##### Table of Contents

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U. S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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|x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------



For the quarterly period ended March 31, 2005



| ̈ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------



For the transition period from  to



Commission file number 000-23847



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SHORE FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Virginia                                                       |  | 54-1873994                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)
|                                                               | 
|25253 Lankford Highway Onley, Virginia                         |  | 23418                                  
|(Address of Principal Executive Offices)                       |  | (Zip Code)                             



Issuers
telephone number: (757) 787-1335



---



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days.    Yes  x    No ̈



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act).    Yes ̈No  x



APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS



Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    Yes ̈No ̈



Number of shares of Common Stock outstanding as of May 13, 2005: 2,070,697



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##### Table of Contents

SHORE FINANCIAL CORPORATION AND SUBSIDIARIES

Index - Form 10-Q



PART I - FINANCIAL INFORMATION



|                                                                                                   |  |   
|-------------------------------------------------------------------------------------------------- |  | --
|Item 1 - Consolidated Financial Statements (Unaudited)                                             |  |   
|                                                                                                   | 
|Consolidated Statements of Financial Condition as of March 31, 2005 and December 31, 2004          |  | 3 
|                                                                                                   | 
|Consolidated Statements of Income for the Three Months Ended March 31, 2005 and 2004               |  | 4 
|                                                                                                   | 
|Consolidated Statements of Stockholders Equity for the Three Months Ended March 31, 2005 and 2004 |  | 5 
|                                                                                                   | 
|Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2005 and 2004           |  | 6 
|                                                                                                   | 
|Notes to Unaudited Consolidated Financial Statements                                               |  | 8 
|                                                                                                   | 
|Item 2 -
Managements Discussion and Analysis of Financial Condition and Results of Operations     |  | 12
|                                                                                                   | 
|Results of Operations                                                                              |  | 12
|                                                                                                   | 
|Interest Sensitivity                                                                               |  | 15
|                                                                                                   | 
|Financial Condition                                                                                |  | 17
|                                                                                                   | 
|Asset Quality                                                                                      |  | 17
|                                                                                                   | 
|Liquidity and Capital Resources                                                                    |  | 19
|                                                                                                   | 
|Item 3 
Quantitative and Qualitative Disclosures about Market Risk                                |  | 21
|                                                                                                   | 
|Item 4 -
Controls and Procedures                                                                   |  | 22
|                                                                                                   | 
|PART II - OTHER INFORMATION                                                                        |  |   
|                                                                                                   | 
|Item 1 -
Legal Proceedings                                                                         |  | 23
|Item 2 -
Changes in Securities                                                                     |  | 23
|Item 3 -
Defaults Upon Senior Securities                                                           |  | 23
|Item 4 -
Submission of Matters to Vote of Security Holders                                         |  | 23
|Item 5 -
Other Information                                                                         |  | 23
|Item 6 -
Exhibits and Reports on Form 8-K                                                          |  | 23
|                                                                                                   | 
|SIGNATURES                                                                                         |  | 24



2



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##### Table of Contents

Consolidated Statements of Financial Condition



|                                                                                                                                         |  |                |             |                  |   |            
|---------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ----------- | ---------------- | - | -----------
|                                                                                                                                         |  | March 31, 2005 |             | December 31,2004
|                                                                                                                                         |  | (Unaudited)    |             |                 
|ASSETS                                                                                                                                   |  |                |             |                  |   |            
|                                                                                                                                         |  |               
|Cash (including interest - earning deposits of approximately $1,944,100 and $3,149,300, respectively)                                    |  | $              | 7,325,600   |                  | $ | 9,415,000  
|Investment securities:                                                                                                                   |  |                |             |                  |   |            
|Held-to-maturity (fair value of $0 and $0, respectively)                                                                                 |  |                |            |                  |   |           
|Available-for-sale (amortized cost of $37,320,600 and $36,437,500, respectively)                                                         |  |                | 37,544,600  |                  |   | 37,386,500 
|Other investments, at cost                                                                                                               |  |                | 1,854,000   |                  |   | 1,584,600  
|Loans receivable, net                                                                                                                    |  |                | 180,280,600 |                  |   | 175,995,200
|Premises and equipment, net                                                                                                              |  |                | 7,845,600   |                  |   | 8,024,900  
|Other assets                                                                                                                             |  |                | 5,396,900   |                  |   | 5,282,300  
|                                                                                                                                         |  |                |             |                  |   |            
|                                                                                                                                         |  | $              | 240,247,300 |                  | $ | 237,688,500
|                                                                                                                                         |  |                |             |                  |   |            
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                     |  |                |             |                  |   |            
|                                                                                                                                         |  |               
|Deposits:                                                                                                                                |  |                |             |                  |   |            
|Interest-bearing                                                                                                                         |  | $              | 166,340,800 |                  | $ | 168,242,100
|Noninterest-bearing                                                                                                                      |  |                | 26,102,400  |                  |   | 24,495,000 
|                                                                                                                                         |  |                |             |                  |   |            
|Total deposits                                                                                                                           |  |                | 192,443,200 |                  |   | 192,737,100
|                                                                                                                                         |  |               
|Advances from Federal Home Loan Bank                                                                                                     |  |                | 25,100,000  |                  |   | 21,966,700 
|Other liabilities                                                                                                                        |  |                | 663,700     |                  |   | 1,025,700  
|                                                                                                                                         |  |                |             |                  |   |            
|Total liabilities                                                                                                                        |  |                | 218,206,900 |                  |   | 215,729,500
|                                                                                                                                         |  |                |             |                  |   |            
|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; 2,070,697 and 2,063,284 shares issued and outstanding,
respectively |  |                | 683,300     |                  |   | 680,900    
|Additional capital                                                                                                                       |  |                | 8,232,400   |                  |   | 8,199,000  
|Retained earnings                                                                                                                        |  |                | 13,001,600  |                  |   | 12,494,400 
|Accumulated other comprehensive income                                                                                                   |  |                | 123,100     |                  |   | 584,700    
|                                                                                                                                         |  |                |             |                  |   |            
|Total stockholders equity                                                                                                               |  |                | 22,040,400  |                  |   | 21,959,000 
|                                                                                                                                         |  |                |             |                  |   |            
|                                                                                                                                         |  | $              | 240,247,300 |                  | $ | 237,688,500
|                                                                                                                                         |  |                |             |                  |   |            



