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 September 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 November 1, 2001.

Class Outstanding at November 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
September 30, 2001 and December 31, 2000............................1-2

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

Consolidated Statements of Earnings
Nine months ended September 30, 2001 and 2000.........................4

Consolidated Statements of Cash Flows
Nine months ended September 30, 2001 and 2000.........................5

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

Consolidated Statement of Changes in Stockholder's Equity
Nine months ended September 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. September 30, December 31,
Consolidated Balance Sheets 2001 2000
----------------------------------------------------------------------------------------------------

ASSETS (Unaudited)

Cash and due from banks............................................... $ 10,190,552 $ 8,965,457
Federal funds sold.................................................... 2,565,000 0
Securities available for sale
U.S. Government agencies (book value of $18,226,219
-2001 and $21,053,805-2000)...................................... 19,669,468 21,167,667
Obligations of state and political subdivisions (book value of
$14,692,998-2001 and $15,110,437-2000)............................ 16,060,247 15,839,088
Other Securities (book value $2,294,661-2001 and
$2,551,294-2000................................................... 2,573,650 2,548,600

Loans................................................................. 164,497,104 158,455,860
Less: Allowance for loan loss......................................... (2,548,447) (2,125,022)
----------- -----------
Net loans.......................................................... 161,948,657 156,330,838

Bank premises and equipment, net...................................... 5,446,450 5,580,409
Accrued interest receivable........................................... 1,479,962 1,533,719
Cash Management Assets, net of allowance for losses................... 10,774,439 9,209,373
Other assets.......................................................... 3,294,606 3,037,565
----------- -----------
Total assets....................................................... $234,003,031 $224,212,716
=========== ===========

See accompanying notes to consolidated financial statements. Page: 1

PART I. Item 1. - FINANCIAL INFORMATION

Chesapeake Financial Shares, Inc. September 30, December 31,
Consolidated Balance Sheets 2001 2000
------------------------------------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited)

Deposits
Noninterest bearing deposits......................................... $ 31,448,238 $ 27,396,972
Savings and interest bearing deposits................................ 77,229,714 64,744,254
Certificates of deposit.............................................. 97,076,630 101,902,570
------------ ------------
Total
deposits.......................................................... 205,754,582 194,043,796

Federal funds purchased and FHLB advances............................... 5,000,000 9,500,000
Accrued interest payable................................................ 275,907 397,244
Other liabilities....................................................... 1,803,620 1,119,597
Note payable............................................................ 799,536 821,762
------------ ------------
Total liabilities.................................................. 213,633,645 205,882,399

Commitments and contingent liabilities 0 0

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
9/30/01 12/31/00 9/30/01 12/31/00
--------- --------- ------- --------
Shares auth. 2,400,000 2,400,000 635,000 635,000
Shares o/s.. 1,247,960 1,229,840 0 0
Paid in capital......................................................... 172,771 153,521
Accumulated other comprehensive income.................................. 938,046 554,280
Retained earnings....................................................... 13,018,769 11,473,316
------------ ------------
Total shareholders' equity......................................... 20,369,386 18,330,317
------------ ------------
Total liabilities and Shareholders' equity......................... $234,003,031 $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 September 30,
2001 2000
---------- ----------
Interest Income (Unaudited)

Interest and fees on loans................................. $3,572,992 $3,411,800
Interest on federal funds sold............................. 62,726 3,636
Interest on time deposits with banks....................... 3,552 8,507
Interest on U.S. Agency Obligations........................ 305,649 423,322
Interest on obligations of state and political subs........ 222,448 175,757
---------- ----------
Total interest income 4,167,367 4,023,022
---------- ----------

Interest Expense

Interest on savings and interest bearing deposits.......... 429,597 544,817
Interest on certificates of deposit........................ 1,330,744 1,458,484
Interest on federal funds purchased........................ 62,926 79,739
Other interest expense..................................... 11,062 11,463
---------- ----------
Total interest expense 1,834,329 2,094,503
---------- ----------
Net interest income........................................ 2,333,038 1,928,519
Provision for loan losses.................................. 114,499 88,874
---------- ----------
Net interest income after provision for loan losses........ 2,218,539 1,839,645
---------- ----------

