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, 1997.
                         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.)

  1 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 $14,343,120.

As of March 2, 1998 the aggregate market value of Common Stock of Chesapeake
Financial Shares, Inc. held by nonaffiliates was approximately $8,672,042 based
upon the sales price per share known to management on that date.

Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of March 2, 1998.

              Class                              Outstanding at March 2, 1998
              -----                              ----------------------------
Common Stock, $5.00 par value                               1,010,103

                      DOCUMENTS INCORPORATED BY REFERENCE

           Portions of the registrant's definitive proxy statement for its
           Annual Meeting of Shareholders to be held on April 3, 1998 are
           incorporated by reference into Part III of this Form 10-KSB.

           Portions of the registrant's 1997 Annual Report to Shareholders are
           incorporated by reference into Part II of this Form 10-KSB.

           Transitional Small Business Disclosure Format (check one): Yes No X.


                       CHESAPEAKE FINANCIAL SHARES, INC.
                                  FORM 10-KSB

<PAGE>




                                     INDEX

                                     PART I

                                                              Page

Item 1.  Description of Business............................  3-11
         Statistical Information............................ 12-24

Item 2.  Description of Properties..........................    24

Item 3.  Legal Proceedings..................................    24

Item 4.  Submission of Matters to a Vote of Security Holders    24


                                    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.................................    26

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...................    27

Signatures .................................................    31

EXHIBIT A Financial Reports


                                       2

<PAGE>



                                     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. Today the Company conducts
substantially all of its business activities through the wholly-owned subsidiary
- the Bank. Additionally, the Company operates Chesapeake Mortgage Company,
Inc., Chesapeake Insurance Agency, Inc., t/a Chesapeake Investment Services, and
CNB Properties, Inc.

         On December 31, 1997, the Company and its subsidiaries had 92 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. 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 14.7%, 8.9%, and 5.5% for each of the years
1997, 1996, and 1995, respectively. Total loans increased to $102.2 or 12.9% at
December 31, 1997, to $90.4 million or 11.6% at December 31, 1996, and to $81.0
million or 8.3% at December 31, 1995. Growth in total deposits has followed a
similar pattern with increases of 15.6%, 7.5%, and 5.7%. The James City County
Winn-Dixie Office was opened in May of 1995. The Five Forks/Williamsburg Office
was opened in May of 1996. The Bank operates nine banking offices and thirteen
ATMs.

         The Bank expanded its market area to James City County in the spring of
1995. The second full service banking facility was opened at Route 5 and
Ironbound Road, southwest of Williamsburg. This branch has complimented the
Winn-Dixie branch and ATM facilities currently in the county. The third
Williamsburg office will open in May of 1998 at Lafayette Street, near
Merchant's Square. This will be a regional office that will also provide office
space for 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 business
activities are primarily related to the small commercial enterprises and
residential real estate due to the area's popularity as a retirement and summer
home location. The growth of the York County - Williamsburg - Hampton triangle
has provided additional commercial and residential business activity which
diversifies revenue sources.

         The Westminster Canterbury Office is leased under an agreement that
expires May 31, 2000. The Gloucester and the James City County branches occupy
facilities rented from Winn-Dixie Raleigh. The initial Gloucester lease on the
premises expires in October of 1999, and the James City lease expires May of
2000. Both Winn-Dixie contracts have two five year renewals. The Five Forks
Office lease expires December 31, 2000 with three five year renewals. The Bank's
Main Office and other branch offices are held in fee, free of any encumbrances

         The Bank's branch offices are located as follows:

Gloucester Winn-Dixie Office    Hayes Office             Lively Office
Route 17                        Route 17                 Lively, Virginia
The Shoppes at Gloucester       Hayes Shopping Center
Gloucester, Virginia            Hayes, Virginia

Rappahannock Westminster        Kilmarnock Office        Mathews Office
Canterbury Office               97 North Main Street     Mathews Courthouse
Irvington, Virginia             Kilmarnock, Virginia     Mathews, Virginia

Irvington Office                James City County        Five Forks Office
Irvington, Virginia             Winn-Dixie Office        Rt5 & Ironbound Rd
                                Williamsburg, Virginia   Williamsburg, Va.

         The Company operates a separate office for its Loan Administration
Department at 19 North Main Street, Kilmarnock, Virginia. This office is leased
under an agreement that expires on April 1, 2002 and has a five year renewal.
The Company has an operations center at 1 North Main Street in Kilmarnock, which
it owns in fee and is unencumbered.