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



3



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##### Table of Contents

Consolidated Statements of Income (Unaudited)



|                                                    |  |                              |           |      |   |          
|--------------------------------------------------- |  | ---------------------------- | --------- | ---- | - | ---------
|                                                    |  | Three Months Ended March 31,
|                                                    |  | 2005                         |           | 2004
|Interest and dividend income                        |  |                              |           |      |   |          
|Loans                                               |  | $                            | 2,632,200 |      | $ | 2,107,400
|Investments                                         |  |                              |           |      |   |          
|Taxable interest                                    |  |                              | 313,700   |      |   | 308,100  
|Tax-exempt interest                                 |  |                              | 34,700    |      |   | 35,700   
|Dividends                                           |  |                              | 42,300    |      |   | 36,400   
|                                                    |  |                              |           |      |   |          
|Total interest and dividend income                  |  |                              | 3,022,900 |      |   | 2,487,600
|                                                    |  |                              |           |      |   |          
|Interest expense                                    |  |                              |           |      |   |          
|Deposits                                            |  |                              | 820,900   |      |   | 693,700  
|FHLB/other advances                                 |  |                              | 128,900   |      |   | 56,600   
|                                                    |  |                              |           |      |   |          
|Total interest expense                              |  |                              | 949,800   |      |   | 750,300  
|                                                    |  |                              |           |      |   |          
|Net interest income                                 |  |                              | 2,073,100 |      |   | 1,737,300
|                                                    |  |                             
|Provision for loan losses                           |  |                              | 78,200    |      |   | 104,700  
|                                                    |  |                              |           |      |   |          
|Net interest income after provision for loan losses |  |                              | 1,994,900 |      |   | 1,632,600
|                                                    |  |                              |           |      |   |          
|Noninterest income                                  |  |                              |           |      |   |          
|Deposit account fees                                |  |                              | 288,000   |      |   | 294,400  
|Loan fees                                           |  |                              | 19,300    |      |   | 31,900   
|Mortgage banking fees                               |  |                              | 31,800    |      |   |         
|Commissions on investment brokerage sales           |  |                              | 31,200    |      |   | 28,600   
|Gains on sales of securities                        |  |                              | 90,400    |      |   | 94,000   
|Other                                               |  |                              | 61,500    |      |   | 70,200   
|                                                    |  |                              |           |      |   |          
|Total noninterest income                            |  |                              | 522,200   |      |   | 519,100  
|                                                    |  |                              |           |      |   |          
|Noninterest expense                                 |  |                              |           |      |   |          
|Compensation and employee benefits                  |  |                              | 736,400   |      |   | 601,400  
|Occupancy and equipment                             |  |                              | 420,100   |      |   | 322,400  
|Data processing                                     |  |                              | 186,200   |      |   | 153,600  
|Professional fees                                   |  |                              | 56,600    |      |   | 46,100   
|Advertising and promotion                           |  |                              | 36,400    |      |   | 28,200   
|Other                                               |  |                              | 164,800   |      |   | 126,300  
|                                                    |  |                              |           |      |   |          
|Total noninterest expense                           |  |                              | 1,600,500 |      |   | 1,278,000
|                                                    |  |                              |           |      |   |          
|Income before income taxes                          |  |                              | 916,600   |      |   | 873,700  
|                                                    |  |                             
|Income taxes                                        |  |                              | 285,500   |      |   | 272,900  
|                                                    |  |                              |           |      |   |          
|Net income                                          |  | $                            | 631,100   |      | $ | 600,800  
|                                                    |  |                              |           |      |   |          
|Earnings Per Common Share:                          |  |                              |           |      |   |          
|Basic                                               |  | $                            | 0.31      |      | $ | 0.29     
|                                                    |  |                              |           |      |   |          
|Diluted                                             |  | $                            | 0.30      |      | $ | 0.29     
|                                                    |  |                              |           |      |   |          



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



4



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##### Table of Contents

Consolidated Statements of Stockholders Equity



|                                                          |  |                 |  |             |         |                   |   |                  |  |   |                                            |   |  |       |           |   |  |   |            |  
|--------------------------------------------------------- |  | --------------- |  | ----------- | ------- | ----------------- | - | ---------------- |  | - | ------------------------------------------ | - |  | ----- | --------- | - |  | - | ---------- | -
|                                                          |  | Number ofShares |  | CommonStock |         | AdditionalCapital |   | RetainedEarnings |  |   | AccumulatedOtherComprehensiveIncome (Loss) |   |  | Total |          
|Balance, December 31, 2003                                |  | 2,061,724       |  | $           | 680,400 |                   | $ | 8,164,600        |  | $ | 10,595,300                                 |   |  | $     | 760,900   |   |  | $ | 20,201,200 |  
|                                                          |  |                 |  |             |         |                  
|Common stock cash dividend declared                       |  |                |  |             |        |                   |   |                 |  |   | (103,000                                   | ) |  |       |          |   |  |   | (103,000   | )
|                                                          |  |                 |  |             |         |                  
|Exercise of stock options                                 |  | 600             |  |             | 200     |                   |   | 4,400            |  |   |                                           |   |  |       |          |   |  |   | 4,600      |  
|                                                          |  |                 |  |             |         |                  
|Repurchase of common stock                                |  |                |  |             |        |                   |   |                 |  |   |                                           |   |  |       |          |   |  |   |           |  
|                                                          |  |                 |  |             |         |                  
|Comprehensive income                                      |  |                |  |             |        |                   |   |                 |  |   | 600,800                                    |   |  |       | 240,600   |   |  |   | 841,400    |  
|                                                          |  |                 |  |             |         |                   |   |                  |  |   |                                            |   |  |       |           |   |  |   |            |  
|Balance, March 31, 2004 (Unaudited)                       |  | 2,062,324       |  | $           | 680,600 |                   | $ | 8,169,000        |  | $ | 11,093,100                                 |   |  | $     | 1,001,500 |   |  | $ | 20,944,200 |  
|                                                          |  |                 |  |             |         |                   |   |                  |  |   |                                            |   |  |       |           |   |  |   |            |  
|Balance, December 31, 2004                                |  | 2,063,284       |  | $           | 680,900 |                   | $ | 8,199,000        |  | $ | 12,494,400                                 |   |  | $     | 584,700   |   |  | $ | 21,959,000 |  
|                                                          |  |                 |  |             |         |                  
|Common stock cash dividend declared                       |  |                |  |             |        |                   |   |                 |  |   | (123,900                                   | ) |  |       |          |   |  |   | (123,900   | )
|                                                          |  |                 |  |             |         |                  
|Exercise of stock options                                 |  | 7,413           |  |             | 2,400   |                   |   | 33,400           |  |   |                                           |   |  |       |          |   |  |   | 35,800     |  
|                                                          |  |                 |  |             |         |                  
|Tax benefit associated with the exercise of stock options |  |                |  |             |        |                   |   |                 |  |   |                                           |   |  |       |          |   |  |   |           |  
|                                                          |  |                 |  |             |         |                  
|Comprehensive income (loss)                               |  |                |  |             |        |                   |   |                 |  |   | 631,100                                    |   |  |       | (461,600  | ) |  |   | 169,500    |  
|                                                          |  |                 |  |             |         |                   |   |                  |  |   |                                            |   |  |       |           |   |  |   |            |  
|Balance, March 31, 2005 (Unaudited)                       |  | 2,070,697       |  | $           | 683,300 |                   | $ | 8,232,400        |  | $ | 13,001,600                                 |   |  | $     | 123,100   |   |  | $ | 22,040,400 |  
|                                                          |  |                 |  |             |         |                   |   |                  |  |   |                                            |   |  |       |           |   |  |   |            |  



