Edgar Filing: CHESAPEAKE FINANCIAL SHARES INC

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 June 30, 2001
-------------

[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _______ to _______

Commission file number 0-18543

CHESAPEAKE FINANCIAL SHARES, INC.
---------------------------------
(Exact name of registrant as specified in its charter)

Virginia 54-1210845
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

97 N. Main St., Kilmarnock, VA 22482
------------------------------------
(Address of principal executive offices) (Zip Code)

(804) 435-1181
--------------
(Registrant's telephone number, including area code)

Not Applicable
--------------
(Former name, former address and former fiscal year, if changed since last
report.)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 12, 13 or 15(d) of the Securities and 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 the number of shares outstanding of each of the issuer's
classes of common stock as of August 1, 2001.

Class Outstanding at August 1, 2001
-------------- -----------------------------

Common Stock, voting, $5.00 par value 1,247,960
Common Stock, non-voting, $5.00 par value 0

CHESAPEAKE FINANCIAL SHARES, INC.

FORM 10-QSB

INDEX
-----

PART I - FINANCIAL INFORMATION

Page
----

Item 1. Financial Statements.................................................... 1-8

Consolidated Balance Sheets
June 30, 2001 and December 31, 2000.......................................... 1-2

Consolidated Statements of Earnings
Three months ended June 30, 2001 and 2000.................................... 3

Consolidated Statements of Earnings
Six months ended June 30, 2001 and 2000...................................... 4

Consolidated Statements of Cash Flows
Six months ended June 30, 2001 ........................................... 5

Consolidated Statement of Changes in Stockholder's Equity
Six months ended June 30, 2000............................................... 6

Consolidated Statement of Changes in Stockholder's Equity
Six months ended June 30, 2001 .......................................... 7

Notes to Consolidated Financial Statements................................... 8

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................................... 9-13

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.................................................. 14

Item 2. Changes in Securities.............................................. 14

Item 3. Defaults Upon Senior Securities.................................... 14

Item 4. Submission of Matters to a Vote of Security Holders................ 14

Item 5. Other Information.................................................. 14

Item 6. Exhibits and Reports on Form 8-K................................... 15

Signatures................................................................... 16

Page I

PART I. Item 1. - FINANCIAL INFORMATION
Chesapeake Financial Shares, Inc. June 30, December 31,
Consolidated Balance Sheets 2001 2000
-------------------------------------------------------------------------------------------------

ASSETS (Unaudited)
Cash and due from banks.......................................... $ 10,043,053 $ 8,965,457
Federal funds sold............................................... 6,047,000 0
Securities available for sale
U.S. Government agencies (book value of $18,226,219
-2001 and $21,053,805-2000)................................. 18,624,760 21,167,667
Obligations of state and political subdivisions (book value of
$14,692,998-2001 and $15,110,437-2000)....................... 16,026,327 15,839,088
Other Securities (book value $2,294,661-2001 and
$2,551,294-2000.............................................. 2,306,100 2,548,600

Loans............................................................ 163,962,453 158,455,860
Less: Reserve for loan loss...................................... (2,435,590) (2,125,022)
------------- -------------
Net loans..................................................... 161,526,863 156,330,838

Bank premises and equipment, net................................. 5,279,135 5,580,409
Accrued interest receivable...................................... 1,485,124 1,533,719
Business Manager Assets.......................................... 10,264,618 9,209,373
Other assets..................................................... 2,830,439 3,037,565
------------- -------------
Total assets.................................................. $ 234,433,419 $ 224,212,716
============= =============

See accompanying notes to consolidated financial statements. Page: 1

LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited)

Deposits
Noninterest bearing deposits............................... $ 30,652,013 $ 27,396,972
Savings and interest bearing deposits...................... 70,986,199 64,744,254
Certificates of deposit.................................... 100,529,810 101,902,570
---------------------------
Total deposits........................................... 202,168,022 194,043,796

Federal funds purchased and FHLB advances..................... 10,000,000 9,500,000
Accrued interest payable...................................... 321,204 397,244
Other liabilities............................................. 1,532,114 1,119,597
Note payable.................................................. 807,046 821,762
---------------------------
Total liabilities........................................ 214,828,386 205,882,399