         The Company acquired a 2.647 acre commercial property (formerly the
Colonial Store complex) located on School Street in Kilmarnock on January 2,
1998. The building is approximately 27,000 square feet. Just over one half of
the space is rented to three tenants, Advance Auto, deMedici Italian Restaurant,
and Rappahannock General Hospital. The remaining space will be used by the
Administrative Support, Operations, and Loan Processing Center. The vacated
space will be sold (1 North Main Street) or sub-let (19 North Main Street).

The Mortgage Company

         Chesapeake Mortgage Company, Inc. (the "Mortgage Company"), which is a
wholly-owned subsidiary of the Company, completed its ninth year of operations
in 1994. The Mortgage Company operations area was consolidated with the Bank's
loan operations/underwriting area at the end of 1995. This resulted in improved
customer service while reducing over all costs. The Bank offers the same
permanent fixed and adjustable rate home mortgage loans as the Mortgage Company.
The Bank also solicits customers in the counties of Lancaster, Northumberland,
Gloucester, Mathews, Middlesex, York and the James City County/Williamsburg
area. The Bank and the Mortgage Company comply with the guidelines of the
Federal Home Loan Mortgage Corporation, and all loans are sold in the secondary
market within fifteen to sixty days after the loan closing date.

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


                                       4

<PAGE>




The Investment Company

         Chesapeake Insurance Agency, Inc., formerly T/A Chesapeake Title
Company, (the "Title Company"), which is a wholly-owned subsidiary of the Bank,
completed its eleventh year of operations in 1997. The Title Company has also
had its operations consolidated with the Bank and provides referrals to other
companies for title insurance services. The Company is now T/A Chesapeake
Investment Services and offers annuity products (fixed and variable), mutual
funds and discount brokerage products.

Lending Activities

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

         Real Estate Lending. The Company's real estate loan portfolio (both
mortgage and construction lending) continues to be its largest loan category as
it amounted to $41.8 million at December 31, 1997, or 40.3% of its 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, 1997, 47.0% of the mortgage portfolio was
subject to repricing or maturing within twelve months.

         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. At December 31, 1997, the mortgage portfolio amounted to $38.9 million, or
37.5% of total loans.

         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.



                                       5

<PAGE>



         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 emphasis on consumer loans (11.8% increase in 1997 over 1996 and
11.8% increase in 1996 over 1995) 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 $16.3
million at December 31, 1997, or 15.7% 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, 1997, 0.39% of the Bank's
consumer loan portfolio was 30 days or more delinquent.

         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, 1997, the Bank's commercial loan portfolio amounted to
$40.9 million, or 39.4% of its total loan portfolio. See Note 3 to the Financial
Statements for a breakdown of the major loan classifications. Of the $40.9
million of commercial loans at December 31, 1997, 73.5% 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, 1997, 90.5% of the
commercial loans were secured by some form of collateral and 1.14% 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 1997 and 1996.

         The Company adopted FASB 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 Corporation 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 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 judgement the loan
will be paid in full. Loans that meet the regulatory definitions of doubtful or
loss generally qualifies 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
uncollectible, as is the case for all loans. The Company had no loans subject to
FASB 114 at December 31, 1997, 1996, and 1995.

Long-Term Debt

         See Note 6 to the Financial Statements for information concerning past
term loan agreements of the Company. The existing line of credit agreement
mentioned in Note 6 requires the Bank, among other things, to maintain its
reserve for loan losses and certain minimum capital ratios as required by the
Company's regulators.

         There is no line of credit balance outstanding at December 31, 1997.

         To secure this indebtedness of the Company to The Community Banker's
Bank, the Company pledged its entire stock ownership interest in the Bank to The
Community Banker's Bank. So long as no event of default shall occur under the
loan agreement and related documents, the Company will be entitled to continue
to receive all cash distributions and dividends with respect to the pledged
shares and to vote such shares, and otherwise to have all rights as owner of the
pledged shares, except the right to transfer or encumber such shares.


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 statewide banking
institutions, including First Virginia Bank, Crestar Bank, NationsBank and First
Union National Bank. 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 legislative changes since 1982 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.





                                       7

<PAGE>



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.