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



5



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##### Table of Contents

Consolidated Statements of Cash Flows



|                                                                           |  |                              |            |   |      |   |            |  
|-------------------------------------------------------------------------- |  | ---------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                           |  | Three Months Ended March 31, |           
|                                                                           |  | 2005                         |            |   | 2004 |  
|Cash flows from operating activities                                       |  |                              |            |   |      |   |            |  
|Net income                                                                 |  | $                            | 631,100    |   |      | $ | 600,800    |  
|Adjustments to reconcile to net cash provided by operating activities:     |  |                              |            |   |      |   |            |  
|Provision for loan losses                                                  |  |                              | 78,200     |   |      |   | 104,700    |  
|Depreciation and amortization                                              |  |                              | 180,800    |   |      |   | 123,800    |  
|Amortization of premium and accretion of discount on securities, net       |  |                              | 17,300     |   |      |   | 20,700     |  
|Gain on sale of investment securities                                      |  |                              | (90,400    | ) |      |   | (94,000    | )
|Increase in cash surrender value of life insurance                         |  |                              | (33,000    | ) |      |   | (33,600    | )
|Changes in:                                                                |  |                              |            |   |      |   |            |  
|Deferred loan fees                                                         |  |                              | 38,700     |   |      |   | 17,100     |  
|Other assets                                                               |  |                              | 168,100    |   |      |   | (86,100    | )
|Other liabilities                                                          |  |                              | (362,000   | ) |      |   | 354,600    |  
|                                                                           |  |                              |            |   |      |   |            |  
|Net cash flows from operating activities                                   |  |                              | 628,800    |   |      |   | 1,008,000  |  
|                                                                           |  |                              |            |   |      |   |            |  
|Cash flows from investing activities                                       |  |                              |            |   |      |   |            |  
|Purchase of available-for-sale securities                                  |  |                              | (1,055,200 | ) |      |   | (127,500   | )
|Proceeds from maturities, sales and calls of available-for-sale securities |  |                              | 245,200    |   |      |   | 1,313,600  |  
|Purchase of other investments                                              |  |                              | (1,455,900 | ) |      |   | (129,200   | )
|Proceeds from maturities, sales and calls of other investments             |  |                              | 1,186,500  |   |      |   | 39,900     |  
|Loan originations, net of repayments                                       |  |                              | (4,402,300 | ) |      |   | (7,479,400 | )
|Purchase of premises and equipment                                         |  |                              | (80,700    | ) |      |   | (799,000   | )
|Basis reduction due to cost savings agreement on building construction     |  |                              | 92,900     |   |      |   |           |  
|                                                                           |  |                              |            |   |      |   |            |  
|Net cash flows from investing activities                                   |  |                              | (5,469,500 | ) |      |   | (7,181,600 | )
|                                                                           |  |                              |            |   |      |   |            |  



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##### Table of Contents

Consolidated Statements of Cash Flows



|                                                 |  |                              |             |   |      |   |             |  
|------------------------------------------------ |  | ---------------------------- | ----------- | - | ---- | - | ----------- | -
|                                                 |  | Three Months Ended March 31, |            
|                                                 |  | 2005                         |             |   | 2004 |  
|Cash flows from financing activities             |  |                              |             |   |      |   |             |  
|Net increase in demand deposits                  |  | $                            | 1,296,100   |   |      | $ | 11,354,700  |  
|Net increase (decrease) in time deposits         |  |                              | (1,590,000  | ) |      |   | 5,794,500   |  
|Proceeds from FHLB advances                      |  |                              | 37,500,000  |   |      |   | 24,102,000  |  
|Repayments of FHLB advances                      |  |                              | (34,366,700 | ) |      |   | (33,918,600 | )
|Proceeds from exercise of stock options          |  |                              | 35,800      |   |      |   | 4,600       |  
|Payment of dividends on common stock             |  |                              | (123,900    | ) |      |   | (103,000    | )
|                                                 |  |                              |             |   |      |   |             |  
|Net cash flows from financing activities         |  |                              | 2,751,300   |   |      |   | 7,234,200   |  
|                                                 |  |                              |             |   |      |   |             |  
|Change in cash and cash equivalents              |  |                              | (2,089,400  | ) |      |   | 1,060,600   |  
|                                                 |  |                             
|Cash and cash equivalents, beginning of period   |  |                              | 9,415,000   |   |      |   | 5,793,800   |  
|                                                 |  |                              |             |   |      |   |             |  
|Cash and cash equivalents, end of period         |  | $                            | 7,325,600   |   |      | $ | 6,854,400   |  
|                                                 |  |                              |             |   |      |   |             |  
|Supplemental disclosure of cash flow information |  |                              |             |   |      |   |             |  
|                                                 |  |                             
|Cash paid during the period for interest         |  | $                            | 841,800     |   |      | $ | 730,800     |  



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



7



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##### Table of Contents

SHORE FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements



NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES



Basis of Presentation



The accompanying unaudited consolidated financial statements of Shore Financial Corporation
and Subsidiaries (the Company) have been prepared in accordance with generally accepted accounting principles (GAAP) and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by GAAP for complete financial statements in the United States of America. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the
consolidated financial statements have been included.



In preparing the
consolidated financial statements in conformity with GAAP in the United States of America, management is required to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.
Actual results could differ from those estimates. The consolidated results of operations and other data for the three month period ended March 31, 2005 are not necessarily indicative of the results that may be expected for any other interim period
or the entire year ending December 31, 2005. The unaudited consolidated financial statements presented herein should be read in conjunction with the audited consolidated financial statements and related notes thereto in the Companys Annual
Report on Form 10-K for the year ended December 31, 2004.



Principles of
Consolidation



The consolidated financial statements of the Company
include and primarily consist of the accounts of its wholly-owned subsidiary Shore Bank (the Bank) and the Banks wholly-owned subsidiary Shore Investments, Inc. All significant intercompany balances and transactions have been
eliminated in consolidation.



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##### Table of Contents

NOTE 2 - EARNINGS PER SHARE



The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the
periods ended March 31, 2005 and 2004.



|                                                  |  |                              |           |      |   |          
|------------------------------------------------- |  | ---------------------------- | --------- | ---- | - | ---------
|                                                  |  | Three Months Ended March 31,
|                                                  |  | 2005                         |           | 2004
|Net income (numerator, basic and diluted)         |  | $                            | 631,100   |      | $ | 600,800  
|Weighted average shares outstanding (denominator) |  |                              | 2,067,800 |      |   | 2,062,000
|                                                  |  |                              |           |      |   |          
|Earnings per common share - basic                 |  | $                            | 0.31      |      | $ | 0.29     
|                                                  |  |                              |           |      |   |          
|Effect of dilutive securities:                    |  |                              |           |      |   |          
|                                                  |  |                             
|Weighted average shares outstanding               |  |                              | 2,067,800 |      |   | 2,062,000
|Effect of stock options                           |  |                              | 31,500    |      |   | 29,200   
|                                                  |  |                              |           |      |   |          
|Diluted average shares outstanding (denominator)  |  |                              | 2,099,300 |      |   | 2,091,200
|                                                  |  |                              |           |      |   |          
|Earnings per common share - assuming dilution     |  | $                            | 0.30      |      | $ | 0.29     
|                                                  |  |                              |           |      |   |          



NOTE 3 - COMPREHENSIVE INCOME



Total comprehensive income consists of the following for the three months
ended March 31, 2005 and 2004:



|                                  |  |                              |          |   |      |   |        
|--------------------------------- |  | ---------------------------- | -------- | - | ---- | - | -------
|                                  |  | Three Months Ended March 31,
|                                  |  | 2005                         |          |   | 2004
|Net income                        |  | $                            | 631,100  |   |      | $ | 600,800
|Other comprehensive income (loss) |  |                              | (461,600 | ) |      |   | 240,600
|                                  |  |                              |          |   |      |   |        
|Total comprehensive income        |  | $                            | 169,500  |   |      | $ | 841,400
|                                  |  |                              |          |   |      |   |        



