U. S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   FORM 10-QSB


  X   QUARTERLY  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934
           For the quarterly period ended September 30, 1998

      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

                           SHORE FINANCIAL CORPORATION

             (Exact name of registrant as specified in its charter)


        Virginia                                                 54-1873994
-------------------------------                            --------------------
  (State or other jurisdiction                               (I.R.S. Employer   
of incorporation or organization)                         Identification Number)

      25253 Lankford Highway                                                 
      Onley, Virginia                                             23418         
-------------------------------                           ----------------------
    (Address of Principal                                       (Zip Code) 
     Executive Offices)                                           

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


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

                APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
                   PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes ___ No ___

Number of shares of Common Stock outstanding as of November 13, 1998:  1,810,812

Transitional Small Business Disclosure Format:  Yes ____  No   X




<PAGE>



                   SHORE FINANCIAL CORPORATION AND SUBSIDIARY
                               Index - Form 10-QSB

                         PART I - FINANCIAL INFORMATION

      Item 1 - Consolidated Financial Statements (Unaudited)

                  Consolidated Balance Sheets as of September 30, 1998 and
                  December 31, 1997

                  Consolidated Statements of Income for the Three Months and
                  Nine Months Ended September 30, 1998 and 1997

                  Consolidated Statements of Cash Flows for the Nine Months
                  Ended September 30, 1998 and 1997

                  Consolidated Statement of Stockholders' Equity for the Nine 
                  Months Ended September 30, 1998

                  Notes to Unaudited Consolidated Financial Statements

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

                  Results of Operations

                  Financial Condition

                  Asset Quality

                  Liquidity and Capital Resources

                  Interest Sensitivity

                  Impact of Accounting Pronouncements

                  Year 2000 Project

                           PART II - OTHER INFORMATION
      Item 1 - Legal Proceedings
      Item 2 - Changes in Securities
      Item 3 - Defaults Upon Senior Securities
      Item 4 - Submission of Matters to Vote of Security Holders
      Item 5 - Other Information
      Item 6 - Exhibits and Reports on Form 8-K

                                   SIGNATURES


<PAGE>

                      SHORE FINANCIAL CORPORATION AND SUBSIDIARY
                    Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>



                                                                    September 30,   December 31,
                                                                        1998           1997
-----------------------------------------------------------------------------------------------
                                                                     (Unaudited)
<S>                                                              <C>                  <C>    

                         Assets


Cash (including interest - earning deposits of
    approximately $3,957,000 and $1,841,000, respectively)       $    5,967,284 $   4,190,551 
Investment securities:                                           
    Held to maturity (fair value of $3,038,000 and               
       $5,219,000, respectively                                       3,027,235     5,232,587
    Available for sale (amortized cost of $23,677,000 and        
       $20,761,000, respectively)                                    24,390,884    21,029,952
Investment in Federal Home Loan Bank stock,                      
    at cost                                                             580,500       580,500
Investment in Federal Reserve Bank stock, at cost                       124,800             -
Loans receivable, net                                                77,307,896    72,889,907
Premises and equipment, net                                           2,357,291     2,420,457
Real estate owned                                                        46,677       445,912
Accrued interest receivable                                             849,903       915,271
Prepaid income taxes                                                     63,493       124,586
Prepaid expenses and other assets                                       347,884       262,791
                                                                 -----------------------------
                                                                 
                                                                 $  115,063,847 $ 108,092,514
                                                                 -----------------------------
                                                                 
          LIABILITIES AND STOCKHOLDERS' EQUITY                   
                                                                 
Deposits                                                         $  100,647,970 $  95,213,440
Advances from Federal Home Loan Bank                                     73,853        75,000
Advance payments by borrowers for taxes                          
    and insurance                                                       341,142       215,029
Income taxes payable:                                            
    Current                                                                   -             -
    Deferred                                                            265,906       103,218
Accrued interest payable                                                 54,010        35,755
Accrued expenses and other liabilities                                  144,713       120,045
                                                                 -----------------------------
         Total liabilities                                          101,527,594    95,762,487
                                                                 -----------------------------
                                                              
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; 1,810,812 and 1,804,812 shares
       issued and outstanding, respectively                             597,568       595,588  
    Additional capital                                                3,584,652     3,563,592
    Retained earnings, substantially restricted                       8,916,444     8,000,729
    Accumulated other comprehensive income                              437,589       170,118
                                                                ------------------------------
         Total stockholders' equity                                  13,536,253    12,330,027
                                                                ------------------------------
                                                              
                                                                 $  115,063,847 $ 108,092,514
                                                                ==============================

</TABLE>



<PAGE>



                                 SHORE FINANCIAL CORPORATION AND SUBSIDIARY
                                      Consolidated Statements of Income
                                                 (UNAUDITED)
<TABLE>
<CAPTION>


                                                  Three Months Ended                Nine Months Ended
                                                     September 30,                    September 30,
                                            ------------------------------------------------------------------
                                                 1998            1997             1998             1997
---------------------------------------------------------------------------- ---------------------------------
<S>                                         <C>               <C>               <C>             <C>    

Interest income
    Loans                                      $ 1,689,477     $  1,690,869     $  5,043,886     $  4,965,316
    Investments                                    426,021          416,251        1,271,971        1,146,132
                                            -------------------------------- ---------------------------------
       Total interest income                     2,115,497        2,107,120        6,315,857        6,111,448
                                            -------------------------------- ---------------------------------

