<PAGE>

                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549

                                   FORM 10-KSB

 [X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
                                    OF 1934
                   For the fiscal year ended December 31, 1999

                         Commission file number: 0-18543

                        CHESAPEAKE FINANCIAL SHARES, INC.
                        ---------------------------------

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

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

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

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

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

                         Common Stock ($5.00 par value)
                         ------------------------------
                                (Title of Class)

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

     Check if there is no disclosure of delinquent filers in response to Item
     405 of Regulation S-B is not contained in this form and no disclosure will
     be contained, to the best of registrant's knowledge, in definitive proxy or
     information statements incorporated by reference in Part III of this Form
     10-KSB or any amendment to this Form 10-KSB. [   ]
                                                   ---

     State issuer's revenues for its most recent fiscal year $17,947,725.

     The aggregate market value of Common Stock of Chesapeake Financial Shares,
     Inc. held by nonaffiliates was approximately $15,421,109 based upon the
     sales price per share of $20.50 on February 1, 2000.

     Indicate the number of shares outstanding of each of the issuer's classes
     of common stock as of March 1, 2000.

          Class                          Outstanding at March 1, 2000
          -----                          ----------------------------
     Common Stock, $5.00 par value                1,232,807

                       DOCUMENTS INCORPORATED BY REFERENCE

     The following documents are incorporated by reference.
     (1)Portions of the Annual Report to Shareholders for the year ended
     December 31, 1999 are incorporated into Part II, Items 5 through 7 of this
     Form 10-KSB.
     (2)Portions of the definitive proxy statement for the 2000 Annual Meeting
     of Stockholders are incorporated into Part III, Items 9 through 12 of this
     Form 10-KSB.

Transitional Small Business Disclosure Format Yes    No X
                                                 ---   ---

                                       1
<PAGE>

                       CHESAPEAKE FINANCIAL SHARES, INC.
                                  FORM 10-KSB
                                     INDEX
                                     -----

                                     PART I

                                                                            Page
                                                                            ----

Item 1.    Description of Business......................................    3-12
           Statistical Information .....................................   13-24

Item 2.    Description of Property......................................      25

Item 3.    Legal Proceedings............................................      25

Item 4.    Submission of Matters to a Vote of Security Holders .........      25

                                    PART II

Item 5.    Market for Common Equity and Related Stockholder
                 Matters................................................      25

Item 6.    Management's Discussion and Analysis or Plan of
                 Operation .............................................      25

Item 7.    Financial Statements.........................................      25

Item 8.    Changes in and Disagreements with Accountants on
                 Accounting and Financial Disclosure ...................      25

                                    PART III

Item 9.    Directors, Executive Officers, Promoters and Control
                 Persons; Compliance with Section 16(a) of the
                 Exchange Act ..........................................      25

Item 10.   Executive Compensation.......................................      26

Item 11.   Security Ownership of Certain Beneficial Owners and
                 Management ............................................      26

Item 12.   Certain Relationships and Related Transactions...............      26

Item 13.   Exhibits and Reports on Form 8-K.............................      26

Signatures .............................................................      27

                                       2
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                                     PART I
                                     ------

Item 1. Description of Business
-------------------------------

The Company

     Chesapeake Financial Shares, Inc. (the "Company") is an independent,
community owned one-bank holding company based in Kilmarnock, Virginia. The
Company was incorporated under the laws of the Commonwealth of Virginia in 1982
in connection with the reorganization of Chesapeake Bank (the "Bank", organized
in 1900) into a one-bank holding company structure. The Company conducts
substantially all of its business activities through its wholly-owned subsidiary
- the Bank. Additionally, the Company operates Chesapeake Financial Group, Inc.,
Chesapeake Mortgage Company, Inc. (Inactive), Chesapeake Insurance Agency, Inc.,
t/a Chesapeake Investment Services, and CNB Properties, Inc.

     On December 31, 1999, the Company and its subsidiaries had 105 full-time
equivalent employees.

The Bank

     The Bank is a full-service commercial bank incorporated under the laws of
the Commonwealth of Virginia, and traces its origins back to 1900. The current
Bank was formed by the merger on April 27, 1968 of Chesapeake Banking Company,
headquartered in Lively, Virginia, and Lancaster National Bank, headquartered in
Irvington, Virginia. Lancaster National Bank was originally chartered on April
14, 1900, and Chesapeake Banking Company was organized on October 15, 1920. The
Bank (formerly Chesapeake National Bank) converted from a national to a state
chartered bank on June 27, 1995.

     The Bank has grown to provide a full range of banking and related financial
services, including checking, savings, certificates of deposit and other
depository services, commercial, residential real estate and consumer loan
services, safekeeping services and trust and estate services. Other products
include Touch Tone Teller, 24 hour access services, and annuity and brokerage
services. In February 2000, the Bank introduced internet banking products,
including a bill paying service. The Bank is a member of the Federal Reserve
System and its deposits are insured by the Bank Insurance Fund of the Federal
Deposit Insurance Corporation.

     Total assets have increased 8.6%, 10.9%, and 14.7% for each of the years
ended December 31, 1999, 1998 and 1997, respectively over prior years. At
December 31, 1999, total loans amounted to $130.6 million, a 19.4% increase from
$109.4 million in total loans at December 31, 1998, which was a 7.1% increase
from the previous year-end total of $102.1 million at December 31, 1997. Growth
in total deposits has followed a similar pattern with increases of 6.2%, 11.6%,
and 15.6% during 1999, 1998 and 1997, respectively over prior years.

     The Bank operates nine banking offices and thirteen ATMs. The Bank expanded
its market area to the James City County/Williamsburg area in May 1995 with the
opening of its James City County (JCC) Winn-Dixie office. The JCC office was
closed on January 31, 2000 as the initial lease term expires in April 2000. In
May 1996, the Bank opened its Five Forks/Williamsburg Office. The Bank also
operates a full service banking facility opened in June 1998, which is in
Williamsburg on Lafayette Street, near Merchant Square. This branch functions as
a regional office and houses Chesapeake Financial Group, Inc. and Chesapeake
Investment Services.

     The Bank's existing market area covers most of the area north of the
Rappahannock River and south of the Potomac River known as the "Northern Neck",
the area bounded on the south by the York River and on the north by the
Rappahannock River, known as the "Middle Peninsula", and the Williamsburg area
north of the James River.

                                       3
<PAGE>

     The Bank's current market area is largely rural. The principal businesses
in the area are small commercial enterprises and businesses related to
residential real estate activities, both of which have benefited from the area's
popularity as a retirement and summer home location. The growth of the York
County - James City County/Williamsburg - Hampton triangle has provided
additional commercial and residential business activity, which diversifies
revenue sources.

     With the exception of the Bank's Rappahannock Westminster-Canterbury Office
(RWC), the Gloucester Winn-Dixie Office, the JCC Office, and the Five Forks
Office, the Bank's Main Office and branch offices are held in fee, free of any
encumbrances. The RWC Office is leased under an agreement that expires May 31,
2000. The Gloucester and the JCC branches occupy facilities rented from Winn-
Dixie Raleigh. The second term on the Gloucester lease on the premises expires
in October of 2005 and has one five year renewal. The JCC lease expires May of
2000 and will not be renewed. The retail office at JCC closed on January 31,
2000. The Five Forks Office lease expires December 31, 2000.