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##### Table of Contents

NOTE 3 - COMPREHENSIVE INCOME(concluded)



The following is a reconciliation of the related tax effects allocated to each component of other comprehensive income at March 31, 2005 and
2004.



|                                                                     |  |                              |          |   |      |   |          |  
|-------------------------------------------------------------------- |  | ---------------------------- | -------- | - | ---- | - | -------- | -
|                                                                     |  | Three Months Ended March 31, |         
|                                                                     |  | 2005                         |          |   | 2004 |  
|Unrealized gains on available-for-sale securities:                   |  |                              |          |   |      |   |          |  
|Unrealized holding gains (losses) arising during the period          |  | $                            | (634,600 | ) |      | $ | 444,000  |  
|Less: reclassification adjustment for (gain) loss included in income |  |                              | (90,400  | ) |      |   | (94,000  | )
|                                                                     |  |                              |          |   |      |   |          |  
|Total other comprehensive income (loss) before tax effect            |  |                              | (725,000 | ) |      |   | 350,000  |  
|                                                                     |  |                             
|Tax (effect) benefit                                                 |  |                              | 263,400  |   |      |   | (109,400 | )
|                                                                     |  |                              |          |   |      |   |          |  
|Net unrealized gain (loss)                                           |  | $                            | (461,600 | ) |      | $ | 240,600  |  
|                                                                     |  |                              |          |   |      |   |          |  



NOTE 4 - SEGMENT
INFORMATION



Segment information consists of the following
for the three months ended March 31, 2005 and 2004:



|                                  |  |          |         |          |   |        |  |                                        |        |  |       |         |   |  |   |        
|--------------------------------- |  | -------- | ------- | -------- | - | ------ |  | -------------------------------------- | ------ |  | ----- | ------- | - |  | - | -------
|(In thousands)                    |  | Virginia |         | Maryland |   | Other  |  | Elimination ofIntersegmentTransactions |        |  | Total
|Net Interest Income:              |  |          |         |          |   |        |  |                                        |        |  |       |         |   |  |   |        
|Three months ended March 31, 2005 |  | $        | 1,528   |          | $ | 395    |  | $                                      | 261    |  | $     | (111    | ) |  | $ | 2,073  
|Three months ended March 31, 2004 |  | $        | 1,234   |          | $ | 283    |  | $                                      | 325    |  | $     | (105    | ) |  | $ | 1,737  
|                                  |  |          |         |          |  
|Assets:                           |  |          |         |          |   |        |  |                                        |        |  |       |         |   |  |   |        
|March 31, 2005                    |  | $        | 179,599 |          | $ | 47,409 |  | $                                      | 53,307 |  | $     | (40,068 | ) |  | $ | 240,247
|December 31, 2004                 |  | $        | 178,140 |          | $ | 47,566 |  | $                                      | 53,756 |  | $     | (41,773 | ) |  | $ | 237,689



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##### Table of Contents

NOTE 5  STOCK-BASED COMPENSATION



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. Management adopted the disclosure provisions of this Standard in 2002, but is still assessing the recognition provisions of the Standard.



In accordance with SFAS 148, the Company provides disclosures as if the fair value-based
method of measuring all outstanding stock options was already adopted and recognized in 2005 and 2004. The following table presents the effect on net income and on basic and diluted net income per share as if the fair value-based method had been
applied to all outstanding and unvested awards at March 31, 2005 and 2004.



|                                                                                                                                    |  |                             |         |   |      |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                                                    |  | Three Months EndedMarch 31, |        
|(Dollars in thousands, except per share data)                                                                                       |  | 2005                        |         |   | 2004 |  
|Net income, as reported                                                                                                             |  | $                           | 631,100 |   |      | $ | 600,800 |  
|Deduct:                                                                                                                             |  |                             |         |   |      |   |         |  
|Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                             | (72,800 | ) |      |   | (60,200 | )
|                                                                                                                                    |  |                             |         |   |      |   |         |  
|Pro forma net income                                                                                                                |  | $                           | 558,300 |   |      | $ | 540,600 |  
|                                                                                                                                    |  |                             |         |   |      |   |         |  
|Earnings per share:                                                                                                                 |  |                             |         |   |      |   |         |  
|                                                                                                                                    |  |                            
|Basic - as reported                                                                                                                 |  | $                           | 0.31    |   |      | $ | 0.29    |  
|                                                                                                                                    |  |                             |         |   |      |   |         |  
|Basic - pro forma                                                                                                                   |  | $                           | 0.27    |   |      | $ | 0.26    |  
|                                                                                                                                    |  |                             |         |   |      |   |         |  
|Diluted - as reported                                                                                                               |  | $                           | 0.30    |   |      | $ | 0.29    |  
|                                                                                                                                    |  |                             |         |   |      |   |         |  
|Diluted - pro forma                                                                                                                 |  | $                           | 0.27    |   |      | $ | 0.26    |  
|                                                                                                                                    |  |                             |         |   |      |   |         |  



NOTE 6  SUBSEQUENT EVENT



During April 2005, the Company declared a $0.06 per share quarterly cash
dividend on its common stock payable on May 2, 2005 to shareholders of record on April 25, 2005.



11



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##### Table of Contents

Item 2 - Managements Discussion and Analysis of Consolidated Financial Condition and Results of Operations



Results of Operations



General



Net income for the three months ended March 31, 2005 was $631,100, or $0.30
per diluted share, compared to net income of $600,800, or $0.29 per diluted share, for the same period of the prior year. Earnings benefited from several factors during the quarter, including continued loan and deposit growth, an improved net
interest margin and increased activity in the banks mortgage banking sector. Other factors impacting earnings for the quarter included additional depreciation and operating costs associated with the Companys new headquarters facility,
depreciation expense related to upgrading the Companys computer systems which included new hardware, software, and additional security protection and increased employee compensation and benefits expense resulting from normal salary adjustments
and an increase in fulltime equivalent employees.



Net Interest Income



Net interest income increased 19.3% to $2.07 million for the three months
ended March 31, 2005, compared to $1.74 million for the same period in 2004. The increase reflects a 22.1% growth in total loans since March 2004 and an increase in the Companys net interest margin. The Companys net interest margin
increased to 3.80% for the three months ended March 31, 2005, compared to 3.76% for the 2004 three month period. The increase in net interest margin over 2004 resulted from the Bank being asset sensitive during a period of rising interest rates that
has occurred since mid 2004. The increase in short-term interest rates by the Federal Reserve has been especially instrumental in improving the Banks yield on adjustable loans with indices attached to the prime interest rate and similar
floating rates.



Average earning assets for the period ending March 2005
increased $33.3 million over the March 2004 period. Loan growth, led by commercial and real estate loan production, constituted all of this increase with average total loans increasing $33.3 million since March 2004. Average commercial loans
increased $16.9 million, or 33.0%, while average real estate mortgages increased 20.8%. Average investment securities were mostly flat during the period, reflecting the liquidity demands generated by the loan growth. Average total deposits increased
by $27.6 million, with strong growth occurring in all deposit categories. During the twelve month period ended March 31, 2005, average interest-bearing checking and savings and noninterest-bearing demand deposits grew by $11.2 million and $5.5
million, respectively, representing increases of 16.5% and 28.2%, respectively, when compared to the March 2004 period. Increased funding in these areas has provided the Company with a lower-costing liquidity source to fund loan growth and,
therefore, benefiting net interest margin. During the period ended March 31, 2005, average time deposit balances increased by $10.9 million, or 13.8%, as compared to the 2004 period. The Company also continued to use Federal Home Loan Bank
(FHLB) advances during the period as an alternative, lower-costing liquidity source. Average FHLB advances increased $6.5 million during the period ended March 31, 2005 as compared to the March 2004 period.



