CHESAPEAKE FINANCIAL SHARES, INC.












                                      1998
                                     ANNUAL
                                     REPORT

<PAGE>
                    (CHESAPEAKE FINANCIAL SHARES, INC. LOGO)


                                MISSION STATEMENT

              Chesapeake Financial Shares, Inc. is an independent,
              community-oriented, one-bank holding company serving
                 a market between the Potomac and James rivers.

              Each staff and board member is part of a team that is
            committed to innovation and to maintaining excellence in
                    customer service that creates growing and
                        rewarding returns to its clients,
                     employees, community, and shareholders.

                             (CHESAPEAKE BANK LOGO)

                  (CHESAPEAKE                           (CHESAPEAKE
               FINANCIAL GROUP LOGO)              INVESTMENT SERVICES LOGO)
<PAGE>

Chesapeake Financial Shares, Inc.
--------------------------------------------------------------------------------


Highlights for 1998
--------------------------------------------------------------------------
Year ended December 31, 1998

Earnings
Net Income                                              $        1,388,733
Per Share                                                             1.07

At Year End
Assets                                                  $      181,861,275
Deposits                                                       164,639,201
Loans - Net                                                    109,422,041
Securities                                                      42,474,916
Shareholders' Equity                                            14,928,406
Book Value Per Share                                                 12.14
Number of Shareholders                                                 451





CONTENTS

Chairman's Letter to Shareholders ............................................ 1

Selected Financial Information ............................................... 2

Financial Statements ......................................................... 3

Notes to Financial Statements ................................................10

Independent Auditor's Report .................................................27

Management's Discussion and Analysis of
Financial Condition and Results of Operations ................................28

Chesapeake Financial Shares, Inc.
Directors and Subsidiaries ...................................................34
<PAGE>
(CHESAPEAKE FINANCIAL SHARES, INC. LOGO)

Dear Shareholder:

      What an unusual year! The headlines for 1998 include Monica Lewinsky, a
special prosecutor, impeachment of the President by the House of
Representatives, the first loss of Congressional seats in a general election by
a party not occupying the White House (probably because of lack of agenda and
lack of leadership by the Republicans), Senator John Glenn returning into space
at age 77, wrestler Jesse "the Body" Ventura being elected governor of
Minnesota, and resignation of Newt Gingrich, Republican Speaker of the House. On
the lighter side!--the comeback of heroes with baseball's Mark McGwire and Sammy
Sosa record home run slugfest of 70 and 66 respectively for the season, along
with 15 year old Tara Lipinski, the youngest skater to ever win an Olympic gold
medal. During the year we lost entertainer turned Congressman Sonny Bono, comic
Flip Wilson (Geraldine), Olympic track star Florence Griffith Joyner, Senator
Barry Goldwater, Gene Autry and Roy Rogers, George Wallace, and finally,
singer/entertainer extraordinaire, Frank Sinatra.

      In August Jeffrey M. Szyperski was elected a Director and President of
Chesapeake Bank. Chesapeake Bank will operate under his overall direction
including strategic planning with special emphasis on overall growth, earnings,
community service, and planning for the Year 2000. Marshall N. Warner, Executive
Vice President, moved to Williamsburg to head all customer services on the
Peninsula including business development, lending, sales of annuities and mutual
funds, and most recently to help guide the new affiliate, Chesapeake Financial
Group.

      For the second consecutive year, Chesapeake Financial Shares declared and
paid a 20% stock dividend and maintained its quarterly dividend payout of $.08
per share or $.28 per share for 1998, up 20.0%.

      Earnings for the year of $1.07 were recorded by Chesapeake for 1998.
Initially earnings of approximately $1.49 per share were written down by two
major non-recurring events. As reported earlier in 1998, the company wrote off
$297,000 based on a series of disputed international electronic transactions
involving Visa. Secondly, $410,000 was added to the allowance for loan loss
provisions to provide for a specific loan which was classified as "doubtful."
Chesapeake's loan quality remained extremely strong as 30 day and over past due
loans were .7% of total loans, the lowest in the company's history, coupled with
a strong loan loss provision of 1.8% of loans. Loan volume ended the year at
$111,436,000, the highest in the company's history, along with total assets of
$181,861,000, also a record. These numbers represent increases of 7.32% and
10.6% respectively.

      Managed trust assets continued to climb to new record levels as clients
took advantage of investment management services. The outreach program to
clients in the Northern Neck, Middle Peninsula, and Williamsburg/James City
County areas continued to produce very positive results.

      Chesapeake Financial Group, a subsidiary of Chesapeake Financial Shares,
was incorporated in the early summer and opened for business on December 1.
After establishing unique partnerships with premier investment managers, CFG
offers superior portfolio management coupled with highly customized service to
high net worth individuals and institutions.

      In response to Chesapeake's enthusiastic acceptance on the Peninsula, the
Lafayette Street Financial Center was opened off of Richmond Road. The
renovation was completed, and on June 19 Chesapeake Financial Shares opened the
financial center housing a Chesapeake Bank office, mortgage loan office, trust
services, Chesapeake Investment Services, and Chesapeake Financial Group.

      As announced in 1997, approximately 30,000 square feet of space in the
School Street business center complex in Kilmarnock was purchased. The area
occupied formerly by the Colonial Store was renovated. Data Processing, Loan
Administration, and Operational Support moved into the new modern quarters on
October 5.

      Specific details on the financial achievements of Chesapeake Financial
Shares are contained within the confines of this report. Please pay particular
attention to management's discussion and analysis of its operations. The
company's annual meeting will be held at 4:00 p.m. on Friday, April 2, 1999 at
Rappahannock Westminster-Canterbury in Irvington. Please try to attend.

                                 Yours sincerely,


                                 /s/ Douglas D. Monroe, Jr.
                                 -----------------------------------------------
                                 Douglas D. Monroe, Jr.
                                 Chairman of the Board & Chief Executive Officer

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                                                                               1
<PAGE>
Chesapeake Financial Shares, Inc.
--------------------------------------------------------------------------------

Selected Financial Information
<TABLE>
<CAPTION>
<S>                                                      <C>          <C>          <C>          <C>          <C>
                                                         1998         1997         1996         1995         1994
                                                    -------------------------------------------------------------
                                                      (Dollars in thousands except ratios and per share amounts)

Results of Operations
Interest income                                     $  12,763    $  11,361    $  10,142    $   9,556    $   8,668
Interest expense                                        6,153        5,407        4,755        4,556        3,770
                                                    ---------    ---------    ---------    ---------    ---------
Net interest income                                     6,610        5,954        5,387        5,000        4,898
Provision for loan losses                                 620           75          150           84          (96)
                                                    ---------    ---------    ---------    ---------    ---------
Net interest income after
     provision for loan losses                          5,990        5,879        5,237        4,916        4,994
Noninterest income                                      3,838        2,982        2,559        2,120        1,626
Noninterest expenses                                    8,104        6,556        5,720        5,351        5,167
                                                    ---------    ---------    ---------    ---------    ---------
Income before tax                                       1,724        2,305        2,076        1,685        1,453
Income tax expense                                        335          554          501          420          418
                                                    ---------    ---------    ---------    ---------    ---------
Net income                                          $   1,389    $   1,751    $   1,575    $   1,265    $   1,035
                                                    =========    =========    =========    =========    =========
Financial Condition
Total assets                                        $ 181,861    $ 163,916    $ 142,876    $ 131,258    $ 124,439
Total deposits                                        164,639      147,519      127,630      118,687      112,295
Net loans                                             109,422      102,099       90,426       80,991       74,804
Note payable and
    subordinated debentures                                 0            0            0          388          538
Shareholders' Equity                                   14,928       13,915       12,009       11,048        9,793
Average assets                                        171,987      148,948      133,376      127,230      122,642
Average shareholders' equity                           14,429       12,866       11,426       10,421        9,502

Key Financial Ratios
Return on average assets                                 0.81%        1.18%        1.18%        0.99%        0.84%
Return on average equity                                 9.62%       13.61%       13.78%       12.14%       10.89%
Dividends paid as a percent
     of net income                                      24.69%       16.21%       15.53%       16.97%       17.68%

Per Share Data
Net income, assuming dilution                       $    1.07    $    1.40    $    1.27    $    1.02    $     .83
Cash dividends declared                             $     .28    $    0.23    $     .20    $    0.18    $    0.15
Book value                                          $   12.14    $   11.49    $    9.93    $    8.98    $    7.83
</TABLE>
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2
<PAGE>
                                                              1998 Annual Report
--------------------------------------------------------------------------------

Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
<S>                                                              <C>                  <C>
                                                                 1998                 1997
Assets                                                      ---------------------------------
Cash and due from banks                                     $  5,937,686         $  5,123,586
Federal funds sold                                             7,000,000            1,900,000
Securities, at approximate market value                       42,474,916           43,907,871
Loans, net                                                   109,422,041          102,099,056
Premises and equipment, net                                    5,247,605            3,448,318
Accrued interest receivable                                    1,346,616            1,300,062
Other assets                                                  10,432,411            6,136,760
                                                            ------------         ------------
           Total assets                                     $181,861,275         $163,915,653
                                                            ============         ============
Liabilities and Shareholders' Equity
Deposits:
   Demand accounts                                          $ 23,830,189         $ 19,255,328
   Savings and interest bearing demand deposits               55,718,469           40,445,981
   Certificates of deposit
      Denominations less than $100,000                        69,582,581           72,128,426
      Denominations of $100,000 or more                       15,507,962           15,689,333
                                                            ------------         ------------
           Total deposits                                   $164,639,201         $147,519,068

Short-term borrowings                                               --              1,250,000
Accrued interest payable                                         303,269              334,763
Other liabilities                                              1,115,825              897,147
Long-term debt                                                   874,574                 --
Commitments and contingent liabilities                              --                   --
                                                            ------------         ------------
           Total liabilities                                $166,932,869         $150,000,978
                                                            ------------         ------------
Shareholders' equity:
   Preferred stock, par value $1 per share; authorized
      50,000 shares; no shares outstanding                  $       --           $       --
   Common stock, voting, par value $5 per share;
      authorized 2,000,000 shares; issued and outstanding
      1,229,599 in 1998 and 1,010,888 in 1997                  6,147,995            5,054,440
   Common stock, nonvoting, par value $5 per share;
      authorized 635,000 shares; no shares outstanding              --                   --
   Paid-in capital                                               523,795              484,348
   Retained earnings                                           8,082,349            8,047,310
   Accumulated other comprehensive income                        174,267              328,577
                                                            ------------         ------------
           Total shareholders' equity                       $ 14,928,406         $ 13,914,675
                                                            ------------         ------------
           Total liabilities and shareholders' equity       $181,861,275         $163,915,653
                                                            ============         ============
</TABLE>
See Notes to Consolidated Financial Statements.
--------------------------------------------------------------------------------
                                                                               3
<PAGE>

Chesapeake Financial Shares, Inc.
--------------------------------------------------------------------------------

Consolidated Statements of Income
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
<S>                                                  <C>             <C>             <C>
                                                     1998            1997            1996
                                                 --------------------------------------------
Interest Income
   Interest and fees on loans                    $ 10,167,293    $  9,038,054    $  8,103,829
   Interest on federal funds sold                      88,899          58,076          40,281
   Interest on time deposits with banks                  --              --            18,431
   Interest on securities available for sale
      Taxable                                       1,854,898       1,636,219       1,428,063
      Nontaxable                                      604,730         589,059         514,213
      Dividends                                        47,049          40,060          37,118
                                                 ------------    ------------    ------------
           Total interest income                 $ 12,762,869    $ 11,361,468    $ 10,141,935
                                                 ------------    ------------    ------------

Interest Expense
   Savings and interest bearing accounts         $  1,237,949    $    990,450    $  1,001,072
   Certificates of deposit
      Denominations less than $100,000              3,932,247       3,503,931       2,922,308
      Denominations of $100,000 or more               896,847         850,604         780,509
   Short-term borrowings                               36,630          62,454          24,764
   Long-term debt                                      48,865            --            26,026
                                                 ------------    ------------    ------------
           Total interest expense                $  6,152,538    $  5,407,439    $  4,754,679
                                                 ------------    ------------    ------------
           Net interest income                   $  6,610,331    $  5,954,029    $  5,387,256

Provision for loan losses                             620,000          75,000         150,000
                                                 ------------    ------------    ------------
           Net interest income after provision
               for loan losses                   $  5,990,331    $  5,879,029    $  5,237,256
                                                 ------------    ------------    ------------
Noninterest Income
   Trust income                                  $  1,042,136    $    923,483    $    818,888
   Service charges                                    531,227         527,107         499,705
   Net gain (loss) on other real estate owned         (59,500)           --            12,788
   (Loss) on securities available for sale               --            (2,365)         (1,593)
   Other income                                     2,324,592       1,533,427       1,229,708
                                                 ------------    ------------    ------------
           Total noninterest income              $  3,838,455    $  2,981,652    $  2,559,496
                                                 ------------    ------------    ------------
</TABLE>
See Notes to Consolidated Financial Statements.
--------------------------------------------------------------------------------
4
<PAGE>
                                                              1998 Annual Report
--------------------------------------------------------------------------------

Consolidated Statements of Income (Continued)
Years Ended December 31, 1998, 1997 and 1996

                                               1998         1997         1996
                                            ------------------------------------
Noninterest Expenses
   Salaries and benefits                    $3,529,694   $3,079,538   $2,840,262
   Occupancy expenses                        1,625,083    1,365,534    1,210,534
   Other expenses                            2,949,648    2,110,722    1,669,517
                                            ----------   ----------   ----------
           Total noninterest expenses       $8,104,425   $6,555,794   $5,720,313
                                            ----------   ----------   ----------

Income before income taxes                  $1,724,361   $2,304,887   $2,076,439

Income tax expense                             335,628      554,378      501,303
                                            ----------   ----------   ----------
           Net income                       $1,388,733   $1,750,509   $1,575,136
                                            ==========   ==========   ==========

Earnings per share, basic                   $     1.13   $     1.45   $     1.29
                                            ==========   ==========   ==========

Earnings per share, assuming dilution       $     1.07   $     1.40   $     1.27
                                            ==========   ==========   ==========


See Notes to Consolidated Financial Statements.

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                                                                               5
<PAGE>

Chesapeake Financial Shares, Inc.
--------------------------------------------------------------------------------

Consolidated Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
<S>                                                              <C>                  <C>                  <C>
                                                                 1998                 1997                 1996
                                                         ---------------------------------------------------------
Cash Flows from Operating Activities
   Net income                                             $   1,388,733         $  1,750,509         $  1,575,136
   Adjustments to reconcile net income to net
      cash provided by operating activities:
        Depreciation and amortization                           657,339              575,598              472,537
        Provision for loan losses                               620,000               75,000              150,000
        Deferred income tax expense (benefit)                  (302,046)               1,681              (66,298)
        Amortization of premiums, net                           738,887              217,385              251,642
        Net loss on sale of bank premises                          --                 28,806                  523
        Loss on securities available for sale                      --                  2,365                1,593
        Net (gain) loss on other real estate owned               59,500                 --                (12,788)
        Origination of loans available for sale              (7,881,750)          (4,251,450)          (3,635,002)
        Proceeds from sale of loans available for sale        8,005,750            4,033,450            3,635,002
        Issuance of common stock for services                    62,000               54,175               37,380
        Changes in other assets and liabilities:
           (Increase) in accrued interest receivable            (46,554)            (211,861)              (3,399)
           (Increase) decrease in other assets                 (937,928)             (52,695)              47,067
           Increase (decrease) in accrued interest
             payable                                            (31,494)              62,217               16,512
           Increase (decrease) in other liabilities             218,678              (67,389)             200,752
                                                         --------------         ------------         ------------
             Net cash provided by
                 operating activities                    $    2,551,115         $  2,217,791         $  2,670,657
                                                         --------------         ------------         ------------

Cash Flows from Investing Activities
   Net decrease in time deposits with banks              $         --           $       --           $    450,375
   Purchases of securities available for sale               (19,242,766)         (18,499,317)         (18,784,158)
   Proceeds from sales and calls of securities
      available for sale                                        970,207            7,217,090            9,216,346
   Proceeds from maturities of securities
      available for sale                                     18,725,164            5,458,072            8,501,663
   Proceeds from sale of other real estate                         --                   --                 35,905
   Proceeds from sale of bank premises                             --                   --                    600
   Net (increase) in loans                                   (8,066,985)         (11,530,232)          (9,563,173)
   Net (increase) in cash management accounts                (3,028,024)          (1,887,724)            (451,788)
   Other capital expenditures                                (2,456,626)            (684,660)          (1,029,587)
                                                         --------------         ------------         ------------
             Net cash (used in) investing activities     $  (13,099,030)        $(19,926,771)        $(11,623,817)
                                                         --------------         ------------         ------------
</TABLE>
See Notes to Consolidated Financial Statements.