     The Bank's branch offices are located as follows:

Gloucester Winn-Dixie Office    Hayes Office             Lively Office
6569 Market Drive               3140 George Washington   Route 3 & 201
The Shoppes at Gloucester           Memorial Hiway       Lively
Gloucester                      Hayes Shopping Center
                                Hayes

Rappahannock Westminster        Kilmarnock Office        Mathews Office
Canterbury Office               97 North Main Street     Route 14 & 198
10 Lancaster Drive              Kilmarnock               Mathews Courthouse
 Irvington                                               Mathews

Irvington Office                Five Forks Office        Lafayette Street
King Carter Drive &             4492 John Tyler Highway      Financial Center
    Tavern Road                 Williamsburg             1229 Lafayette Street
Irvington                                                Williamsburg

The Mortgage Company

     Chesapeake Mortgage Company, Inc. (the "Mortgage Company"), which is a
wholly-owned subsidiary of the Company, is curently inactive.

     See "Lending Activities" below for further information on the mortgage
lending services offered by the Bank.

The Investment Companies

     Chesapeake Financial Group, Inc. ("CFG") was incorporated August 31, 1998
and opened for business at year end 1998. CFG has established unique
partnerships with premier investment managers to offer superior portfolio
management coupled with highly customized service to high net worth individuals
and institutions.

     Chesapeake Insurance Agency, Inc., formerly T/A Chesapeake Title Company,
(the "Title Company"), which is a wholly-owned subsidiary of the Bank, completed
its ninth year of operations in 1999. Chesapeake Insurance Agency, Inc. is now
T/A Chesapeake Investment Services ("CIS") and offers fixed and variable annuity
products, mutual funds and discount brokerage products. The Bank, the Bank's
trust department, CIS, and CFG combine to offer services for every financial
need.

                                       4
<PAGE>

Other Entities

     CNB Properties, Inc. was formed September 23, 1991, to provide a corporate
entity to buy and hold properties (such as foreclosures) on a temporary basis.

Lending Activities

     The Company provides a wide range of commercial, real estate, and consumer
loan services through the Bank.

     Commercial Lending. Commercial lending activities to the Bank's commercial,
industrial, agricultural, and governmental customers include the making of
asset-based and other secured loans, making unsecured loans, and offering demand
and term loans. Management believes commercial loans offer the potential for
better yields and repricing characteristics than most other types of loans. At
December 31, 1999, the Bank's commercial loan portfolio amounted to $62.1
million, or 46.7% of its total loan portfolio. For a breakdown of the major loan
classifications, see Note 3 to the Consolidated Financial Statements included in
the Company's 1999 Annual Report to Shareholders, portions of which are provided
in Exhibit 13 to this report and are incorporated by reference herein. Of the
$62.1 million of commercial loans at December 31, 1999, 65.4% of such loans
either matured or were subject to repricing within one year. (see Table 4 at
page 18).

     Unlike residential mortgage loans, which generally are made on the basis of
the borrower's ability to make repayment from his employment and other income,
commercial loans generally involve more risk. Commercial loans typically are
made on the basis of the borrower's ability to make repayment from the cash flow
of its business and are generally secured by business assets, such as accounts
receivable, equipment, and inventory. As a result, the availability of funds for
the repayment of commercial loans may be substantially dependent on the success
of the business itself. At December 31, 1999, 96.3% of the commercial loans were
secured by some form of collateral and 0.54% of the Bank's commercial loan
portfolio was 30 days or more delinquent. See Table 6 at page 20 showing the
amount of commercial loans charged off during 1999 and 1998.

     Real Estate Lending. The Bank's second largest loan category is its real
estate loan portfolio (both mortgage and construction lending), which amounted
to $39.7 million at December 31, 1999, or 29.9% of the Bank's total loan
portfolio. The Bank offers permanent fixed and adjustable rate first mortgage
loans on one-to-four family residential properties. Most of the long-term fixed
rate mortgages and the adjustable rate mortgages are underwritten and documented
in accordance with the guidelines of the Federal Home Loan Mortgage Corporation
and are sold in the secondary market within fifteen to sixty days after the loan
closing date.

     The Bank emphasizes the origination of adjustable rate mortgages in order
to increase the proportion of the Company's total loan portfolio with more
frequent repricing. At December 31, 1999, 50.2% of the mortgage portfolio was
subject to repricing or maturing within twelve months.

                                       5
<PAGE>

     The relative customer demand for adjustable-rate and fixed-rate residential
mortgage loans has varied considerably, depending on such factors as the level
of interest rates and expectations regarding future interest rates and the
supply of new housing units placed on the market in the Company's trade area. As
part of its residential lending program, the Bank offers construction loans with
80% loan-to-value ratios to qualified builders and individuals. Construction
loans generally have terms of up to twelve months and interest rates, which
generally are fixed commitments. Loan proceeds are disbursed in increments as
construction progresses and as inspections warrant. In addition to builders'
projects, the Bank finances the construction of individual, owner- occupied
houses where qualified contractors are involved. Construction loans are
structured either to be converted to permanent loans at the end of the
construction phase or to be paid off upon receiving financing from another
financial institution.

     Construction loans afford the Bank the opportunity to charge higher loan
origination fees, to increase the frequency of repricing of its loan portfolio
and to earn yields higher than those obtainable on adjustable-rate loans secured
by existing one-to-four-family residential properties. These higher yields
reflect the higher risks associated with construction lending, principally the
difficulty in evaluating accurately the total funds required to complete a
project and the post-completion value of the project. As a result, the Bank
places a strong emphasis upon the borrower's ability to repay principal and
interest.

     Consumer Lending. As the competitive and regulatory environments have
changed, the Company has sought to expand its retail banking services to
complement the range of traditional consumer services already offered. The Bank
has maintained its emphasis on consumer loans (a 25.5% increase in 1999 over
1998 and a 31.4% increase in 1998 over 1997) because of their attractive yields
and repricing characteristics. The Bank currently originates a variety of
consumer loans, including lines of credit secured by owner-occupied real estate,
real estate equity loans, boat loans, loans secured by deposits, unsecured loans
and automobile loans. The Bank's consumer loan portfolio was approximately $26.8
million at December 31, 1999, or 20.2% of its total loan portfolio.

     Consumer loans generally are considered to entail greater risk than
residential mortgage loans secured by first liens on owner-occupied properties.
The Bank's underwriting and screening processes have been designed to reduce
this risk and have, to date, limited the Bank's consumer delinquency rate to
levels below industry averages. At December 31, 1999, only 0.40% of the Bank's
consumer loan portfolio was 30 days or more delinquent.

     The Company has adopted FASB (Financial Accounting Standards Board) No.
114, "Accounting by Creditors for Impairment of a Loan". This statement has been
amended by FASB No. 118, "Accounting by Creditors for Impairment of a Loan-
Income Recognition and Disclosures". Statement 114, as amended, requires that
the impairment of loans that have been separately identified for evaluation is
to be measured based on present value of expected future cash flows or,
alternatively, the observable market price of the loans or the fair value of the
collateral. However, for those loans that are collateral dependent (that is, if
repayment of those loans is expected to be provided solely by the underlying
collateral) and for which management has determined foreclosure is probable, the
measure of impairment of those loans is to be based on the fair value of the
collateral. Statement 114, as amended, also requires certain disclosures about
investments in impaired loans and the allowance for credit losses and interest
income recognized on loans.