Noninterest Income

Income from fiduciary activities........................... 395,578 393,342
Service charges on deposit accounts........................ 210,339 175,554
Merchant card income....................................... 292,260 348,199
ATM income................................................. 74,885 61,847
Cash Management income..................................... 495,329 362,813
Other income............................................... 132,662 142,055
---------- ----------
Total noninterest income 1,601,053 1,483,810
---------- ----------

Noninterest Expense

Salaries................................................... 1,001,858 908,766
Employee benefits.......................................... 261,759 174,418
Occupancy expenses......................................... 462,927 440,120
Merchant card expense...................................... 245,030 306,084
ATM expense................................................ 62,883 61,497
Cash management expense.................................... 192,543 195,109
Other expenses............................................. 653,837 450,672
---------- ----------
Total noninterest expense............................. 2,880,837 2,536,666
---------- ----------
Income before income taxes................................. 938,755 786,789
Income taxes............................................... 247,892 188,829
---------- ----------
Net income............................................ $ 690,863 $ 597,960
========== ==========

Earnings per share, basic.................................. $ 0.56 $ 0.49
Earnings per share, assuming dilution...................... $ 0.54 $ 0.47

See accompanying notes to consolidated financial statements. Page: 3

PART I. Item 1. - FINANCIAL INFORMATION (cont'd.)

Chesapeake Financial Shares, Inc. Nine Months Ended
Consolidated Statements of Earnings September 30,
2001 2000
----------- -----------

Interest Income (Unaudited)

Interest and fees on loans........................... $10,984,671 $ 9,572,505
Interest on federal funds sold....................... 92,743 5,696
Interest on time deposits with banks................. 17,815 17,383
Interest on U.S. Agency Obligations.................. 989,697 1,216,472
Interest on obligations of state and political subs.. 676,308 677,863
----------- -----------
Total interest income 12,761,234 11,489,919
----------- -----------

Interest Expense

Interest on savings and interest bearing deposits.... 1,340,103 1,649,686
Interest on certificates of deposit.................. 4,329,292 3,694,562
Interest on federal funds purchased.................. 291,039 309,816
Other interest expense............................... 33,493 30,784
----------- -----------
Total interest expense 5,993,927 5,684,848
----------- -----------
Net interest income.................................. 6,767,307 5,805,071
Provision for loan losses............................ 437,165 269,122
----------- -----------
Net interest income after provision for loan losses.. 6,330,142 5,535,949
----------- -----------

Noninterest Income

Income from fiduciary activities..................... 870,282 852,798
Service charges on deposit accounts.................. 624,539 501,407
Security gains (losses) - net-....................... (1,625) 0
Merchant card income................................. 718,038 755,796
ATM income........................................... 199,629 176,197
Cash Management income............................... 1,385,375 1,101,135
Other income......................................... 454,049 428,670
----------- -----------
Total noninterest income 4,250,287 3,816,003
----------- -----------

Noninterest Expense

Salaries............................................. 2,977,367 2,628,831
Employee benefits.................................... 657,664 537,642
Occupancy expenses................................... 1,319,815 1,213,333
Merchant card expense................................ 632,077 680,426
ATM expense.......................................... 180,527 180,760
Cash management expense.............................. 478,305 539,006
Other expenses....................................... 1,689,998 1,466,953
----------- -----------
Total noninterest expense....................... 7,935,753 7,246,951
----------- -----------
Income before income taxes........................... 2,644,676 2,105,001
Income taxes......................................... 688,958 505,200
----------- -----------
Net income...................................... $ 1,955,718 $ 1,599,801
=========== ===========

Earnings per share, basic............................ $ 1.58 $ 1.30
Earnings per share, assuming dilution................ $ 1.54 $ 1.26

See accompanying notes to consolidated financial statements. Page: 4

PART I. - FINANCIAL INFORMATION (cont'd.)

