposits outstanding at December 31, 2003 mature as follows:



|                    |  |   |           
|------------------- |  | - | ----------
|Within one year     |  | $ | 34,184,000
|One to two years    |  |   | 10,515,000
|Two to three years  |  |   | 6,736,000 
|Three to four years |  |   | 10,799,000
|Four to five years  |  |   | 12,817,000
|Thereafter          |  |   | 1,441,800 
|                    |  |   |           
|                    |  | $ | 76,492,800
|                    |  |   |           



NOTE 7



FAIR VALUE OF FINANCIAL INSTRUMENTS



The estimated fair values of the Banks financial instruments as of
December 31, 2003 and 2002 are as follows:



|                                        |  |                 |         |            |   |        
|--------------------------------------- |  | --------------- | ------- | ---------- | - | -------
|                                        |  | CARRYING AMOUNT |         | FAIR VALUE
|                                        |  | (IN THOUSANDS) 
|                                       
|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    
|                                        |  |                
|December 31, 2002                       |  |                 |         |            |   |        
|                                        |  |                
|Financial assets                        |  |                 |         |            |   |        
|Cash and cash equivalents               |  | $               | 7,535   |            | $ | 7,535  
|Securities                              |  | $               | 47,183  |            | $ | 47,249 
|Loans, net of allowance for loan losses |  | $               | 116,810 |            | $ | 118,036
|Accrued interest receivable             |  | $               | 1,017   |            | $ | 1,017  
|Financial liabilities                   |  |                 |         |            |   |        
|Deposits                                |  | $               | 158,989 |            | $ | 159,862
|Advances from Federal Home Loan Bank    |  | $               | 2,150   |            | $ | 2,160  
|Accrued interest payable                |  | $               | 65      |            | $ | 65     
|Unrecognized financial instruments      |  |                 |         |            |   |        
|Commitments to extend credit            |  |                 | N/A     |            |   | N/A    



45



---



SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements

December 31, 2003 and 2002 (continued)



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
the current 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.



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 using the rates
currently offered for deposits of similar remaining maturities.



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.



46



---



SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements

December 31, 2003 and 2002 (continued)



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,
|                    |  | 2003         |            | 2002
|Within one year     |  | $            | 16,200,000 |      | $ | 1,400,000
|One to two years    |  |              |           |      |   |         
|More than two years |  |              | 683,300    |      |   | 750,000  
|                    |  |              |            |      |   |          
|                    |  | $            | 16,883,300 |      | $ | 2,150,000
|                    |  |              |            |      |   |          



Information regarding
FHLB advances is summarized below:



|                                                    |  |                          |            |  |   |          
|--------------------------------------------------- |  | ------------------------ | ---------- |  | - | ---------
|                                                    |  | YEARS ENDED DECEMBER 31,
|                                                    |  |                          | 2003       |  |   | 2002     
|                                                    |  |                          |            |  |   |          
|Monthly average balance of borrowings outstanding   |  | $                        | 5,961,400  |  | $ | 1,445,000
|Maximum month-end balance of borrowings outstanding |  | $                        | 16,883,300 |  | $ | 4,883,000



The weighted average
interest rate on advances was 1.78% and 3.81% for the years ended December 31, 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 $250,000, and government agency securities with a fair market value of approximately $19.7 million held under a specific collateral agreement. As a member of the FHLB, the Bank has total borrowing capacity of $25.2 million.