                                       6
<PAGE>

     The Company considers all consumer installment loans and residential
mortgage loans to be homogeneous loans. These loans are not subject to
impairment under FASB 114. A loan is considered impaired when it is probable
that the Company will be unable to collect all principal and interest amounts
according to the contractual terms of the loan agreement. Factors involved in
determining impairment include, but are not limited to, expected future cash
flows, financial condition of the borrower, and the current economic conditions.
A performing loan may be considered impaired if the factors above indicate a
need for impairment. A loan on nonaccrual status may not be considered impaired
if it is in the process of collection or there is an insignificant shortfall in
payment. An insignificant delay of less than 30 days or a shortfall of 5% of the
required principal and interest payment generally does not indicate an
impairment situation, if in management's judgment the loan will be paid in full.
Loans that meet the regulatory definitions of doubtful or loss generally qualify
as an impaired loan under FASB 114. Charge-offs for impaired loans occur when
the loan, or portion of the loan, is determined to be uncollectable. The Company
had no loans subject to FASB 114 at December 31, 1999, 1998, and 1997.

Long-Term Debt

     See Note 5 to the Consolidated Financial Statements included in the
Company's 1999 Annual Report to Shareholders, portions of which are provided in
Exhibit B to this report and are incorporated by reference herein for
information concerning term loan agreements of the Company.

Competition

     The Bank is subject to intense competition from various financial
institutions and other companies or firms that offer financial services. In its
market area, the Bank is and will be competing with several national and
regional banking institutions, including First Virginia Bank, Wachovia Bank,
SunTrust Bank, Bank of America, and First Union. The Bank competes for deposits
with other commercial banks, savings and loan associations, credit unions and
with issuers of commercial paper and securities, such as money market and mutual
funds. In making loans, the Bank competes with other commercial banks, savings
and loan associations, consumer finance companies, credit unions, leasing
companies and other lenders. Federal and state law changes in recent years have
significantly increased competition among financial institutions, and current
trends towards further deregulation may be expected to increase such competition
even further. Many of the financial organizations in competition with the
Company have greater financial resources than the Company and are able to offer
similar services at varying costs with greater loan capacities.

Supervision and Regulation

     Bank holding companies and banks are extensively regulated under both
federal and state law. The following description briefly discusses certain
provisions of federal and state laws and certain regulations and proposed
regulations and the potential impact of such provisions on the Company and the
Bank.

     Bank Holding Companies. As a bank holding company registered under The Bank
Holding Company Act of 1956 (the "BHCA"), the Company is subject to regulation
by the Federal Reserve Board. The Federal Reserve Board has jurisdiction under
the BHCA to approve any bank or nonbank acquisition, merger or consolidation
proposed by a bank holding company. The BHCA generally limits the activities of
a bank holding company and its subsidiaries to that of banking, managing or
controlling banks, or any other activity which is so closely related to banking
or to managing or controlling banks as to be a proper incident thereto.

                                       7
<PAGE>

     There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by federal law and
regulatory policy that are designed to reduce potential loss exposure to the
depositors of such depository institutions and to the FDIC insurance fund in the
event the depository institution becomes in danger of default or is in default.
For example, under a policy of the Federal Reserve Board with respect to bank
holding company operations, a bank holding company is required to serve as a
source of financial strength to is subsidiary depository institutions and to
commit resources to support such institutions in circumstances where it might
not do so absent such policy. In addition, the "cross guarantee" provision of
federal law requires insured depository institutions under common control to
reimburse the FDIC for any loss suffered or reasonably anticipated by either the
Savings Association Insurance Fund ("SAIF") or the Bank Insurance Fund ("BIF")
as a result of the default of a commonly controlled insured depository
institution or for any assistance provided by the FDIC to a commonly controlled
insured depository institution in danger of default. The FDIC may decline to
enforce the cross-guarantee provisions if it determines that a waiver is in the
best interest of the SAIF or the BIF or both. The FDIC's claim for damages is
superior to claims of stockholders of the insured depository institution or its
holding company but is subordinate to claims of depositors, secured creditors
and holders of subordinated debt (other than affiliates) of the commonly
controlled insured depository institutions.

     The Federal Deposit Insurance Act ("FDIA") also provides that amounts
received from the liquidation or other resolution of any insured depository
institution by any receiver must be distributed (after payment of secured
claims) to pay the deposit liabilities of the institution prior to payment of
any other general or unsecured senior liability, subordinated liability, general
creditor or stockholder. This provision would give depositors a preference over
general and subordinated creditors and stockholders in the event a receiver is
appointed to distribute the assets of the Bank.

     The Company is registered under the bank holding company laws of Virginia.
Accordingly, the Company and the Bank are subject to regulation and supervision
by the State Corporation Commission of Virginia (the "SCC").

     Interstate Banking and Branching. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 authorizes the Federal Reserve Board to permit
adequately capitalized and adequately managed bank holding companies to acquire
all or substantially all of the assets of an out-of-state bank or bank holding
company, subject to certain conditions, including nationwide and state
concentration limits. Banks also are able to branch across state lines (unless
state law would permit such interstate branching at an earlier date), provided
certain conditions are met, including that applicable state law must expressly
permit such interstate branching. Virginia law permits branching across state
lines, provided there is reciprocity with the state in which the out-of-state
bank is based.

                                       8
<PAGE>

     Capital Requirements. The Federal Reserve Board, the Office of the
Comptroller of the Currency (the "OCC") and the FDIC have issued substantially
similar risk-based and leverage capital guidelines applicable to United States
banking organizations. In addition, those regulatory agencies may from time to
time require that banking organization maintain capital above the minimum levels
because of its financial condition or actual or anticipated growth. Under the
risk-based capital requirements of these federal bank regulatory agencies, the
Company and the Bank are required to maintain a minimum ratio of total capital
to risk-weighted assets of at least 8%. At least, half of the total capital is
required to the "Tier 1 capital", which consists principally of common and
certain qualifying preferred shareholders' equity, less certain intangibles and
other adjustments. The remainder ("Tier 2 capital") consists of a limited amount
of subordinated and other qualifying debt (including certain hybrid capital
instruments) and a limited amount of the general loan loss allowance. The Tier 1
and total capital to risk-weighted asset ratios of the Company as of December
31, 1999 were 10.4% and 11.7%, respectively, exceeding the minimums required.

     In addition, each of the federal regulatory agencies has established a
minimum leverage capital ratio (Tier 1 capital to average tangible assets).
These guidelines provide for a minimum ratio of 3% for banks and bank holding
companies that meet certain specified criteria, including that they have the
highest regulatory examination rating and are not contemplating significant
growth or expansion. All other institutions are expected to maintain a leverage
ratio of at least 100 to 200 basis points above the minimum. The leverage ratio
of the Company as of December 31, 1999, was 8.3%, which is above the minimum
requirements. The guidelines also provide that banking organizations
experiencing internal growth or making acquisitions will be expected to maintain
strong capital positions substantially above the minimum supervisory levels,
without significant reliance on intangible assets.

     Limits on Dividends and Other Payments. The Company is a legal entity
separate and distinct from its subsidiary institutions. Substantially all of the
revenues of the Company result from dividends paid to it by the Bank. There are
various legal limitations applicable to the payment of dividends to Company as
well as the payment of dividends by Company to its respective shareholders.

     Under federal law, the Bank may not, subject to certain limited exceptions,
make loans or extensions of credit to, or investments in the securities of, the
Company or take securities of the Company as collateral for loans to any
borrower. The Bank is also subject to collateral security requirements from any
loans or extensions of credit permitted by such exceptions.