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

Cash flows from operating activities:
Net income............................................................ $ 1,955,718 $ 1,599,801
Adjustments to reconcile net income to net cash provided by
(used for) operating activities:
Depreciation and amortization....................................... 748,298 670,966
Provision for loan losses........................................... 437,165 269,122
Provision for cash management account losses........................ 210,000 190,000
(Accretion) of discount and amortization of premiums, net............ 254,693 158,377
Net loss on sale of securities...................................... 1,625 0
Changes in assets and liabilities:
Decrease (increase) in accrued interest receivable................. 53,757 (204,406)
Decrease (increase) in other assets................................ (456,364) (144,548)
Increase (decrease) in accrued interest payable.................... (121,337) 34,840
Increase (decrease) in other liabilities........................... 684,023 209,496
--------- ---------
Net cash provided by (used for) operating activities.................. 3,767,578 2,783,648
--------- ----------

Cash flows from investing activities:
Purchases of securities available for sale............................ (2,124,323) (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 3,406,732
Origination of loans available for sale............................... (8,817,380) (1,698,360)
Proceeds from sale of loans available for sale........................ 8,817,380 1,698,360
Net (increase) decrease in loans outstanding.......................... (6,054,984) (20,466,275)
Net (increase) decrease in Cash Management assets................... (1,775,066) 658,311
Other capital expenditures............................................ (614,339) (889,887)
--------- ----------
Net cash provided by (used for) investing activities.................. (6,865,628) (20,292,834)
--------- ----------

Cash flows from financing activities:
Net increase (decrease) in demand accounts, interest bearing demand
deposit accounts and savings deposits............................... 16,536,727 2,838,571
Net increase (decrease) in certificates of deposit.................... (4,825,941) 13,102,560
Net increase (decrease) in federal funds purchased.................... (4,500,000) 2,100,000
Cash dividends........................................................ (410,265) (356,721)
Proceeds from issuance of voting common stock......................... 119,000 110,790
Acquisition of voting common stock.................................... (9,150) (276,263)
Curtailment of long-term borrowings................................... (22,226) (18,744)
--------- ----------
Net cash provided by (used for) financing activities.................. 6,888,145 17,500,193
--------- ----------

Net (decrease) increase in cash and federal funds sold................ 3,790,095 (8,993)
Cash and federal funds sold at beginning of period.................... 8,965,457 8,669,184
--------- ----------
Cash and federal funds sold at end of period.......................... $12,755,552 $ 8,660,191
========== ==========

See accompanying notes to consolidated financial statements. Page: 5

Consolidated Statement of Changes in Stockholder's Equity
Chesapeake Financial Shares, Inc.
Nine Months Ended September 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 1,599,801 $ 1,599,801 1,599,801
Other comprehensive
income, net of tax:
Unrealized gain on securities
available for sale, net of
deferred taxes of $277,290 538,269 538,269 538,269
----------- ----------- ----------

Total comprehensive income,
net of tax: $ 2,138,070
===========

Acquisition of common stock (276,263) (74,880) (201,383)
Issuance of common stock 110,790 75,600 35,190
Dividends declared (356,721) (356,721) 0
----------- ----------- ---------- ---------- ---------
Ending balance $17,129,328 $10,980,000 $ (81,579) $6,132,355 $ 98,552
=========== =========== ========== ========== =========

Page 6

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

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

Comprehensive Income:
Net Income 1,955,718 $ 1,955,718 1,955,718
Other comprehensive
income, net of tax:
Unrealized gain on securities
available for sale, net of
deferred taxes of $197,145 382,693 382,693 382,693
Add: reclassification
adjustment, net of income
taxes of $552 1,073 1,073 1,073
----------- ------------ ------------

Total comprehensive income,
net of tax: $ 2,339,484
============

Acquisition of common stock (9,150) (3,000) (6,150)
Issuance of common stock 119,000 93,600 25,400
Dividends declared (410,265) (410,265) 0
----------- ---------- ------------ ---------- ---------

Ending balance $20,369,386 $13,018,769 $ 938,046 $6,239,800 $ 172,771
=========== =========== ============ ========== =========

Page 7

PART I. Item 1. - FINANCIAL INFORMATION (cont'd.) 9/01-10QSB
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., an entity that 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 nine months ended September 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.