Interest expense
    Deposits                                     1,082,235        1,115,364        3,240,737        3,219,689
    FHLB advances                                      594            1,114            1,728           50,770
                                            -------------------------------- ---------------------------------
       Total interest expense                    1,082,829        1,116,478        3,242,465        3,270,459
                                            -------------------------------- ---------------------------------

Net interest income                              1,032,668          990,642        3,073,392        2,840,989

Provision for loan losses                           42,300           36,000          117,900          208,000
                                            -------------------------------- ---------------------------------

Net interest income after
    provision for loan losses                      990,368          954,642        2,955,492        2,632,989
                                            -------------------------------- ---------------------------------

Noninterest income
    Deposit account fees                           164,037          116,935          420,192          339,350
    Loan fees                                       34,322           26,977           94,029           75,402
    Other                                           28,658           27,657          120,622          168,760
                                            -------------------------------- ---------------------------------
       Total noninterest income                    227,016          171,569          634,842          583,512
                                            -------------------------------- ---------------------------------

Noninterest expense
    Compensation and employee
       benefits                                    291,289          282,882          912,440          861,033
    Occupancy and equipment                        171,144          148,719          492,798          422,223
    Advertising                                      9,149           15,026           41,227           41,054
    Data processing                                114,219           95,011          345,501          274,958
    Federal insurance premium                       14,881           14,574           44,858           43,298
    Other                                           94,276           65,202          284,396          246,536
                                            -------------------------------- ---------------------------------
       Total noninterest expense                   694,958          621,414        2,121,219        1,889,102
                                            -------------------------------- ---------------------------------

Income before income taxes                         522,426          504,797        1,469,115        1,327,399

Income taxes                                       198,523          185,327          553,400          377,993
                                            -------------------------------- ---------------------------------

Net income                                     $   323,903     $    319,470     $    915,715     $    949,406
                                            ================================ =================================


Earnings Per Common Share:
       Basic                                   $      0.18     $       0.20     $       0.51     $       0.66
                                            ================================ =================================

       Diluted                                 $      0.18     $       0.20     $       0.50     $       0.65
                                            ================================ =================================
</TABLE>




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

<PAGE>




                               SHORE FINANCIAL CORPORATION AND SUBSIDIARY
                             Consolidated Statement of Stockholders' Equity
                                              (UNAUDITED)
<TABLE>
<CAPTION>

Nine Months Ended September 30, 1998
---------------------------------------------------------------------------------------------------------

                                                                           Net Unrealized
                                                                               Gain on
                                     Common     Additional     Retained      Securities
                                      Stock       Capital      Earnings   Available for Sale   Total
                                   ------------  ------------ ------------ ---------------- -------------
<S>                                <C>           <C>          <C>          <C>               <C>    

Balance, December 31, 1997          $  595,588   $ 3,563,592  $ 8,000,729     $   170,118    $ 12,330,027     
                                                                                 
Proceeds from sale of common stock                                               
    upon exercise of stock options       1,980        21,060                                       23,040
                                                                                 
Comprehensive income                         -             -      915,715         267,471       1,183,186
                                   -----------------------------------------------------------------------    
                                                                                 
Balance, September 30, 1998         $  597,568   $ 3,584,652  $ 8,916,444     $   437,589    $ 13,536,253
                                   ======================================================================

</TABLE>


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

<PAGE>
                       SHORE FINANCIAL CORPORATION AND SUBSIDIARY
                         Consolidated Statements of Cash Flows
                                      (Unaudited)
<TABLE>
<CAPTION>

Nine Months Ended September 30,                                     1998         1997
-----------------------------------------------------------------------------------------
<S>                                                          <C>            <C>    


Cash flows from operating activities
    Net income                                                $    915,715   $   949,406
    Adjustments to reconcile to net cash
       provided by operating activities:
         Provision for loan losses                                 117,900       208,000
         Depreciation and amortization                             199,955       155,707
         Amortization of premium and accretion
           of discount on securities, net                            8,651        (4,912)
         (Gain) loss on sale of securities                         (30,646)       23,000
         (Gain) loss on sale of premises and
           equipment                                                 3,450       (77,865)
         Change in net deferred loan fees                          (92,506)       13,298
         Loss on sale of repossessed assets                         11,494             -
         (Increase) decrease in other assets                        36,189       (59,921)
         Increase in other liabilities                             169,036       410,286
                                                              ---------------------------
           Net cash provided by operating activities             1,339,238     1,616,999
                                                              ---------------------------

Cash flows from investing activities
    Purchase of available-for-sale securities                  (12,406,683)  (13,766,629)
    Proceeds from maturities and sales of
       available-for-sale securities                            10,621,732     9,048,806
    Purchase of held-to-maturity securities                              -             -
    Proceeds from maturities of held-to-maturity
       securities                                                1,081,525       440,332
    Purchase of Federal Reserve Bank stock                        (124,800)            -
    Loan origination, net of repayments                         (4,553,653)   (2,237,707)
    Proceeds from sale of premises and equipment                     1,439        99,000
    Purchase of premises and equipment                            (136,499)     (280,724)
    Proceeds from sale of real estate owned                        498,011       146,032
                                                              ---------------------------
           Net cash used by investing activities                (5,018,928)   (6,550,890)
                                                              ---------------------------