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6
<PAGE>
                                                              1998 Annual Report
--------------------------------------------------------------------------------

Consolidated Statements of Cash Flows (Continued)
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
<S>                                                           <C>             <C>             <C>
                                                              1998            1997            1996
                                                         --------------------------------------------
Cash Flows from Financing Activities
   Proceeds from issuance of long-term debt              $    900,000    $       --      $       --
   Net increase (decrease) in short-term borrowings        (1,250,000)       (750,000)      1,885,000
   Net increase in demand accounts, interest-
      bearing demand accounts and savings accounts         19,847,349       5,780,887       2,402,429
   Net increase (decrease) in certificates of deposits     (2,727,216)     14,108,616       6,539,824
   Net proceeds from issuance of common stock                 123,175          15,914          41,825
   Acquisition of common stock                                (62,943)        (36,754)       (293,631)
   Cash dividends                                            (342,924)       (282,933)       (244,585)
   Curtailment of long-term debt                              (25,426)           --          (387,500)
                                                         ------------    ------------    ------------
             Net cash provided by financing
                 activities                              $ 16,462,015    $ 18,835,730    $  9,943,362
                                                         ------------    ------------    ------------
             Net increase in cash and federal
                 funds sold                              $  5,914,100    $  1,126,750    $    990,202

Cash and federal funds sold at beginning of year            7,023,586       5,896,836       4,906,634
                                                         ------------    ------------    ------------
Cash and federal funds sold at end of year               $ 12,937,686    $  7,023,586    $  5,896,836
                                                         ============    ============    ============

Supplemental Disclosures of Cash Flow Information:
   Cash paid during the year for:
      Interest                                           $  6,184,032    $  5,345,222    $  4,738,167
                                                         ============    ============    ============
      Income taxes                                       $    594,326    $    479,719    $    531,684
                                                         ============    ============    ============
Supplemental Schedule of Noncash Investing and
   Financing Activities
      Sale of other real estate by issuance
        of new loans                                     $       --      $       --      $     30,000
                                                         ============    ============    ============
      Unrealized gain (loss) on securities
        available for sale                               $   (241,463)   $    613,324    $   (234,964)
                                                         ============    ============    ============
      Common stock issued for services                   $     62,000    $     54,175    $     37,380
                                                         ============    ============    ============
      Common stock dividend                              $  1,010,770    $    838,525    $       --
                                                         ============    ============    ============
</TABLE>
See Notes to Consolidated Financial Statements.

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                                                                               7
<PAGE>

Chesapeake Financial Shares, Inc.
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Consolidated Statements of Changes in Shareholders' Equity Years Ended December
31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
                                               Common                                 Accumulated Other
                                               Stock,        Paid-In       Retained     Comprehensive   Comprehensive
                                               Voting        Capital       Earnings        Income          Income          Total
                                           ----------------------------------------------------------------------------------------
<S>               <C> <C>                  <C>             <C>           <C>             <C>
Balance, December 31, 1995                 $  4,275,685    $  605,669    $  6,087,708    $   78,860
                                                                                                                       $ 11,047,922
   Comprehensive income:
      Net income                                   --            --         1,575,136          --      $  1,575,136       1,575,136
      Other comprehensive income:
        Unrealized losses on securities
          available for sale:
             Unrealized holding losses
                arising during the
                period, net of deferred
                income taxes of $80,430            --            --              --            --          (156,127)           --
             Add: reclassification
                adjustment, net of
                income taxes of $542               --            --              --            --             1,051            --
                                                                                                       ------------
      Other comprehensive income,
        net of tax                                 --            --              --        (155,076)   $   (155,076)       (155,076)
                                                                                                       ------------
      Total comprehensive income                   --            --              --            --      $  1,420,060            --
                                                                                                       ============
   Exercise of stock options                     20,375        21,450            --            --                            41,825
   Issuance of common stock
      for services                               15,575        21,805            --            --                            37,380
   Acquisition of common stock                 (113,200)     (180,431)           --            --                          (293,631)
   Cash dividends ($.20 per share)                 --            --          (244,585)         --                          (244,585)
                                           ------------    ----------    ------------    ----------                    ------------
Balance, December 31, 1996                 $  4,198,435    $  468,493    $  7,418,259    $  (76,216)                   $ 12,008,971
   Comprehensive income:
      Net income                                   --            --         1,750,509          --      $  1,750,509       1,750,509
      Other comprehensive income:
        Unrealized gains on securities
          available for sale:
             Unrealized holding gains
                arising during the period,
                net of deferred income
                taxes of $207,727                  --            --              --            --           403,232            --
             Add: reclassification
                adjustment, net of
                income taxes of $804               --            --              --            --             1,561            --
                                                                                                       ------------
      Other comprehensive income,
        net of tax                                 --            --              --         404,793    $    404,793         404,793
                                                                                                       ------------
      Total comprehensive income                   --            --              --            --      $  2,155,302            --
                                                                                                       ============
   Sale of common stock                         2,500           4,664            --            --                             7,164
   Exercise of stock options                    5,000           3,750            --            --                             8,750
   Issuance of common stock
      for services                             21,670          32,505            --            --                            54,175
   Acquisition of common stock                (11,690)        (25,064)           --            --                           (36,754)
   Cash dividends ($.23 per share)               --              --          (282,933)         --                          (282,933)
   Stock dividend                             838,525            --          (838,525)         --                              --
                                           ----------      ----------     -----------                                 -------------
Balance, December 31, 1997                 $5,054,440      $  484,348     $ 8,047,310    $  328,577                   $  13,914,675
</TABLE>
See Notes to Consolidated Financial Statements.
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8
<PAGE>
                                                              1998 Annual Report
--------------------------------------------------------------------------------

Consolidated Statements of Changes in Shareholders' Equity (Continued) Years
Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
                                              Common                                    Accumulated Other
                                              Stock,          Paid-In      Retained       Comprehensive   Comprehensive
                                              Voting          Capital      Earnings           Income         Income         Total
                                          -----------------------------------------------------------------------------------------
Balance, December 31, 1997
<S>                                       <C>             <C>           <C>            <C>                             <C>
   (forwarded)                            $  5,054,440    $  484,348    $ 8,047,310    $    328,577                    $ 13,914,675
   Comprehensive income:
      Net income                                  --            --        1,388,733            --      $  1,388,733       1,388,733
      Other comprehensive income:
        Unrealized holding losses on
           securities available for sale,
           net of deferred income
           taxes of $79,493                       --            --             --          (154,310)       (154,310)       (154,310)
                                                                                                       ------------
      Total comprehensive income                  --            --             --              --      $  1,234,423            --
                                                                                                       ============
   Exercise of stock options                    79,260        43,915           --              --                           123,175
   Issuance of common stock
      for services                              18,950        43,050           --              --                            62,000
   Acquisition of common stock                 (15,425)      (47,518)          --              --                           (62,943)
   Cash dividends ($.28 per share)                --            --         (342,924)           --                          (342,924)
   Stock dividend                            1,010,770          --       (1,010,770)           --                              --
                                          ------------    ----------    -----------    ------------                    ------------
Balance, December 31, 1998                $  6,147,995    $  523,795    $ 8,082,349    $    174,267                    $ 14,928,406
                                          ============    ==========    ===========    ============                    ============
</TABLE>
See Notes to Consolidated Financial Statements.
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                                                                               9
<PAGE>

Chesapeake Financial Shares, Inc.
--------------------------------------------------------------------------------

Notes to Consolidated Financial Statements

Note 1.  Summary of Significant Accounting Policies

General

      Chesapeake Financial Shares, Inc. ("CFS") owns 100% of Chesapeake Bank
(the "Bank"). Two additional subsidiaries, Chesapeake Financial Group, Inc. and
Chesapeake Insurance Agency, Inc. T/A Chesapeake Investment Services are
wholly-owned subsidiaries of CFS and the Bank, respectively. The consolidated
financial statements include the accounts of CFS and its wholly-owned
subsidiaries. All significant intercompany accounts have been eliminated.

      The accounting and reporting policies of CFS are in accordance with
generally accepted accounting principles and conform to general practices within
the banking industry. The more significant of these policies are summarized
below.

