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U. S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2005

For the transition period from              to             

Commission file number 000-23847

SHORE FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

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

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

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

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS

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

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

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SHORE FINANCIAL CORPORATION AND SUBSIDIARIES

Index - Form 10-Q

PART I - FINANCIAL INFORMATION

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Consolidated Statements of Financial Condition

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

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Consolidated Statements of Income (Unaudited)

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

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Consolidated Statements of Stockholders’ Equity

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

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Consolidated Statements of Cash Flows

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Consolidated Statements of Cash Flows

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

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SHORE FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

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

Principles of Consolidation

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

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NOTE 2 - EARNINGS PER SHARE

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

NOTE 3 - COMPREHENSIVE INCOME

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

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NOTE 3 - COMPREHENSIVE INCOME (concluded)

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

NOTE 4 - SEGMENT INFORMATION

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

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NOTE 5 – STOCK-BASED COMPENSATION

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

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

NOTE 6 – SUBSEQUENT EVENT

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

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

Results of Operations

General

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

Net Interest Income

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

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

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

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

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

Average Balances, Income and Expenses, Yields and Rates

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Interest Sensitivity

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

An important element of the Company’s asset/liability management process is monitoring its interest sensitivity gap. The interest sensitivity gap is the difference between interest sensitive assets and interest sensitive liabilities at a specific time interval. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities, and is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets during a given period. Generally, during a period of rising interest rates, a negative gap within shorter maturities would adversely affect net interest income, while a positive gap within shorter maturities would result in an increase in net interest income. Conversely, during a period of falling interest rates, a negative gap within shorter maturities would result in an increase in net interest income while a positive gap within shorter maturities would have the opposite effect. This gap can be managed by repricing assets or liabilities, by selling investments available for sale, by replacing an asset or liability at maturity, or by adjusting the interest rate during the life of an asset or liability. Matching the amounts of assets and liabilities maturing in the same time interval helps to hedge the risk and minimize the impact on net interest income in periods of rising or falling interest rates.

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

Interest Sensitivity Analysis