47



---



SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements

December 31, 2003 and 2002 (continued)



NOTE 9



OTHER NONINTEREST INCOME AND EXPENSE



Other noninterest income and expense consists of the following:



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



48



---



SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements

December 31, 2003 and 2002 (continued)



NOTE 10



INCOME TAXES



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



|                                                 |  |                          |          |   |      |   |         |  
|------------------------------------------------ |  | ------------------------ | -------- | - | ---- | - | ------- | -
|                                                 |  | YEARS ENDED DECEMBER 31, |         
|                                                 |  | 2003                     |          |   | 2002 |  
|Current                                          |  |                          |          |   |      |   |         |  
|Federal                                          |  | $                        | 971,100  |   |      | $ | 866,200 |  
|State                                            |  |                          | 12,000   |   |      |   | 9,000   |  
|                                                 |  |                          |          |   |      |   |         |  
|                                                 |  |                          | 983,100  |   |      |   | 875,200 |  
|                                                 |  |                          |          |   |      |   |         |  
|Deferred                                         |  |                          |          |   |      |   |         |  
|Federal                                          |  |                          | (90,100  | ) |      |   | (73,400 | )
|State                                            |  |                          |         |   |      |   |        |  
|                                                 |  |                          |          |   |      |   |         |  
|                                                 |  |                          | (90,100  | ) |      |   | (73,400 | )
|                                                 |  |                          |          |   |      |   |         |  
|Total                                            |  |                          |          |   |      |   |         |  
|Federal                                          |  |                          | 881,000  |   |      |   | 792,800 |  
|State                                            |  |                          | 12,000   |   |      |   | 9,000   |  
|                                                 |  |                          |          |   |      |   |         |  
|                                                 |  | $                        | 893,000  |   |      | $ | 801,800 |  
|                                                 |  |                          |          |   |      |   |         |  
|                                                 | 
|                                                 |  | DECEMBER 31,             |         
|                                                 |  |                          | 2003     |   |      |   | 2002    |  
|Deferred tax asset                               |  |                          |          |   |      |   |         |  
|Bad debts and other provisions                   |  | $                        | 681,000  |   |      | $ | 517,000 |  
|                                                 |  |                          |          |   |      |   |         |  
|Total deferred tax asset                         |  |                          | 681,000  |   |      |   | 517,000 |  
|                                                 |  |                          |          |   |      |   |         |  
|Deferred tax liability                           |  |                          |          |   |      |   |         |  
|FHLB stock                                       |  |                          | 70,000   |   |      |   | 70,000  |  
|Depreciation                                     |  |                          | 287,000  |   |      |   | 219,800 |  
|Unrealized gain on securities available for sale |  |                          | 417,000  |   |      |   | 321,000 |  
|Other                                            |  |                          | 11,500   |   |      |   | 4,800   |  
|                                                 |  |                          |          |   |      |   |         |  
|Total deferred tax liability                     |  |                          | 785,500  |   |      |   | 615,600 |  
|                                                 |  |                          |          |   |      |   |         |  
|Net deferred tax liability                       |  | $                        | (104,500 | ) |      | $ | (98,600 | )
|                                                 |  |                          |          |   |      |   |         |  



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, |          
|                                             |  | 2003                     |           |   | 2002 |  
|Federal income tax/expenseat statutory rate |  | $                        | 1,005,000 |   |      | $ | 875,000 |  
|Tax effect of:                               |  |                          |           |   |      |   |         |  
|Tax exempt interest income                   |  |                          | (43,000   | ) |      |   | (47,000 | )
|BOLI cash surrender value increase           |  |                          | (49,000   | ) |      |   |        |  
|Dividends received deduction                 |  |                          | (27,000   | ) |      |   | (32,400 | )
|Other, net                                   |  |                          | 7,000     |   |      |   | 6,200   |  
|                                             |  |                          |           |   |      |   |         |  
|                                             |  | $                        | 893,000   |   |      | $ | 801,800 |  
|                                             |  |                          |           |   |      |   |         |  



49



---



SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements

December 31, 2003 and 2002 (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 (as defined) to average assets (as defined). Management
believes, as of December 31, 2003, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