Securities

      Investments in equity securities that have readily determinable fair
values and all investments in debt securities are classified in three categories
based on management's intent and accounted for as follows:

      a.   Securities Held to Maturity

           Securities classified as held to maturity are those debt securities
      the Corporation has both the intent and ability to hold to maturity
      regardless of changes in market conditions, liquidity needs or changes in
      general economic conditions. These securities are carried at cost adjusted
      for amortization of premium and accretion of discount, computed by the
      interest method over their contractual lives. The Corporation held no
      assets classified as held to maturity at December 31, 1998 or 1997.

      b.   Securities Available for Sale

           Securities classified as available for sale are those debt and equity
      securities that the Corporation intends to hold for an indefinite period
      of time, but not necessarily to maturity. Any decision to sell a security
      classified as available for sale would be based on various factors,
      including significant movements in interest rates, changes in the maturity
      mix of the Corporation's assets and liabilities, liquidity needs,
      regulatory capital considerations, and other similar factors. Securities
      available for sale are carried at fair value. Unrealized gains or losses
      are reported as increases or decreases in shareholders' equity, net of the
      related deferred tax effect. Realized gains or losses, determined on the
      basis of the amortized cost of specific securities sold, are included in
      earnings.

      c.   Trading Securities

           Trading securities, which are generally held for the short term in
      anticipation of market gains, are carried at fair value. Realized and
      unrealized gains and losses on trading account assets are included in
      interest income on trading account securities. The Corporation held no
      assets classified as trading securities at December 31, 1998 or 1997.

Loans

      Loans are stated at face value, net of unearned discount and the reserve
for loan losses. Interest is computed by methods which result in level rates of
return on principal. Nonrefundable loan fees and direct loan origination costs
are recognized in operations when received and incurred, respectively. The
impact of this methodology is not significantly different from recognizing the
net of these fees and costs over the contractual life of the related loan.

      Loans are placed on nonaccrual status when a loan is specifically
determined to be impaired or when principal or interest is delinquent for 90
days or more. Any unpaid interest previously accrued on those loans is reversed
from income. Interest income generally is not recognized on specific impaired
loans unless the likelihood of further loss is remote. Interest payments
received on such loans are applied as a reduction of the loan principal balance.
Interest income on other nonaccrual loans is recognized only to the extent of
interest payments received.


--------------------------------------------------------------------------------
10
<PAGE>
                                                              1998 Annual Report
--------------------------------------------------------------------------------

Notes to Consolidated Financial Statements

      Mortgage loans held for resale are stated at the lower of cost or market
on an individual loan basis. Loan discounts and origination fees received on
loans held for resale are deferred until the related loans are sold to third
party investors. Gains are recognized at the time of sale.

      The impairment of loans that have been separately identified for
evaluation is measured based on the 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. The Corporation had no loans subject to FASB No. 114 at December 31,
1998 and 1997.

Reserve for Loan Losses

      The reserve for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent in the loan
portfolio. The amount of the reserve is based on management's evaluation of the
collectibility of the loan portfolio, including the nature of the portfolio,
credit concentrations, trends in historical loss experience, specific impaired
loans, and economic conditions. Reserves for impaired loans are generally
determined based on collateral values or the present value of estimated cash
flows. The reserve is increased by a provision for loan losses, which is charged
to expense and reduced by charge-offs, net of recoveries. Changes in the reserve
relating to impaired loans are charged or credited to the provision for loan
losses. Because of uncertainties inherent in the estimation process,
management's estimate of credit losses inherent in the loan portfolio and the
related reserve may change in the near term.

Premises and Equipment

      Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using both straight-line and accelerated methods over
the assets' estimated useful lives. Estimated useful lives range from 10 to 39
years for buildings and 3 to 7 years for furniture, fixtures and equipment.

Foreclosed Properties

      Foreclosed properties are recorded at the lower of the outstanding loan
balance at the time of foreclosure or the estimated fair value less estimated
costs to sell. At foreclosure any excess of loan balance over the fair value of
the property is charged to the reserve for loan losses. Such carrying value is
periodically reevaluated and written down if there is an indicated decline in
fair value. Costs to bring a property to salable condition are capitalized up to
the fair value of the property while costs to maintain a property in salable
condition are expensed as incurred. The Bank has included $185,000 and $245,000
of foreclosed properties in other assets at December 31, 1998 and 1997. No real
estate was acquired in settlement of loans during 1998 and 1997.

Trust Department Assets

      Securities and other property held by the Trust Department in a fiduciary
or agency capacity are not assets of the Corporation and are not included in the
accompanying consolidated financial statements.

Income Taxes

      Deferred taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences, operating loss
carryforwards, and tax credit carryforwards. Deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
bases. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.

--------------------------------------------------------------------------------
                                                                              11
<PAGE>
Chesapeake Financial Shares, Inc.
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements

Statement of Cash Flows

      For purposes of the statement of cash flows, CFS considers cash
equivalents to include cash on hand, amounts due from banks and federal funds
sold.

Advertising Costs

      CFS follows the policy of charging the production costs of advertising to
expense as incurred.

Use of Estimates

      The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period.
Actual results could differ from those estimates.

Earnings Per Share

      In 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share." Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Basic earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where appropriate, restated to
conform to the Statement 128 requirements.

Comprehensive Income

      As of January 1, 1998, CFS adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes new rules for the reporting and display of comprehensive income and
its components; however, the adoption of this statement had no impact on the
Corporation's net income or shareholders' equity. SFAS No. 130 requires other
comprehensive income to include unrealized gains and losses on investments in
securities classified as available for sale in accordance with SFAS No. 115,
foreign currency translation adjustments, and minimum pension liability
adjustments, which prior to adoption were reported separately in shareholders'
equity. The December 31, 1997 and December 31, 1996 financial statements have
been reclassified to conform to the requirements of SFAS No. 130.

Defined Benefit Plan

      In 1998, CFS adopted Statement of Financial Accounting Standards No. 132,
"Employers' Disclosures About Pensions and Other Postretirement Benefits." This
pronouncement does not change the measurement or recognition of amounts
recognized in CFS's financial statements applicable to its defined benefit plan.
Statement No. 132 revises the existing disclosure requirements by standardizing
the disclosure requirements for pensions requiring certain additional
information on changes in the benefit obligations and fair values of plan
assets, and eliminating certain disclosures.

--------------------------------------------------------------------------------
12
<PAGE>
                                                              1998 Annual Report
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements

Note 2.  Securities

      Amortized cost and fair values of securities available for sale as of
December 31, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
                                                                       1998
                                           ----------------------------------------------------------
                                                              Gross         Gross
                                            Amortized       Unrealized    Unrealized         Fair
                                               Cost           Gains        (Losses)          Value
                                           ----------------------------------------------------------
<S>                                        <C>            <C>            <C>             <C>
U.S. Treasury securities                   $    500,187   $      1,219   $       --      $    501,406
U.S. Government agencies                     28,546,182         38,175       (384,326)     28,200,031
Securities of state and
   political subdivisions                    12,329,706        602,780            (57)     12,932,429
Other                                           834,800          6,250           --           841,050
                                           ------------   ------------   ------------    ------------
      Total                                $ 42,210,875   $    648,424   $   (384,383)   $ 42,474,916
                                           ============   ============   ============    ============

                                                                       1997
                                           ----------------------------------------------------------
                                                              Gross         Gross
                                            Amortized       Unrealized    Unrealized         Fair
                                               Cost           Gains        (Losses)          Value
                                           ----------------------------------------------------------

U.S. Treasury securities                   $  1,702,928   $        516   $     (4,787)   $  1,698,657
U.S. Government agencies                     29,482,679        130,705        (73,037)     29,540,347
Securities of state and
   political subdivisions                    11,473,361        452,106           --        11,925,467
Other                                           743,400           --             --           743,400
                                           ------------   ------------   ------------    ------------
      Total                                $ 43,402,368   $    583,327   $    (77,824)   $ 43,907,871
                                           ============   ============   ============    ============
</TABLE>

      The amortized cost and fair value of securities available for sale as of
December 31, 1998, by contractual maturity are shown below. Expected maturities
may differ from contractual maturities because issuers may have the right to
call or prepay obligations without any penalties.
<TABLE>
<CAPTION>
                                                              Amortized              Fair
                                                                Cost                 Value
                                                           -----------------------------------
<S>                                                        <C>                   <C>
Due in one year or less                                    $   3,160,167         $   3,151,364
Due after one year through five years                         18,921,397            18,788,151
Due after five years through ten years                         6,676,325             6,560,277
Due after ten years                                           12,618,186            13,134,074
Other                                                            834,800               841,050
                                                           -------------         -------------
      Total                                                $  42,210,875         $  42,474,916
                                                           =============         =============
</TABLE>
      Proceeds from sales and calls of securities available for sale during
1998, 1997 and 1996 were $970,207, $7,217,090 and $9,216,346, respectively.
There were no realized gains or losses on sales and calls of securities during
1998. Gross gains of $22,319 and $37,526 and gross losses of $24,684 and $39,119
were realized on sales and calls of securities in 1997 and 1996, respectively.