Interest and dividend income was $3.02 million for the three month period ended March 31,
2005, representing an increase of 21.5% over the comparable 2004 amount. As discussed above, strong loan growth and improving interest rates on loans positively impacted interest and dividend income during the period. Loan yields improved by 10
basis points from March 2004 to March 2005, while investment yields increased by 6 basis points over the same period.



12



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##### Table of Contents

Average deposit growth of 16.6% and a 49.3% increase in FHLB advances resulted in interest expense increasing 26.6% to
$949,800 for the three months ended March 31, 2005, compared to $750,300 for the same period in 2004. The rising rate environment has put pressure on the Bank to raise its deposit rates to maintain adequate funding and to grow the Company. The
average rate on interest-bearing liabilities for the three months ended March 31, 2005 was 2.01%, compared to 1.87% incurred in 2004. Interest rates on checking and savings accounts and FHLB advances primarily impacted the Banks cost of
funding by increasing 13 basis points and 89 basis points, respectively, while time deposit costs increased a nominal 2 basis points.



13



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##### Table of Contents

The following table illustrates average balances of total interest-earning assets and total interest-bearing liabilities
for the periods indicated, showing the average distribution of assets, liabilities, and 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 averages.



Average Balances, Income and Expenses, Yields and Rates



|                                           |  |                              |         |   |                |   |            |  |      |                |  |   |                |   |            |   |       |  |      |  
|------------------------------------------ |  | ---------------------------- | ------- | - | -------------- | - | ---------- |  | ---- | -------------- |  | - | -------------- | - | ---------- | - | ----- |  | ---- | -
|                                           |  | Three Months Ended March 31, |        
|                                           |  | 2005                         |         |   | 2004           |  
|(In Thousands)                             |  | AverageBalance               |         |   | Income/Expense |   | Yield/Rate |  |      | AverageBalance |  |   | Income/Expense |   | Yield/Rate |  
|Assets:                                    |  |                              |         |   |                |   |            |  |      |                |  |   |                |   |            |   |       |  |      |  
|Securities (1)                             |  | $                            | 38,332  |   |                | $ | 394        |  | 4.11 | %              |  | $ | 39,112         |   |            | $ | 396   |  | 4.05 | %
|Loans (net of unearned income):            |  |                              |         |   |                |   |            |  |      |                |  |   |                |   |            |   |       |  |      |  
|Real estate mortgage                       |  |                              | 93,128  |   |                |   | 1,323      |  | 5.68 | %              |  |   | 77,095         |   |            |   | 1,137 |  | 5.90 | %
|Commercial                                 |  |                              | 67,988  |   |                |   | 1,042      |  | 6.13 | %              |  |   | 51,126         |   |            |   | 747   |  | 5.84 | %
|Home equity lines                          |  |                              | 15,661  |   |                |   | 218        |  | 5.57 | %              |  |   | 15,096         |   |            |   | 166   |  | 4.40 | %
|Consumer                                   |  |                              | 2,269   |   |                |   | 49         |  | 8.64 | %              |  |   | 2,473          |   |            |   | 57    |  | 9.22 | %
|                                           |  |                              |         |   |                |   |            |  |      |                |  |   |                |   |            |   |       |  |      |  
|Total loans                                |  |                              | 179,046 |   |                |   | 2,632      |  | 5.88 | %              |  |   | 145,790        |   |            |   | 2,107 |  | 5.78 | %
|Interest-bearing deposits in other banks   |  |                              | 2,664   |   |                |   | 15         |  | 2.25 | %              |  |   | 1,851          |   |            |   | 3     |  | 0.65 | %
|                                           |  |                              |         |   |                |   |            |  |      |                |  |   |                |   |            |   |       |  |      |  
|Total earning assets                       |  |                              | 220,042 |   |                |   | 3,041      |  | 5.53 | %              |  |   | 186,753        |   |            |   | 2,506 |  | 5.37 | %
|                                           |  |                              |         |   |                |   |            |  |      |                |  |   |                |   |            |   |       |  |      |  
|Less: allowance for loan losses            |  |                              | (2,432  | ) |                |   |            |  |      |                |  |   | (2,040         | ) |            |   |       |  |      |  
|Total nonearning assets                    |  |                              | 19,309  |   |                |   |            |  |      |                |  |   | 16,347         |   |            |   |       |  |      |  
|                                           |  |                              |         |   |                |   |            |  |      |                |  |   |                |   |            |   |       |  |      |  
|Total assets                               |  | $                            | 236,919 |   |                |   |            |  |      |                |  | $ | 201,060        |   |            |   |       |  |      |  
|                                           |  |                              |         |   |                |   |            |  |      |                |  |   |                |   |            |   |       |  |      |  
|Liabilities                                |  |                              |         |   |                |   |            |  |      |                |  |   |                |   |            |   |       |  |      |  
|Interest-bearing deposits:                 |  |                              |         |   |                |   |            |  |      |                |  |   |                |   |            |   |       |  |      |  
|Checking and savings                       |  | $                            | 79,391  |   |                | $ | 142        |  | 0.72 | %              |  | $ | 68,166         |   |            | $ | 100   |  | 0.59 | %
|Time deposits                              |  |                              | 89,687  |   |                |   | 679        |  | 3.03 | %              |  |   | 78,812         |   |            |   | 593   |  | 3.01 | %
|                                           |  |                              |         |   |                |   |            |  |      |                |  |   |                |   |            |   |       |  |      |  
|Total interest-bearing deposits            |  |                              | 169,078 |   |                |   | 821        |  | 1.94 | %              |  |   | 146,978        |   |            |   | 693   |  | 1.89 | %
|                                           |  |                              |         |   |                |  
|FHLB advances                              |  |                              | 19,764  |   |                |   | 129        |  | 2.61 | %              |  |   | 13,236         |   |            |   | 57    |  | 1.72 | %
|                                           |  |                              |         |   |                |   |            |  |      |                |  |   |                |   |            |   |       |  |      |  
|Total interest-bearing liabilities         |  |                              | 188,842 |   |                |   | 950        |  | 2.01 | %              |  |   | 160,214        |   |            |   | 750   |  | 1.87 | %
|                                           |  |                              |         |   |                |   |            |  |      |                |  |   |                |   |            |   |       |  |      |  
|Non-interest bearing liabilities:          |  |                              |         |   |                |   |            |  |      |                |  |   |                |   |            |   |       |  |      |  
|Demand deposits                            |  |                              | 25,028  |   |                |   |            |  |      |                |  |   | 19,527         |   |            |   |       |  |      |  
|Other liabilities                          |  |                              | 753     |   |                |   |            |  |      |                |  |   | 784            |   |            |   |       |  |      |  
|                                           |  |                              |         |   |                |   |            |  |      |                |  |   |                |   |            |   |       |  |      |  
|Total liabilities                          |  |                              | 214,623 |   |                |   |            |  |      |                |  |   | 180,525        |   |            |   |       |  |      |  
|Stockholders equity                       |  |                              | 22,296  |   |                |   |            |  |      |                |  |   | 20,535         |   |            |   |       |  |      |  
|                                           |  |                              |         |   |                |   |            |  |      |                |  |   |                |   |            |   |       |  |      |  
|Total liabilities and stockholders equity |  | $                            | 236,919 |   |                |   |            |  |      |                |  | $ | 201,060        |   |            |   |       |  |      |  
|                                           |  |                              |         |   |                |   |            |  |      |                |  |   |                |   |            |   |       |  |      |  
|Net interest income (1)                    |  |                              |         |   |                | $ | 2,091      |  |      |                |  |   |                |   |            | $ | 1,756 |  |      |  
|                                           |  |                              |         |   |                |   |            |  |      |                |  |   |                |   |            |   |       |  |      |  
|Interest rate spread (1)(2)(3)             |  |                              |         |   |                |   |            |  | 3.52 | %              |  |   |                |   |            |   |       |  | 3.50 | %
|Net interest margin (1)(2)(4)              |  |                              |         |   |                |   |            |  | 3.80 | %              |  |   |                |   |            |   |       |  | 3.76 | %