As of
December 31, 2003, 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 CAPITALADEQUACYPURPOSES |   |        | TO BE WELLCAPITALIZED UNDERPROMPTCORRECTIVEACTION PROVISIONS |       
|                                          |  |        |        |       |                             |   |        |                                                              |       
|(DOLLARS IN THOUSANDS)                    |  | AMOUNT |        | RATIO |                             |   | AMOUNT |                                                              | RATIO  |  |      | AMOUNT |  | RATIO |       
|                                          |  |        |       
|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  | %
|As of December 31, 2002:                  |  |        |        |       |                             |   |        |                                                              |        |  |      |        |  |       |        |  |       |  
|Total Capital (to Risk-Weighted Assets):  |  |        |        |       |                             |   |        |                                                              |        |  |      |        |  |       |        |  |       |  
|Consolidated                              |  | $      | 18,291 |       | 16.24                       | % |        | $                                                            | 9,011  |  | 8.00 | %      |  | $     | N/A    |  | N/A   |  
|Shore Bank                                |  |        | 14,317 |       | 13.13                       | % |        |                                                              | 8,723  |  | 8.00 | %      |  |       | 10,904 |  | 10.00 | %
|Tier 1 Capital (to Risk-Weighted Assets): |  |        |        |       |                             |   |        |                                                              |        |  |      |        |  |       |        |  |       |  
|Consolidated                              |  | $      | 16,917 |       | 15.02                       | % |        | $                                                            | 4,506  |  | 4.00 | %      |  | $     | N/A    |  | N/A   |  
|Shore Bank                                |  |        | 12,943 |       | 11.87                       | % |        |                                                              | 4,362  |  | 4.00 | %      |  |       | 6,543  |  | 6.00  | %
|Tier 1 Capital (to Average Assets):       |  |        |        |       |                             |   |        |                                                              |        |  |      |        |  |       |        |  |       |  
|Consolidated                              |  | $      | 16,917 |       | 10.04                       | % |        | $                                                            | 6,741  |  | 4.00 | %      |  | $     | N/A    |  | N/A   |  
|Shore Bank                                |  |        | 12,943 |       | 7.87                        | % |        |                                                              | 6,581  |  | 4.00 | %      |  |       | 8,226  |  | 5.00  | %



50



---



SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements

December 31, 2003 and 2002 (continued)



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, 2003, the Banks retained earnings available for the payment of dividends was $2.9 million. Accordingly, $13.1 million of the
Companys equity in the net assets of the Bank was restricted at December 31, 2003. Funds available for loans or advances by the Bank to the Company amounted to $400,000.

During the year ended December 31, 2003, the Company paid quarterly cash dividends of $0.042 per share. During December 2003, the Company declared a 20%
stock dividend paid on December 31, 2003 to shareholders of record on December 20, 2003. During February and May of 2002, the Company paid quarterly dividends of $0.025 per share, while during August and November 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 14, 2004, the Company declared a $0.05 per share quarterly cash dividend paid on February 2, 2004 to
shareholders of record on January 21, 2004.

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



Profit Sharing Plan



The Companys Profit Sharing Plan Trust (the Plan) provides for retirement, death and disability benefits.
An employee becomes eligible for participation after completion of ninety days of service, and becomes a member of the Plan on the first day of the month following qualification. 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%-10% 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 $66,600 and $54,200 for the years ended December 31, 2003 and 2002,
respectively. The Company may also elect to make discretionary contributions to the Plan; accordingly, $78,000 and $70,000 of such contributions were made during the years ended December 31, 2003 and 2002, respectively.



Stock Option Plans



The Companys 1992 Stock Option Plan and the 2001 Stock Incentive Plan (stock incentive plans) are 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



51



---



SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements

December 31, 2003 and 2002 (continued)



outstanding performance and the attainment of targeted goals. The stock incentive plans provide 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 Shore Financial Corporation 2001 Stock Incentive Plan (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 December 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 Stock Incentive Plan also provides for the granting of restricted stock
awards. The 2001 Plan expires on April 16, 2011.