     The Bank is subject to various statutory restrictions on its ability to pay
dividends to the Company. Under the current supervisory practices of the Bank's
regulatory agencies, prior approval from those agencies is required if cash
dividends declared in any given year exceed net income for that year plus
retained earnings of the two preceding years. Under these supervisory practices,
at December 31, 1999, the Bank could have paid additional dividends to the
Company of approximately $2.9 million, without obtaining prior regulatory
approval. The payment of dividends by the Bank or the Company may also be
limited by other factors, such as requirements to maintain capital above
regulatory guidelines. Bank regulatory agencies have authority to prohibit the
Bank or the Company from engaging in an unsafe or unsound practice in conducting
their business. The payment of dividends, depending upon the financial condition
of the Bank, or the Company, could be deemed to constitute such an unsafe and
unsound practice.

                                       9
<PAGE>

     Under the federal law, insured depository institutions such as the Bank are
prohibited from making capital distributions, including the payment of
dividends, if, after making such distribution, the institution would become
"undercapitalized" (as such term is used in the statute). Based on the Bank's
current financial condition, the Company does not expect that this provision
will have any impact on its ability to obtain dividends from the Bank.

     The Bank. The Bank is supervised and regularly examined by the Federal
Reserve Board and the SCC. The various laws and regulations administered by the
regulatory agencies affect corporate practices, such as payment of dividends,
incurring debt and acquisition of financial institutions and other companies,
and affect business practices, such as payment of interest of deposits, the
charging of interest on loans, types of business conducted and locations of
offices.

     The Bank is also subject to the requirements of the Community Reinvestment
Act (the "CRA"). The CRA imposes on financial institutions an affirmative and
ongoing obligation to meet the credit needs of the local communities, including
low and moderate income neighborhoods, consistent with the safe and sound
operation of those institutions. Each financial institution's efforts in meeting
community credit needs currently are evaluated as part of the examination
process pursuant to twelve assessment factors. These factors also are considered
in evaluating mergers, acquisitions and applications to open a branch or
facility.

     As an institution with deposits insured by the BIF, the Bank also is
subject to insurance assessments imposed by the FDIC. The FDIC has implemented a
risk-based deposit insurance assessment system under which the assessment rate
for an insured institutions may vary according to regulatory capital levels of
the institution and other factors (including supervisory evaluations).
Depository institutions insured by the BIF that are "well capitalized," are
required to pay only the statutory minimum assessment of $2,000 annually for
deposit insurance, while all other banks are required to pay premiums ranging
from .03% to .27% of domestic deposits. These rate schedules are subject to
future adjustments by the FDIC. In addition, the FDIC has authority to impose
special assessments from time to time. However, because the legislation enacted
in 1996 requires that both Savings Association Insurance Fund insured and BIF-
insured deposits pay a pro rata portion of the interest due on the obligations
issued by the Financing Corporation, the FDIC is assessing BIF-insured deposits
an additional 1.30 basis points per $100 of deposits to cover those obligations.

     Other Safety and Soundness Regulations. There are a number of obligations
and restrictions imposed on bank holding companies and their depository
institution subsidiaries by Federal law and regulatory policy that are designed
to reduce potential loss exposure to the depositors of such depository
institutions and to the FDIC insurance funds in the event the depository
institution becomes in danger of default or is in default. For example, under a
policy of the Federal Reserve Board with respect to bank holding company
operations, a bank holding company is required to serve as a source of financial
strength to its subsidiary depository institutions and to commit resources to
support such institutions in circumstances where it might not do so otherwise.
In addition, the "cross-guarantee" provisions of Federal law require insured
depository institutions under common control to reimburse the FDIC for any loss
suffered or reasonably anticipated by the BIF as a result of the default of a
commonly controlled insured depository institution or for any assistance
provided by the FDIC to a commonly controlled insured depository institution in
danger of default. The FDIC may decline to enforce the cross-guarantee provision
if it determines that a waiver is in the best interests of the BIF. The FDIC's
claim for reimbursement is superior to claims of shareholders of the insured
depository institution or its holding company but is subordinate to claims of
depositors, secured creditors and holders of subordinated debt (other than
affiliates) of the commonly controlled insured depository institution.

                                       10
<PAGE>

     The Federal banking agencies also have broad powers under current Federal
law to take prompt corrective action to resolve problems of insured depository
institutions. The FDIA requires that the federal banking agencies establish five
capital levels for insured depository institutions - "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized,"
and "critically undercapitalized." It also requires or permits such agencies to
take certain supervisory actions should an insured institution's capital level
fall. For example, an "adequately capitalized" institution is restricted from
accepting brokered deposits. An "undercapitalized" or "significantly
undercapitalized" institution must develop a capital restoration plan and is
subject to a number of mandatory and discretionary supervisory actions. These
powers and authorities are in addition to the traditional powers of the Federal
banking agencies to deal with undercapitalized institutions.

     Federal regulatory authorities also have broad enforcement powers over the
Company and the Bank, including the power to impose fines and other civil and
criminal penalties, and to appoint a receiver in order to conserve the assets of
any such institution for the benefit of depositors and other creditors.

     The Gramm-Leach-Bliley Act of 1999. The Gramm-Leach-Bliley Act of 1999
("GLBA") was signed into law on November 12, 1999. The main purpose of GLBA is
to permit greater affiliations within the financial services industry, primarily
banking, securities and insurance. While certain portions of GLBA became
effective upon enactment and on March 11, 2000, many other provisions do not
become effective until May 2001 and most of the regulations implementing the law
have not yet been issued. As a result, the overall impact of GLBA on the Company
cannot be predicted at this time. The provisions of GLBA that are believed to be
of most significance to the Company are discussed below.

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

     .    securities activities such as underwriting, dealing, brokerage,
          investment and merchant banking; and

     .    insurance underwriting, sales and brokerage activities.

     A bank holding company may elect to become a financial holding company only
if all of its depository institution subsidiaries are well-capitalized, well-
managed and have at least a satisfactory Community Reinvestment Act rating.

     GLBA establishes a system of functional regulation under which the federal
banking agencies will regulate the banking activities of financial holding
companies and banks' financial subsidiaries, the Securities and Exchange
Commission ("SEC") will regulate their securities activities and state insurance
regulators will regulate their insurance activities.

                                       11
<PAGE>

     With regard to Federal securities laws, GLBA removes the blanket exemption
for banks from being considered brokers or dealers under the Securities Exchange
Act of 1934, and sets out a number of limited activities, including trust and
fiduciary activities, in which a bank may engage without being considered a
broker, and a set of activities in which a bank may engage without being
considered a dealer. The Investment Advisers Act of 1940 also will be amended to
eliminate certain provisions exempting banks from the registration requirements
of that statute, and the Investment Company Act of 1940 will be amended to
provide the SEC with regulatory authority over various bank mutual fund
activities.

     GLBA also provides new protections against the transfer and use by
financial institutions of consumers nonpublic personal information. A financial
institution must provide to its customers, at the beginning of the customer
relationship and annually thereafter, the institution's policies and procedures
regarding the handling of customers' nonpublic personal financial information.
The new privacy provisions will generally prohibit a financial institution from
providing a customer's personal financial information to unaffiliated third
parties unless the institution discloses to the customer that the information
may be so provided and the customer is given the opportunity to opt out of such
disclosure.

     At this time, the Company is unable to predict the impact GLBA may have
upon its or its subsidiaries' financial condition or results of operations. The
Company is currently reviewing the new law and at this time has not elected to
be treated as a financial holding company under GLBA.