Commitments and contingent liabilities

Shareholders' equity
Preferred stock, par value $1 per share; authorized 50,000
shares; none outstanding................................... 0 0
Common stock, voting, par value $5......................... 6,239,800 6,149,200
Common stock, non-voting................................... 0 0
voting non-voting
6/30/01 12/31/00 6/30/01 12/31/00
------- -------- ------- --------
Shares auth. 2,400,000 2,400,000 635,000 635,000
Shares o/s 1,247,960 1,229 0 0
Paid in capital............................................... 172,771 153,521
Accumulated other comprehensive income........................ 727,280 554,280
Retained earnings............................................. 12,465,182 11,473,316
------------ ------------
Total shareholders' equity............................... 19,605,033 18,033,317
------------ ------------
Total liabilities and Shareholders' equity............... $234,433,419 $224,212,716
============ ============

See accompanying notes to consolidated financial statements. Page: 2

PART I. Item 1. - FINANCIAL INFORMATION (cont'd.)
Chesapeake Financial Shares, Inc. Three Months Ended
Consolidated Statements of Earnings June 30,
2001 2000
-------------------------------------------------------------------------------------------------------

Interest Income (Unaudited)

Interest and fees on loans................................................ $3,722,515 $3,165,548
Interest on federal funds sold............................................ 29,523 685
Interest on time deposits with banks...................................... 6,631 6,184
Interest on U.S. Agency Obligations....................................... 329,195 358,433
Interest on obligations of state and political subs....................... 217,297 278,784
------------------------
Total interest income................................................ 4,305,161 3,809,634

Interest Expense

Interest on savings and interest bearing deposits......................... 417,238 563,887
Interest on certificates of deposit....................................... 1,469,741 1,163,857
Interest on federal funds purchased....................................... 100,633 152,257
Other interest expense.................................................... 11,165 11,561
------------------------
Total interest expense............................................... 1,998,777 1,891,562
------------------------
Net interest income....................................................... 2,306,384 1,918,072
Provision for loan losses................................................. 127,666 115,124
------------------------
Net interest income after provision for loan losses....................... 2,178,718 1,802,948
------------------------

Noninterest Income

Income from fiduciary activities.......................................... 255,035 236,546
Service charges on deposit accounts....................................... 216,975 164,176
Merchant card income...................................................... 230,834 224,771
ATM income................................................................ 69,358 57,993
Cash Management income.................................................... 453,325 384,970
Other income.............................................................. 171,321 137,545
------------------------
Total noninterest income............................................. 1,396,848 1,206,001
------------------------

Noninterest Expense

Salaries.................................................................. 1,084,657 867,772
Employee benefits......................................................... 178,615 188,785
Occupancy expenses........................................................ 473,343 379,457
Merchant card expense..................................................... 225,936 215,034
ATM expense............................................................... 59,269 58,645
Cash management expense................................................... 138,310 167,800
Other expenses............................................................ 527,606 524,861
------------------------
Total noninterest expense............................................ 2,687,736 2,402,354
------------------------
Income before income taxes................................................ 887,830 606,595
Income taxes.............................................................. 244,879 146,227
------------------------
Net income........................................................... $ 642,951 $ 460,368
========================

Earnings per share, basic................................................. $ 0.52 $ 0.37
Earnings per share, assuming dilution..................................... $ 0.51 $ 0.36

See accompanying notes to consolidated financial statements. Page: 3

PART I. Item 1. - FINANCIAL INFORMATION (cont'd.)
Chesapeake Financial Shares, Inc. Six Months Ended
Consolidated Statements of Earnings June 30,
2001 2000
-------------------------------------------------------------------------------------------------

Interest Income (Unaudited)

Interest and fees on loans........................................... $ 7,411,679 $ 6,160,705
Interest on federal funds sold....................................... 30,017 2,060
Interest on time deposits with banks................................. 14,263 8,876
Interest on U.S. Agency Obligations.................................. 684,048 793,150
Interest on obligations of state and political subs.................. 453,860 502,106
--------------------------
Total interest income........................................... 8,593,867 7,466,897