      The amortized cost of securities pledged to secure public deposits,
borrowings from the Federal Reserve Bank and fiduciary powers amounted to
$7,214,920 and $7,991,890, at December 31, 1998 and 1997, respectively.

                                                                              13
--------------------------------------------------------------------------------
<PAGE>

Chesapeake Financial Shares, Inc.
--------------------------------------------------------------------------------

Notes to Consolidated Financial Statements

Note 3.  Loans

Major classifications of loans are summarized as follows:
                                                 December 31,
                                      -------------------------------
                                           1998               1997
                                      -------------------------------
Commercial                            $ 49,058,143       $ 43,370,353
Real estate-mortgage                    33,003,161         38,945,983
Real estate-construction                 5,468,068          2,900,402
Consumer                                21,378,419         16,267,812
Participations with other banks          1,610,393          1,945,360
Other                                      927,609            409,225
                                      ------------       ------------
   Loans, gross                       $111,445,793       $103,839,121
Less reserve for loan losses             2,023,752          1,740,065
                                      ------------       ------------
   Loans, net                         $109,422,041       $102,099,056
                                      ============       ============

      Participations with other banks are secured by residential property.

      Nonaccrual loans excluded from impaired loan disclosure under FASB No. 114
amounted to $202,434 and $581,048 at December 31, 1998 and 1997, respectively.
If interest on these loans had been accrued, such income would have approximated
$11,502 and $37,604 at December 31, 1998 and 1997, respectively.

      Changes in the reserve for loan losses are as follows:
<TABLE>
<CAPTION>
                                                    Years Ended December 31,
                                      -------------------------------------------------
<S>                                       <C>                 <C>               <C>
                                          1998                1997              1996
                                      -------------------------------------------------
Balance at beginning of year          $ 1,740,065        $  1,652,844       $ 1,463,181
   Provision for loan losses              620,000              75,000           150,000
   Loans charged off                     (355,637)            (41,956)         (157,448)
   Recoveries on loans
      previously charged off               19,324              54,177           197,111
                                      -----------        ------------       -----------
Balance at end of year                $ 2,023,752        $  1,740,065       $ 1,652,844
                                      ===========        ============       ===========
</TABLE>

Note 4.  Premises and Equipment

      Major classifications of premises and equipment are summarized as follows:

                                                         December 31,
                                            ------------------------------------
                                                 1998                   1997
                                            ------------------------------------
Land                                        $     762,335         $     553,135
Buildings                                       3,795,886             2,432,575
Furniture, fixtures and improvements            1,001,452               819,849
Mechanical equipment                            3,246,239             2,648,085
Leasehold improvements                            762,001               759,033
                                            -------------         -------------
                                            $   9,567,913         $   7,212,677
   Less accumulated depreciation                4,320,308             3,764,359
                                            -------------         -------------
                                            $   5,247,605         $   3,448,318
                                            =============         =============

      For the years ended December 31, 1998, 1997 and 1996, depreciation expense
was $657,339, $491,598 and $388,537, respectively.

--------------------------------------------------------------------------------
14
<PAGE>

                                                              1998 Annual Report
--------------------------------------------------------------------------------

Notes to Consolidated Financial Statements

Note 5.  Note Payable

      The Bank has unsecured lines of credit with correspondent banks totaling
$10,300,000 available for overnight borrowing. The Bank also has a line of
credit secured by mortgage loans totaling $13,000,000 available for long or
short-term borrowing. There were no amounts drawn on these lines of credit at
December 31, 1998.

      CFS's fixed-rate long-term debt of $874,574 at December 31, 1998 matures
through 2018. The long-term debt is secured by a deed of trust on property
located in Lancaster County, Virginia. Aggregate maturities during the next five
years are: 1999, $24,566; 2000, $28,246; 2001, $29,840; 2002, $31,523; and 2003,
$33,301.


Note 6.  Income Taxes

      Net deferred tax assets consist of the following components as of December
31, 1998 and 1997:

                                             1998                    1997
                                         -----------------------------------
Deferred tax assets:
   Reserve for loan losses               $   615,878            $    389,778
   Deferred compensation                     130,108                 110,071
   Accrued pension expense                   106,686                  82,452
   Intangible assets                          56,439                  80,489
   Other                                      51,144                  20,373
                                         -----------            ------------
                                         $   960,255            $    683,163
                                         ===========            ============
Deferred tax liabilities:
   Securities available for sale         $    89,774            $    160,134
   Accumulated discount accretion              4,576                   2,948
   Premises and equipment                    154,619                 181,201
                                         -----------            ------------
                                         $   248,969            $    344,283
                                         -----------            ------------
                                         $   711,286            $    338,880
                                         ===========            ============

      The provision for income taxes charged to operations for the years ended
December 31, 1998, 1997 and 1996, consists of the following:

                                        1998            1997             1996
                                   --------------------------------------------
Current tax expense                $   637,674      $  552,697       $  567,601
Deferred tax expense (benefit)        (302,046)          1,681          (66,298)
                                   -----------      ----------       ----------
                                   $   335,628      $  554,378       $  501,303
                                   ===========      ==========       ==========

      The income tax provision differs from the amount of income tax determined
by applying the U.S. federal income tax rate to pretax income for the years
ended December 31, 1998, 1997 and 1996, due to the following:

                                           1998           1997           1996
                                       ----------------------------------------
Computed "expected" tax expense        $  586,283     $  783,662      $ 705,989
Increase (decrease) in income taxes
  resulting from:
Tax exempt interest income               (242,660)      (204,598)      (203,087)
Other                                      (7,995)       (24,686)        (1,599)
                                       ----------     ----------      ---------
                                       $  335,628     $  554,378      $ 501,303
                                       ==========     ==========      =========



                                                                              15
<PAGE>

Chesapeake Financial Shares, Inc.
--------------------------------------------------------------------------------

Notes to Consolidated Financial Statements

Note 7.  Employee Benefit Plans

Pension Plan

      The Corporation has a noncontributory, defined benefit pension plan for
all full-time employees over 21 years of age. Benefits are generally based upon
years of service and the employees' compensation. The Corporation funds pension
costs in accordance with the funding provisions of the Employee Retirement
Income Security Act.

      The following tables provide a reconciliation of the changes in the plan's
benefit obligations and fair value of assets over the two-year period ending
December 31, 1998 and 1997, computed as of October 1, 1998 and 1997,
respectively:
<TABLE>
<CAPTION>
<S>                                                               <C>                   <C>
                                                                  1998                  1997
                                                             -----------------------------------
Change in Benefit Obligation
   Benefit obligation, beginning                             $   1,577,250        $    1,311,102
   Service cost                                                    121,141               105,702
   Interest cost                                                   117,913                97,952
   Actuarial loss                                                  132,795                81,391
   Benefits paid                                                  (756,407)              (18,897)
                                                             -------------        --------------
   Benefit obligation, ending                                $   1,192,692        $    1,577,250
                                                             =============        ==============

Change in Plan Assets
   Fair value of plan assets, beginning                      $   1,770,008        $    1,255,666
   Actual return on plan assets                                     (5,716)              287,179
   Employer contributions                                             --                 246,060
   Benefits paid                                                  (756,407)              (18,897)
                                                             -------------        --------------
   Fair value of plan assets, ending                         $   1,007,885        $    1,770,008
                                                             =============        ==============

Funded Status
   Unrecognized net actual gain                              $    (184,807)       $      192,758
   Unrecognized net obligation at transition                      (207,851)             (520,835)
   Unrecognized prior service cost                                  44,764                48,834
   Accrued benefit cost included in other liabilities               34,113                36,737
                                                             -------------        --------------
                                                             $    (313,781)       $     (242,506)
                                                             =============        ==============

      The following table provides the components of net periodic benefit cost
for the plans for the years ended December 31, 1998, 1997 and 1996:

