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 March 31, 2002
--------------

[_] 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 May 1, 2002.

Class Outstanding at May 1, 2002
---------- --------------------------

Common Stock, voting, $5.00 par value 1,284,198
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 1-6

Consolidated Balance Sheets
March 31, 2002 and December 31, 2001 ............................... 1-2

Consolidated Statements of Earnings
Three months ended March 31, 2002 and 2001 ......................... 3

Consolidated Statements of Cash Flows
Three months ended March 31, 2002 and 2001 ......................... 4

Consolidated Statement of Changes in Stockholder's Equity
Three months ended March 31, 2001 .................................. 5

Consolidated Statement of Changes in Stockholder's Equity
Three months ended March 31, 2002 .................................. 6

Notes to Consolidated Financial Statements ......................... 7

Item 2. Management's Discussion and Analysis of Financial
Condition or Plan of Operations .................................... 8-12

PART II - OTHER INFORMATION

Item 1. Legal Proceedings ........................................ 13

Item 2. Changes in Securities .................................... 13

Item 3. Defaults Upon Senior Securities .......................... 13

Item 4. Submission of Matters to a Vote of Security Holders ...... 13

Item 5. Other Information ........................................ 13

Item 6. Exhibits and Reports on Form 8-K ......................... 14

Signatures ......................................................... 15

PART I. Item 1. - FINANCIAL INFORMATION

Chesapeake Financial Shares, Inc. March 31, December 31,
Consolidated Balance Sheets 2002 2001
--------------------------------------------------------------------------------------------------

ASSETS (Unaudited)
Cash and due from banks ......................................... $ 12,625,224 $ 12,298,550
Federal Funds Sold .............................................. 14,712,000 7,674,000
Securities available for sale
U.S. Government agencies (book value of $17,808,662
-2002 and $17,700,819-2001) .................................. 17,983,123 17,965,367
Obligations of state and political subdivisions (book value
of $15,779,249-2002 and $15,151,912-2001) .................... 16,305,373 15,655,638
Other Securities (book value $2,284,710-2002 and
$2,488,027-2001 .............................................. 2,387,618 2,499,350

Loans ........................................................... 171,544,918 169,015,349
Less: Allowance for loan losses ................................. (2,575,144) (2,540,577)
-----------------------------
Net loans .................................................... 168,969,774 166,474,772

Bank premises and equipment, net ................................ 7,418,571 6,985,214
Accrued interest receivable ..................................... 1,272,343 1,288,705
Business Manager Assets ......................................... 11,930,859 10,882,704
Other assets .................................................... 5,853,964 3,279,369
-----------------------------
Total assets ................................................. $259,458,849 $ 245,003,669
=============================

See accompanying notes to consolidated financial statements.

Page: 1

PART I. Item 1. - FINANCIAL INFORMATION

Chesapeake Financial Shares, Inc. March 31, December 31,
Consolidated Balance Sheets 2002 2001
--------------------------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited)

Deposits
Noninterest bearing deposits ............................ $ 33,621,607 $ 33,592,404
Savings and interest bearing deposits ................... 87,282,792 83,345,883
Certificates of deposit ................................. 103,401,301 94,879,030
----------------------------
Total deposits ........................................ 224,305,700 211,817,317

Federal funds purchased and FHLB advances .................. 11,000,000 10,000,000
Accrued interest payable ................................... 253,686 255,482
Other liabilities .......................................... 1,767,223 1,564,010
Note payable ............................................... 784,202 791,922
----------------------------
Total liabilities ..................................... 238,110,811 224,428,731

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 .................................... 6,420,990 6,276,990
Common stock, non-voting ................................ 0 0
voting non-voting
3/31/02 12/31/01 3/31/02 12/31/01
------- -------- ------- --------
Shares auth. 2,000,000 2,000,000 635,000 635,000
Shares o/s.. 1,284,198 1,255,398 0 0
Paid in capital ............................................ 320,383 229,948
Accumulated other comprehensive income ..................... 530,305 514,534
Retained earnings .......................................... 14,076,360 13,553,466
----------------------------
Total shareholders' equity ............................ 21,348,038 20,574,938
----------------------------
Total liabilities and shareholders' equity ............ $ 259,458,849 $245,003,669
============================