September 30, 2001 September 30, 2000
------------------ ------------------

Weighted average number of common shares, basic 1,241,171 1,229,019
Effect of dilutive stock options 30,718 39,440
--------- ---------
Weighted number of common shares and dilutive
potential common stock used in diluted EPS 1,271,889 1,268,459
========= =========

4. Recent accounting pronouncements

In July 2001, the Financial Accounting Standards Board issued two
statements - Statement 141, Business Combinations, and Statement 142, Goodwill
and Other Intangible Assets, which will potentially impact the accounting for
goodwill and other intangible assets. Statement 141 eliminates the pooling
method of accounting for business combinations and requires that intangible
assets that meet certain criteria be reported separately from goodwill. The
Statement also requires negative goodwill arising from a business combination to
be recorded as an extraordinary gain. Statement 142 eliminates the amortization
of goodwill and other intangibles that are determined to have an indefinite
life. The Statement requires, at a minimum, annual impairment tests for
goodwill and other intangible assets that are determined to have an indefinite
life.

Upon adoption of these Statements, an organization is required to re-
evaluate goodwill and other intangible assets that arose from business
combinations entered into before July 1, 2001. If the recorded other intangible
assets do not meet the criteria for recognition, they should be classified as
goodwill. Similarly, if there are other intangible assets that meet the
criteria for recognition but were not separately recorded from goodwill, they
should be reclassified from goodwill. An organization also must reassess the
useful lives of intangible assets and adjust the remaining amortization periods
accordingly. Any negative goodwill must be written off.

The standards generally are required to be implemented by the Company in
its 2002 financial statements. The adoption of theses statements will not have
a material impact on the financial statements of the Company.

Page: 8

PART I. Item 2. - FINANCIAL INFORMATION (cont'd.) 9/01-10QSB
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 September 30, 2001 was approximately $10,705,000, compared to
$4,731,000 one year ago and $4,034,000 at December 31,2000.

The liquidity ratio at September 30, 2001 was 19.2%, compared with 23.3%
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 9.3% at September 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 September 30, 2001 and December 31, 2000
the consolidated ratio of Tier 1 risk-based capital to risk-adjusted assets was
10.3% and 9.1%, respectively. Total risked based capital to risk weighted
assets was 11.5% and 10.3% at September 30, 2001 and December 31, 2000,
respectively. Tier one leverage capital was 8.3% and 7.6% at September 30, 2001
and December 31, 2000, respectively.

During the first quarter of 2002, the Bank expects to open a new office in
an existing market, Gloucester County, Virginia. Funding for this office will
come from existing capital reserves and general operations.

Page: 9

B. Results of operations:

Earnings Summary:

Net income was $1,955,718 for the nine months ended September 30, 2001,
compared with income of $1,599,801 for the same period in 2000. On a fully
diluted per share basis, the net income was $1.54 for the first nine months of
2001. Fully diluted earnings per share for the first nine months of 2000 were
$1.26. Net interest income before provision increased to $6,767,307 for the nine
months ended September 30, 2001, a 16.6% increase and noninterest income
increased to $4,250,287, an 11.4% increase for the same period. The Company
experienced a net increase in noninterest expense (which includes other expense)
of $688,802 or 9.5%.

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
September 30, 2001, the Company's interest-earning assets exceeded its interest-
bearing liabilities by approximately $34.7 million, compared with a $29.8
million excess one year ago.

Net interest margins are 4.73% at September 30, 2001 compared to 4.43% at
September 30, 2000. Margins had generally improved through the first quarter
of 2000, but since then compression of margins actually occurred 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 through the last quarter
of 2000 intensified. In the current falling rate environment of 2001and
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. However, management believes margins will compress
during 2002 due to assets repricing in this low rate environment.

There has been reasonable growth in deposits in all trade areas of the bank
and total deposits increased 6.0% since December 31, 2000 and 7.9% from one year
ago. Total certificates of deposit have increased 3.8% from one year ago, but
are down 4.7% from December 31, 2000.