                                                          1998                 1997                1996
                                                     -----------------------------------------------------
Components of Net Periodic Benefit Cost
   Service cost                                      $     121,141        $    105,702        $    102,467
   Interest cost                                           117,913              97,952              88,547
   Expected return on plan assets                         (158,844)           (112,553)            (91,671)
   Amortization of prior service cost                        2,624               2,624               2,624
   Amortization of net obligation at transition              4,070               4,070               4,070
   Recognized net actuarial (loss)                         (15,629)            (14,119)            (12,684)
                                                     -------------        ------------        ------------
   Net periodic benefit cost                         $      71,275        $     83,676        $     93,353
                                                     =============        ============        ============
</TABLE>
The assumptions used in the measurement of the Company's benefit obligation are
shown in the following table:

                                             1998         1997         1996
                                             ------------------------------
Weighted-Average Assumptions
Discount rate                                7.50%       7.50%        7.50%
Expected return on plan assets               9.00%       9.00%        9.00%
Rate of compensation increase                5.00%       6.00%        6.00%

--------------------------------------------------------------------------------
16
<PAGE>
                                                              1998 Annual Report
--------------------------------------------------------------------------------

Notes to Consolidated Financial Statements

Deferred Compensation Agreements

The Bank and CFS have deferred compensation agreements providing for monthly
payments to an officer of each company commencing at retirement. The liabilities
under these agreements are being accrued over the officers' remaining periods of
employment such that the then present value of the monthly payments will have
been accrued by retirement date. CFS funds the deferred compensation commitments
through life insurance policies on the officers. One of the officers is
currently retired and receiving benefits under this plan.

Employee Stock Ownership Plan

Generally, full-time employees who have completed one calendar year of service
are eligible. Contributions each year are at the discretion of the Board of
Directors, within certain limitations prescribed by Federal tax regulations.
Compensation expense related to the plan was $19,993, $20,000 and $19,992 in
1998, 1997 and 1996, respectively. An employee's proportional ownership in the
plan assets vests on an increasing scale over 7 years, or sooner under certain
circumstances. The plan intends to invest contributions received in shares of
CFS common stock.

401(k) Plan

CFS has adopted a contributory 401(k) plan which covers substantially all
employees. Total expense related to the plan was $28,916, $25,590 and $20,381
for 1998, 1997 and 1996.


Note 8.  Stock Option Plan

      CFS had a stock option plan in which options for 172,800 shares of voting
common stock and 112,500 shares of nonvoting common stock were reserved for
issuance. The stock option plan required that options be granted at an exercise
price equal to at least 100% of the fair market value of the common stock on the
date of grant; however, for those individuals who owned more than 10% of the
stock of CFS, the option price was at least 110% of the fair market value on the
date of grant. Such options were generally not exercisable until after three
years from the date of issuance and required continuous employment during the
period prior to exercise. This plan expired in 1995. Options previously granted
may be exercised by the participants until the options expire, which is ten
years after the date of the original option grant.

      A summary of the status of the expired plan at December 31, 1998, 1997 and
1996 and the changes during the years ended on those dates is as follows:
<TABLE>
<CAPTION>
<S>                                             <C>                               <C>                               <C>
                                                1998                              1997                              1996
                                    ----------------------------------------------------------------------------------------------
                                                       Weighted                          Weighted                         Weighted
                                                       Average                           Average                           Average
                                                       Exercise                          Exercise                         Exercise
                                      Shares             Price           Shares            Price           Shares            Price
                                    ----------------------------------------------------------------------------------------------
Outstanding at beginning
   of year                           89,460            $  7.66          90,900           $  7.02         96,768            $  7.02
Options exercised                   (16,452)              7.49          (1,440)             6.08         (5,868)              7.13
                                    --------                            -------                          -------
Outstanding at end of year           73,008               6.92          89,460              7.66         90,900               7.02
                                    ========                            =======                          =======
Options exercisable,
   end of year                       73,008                             64,260                           41,220
</TABLE>

--------------------------------------------------------------------------------
                                                                              17
<PAGE>
Chesapeake Financial Shares, Inc.
--------------------------------------------------------------------------------

Notes to Consolidated Financial Statements

      In 1996, CFS adopted an incentive stock plan under which options may be
granted to certain key employees for purchase of CFS's common stock. The
effective date of the plan was April 5, 1996 with an expiration date of March
31, 2006. The plan reserves for issuance 64,800 shares of CFS's voting common
stock. The stock option plan requires that options be granted at an exercise
price equal to at least 100% of the fair market value of the common stock on the
date of the grant; however for those individuals who own more than 10% of the
stock of CFS, the option price must be at least 110% of the fair market value on
the date of grant. Such options are generally not exercisable until three years
from the date of issuance and require continuous employment during the period
prior to exercise. The options will expire in no more than ten years after the
date of grant.

      A summary of the status of the 1996 plan at December 31, 1998, 1997 and
1996 and the changes during the years ended on those dates are as follows:
<TABLE>
<CAPTION>
<S>                                             <C>                               <C>                               <C>
                                                1998                              1997                              1996
                                       -------------------------------------------------------------------------------------------
                                                       Weighted                          Weighted                         Weighted
                                                       Average                           Average                           Average
                                                       Exercise                          Exercise                         Exercise
                                       Shares            Price           Shares            Price           Shares            Price
                                       -------------------------------------------------------------------------------------------
Outstanding at beginning
   of year                             25,920     $       9.77            13,680    $       9.41               --     $         --
Options granted                        12,000            17.07            12,240           10.16           13,680             9.41
                                       ------                             ------                           ------
Outstanding at end of year             37,920            12.08            25,920            9.77           13,680             9.41
                                       ======                             ======                           ======
Options exercisable, end
   of year                                 --                                 --                               --
Options available for grant,
   end of year                         26,880                             38,880                           51,120

      The status of the options outstanding at December 31, 1998 is as follows:

                                                          Options Outstanding                               Options Exercisable
                                                  ----------------------------------                 -----------------------------
                                                                            Weighted                                      Weighted
     Remaining           Range of                                            Average                                      Average
    Contractual          Exercise                   Number                  Exercise                   Number             Exercise
       Life                Price                  Outstanding                 Price                  Exercisable            Price
----------------------------------------------------------------------------------------------------------------------------------
        0.3           $6.68 to 6.94                  19,728               $    6.83                     19,728               6.83
        1.3           $6.94 to 7.64                  12,960                    7.41                     12,960               7.41
        2.3           $6.08 to 6.85                  16,560                    6.18                     16,560               6.18
        3.3           $6.94 to 7.64                  23,760                    7.26                     23,760               7.26
        4.3           $9.03 to 18.33                 16,560                   10.96                         --                 --
        5.3           $9.93 to 16.67                 13,320                   10.69                         --                 --
        6.3           $16.67                          8,040                   16.67                         --                 --
</TABLE>
      CFS applies APB Opinion 25 in accounting for its stock option plans,
accordingly no compensation expense has been recognized for 1998, 1997 and 1996.
Had compensation cost been determined on the basis of fair value pursuant to
FASB Statement No. 123, there would not have been a significant impact on net
income or earnings per share.

--------------------------------------------------------------------------------
18
<PAGE>
                                                              1998 Annual Report
--------------------------------------------------------------------------------

Notes to Consolidated Financial Statements

Note 9.  Shareholders' Equity

      During 1998, 1997 and 1996, CFS issued 3,790 shares, 4,334 shares and
3,115 shares, respectively, of common stock to its Directors for partial
compensation.


Note 10.  Commitments and contingencies

      CFS leases certain facilities and equipment under operating leases which
expire at various dates through 2000. These leases generally contain renewal
options and require CFS to pay taxes, insurance, maintenance and other expenses
in addition to the minimum normal rentals.

      Minimum rental payments under these operating lease agreements as of
December 31, 1998 are as follows:

                   Year Ending
                  December 31,
                  -----------------------
                     1999       $  95,664
                     2000          63,264
                     2001          15,864
                     2002           7,088
                     2003           2,700

      Rent expense under operating leases aggregated $142,610, $129,130 and
$129,707 for the years ended December 31, 1998, 1997 and 1996, respectively.

      As a member of the Federal Reserve System, the Bank is required to
maintain certain average reserve balances. For the final weekly reporting period
in the years ended December 31, 1998 and 1997, the aggregate amounts of daily
average required balances were approximately $2,492,000 and $1,206,000 for both
periods.

      CFS utilizes and is dependent upon data processing systems and software,
generally referred to as Information Technology or IT, to conduct its business.
The IT systems include a mainframe processing system licensed to the Bank by an
outside vendor and various purchased software packages which are run on in-house
computers and computer networks. Non-IT systems include most other equipment and
machinery, such as elevators and thermostats, that may have microcontrollers.