         The Riegle-Neil Interstate Banking and Branching Efficiency Act of 1994
authorizes the Federal Reserve 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. Effective June 1, 1997, 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 has adopted legislation
that permits branching across state lines effective July 1, 1995, provided there
is reciprocity with the state in which the out-of-state bank is based.

         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.


                                       8

<PAGE>




         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").

         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 be "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, 1997 were 12.2% and 13.5%, 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, 1997, was 8.5%, 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 for any loans or extensions of credit permitted by such exceptions.


                                       9

<PAGE>




         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, 1997, the Bank could have paid additional dividends to the
Company of approximately $1.5 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. .

         Under the FDIA, 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. Because the SAIF was
recently recapitalized through a special assessment, the FDIC has implemented a
risk-based assessment schedule for both BIF insured and SAIF insured deposits,
imposing assessments ranging from zero (or a $2,000 minimum) to 0.27% of an
institution's average assessment base. The actual assessment to be paid is based
on whether the institution is considered "well capitalized", "adequately
capitalized" or "undercapitalized", as such terms have been defined in
applicable federal regulations, and whether such institution is considered by
its supervisory agency to be financially sound or to have supervisory concerns.



                                       10

<PAGE>



         Other Safety and Soundness Regulations. The federal banking agencies
have broad powers under current federal law to take prompt corrective action to
resolve problems of insured depository institutions. The extent of these powers
depends upon whether the institutions in question are "well capitalized,"
adequately capitalized," "undercapitalized," "significantly undercapitalized" or
"critically undercapitalized," all such terms are defined under uniform
regulations defining such capital levels issued by each of the federal banking
agencies.

         Current federal law also requires each of the federal banking agencies
to develop regulations addressing certain safety and soundness standards for
insured depository institutions and depository institution holding companies,
including operational and managerial standards, asset quality, earnings and
stock valuation standards, as well as compensation standards (but not dollar
levels of compensation). Each of the federal banking agencies have issued a
joint notice of proposed rulemaking, which requested comment on the
implementation of these standards. The proposed rule sets forth general
operational and managerial standards in the areas of internal controls,
information systems and internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth and compensation, fees and
benefits. The proposal contemplates that each federal agency would determine
compliance with these standards throughout the examination process, and if
necessary to correct weaknesses, require an institution to file a written safety
and soundness compliance plan. The Company has not yet determined the effect
that the proposed rule would have on its operations if it is enacted
substantially as proposed.

Other

         The Bank utilizes and is dependent upon data processing systems and
software to conduct its business. The data processing systems and software
include a mainframe processing system licensed to the Bank by an outside vendor
and various purchased software packages which are run on in-house computer
networks. In 1997, the Bank initiated a review and assessment of all hardware
and software to confirm that it will function properly in the year 2000. The
Bank's mainframe hardware and banking software are currently Year 2000
compliant. The majority of the other vendors have been contacted and have
indicated that their hardware and/or software will be Year 2000 compliant.
Testing will be performed on all systems and hardware for compliance. While
there may be some additional expenses incurred during the next two years, Year
2000 compliance is not expected to have a material effect on the Company's
consolidated financial statements.

         During the first quarter of 1997, the Bank satisfactorily completed a
Consumer Compliance Examination and a Community Reinvestment Act Examination
performed by the Federal Reserve Bank of Richmond. As of June 9, 1997, the Bank
and the company satisfactorily completed a Safety and Soundness Examination
performed by the Bureau of Financial Institutions of the SCC. In December of
1997 the Company satisfactorily completed a Transfer Agent Examination and a
Year 2000 Examination, both performed by the Federal Reserve Bank of Richmond.
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.


                                       11

<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..13-14

TABLE 2 . Analysis of Change in Net Interest Income...............   15

TABLE 3.  Types of Investment Securities..........................   16

TABLE 4.  Maturity Schedule of Selected Loans as of Dec. 31, 1997.   17

TABLE 5 . Risk Elements...........................................   18

TABLE 6.  Summary of Reserve for Loan Losses......................   19

TABLE 7.  Allocation of the Reserve for Loan Losses...............   20

TABLE 8.  Deposits................................................   20

TABLE 9.  Return on Equity and Assets.............................   21

TABLE 10. Short Term Borrowing....................................   21

TABLE 11. Interest Sensitivity Analysis...........................   22

TABLE 12. Analysis of Capital.....................................   23



                                       12

<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.