Cash flows from financing activities
    Net increase in demand deposits                              5,157,968     2,294,600
    Net increase in time deposits                                  276,562     5,071,565
    Proceeds from FHLB advances                                    200,000    12,500,000
    Repayments of FHLB advances                                   (201,147)  (16,500,000)
    Proceeds from the sale of common stock                          23,040     3,105,143
                                                              ---------------------------
           Net cash provided by financing activities             5,456,423     6,471,308
                                                              ---------------------------

Increase in cash and cash equivalents                            1,776,733     1,537,417

Cash and cash equivalents, beginning of period                   4,190,551     2,571,553
                                                              ---------------------------

Cash and cash equivalents, end of period                      $  5,967,284   $ 4,108,970
                                                              ===========================


Supplemental disclosure of cash flow information

    Cash paid during the period for interest                  $  3,224,210   $ 3,307,951
    Cash paid for income taxes                                $    490,498   $   244,144


Supplemental schedule of non-cash investing and
    financing activities

    Transfers from loans to real estate acquired
       through foreclosure                                    $    110,269   $   567,559

</TABLE>

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

<PAGE>


                   SHORE FINANCIAL CORPORATION AND SUBSIDIARY
              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 Subsidiary (the "Company") have been prepared in accordance with
generally accepted accounting principles ("GAAP") and with the instructions to
Form 10-QSB and Item 310(b) of Regulation S-B. Accordingly, they do not include
all of the information and footnotes required by GAAP for complete financial
statements. 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,
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 and nine month periods ended September
30, 1998 are not necessarily indicative of the results that may be expected for
any other interim period or the entire year ending December 31, 1998. 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, 1997.

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").
All significant intercompany balances and transactions have been eliminated in
consolidation.


NOTE 2 - ORGANIZATION

The Company is a Virginia corporation organized in September 1997 by the Bank
for the purpose of becoming a unitary holding company of the Bank. In February
and March 1998, the Bank received all necessary federal and state regulatory
approvals to consummate the reorganization of the Bank into the holding company
form of organization (the "Reorganization") and, in connection therewith, the
subsequent conversion of the Bank from a federally chartered savings bank to a
Virginia chartered, Federal Reserve member, commercial bank. On March 16, 1998,
the Bank effected the Reorganization and on April 1, 1998 the Bank completed the
charter conversion.



<PAGE>



NOTE 3 - EARNINGS PER SHARE

The following is an unaudited reconciliation of the numerators and denominators
of the basic and diluted earnings per share computations for the periods ended
September 30, 1998 and 1997.


<TABLE>
<CAPTION>


                                               Three Months Ended         Nine Months Ended
                                                   September 30,             September 30,
                                             ------------------------     ------------------------
                                                1998         1997            1998         1997
                                             -----------  -----------     -----------  -----------
<S>                                           <C>         <C>              <C>        <C>    


Net income (numerator, basic and diluted)    $  323,903   $  319,470      $  915,715   $  949,406
Weighted average shares outstanding
(denominator)                                 1,810,812    1,570,437       1,808,834    1,439,908
                                             -----------  -----------     -----------  -----------

Earnings per common share - basic                 $0.18        $0.20           $0.51        $0.66
                                             ===========  ===========     ===========  ===========

Effect of dilutive securities:

Weighted average shares outstanding           1,810,812    1,570,437       1,808,834    1,439,908
Effect of stock options                          15,088       17,458          16,115       14,701
                                             -----------  -----------     -----------  -----------
Diluted average shares outstanding
(denominator)                                 1,825,900    1,587,895       1,824,949    1,454,609
                                             -----------  -----------     -----------  -----------

Earnings per common share -
assuming dilution                                 $0.18        $0.20           $0.50        $0.65
                                             ===========  ===========     ===========  ===========

</TABLE>



NOTE 4 - COMPREHENSIVE INCOME

On January 1, 1998, the Company adopted Financial Accounting Standards Board
(FASB) Statement No. 130, Reporting Comprehensive Income. FASB No. 130
establishes standards for reporting and displaying comprehensive income and its
components. The adoption of FASB No. 130 did not have a material impact on the
Company. All of the Company's other comprehensive income relates to net
unrealized gains (losses) on available-for-sale securities.

Total comprehensive income consists of the following for the nine months ended
September 30, 1998:




Net income                                   $  915,715
Net unrealized gains on available-
      for-sale securities                       267,471
                                             -----------
Total comprehensive income                   $1,183,186
                                             ===========


<PAGE>



The following is an unaudited reconciliation of the related tax effects
allocated to each component of other comprehensive income at September 30, 1998.



<TABLE>
<CAPTION>

                                                             Tax
                                             Before-Tax   (Expense)    Net-of-Tax
                                               Amount     or Benefit     Amount
                                             -----------  -----------  -----------
<S>                                           <C>         <C>         <C>    

Unrealized gains on securities:
Unrealized holding gains
      arising during the period                $460,805    ($174,333)    $286,471
Less: reclassification adjustment
      for gains included in income               30,646      (11,645)      19,000
                                             -----------  -----------  -----------

Net unrealized gains                           $430,159    ($162,688)    $267,471
                                             ===========  ===========  ===========
</TABLE>






NOTE 5 - STOCKHOLDERS' EQUITY

During the period ended September 30, 1998, 6,000 stock options were exercised
at $3.84 per share and 16,000 stock options were granted at $10.00 per share. At
September 30, 1998, 50,000 stock options were outstanding at a weighted average
exercise price of $7.01 per share.