      In 1997, the Company initiated a review and assessment of all IT and
non-IT systems to confirm that they will function properly in the year 2000. The
Bank has successfully completed three reviews by regulatory authorities
assessing progress toward year 2000 compliance. While management believes that
it is taking the necessary steps to resolve its year 2000 issues in a timely
manner, there can be no assurances that there will be no year 2000 problems. At
present, management does not expect that any such problems will have a material
adverse effect on its business.


Note 11.  Related Party Transactions

      Officers, Directors and their affiliates had borrowings of $5,967,946 and
$5,679,221 at December 31, 1998 and 1997, respectively, with the Bank.

      Changes in borrowings during 1998 were as follows:

                     Balance, December 31, 1997                  $5,679,221
                        Additions                                   791,599
                        Payments                                   (502,874)
                                                                 ----------
                     Balance, December 31, 1998                  $5,967,946
                                                                 ==========

      These transactions occurred in the ordinary course of business on
substantially the same terms as those prevailing at the time for comparable
transactions with unrelated persons.

--------------------------------------------------------------------------------
                                                                              19

<PAGE>
Chesapeake Financial Shares, Inc.
--------------------------------------------------------------------------------

Notes to Consolidated Financial Statements

Note 12.  Other Income and Expenses

      The principal components of "Other Income" in the consolidated statements
of income are:

<TABLE>
<CAPTION>

                                                                     1998                      1997                       1996
                                                                -----------------------------------------------------------------
<S>                                                             <C>                       <C>                       <C>
Cash management fees and discount                               $      954,505            $     598,003             $     381,985
FHLMC servicing fee income                                             118,601                  121,534                   130,871
Merchant discount                                                      656,190                  369,441                   204,438
ATM fee income                                                         181,960                  199,329                   149,241
Other (includes no items in
   excess of 1% of total revenue)                                      413,336                  245,120                   363,173
                                                                --------------            -------------             -------------
                                                                $    2,324,592            $   1,533,427             $   1,229,708
                                                                ==============            =============             =============
</TABLE>

      The principal components of "Other Expenses" in the consolidated
statements of income are:

<TABLE>
<CAPTION>

                                                                     1998                      1997                       1996
                                                                -----------------------------------------------------------------
<S>                                                            <C>                       <C>                        <C>
Advertising                                                    $       225,829           $      211,136             $     135,468
Merchant card                                                          668,407                  368,320                   211,815
Cash management royalties                                              189,887                  138,615                    91,386
Check card losses                                                      297,102                       --                        --
Other (includes no items in
   excess of 1% of total revenue)                                    1,568,423                1,392,651                 1,230,848
                                                                --------------            -------------             -------------
                                                                $    2,949,648            $   2,110,722             $   1,669,517
                                                                ==============            =============             =============
</TABLE>


Note 13.  Earnings Per Share

      The following data shows the amounts used in computing earnings per share
and the effect on the weighted average number of shares of dilutive potential
common stock. The potential common stock did not have a significant impact on
net income. The number of shares used in the calculations for 1997 and 1996
reflect a 20% stock dividend paid on October 15, 1997 and a 20% stock dividend
paid on October 15, 1998.

<TABLE>
<CAPTION>

                                                                       1998                     1997                       1996
                                                                    --------------------------------------------------------------
<S>                                                                  <C>                      <C>                       <C>
Weighted average number
   of common shares, basic                                           1,224,531                1,208,310                 1,218,444
Effect of dilutive stock options                                        68,078                   43,159                    24,901
                                                                    ----------               ----------                ----------

Weighted number of common shares
   and dilutive potential common stock
   used in diluted EPS                                               1,292,609                1,251,469                 1,243,345
                                                                     =========                =========                 =========
</TABLE>


Note 14.  Time Deposits

Remaining maturities on certificates of deposit are as follows:

                     1999                                    $    65,691,040
                     2000                                         10,977,518
                     2001                                          4,553,109
                     2002                                            128,953
                     2003 and thereafter                           3,739,923
                                                             ---------------
                                                             $    85,090,543
                                                             ===============


--------------------------------------------------------------------------------
20

<PAGE>

                                                              1998 Annual Report
--------------------------------------------------------------------------------

Notes to Consolidated Financial Statements

Note 15.  Financial Instruments With Off Balance Sheet Risk

      The Corporation is a party to financial instruments with off balance sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit and
standby letters of credit. Those instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the balance sheet. The contract amounts of those instruments reflect the extent
of involvement the Corporation has in particular classes of financial
instruments.

      The Corporation's exposure to credit loss in the event of nonperformance
by the other party to the financial instruments for commitments to extend credit
and standby letters of credit is represented by the contractual amounts of those
instruments. The Corporation uses the same credit policies in making commitments
and conditional obligations as they do for on balance sheet instruments.

      Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract. Standby
letters of credit are conditional commitments issued by the Corporation to
guarantee the performance of a customer to a third party. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. At December 31, 1998, the Corporation's total commitments to extend
credit and standby letters of credit were $27,300,202 and $1,063,440,
respectively. At December 31, 1997, the Corporation's total commitments to
extend credit and standby letters of credit were $14,923,489 and $1,079,950,
respectively. The Corporation evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Corporation upon extension of credit, is based on management's credit
evaluation of the counterparty. Collateral held varies but may include accounts
receivable, inventory, property, plant, and equipment, and income-producing
commercial properties. Since most of the letters of credit are expected to
expire without being drawn upon, they do not necessarily represent future cash
requirements.

      The Corporation grants commercial, real estate and consumer loans to
customers primarily in the Northern Neck, Middle Peninsula, Williamsburg and
James City County areas of Virginia. Although the Corporation has a diversified
loan portfolio, the ability of debtors to honor their contracts is highly
dependent upon the real estate development market in this area.

      The Corporation maintains its cash accounts in several correspondent
banks. The total amount by which cash on deposit in those banks exceeds the
federally insured limits is approximately $96,166 at December 31, 1998.


Note 16.  Disclosures About Fair Value of Financial Instruments

      The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:

Cash and Short-Term Investments

      For those short-term instruments, the carrying amount is a reasonable
estimate of fair value.

Securities

      For securities held for investment purposes, fair values are based on
quoted market prices or dealer quotes.

Loan Receivables

      For certain homogeneous categories of loans, such as some residential
mortgages, and other consumer loans, fair value is estimated using the quoted
market prices for securities backed by similar loans, adjusted for differences
in loan characteristics. The fair value of other types of loans is estimated by
discounting the future cash flows using the current rates at which similar loans
would be made to borrowers with similar credit ratings and for the same
remaining maturities.



--------------------------------------------------------------------------------
                                                                              21

<PAGE>
Chesapeake Financial Shares, Inc.
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements

Deposit Liabilities

      The fair value of demand deposits, savings accounts and certain money
market deposits is the amount payable on demand at the reporting date. The fair
value of fixed-maturity certificates of deposit is estimated using the rates
currently offered for deposits of similar remaining maturities.

Off-Balance-Sheet Financial Instruments

      The fair value of commitments is estimated using the fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the present creditworthiness of the counterparties.
For fixed-rate loan commitments, fair value also considers the difference
between current levels of interest rates and the committed rates. The fair value
of letters of credit is based on fees currently charged for similar agreements
or on the estimated cost to terminate them or otherwise settle the obligations
with the counterparties at the reporting date.

      At December 31, 1998 and 1997, the carrying amounts and fair values of
loan commitments and stand-by letters of credit were deemed immaterial.

      The estimated fair values of CFS's financial instruments are as follows:

<TABLE>
<CAPTION>
                                                            1998                                              1997
                                          ---------------------------------------           ---------------------------------------
                                            Carrying                    Fair                   Carrying                     Fair
(In Thousands)                                Amount                    Value                   Amount                     Value
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>                       <C>                     <C>                      <C>
Financial assets:
Cash and short-term
   investments                             $   12,938                $     12,938            $     7,024              $      7,024
Securities                                     42,475                      42,475                 43,908                    43,908
Loans                                         109,422                     110,071                102,099                   102,044
                                           ----------                ------------            -----------              ------------
Total financial assets                     $  164,835                $    165,484            $   153,031              $    152,976
                                           ==========                ============            ===========              ============

Financial liabilities:
Deposits                                   $  164,639                $    165,008            $   147,519              $    148,174
Short-term borrowings                              --                          --                  1,250                     1,250
Long-term debt                                    875                         601                     --                        --
                                           ----------                ------------            -----------              ------------
Total financial liabilities                $  165,514                $    165,609            $   148,769              $    149,424
                                           ==========                ============            ===========              ============
</TABLE>


Note 17.  Regulatory Matters

      The Corporation is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - possibly additional discretionary
- actions by regulators that, if undertaken, could have a direct material effect
on the Corporation's financial statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, the Corporation must meet
specific capital guidelines that involve quantitative measures of the
Corporation's assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Corporation's capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.