The stock incentive plans are 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. Unless sooner terminated, each of the stock incentive plans is in effect for a period of ten years
from the date of adoption by the Board of Directors.

Under the stock incentive plans, 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 until 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 year ended December 31, 2003 and 2002, the Company granted 15,367 and 15,600 incentive stock options under the 2001 plan at an
average exercise price of $10.68 and $8.02, respectively, and granted 7,260 and 6,780 nonqualified stock options under the 2001 plan at an average exercise price of $10.68 and $8.02, respectively.

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



|                                               |  |                          |  |                                |       |         |        |                                |   |     
|---------------------------------------------- |  | ------------------------ |  | ------------------------------ | ----- | ------- | ------ | ------------------------------ | - | ----
|                                               |  | YEARS ENDED DECEMBER 31,
|                                               |  | 2003                     |  | 2002                          
|                                               |  |                          | 
|                                               |  | OPTIONS                  |  | WEIGHTED- AVERAGEEXERCISEPRICE |       | OPTIONS |        | WEIGHTED- AVERAGEEXERCISEPRICE
|                                               |  |                         
|Outstandingbeginning of year                  |  | 88,260                   |  | $                              | 7.27  |         | 72,300 |                                | $ | 7.28
|Granted                                        |  | 22,627                   |  |                                | 10.68 |         | 22,380 |                                |   | 6.44
|Exercised                                      |  | 37,200                   |  |                                | 7.36  |         | 3,780  |                                |   | 6.59
|Forfeited                                      |  | 1,680                    |  |                                | 11.33 |         | 2,640  |                                |   | 6.02
|                                               |  |                         
|Outstandingend of year                        |  | 72,007                   |  | $                              | 7.84  |         | 88,260 |                                | $ | 7.27
|                                               |  |                         
|Exercisableend of year                        |  | 72,007                   |  | $                              | 7.84  |         | 88,260 |                                | $ | 7.27
|                                               |  |                         
|Weighted average fair value of options granted |  |                          |  | $                              | 1.78  |         |        |                                | $ | 1.80
|                                               |  |                         



52



---



SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements

December 31, 2003 and 2002 (continued)



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

Other information pertaining to
options outstanding at December 31, 2003 is as follows:



|                           |  |                     |  |                                                 |  |                              |      |                   |        |                              |   |     
|-------------------------- |  | ------------------- |  | ----------------------------------------------- |  | ---------------------------- | ---- | ----------------- | ------ | ---------------------------- | - | ----
|                           |  | OPTIONS OUTSTANDING |  | OPTIONS EXERCISABLE                            
|                           |  |                     | 
|RANGE OF EXERCISE PRICES   |  | NUMBEROUTSTANDING   |  | WEIGHTEDAVERAGEREMAININGCONTRACTUALLIFE (YEARS) |  | WEIGHTEDAVERAGEEXERCISEPRICE |      | NUMBEREXERCISABLE |        | WEIGHTEDAVERAGEEXERCISEPRICE
|                          
|$6.02$10.68               |  | 72,007              |  | 6.57                                            |  | $                            | 7.84 |                   | 72,007 |                              | $ | 7.84
|                           |  |                     |  |                                                 |  |                              |      |                   |        |                              |   |     
|Outstanding at end of year |  | 72,007              |  |                                                 |  |                              |      |                   | 72,007 |                              |   |     
|                           |  |                     |  |                                                 |  |                              |      |                   |        |                              |   |     



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, 2002 |  | $1,869,000 |           
|Originations               |  |            | 1,944,000  |  
|Repayments                 |  |            | (1,762,000 | )
|                           |  |            |            |  
|Balance, December 31, 2003 |  | $          | 2,051,000  |  
|                           |  |            |            |  



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 $1,750 per month for twelve years with four 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.

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, during the third
quarter of 2002, the general partnership notified the Bank of its intention to sell the building. 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.