<TABLE>
<CAPTION>

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

                                         1997                           1996
                                         ----                           ----
                                          Annual                       Annual
                                Average  Income/   Yield/  Average     Income/    Yield/
                                Balance  Expense    Rate   Balance     Expense    Rate
                                -------  -------   -----   ------      -------    ------
                                                      (Dollars in Thousands)
<S> <C>
Assets:
Securities:
Taxable                         $26,969   $1,676    6.21%   $24,881   $1,466       5.89%
Tax-exempt(1)                    11,211      589    7.96     10,101      514       7.38%
                                 ------   ------             ------    -----
Total securities                 38,180    2,265    6.73     34,982    1,980       6.32%
Loans (net of
         unearned income):

   Taxable(2)                    94,841    8,872    9.35     83,935    7,929       9.45%
   Tax-exempt                     2,174      166   11.57      2,669      175       9.51%
                                 ------   ------             ------    -----
Total  loans                     97,015    9,038    9.40     86,604    8,104       9.45%
Federal funds sold and
repurchase agreements             1,050       58    5.52        750       40       5.33%
Interest-bearing deposits
in other banks                     --         --      --        396       18       4.55%
                                 ------    -----   -----      -----   ------      ------
Total earning asset
                                136,245   11,361    8.62%   122,732   10,142       8.55%
Less:  allowance for loan
   losses                        (1,678)                     (1,587)
Total nonearning assets          14,381                      12,231
Total assets                   $148,948                    $133,376
                               --------                    --------

</TABLE>






                                       13

<PAGE>




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

<TABLE>
<CAPTION>

                                                              Year Ended December 31,
                                                              -----------------------
                                                                1997                1996
                                                                ----                ----
                                                         Annual                    Annual
                                              Average   Income/   Yield/  Average  Income/  Yield/
                                              Balance   Expense    Rate   Balance  Expense    Rate
                                              -------   -------   ------  -------  -------  -------
                                                                    (Dollars in Thousands)
<S> <C>
Liabilities and Shareholder's Equity:
Interest-bearing deposits:
   Checking                                    21,022      508     2.42%  $ 20,552  $  503   2.45%
   Regular savings                             11,437      308     2.69     11,064     299   2.70
   Money market savings                         5,980      174     2.91      6,692     199   2.97
Certificates of deposit:
$100,000 and over                              15,131      851     5.62     14,022     781   5.57
Under $100,000                                 63,236    3,504     5.54     53,049   2,922   5.51
                                               ------   ------     ----     ------   -----   ----
Total interest-bearing
         deposits                             116,806    5,345     4.58    105,379   4,704   4.46
Federal funds purchased
and securities sold under
agreements to repurchase                          849       51     6.04        452      25   5.53
Other borrowing                                   216       11     5.17        286      26   9.09
                                                 -----      ---               ----     ---   ----
Total interest-bearing
      liabilities                             117,871    5,407     4.59%   106,117   4,755   4.48%
Noninterest bearing liabilities:
   Demand deposits                             16,612                       14,362
   Other liabilities                            1,599                        1,471
                                             --------                      -------
Total liabilities                             136,082                      121,950
Shareholders' equity                           12,866                       11,426
Total liabilities and share-
   holders' equity                           $148,948                     $133,376
Net interest income/yield                               5,954      4.65%            $5,387  4.68%
Interest rate spread                                               4.03%                    4.07%

</TABLE>

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

2) Includes non-accrual loans.


                                       14

<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,
                                                              -----------------------
                                           1997 vs.1996          1996 vs. 1995
                                       Increase (Decrease)     Increase (Decrease)
                                       Due to Changes in:(1)   Due to Changes in:(2)
                                       ---------------------   ---------------------
                                      Volume   Rate    Total   Volume   Rate   Total
                                                      (In thousands)
<S> <C>
Earning Assets:
Securities:
   Taxable                           $  127    $ 83   $ 210      $(269)  $ 30  $(239)
   Tax-exempt                            56      19      75        185    (14)   171
Loans
  Taxable                             1,032     (89)    943        730    (25)   705
  Tax-exempt                            (32)     23      (9)         4     38     42
Federal funds sold
   and repurchase
   agreements                            16       2      18        (59)    (3)   (62)
Interest-bearing deposits
   in other banks                       (18)      0     (18)       (28)    (3)   (31)
                                      ------    ----  -------     -----    ----  -----
Total earning
         assets                      $1,181    $ 38  $1,219       $ 563  $ 23    $586
                                     ------    ----  ------       -----    ----  -----