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 March 31,
2002 2001
-------------------------------------------------------------------------------

Interest Income (Unaudited)

Interest and fees on loans ......................... $ 3,250,215 $ 3,689,164
Interest on federal funds sold ..................... 52,478 494
Interest on time deposits with banks ............... 1,748 7,632
Interest on U.S. Agency Obligations ................ 289,991 354,853
Interest on obligations of state and political
subs ............................................. 220,833 236,563
----------- -----------
Total interest income ......................... 3,815,265 4,288,706

Interest Expense

Interest on savings and interest bearing deposits .. 335,637 493,268
Interest on certificates of deposit ................ 979,937 1,528,807
Interest on federal funds purchased ................ 61,553 127,480
Other interest expense ............................. 10,854 11,266
----------- -----------
Total interest expense ........................ 1,387,981 2,160,821
----------- -----------
Net interest income ................................ 2,427,284 2,127,885
Provision for loan losses .......................... 199,999 195,000
----------- -----------
Net interest income after provision for loan
losses ........................................... 2,227,285 1,932,885
----------- -----------

Noninterest Income

Income from fiduciary activities ................... 240,932 219,669
Service charges on deposit accounts ................ 193,668 197,225
Securities (losses) - net .......................... (2,405) (1,625)
Merchant card income ............................... 216,737 194,944
ATM income ......................................... 67,977 55,386
Cash management income ............................ 583,782 436,721
Other income ....................................... 165,739 150,066
----------- -----------
Total noninterest income ...................... 1,466,430 1,252,386
----------- -----------

Noninterest Expense

Salaries ........................................... 1,031,248 890,852
Employee benefits .................................. 237,808 217,290
Occupancy expenses ................................. 506,019 383,545
Merchant card expense .............................. 180,048 161,111
ATM expense ........................................ 71,275 58,375
Cash management expense ............................ 97,250 147,452
Other expenses ..................................... 661,934 508,555
----------- -----------
Total noninterest expense ..................... 2,785,582 2,367,180
----------- -----------
Income before income taxes ......................... 908,133 818,091
Income taxes ....................................... 233,901 196,187
----------- -----------
Net income .................................... $ 674,232 $ 621,904
=========== ===========

Earnings per share, basic .......................... $ 0.54 $ 0.51
Earnings per share, assuming dilution .............. $ 0.53 $ 0.49
Dividends per share ................................ $ 0.12 $ 0.11

See accompanying notes to consolidated financial statements.

Page: 3

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

Chesapeake Financial Shares, Inc. Three Months Ended
Consolidated Statements of Cash Flows March 31,
2002 2001
-------------------------------------------------------------------------------------------------
(Unaudited)

Cash flows from operating activities:
Net income ......................................................... $ 674,232 $ 621,904
Adjustments to reconcile net income to net cash provided by
(used for) operating activities:
Depreciation and amortization .................................... 274,427 229,516
Provision for loan losses ........................................ 199,999 195,000
Provision for cash management account losses ..................... 39,841 60,000
(Accretion) of discount and amortization of premiums, net ........ (49,224) 67,899
Net loss on sale of securities ................................... 2,405 1,625
Changes in assets and liabilities:
Decrease (increase) in accr. interest receivable ................. 16,362 (78,115)
Decrease (increase) in other assets .............................. (2,582,719) 545,813
Increase (decrease) in accrued interest payable .................. (1,796) (30,097)
Increase (decrease) in other liabilities ......................... 203,213 169,222
----------------------------
Net cash provided by (used for) operating activities ............... (1,223,260) 1,719,767
----------------------------

Cash flows from investing activities:

Purchases of securities available for sale ......................... (5,006,773) (994,798)
Proceeds from sale of securities available for sale ................ 673,524 1,040,000
Proceeds from maturities of securities available for sale .......... 3,848,204 958,955
Origination of loans available for sale ............................ (5,319,300) (1,552,300)
Proceeds from sale of loans available for sale ..................... 5,319,300 1,552,300
Net (increase) decrease in loans outstanding ....................... (2,695,001) (4,225,759)
Net (increase) decrease in business manager assets ................. (1,087,996) (1,454,955)
Other capital expenditures ......................................... (707,784) (91,392)
----------------------------
Net cash provided by (used for) investing activities ............... (4,975,826) (4,767,949)
----------------------------

Cash flows from financing activities:

Net increase (decrease) in demand accounts, interest bearing demand
deposit accounts and savings deposits ............................ 3,966,112 (4,904,086)
Net increase (decrease) in certificates of deposit ................. 8,522,271 1,002,564
Net increase (decrease) in federal funds purchased ................. 1,000,000 (2,100,000)
Cash dividends ..................................................... (151,338) (135,714)
Proceeds from issuance of voting common stock ...................... 234,435 26,250
Acquisition of voting common stock ................................. 0 (9,150)
Curtailment of long-term borrowings ................................ (7,720) (7,308)
----------------------------
Net cash provided by (used for) financing activities ............... 13,563,760 3,680,728
Net (decrease) increase in cash and federal funds sold ............. 7,364,674 632,546
Cash and federal funds sold at beginning of period ................. 19,972,550 8,965,457
----------------------------
Cash and federal funds sold at end of period ....................... $ 27,337,224 $ 9,598,003
============================

See accompanying notes to consolidated financial statements.

Page: 4

Statement of Changes in Stockholder's Equity
Chesapeake Financial Shares, Inc.
Three Months Ended March 31, 2001
(unaudited)

Accumulated Additional
Comprehensive Retained Other Compr. 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 621,904 621,904 621,904
Other comprehensive
income, net of tax:
Unrealized gain on securities
available for sale; net of 201,150 201,150 201,150
deferred income taxes of
$103,107 ------------ ------------- ------------

Total comprehensive income,
net of tax: $ 822,054
=============

Acquisition of common stock (9,150) (3,000) (6,150)
Issuance of common stock 26,250 21,600 4,650
Dividends declared (135,713) (135,713)
------------ ------------ ------------ ----------- ----------

Ending balance $ 19,033,757 $ 11,959,506 $ 754,430 $ 6,167,800 $ 152,021
============ ============ ============ =========== ==========

Page 5

Statement of Changes in Stockholder's Equity
Chesapeake Financial Shares, Inc.
Three Months Ended March 31, 2002
(unaudited)

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

Beginning balance $ 20,574,938 $ 13,553,466 $ 514,534 $ 6,276,990 $ 229,948

Comprehensive Income:
Net Income 674,232 $ 674,232 674,232
Other comprehensive
income, net of tax:
Unrealized gain on securities
available for sale; net of 15,771 15,771 15,771
deferred income taxes of
$8,124
------------ ------------ ------------
Total comprehensive income,
net of tax: $ 690,003
============

Acquisition of common stock 0 0 0
Issuance of common stock 234,435 144,000 90,435
Dividends declared (151,339) (151,338)
------------ ------------ ------------ ------------ ----------

Ending balance $ 21,348,037 $ 14,076,360 $ 530,305 $ 6,420,990 $ 320,383
============ ============ ============ ============ ==========

Page 6

PART I. Item 1. - FINANCIAL INFORMATION (cont'd.) 3/02-10QSB
Chesapeake Financial Shares, Inc.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

1. Chesapeake Financial Shares, Inc. ("CFS) owns 100% of Chesapeake Bank (the
"Bank") and Chesapeake Investment Group, Inc. The CFS conducts substantially all
of its business activities through the Bank. The CFS also operates Chesapeake
Investment Group, Inc. and its subsidiaries Chesapeake Financial Group, Inc.,
Chesapeake Insurance Agency, Inc., d/b/a Chesapeake Investment Services, and
Chesapeake Trust Company. The 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
accounting principles generally accepted in the United States of America and to
the general practices within the 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.

