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, 1998.

                         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 $16,601,324.

           As of March 2, 1999 the aggregate market value of Common Stock of
           Chesapeake Financial Shares, Inc. held by nonaffiliates was
           approximately $8,430,535 based upon the average sales price per share
           known to management during January and February 1999.

           Indicate the number of shares outstanding of each of the issuer's
           classes of common stock as of March 1, 1999.

            Class                               Outstanding at March 1, 1999
            -----                               ----------------------------
           Common Stock, $5.00 par value                1,237,439

                             DOCUMENTS INCORPORATED BY REFERENCE

           The following documents are incorporated by reference and the Part of
           the Form 10-KSB into which the document is incorporated. (1)Portions
           of the Annual Report to Shareholders for the year ended December 31,
           1998 are incorporated into Part II, Items 5 through 7 of this Form
           10-KSB.
           (2)Portions of the definitive proxy statement for the 1999
           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


<PAGE>

                        CHESAPEAKE FINANCIAL SHARES, INC.
                                   FORM 10-KSB
                                      INDEX

                                     PART I

                                                                            Page
                                                                            ----
Item 1.Description of Business............................................     3
Statistical Information................................................... 12-23

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

Item 10. Executive Compensation.............................................. 25

Item 11. Security Ownership of Certain Beneficial Owners and
         Management.......................................................... 25

Item 12. Certain Relationships and Related Transactions...................... 25

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

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

                                       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 Financial Group, Inc.,
Chesapeake Mortgage Company, Inc. (Inactive), Chesapeake Insurance Agency, Inc.,
t/a Chesapeake Investment Services, and CNB Properties, Inc.

        On December 31, 1998, the Company and its subsidiaries had 101 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 and Touch Tone Loan 24 hour access services and
annuity and brokerage 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 10.9%, 14.7%, and 8.9% for each of the years
1998, 1997 and 1996, respectively. At December 31, 1998, total loans amounted to
$109.4 million, a 7.1% increase from $102.1 million in total loans at December
31, 1997, which was a 12.9% increase from the previous year-end total of $90.4
million at December 31, 1996. Growth in total deposits has followed a similar
pattern with increases of 7.5%, 15.6%, and 11.6% during 1996, 1997 and 1998,
respectively.

        The Bank operates ten 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 Winn-Dixie office. In May 1996, the
Bank opened its Five Forks/Williamsburg Office. The third full service banking
facility in Williamsburg opened in June 1998 on Lafayette Street, near Merchant
Square. This branch functions as a regional office and houses Chesapeake
Financial Group, Inc. and Chesapeake Investment Services.

                                       3
<PAGE>



        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.

        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 - 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 Westminster Canterbury Office, the
Gloucester Winn-Dixie Office, the James City County Winn-Dixie Office, and the
Five Forks Office, the Bank's Main Office and branch offices are held in fee,
free of any encumbrances. 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.
<TABLE>
<CAPTION>

        The Bank's branch offices are located as follows:
<S>     <C>                         <C>                          <C>
Gloucester Winn-Dixie Office        Hayes Office                 Lively Office
Route 17                            Route 17                     Lively
The Shoppes at Gloucester           Hayes Shopping Center
Gloucester                          Hayes

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

Irvington Office                    James City County            Five Forks Office
Irvington                           Winn-Dixie Office            Rt5 & Ironbound Rd
                                    Williamsburg                 Williamsburg
</TABLE>

Lafayette Street Financial Center
1229 Lafayette Street
Williamsburg


        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 will be sold (1 North Main Street) or
sub-let (19 North Main Street). The space at 19 N. Main Street is leased under
an agreement that expires on April 1, 2002 and has a five year renewal.

                                       4
<PAGE>


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.



<PAGE>


THE INVESTMENT COMPANIES

        Chesapeake Financial Group, Inc. ("CFG") was incorporated August 31,
1998 and opened for business at year end. 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 as a title company in 1995. The Title
Company has also had the operations area consolidated with the Bank and provides
referrals to other companies for title insurance services. Chesapeake Insurance
Agency, Inc is now T/A Chesapeake Investment Services ("CIS") and offers annuity
products (fixed and variable), mutual funds and discount brokerage products. The
Bank, the Trust Department, CIS, and CFG combine to offer services for every
financial need.