53



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SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements

December 31, 2003 and 2002 (continued)



NOTE 14



COMMITMENTS AND CONTINGENCIES AND OTHER RELATED PARTY TRANSACTIONS



The Company has a non-related party lease agreement providing for the use of commercial office space to facilitate the Companys and the Banks
administrative operations. The lease term originally began in March 1999 and was to expire in February 2004. However, in conjunction with the planned completion date of its new corporate headquarters, the Company extended the lease agreement during
2003 to expire in August 2004. Lease amounts during the initial lease term approximate $2,500, but increase to $3,290 effective March 1, 2004. The agreement provides for two five-year renewals with the same terms and conditions of the original lease
agreement. Lease amounts for the renewals can be increased by fifty percent of the US Consumer Price Index increase during the previous five years of the lease term. However, the Company does not anticipate exercising its renewal option in this
lease agreement beyond August 2004.

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



|                          |  |   |        
|------------------------- |  | - | -------
|Years Ending December 31, |  |   |        
|2004                      |  | $ | 45,900 
|2005                      |  |   | 21,100 
|2006                      |  |   | 21,100 
|2007                      |  |   | 21,100 
|2008                      |  |   | 21,100 
|                          |  |   |        
|                          |  | $ | 130,300
|                          |  |   |        



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

The Company is constructing a new
facility to house its operations and administration functions. At December 31, 2003, outstanding commitments to complete the construction of this facility totaled approximately $2.2 million.

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, 2003 and 2002, the Bank had outstanding commitments to originate loans, including outstanding construction loan commitments, with variable interest rates of approximately $14.4 million and $10.0 million,
respectively. In addition, unused lines of credit, primarily at variable rates, amounted to approximately $24.2 million and $19.7 million at December 31, 2003 and 2002, respectively. Standby letters of credit at December 31, 2003 and 2002 were
$617,000 and $97,000, respectively. The distribution of commitments to extend credit approximates the distribution of loans outstanding.



54



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SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements

December 31, 2003 and 2002 (continued)



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.

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,
|                                                  |  | 2002                     |           | 2001
|                                                  |  |                          |          
|Net income (numerator, basic and diluted)         |  | $                        | 2,062,100 |      | $ | 1,771,800
|Weighted average shares outstanding (denominator) |  |                          | 2,036,700 |      |   | 2,034,100
|                                                  |  |                          |          
|Earnings per common sharebasic                   |  | $                        | 1.01      |      | $ | 0.87     
|                                                  |  |                          |          
|Effect of dilutive securities:                    |  |                          |           |      |   |          
|Weighted average shares outstanding               |  |                          | 2,036,700 |      |   | 2,034,100
|Effect of stock options                           |  |                          | 34,900    |      |   | 17,600   
|                                                  |  |                          |          
|Diluted average shares outstanding (denominator)  |  |                          | 2,071,600 |      |   | 2,051,700
|                                                  |  |                          |          
|                                                  |  |                          |           |      |   |          
|Earnings per common share assuming dilution      |  | $                        | 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, 2003 and 2002,
the Bank realized amortization expense of $62,000 and $0, respectively, on this asset.



55



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SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements

December 31, 2003 and 2002 (continued)



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 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, 2003, the Bank had approximately $2.9 million available to declare in dividends under existing regulatory guidelines.

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

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



Condensed Balance Sheets



|                                           |  |              |            |      |   |           
|------------------------------------------ |  | ------------ | ---------- | ---- | - | ----------
|                                           |  | DECEMBER 31,
|                                           |  | 2003         |            | 2002
|                                           |  |             
|Assets                                     |  |              |            |      |   |           
|Cash and due from banks                    |  | $            | 304,000    |      | $ | 422,000   
|Securities available-for-sale              |  |              | 3,975,000  |      |   | 3,331,000 
|Investment in Shore Bank                   |  |              | 15,989,000 |      |   | 14,243,000
|Other assets                               |  |              | 404,000    |      |   | 356,000   
|                                           |  |              |            |      |   |           
|Total assets                               |  | $            | 20,672,000 |      | $ | 18,352,000
|                                           |  |              |            |      |   |           
|Liabilities and Stockholders Equity       |  |              |            |      |   |           
|Liabilities                                |  | $            | 471,000    |      | $ | 135,000   
|Stockholders equity                       |  |              | 20,201,000 |      |   | 18,217,000
|                                           |  |              |            |      |   |           
|Total liabilities and stockholders equity |  | $            | 20,672,000 |      | $ | 18,352,000
|                                           |  |              |            |      |   |           