---

|(1) | Tax equivalent basis. The tax equivalent adjustment to net interest income was $18,000 and $19,000 for the three months ended March 31, 2005 and 2004, respectively.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Yield and rate percentages are all computed through the annualization of interest income and expense divided by average daily balances based on amortized costs.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Interest rate spread is the average yield earned on earning assets less the average rate incurred on interest-bearing liabilities.
|--- | ----------------------------------------------------------------------------------------------------------------------------------

|(4) | Net interest margin is derived by dividing net interest income by average total earning assets.
|--- | -----------------------------------------------------------------------------------------------



14



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##### Table of Contents

Interest Sensitivity



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



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



15



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##### Table of Contents

The following table presents the Companys interest sensitivity position at March 31, 2005. This one-day position,
which continually is changing, is not necessarily indicative of the Companys position at any other time.



Interest Sensitivity Analysis



|                                                                            |  |                |         |   |            |   |         |             |  |   |              |   |  |       |         |   |  |   |         |  
|--------------------------------------------------------------------------- |  | -------------- | ------- | - | ---------- | - | ------- | ----------- |  | - | ------------ | - |  | ----- | ------- | - |  | - | ------- | -
|                                                                            |  | March 31, 2005 |        
|(In Thousands)                                                              |  | Within 90 Days |         |   | 91-365Days |   |         | 1 to 5Years |  |   | Over 5 Years |   |  | Total |        
|Interest-Earning Assets:                                                    |  |                |         |   |            |   |         |             |  |   |              |   |  |       |         |   |  |   |         |  
|Loans (1)                                                                   |  | $              | 51,311  |   |            | $ | 39,332  |             |  | $ | 84,186       |   |  | $     | 7,934   |   |  | $ | 182,763 |  
|Securities                                                                  |  |                | 3,368   |   |            |   | 8,939   |             |  |   | 23,686       |   |  |       | 3,406   |   |  |   | 39,399  |  
|Money market and other short term securities                                |  |                | 1,944   |   |            |   |        |             |  |   |             |   |  |       |        |   |  |   | 1,944   |  
|Other earning assets                                                        |  |                |        |   |            |   |        |             |  |   |             |   |  |       | 3,314   |   |  |   | 3,314   |  
|                                                                            |  |                |         |   |            |   |         |             |  |   |              |   |  |       |         |   |  |   |         |  
|Total earning assets                                                        |  | $              | 56,623  |   |            | $ | 48,271  |             |  | $ | 107,872      |   |  | $     | 14,654  |   |  | $ | 227,420 |  
|                                                                            |  |                |         |   |            |   |         |             |  |   |              |   |  |       |         |   |  |   |         |  
|Cumulative earning assets                                                   |  | $              | 56,623  |   |            | $ | 104,894 |             |  | $ | 212,766      |   |  | $     | 227,420 |   |  | $ | 227,420 |  
|                                                                            |  |                |         |   |            |   |         |             |  |   |              |   |  |       |         |   |  |   |         |  
|Interest-Bearing Liabilities:                                               |  |                |         |   |            |   |         |             |  |   |              |   |  |       |         |   |  |   |         |  
|Money market savings                                                        |  | $              | 28,591  |   |            | $ |        |             |  | $ |             |   |  | $     |        |   |  | $ | 28,591  |  
|Interest checking (2)                                                       |  |                |        |   |            |   |        |             |  |   | 26,345       |   |  |       |        |   |  |   | 26,345  |  
|Savings (2)                                                                 |  |                | 1,800   |   |            |   | 1,213   |             |  |   | 21,119       |   |  |       |        |   |  |   | 24,132  |  
|Certificates of deposit                                                     |  |                | 17,627  |   |            |   | 27,154  |             |  |   | 41,445       |   |  |       | 1,047   |   |  |   | 87,273  |  
|FHLB advances                                                               |  |                | 19,500  |   |            |   | 5,000   |             |  |   |             |   |  |       | 600     |   |  |   | 25,100  |  
|                                                                            |  |                |         |   |            |   |         |             |  |   |              |   |  |       |         |   |  |   |         |  
|Total interest-bearing liabilities                                          |  | $              | 67,518  |   |            | $ | 33,367  |             |  | $ | 88,909       |   |  | $     | 1,647   |   |  | $ | 191,441 |  
|                                                                            |  |                |         |   |            |   |         |             |  |   |              |   |  |       |         |   |  |   |         |  
|Cumulative interest-bearing liabilities                                     |  |                | 67,518  |   |            |   | 100,885 |             |  |   | 189,794      |   |  |       | 191,441 |   |  |   | 191,441 |  
|                                                                            |  |                |         |   |            |   |         |             |  |   |              |   |  |       |         |   |  |   |         |  
|Period gap                                                                  |  | $              | (10,895 | ) |            | $ | 14,904  |             |  | $ | 18,963       |   |  | $     | 13,007  |   |  | $ | 35,979  |  
|Cumulative gap                                                              |  | $              | (10,895 | ) |            | $ | 4,009   |             |  | $ | 22,972       |   |  | $     | 35,979  |   |  | $ | 35,979  |  
|Ratio of cumulative interest-earning assets to interest-bearing liabilities |  |                | 83.86   | % |            |   | 103.97  | %           |  |   | 112.10       | % |  |       | 118.79  | % |  |   | 118.79  | %
|Ratio of cumulative gap to total earning assets                             |  |                | -4.79   | % |            |   | 1.76    | %           |  |   | 10.10        | % |  |       | 15.82   | % |  |   | 15.82   | %

---

|(1) | Includes nonaccrual loans of $746,000, which are included in the 91-365 days and 1 to 5 years categories.
|--- | ---------------------------------------------------------------------------------------------------------

|(2) | Management has determined that interest checking and savings accounts are not sensitive to changes in related market rates and, therefore, they are placed in the 1 to 5 years
category.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Noninterest Income



Noninterest income was $522,200 during the three months ended March 31,
2005, as compared to $519,100 for the same period in 2004. Noninterest income benefited from the Banks new mortgage banking operation with fees of $31,800 during the 2005 quarter, while lower insufficient funds fees caused a decline in deposit
fees during the quarter as compared to 2004. Included in the 2005 and 2004 amounts are gains on sales of securities of $90,400 and $94,000, respectively.