OTHER ENTITIES

        CNB Properties, Inc. was formed September 23, 1991, to provide a
corporate vehicle to buy and hold properties (such as foreclosures) on a
temporary basis. There has never been more than one property held at any point
in time and never more than several months.

LENDING ACTIVITIES

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

        REAL ESTATE LENDING. The Bank's second largest loan category is its real
estate loan portfolio, (both mortgage and construction lending) which amounted
to $38.5 million at December 31, 1998, or 34.5% 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.

                                       5
<PAGE>

        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, 1998, 46.7% 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. 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 emphasis on consumer loans (a 31.4% increase over 1997 and an
11.8% increase in 1997 over 1996) 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 $21.4
million at December 31, 1998, or 19.2% 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, 1998, only 0.31% 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, 1998, the Bank's commercial loan portfolio amounted to
$49.1 million, or 44.1% of its total loan portfolio. See Note 3 to the Financial
Statements for

                                       6
<PAGE>

a breakdown of the major loan classifications. Of the $49.1 million of
commercial loans at December 31, 1998, 64.7% of such loans either matured or
were subject to repricing within one year. (see Table 4 at page 16).

        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, 1998, 94.6% of the
commercial loans were secured by some form of collateral and 0.45% of the Bank's
commercial loan portfolio was 30 days or more delinquent. See Table 6 at page 18
showing the amount of commercial loans charged off during 1998 and 1997.

        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.

        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
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, 1998, 1997, and 1996.

LONG-TERM DEBT

        See Note 5 to the Financial Statements for information concerning term
loan agreements of the Company.

                                       7
<PAGE>

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 regional banking
institutions, including First Virginia Bank, Wachovia Bank, SunTrust Bank,
NationsBank, 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 legislative 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.

         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.  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

                                       8
<PAGE>

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").

        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, 1998 were 11.3% and 12.6%, 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, 1998, was 8.4%, which is above the minimum
requirements. The guidelines also provide that banking organizations
experiencing internal growth or making acquisitions will be expected to

                                       9
<PAGE>

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, 1998, the Bank could have paid additional dividends to the
Company of approximately $1.9 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. .

        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

                                       10
<PAGE>

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.

     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

                                       11
<PAGE>

to conserve the assets of any such institution for the benefit of depositors and
other creditors.

OTHER

        Please see the "Year 2000 Readiness Disclosure" at page 33 of the
Company's Annual Report to Shareholder's.

        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, State Corporation Commission,
Commonwealth of Virginia. 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. 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.


                                       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.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, 1998   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



                                       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,

                                      1998                    1997
                                      ----                    ----
                                     Annual                  Annual
                          Average  Income/   Yield/ Average  Income/   Yield/
                          Balance  Expense    Rate  Balance  Expense    Rate
                          -------  -------    ----  -------  -------    ----
                                                   (Dollars in Thousands)
Assets:
Securities:
Taxable                   $34,234   $1,886  5.51%   $26,383   $1,636  6.20%
Tax-exempt(1)              11,749      605  7.80     11,211      589  7.96%
                           ------   ------         --------    -----
Total securities           45,983    2,491  6.10     37,594    2,225  6.72%
Loans (net of unearned income):
   Taxable(2)             103,215    9,962  9.65     94,841    8,872  9.35%
   Tax-exempt               2,567      205 12.10      2,174      166 11.57%
                           ------   ------         --------    -----
Total  loans              105,782   10,167  9.71     97,015    9,038  9.40%
Federal funds sold and
repurchase agreements       1,702       89  5.23      1,050       58  5.52%
Interest-bearing deposits
in other banks                346       16  4.62        586       40  6.83%
                           ------      --- -----      -----   ------ ------
Total earning asset
                          153,813   12,763  8.57%   136,245   11,361  8.62%
Less:  allowance for loan
   losses                  (1,806)                  (1,678)
Total nonearning assets    19,261                   14,381
                          -------                   -------
Total assets             $171,268                 $148,948
                         --------                 --------