These financial statements should be read in conjunction with the financial
statements and the footnotes included in the registrant's 2001 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.

March 31, 2002 March 31, 2001
-------------- --------------

Weighted average number of common shares, basic 1,258,118 1,231,126
Effect of dilutive stock options 20,770 29,079
-------------- --------------
Weighted number of common shares and dilutive
potential common stock used in diluted EPS 1,278,888 1,260,205
============== ==============

Page: 7

PART I. Item 2. - FINANCIAL INFORMATION (cont'd.) 3/02-10QSB
Chesapeake Financial Shares, Inc.
Management's Discussion and Analysis of Financial
Condition or Plan of Operation (Unaudited)
--------------------------------------------------------------------------------

A. Critical Accounting Policies

The financial condition and results of operations presented in the
Consolidated Financial Statements, accompanying notes to the Consolidated
Financial Statements, selected financial data appearing elsewhere within this
report, and management's discussion and analysis are, to a large degree,
dependent upon Chesapeake Financial Shares' accounting policies. The selection
and application of these policies involve judgments, estimates and uncertainties
that are susceptible to change.

Presented below are discussions of those accounting policies that
management believes are the most important (Critical Accounting Policies) to the
portrayal and understanding of Chesapeake's finanancial condition and results of
operations. These Critical Accounting Policies require management's most
difficult, subjective and complex judgments about matters that are inherently
uncertain. In the event that different assumptions or conditions were to
prevail, and depending upon the severity of such changes, the possibility of
materially different financial conditions or results of operations is a
reasonable likelihood.

Allowance for Loan Loss - Chesapeake Bank's management maintains an
allowance 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 lookback period for losses and recoveries was changed in 2001 from a
24 month history to a 15 month history in order to arrive at more accurate
historical factors which reflect the effects of current economic conditions on
the loan portfolio.

Page: 8

B. 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 March 31, 2002 was approximately $20,928,000, compared to
$4,768,000 one year ago and $15,205,000 at December 31, 2001.

The asset liquidity ratio at March 31, 2002 was 23.1%, compared with
17.7% 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
believes that this asset liquidity ratio combined with liability liquidity
through the Federal Home Loan Bank and other lenders represents a sufficient
level of liquidity to meet cash needs.

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 9.1% at March 31, 2002 and
9.3% at December 31, 2001, 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 March 31, 2002 and December 31, 2001
the bank's ratio of Tier 1 risk-based capital to risk-adjusted assets was 9.2%
and 9.4%, respectively. Total risked based capital to risk weighted assets was
10.4% and 10.6% at March 31, 2002 and December 31, 2001, respectively. Tier one
leverage capital was 7.5% and 7.7% at March 31, 2002 and December 31, 2001,
respectively.

Page: 9

C. Results of operations:

Earnings Summary:

Net income was $674,232 for the three months ended March 31, 2002,
compared with income of $621,904 for the same period in 2001. On a fully diluted
per share basis, the net profit was $0.53 for the first three months of 2002.
Earnings per share for the first quarter of 2001 were $0.49. Net interest income
before provision increased $299,434 or 14.1% and noninterest income increased
$214,044 or 17.1%. The Company experienced a net increase in noninterest expense
(which includes other expense) of $418,402 or 17.7%.

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
March 31, 2002, the Company's interest-earning assets exceeded its
interest-bearing liabilities by approximately $31.1 million, compared with $27.1
million excess one year ago.

Net interest margins are 4.64% at March 31, 2002 compared to 4.55% at
March 31, 2001. Unlike most of Chesapeake's peer group, margins increased during
the falling rate environment of last year. Margins had generally improved during
the first half of 2000, but then compression of margins actually occurred as
rates continued upward through the end of 2000. Management expected margins to
improve during the past year. If rates stay at current levels margins are
expected to narrow.

There has been significant growth in interest bearing deposits, savings
accounts, and noninterest bearing deposits during the last year. There has been
little growth in certificates of deposit. Deposits have been easier to attract
during this falling rate environment and market uncertainty.