Interest Expense

Interest on savings and interest bearing deposits.................... 910,506 1,104,869
Interest on certificates of deposit.................................. 2,998,548 2,236,078
Interest on federal funds purchased.................................. 228,113 230,077
Other interest expense............................................... 22,431 19,321
--------------------------
Total interest expense.......................................... 4,159,598 3,590,345
--------------------------
Net interest income.................................................. 4,434,269 3,876,552
Provision for loan losses............................................ 322,666 180,248
--------------------------
Net interest income after provision for loan losses.................. 4,111,603 3,696,304
--------------------------

Noninterest Income

Income from fiduciary activities..................................... 474,704 459,456
Service charges on deposit accounts.................................. 414,200 325,853
Security gains (losses) - net-....................................... (1,625) 0
Merchant card income................................................. 425,778 407,597
ATM income........................................................... 124,744 114,350
Cash Management income............................................... 890,046 738,322
Other income......................................................... 321,387 286,615
--------------------------
Total noninterest income........................................ 2,649,234 2,332,193
--------------------------

Noninterest Expense

Salaries............................................................. 1,975,509 1,720,065
Employee benefits.................................................... 395,905 363,224
Occupancy expenses................................................... 856,888 773,213
Merchant card expense................................................ 387,047 374,342
ATM expense.......................................................... 117,644 119,263
Cash management expense.............................................. 285,762 343,897
Other expenses....................................................... 1,036,161 1,016,281
--------------------------
Total noninterest expense....................................... 5,054,916 4,710,285
--------------------------
Income before income taxes........................................... 1,705,921 1,318,212
Income taxes......................................................... 441,066 316,371
--------------------------
Net income...................................................... $ 1,264,855 $ 1,001,841
==========================

Earnings per share, basic............................................ $ 1.02 $ 0.82
Earnings per share, assuming dilution................................ $ 1.00 $ 0.79

See accompanying notes to consolidated financial statements. Page: 4

Chesapeake Financial Shares, Inc. Six Months Ended
Consolidated Statements of Cash Flows June 30,
2001 2000
-------------------------------------------------------------------------------------------------------------------
(Unaudited)

Cash flows from operating activities:
Net income........................................................................... $ 1,264,855 $ 1,001,841
Adjustments to reconcile net income to net cash provided by
(used for) operating activities:
Depreciation and amortization...................................................... 498,581 425,827
Provision for loan losses.......................................................... 322,666 180,248
Provision for cash management account losses....................................... 120,000 142,500
(Accretion) of discount and amortization of premiums, net........................... 150,374 158,377
Net loss on sale of securities..................................................... 1,625 0
Changes in assets and liabilities:
Decrease (increase) in accrued interest receivable................................ 48,595 (111,258)
Decrease (increase) in other assets............................................... 118,009 (353,152)
Increase (decrease) in accrued interest payable................................... (76,040) (6,948)
Increase (decrease) in other liabilities.......................................... 412,517 42,512
---------------------------
Net cash provided by (used for) operating activities................................. 2,861,182 1,479,947
---------------------------

Cash flows from investing activities:
Purchases of securities available for sale........................................... (994,798) (3,001,715)
Proceeds from sale or call of securities available for sale.......................... 1,038,375 0
Proceeds from maturities of securities available for sale............................ 2,664,709 2,344,846
Origination of loans available for sale.............................................. 5,032,900 (774,500)
Proceeds from sale of loans available for sale....................................... 5,032,900 774,500
Net (increase) decrease in loans outstanding......................................... (5,518,691) (13,612,094)
Net (increase) decrease in business manager assets................................... (1,175,245) 35,231
Other capital expenditures........................................................... (197,307) (232,608)
---------------------------
Net cash provided by (used for) investing activities................................. (4,182,957) (14,466,340)
---------------------------

Cash flows from financing activities:
Net increase (decrease) in demand accounts, interest bearing demand
deposit accounts and savings deposits.............................................. 9,496,986 (703,311)
Net increase (decrease) in certificates of deposit................................... (1,372,760) 9,994,831
Net increase (decrease) in federal funds purchased................................... 500,000 5,200,000
Cash dividends....................................................................... (272,989) (233,901)
Proceeds from issuance of voting common stock........................................ 119,000 110,790
Acquisition of voting common stock................................................... (9,150) (249,666)
Curtailment of long-term borrowings.................................................. (14,716) (11,635)
---------------------------
Net cash provided by (used for) financing activities................................. 8,446,371 14,107,108
---------------------------

