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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2004

Commission file number: 000-23847

SHORE FINANCIAL CORPORATION

(Exact name of Registrant in its charter)

25020 Shore Parkway, Onley, Virginia 23418

(Address or principal executive offices) (Zip code)

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

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

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

Common Stock, $0.33 par value

(Title of Class)

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

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

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

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

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

DOCUMENTS INCORPORATED BY REFERENCE

PART I

General

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

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

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

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

Market Area

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

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

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

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

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

Competition

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

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

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

Credit Policies

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

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

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

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

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

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

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

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

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

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

Employees

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

Regulation and Supervision

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

The Company

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

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

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

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

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

The Bank

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

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

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PART II

Market Information

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

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

Dividend Policy

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

Equity Compensation Plan Information

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

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

Overview

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

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

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

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Results of Operation

General

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

Interest Income

2004 Compared to 2003

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

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

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

2003 Compared to 2002

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

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

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

Interest Expense

2004 Compared to 2003

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

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

2003 Compared to 2002

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

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Net Interest Income

2004 Compared to 2003

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

2003 Compared to 2002

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

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

Average Balances, Income and Expenses, Yields and Rates

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

Volume and Rate Analysis

Interest Sensitivity

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

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

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

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

Interest Sensitivity Analysis