                                       14
<PAGE>

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

                                              Year Ended December 31,

                                      1998                    1997
                                      ----                    ----
                                     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                $27,170   $  728  2.68%   $21,022    $ 508  2.42%
   Regular savings          12,305      332  2.70     11,437      308  2.69
   Money market savings
                             6,189      178  2.88      5,980      174  2.91
Certificates of deposit:
$100,000 and over           16,908      897  5.31     15,131      851  5.62
Under $100,000              70,205    3,932  5.60     63,236    3,504  5.54
                            ------   ------  ----     ------    -----  ----
Total interest-bearing
        deposits           132,777    6,067  4.57    116,806    5,345  4.58
Federal funds purchased
   and securities sold under
   agreements to repurchase
                               648       36  5.56        849       51  6.01
Other borrowing                884       49  5.54        216       11  5.09
                              -----      ---  ----      -----      ---  ----
   Total interest-bearing
      liabilities          134,309    6,152  4.58%   117,871    5,407  4.59%
Noninterest bearing liabilities:
   Demand deposits          21,141                    16,612
   Other liabilities         1,462                     1,599
                            ------                     -----
Total liabilities          156,912                   136,082
Shareholders' equity        14,355                    12,866
Total liabilities and share-
   holders' equity        $171,267                  $148,948
Net interest income/yield             $6,611 4.57%              $5,954  4.65%
Interest rate spread                         3.99%                      4.03%

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.
                                                Year Ended December 31,

                                    1998 vs.1997          1997 vs. 1996
                                Increase (Decrease)     Increase (Decrease)
                                Due to Changes in:(1)   Due to Changes in:(2)
                                ---------------------   ---------------------
                               Volume    Rate  Total   Volume    Rate   Total
                               ------    ----  -----   ------    ----   -----
                                                   (In thousands)
Earning Assets:
Securities:
   Taxable                     $ 399    $(149) $ 250   $  88   $  82   $ 170
   Tax-exempt                     28      (12)    16      56      19      75
Loans
  Taxable                        799      291  1,090   1,032     (88)    944
  Tax-exempt                      31        8    (39)    (32)     23      (9)
Federal funds sold
   and repurchase
   agreements                     34       (3)    31      16       2      18
Interest-bearing deposits
   in other banks                (13)     (11)   (24)      8      13      21
                               ------    ----- ------  -----    ----  ------
Total earning
        assets                $1,278     $124 $1,402  $1,168    $ 51  $1,219
                              ------     ---- ------  ------    ----  ------

Interest-Bearing Liabilities:
   Interest checking          $  161    $  59 $  220  $   12  $   (7) $    5
   Regular savings                23        1     24      10      (1)      9
   Money market savings            6       (2)     4     (21)     (4)    (25)
Time deposits:
      CDS $100,000 or more        87      (41)    46      62       8      70
      CDS Other                  390       38    428     561      21     582
                              ------     ----   ----  ------    ----    ----
Total interest-bearing
   deposits                      667       55    722     624      17     641
Federal funds purchased
   and securities sold
   under agreements to
   repurchase                    (11)      (4)   (15)     22       4      26
Other borrowing                   37        1     38      (6)     (9)    (15)
                                 ---       ----  ---      ---     ---    ----
Total interest-bearing
      liabilities              $ 693    $  52  $ 745   $ 640   $  12   $ 652
                               -----    -----  ------  -----   -----   -----
Change in net interest
   income:                     $ 585     $ 72  $ 657   $ 528    $ 39   $ 567
                               -----     ----  -----   -----    ----   -----

(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,
                                                     1998          1997
Book Value:                                               (In thousands)
U.S. Government securities. . . . . . . . .  $29,046             $31,186
State and political subdivisions. . . . . .   12,330              11,473
Other securities. . . . . . . . . . . . .        835                 743
   Total securities                          $42,211             $43,402