Net (decrease) increase in cash and federal funds sold............................... 7,124,596 1,120,715
Cash and federal funds sold at beginning of period................................... 8,965,457 8,669,184
---------------------------
Cash and federal funds sold at end of period......................................... $16,090,053 $ 9,789,899
===========================

See accompanying notes to consolidated financial statements. Page: 5

Consolidated Statement of Changes in Stockholder's Equity
Chesapeake Financial Shares, Inc.
Six Months Ended June 30, 2000
(unaudited)
-----------

Accumulated
Other Additional
Comprehensive Retained Comprehensive Common Paid-In
Total Income Earnings Income (loss) Stock Capital
----------- ------------- ----------- ------------- ---------- ----------

Beginning balance $15,513,452 $ 9,736,920 $ (619,848) $6,131,635 $ 264,745

Comprehensive Income:
Net Income 1,001,841 $1,001,841 1,001,841
Other comprehensive
income, net of tax:
Unrealized gain on securities
available for sale, net of
deferred taxes of $143,295 278,161 278,161 278,161
----------- ---------- -----------

Total comprehensive income,
net of tax: $1,280,003
==========

Acquisition of common stock (249,666) (66,260) (183,406)
Issuance of common stock 110,790 98,400 12,390
Dividends declared (233,901) (233,901) 0
----------- ----------- ----------- ---------- ----------
Ending balance $16,420,677 $10,504,860 $ (341,687) $6,163,775 $ 93,729
=========== =========== =========== ========== ==========

Page 6

Consolidated Statement of Changes in Stockholder's Equity
Chesapeake Financial Shares, Inc.
Six Months Ended June 30, 2001
(unaudited)
-----------

Accumulated
Other Additional
Comprehensive Retained Comprehensive Common Paid-In
Total Income Earnings Income Stock Capital
----------- ------------- ----------- ------------- ---------- ----------

Beginning balance $18,330,317 $11,473,316 $ 554,280 $6,149,200 $ 153,521

Comprehensive Income:
Net Income 1,264,855 $1,264,855 1,264,855
Other comprehensive
income, net of tax:
Unrealized gain on securities
available for sale, net of
deferred taxes of $88,568 171,927 171,927 171,927
Add: reclassification
adjustment, net of income
taxes of $552 1,073 1,073 1,073
----------- ---------- ------------

Total comprehensive income,
net of tax: $1,437,855
==========

Acquisition of common stock (9,150) (3,000) (6,150)
Issuance of common stock 119,000 93,600 25,400
Dividends declared (272,989) (272,989) 0
----------- ----------- ------------ ---------- -----------
Ending balance $19,605,033 $12,465,182 $ 727,280 $6,239,800 $ 172,771
=========== =========== ============ ========== ===========

Page 7

PART I. Item 1. - FINANCIAL INFORMATION (cont'd.) 6/01-10QSB
Chesapeake Financial Shares, Inc.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
1. Chesapeake Financial Shares, Inc. ("CFS) is a Virginia based financial
services holding company which traces its roots to a national bank founded in
Irvington, Virginia in 1900. The Company has two operating subsidiaries,
Chesapeake Bank (the "Bank"), which constitutes the majority of its business
activity, and Chesapeake Investment Group, Inc., a newly formed entity which has
as its subsidiaries, Chesapeake Financial Group, Inc., Chesapeake Insurance
Agency, Inc., d/b/a Chesapeake Investment Services, and Chesapeake Trust
Company, Inc. Chesapeake Bank also is the 100% owner of CNB Properties, Inc. The
consolidated financial statements include the accounts of CFS and its wholly
owned subsidiaries. All significant intercompany accounts have been eliminated.

2. The accounting and reporting policies of the registrant conform to
generally accepted accounting principles and to the general practices within the
banking industry. The interim financial statements have not been audited;
however, in the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the
consolidated financial statements have been included.

The results of operations for the three and six months ended June 30, 2001
are not necessarily indicative of the results expected for the full year. These
financial statements should be read in conjunction with the financial statements
and the footnotes included in the registrant's 2000 Annual Report to
Shareholders.