<PAGE>



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

Results of Operations

General

Net income for the nine months ended September 30, 1998 decreased $33,000, or
3.5%, to $916,000, compared to net income of $949,000 for the same period in the
prior year. Earnings for the 1998 nine month period include approximately
$92,000 in losses associated with the operation of the newest branch office,
located in Salisbury, Maryland, which opened in November 1997. Net income for
the nine months ended September 30, 1997 includes approximately $50,000
(after-tax) of net nonrecurring items that positively affected earnings for that
period. These items primarily consist of gains from the sale of real estate,
enterprise zone tax credits, and special charitable contributions. Earnings were
positively impacted during the 1998 period by the $3.1 million in additional
available capital raised during August 1997, $4.4 million in net loan growth,
net gains on sale of securities of $31,000 and increased deposit account and
loan fees.

Net Interest Income

Net interest income increased $232,000 for the nine months ended September 30,
1998 as compared to the same period in 1997. The net interest margin increased
to 4.02% from 3.88% for the nine month period. The interest rate spread remained
relatively flat at 3.40% for the nine months ended September 30, 1998 as
compared to 3.42% for the 1997 nine month period. The interest rate spread does
not reflect the impact of noninterest bearing deposits on the Bank's cost of
funds and the corresponding net interest spread. Noninterest bearing demand
deposits increased to $7.3 million at September 30, 1998 as compared $5.3
million at September 30, 1997. Including average noninterest deposits in
calculating the cost of funds results in an interest rate spread of 3.71% for
the nine months ended September 30, 1998 as compared to 3.67% for the same
period in 1997. This increase more accurately reflects the impact of
management's efforts to reduce the Bank's overall cost of funds and the Bank's
shift towards operating as a commercial bank.

Interest income increased $204,000 for the nine months ended September 30, 1998
as compared to the same period in 1997. The increase resulted from the average
balance of loans increasing by $1.3 during the period, primarily in commercial
and consumer lending and home equity lines. Additionally, the average balance of
securities increased by $4.6 million resulting from approximately $3.1 million
in additional capital raised in the Bank's public and subscription offerings of
common stock (the "Offering") during August 1997 and deposit growth during the
period.

Interest expense decreased $28,000 for the nine months ended September 30, 1998
as compared to the same period in 1997. This is due to the average rate on
interest-bearing liabilities decreasing from 4.87% in 1997 to 4.71% for the
September 1998 period while average interest-bearing liabilities outstanding
during the period increased $2.2 million. An increased emphasis on commercial
and consumer relationships has resulted in an increase in lower costing
interest-bearing and noninterest-bearing checking and savings accounts.



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, 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.

<PAGE>


             Average Balances, Income and Expenses, Yields and Rates

<TABLE>
<CAPTION>

                                                                  Nine Months Ended September 30,
                                               -----------------------------------------------------------------------
                                                              1998                               1997
                                               ----------------------------------- -----------------------------------
                                                Average     Income/      Yield/     Average     Income/      Yield/
                                                Balance     Expense       Rate      Balance     Expense       Rate
                                               ----------- ----------- ----------- ----------- ----------- -----------
<S>                                               <C>           <C>        <C>       <C>           <C>          <C>
                                            
Assets:                                     
       Securities (1)                            $ 26,685      $1,272       6.35%    $ 21,919      $1,097       6.67%
       Loans (net of unearned income):         
           Real Estate Mortgage                    46,523       2,989       8.57%      49,614       3,208       8.62%
           Real Estate Construction                 1,370          84       8.18%       1,741         105       8.06%
           Commercial                              16,889       1,178       9.30%      14,539       1,003       9.20%
           Home Equity Lines                        5,515         382       9.24%       4,558         335       9.79%
           Consumer                                 5,668         411       9.67%       4,259         314       9.83%
                                               ----------- -----------             ----------- -----------
               Total loans                         75,965       5,044       8.85%      74,711       4,965       8.86%
                                               ----------- -----------             ----------- -----------
       Federal funds sold                               0           0       0.00%           0           0       0.00%
       Interest-bearing deposits             
           in other banks                           3,121         116       4.96%       2,316          87       5.01%
                                               ----------- -----------             ----------- -----------
               Total earning assets               105,771       6,432       8.11%      98,946       6,149       8.29%
                                               ----------- -----------             ----------- -----------
       Less: allowance for loan losses               (770)                               (738)
       Total nonearning assets                      6,892                               6,084
                                               -----------                         -----------
       Total assets                              $111,893                            $104,292
                                               ===========                         ===========
                                              
Liabilities                                   
       Interest-bearing deposits:             
           Checking and savings                  $ 23,956      $  441       2.45%    $ 19,808      $  377       2.54%
           Time deposits                           67,740       2,799       5.51%      68,500       2,843       5.53%
                                               ----------- ----------- ----------- ----------- ----------- -----------
                                      