Maturities of Securities Held at December 31, 1998


                                                               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                   $5,973      $20,958    $1,615  $     -  $28,546
   Market value                  5,963       20,664     1,573        -   28,200
   Weighted average yield(1)      4.72%        4.62%     5.16%       -%    4.62%
U.S. Treasury Securities:
   Book value                      500            -          -        -    500
   Market value                    501            -          -        -    501
   Weighted average yield(1)      5.22%           0%         -%       -%  5.22%
State and Political Subdivisions:
   Book value                        -          203      2,165    9,962  12,330
   Market value                      -          209      2,268   10,456  12,933
Weighted average yield(1)            -%        7.42%-     7.91%    8.02%   7.99%
Other Securities:
   Book Value                        -            -          -     835     835
   Market Value                      -            -          -     841     841
Weighted Average Yield(1)            -%           -%         -%   6.26%   6.26%
Total Securities:
   Book value                   $6,473      $21,161     $3,780  $10,797  $42,211
   Market value                  6,464       20,873      3,841   11,297   42,475
   Weighted average yield(1)      4.76%        4.64%      6.73%    7.88%   5.76%

(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, 1998.


                                       17
<PAGE>



                                           TABLE 4
                    LOAN PORTFOLIO AND MATURITY SCHEDULE OF SELECTED LOANS
                                   AS OF DECEMBER 31, 1998


        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, 1998 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          $5,649  $26,096 $ 6,242 $ 8,894  $3,104  $    0
Real estate-construction       5,166        0     111       0     191       0
Real estate mortgage             467   12,316     953  17,749   1,518       0
Consumer installment           6,125    1,132   9,250     510   4,361       0
                              ------  -------  ------  ------  ------    ----
   Total                     $17,407  $39,544 $16,556 $27,153  $9,174  $    0
                             -------  ------- ------- -------  ------  ------





                                       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)
                                                     1998        1997
               Nonaccrual loans(1)                 $   202       $ 581

               Restructured loans                        0           0

               Foreclosed properties                   185         245
                                                     -----       -----

               Total nonperforming assets          $   387       $ 826
                                                    -------       -----

               Loans past due 90+ days and
                  accruing interest                $     4       $  14

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

               Reserve for loan losses to
                  nonaccrual loans                   999.7%      299.5%

               Nonperforming assets to
                  period-end loans and
                  foreclosed properties (2)           0.35%        .80%

               Net charge-offs (recoveries)
                  to average loans                    0.32%      (0.01%)



(1)There were no troubled debt restructurings in 1998 or 1997. The Bank expects
to charge off $585,705 in problem loans (fully reserved at December 31, 1998).
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 29 of the 1998 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, 1998, performing loans totaling approximately $4.5 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, consumer, hospitality, and the
retail sectors.




                                       19
<PAGE>







                                       20
<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,
                                                 -----------------------
                                               1998                1997
                                               -----               ----
                                                  (Dollars in thousands)

        Reserve, beginning of period         $1,740               $1,653

        Loans charged off:
           Commercial                          (330)                 (29)

           Real estate construction               0                    0

           Real estate mortgage                  (0)                  (3)

           Consumer                             (25)                 (10)
                                            -------              --------

        Total loans charged off                (355)                 (42)
                                            --------               ------

        Recoveries of loans previously charged off:
           Commercial                             0                   35

           Real estate - construction             0                    0

           Real estate - mortgage                 7                    0

           Consumer                              12                   19
                                              -----                  ---

        Total recoveries                         19                   54
                                            -------              -------

        Net loans (charged off) recovered
                                               (336)                  12
        Provision for (recovery off) loan losses
                                                620                   75
                                                ---                -----

        Balance, end of period               $2,024               $1,740
                                             ------               ------


        Net charge-offs (recoveries) to average loans
                                              (0.32%)              (0.01%)


                                       21
<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.