Page: 10

Provision for Loan Losses:

The loan loss provision is a charge against earnings necessary to maintain
the allowance 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 September 30, 2001 supports the adequacy of
the current loan loss level of $2.5 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.

Noninterest Income:

Noninterest income is up 11.4% or $434,284 from the same period last year.
Chesapeake Bank's Cash Management product generated $1,385,375 in gross revenue
for the first nine months ended September 30, 2001, compared to the same period
last year of $1,101,135. Managed assets in the Cash Management program were
$11,199,573 at September 30, 2001, and $8,272,850 at September 30, 2000. Service
Charges on deposit accounts were up 24.6%, or $123,132, from one year ago due to
increased account volume.

The Other Income category was $454,049, up 5.9%, or $25,379 from one year
ago.

Page: 11

Employee salary expense amounted to $2,977,367 and $2,628,831 for the nine
months ended September 30, 2001 and 2000, respectively. Benefits expense is up
22.3% or $120,022 from September 30, 2000. These increases are directly related
to new hires and increases for existing staff. Occupancy expenses were up
$106,482 or 8.8% from the same period one year ago due to general increases in
prices of services used by the Bank.

Cash Management expense was $478,305 for the nine months ended September
30, 2001, down 11.3% 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.

Page: 12

Assets and Loans:

At September 30, 2001, Chesapeake Financial Shares had total assets of $
234.0 million, up 4.4% from $224.2 million at December 31, 2000 and up 7.7% from
$217.3 million of one year ago. Management has budgeted a 7.0% growth in total
assets for 2001.

Total loans (gross) at September 30, 2001 were $164.5 million, representing
an increase of 3.8% 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.

9/30/01 12/31/00
---------- ---------

Nonaccrual loans $1,019,077 $ 562,813
90 days past due 166,905 28,234
Restructured loans 0 0
---------- ---------
Totals $1,185,982 $ 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 September 30, 2001, amounted to $26,759 and
charged off loans through September 30, 2000, were $131,072. Recoveries through
September 30, 2001 were $13,019 as compared to $2,676 as of September 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
loans (224% of 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 two
properties with a total carrying value of $55,000. Bank management is currently
marketing these properties. The Bank also has one repossessed asset valued at
$395.

Deposits:

Deposits were $ 205.8 million at September 30, 2001 and $194.0 million at
December 31, 2000. Deposits were $190.8 million at September 30, 2000. The
Bank's mix of deposit dollars has changed from September 30, 2000 with net
increases in all categories. However, there have been greater increases in
transaction accounts than certificates of deposit. It is management's opinion
that this trend will continue in the current economic and interest rate
environment.

Page: 13

PART II. Item l. - OTHER INFORMATION 9/01-10QSB
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
---------------------------------------------------
None to report.

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 a 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.

Forward-Looking Statements: The foregoing discussion may contain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act with respect to the plans, objectives, future performance
and business of the Company. These forward-looking statements involve certain
risks and uncertainties. Factors that may cause actual results to differ
materially from those contemplated by such forward-looking statements include,
among others, the following possibilities: (1) competitive pressure in the
banking industry increases significantly; (2) changes in the interest rate
environment reduce margins; (3) general economic conditions, either nationally
or regionally, are less favorable than expected, resulting in, among other
things, a deterioration in credit quality; (4) changes in the regulatory
environment; (5) changes in business conditions, impacting, among others, the
Company's customers and vendors; and (6) changes in the securities market.

Page: 14

PART II. Item 6. - OTHER INFORMATION 9/01-10QSB
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 9/01
-----------------------------------------------------------------------------

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)

11/08/01 /s/ Douglas D. Monroe, Jr.
-------- ------------------------------------
(Date) (Signature)
Douglas D. Monroe, Jr.
Chairman and Chief Executive Officer

11/08/01 /s/ John H. Hunt, II
-------- -------------------------------------
(Date) (Signature)
John H. Hunt, II
Secretary and Chief Financial Officer

Page: 16