               Total interest-bearing        
                  deposits                         91,696       3,240       4.71%      88,308       3,220       4.86%
                                             
       FHLB advances                                   75           2       3.56%       1,252          51       5.43%
                                               ----------- -----------             ----------- -----------
               Total interest-bearing        
               liabilities                         91,771       3,242       4.71%      89,560       3,271       4.87%
                                                           -----------                         -----------
       Non-interest bearing liabilities:
           Demand deposits                          6,536                               4,889
           Other liabilities                          777                                 899
                                               -----------                         -----------
                                        
       Total liabilities                           99,084                              95,348
       Stockholders' equity                        12,809                               8,943
                                               -----------                         -----------
                                        
       Total liabilities and stockholders'                                                                         
           equity                                $111,893                            $104,292
                                               ===========                         ===========
                                             
       Net interest income                                     $3,190                              $2,878
                                                           ===========                         ===========
                                             
       Interest rate spread (1)                                             3.40%                               3.42%
       Net interest margin (1)                                              4.02%                               3.88%

</TABLE>

                                             
        (1) Tax equivalent basis.   

<PAGE>



Noninterest Income

Noninterest income was $635,000 during the nine months ended September 30, 1998
as compared to $574,000 for the same period in 1997, an increase of $51,000 or
10.63%. This was due primarily to increases in deposit account and loan fees
resulting from the additional commercial and consumer relationships obtained
during the period. Additionally, the Bank realized gains on sales of investments
totaling $36,000 during the September 1998 period. Excluding a $79,000 pretax
gain on sale of real estate realized during the nine months ended September 30,
1997, 1998 noninterest income would have increased approximately $130,000 or
24.74% over the 1997 amount.

Noninterest Expense

Noninterest expense was $2.1 million during the nine months ended September 30,
1998 as compared to $1.9 million for the same period in 1997, an increase of
$200,000 or 10.53%. The increase was due primarily to additional expenses
associated with operating the new Salisbury branch location. Compensation and
benefits expense increased as a result of normal salary adjustments and the
addition of personnel to accommodate the Bank's growth and the new branch.
Occupancy and equipment expenses increased as a result of normal growth and the
new branch location while data processing expenses increased due to planned
technological and other bank equipment upgrades primarily relating to Year 2000
requirements.

Financial Condition

During the nine months ended September 30, 1998, the Bank increased its assets
$7.0 million from $108.1 million at December 31, 1997, to $115.1 million at
September 30, 1998. This increase was due primarily to increases in net loans
and investments of $4.4 million and $1.2 million, respectively. Consolidation
and other changes in the local banking market have created increased lending
opportunities for the Bank in recent months. Additionally, overall growth in the
Bank's Maryland market resulting from the new branch has improved lending
activity during 1998. Interest-earning deposits increased $2.1 million during
the period. Growth in securities and interest-earning deposits resulted from
$5.4 million in deposit growth that was not fully offset by loan demand and
gains on available-for-sale securities.

Deposits increased $5.4 million during the nine months ended September 30, 1998.
The increase was due primarily to growth in demand deposit accounts. FHLB
advances remained flat during the period due to liquidity needs being met by
other sources.

Stockholders' equity increased $1.2 million during the nine months ended
September 30, 1998. The increase was due primarily to net income of $916,000
during the period and unrealized gains on available-for-sale securities.

Asset Quality

Loans are placed on nonaccrual status when, in the judgment of management, the
probability of collection of interest 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 $625,000 at September 30, 1998, compared to
$823,000 at December 31, 1997. As to nonaccrual loans existing at September 30,
1998, approximately $24,000 of interest income would have been recognized during
the nine months then ended if interest thereon had accrued. A significant
portion of the total nonperforming assets at December 31, 1997 was composed of a
$600,000 real estate loan that was foreclosed on in June 1997. Since the
foreclosure, the Bank has sold all property obtained, with the primary remaining
piece of real estate being sold during June 1998. Properties were sold at
amounts approximating their carrying values, resulting in no significant gains
or losses to the Bank. Other real estate owned at September 30, 1998 consisted
of one parcel of real estate of which management anticipates that net proceeds
from the sale of the collateral will cover the remaining carrying value.

<PAGE>



As of September 30, 1998, all loans 60 days or more delinquent, including
nonperforming loans, totaled $977,000. Performing loans totaling $1.3 million
exist that have possible credit problems and cause management to have concerns
about the borrowers continuing ability to comply with existing repayment terms.
Loans in this category, along with the delinquent loans, are subject to constant
management attention, and their status is reviewed on a regular basis.