                                               1998                   1997
                                    Percent of loans            Percent of loans
                                    in each category            in each category
                             Amount  to Total Loans    Amount    to Total Loans
                             ------  --------------    ------    ---------------
                                                   (dollars in thousands)

Commercial                  $1,233            44.1%     $ 366           39.3%
Real estate - construction       0             4.9          0            2.8
Real estate - mortgage         463            29.6      1,154           37.5
Consumer                       299            19.2        220           15.7
Other                           29             0.8          0            0.4
Participations                   0             1.4          0            4.3
                             -----          ------      -----           ----

Total                       $2,024           100.0%    $1,740          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:
                                            Year ended December 31,
                                            -----------------------
                                      1998                  1997
                                      ----                  ----
                             Average    Average       Average     Average
                             Balance     Rate         Balance       Rate
                             -------    -------       --------    -------
                                          (dollars in thousands)

Non-interest bearing demand deposits
                             $ 21,141                     $ 16,612
                             --------                     --------
Interest bearing deposits:
  Interest checking            27,170   2.68%        21,022         2.42%
  Regular savings              12,305   2.70         11,437         2.69
  Money market savings          6,189   2.88          5,980         2.91
Time deposits:
  Certificates of deposit $100,000 or more
                               16,908   5.31         15,131         5.62
  Other certificates of deposit
                               70,205   5.60         63,236         5.54
                             --------              --------

Total interest bearing deposits
                              132,777   4.57         116,806         4.58
                             --------               --------

Total deposits        $153,918          3.94%       $133,418         4.01%
                      --------                      --------

        Maturities of time certificates of deposits of $100,000 or more
outstanding at December 31, 1998 were (dollars in thousands):

                                                     1998
                                                     ----
                      3 months or less             $ 6,073
                      3 - 6 months                   3,144
                      6 - 12 months                  4,763
                      Over 12 months                 1,528
                                                   -------
                         Total                     $15,508


                                       22
<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,
                                                    ----------------------
                                                     1998        1997
                                                     ----        -----

               Return on average assets              0.81%        1.18%

               Return on average equity              9.62%       13.61%

               Dividend payout ratio                24.69%       16.21%

               Average equity to average assets      8.39%        8.63%




                                           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 1998 and 1997 are presented below:

                                                      Year ended December 31,
                                                      -----------------------
                                                      (Dollars in Thousands)
                                                        1998         1997
                                                        ----         ----
Average daily amount outstanding                      $  648       $1,065

Average interest rate                                   5.56%        5.52%

Maximum outstanding at any month end                  $3,500       $3,300

Balance at end of period                              $    0       $1,250

                                       23
<PAGE>

<TABLE>
<CAPTION>

                                                    TABLE 11
                                      INTEREST SENSITIVITY ANALYSIS

                                            December 31, 1998
                                            -----------------
                       Within        90-365        1 to 5      Over
                      90  Days        Days          Years     5 Years      Total
                      --------        ----          -----     --------     -----
<S>     <C>           <C>             <C>           <C>       <C>          <C>
                                             (dollars in thousands)
Earnings Assets:
Loans (2)             $ 21,127      $ 37,535        $ 43,610  $  9,174     $111,446
Securities & Time
 Deposits with
 other banks             3,510         6,912          15,895    16,158       42,475
Federal funds sold
 and other short-
 term investments        7,000             -               -         -        7,000
                      --------     ---------       ---------  --------      -------
Total interest
 earning assets
                      $ 31,637      $ 44,447        $ 59,505   $25,332     $160,921
                      --------      --------        --------   -------     --------

Interest-Bearing
 Liabilities:
Interest checking,
 savings and money
 market savings(3)     $ 3,165      $  7,210        $ 45,343     $   0     $ 55,718
Certificates of
 deposit:
   $100,000 and over     5,553         6,715           3,421         -       15,507
   Under $100,000       14,073        39,349          18,706         -       69,583
Federal funds
 purchased and
 securities sold
 under agreements
 to repurchase               0             -               -         -            0
Other borrowing              6            21             123       725          875
                    ---------          -----          ------     -----       ------
Total interest-
bearing liabilities    $24,330      $ 56,218        $ 60,410   $   725     $141,683
                        ------        ------          ------     ------     -------

Period gap            $  7,307      $(11,771)       $   (905)  $24,607    $  19,238

Cumulative gap                      $ (4,464)       $ (5,369)  $19,238
Ratio of cumulative
 gap to total
 earning assets(4)        4.54%        -2.77%          -3.34%    12.30%
</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 5.7% 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.