Condensed
Statements of Income

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

|(1) |  | Amount in parentheses represents the excess of dividends declared over net income of subsidiary.
|--- |  | ------------------------------------------------------------------------------------------------





56



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SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements

December 31, 2003 and 2002 (continued)



Condensed Statements of Cash Flows

|                                                    |  |                          |            |   |      |   |            |  
|--------------------------------------------------- |  | ------------------------ | ---------- | - | ---- | - | ---------- | -
|                                                    |  | YEARS ENDED DECEMBER 31, |           
|                                                    |  | 2003                     |            |   | 2002 |  
|                                                    |  |                          |           
|                                                    |  |                          |            |   |      |   |            |  
|Operating Activities                                |  |                          |            |   |      |   |            |  
|Net income                                          |  | $                        | 2,062,000  |   |      | $ | 1,772,000  |  
|Equity in undistributed net income of subsidiary    |  |                          | (1,879,000 | ) |      |   | (1,304,000 | )
|Other non-cash transactions                         |  |                          |           |   |      |   | 8,000      |  
|Gain on sale of securities                          |  |                          | (262,000   | ) |      |   |           |  
|Change in other assets                              |  |                          | (101,000   | ) |      |   | (1,000     | )
|Change in other liabilities                         |  |                          | 138,000    |   |      |   | 68,000     |  
|                                                    |  |                          |            |   |      |   |            |  
|Cash flows from operating activities                |  |                          | (42,000    | ) |      |   | 543,000    |  
|                                                    |  |                          |            |   |      |   |            |  
|Investing Activities                                |  |                          |            |   |      |   |            |  
|Proceeds from sale of available-for-sale securities |  |                          | 1,024,000  |   |      |   |           |  
|Purchase of available-for-sale securities           |  |                          | (923,000   | ) |      |   | (107,000   | )
|Purchase of premises and equipment                  |  |                          |           |   |      |   | (307,000   | )
|Other investing activities                          |  |                          | 53,000     |   |      |   |           |  
|                                                    |  |                          |            |   |      |   |            |  
|Cash flows from investing activities                |  |                          | 154,000    |   |      |   | (414,000   | )
|                                                    |  |                          |            |   |      |   |            |  
|Financing Activities                                |  |                          |            |   |      |   |            |  
|Proceeds from exercise of common stock options      |  |                          | 110,000    |   |      |   | 25,000     |  
|Repurchase of common stock                          |  |                          |           |   |      |   | (48,000    | )
|Payment of dividends on common stock                |  |                          | (340,000   | ) |      |   | (237,000   | )
|                                                    |  |                          |            |   |      |   |            |  
|Cash flows from financing activities                |  |                          | (230,000   | ) |      |   | (260,000   | )
|                                                    |  |                          |            |   |      |   |            |  
|Change in cash and cash equivalents                 |  |                          | (118,000   | ) |      |   | (131,000   | )
|Cash and cash equivalents, beginning of period      |  |                          | 422,000    |   |      |   | 553,000    |  
|                                                    |  |                          |            |   |      |   |            |  
|Cash and cash equivalents, end of period            |  | $                        | 304,000    |   |      | $ | 422,000    |  
|                                                    |  |                          |            |   |      |   |            |  



NOTE 18



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.