Interest-Bearing Liabilities:
   Interest checking                 $   12    $ (7) $    5       $  30  $(41)   $(11)
   Regular savings                       10      (1)      9           5    (4)      1
   Money market savings                 (21)     (4)    (25)        (42)    1     (41)
Time deposits:
      CDS $100,000 or more               62       8      70         444  (283)    161
      CDS Other                         561      21     582        (118)  223     105
                                      -----    ----    ----        ----- ----    -----
Total interest-bearing
   deposits                             624      17     641     319   (104)    215
Federal funds purchased
   and securities sold
   under agreements to
   repurchase                            22       4      26       4     (3)      1
Other borrowing                          (6)     (9)    (15)    (17)    (1)    (18)
                                        ----    ----    ----    ----   ----    ----
   Total interest-bearing
      liabilities                      $ 640   $ 12   $ 652   $ 306  $(108)   $198
                                        ----    ----   -----    ----   -----  -----
Change in net interest
   income:                             $ 528   $ 39   $ 567    $257  $ 131    $388
                                       -----    ----   -----   ---- ------    ----

</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 combined 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.



                                       15

<PAGE>



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


                                               December 31,
                                               ------------
                                            1997           1996
                                            ----           ----
Book Value:                                    (In thousands)
U.S. Government securities.................$31,186       $26,547
State and political subdivisions........... 11,473        10,540
Other securities...........................    743           711
                                          --------       -------
   Total securities                        $43,402       $37,798


Expected maturities of Securities Held at December 31, 1997


                                                             Over Ten
                                   One      One      Five    Years and
                                  Year    to Five   to Ten    Equity
                                 or Less   Years     Years  Securities  Total
                                 -------  -------   ------  ----------  ------
                                               (Dollars in thousands)


U.S. Agency Securities:
   Book value                     $4,087  $ 7,298    $3,670  $14,428  $29,483
   Market value                    4,057    7,270     3,673   14,540   29,540
   Weighted average yield(1)        5.59%    6.76%     6.95%    8.13%    7.34%
U.S. Treasury Securities:
   Book value                      1,197      506         -        -    1,703
   Market value                    1,195      504         -        -    1,699
   Weighted average yield(1)        5.27%    5.23%        -%       -%    5.26%
State and Political Subdivisions:
   Book value                        261        -       910   10,302   11,473
   Market value                      261        -       933   10,731   11,925
Weighted average yield(1)           6.61%       -      7.97%    8.27%    8.21%
Other Securities:
   Book Value                          -        -         -      743      743
      Market Value                     -        -         -      743      743
Weighted Average Yield(1)              -%       -%        -%    4.50%    4.50%
 Total Securities:
   Book value                     $5,545  $ 7,804    $4,580  $25,473  $43,402
   Market value                    5,513    7,774     4,606   26,014   43,907
   Weighted average yield(1)        5.57%    6.35%     7.16%    8.19%    7.44%



(1) Yields on tax-exempt securities have been computed on a tax-equivalent
basis.

The Bank held no issues that exceeded 10% of Shareholder's Equity at December
31, 1997.



                                       16

<PAGE>






                                    TABLE 4
             LOAN PORTFOLIO AND MATURITY SCHEDULE OF SELECTED LOANS
                            AS OF DECEMBER 31, 1997


         For the table and accompanying notes addressing the loan portfolio, see
"Note 3. Loans" on page 13 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, 1997 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.


                              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)

Commercial and other          $2,696 $27,335 $ 4,412 $ 5,850  $ 562   $    0
Real estate-construction       2,900       0       0       0       0       0
Real estate mortgage           1,625  15,151     852  20,090   1,228       0
Consumer installment           4,594   1,107   6,706     702   3,158       0
                              ------ -------  ------  ------  ------    ----
   Total                     $12,115 $43,593 $11,970 $26,642  $4,648  $    0
                             ------- ------- ------- -------  ------  ------





                                       17

<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,
                                             -----------
                                        1997            1996
                                        ----            ----
                                             (Thousands)
           Nonaccrual loans(1)          $   581      $ 143

           Restructured loans                 0          0

           Foreclosed properties            245        245

           Total nonperforming assets   $   826      $ 388
                                         -------     -----

           Loans past due 90+ days and
              accruing interest         $    14      $   8

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

           Reserve for loan losses to
              nonaccrual loans            299.5%   1,156.3%

           Nonperforming assets to
              period-end loans and
              foreclosed properties (2)    0.79%       .42%

           Net charge-offs (recoveries)
              to average loans            (0.01%)    (0.05%)



(1)There were no troubled debt restructurings in 1997 or 1996. The Bank expects
to charge off $86,481 in problem loans (fully reserved at December 31, 1997).
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 28 of the 1997 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, 1997, performing loans totaling approximately $5.2 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.