Provision for Loan Losses



Provision for loan losses was $78,200 for the three months ended March 31, 2005, as compared to $104,700 for the same period of 2004. Asset quality remained good during
the quarter triggering a reduction in the provision. See Asset Quality for additional discussion relating to the allowance for loan losses.



Noninterest Expense



Noninterest expenses were $1.60 million for the three months ended March 31, 2005, as compared to $1.28 million during the same period of 2004, representing an increase
of 25.2%. The increase resulted from the depreciation and operating costs associated with the Companys new headquarters facility, opened during August 2004, that combined operations and corporate offices and depreciation expense related to
upgrading the Companys computer systems which included new hardware,



16



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##### Table of Contents

software, and additional security protection. These expenditures were incurred to accommodate and support continued asset
growth of the Company. Increased employee compensation and benefits expense since March 2004 also impacted noninterest expense, resulting from normal salary adjustments and an increase in fulltime equivalent employees, including the addition of a
mortgage banking producer, a Shore Investments Inc. investment advisor in our Maryland market, a Sarbanes-Oxley administrator and other employees to accommodate the Companys growth.



Financial Condition



During the three months
ended March 31, 2005, the Companys assets increased by $2.5 million from $237.7 million at December 31, 2004 to $240.2 million at March 31, 2005. Net loans led this growth with an increase of $4.3 million while cash balances declined by $2.1
million and other asset categories remained flat during the period. Favorable market conditions continued to benefit loan volumes.



Deposits remained relatively flat with a balance of $192.4 at March 31, 2005. Interest-bearing demand, savings and time deposit account balances declined by $1.9 million,
while noninterest-bearing deposits grew by $1.6 million. The Banks deposits tend to be seasonal with slower growth occurring in the winter months due to less tourist activities and customer tax payments occurring. The lack of deposit growth
created the need to fund the loan growth experienced with FHLB advances, which increased by $3.1 million.



Stockholders equity was $22.0 million at March 31, 2005, remaining flat as compared to December 31, 2004. Comprehensive income benefited from $631,100 of net income during the quarter, but the increase in
interest rates caused the value of the Company investment portfolio to decline by $461,600 (net of the tax effect). The Company also paid common stock dividends of $123,900 ($0.06 per share) during the period.



During April 2005, the Company declared a $0.06 per share quarterly cash dividend on its
common stock payable on May 2, 2005 to shareholders of record on April 25, 2005.



Asset Quality



Loans are placed on nonaccrual
status when, in the judgment of management, the probability of interest collection is deemed to be insufficient to warrant further accrual or the loan reaches 90 days delinquent whereby the loan no longer accrues interest.



Total nonperforming assets, which consist of nonaccrual loans and foreclosed properties,
adjusted for estimated losses upon sale and the related selling expenses and holding costs, were $746,000 at March 31, 2005, compared to $950,000 at December 31, 2004. As to nonaccrual loans existing at March 31, 2005, approximately $6,000 of
interest income would have been recognized during the three months then ended if interest thereon had accrued. The Company has not identified any other loans deemed impaired under the guidelines established by SFAS No. 114, Accounting by
Creditors for Impairment of a Loan,as amended by SFAS No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures.



At March 31, 2005, all loans 60 days or more delinquent, including nonperforming loans, totaled $1.19 million. In addition, other performing
loans, totaling $3.2 million, existed that were current, but had other potential weaknesses that management considers to warrant additional monitoring. Loans in this category, along with the delinquent loans, are subject to management attention, and
their status is reviewed on a regular basis.



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



Nonperforming Assets



|                                                                     |  |               |        |   |                  |   |        |  
|-------------------------------------------------------------------- |  | ------------- | ------ | - | ---------------- | - | ------ | -
|(In Thousands)                                                       |  | March 31,2005 |        |   | December 31,2004 |  
|Nonaccrual loans:                                                    |  |               |        |   |                  |   |        |  
|Commercial                                                           |  | $             | 79     |   |                  | $ | 374    |  
|Real estate mortgage                                                 |  |               | 397    |   |                  |   | 272    |  
|Home equity lines of credit                                          |  |               | 99     |   |                  |   | 120    |  
|Consumer                                                             |  |               | 171    |   |                  |   | 184    |  
|                                                                     |  |               |        |   |                  |   |        |  
|Total nonaccrual loans                                               |  |               | 746    |   |                  |   | 950    |  
|Other real estate owned                                              |  |               |       |   |                  |   |       |  
|                                                                     |  |               |        |   |                  |   |        |  
|Total nonperforming assets                                           |  | $             | 746    |   |                  | $ | 950    |  
|                                                                     |  |               |        |   |                  |   |        |  
|Loans past due 90 or more days accruing interest                     |  |               |       |   |                  |   |       |  
|Allowance for loan losses to nonaccrual loans                        |  |               | 332.71 | % |                  |   | 253.05 | %
|Nonperforming assets to period end loans and other real estate owned |  |               | 0.41   | % |                  |   | 0.53   | %



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|                                                                                                                         |  |                              |        |   |      |   |        |  
|------------------------------------------------------------------------------------------------------------------------ |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|Set forth below is a table detailing the allowance for loan losses for the periods indicated.  Allowance for Loan Losses | 
|                                                                                                                         |  | Three Months Ended March 31, |       
|(In Thousands)                                                                                                           |  | 2005                         |        |   | 2004 |  
|Balance, beginning of period                                                                                             |  | $                            | 2,404  |   |      | $ | 2,002  |  
|Loans charged off:                                                                                                       |  |                              |        |   |      |   |        |  
|Commercial                                                                                                               |  |                              |       |   |      |   | (5     | )
|Real estate mortgage                                                                                                     |  |                              |       |   |      |   |       |  
|Consumer                                                                                                                 |  |                              | (6     | ) |      |   | (6     | )
|                                                                                                                         |  |                              |        |   |      |   |        |  
|Total loans charged-off                                                                                                  |  |                              | (6     | ) |      |   | (11    | )
|                                                                                                                         |  |                              |        |   |      |   |        |  
|Recoveries:                                                                                                              |  |                              |        |   |      |   |        |  
|Commercial                                                                                                               |  |                              |       |   |      |   | 5      |  
|Real estate mortgage                                                                                                     |  |                              |       |   |      |   |       |  
|Consumer                                                                                                                 |  |                              | 6      |   |      |   | 7      |  
|                                                                                                                         |  |                              |        |   |      |   |        |  
|Total recoveries                                                                                                         |  |                              | 6      |   |      |   | 12     |  
|                                                                                                                         |  |                              |        |   |      |   |        |  
|Net recoveries (charge-offs)                                                                                             |  |                              |       |   |      |   | 1      |  
|Provision for loan losses                                                                                                |  |                              | 78     |   |      |   | 105    |  
|                                                                                                                         |  |                              |        |   |      |   |        |  
|Balance, end of period                                                                                                   |  | $                            | 2,482  |   |      | $ | 2,108  |  
|                                                                                                                         |  |                              |        |   |      |   |        |  
|Allowance for loan losses to loans outstanding at end of period                                                          |  |                              | 1.36   | % |      |   | 1.41   | %
|                                                                                                                         |  |                             
|Allowance for loan losses to nonaccrual loans outstanding at end of period                                               |  |                              | 332.71 | % |      |   | 441.00 | %
|                                                                                                                         |  |                             
|Net charge-offs (recoveries) to average loans outstanding during period                                                  |  |                              | 0.00   | % |      |   | 0.00   | %



Liquidity and Capital Resources



Liquidity
represents the Companys ability to meet present and future obligations through the sale and 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, available-for-sale investments and investments and loans maturing within one year. In addition to liquid assets, the Company maintains several lines of credit with other institutions to support liquidity, the largest
of which is with the Federal Home Loan Bank of Atlanta. The Companys ability to obtain deposits and purchase funds at favorable rates determines its liability liquidity.