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




                             Nonperforming Assets

                                                     September 30,  December 31,
                                                         1998           1997
                                                   ------------- ---------------

Nonaccrual loans:
      Commercial                                             $0              $0
     Real Estate Construction                                 0               0
     Real Estate Mortgage                                  $513            $306
     Home equity lines of credit                              0               0
        Consumer                                             65              71
                                                   ------------- ---------------

     Total nonaccrual loans                                 578             377
Other real estate owned                                      47             446
                                                   ------------- ---------------

     Total nonperforming assets                            $625            $823
                                                   ============= ===============

Loans past due 90 or more days
     accruing interest                                       $0              $0
Allowance for loan losses to
     nonaccrual loans                                   134.43%         204.24%
Nonperforming assets to period end
     loans and other real estate owned                    0.80%           1.11%



<PAGE>



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



                           Allowance for Loan Losses

                                                        Nine Months Ended
                                                          September 30,
                                                   -----------------------------
                                                       1998           1997
                                                   ------------- ---------------

Balance, beginning of period                               $770            $702
Loans charged off:
      Commercial                                             26             115
     Real estate construction                                 0               6
     Real estate mortgage                                    24               0
     Home equity lines of credit                              0               0
        Consumer                                             64              12
                                                   ------------- ---------------

     Total loans charged-off                                114             133
                                                   ------------- ---------------

Recoveries:
      Commercial                                              0               0
     Real estate construction                                 0               0
     Real estate mortgage                                     0               0
     Home equity lines of credit                              0               0
        Consumer                                              3               3
                                                   ------------- ---------------

     Total recoveries                                         3               3
                                                   ------------- ---------------

Net charge-offs                                            (111)           (130)
Provision for loan losses                                   118             208
                                                   ------------- ---------------

Balance, end of period                                     $777            $780
                                                   ============= ===============

Allowance for loan losses to loans
     outstanding at end of period                         0.99%           1.03%

Allowance for loan losses to nonaccrual
     loans outstanding at end of period                 134.43%         206.90%

Net charge-offs to average loans
     outstanding during period                           -0.15%          -0.17%





<PAGE>



Liquidity and Capital Resources

Liquidity represents the Bank'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. The Bank's
ability to obtain deposits and purchase funds at favorable rates determines its
liability liquidity.

At September 30, 1998, the Bank had outstanding loan and line of credit
commitments of $11.7 million. Scheduled maturities of certificate of deposits
during the twelve months following September 30, 1998 amounted to $42.5 million.
Historically, the Bank has been able to retain a significant amount of their
deposits as they mature. As a result of the Bank's management of liquid assets
and the ability to generate liquidity through liability funding, management
believes that the Bank maintains overall liquidity that is sufficient to satisfy
its depositor's requirements and meet its customers' credit needs.

Total cash and cash equivalents increased $1.8 million for the nine months ended
September 30, 1998, compared to a increase of $1.5 million for the nine months
ended September 30, 1997. Net cash provided by operating activities was $1.3
million for the nine months ended September 30, 1998, compared to $1.6 million
during the same period in 1997. The fluctuations in amounts during the period
from September 30, 1997 to September 30, 1998 were primarily the result of
fluctuations in earnings, assets and liabilities and the impact of noncash
transactions during the periods.

Net cash used in investing activities was $5.0 million during the nine months
ended September 30, 1998, compared to $6.6 million for the nine months ended
September 30, 1997. The fluctuations in amounts during these periods were
primarily the result of increased security purchases and loan growth offset by
sales of real estate owned during the nine months ended September 30, 1998, as
compared to the same period of 1997. The Bank raised approximately $3.1 million
in its initial public offering during August 1997 with this amount being
invested in securities during the 1997 period.

Net cash provided by financing activities was $5.5 million for the nine months
ended September 30, 1998, compared to $6.5 million for the nine months ended
September 30, 1997. The fluctuations in amounts during these periods were
primarily the result of the $3.1 million the Bank raised in its August 1997
public offering offset by FHLB advance repayments exceeding borrowings by
approximately $4.0 million during 1997.

The Federal Reserve, the Bank's primary federal regulator, have defined various
tests for assessing the capital strength and adequacy of financial institutions,
based on various definitions of capital. "Tier 1 capital" is a combination of
common and qualifying preferred stockholders' equity less goodwill and
available-for-sale security adjustments. "Tier 2 capital" is defined as
qualifying subordinated debt and a portion of allowances for loan losses. "Total
capital" is defined as Tier 1 capital plus Tier 2 capital. Certain risk-based
capital ratios are computed using the above capital definitions, total assets
and risk-weighted assets and are measured against regulatory minimums to
ascertain adequacy. All assets and off-balance sheet risk items are grouped into
categories according to degree of risk and assigned a risk weighting and the
resulting total is risk-weighted assets. "Tier 1 risk-based capital" is Tier 1
capital divided by risk-weighted assets. "Total risk-based capital" is total
capital divided by risk-weighted assets.

The required minimum capital ratios for capital adequacy purposes, as defined
collectively by the federal banking agencies, for Tier 1 risk-based capital,
total risk-based capital, and Tier 1 capital are 4.0%, 8.0% and 4.0%,
respectively. To be considered "well capitalized" under federal regulation,
these same required ratios are 6.0%, 10.0% and 5.0%, respectively.

<PAGE>



Core and tangible capital, as defined by federal regulations, are substantially
equivalent to Tier 1 capital, as disclosed above. The core and tangible capital
requirements were 3.0% and 1.5%, respectively, during the indicated periods.

The following table details the components of Tier 1 and Tier 2 capital and
related ratios at September 30, 1998.