                                       18

<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,
                                                         -----------------------
                                                            1997      1996
                                                            ----      ----
                                                         (Dollars in thousands)

         Reserve, beginning of period                      $1,653     $1,463

         Loans charged off:
            Commercial                                        (29)       (92)
            Real estate construction                            0          0
            Real estate mortgage                               (3)         0
            Consumer                                          (10)       (65)
                                                           ------      -----
         Total loans charged off                              (42)      (157)
                                                           -------     -----

         Recoveries of loans previously charged off:
            Commercial                                         35        180
            Real estate - construction                          0          0
            Real estate - mortgage                              0          0
            Consumer                                           19         17
                                                          -------      -----
         Total recoveries                                      54        197
                                                          -------      -----

         Net loans (charged off) recovered
                                                               12         40

         Provision for (recovery off) loan losses
                                                               75        150
                                                          -------     ------

         Balance, end of period                            $1,740     $1,653
                                                          -------     ------

         Net charge-offs (recoveries) to average loans
                                                           (0.01%)     (0.17%)



                                       19

<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.

                                           1997                      1996
                                     Percent of loans          Percent of loans
                                     in each category          in each category
                             Amount  to Total Loans    Amount  to Total Loans
                             ------  --------------    ------  ----------------
                                              (dollars in thousands)

Commercial                   $  366       39.3%        $  344          36.1%
Real estate - construction        0        2.8              0           3.4
Real estate - mortgage        1,154       37.5          1,107          41.6
Consumer                        220       15.7            202          15.8
Other                             0        0.4              0           0.5
Participations                    0        4.3              0           2.6
                              -----      ------          -----         ----

Total                        $1,740       100.0%       $1,653         100.0%
                             ------      ------        ------         -----


                                    TABLE 8
                                    DEPOSITS

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

<TABLE>
<CAPTION>


                                                         Year ended December 31,
                                                         -----------------------
                                                     1997                      1996
                                                     ----                      ----
                                              Average       Average      Average    Average
                                              Balance        Rate        Balance      Rate
                                              -------       -------      -------    -------
                                                        (dollars in thousands)
<S> <C>

Non-interest bearing demand deposits
                                             $ 16,612                   $ 14,362
                                             --------                   --------
Interest bearing deposits:
  Interest checking                            21,022        2.42%        20,552     2.45%
  Regular savings                              11,437        2.69         11,064     2.70
  Money market saving                           5,980        2.91          6,692     2.97
Time deposits:
  Certificates of deposit $100,000 or more
                                               15,131        5.62         14,022     5.57
  Other certificates of deposit
                                               63,236        5.54         55,049     5.51
                                              -------                     ------

Total interest bearing deposits
                                              116,806        4.58        105,379     4.46
                                             --------                    -------

Total deposits                               $133,418        4.01%      $119,741     3.93%
                                             --------                    --------
</TABLE>

         Maturities of time certificates of deposits of $100,000 or more
outstanding at December 31, 1997 were (dollars in thousands):

                                               1997

                           3 months or less  $ 5,547
                           3 - 6 months        2,245
                           6 - 12 months       4,472
                           Over 12 months      3,425
                                             -------
                              Total          $15,689



                                       20

<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,
                                                   ----------------------
                                                    1997            1996
                                                    ----            ----
                  Return on average assets          1.18%            1.18%

                  Return on average equity         13.61%           13.78%

                  Dividend payout ratio            16.21%           15.53%

                  Average equity to average assets  8.63%            8.57%




                                    TABLE 10
                              SHORT TERM BORROWING

         The Bank periodically borrows funds through federal funds from its
correspondent banks, through securities sold under agreements to repurchase, 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 1997 and 1996 are presented below:

                                                        Year ended December 31,
                                                        -----------------------
                                                        (Dollars in Thousands)
                                                        1997             1996
                                                        ----             ----
Average daily amount outstanding                       $1,065          $  452