57



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SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Notes to Consolidated Financial Statements

December 31, 2003 and 2002 (continued)



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.



|                             |  |          |         |          |   |        |  |                                        |        |  |       |         |   |  |   |        
|---------------------------- |  | -------- | ------- | -------- | - | ------ |  | -------------------------------------- | ------ |  | ----- | ------- | - |  | - | -------
|(IN THOUSANDS)               |  | VIRGINIA |         | MARYLAND |   | OTHER  |  | ELIMINATIONOF INTERSEGMENTTRANSACTIONS |        |  | TOTAL
|                            
|Net Interest Income:         |  |          |         |          |   |        |  |                                        |        |  |       |         |   |  |   |        
|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, 2003            |  | $        | 150,561 |          | $ | 38,131 |  | $                                      | 50,924 |  | $     | (43,066 | ) |  | $ | 196,550
|December 31, 2002            |  | $        | 140,389 |          | $ | 39,060 |  | $                                      | 56,774 |  | $     | (56,230 | ) |  | $ | 179,993



NOTE 19



COMPREHENSIVE INCOME



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



|                           |  |                          |           |      |   |          
|-------------------------- |  | ------------------------ | --------- | ---- | - | ---------
|                           |  | YEARS ENDED DECEMBER 31,
|                           |  | 2003                     |           | 2002
|                           |  |                         
|Net income                 |  | $                        | 2,062,100 |      | $ | 1,771,800
|Other comprehensive income |  |                          | 151,700   |      |   | 445,400  
|                           |  |                          |          
|Total comprehensive income |  | $                        | 2,213,800 |      | $ | 2,217,200
|                           |  |                          |          



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



|                                                                     |  |                          |          |   |      |   |          |  
|-------------------------------------------------------------------- |  | ------------------------ | -------- | - | ---- | - | -------- | -
|                                                                     |  | YEARS ENDED DECEMBER 31, |         
|                                                                     |  | 2003                     |          |   | 2002 |  
|                                                                     |  |                          |         
|Unrealized gains on available-for-sale securities:                   |  |                          |          |   |      |   |          |  
|Unrealized holding gains arising during the period                   |  | $                        | 550,400  |   |      | $ | 702,900  |  
|Less: reclassification adjustment for (gain) loss included in income |  |                          | (269,400 | ) |      |   | (4,900   | )
|                                                                     |  |                          |          |  
|Total other comprehensive income before tax effect                   |  |                          | 281,000  |   |      |   | 698,000  |  
|Tax effect                                                           |  |                          | (129,300 | ) |      |   | (252,600 | )
|                                                                     |  |                          |          |  
|Net unrealized gain                                                  |  | $                        | 151,700  |   |      | $ | 445,400  |  
|                                                                     |  |                          |          |  



******



58



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SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Directors and Officers



SHORE FINANCIAL

CORPORATION



BOARD OF DIRECTORS



Henry P. Custis, Jr., Chairman

Law firm of Custis, Lewis & Dix,

L.L.P.



Terrell E. Boothe

Terrell E. Boothe, Inc.



The Honorable D. Page
Elmore

Maryland House of Delegates



Scott C. Harvard

President and Chief Executive Officer

Shore Financial Corporation and

Shore Bank



Richard F. Hall, III

Loblolly Farms

Seaside Produce



Dr. Lloyd J. Kellam, III

Eastern Shore Physicians and

Surgeons



L. Dixon Leatherbury

Leatherbury Equipment Co.

Wakefield Equipment Co.



A. Jackson Mason

Mason-Davis Co., Inc.