3. The following data shows the amounts used in computing earnings per share
and the effect on the weighted average number of shares of potential
dilutive common stock. The potential common stock will not have a
significant impact on net income.

June 30, 2001 June 30, 2000
------------- -------------

Weighted average number of common shares, basic 1,237,720 1,229,195
Effect of dilutive stock options 25,204 43,810
------------- -------------
Weighted number of common shares and dilutive
potential common stock used in diluted EPS 1,262,924 1,273,005
============= =============

Page: 8

PART I. Item 2. - FINANCIAL INFORMATION (cont'd.) 6/01-10QSB
Chesapeake Financial Shares, Inc.
Management's Discussion and Analysis of Financial
Condition or Plan of Operation (Unaudited)
--------------------------------------------------------------------------------

A. Summary - liquidity and capital resources

Sufficient short-term assets are maintained at Chesapeake Financial Shares
to meet cash needs anticipated by management. Management's primary sources of
liquidity continue to be federal funds sold, short term borrowings from Federal
Home Loan Bank Atlanta, securities maturing within one year, and principal
payments from mortgage securities. The repayment and sale of loans also provides
liquidity. The total of federal funds sold, securities maturing within one year,
and estimated principal payments on mortgage-backed securities within one year
at June 30, 2001 was approximately $11,595,000, compared to $4,824,000 one year
ago and $4,034,000 at December 31,2000. The increase in short term assets was an
anomaly at quarter end. Adjusting for the anomaly short term assets at June 30,
2001 would be $5,548,000.

The liquidity ratio at June 30, 2001 was 19.7%, compared with 24.6% one
year ago. This ratio is arrived at by dividing net liquid assets (sum of total
Cash and Due from Banks, including Federal Reserve, unpledged and over pledged
portions of Investment Securities at market value, and federal funds sold less
reserves required at the Federal Reserve Bank) by net liabilities (total
liabilities excluding valuation reserves and capital). Management has found in
the past that 18% represents a sufficient level of liquidity to meet cash needs.
Lower asset liquidity ratios are to be expected as management has positioned the
Company to be more liability liquid to meet the demand for scarce deposits in
the current market environment.

Management believes capital is adequate to meet current needs. Unencumbered
capital (total capital net of accumulated other comprehensive income less
intangibles plus reserves) as a percent of total adjusted assets (total assets
less intangibles plus reserves) was 9.0% at June 30, 2001 and 8.7% at December
31, 2000, for CFS.

Chesapeake Financial Shares and Chesapeake Bank must have a ratio of Tier 1
capital (common equity, retained earnings less certain goodwill) to
risk-adjusted assets of at least 4.0%. At June 30, 2001 and December 31, 2000
the consolidated ratio of Tier 1 risk-based capital to risk-adjusted assets was
10.1% and 9.1%, respectively. Total risked based capital to risk weighted assets
was 11.3% and 10.3% at June 30, 2001 and December 31, 2000, respectively. Tier
one leverage capital was 8.1% and 7.6% at June 30, 2001 and December 31, 2000,
respectively.

Page: 9

B. Results of operations:

Earnings Summary:

Net income was $1,264,855 for the six months ended June 30, 2001, compared
with income of $1,001,841 for the same period in 2000. On a fully diluted per
share basis, the net income was $1.00 for the first six months of 2001. Fully
diluted earnings per share for the first six months of 2000 was $0.79. Net
interest income before provision increased $557,717 or 14.4% and noninterest
income increased $317,041 or 13.6%. The Company experienced a net increase in
noninterest expense (which includes other expense) of $344,631 or 7.3%.

Net Interest Income:

Chesapeake Financial Shares' results of operation are significantly
affected by its ability to manage effectively the interest rate sensitivity and
maturity of its interest-earning assets and interest-bearing liabilities. At
June 30, 2001, the Company's interest-earning assets exceeded its
interest-bearing liabilities by approximately $35.5 million, compared with a
$29.7 million excess one year ago.