Average interest rate                                    5.86%           5.53%

Maximum outstanding at any month end                   $3,300          $2,400

Balance at end of period                               $1,250          $2,000



                                       21

<PAGE>



                                    TABLE 11
                         INTEREST SENSITIVITY ANALYSIS

                                       December 31, 1997
                                       -----------------
                           Within    90-365    1 to 5    Over
                           90  Days    Days    Years    5 Years     Total
                           --------  ------    ------   -------     -----
                                         (dollars in thousands)
Earnings Assets:
Loans (2)                  $ 27,782 $ 32,906 $ 37,960  $  4,649   $103,297
Securities & Time
 Deposits with
 other banks                  1,800    8,366   16,706    17,036     43,908
Federal funds sold
 and other short-
 term investments             1,900        -        -         -      1,900
                           -------- --------- -------   -------    -------
Total interest
 earning assets
                           $ 31,482 $ 41,272 $ 54,666  $21,685    $149,105
                           -------- -------- --------  -------    --------

Interest-Bearing
 Liabilities:
Interest checking,
 savings and money
 market savings(3)         $ 2,280 $  5,319  $ 32,847   $     0  $ 40,448
Certificates of
 deposit:
   $100,000 and over         5,553    6,715     3,421         -    15,689
   Under $100,000           14,073   39,349    18,706         -    72,128
Federal funds
 purchased and
 securities sold
 under agreements
 to repurchase               1,250        -         -         -     1,250
                         ---------  -------    ------   -------   -------
Total interest-
bearing liabilities        $23,156  $ 51,383  $ 54,974  $     0  $129,513
                            ------  --------  --------  -------   -------

Period gap                 $ 8,326  $(10,111) $   (308) $21,685  $ 19,592

Cumulative gap                      $ (1,785) $ (2,093) $19,592
Ratio of cumulative
 gap to total
 earning assets(4)            5.58%    -1.20%    -1.40%   13.14%

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

(2) Excludes 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 5.6% 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.


                                       22

<PAGE>



                                    TABLE 12
                             ANALYSIS OF CAPITAL *

                                                December 31,
                                          1997              1996
                                          ----              ----
                                                 (thousands)

   Tier 1 Capital:
             Common stock                $  5,054         $ 4,198
    Additional paid in capital                484             468
      Retained earnings                     8,064           7,343
       Less:  Goodwill                          0             (84)
                                         --------        --------
    Total Tier 1 capital                 $ 13,602         $11,925


   Tier 2 Capital:
     Allowance for loan losses              1,397           1,196
     Allowable long-term debt                   0               0
                                         --------        --------
     Total Tier 2 Capital                   1,397           1,196
     Total risk-based capital            $ 14,999         $13,121
                                         --------        --------
   Risk weighted assets                  $111,196         $95,348


   Capital Ratios:
   Tier 1 risk-based capital ratio           12.2%           12.5%

   Total risk-based capital ratio            13.5            13.7

   Tier 1 capital to average
      adjusted total assets                   8.5             8.5



* See the captioned "Note 19 Regulatory Matters" which is included in Exhibit A
at page 23, The Annual Report to Shareholders was filed with the Commission on
or about March 11, 1997.


                                       23

<PAGE>



                            Accounting Rule Changes

         In June 1996, the FASB issued FASB No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities". This
Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. Those
standards are based on consistent application of a financial components approach
that focuses on control of the affected asset or liability that it controls or
surrenders. This Statement is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996, and
is to be applied prospectively.

         In October 1996, the FASB issued FASB Statement No. 127, which deferred
for one year paragraphs 9-12 (Accounting for Transfers and Servicing of
Financial Assets) under FASB No. 125 for securities lending, repurchase
agreements, dollar rolls, and other secured transactions. The FASB also agreed
to defer for one year paragraph 15 (Secured Borrowings and Collateral) under
FASB No 125 for all transactions.

         During June 1997, the FASB issued FASB No. 130, "Reporting
Comprehensive Income". This pronouncement established standards for reporting
and display of comprehensive income and its components (revenues, expenses,
gains, and losses) in a full set of general purpose financial statements. FASB
No. 130 is effective for financial statements beginning after December 15, 1997.

         Additionally during June of 1997, the FASB issued FASB No. 131,
"Disclosures About Segments of an Enterprise and Related Information". FASB No.
131 establishes standards for the way that public enterprises report information
about operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. This statement becomes effective for financial statements for periods
beginning after December 31, 1997.