At March 31, 2005, the Company had outstanding loan and line of credit commitments of $45.2 million. Scheduled maturities of certificate of
deposits during the twelve months following March 31, 2005 amounted to $44.7 million. Historically, the Company has been able to retain a significant amount of its deposits as they mature. 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 depositors requirements and meet its customers credit needs.



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Total cash and cash equivalents decreased $2.09 million for the three months ended March 31, 2005, compared to a increase
of $1.06 million for the three months ended March 31, 2004. Net cash from operating activities was $628,700 for the three months ended March 31, 2005, compared to $1.01 million during the same period of 2004. This decrease reflects the earnings
growth experienced during the quarter, offset by the payment of outstanding amounts on the Companys new headquarters building and other fluctuations in normal operating activities.



Net cash used in investing activities was $5.47 million during the three months ended March 31, 2005, compared to net cash used in investing
activities of $7.18 million for the three months ended March 31, 2004. Stronger loan growth during the first quarter of 2004 than what occurred during 2005 constituted the majority of the difference, while purchases of premises and equipment during
2004 related to the new operations facility also increased investing activity during that period.



Net cash from financing activities was $2.75 million for the three months ended March 31, 2005, compared to net cash from financing activities of $7.23 million for the three months ended March 31, 2004. While net
repayments of FHLB advances negatively impacted cash flows from financing activities during 2004, greater deposit during that period than incurred during 2005 more than offset the effects of these payoffs.



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. Additionally, certain restrictions exist 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 for the Bank, and loans and advances are limited to 10 percent of the Banks capital and surplus on a secured basis. The Bank did not pay dividends to the Company during the three months
ended March 31, 2005 and 2004. At March 31, 2005, the Banks retained earnings available for the payment of dividends was $4.7 million. 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 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). At March 31, 2005, the Company meets all capital adequacy requirements to which it is subject.



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The following table details the components of Tier 1 and Tier 2 capital and related ratios at March 31, 2005 and December
31, 2004.



Analysis of Capital



|                                                  |  |               |         |   |                  |   |         |  
|------------------------------------------------- |  | ------------- | ------- | - | ---------------- | - | ------- | -
|(In Thousands)                                    |  | March 31,2005 |         |   | December 31,2004 |  
|Tier 1 Capital:                                   |  |               |         |   |                  |   |         |  
|Common stock                                      |  | $             | 683     |   |                  | $ | 681     |  
|Additional paid-in capital                        |  |               | 8,232   |   |                  |   | 8,199   |  
|Retained earnings                                 |  |               | 13,002  |   |                  |   | 12,494  |  
|Accumulated other comprehensive income            |  |               | 123     |   |                  |   | 585     |  
|                                                  |  |               |         |   |                  |   |         |  
|Total capital (GAAP)                              |  |               | 22,040  |   |                  |   | 21,959  |  
|Less: Intangibles                                 |  |               | (510    | ) |                  |   | (526    | )
|Net unrealized gain on debt and equity securities |  |               | (123    | ) |                  |   | (585    | )
|                                                  |  |               |         |   |                  |   |         |  
|Total Tier 1 capital                              |  |               | 21,407  |   |                  |   | 20,848  |  
|                                                  |  |              
|Tier 2 Capital:                                   |  |               |         |   |                  |   |         |  
|Allowable allowances for loan losses              |  |               | 2,040   |   |                  |   | 2,007   |  
|Net unrealized gains on equity securities         |  |               | 151     |   |                  |   | 289     |  
|                                                  |  |               |         |   |                  |   |         |  
|Total Tier 2 capital                              |  | $             | 23,598  |   |                  | $ | 23,144  |  
|                                                  |  |               |         |   |                  |   |         |  
|Risk-weighted assets                              |  | $             | 166,024 |   |                  | $ | 163,642 |  
|                                                  |  |              
|Capital Ratios:                                   |  |               |         |   |                  |   |         |  
|Tier 1 risk-based capital ratio                   |  |               | 12.89   | % |                  |   | 12.74   | %
|Total risk-based capital ratio                    |  |               | 14.21   | % |                  |   | 14.14   | %
|Tier 1 capital to average adjusted total assets   |  |               | 8.99    | % |                  |   | 9.62    | %



Recent Accounting and Reporting
Pronouncements



In March 2005, the Public Company Accounting Oversight
Board (PCAOB) delayed by one year the effective date for non-accelerated filers to comply with the standards set forth in Section 404 of the Sarbanes-Oxley Act of 2002. Accordingly, the Company must comply with Section 404 of this act beginning with
its fiscal quarter ending September 30, 2006.



Item 3 - Quantitative and Qualitative Disclosures about Market Risk



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



The modeling methodologies used measure interest rate sensitivity by analyzing the potential impact on net interest income under various interest rate scenarios. One such scenario would assume a



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##### Table of Contents

hypothetical 200 basis point instantaneous and parallel shift in the yield curve in interest rates. Accordingly,
management modeled the impact of a 200 basis point decline in interest rates and a 200 basis point increase in interest rates at March 31, 2005. A 200 basis point instantaneous and parallel decrease in the yield curve in interest rates would cause
net interest income to decrease by $264,000, while a 200 basis point instantaneous and parallel increase in the yield curve in interest rates would cause net interest income to increase by $40,000.



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



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



Item 4 - 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 quarter. 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.



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##### Table of Contents

PART II - OTHER INFORMATION



Item 1 - Legal Proceedings



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



Item 2 - Changes in Securities



None.



Item 3 - Defaults Upon Senior Securities



Not
applicable.



Item 4 - Submission of Matters to a Vote of Stockholders



None.



Item 5 - Other Information



None.



Item 6 - Exhibits and Reports on Form 8-K



|(a) | Certifications pursuant to subsections 302 and 906 of the Sarbanes-Oxley Act of 2002.
|--- | -------------------------------------------------------------------------------------



|(b) | Form 8-K was filed during April 2005 relative to the Companys March 31, 2005 earnings release dated April 19, 2005.
|--- | --------------------------------------------------------------------------------------------------------------------



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SIGNATURES



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



|                        |  |  |  |             
|----------------------- |  |  |  | ------------
|/s/ Scott C. Harvard    |  |  |  | May 13, 2005
|Scott C. Harvard        |  |  |  |             
|President and           |  |  |  |             
|Chief Executive Officer |  |  |  |             
|                        |  | 
|/s/ Steven M. Belote    |  |  |  | May 13, 2005
|Steven M. Belote        |  |  |  |             
|Vice President and      |  |  |  |             
|Chief Financial Officer |  |  |  |             



24