                                 Analysis of Capital
<TABLE>
<CAPTION>


                                                         September 30    December 31,
                                                             1998            1997
                                                         --------------  --------------
<S>                                                    <C>                <C>    

Tier 1 Capital:
       Common stock                                            $   598         $   596
       Additional paid-in capital                                3,585           3,564
       Retained earnings                                         9,353           8,170
                                                         --------------  --------------
           Total capital (GAAP)                                 13,536          12,330
       Less Intangibleses                                          (42)            (45)
       Unrealized (gains) losses                                  (438)           (170)
                                                         --------------  --------------
           Total Tier 1 capital                                $13,056         $12,115
                                                         --------------  --------------
Tier 2 Capital:
       Allowances for loan losses                                  777             732
                                                         --------------  --------------
           Total Tier 2 capital                                 13,833          12,847
                                                         --------------  --------------

Risk-weighted assets                                           $70,986         $58,521

Capital Ratios:
       Tier 1 risk-based capital ratio                          18.39%          20.70%
       Total risk-based capital ratio                           19.49%          21.95%
       Tier 1 capital to average adjusted
           total assets                                         11.67%          11.91%
</TABLE>





Interest Sensitivity

An important element of both earnings performance and the maintenance of
sufficient liquidity is proper management of the interest sensitivity gap. The
interest sensitivity gap is the difference between interest sensitive assets and
interest sensitive liabilities at a specific time interval. A gap is considered
positive when the amount of interest rate sensitive assets exceeds the amount of
interest rate sensitive liabilities, and is considered negative when the amount
of interest rate sensitive liabilities exceeds the amount of interest rate
sensitive assets during a given period. Generally, during a period of rising
interest rates, a negative gap within shorter maturities would adversely affect
the 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
assets or liability at maturity, or by adjusting the interest rate during the
life of an asset or liability. Matching amounts of assets and liabilities
maturing in the same time interval helps hedge the risk and minimize the impact
on net interest income in periods of rising or falling interest rates.


<PAGE>


The Bank determines the overall magnitude of interest sensitivity risk and then
formulates policies governing asset generation and pricing, funding sources and
pricing, and off-balance-sheet commitments in order to reduce sensitivity risk.
These decisions are based on management's outlook regarding future interest rate
movements, the state of the local and national economy, and other financial and
business risk factors.

The following table presents the Bank's interest sensitivity position at
September 30, 1998. This one-day position, which continually is changing, is not
necessarily indicative of the Bank's position at any other time.



                          Interest Sensitivity Analysis

<TABLE>
<CAPTION>
                                                                          September 30, 1998
                                                   -----------------------------------------------------------------
                                                     With-in         91-365        3 to 5       Over
                                                     90 Days          Days         Years      5 Years      Total
                                                   ------------- --------------- ----------- ----------- -----------
<S>                                                <C>               <C>            <C>         <C>       <C>   

Interest-Earning Assets:
           Loans                                        $12,906       $24,745     $33,975    $  6,459    $ 78,085
      Securities                                            803         7,170      10,977       8,468      27,418
     Money market and other
     short term securities                                3,957             0           0           0       3,957
                                                   ------------- ------------- ----------- ----------- -----------

     Total earning assets                               $17,666       $31,915     $44,952    $ 14,927    $109,460
                                                   ============= ============= =========== =========== ===========
     Cummulative earning assets                         $17,666       $49,581     $94,533    $109,460    $109,460
                                                   ============= ============= =========== =========== ===========


Interest-Bearing Liabilities:
     Money market savings                               $ 5,247       $     0     $     0    $      0    $  5,247
     Interest checking                                        0             0       9,063           0       9,063
         Savings                                              0             0      12,198           0      12,198
     Certificates of deposit                             11,614        30,913      19,909       4,403      66,839
     FHLB advances                                            0             0           0          74          74
                                                   ------------- ------------- ----------- ----------- -----------

     Total interest-bearing liabilities                 $16,861       $30,913     $41,170    $  4,477    $ 93,421
                                                   ============= ============= =========== =========== ===========
     Cummulative interest-bearing liabilities           $16,861       $47,774     $88,944    $ 93,422    $ 93,422
                                                   ============= ============= =========== =========== ===========

      Period gap                                        $   805       $ 1,002     $ 3,781    $ 10,449    $ 16,038
     Cummulative gap                                    $   805       $ 1,807     $ 5,588    $ 16,038    $ 16,038
     Ratio of cummulative interest-earning
     assets to interest-bearing liabilities              104.77%       103.78%     106.28%     117.17%     117.17%
     Ratio of cummulative gap to total
     earning assets                                        4.56%         5.66%      12.43%     107.44%      14.65%
</TABLE>


<PAGE>



Impact of Accounting Pronouncements

Financial Accounting Standards Board Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities, was issued in June 1998. This
Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This Statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1998. Management has studied this Statement and
concluded that it does not materially affect the Company's financial condition
or results of operations.

The American Institute of Certified Public Accountants issued Statement of
Position (SOP) 98-5, Reporting on the Costs of Startup Activities, in April
1998. The SOP requires such costs to be expensed as incurred instead of being
capitalized and amortized. It applies to startup activities and costs of
organization of both development state and established operating activities, and
it changes existing practice for some industries. The SOP broadly defines
startup activities as those one-time activities that relate to the opening of a
new facility, introduction of a new product or service, doing business in a new
territory, initiating a new process in an existing facility, doing business with
a new class of customer or beneficiary, or commencing some new operation. The
SOP is effective for financial statements for fiscal years beginning after
December 15, 1998. Consistent with banking industry practice its is the
Company's policy to expense such costs. Therefore, this SOP is not expected to
materially affect the Company's financial position or results of operations.