ITEM 2.  Description of Properties

         The Company owns no properties at December 31, 1997; however, its
subsidiary, the Bank owns and leases properties as described in PART 1, Item 1
of this report. The Company purchased a property on January 2, 1998 that is
described in PART I, Item 1, The Bank.

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, 1997.


                                       24

<PAGE>



                                    PART II

ITEM 5.  Market for the Common Equity and Related Shareholder Matters

         This information is included in the 1997 Annual Report to Shareholders
at pages 30-31 in the section captioned, "Dividend and Market Information".

ITEM 6.  Management's Discussion and Analysis or Plan of Operations

         This information is included in the 1997 Annual Report to Shareholders
at pages 28-32.

ITEM 7.  Financial Statements

         The financial statements, together with the report thereon of Yount,
Hyde and Barbour, P.C. dated January 8, 1998, are attached hereto as exhibit A.

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.

                                       25

<PAGE>



                                    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
1998 Proxy Statement at pages 2 through 4 and page 8 thereof attached hereto as
exhibit B.

ITEM 10.  Executive Compensation

         This information is incorporated herein by reference from the 1998
Proxy Statement at pages 4 through 8 thereof attached hereto as exhibit B.

ITEM 11.  Security Ownership of Certain Beneficial Owners and Management

         This information is incorporated herein by reference from the 1998
Proxy Statement at pages 2 through 4 thereof attached hereto as exhibit B.

ITEM 12.  Certain Relationships and Related Transactions

         This information is incorporated herein by reference from the 1998
Proxy Statement at page 7 thereof. See for further information Note 12 to the
Financial statements at page 20 of the Company's 1997 Consolidated Financial
Report attached hereto as exhibit A.



                                       26

<PAGE>



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

      #2       Not Applicable.

      #3       (I)(ii)Articles of Incorporation and 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.

      #4       Not Applicable

      #9       Not Applicable

      #10      Material Contracts.  Exhibits 10.1 - 10.6 are incorporated by
               reference to Exhibit 10 to previously filed Registration
               Statement on Form S-18, Registration No. 33-27825, dated May 15,
               1989, as amended.

               10.1     Employee Stock Option Plan

               10.2     Douglas D. Monroe, Jr. Deferred Compensation Agreement

               10.3     Thomas B. Denegre, Jr. Deferred Compensation Agreement

               10.4     Rappahannock Westminster Canterbury Lease Agreement

               10.5     Main Street, Kilmarnock Lease Agreement

               10.6     IBM Credit Corporation Equipment Leasing Agreement

               10.7     Virginia Bankers Bank Term Loan Agreement incorporated
                        by reference to the Company's SEC 10-Q filing for March
                        31, 1993, Exhibit 10.2

               10.8     Ted M. Kattmann Employment Agreement filed herewith

               10.9     John H. Hunt, II Employment Agreement filed herewith

      #11      Not Applicable

      #12      Not Applicable

      #13      Annual Report to Security Holders is filed herewith

      #16      Not Applicable

      #18      Not Applicable

      #21      Subsidiaries of the Registrant is filed herewith.

      #22      None

      #23      Attached

      #24      Not Applicable

      #27      Not Applicable

      #28      Not Applicable

      #99      Not Applicable

(b)     Reports on Form 8-K. No reports were filed by the registrant during
        the fourth quarter of 1997.

                                       27

<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 13, 1998                    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 13, 1998
    ----------------------
         Douglas D. Monroe, Jr.
         Chairman of the Board and
         Chief Executive Officer

/s/      T. Nash Broaddus                    March 13, 1998
         ----------------
         T. Nash Broaddus, Director

/s/      Thomas B. Denegre, Jr.              March 13, 1998
         ----------------------
         Thomas B. Denegre, Jr., Director

/s/      Eugene S. Hudnall                   March 13, 1998
         -----------------
         Eugene S. Hudnall, Director

/s       Katherine W. Monroe                 March 13, 1998
         -------------------
         Katherine W. Monroe, Director

/s/      Robert S. Scheu                     March 13, 1998
         ----------------
         Robert S. Scheu, Director

/s/      William F. Shumadine, Jr.           March 13, 1998
         -------------------------
         William F. Shumadine, Jr., Director

/s/      Robert L. Stephens                  March 13, 1998
         ------------------
         Robert L. Stephens, Director

                                       28