Other

     In December of 1997 the Company satisfactorily completed a Transfer Agent
Examination and the Bank satisfactorily completed a Phase I and Phase II Year
2000 Examination, all performed by the Federal Reserve Bank of Richmond. During
the second quarter of 1998, the Bank and the holding company satisfactorily
completed a comprehensive combined Safety and Soundness examination, Consumer
Compliance Examination and a Community Reinvestment Act Examination performed by
the Federal Reserve Bank of Richmond. As of September 30, 1999, the Bank
satisfactorily completed a Safety and Soundness Examination performed by the
Bureau of Financial Institutions, State Corporation Commission, Commonwealth of
Virginia.

     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 Company.

Forward-Looking Statements

     This report contains certain forward-looking statements with respect to the
financial condition, results of operations, plans, objectives 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: (a) competitive pressure in the financial services
industry increases significantly; (b) changes in the interest rate environment
reduce margins; (c) general economic conditions, either nationally or
regionally, are less favorable than expected, resulting in, among other things,
a deterioration in credit quality; (d) changes occur in the financial services
regulatory environment; and (e) changes occur in the securities markets.

                                       12
<PAGE>

Item 1.  Statistical Information
--------------------------------

     The following statistical information is furnished pursuant to the
requirements of Guide 3 (Statistical Disclosure by Bank Holding Companies)
promulgated under the Securities Act of 1933.

                                     INDEX

                                                                     Page

TABLE 1.     Average Balance Sheets, Net Interest Income, and Rates.14-15

TABLE 2.     Analysis of Change in Net Interest Income...............  16

TABLE 3.     Types of Investment Securities..........................  17

TABLE 4.     Maturity Schedule of Selected Loans as of Dec. 31, 1999   18

TABLE 5.     Risk Elements...........................................  19

TABLE 6.     Summary of Reserve for Loan Losses......................  20

TABLE 7.     Allocation of the Reserve for Loan Losses...............  21

TABLE 8.     Deposits................................................  21

TABLE 9.     Return on Equity and Assets.............................  22

TABLE 10.    Short Term Borrowing....................................  22

TABLE 11.    Interest Sensitivity Analysis...........................  23

TABLE 12.    Analysis of Capital.....................................  24

                                       13
<PAGE>

                                    TABLE 1
            AVERAGE BALANCES, INCOME AND EXPENSES, YIELDS AND RATES

     The following table depicts interest income on earnings assets and related
average yields as well as interest expense on interest-bearing liabilities and
related average rates paid for the periods indicated.


                                    Year Ended December 31,
                                    -----------------------

                                        1999                      1998
                                        ----                      ----
                                       Annual                     Annual
                              Average  Income/  Yield/  Average  Income/  Yield/
                              Balance  Expense    Rate  Balance  Expense    Rate
                              -------  -------    ----  -------  -------   -----
                                            (Dollars in Thousands)
Assets:
Securities:
Taxable                      $ 29,351   $1,688  5.75%  $ 34,234  $1,886  5.51%
Tax-exempt(1)                  13,291      684  7.82%    11,749     605  7.80%
                             --------   ------         --------  ------
Total securities               42,642    2,372  6.40%    45,983   2,491  6.10%
Loans (net of unearned
 income):
 Taxable(2)                   119,470   10,859  9.09%   103,215   9,962  9.65%
 Tax-exempt                     1,846      138 11.36%     2,567     205 12.10%
                             --------   ------         --------  ------
Total  loans                  121,316   10,997  9.12    105,782  10,167  9.71%
Federal funds sold and
repurchase agreements             975       40  4.10%     1,702      89  5.23%
Interest-bearing deposits
in other banks                    284       14  4.93%       346      16  4.62%
                             --------   ------  ----   --------  ------  ----
Total earning asset
                              165,217   13,423  8.38%   153,813  12,763  8.57%
Less:  allowance for loan
 losses                        (2,137)                   (1,806)
Total nonearning assets        24,349                    19,980
                              -------                   -------
Total assets                 $187,429                  $171,987
                             --------                  --------

                                       14
<PAGE>

                                TABLE 1 (cont.)
            AVERAGE BALANCES, INCOME AND EXPENSES, YIELDS AND RATES

                                       Year Ended December 31,
                                       -----------------------

                                 1999                          1998
                                 ----                          ----
                                 Annual                        Annual
                        Average  Income/  Yield/    Average   Income/  Yield/
                        Balance  Expense    Rate    Balance   Expense    Rate
                        -------  -------    ----    -------   -------   -----
                                    (Dollars in Thousands)
Liabilities and Shareholder's Equity:
Interest-bearing deposits:
   Checking             $50,065   $1,654   3.30%    $27,170     $ 728   2.68%
   Regular savings       10,955      282   2.57%     12,305       332   2.70%
   Money market savings
                          4,464      129   2.89%      6,189       178   2.88%
Certificates of deposit:
$100,000 and over        14,326      681   4.75%     16,908       897   5.31%
Under $100,000           63,159    3,232   5.12%     70,205     3,932   5.60%
                         ------    -----   ----      ------     -----   ----
Total interest-bearing
   deposits             142,969    5,978   4.18%    132,777     6,067   4.57
Federal funds purchased
   and securities sold under
   agreements to repurchase
                          2,737      149   5.44%        648        36   5.56%
Other borrowing             858       47   5.48%        884        49   5.54%
                          -----      ---   ----      ------      ----   ----
   Total interest-bearing
      liabilities       146,564    6,174   4.21%    134,309     6,152   4.58%
Noninterest bearing liabilities:
   Demand deposits       23,996                      21,861
   Other liabilities      1,530                       1,462
                         ------                      ------
Total liabilities       172,090                     157,632
Shareholders' equity     15,339                      14,355
Total liabilities and share-
   holders' equity     $187,429                    $171,987
Net interest income/yield         $7,249   4.65%               $6,611   4.57%
Interest rate spread                       4.17%                        3.99%

1)   Yields are reported on a taxable equivalent basis assuming a federal tax
     rate of 34%.

2)   Includes non-accrual loans.

                                       15
<PAGE>

                                    TABLE 2
                          VOLUME AND RATE ANALYSIS (1)

     The following table analyzes changes in net interest income attributable to
changes in the volume of interest-bearing assets and liabilities compared to
changes in interest rates.  Nonaccruing loans are included in average loans
outstanding.

<TABLE>
<CAPTION>
                                                     Year Ended December 31,
                                                     -----------------------
                                             1999 vs.1998               1998 vs. 1997
                                          Increase (Decrease)        Increase (Decrease)
                                         Due to Changes in:(1)      Due to Changes in:(2)
                                       -------------------------  ------------------------
                                       Volume      Rate    Total  Volume     Rate    Total
                                       ------      ----    -----  ------     ----    -----
                                                        (In thousands)
<S>                                    <C>       <C>       <C>      <C>    <C>      <C>
Earning Assets:
Securities:
  Taxable                              $ (268)   $   70   $ (198)   $399   $ (149)  $  250
  Tax-exempt                               79         0       79      28      (12)      16
Loans
 Taxable                                1,567      (670)     897     799      291    1,090
 Tax-exempt                               (57)      (10)     (67)     31        8       39
Federal funds sold
  and repurchase
  agreements                              (38)      (11)     (49)     34       (3)      31
Interest-bearing deposits
  in other banks                           (3)        1       (2)    (13)     (11)     (24)
                                       ------    ------   ------    ----   ------   ------
Total earning
    assets                             $1,280    $ (620)  $  660  $1,278    $ 124   $1,402
                                       ------    ------   ------  ------   ------   ------

Interest-Bearing Liabilities:
  Interest checking                    $  615    $  311   $  926    $161   $   59   $  220
  Regular savings                         (36)      (14)     (50)     23        1       24
  Money market savings                    (50)        1      (49)      6       (2)       4
Time deposits:
   CDS $100,000 or more                  (137)      (79)    (216)     87      (41)      46
   CDS Other                             (396)     (304)    (700)    390       38      428
                                       ------    ------     ----   ------  ------   ------
Total interest-bearing
  deposits                                 (4)      (85)     (89)    667       55      722
Federal funds purchased
  and securities sold
  under agreements to
  repurchase                              116        (3)     113     (11)      (4)     (15)
Other borrowing                            (1)       (1)      (2)     37        1       38
                                       ------    ------   ------    ----   ------   ------
Total interest-bearing
   liabilities                         $  111    $  (89)  $   22   $ 693   $   52   $  745
                                       ------    ------   ------    ----   ------   ------
Change in net interest
  income:                              $1,169    $ (531)  $  638   $ 585    $  72   $  657
                                       ------    ------   ------    ----   ------   ------
</TABLE>

(1) The change in interest due to both rate and volume has been allocated to
change due to volume and change due to rate in proportion to the relationship of
the absolute dollar amounts of the change in each.