Year 2000 Project

The Year 2000 presents problems for businesses that are dependent on computer
hardware and software to perform date dependent calculations and logic
comparisons. A great deal of software and microchip technology was developed
utilizing two digit years rather than four digit years (example: 97 instead of
1997). Technology utilizing two digit years most likely will not be able to
distinguish the year 2000 from 1900, and therefore may shut down or perform
miscalculations and comparisons as much as 100 years off. Management is fully
aware this presents a potential business disruption, and is well into a program
of due diligence in addressing the impact of the Year 2000 on the Company and
the Bank.

The Company and the Bank (collectively the Company) have adopted the five phase
plan of action developed by the Federal Financial Institutions Examination
Council to address Year 2000 issues. During phase one, awareness, the Company
developed an overall strategy and timetable for the completion of all Year 2000
requirements by mid 1999. Phase two, assessment, involved analyzing,
prioritizing and putting each computer driven system on track for Year 2000
compliance according to the timetable establish in the awareness phase. During
the third phase, renovation, necessary upgrades were ordered for hardware and
software. In addition, each vendor was contacted regarding their Year 2000
progress. Phases one through three have been completed. Currently, the Company
is heavily involved with the fourth phase, validation. This phase is the actual
real life testing of all the new upgrades and components. Furthermore, the
Company is testing with its third party service providers to make sure all new
or updated year 2000 compliant systems work with its business partners. Due to
the complexity and enormity of this phase, it is anticipated that it will take
until June 30, 1999 for exhaustive testing to be completed. The final phase is
the actual implementation of the new systems at the turn of the century, with
the readiness to execute contingency plans if needed.

<PAGE>



The number one priority is to minimize or eliminate the impact the Year 2000
date change will have on the Company's customers and shareholders. The Company
has been working with due diligence on this challenge since 1996. The Company is
in the enviable position of having a technologically advanced computer system
already in place. The Manager of Information Systems has tested all the in house
hardware and software for Year 2000 compliance. Management is working in
conjunction with the Company's major service provider to perform Year 2000
application testing for its day-to-day bank operations. Using a simulated
customer base, the Company will be testing virtually every type of banking
transaction it performs for Year 2000 compatibility. Management has analyzed
infrastructure components, like ATMs, security systems, telephones, vaults, and
has acquired necessary upgrades and installations when necessary. It is
anticipated that company-wide systems will be deemed Year 2000 compliant with
testing which will occur through mid-1999.

In addition to collaborating with outside service providers, the Company is
working with its banking customers to ensure a smooth transition into the new
millennium. The Company is a resource for commercial loan customers and
depositors that need guidance in preparing their own businesses for Year 2000.
The Company sponsored a seminar and has provided handouts and phone
consultations to assist its commercial customers and depositors in this
challenge.

The Company is also seeking the guidance of outside consultants regarding its
Year 2000 project plan. The Company's independent auditors will review its
testing and contingency plans in conjunction with their annual audit to be
conducted in early 1999. Furthermore, the Company's Year 2000 project plan will
meet all the guidelines and mandates from the Federal Reserve and the Federal
Financial Institutions Examination Council.

The Company has also addressed Year 2000 issues with its corporate insurance
carrier during the recent renewal period. Insurance policies have been reviewed
and steps have been taken to minimize the Company's insurance risk surrounding
the Year 2000.

To date, the Company has spent approximately $25,000 in expenses relating to
Year 2000. An estimated $15,000 more will be spent throughout the first quarter
1999. New hardware, new software, upgrades for the automated teller machines,
seminar training for the staff, and sophisticated testing services have
comprised the bulk of the Year 2000 expense. These costs are based on the best
estimates of management. It is impossible to accurately predict every expense
that may result from the Year 2000 issue; actual expenses could differ from the
estimated expenses.

At this time, the Company anticipates that even the worst case Year 2000
scenario would not have a long lasting, significant adverse effect on the
Company's financial condition and results of operations for the year ending
December 31, 2000 and beyond. The Company has been developing contingency plans
throughout each remediation phase, but it will not finalize these plans until
all testing is complete; most likely during the second quarter of 1999. Although
the Company has faith in the contingency plans being developed and the success
of the testing being conducted, it is the opinion of management that no one can
exactly predict all the possible ramifications of the Year 2000 issue.

To summarize, the Company has completed phases one through three (awareness,
assessment, and renovation) and will continue to be deeply involved with the
validation phase through mid 1999. All vendors and suppliers have been contacted
and have provided comprehensive and reassuring Year 2000 progress reports.
Presently, the Company sees no need to replace any vendor, although, alternative
vendors have been compiled for contingency planning. In addition, all commercial
loan and deposit customers have been contacted regarding their Year 2000
progress. The Company expects the adverse effect of Year 2000 on its commercial
customers to be immaterial.



<PAGE>




                           PART II - OTHER INFORMATION

Item 1 - Legal Proceedings

In the ordinary course of its operations, the Bank 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
Bank.

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

None.




<PAGE>



                                   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.


Scott C. Harvard                                      November 16, 1998
-----------------------
Scott C. Harvard
President and
Chief Executive Officer

Steven M. Belote                                      November 16, 1998
------------------------
Steven M. Belote
Treasurer and
Chief Financial Officer