Net interest margins are 4.53% at June 30, 2001 compared to 4.63% at June
30, 2000. Margins had narrowed during the later part of 1998 and the first half
of 1999 due to falling rates and the resulting compression of spreads as deposit
rates hit floors. Margins had generally improved through the first quarter of
2000, but since then compression of margins actually occurred again as short
term rates continued upward, creating a flat yield curve through the end of 2000
and the competition with the brokerage firms for deposits intensified. In the
current falling rate environment and steepening of the yield curve, management
expects margins to improve slightly during the balance of the year due to higher
priced deposits maturing in this lower rate environment. The Bank's sustained
margin levels of 4.5% have been 30 basis points better than several Virginia
community banks.

There has been reasonable growth in deposits in all trade areas of the bank
and total deposits increased 4.2% since December 31, 2000 and 9.8% from one year
ago. Total certificates of deposit have increased 11.2% from one year ago, but
are down 1.3% from December 31, 2000. Large banks seem to be buying market share
again with very aggressive "promotional specials" at the top of the market.

Page: 10

Provision for Loan Losses:

The loan loss provision is a charge against earnings necessary to maintain
the reserve for loan losses at a level consistent with management's evaluation
of the credit quality and risk adverseness of the portfolio. Management makes a
quarterly evaluation as to the adequacy of the current loan loss reserve.
Management's detailed analysis as of June 30, 2001 supports the adequacy of the
current loan loss level of $2.4 million.

Chesapeake Bank's management maintains a reserve for loan loss that they
feel represents a conservative estimate of potential losses in the Bank's loan
portfolio. The methodology incorporates subjective factors into the evaluation
of the adequacy of the ALLL such as:

The effect of volume and trends in delinquencies and nonaccrual loans.
The effect of trends in portfolio volume, maturity, and composition.
An estimate of future loss on all significant loans and assessment of
underwriting and lending policies and procedures including those
for charge off, collection and recovery.
Experience, ability and depth of lending management and staff.
The effect of national and local economic conditions and downturns in
specific industries.
Concentrations of credit that might affect loss experience across one
or more components of the portfolio.
The results of any independent reviews of the portfolio.

The loan loss reserve was 1.5% and 1.3% of gross loans as of June 30, 2001
and December 31, 2000.

Noninterest Income:

Noninterest income is up 13.6% or $317,041 from the same period last year.
Chesapeake Bank's Cash Management product generated $890,046 in gross revenue
for the first six months ended June 30, 2001, compared to the same period last
year of $738,322. Managed assets in the Cash Management program were $10,714,619
at June 30, 2001, and $8,613,430 at June 30, 2000. Service Charges on deposit
accounts were up 27.1%, or $88,347, from one year ago due to increased account
volume.

The Other Income category was $321,387, up 12.1%, or $34,772 from one year
ago.

Page: 11

Employee salary expense amounted to $1,975,509 and $1,720,065 for the six
months ended June 30, 2001 and 2000, respectively. Benefits expense is up 9.0%
or $32,681 from June 30, 2000. These increases are directly related to new hires
and increases for existing staff. Occupancy expenses were up $83,675 or 10.8%
from the same period one year ago due to general increases in prices of services
used by the Bank.

Cash management expense was $285,762 for the six months ended June 30,
2001, down 16.9% from the same period one year ago. This decrease is mainly due
to the timing of expense receipts related to the business activity and reduced
costs of services in a new contract arrangement.

Page: 12

Assets and Loans:

At June 30, 2001, Chesapeake Financial Shares had total assets of $ 234.4
million, up 4.6% from $224.2 million at December 31, 2000 and up 10.1% from
$212.6 million of one year ago. Management has budgeted for a 7.0% growth in
total assets for 2000.

Total loans (gross) at June 30, 2001 were $164.0 million, representing an
increase of 3.5% from December 31, 2000, when loans were $158.5 million.
Chesapeake Bank's loan quality is good as the following table shows. Management
is confident that no serious delinquency trends are developing.

6/30/01 12/31/00
------- --------

Nonaccrual loans $752,968 $562,813
90 days past due 125,727 28,234
Restructured loans 0 0
-------- --------
Totals $878,695 $591,047

Management is also confident there will be no loss incurred as the Bank is
well secured on these assets. There are no impaired loans outstanding at the end
of either period.

Charged off loans through June 30, 2001, amounted to $13,572 and charged
off loans through June 30, 2000, were $122,967. Recoveries through June 30, 2001
were $1,474 as compared to $1,860 as of June 30, 2000.