(2) The combine effect of changes in both volume and rate which cannot be
separately identified has been allocated proportionately to the change due to
volume and change due to rate.

                                       16
<PAGE>

                                    TABLE 3
                   SECURITIES HELD FOR RESALE AND INVESTMENT
                    MATURITY DISTRIBUTION AND AVERAGE YIELD

                                                         December 31,
                                                         ------------
                                                        1999       1998
                                                      -------     -------
Book Value:                                              (In thousands)
U.S. Government securities .........................  $24,195     $29,046
State and political subdivisions ...................   13,571      12,330
Other securities....................................    2,555         835
                                                      -------     -------
   Total securities                                   $40,321     $42,211

Maturities of Securities Held at December 31, 1999

<TABLE>
<CAPTION>
                                                            Over Ten
                               One       One      Five     Years and
                               Year    to Five   to Ten     Equity
                             or Less    Years     Years   Securities    Total
                             --------  --------  -------  -----------  --------
                                          (Dollars in thousands)
<S>                          <C>       <C>       <C>      <C>          <C>
U.S. Agency Securities:
 Book value                   $1,292         -        -            -   $ 1,292
 Market value                  1,257         -        -            -     1,257
 Weighted average yield(1)
                                5.88%        0%       0%           0%     5.88%
State and Political
 Subdivisions:
 Book value                        -       344    3,291        9,936    13,571
 Market value                      -       353    3,219        9,595    13,167
Weighted average yield(1)          0%     9.06%    8.20%        8.26%     8.27%
Corporate Debt Securities:
 Book value                        -         -    1,059          507     1,566
 Market value                      -         -    1,027          486     1,513
 Weighted average yield(1)         0%        0%    6.78%        6.56%     6.71%
Mortgage Backed Securities:
 Book value                    2,600    17,244    3,063            -    22,907
 Market value                  2,605    16,949    2,917            -    22,471
Weighted average yield(1)       6.14%   6.40%-     6.84%           0%     6.43%
Other Securities:
 Book Value                        -       150      739          100       989
 Market Value                      -       150      739          100       989
Weighted Average Yield(1)          -%     6.52%    5.54%        5.83%     5.72%
Total Securities:
 Book value                   $3,892   $17,738   $8,152      $10,543   $40,325
 Market value                  3,862    17,452    7,902       10,181    39,397
 Weighted average yield(1)      6.05%     6.45%    7.26%        8.16%     7.06%
</TABLE>

(1) Yields on tax-exempt securities have been computed on a tax-equivalent
basis.
The Bank held only one issue, an agency security, that exceeded 10% of
Shareholder's Equity at December 31, 1998.

                                       17
<PAGE>

                                    TABLE 4
             LOAN PORTFOLIO AND MATURITY SCHEDULE OF SELECTED LOANS
                            AS OF DECEMBER 31, 1999


     For the table and accompanying notes addressing the loan portfolio, see
"Note 3. Loans" on page 14 of the Annual Report to Shareholders which is
incorporated by reference herein (attached as Exhibit 13 to this Form 10-KSB).

     The maturity distribution and rate sensitivity of certain categories of
loans as of December 31, 1999 is presented below.

     Management considers the liquidity of the Company to be adequate.
Sufficient assets are maintained on a short-term basis to meet the liquidity
demands anticipated by management. In addition, secondary sources are available
through the use of borrowed funds. See Table 10 at page 18.

<TABLE>
<CAPTION>

                                      1 Year or Less          1-5 Years          Over 5 Years
                                     ----------------     -----------------     ---------------
                                     Fixed   Variable     Fixed    Variable     Fixed  Variable
                                      Rate       Rate      Rate        Rate      Rate      Rate
                                      ----       ----      ----        ----      ----      ----
                                                       (Dollars in thousands)
<S>                                 <C>       <C>       <C>         <C>       <C>      <C>
Commercial and other                $8,270    $32,323   $ 5,817     $13,032   $ 4,179  $     0
Real estate-construction             1,463         11         0           0     1,320        0
Real estate mortgage                   730     11,633     1,861      20,951     1,780        0
Consumer installment                 7,989      2,804    10,661          83     5,295        0
                                   -------    -------   -------     -------   -------  -------
 Total                             $18,452    $46,771   $18,339     $34,066   $12,574        0
                                   -------    -------   -------     -------   -------  -------
</TABLE>

                                       18
<PAGE>

                                    TABLE 5
                                 RISK ELEMENTS

     Risk elements associated with the loan portfolio are presented below.  The
Company places a loan on nonaccrual status when management believes, after
considering economic and business conditions and collection efforts, that the
borrower's financial condition is such that collection of principal and interest
is doubtful.  The Company's policy is to place loans on nonaccrual status if
principal or interest is past due for 90 days or more unless the debt is both
well secured and in the process of being collected.

                                     December 31,
                                     -----------
                                     (Thousands)
                                    1999     1998
                                    ----     -----
Nonaccrual loans(1)             $    155   $  202

Restructured loans                     0        0

Foreclosed properties                185      185
                                --------   ------

Total nonperforming assets      $    340   $  387
                                --------   ------

Loans past due 90+ days and
 accruing interest              $      4   $    4

Reserve for loan losses
 to period end loans                 1.7%     1.8%

Reserve for loan losses to
 nonaccrual loans                1,449.1%   999.7%

Nonperforming assets to
 period-end loans and
 foreclosed properties (2)          0.26%     .35%

Net charge-offs (recoveries)
 to average loans                   0.02%   (0.32%)

(1)There were no troubled debt restructurings in 1999 or 1998. The Bank expects
to charge off $586,076 in problem loans (fully reserved at December 31, 1999).
These loans present potential risk of non-payment and are not included in the
numbers above. The Bank expects to collect all other payments due. See the
discussion on page 31 of the 1999 Annual Report to Shareholders and Note 3 to
the Financial Statements contained therein for additional information on the
risk elements associated with the loan portfolio.

(2)As of December 31, 1999, performing loans totaling approximately $5.9 million
were identified as potential problem loans through internal loan review systems
and procedures. The Bank has specifically reserved for potential losses in these
loans as of year end.

     Loan Concentrations: The Bank has no concentration of credit that exceeds
10% of gross loans, except real estate and consumer.

                                       19
<PAGE>

                                    TABLE 6
                        SUMMARY OF RESERVE FOR LOAN LOSS

     The following table shows the Company's loan loss and recovery experience
for the past two years.