                                       24
<PAGE>


                                           TABLE 12
                                    ANALYSIS OF CAPITAL *

                                                        December 31,
                                                    1998           1997
                                                    ----           ----
                                                       (thousands)

        Tier 1 Capital:
                Common stock                    $  6,148       $  5,054
         Additional paid in capital                   524           484
           Retained earnings                        8,082         8,064
            Less:  Goodwill                             0             0
                                                   ------       -------
         Total Tier 1 capital                   $ 14,754       $ 13,602


        Tier 2 Capital:
          Allowance for loan losses                 1,633         1,392
          Allowable long-term debt                      0             0
                                                    -----         -----
          Total Tier 2 Capital                      1,633         1,392
          Total risk-based capital               $ 16,387      $ 14,999
                                                 --------        ------

        Risk weighted assets                     $130,167      $111,196


        Capital Ratios:
        Tier 1 risk-based capital ratio              11.3%         12.2%

        Total risk-based capital ratio               12.6          13.5

        Tier 1 capital to average
           adjusted total assets                      8.4           8.5



* See the captioned "Note 17 Regulatory Matters" which is included in Exhibit A
at page 22, The Annual Report to Shareholders was filed with the Commission on
or about March 10, 1999.


                                       25
<PAGE>


ITEM 2.  DESCRIPTION OF PROPERTY

        The Company owns one property at December 31, 1998 which was purchased
on January 2, 1998 that is described in PART I, Item 1, The Bank, however, owns
and leases properties as 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, 1998.


                                       26
<PAGE>

                                           PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
        This information is included in the 1998 Annual Report to Shareholders
at page 32 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 1998 Annual Report to Shareholders
at pages 28-33.


ITEM 7.  FINANCIAL STATEMENTS

        This information is included in the 1998 Annual Report to Shareholders
at pages 2-27.

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 1999 Annual Meeting of Shareholders at pages 2 through 4
and page 6 thereof.

ITEM 10.  EXECUTIVE COMPENSATION

        This information is incorporated herein by reference from the Company's
Proxy Statement for the 1999 Annual Meeting of Shareholders at pages 4 through 6
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 1999 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 1999 Annual Meeting of Shareholders at page 7 thereof.


                                       27
<PAGE>



                                              28

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 - 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 Ownership 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

               10.8   Ted M. Kattmann Employment Agreement filed herewith

               10.9   John H. Hunt, II Employment Agreement filed herewith

        #13    Annual Report to Security Holders is filed herewith

        #21    Subsidiaries of the Registrant is filed herewith.

        #22    None

   (b)    Reports on Form 8-K. No reports were filed by the registrant
                 during the fourth quarter of 1998.


                                       28
<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, 1999               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, 1999
    ----------------------
        Douglas D. Monroe, Jr.
        Chairman of the Board and
        Chief Executive Officer

/s/     T. Nash Broaddus                                         March 29, 1999
        --------------------------
        T. Nash Broaddus, Director

/s/     Thomas B. Denegre, Jr.                                   March 29, 1999
        ----------------------
        Thomas B. Denegre, Jr., Director

/s/     Eugene S. Hudnall                                        March 29, 1999
        ---------------------------
        Eugene S. Hudnall, Director

/s/     Katherine W. Monroe                                      March 29, 1999
        -----------------------------
        Katherine W. Monroe, Director

/s/     Robert S. Scheu                                          March 29, 1999
        -----------------------------
        Robert S. Scheu, Director

/s/     William F. Shumadine, Jr.                                March 29, 1999
        -----------------------------
        William F. Shumadine, Jr., Director

/s/     Robert L. Stephens                                       March 29, 1999
        -----------------------------
        Robert L. Stephens, Director


                                       29
<PAGE>

                                         EXHIBIT #13

                               [INSERT 1998 ANNUAL REPORT HERE]




                                         EXHIBIT #21


                                SUBSIDIARIES OF THE REGISTRANT


                                       Chesapeake Bank

                                 Chesapeake Mortgage Company

                                Chesapeake Investment Services

                                     CNB Properties, Inc.

                               Chesapeake Financial Group, Inc.


                                       30