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 allowance. Management's detailed analysis as of March 31, 2002 supports the
adequacy of the current loan loss level of $2.6 million.

The loan loss allowance is 1.5% of gross loans as of March 31, 2002 and
was also 1.5% of gross loans as of December 31, 2001.

Noninterest Income:

Noninterest income is up 17.1% or $214,044 from the same period last
year. Chesapeake Bank's Business Manager product generated $583,782 in gross
revenue for the first three months ended March 31, 2002, compared to the same
period last year of $436,721. Managed assets in the business manager program
were $12,406,036 at March 31, 2002, and $10,964,328 at March 31, 2001. The
merchant card program has generated $21,793 or 11.2% more in gross revenue
through March of this year than in the same period last year due. Income from
fiduciary activities was up 9.7%, or $21,263, from one year ago due to increased
business activity in Chesapeake Trust Company.

Noninterest Expenses:

Other expenses are up 30.2%, or $153,379, over the same period last
year due to start up expenses related to the new Gloucester office. Employee
salary expense amounted to $1,031,248 and $890,852 for the three months ended
March 31, 2002 and 2001, respectively. Occupancy expenses were up 31.9% or
$122,474 from March 31, 2001 due primarily to incremental costs and depreciation
on the new Gloucester office.

Page: 11

Assets and Loans:

At March 31, 2002, Chesapeake Financial Shares had total assets of
$259.4 million, up 5.9% from $245.0 million at December 31, 2001 and up 13.4%
from $228.8 million of one year ago. Management has budgeted for a 10.6% growth
in total assets for 2002.

Total loans (gross) at March 31, 2002 were $171.5 million, representing
an increase of 1.5% from December 31, 2001, when loans were $169.0 million.
Chesapeake Bank's loan quality is good as the following table shows. Management
is confident that no serious delinquency trends are developing.

3/31/02 12/31/01
------- --------

Nonaccrual loans $1,021,246 $ 822,264
90 days past due 2,499 21,551
Restructured loans 0 0

---------- ----------
Totals $1,023,745 $ 843,815

Management is confident that no significant loss will be incurred as
the Bank is well secured on these assets.

Charged off loans through March 31, 2002, amounted to $167,622. Charged
off loans through March 31, 2001 amounted to $3,032. Recoveries through March
31, 2002 were $2,190 as compared to $225 as of March 31, 2001.

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 allowance. The Bank's only
concentrations of credit greater than 70% of capital are individual consumer
(224% 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 no
properties. The Bank has repossessed assets with a carrying value of $3,253.

Deposits:

Deposits were $ 224.3 million at March 31, 2002 and $211.8 million at
December 31, 2001. Deposits were $200.0 million at March 31, 2001. The Bank's
mix of deposit dollars has changed from March 31, 2001. While there was no
significant increase in certificates of deposit (0.5%), there was a 24.3%
increase in savings and interest bearing deposits and a 25.3% increase in
noninterest bearing balances during the same period.

Page: 12

PART II. Item l. - OTHER INFORMATION 3/02-10QSB
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 1 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 5, 2002 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 87% of the shareholders were
represented at the meeting in person or by proxy with over 87% 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. Chesapeake completed a Combined Safety and Soundness Examination performed
by the Virginia State Corporation Commission, Bureau of Financial Institutions,
during the first quarter of 2002. 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: 13

PART II. Item 6. - OTHER INFORMATION 3/02-10QSB
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 N/A

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 27 Financial Data Schedule Attached

Exhibit 99 Additional exhibits N/A

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

Page: 14

SIGNATURES
Chesapeake Financial Shares, Inc. SEC 10-QSB 3/02
--------------------------------------------------------------------------------

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)

05/08/02 /s/ Douglas D. Monroe, Jr.
----------------------- ------------------------------
(Date) Douglas D. Monroe, Jr.
Chairman and Chief Executive Officer

05/08/02 /s/ John H. Hunt, II
----------------------- -----------------------------
(Date) John H. Hunt, II
Secretary and Chief Financial Officer

Page: 15