     The Company tries to maintain a reserve for loan loss that represents an
estimate of all losses estimated in the Bank's loan portfolio. To achieve this
goal, the loan loss provision must be sufficient to cover charged-off loans plus
growth in the loan portfolio. The loan loss provision is a charge against
earnings necessary to maintain the reserve for loan losses at management's
targeted level. In considering the provision for loan loss, an evaluation of the
loan portfolio is conducted. Loans in non-accrual status and loans past due over
ninety days are considered in this evaluation as well as other loans the Company
feels may be a potential loss. The status of non-accrual and past due loans
varies from quarter to quarter based on seasonality and cash flow of customers.

                                                        Year ended December 31,
                                                        -----------------------
                                                         1999             1998
                                                         ----             ----
                                                         (Dollars in thousands)

Reserve, beginning of period                           $2,024           $1,740

Loans charged off:
 Commercial                                                (8)            (330)

 Real estate construction                                   0                0

 Real estate mortgage                                       0                0

 Consumer                                                 (19)             (25)
                                                       ------           ------

Total loans charged off                                   (27)            (355)
                                                       ------           ------

Recoveries of loans previously charged off:
 Commercial                                                27                0

 Real estate - construction                                 0                0

 Real estate - mortgage                                     0                7

 Consumer                                                  19               12
                                                       ------           ------

Total recoveries                                           46               19
                                                       ------           ------

Net loans (charged off) recovered
                                                           19             (336)
Provision for (recovery off) loan losses
                                                          210              620
                                                          ---              ---

Balance, end of period                                 $2,253           $2,024
                                                       ------           ------

Net charge-offs (recoveries) to average loans
                                                         0.02%           (0.32%)

                                       20
<PAGE>

                                    TABLE 7
                   ALLOCATION OF THE RESERVE FOR LOAN LOSSES

  The following table provides a breakdown of the allowance for loan losses by
 major categories of the Company's loan portfolio.  See Note 3 to the Financial
              Statements for the amount of loans in each category.

<TABLE>
<CAPTION>
                                                     1999                          1998
                                               Percent of loans              Percent of loans
                                               in each category              in each category
                                        Amount   to Total Loans   Amount      to Total Loans
                                        ------  ---------------   ------     ----------------
                                                      (dollars in thousands)
<S>                                     <C>     <C>              <C>         <C>
Commercial                              $1,559            46.7%  $1,233            44.1%
Real estate - construction                   0             2.1        0             4.9
Real estate - mortgage                     408            27.8      463            29.6
Consumer                                   264            20.2      299            19.2
Other                                       23             1.1       29             0.8
Participations                               0             2.1        0             1.4
                                        ------           -----   ------           -----

Total                                   $2,254           100.0%  $2,024           100.0%
                                        ------           -----   ------           -----
</TABLE>


                                    TABLE 8
                                    DEPOSITS

     The average balance and rates for certain categories of deposits for the
last two years are shown in the following table:

                                                Year ended December 31,
                                                -----------------------
                                              1999                1998
                                            --------            --------
                                         Average  Average   Average   Average
                                         Balance    Rate    Balance     Rate
                                         -------  --------  --------  --------
                                               (dollars in thousands)

Non-interest bearing demand deposits
                                         $ 24,026            $ 21,141
                                         --------            --------
Interest bearing deposits:
 Interest checking                         50,065     3.30%    27,170     2.68%
 Regular savings                           10,955     2.57     12,305     2.70
 Money market savings                       4,464     2.89      6,189     2.88
Time deposits:
 Certificates of deposit $100,000 or
  more
                                           14,326     4.75     16,908     5.31
 Other certificates of deposit
                                           63,159     5.12     70,205     5.60
                                         --------            --------

Total interest bearing deposits
                                          142,969     4.18    132,777     4.57
                                         --------            --------

Total deposits                           $166,965     3.58%  $153,918     3.94%
                                         --------            --------

     Maturities of time certificates of deposits of $100,000 or more outstanding
at December 31, 1999 were (dollars in thousands):

                                     1999
                                   =======

               3 months or less    $ 6,592
               3 - 6 months          2,683
               6 - 12 months         5,257
               Over 12 months        1,453
                                   -------
                  Total            $15,985

                                       21
<PAGE>

                                    TABLE 9
                          RETURN ON EQUITY AND ASSETS

     The ratio of net income to average total assets and average shareholders'
equity and certain other ratios for the periods indicated are as follows:

                                              Year ended December 31,
                                              -----------------------
                                                 1999         1998
                                              ----------    ---------

          Return on average assets               1.10%         0.81%

          Return on average equity              13.44%         9.62%

          Dividend payout ratio                 19.73%        24.69%

          Average equity to average assets       8.18%         8.39%



                                    TABLE 10
                              SHORT TERM BORROWING

     The Bank periodically borrows funds through federal funds from its
correspondent banks, through securities sold under agreements to repurchase,
through the Federal Home Loan Bank of Atlanta, and through the discount window
at the Federal Reserve Bank of Richmond. The borrowings mature daily for cash
flow requirements. The borrowed amounts and their corresponding rates during
1999 and 1998 are presented below:

                                    Year ended December 31,
                                    -----------------------
                                     (Dollars in Thousands)
                                         1999     1998
                                        ------   -------

Average daily amount outstanding        $4,384   $  648

Average interest rate                     5.35%    5.56%

Maximum outstanding at any month end    $9,000   $3,500

Balance at end of period                $4,800   $    0

                                       22
<PAGE>

                                    TABLE 11
                         INTEREST SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>

                                                  December 31, 1999
                                                  -----------------
                                 Within     90-365     1 to 5      Over
                                90 Days       Days      Years    5 Years    Total
                               --------   --------   --------   --------  -------
                                           (dollars in thousands)
<S>                             <C>       <C>         <C>       <C>        <C>
Earnings Assets:
Loans (2)                       $25,891   $ 41,001    $52,262   $ 12,720   $131,874
Securities & Time
 Deposits with
 other banks                      2,086      4,248     15,965     17,097     39,396
Federal funds sold
 and other short-
 term investments                     0          -          -          -          0
                                -------   --------    -------   --------   --------
Total interest
 earning assets
                               $ 27,977    $45,249    $68,227   $ 29,817   $171,270
                                -------   --------    -------   --------   --------

Interest-Bearing
 Liabilities:
Interest checking,
 savings and money
 market savings(3)              $ 3,864   $  8,695    $54,826   $      0   $ 67,385
Certificates of
 deposit:
  $100,000 and over               6,592      7,940      1,453          -     15,985
  Under $100,000                 11,915     33,941     18,603          -     64,459
Federal funds
 purchased and
 securities sold
 under agreements
 to repurchase                    4,800          -          -          -      4,800
Other borrowing                       6         21        121        700        848
                                -------   --------    -------   --------   --------
Total interest-
bearing liabilities             $27,177    $50,597   $ 75,003    $   700   $153,477
                                -------    -------   --------    -------   --------

Period gap                      $   800   $ (5,348)   $(6,776)  $ 29,117   $ 17,793

Cumulative gap                             $(4,548)  $(11,324)   $17,793
Ratio of cumulative
 gap to total
 earning assets(4)                 0.47%     -2.66%     -6.61%     10.39%
</TABLE>

(1) The repricing dates may differ from maturity dates for certain assets due to
prepayment assumptions.

(2) Includes nonaccrual loans.

(3) The Bank's Asset Liability Management Committee has found that interest
bearing checking accounts and regular saving accounts are generally not
sensitive to changes in interest rates. However, current interest rate levels
have warranted placing approximately 6.0% of these balances in the 90 day
category.