Concentrations of credit in loans are compiled quarterly by management and
reviewed with the Board of Director's Loan Review Committee. There have been no
material changes in the concentrations of credit within the past three months
that would warrant above average additions to the reserve. The Bank's only
concentrations of credit greater than 70% of capital are individual consumer
(226% of capital) and residential real estate (73% of total capital). Bank
management feels that the current levels are consistent with the objectives of
the Bank and do not represent unwarranted risk.

The Bank's Other Real Estate Owned (OREO) portfolio currently has one
property with a total carrying value of $20,000. Bank management is currently
marketing this property. The Bank also has one repossessed asset valued at $395.

Deposits:

Deposits were $202.2 million at June 30, 2001 and $194.0 million at
December 31, 2000. Deposits were $184.1 million at June 30, 2000. The Bank's mix
of deposit dollars has changed from June 30, 2000 with net increases in all
categories. It is management's opinion that this trend will continue in the
current interest rate environment.

Page: 13

PART II. Item l. - OTHER INFORMATION 6/01-10QSB
Chesapeake Financial Shares, Inc.
Legal Proceedings
--------------------------------------------------------------------------------
None to report

PART II. Item 2. - OTHER INFORMATION
Chesapeake Financial Shares, Inc.
Changes in Securities
--------------------------------------------------------------------------------
None to report.

PART II. Item 3. - OTHER INFORMATION
Chesapeake Financial Shares, Inc.
Default Upon Senior Securities
--------------------------------------------------------------------------------
None to report.

PART II. Item 4. - OTHER INFORMATION
Chesapeake Financial Shares, Inc.
Submission of Matters to a Vote of Security Holders
--------------------------------------------------------------------------------

Chesapeake Financial Shares' annual meeting of shareholders was held on
Friday, April 6, 2001 in Irvington, Virginia. We have previously forwarded to
the Commission copies of the letter to shareholders, the notice of the meeting,
the proxy statement, and the proxy. Over 90% of the shareholders were
represented at the meeting in person or by proxy with over 89% voting in favor
of the proposals submitted.

PART II. Item 5. - OTHER INFORMATION
Chesapeake Financial Shares, Inc.
Other Information
--------------------------------------------------------------------------------

During the fourth quarter of 2000, the Company satisfactorily completed a
Combined Safety and Soundness Examination performed by the Federal Reserve Bank
of Richmond. As of December 2000, the Bank and the Company satisfactorily
completed Transfer Agent Examination, also performed by the Federal Reserve
Bank. As a result of these examinations management is not aware of any current
recommendations of the regulatory authorities which, if they were implemented,
would have a material effect on liquidity, capital resources or operations of
the Bank or Holding Company.

Page: 14

PART II. Item 6. - OTHER INFORMATION 6/01-10QSB
Chesapeake Financial Shares, Inc.
Exhibits and Reports on Form 8-K
(Unaudited)
--------------------------------------------------------------------------------

(a) Exhibit 2 Plan of acquisition, reorganization, arrangement,
liquidation or succession N/A

Exhibit 4 Instruments defining the rights of security
holders, including indentures N/A

Exhibit 10 Material contracts N/A

Exhibit 11 Statement re: computation of earnings per share See Part 1, Item 1,
Note 3 of this Form
10-QSB

Exhibit 15 Letter re: unaudited interim financial information N/A

Exhibit 18 Letter re: change in accounting principles N/A

Exhibit 19 Report furnished to security holders N/A

Exhibit 22 Published report regarding matters submitted to vote
of security holders Previously Filed

Exhibit 23 Consents of experts and counsel N/A

Exhibit 24 Power of attorney N/A

Exhibit 99 Additional exhibits N/A

(b) No filings were made on Form 8-K for the period.

Page: 15

SIGNATURES
Chesapeake Financial Shares, Inc. SEC 10-QSB 6/01
--------------------------------------------------------------------------------

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

Chesapeake Financial Shares, Inc.
---------------------------------
(Registrant)

08/08/01
----------------- -----------------------
(Date) (Signature)
Douglas D. Monroe, Jr.
Chairman and Chief Executive Officer

08/08/01
----------------- -----------------------
(Date) (Signature)
John H. Hunt, II
Secretary and Chief Financial Officer

Page: 16