OFFICERS



Scott C. Harvard

President and Chief Executive Officer



Steven M. Belote

Vice President, Chief Financial Officer and Secretary



Vonda M. Smith

Assistant Secretary





SHORE BANK



OFFICERS



Scott C. Harvard

President and Chief Executive Officer



Steven M. Belote

Senior Vice President and
Chief Financial Officer



J. Anderson Duer, Jr.

Senior Vice President-Lending



Brenda P. Wallace

Senior Vice President-Operations



Craig H. McConnell

Regional Vice President



Vonda M. Smith

Corporate Secretary



Natalie N. Binder

Vice President



Tammy V. Mason

Vice President



J. Scott Schreiber

Vice President



Donna E. Weaver

Vice President



Dennis J. Hebert

Vice President/Maryland Division



Jacqueline L. Carpenter

Assistant Vice President



William H. Deckert, III

Assistant Vice President



Anne H. J. Dize

Assistant Vice President



Christine R.
Gray

Assistant Vice President



Claire I. Hoff

Assistant Vice President



Martha H. James

Assistant Vice President



Dawn M.
Steelman

Assistant Vice President



Jane O. Wyatt

Assistant Vice President



SALISBURY BOARD OF DIRECTORS



John J. Evans, CPA, Chairman

Holloway
& Marval, P.A.



Edward E. Henry

Retired



Craig H. McConnell

Regional Vice President

Shore
Bank



Billye Lee Sarbanes

Retired



John Charles Seipp

Attorney & Counselor at Law



Donald E. Williams

Advanced Property Rental



Dr. Donald Wood

Peninsula Cardiology Associates, P.A.



59



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SHORE FINANCIAL
CORPORATION AND SUBSIDIARIES



Corporate Information



CORPORATE HEADQUARTERS

AND MAIN OFFICE



25253 Lankford Highway

Onley, Virginia 23418

Phone: (757) 787-1335

Fax: (757) 789-3645



BRANCH OFFICES



18426 Dunne Avenue

Parksley, Virginia 23421



6350 Maddox Boulevard

Chincoteague, Virginia 23336



21220 North Bayside Drive

Cheriton, Virginia
23316



4017 Lankford Highway

Exmore, Virginia 23350



1503 South Salisbury Boulevard

Salisbury, Maryland 21801



100 West Main Street

Salisbury, Maryland 21801



OPERATIONS CENTER



23378 Commerce Drive

Accomac, Virginia 23301



Shore Investments,
Inc.

25253 Lankford Highway

Onley, Virginia 23418

(757) 787-1335





TRANSFER AGENT



Fulton Financial Services

One Penn Square

Lancaster, Pennsylvania 17604



SPECIAL COUNSEL



LeClair Ryan

707 East Main Street, 11th Floor

Richmond, Virginia 23219



INVESTOR INFORMATION



Lynn M. Badger

Shore Financial Corporation

P.O. Box 920

Onley, Virginia, 23418

(757) 787-1335

investorinfo@shorebank.com



MEMBER



Federal Deposit Insurance

Corporation

Federal Reserve System



INDEPENDENT AUDITORS



Goodman & Company, LLP

One Commercial Place, Suite 800

Norfolk, Virginia 23514



INTERNET



Web site: www.shorebank.com

Address: shorebank.com





ANNUAL MEETING



The Annual Meeting of the stockholders of Shore Financial Corporation will be held at the Chamber of Commerce in Melfa, Virginia on Tuesday, April 20, 2004, 2:00 P.M.



SECURITIES LISTING



The Companys shares are traded on The NASDAQ National Stock Market under ticker symbol SHBK.



MARKET PARTICIPANTS



Anderson & Strudwick, Inc.



F.J. Morrissey & Co. Inc.



Ferris, Baker Watts, Incorporated



Goldman
Sachs & Company



Knight Equity Markets, L.P.



Koonce Securities, Inc.



McKinnon & Company, Inc.



RBC Dain Rauscher, Inc.



Sandler ONeill & Partners, L.P.



Schwab Capital Markets, L.P.



Scott & Stringfellow, Inc.



60



---

LOGO



LOGO

www.shorebank.com



Shore Financial Corporation

25253
Lankford Highway

P.O. Box 920

Onley, Virginia 23418



(757) 787-1335