(4) The Bank's Asset Liability Management Committee monitors interest rate risk
using gap analysis and rate shock - market value - duration analysis using
regulatory guidelines. The relative risk to earnings based on the gaps in the
table above are considered reasonable by management and is within limits
established by the Board of Directors.

                                       23
<PAGE>

                                    TABLE 12
                             ANALYSIS OF CAPITAL *

                                       December 31,
                                     1999       1998
                                   ---------  ---------
                                       (thousands)

Tier 1 Capital:
     Common stock                  $  6,132   $  6,148
 Additional paid in capital             265        524
   Retained earnings                  9,737      8,082
    Less:  Goodwill                       0          0
                                   --------   --------
 Total Tier 1 capital              $ 16,134   $ 14,754


Tier 2 Capital:
  Allowance for loan losses           1,939      1,633
  Allowable long-term debt                0          0
                                   --------   --------
  Total Tier 2 Capital                1,939      1,633
  Total risk-based capital         $ 18,073   $ 16,387
                                   --------   --------

Risk weighted assets               $154,703   $130,167


Capital Ratios:
Tier 1 risk-based capital ratio        10.4%      11.3%

Total risk-based capital ratio         11.7       12.6

Tier 1 capital to average
   adjusted total assets                8.3        8.4


* See the captioned "Note 17 Regulatory Matters" which is on page 26 of the
Company's 1999 Annual Report to Shareholders, portions of which are provided in
Exhibit 13 to this report and are incorporated by reference herein.

                                       24
<PAGE>

ITEM 2.  Description of Property
--------------------------------

     The Company acquired a 2.647 acre commercial property (formerly the
Colonial Store complex) on School Street in Kilmarnock on January 2, 1998.  The
long term debt is secured by this property.  The building is approximately
27,000 square feet. Just over one half of the space is rented to three tenants,
Advance Auto, deMedici's Fine Italian Restaurante, and Rappahannock General
Hospital. The remaining space is being used by the Administrative Support,
Operations, and Loan Processing Center. The vacated space at 1 North Main Street
was sold in September, 1999.  The space at 19 N. Main Street is leased under an
agreement that expires on April 1, 2002 and has a five year renewal.

     The Bank owns and leases properties also described in Item 1 of this
report.

ITEM 3.  Legal Proceedings
--------------------------

     The Bank is currently not involved in any material legal proceeding other
than ordinary litigation incidental to its business.

ITEM 4.  Submission of Matters to a Vote of Security Holders
------------------------------------------------------------

     There were no matters submitted to a vote of security holders during the
quarter ended December 31, 1999.

                                    PART II

ITEM 5.  Market for Common Equity and Related Stockholder Matters
-----------------------------------------------------------------
     This information is included in the Company's 1999 Annual Report to
Shareholders at page 33-34 in the section captioned, "Dividend and Market
Information".

ITEM 6.  Management's Discussion and Analysis or Plan of Operation
------------------------------------------------------------------
     This information is included in the Company's 1999 Annual Report to
Shareholders at pages 31-35.


ITEM 7.  Financial Statements
-----------------------------

     This information is included in the Company's 1999 Annual Report to
Shareholders at pages 3-30.

ITEM 8.  Changes in and Disagreements with Accountants on Accounting and
------------------------------------------------------------------------
Financial Disclosure
--------------------

     There have been no disagreements between the Company and its independent
accountants for the past two years.

                                    PART III

ITEM 9.  Directors, Executive Officers, Promoters and Control Persons;
----------------------------------------------------------------------
Compliance with Section 16(a) of the Exchange Act
-------------------------------------------------

     This information is incorporated herein by reference from the Company's
Proxy Statement for the 2000 Annual Meeting of Shareholders at pages 2 through 4
and page 7 thereof.

     In addition, the Company has the following executive officers:

     Name                   Age   Position for last five years
     ----------------------------------------------------------

     John H. Hunt, II       52    CFO & Secretary for the Company
                                        and the Bank

     Marshall N. Warner     55    EVP since 3/97, SVP/SLO since 11/92
                                        Of the Bank

                                       25
<PAGE>

ITEM 10.  Executive Compensation
--------------------------------

     This information is incorporated herein by reference from the Company's
Proxy Statement for the 2000 Annual Meeting of Shareholders at pages 4 through 7
thereof.

ITEM 11.  Security Ownership of Certain Beneficial Owners and Management
------------------------------------------------------------------------

     This information is incorporated herein by reference from the Company's
Proxy Statement for the 2000 Annual Meeting of Shareholders at pages 2 and 3
thereof.

ITEM 12.  Certain Relationships and Related Transactions
--------------------------------------------------------

     This information is incorporated herein by reference from the Company's
Proxy Statement for the 2000 Annual Meeting of Shareholders at page 10 thereof.

ITEM 13.  Exhibits and Reports on Form 8-K
------------------------------------------
 (a) Exhibit Index:

     #3   (i) Articles of Incorporation and (ii) Bylaws. Incorporated by
              reference to Exhibits 3.1 and 3.2 of previously filed Registration
              Statement on Form S-18, Registration No. 33-27825, dated May 15,
              1989, as amended.

     #10      Material Contracts.  Exhibits 10.1 through 10.3 are incorporated
              by reference to Exhibit 10 and are filed as noted below:

              10.1 Employee Stock Ownership Plan (previously filed)

              10.2 Douglas D. Monroe, Jr. Deferred Compensation Agreement
              (previously filed)

              10.3 John H. Hunt, II Employment Agreement (previously filed)

              10.4 401K Overflow Plan (filed herewith)

              10.5 Employee Stock Option Plan (filed herewith)

     #13      1999 Annual Report to Shareholders (filed herewith)

     #21      Subsidiaries of the Registrant (filed herewith)

     #22      None

     #27      Financial data schedule (filed herewith)

 (b) Reports on Form 8-K.  No reports were filed by the registrant
           during the fourth quarter of 1999.

                                       26
<PAGE>

SIGNATURES

In accordance with Section 13 or 15(d) 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.


Date:  March 29, 2000      By /s/ Douglas D. Monroe, Jr.
       --------------         --------------------------
                                   Douglas D. Monroe, Jr.
                                   Chairman of the Board and
                                   Chief Executive Officer

In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.


/s/  Douglas D. Monroe, Jr.                          March 29, 2000
     ----------------------
     Douglas D. Monroe, Jr.
     Chairman of the Board and
     Chief Executive Officer
     (Principal Executive Officer)

/s/  John H. Hunt, II                                March 29, 2000
     ----------------
     John H. Hunt, II
     Chief Financial Officer and
     Secretary (Principal Financial
     Officer)

/s/  T. Nash Broaddus                                March 29, 2000
     ----------------
     T. Nash Broaddus, Director

/s/  Eugene S. Hudnall                               March 29, 2000
     -----------------
     Eugene S. Hudnall, Director

/s/  Katherine W. Monroe                             March 29, 2000
     -------------------
     Katherine W. Monroe, Director

/s/  Bruce P. Robertson                              March 29, 2000
     ------------------
     Bruce P. Robertson, Director

/s/  William F. Shumadine, Jr.                       March 29, 2000
     -------------------------
     William F. Shumadine, Jr., Director

/s/  Robert L. Stephens                              March 29, 2000
     ------------------
     Robert L. Stephens, Director

/s/  Jeffrey M. Szyperski                            March 29, 2000
     --------------------
     Jeffrey M. Szyperski, Director

                                       27