      Quantitative measures established by regulation to ensure capital adequacy
require the Corporation to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets, and of Tier 1 capital to average assets. Management
believes, as of December 31, 1998, that the Corporation meets all capital
adequacy requirements to which it is subject.


--------------------------------------------------------------------------------
22
<PAGE>

                                                              1998 Annual Report
--------------------------------------------------------------------------------

Notes to Consolidated Financial Statements

      As of December 31, 1998, the most recent notification from the Federal
Reserve Bank categorized the Corporation as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Corporation must maintain minimum total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institution's category.

      The Corporation's actual capital amounts and ratios are also presented in
the table.

<TABLE>
<CAPTION>

                                                                                                            To Be Well
                                                                                                         Capitalized Under
                                                                    For Capital                          Prompt Corrective
                                         Actual                  Adequacy Purposes                       Action Provisions
                                ----------------------     -----------------------------        -----------------------------------
(Amount in Thousands)             Amount         Ratio         Amount          Ratio                Amount           Ratio
-----------------------------------------------------------------------------------------------------------------------------------
<S>                             <C>              <C>        <C>               <C>               <C>             <C>
As of December 31, 1998:
   Total Capital (to Risk
      Weighted Assets):
        Consolidated            $   16,387       12.6%     (> or =)$10,413      (> or =) 8.0%                    N/A
        Chesapeake Bank         $   15,436       12.0%     (> or =)$10,340      (> or =) 8.0%   (> or =)$12,924       (> or =) 10.0%
   Tier 1 Capital (to Risk
      Weighted Assets):
        Consolidated            $   14,754       11.3%     (> or =)$ 5,207      (> or =) 4.0%                    N/A
        Chesapeake Bank         $   13,820       10.7%     (> or =)$ 5,170      (> or =) 4.0%   (> or =)$ 7,755       (> or =) 6.0%
   Tier 1 Capital (to
      Average Assets):
        Consolidated            $   14,754        8.4%     (> or =)$ 7,029      (> or =)4.0%                     N/A
        Chesapeake Bank         $   13,820        7.9%     (> or =)$ 6,966      (> or =) 4.0%   (> or =)$ 8,707       (> or =) 5.0%
As of December 31, 1997:
   Total Capital (to Risk
      Weighted Assets):
        Consolidated            $   14,999       13.5%     (> or =)$ 8,903      (> or =) 8.0%                    N/A
        Chesapeake Bank         $   13,057       11.8%     (> or =)$ 8,879      (> or =) 8.0%   (> or =)$11,098       (> or =) 10.0%
   Tier 1 Capital (to Risk
      Weighted Assets):
        Consolidated            $   13,602       12.2%     (> or =)$ 4,452      (> or =) 4.0%                    N/A
        Chesapeake Bank         $   11,665       10.5%     (> or =)$ 4,440      (> or =) 4.0%   (> or =)$ 6,659       (> or =) 6.0%
   Tier 1 Capital (to
      Average Assets):
        Consolidated            $   13,602        8.5%     (> or =)$ 6,392      (> or =) 4.0%                    N/A
        Chesapeake Bank         $   11,665        7.4%     (> or =)$ 6,317      (> or =) 4.0%   (> or =) $7,896       (> or =) 5.0%
</TABLE>



--------------------------------------------------------------------------------
                                                                              23

<PAGE>


Chesapeake Financial Shares, Inc.
--------------------------------------------------------------------------------

Notes to Consolidated Financial Statements

Note 18.  Parent Company Financial Statements

      The following parent company accounting policies should be read in
conjunction with the related condensed balance sheets, statements of income, and
statements of cash flows.

      Investments in subsidiaries are accounted for using the equity method of
accounting. The parent company and its subsidiaries file a consolidated federal
income tax return. The subsidiaries' individual tax provisions and liabilities
are stated as if they filed separate returns and any benefits or detriments of
filing the consolidated tax return are absorbed by the parent company.

      The parent company's principal assets are its investments in its
wholly-owned subsidiaries. Dividends from the Bank are the primary source of
funds for the parent company. The payment of dividends by the Bank is restricted
by various statutory limitations. Banking regulations also prohibit extensions
of credit by the Bank to the parent company unless appropriately secured by
assets. As of December 31, 1998, the amount available for payment of additional
dividends without prior regulatory approval from the Bank to the parent company
is $1,851,278 or 12.4% of consolidated net assets.

Balance Sheets (Condensed)

<TABLE>
<CAPTION>
                                                                                             December 31,
                                                                        --------------------------------------------------
                                                                              1998                               1997
                                                                        --------------------------------------------------
<S>                                                                     <C>                               <C>
Assets
Cash                                                                    $       408,701                   $        366,397
Securities                                                                      550,052                          1,534,706
Investment in subsidiaries                                                   13,982,051                         11,987,491
Premises and equipment, net                                                     860,377                                 --
Other assets                                                                     30,132                             36,081
                                                                        ---------------                    ---------------
        Total assets                                                    $    15,831,313                    $    13,924,675
                                                                        ===============                    ===============

Liabilities and Shareholders' Equity
Long-term debt                                                          $       874,574                    $            --
Other liabilities                                                                28,333                             10,000
Shareholders' equity                                                         14,928,406                         13,914,675
                                                                        ---------------                    ---------------
        Total liabilities and shareholders' equity                      $    15,831,313                    $    13,924,675
                                                                        ===============                    ===============
</TABLE>





--------------------------------------------------------------------------------
24

<PAGE>

                                                              1998 Annual Report
--------------------------------------------------------------------------------

Notes to Consolidated Financial Statements

Statements of Income (Condensed)

<TABLE>
<CAPTION>

                                                                                    Years Ended December 31,
                                                                ------------------------------------------------------------------
                                                                    1998                      1997                      1996
                                                                ------------------------------------------------------------------
<S>                                                             <C>                       <C>                       <C>
Income - Dividends - Bank                                       $      325,000            $     930,000             $   1,800,000
         Other                                                         151,088                   87,830                    21,858
                                                                --------------            -------------             -------------
      Total income                                              $      476,088            $   1,017,830             $   1,821,858
                                                                --------------            -------------             -------------

Expenses - Interest expense                                     $       48,865            $          --             $      26,026
           Other expenses                                              206,692                  144,747                   103,912
                                                                --------------            -------------             -------------
      Total expenses                                            $      255,557            $     144,747             $     129,938
                                                                --------------            -------------             -------------

Income before income taxes and
   equity in undistributed earnings
   of subsidiaries                                              $      220,531            $     873,083             $   1,691,920
Allocated income tax benefit                                            30,856                   25,552                    21,158
                                                                --------------            -------------             -------------
Income before equity in
   undistributed earnings of subsidiaries                       $      251,387            $     898,635             $   1,713,078
Equity (deficit) in undistributed
   earnings of subsidiaries                                          1,137,346                  851,874                  (137,942)
                                                                --------------            -------------             -------------
Net income                                                      $    1,388,733            $   1,750,509             $   1,575,136
                                                                ==============            =============             =============
</TABLE>





--------------------------------------------------------------------------------
                                                                              25

<PAGE>

Chesapeake Financial Shares, Inc.

Notes to Consolidated Financial Statements

Statements of Cash Flows (Condensed)

<TABLE>
<CAPTION>
                                                                                      Years Ended December 31,
                                                               ------------------------------------------------------------------
                                                                      1998                       1997                      1996
                                                               ------------------------------------------------------------------
<S>                                                            <C>                <C>                      <C>
Cash Flows from Operating Activities
   Net income                                                  $     1,388,733    $            1,750,509   $            1,575,136
   Adjustments to reconcile net income
      to net cash provided by operating
      activities:
        Depreciation                                                    39,623                     --                        --
        Equity (deficit) in undistributed earnings
           of subsidiaries                                          (1,137,346)                (851,874)                  137,942
        Issuance of common stock for services                           62,000                   54,175                    37,380
        Amortization of premium                                         (3,742)                  (2,960)                      144
        Changes in other assets and liabilities:
           (Increase) decrease in other assets                          12,133                  (10,025)                  (10,847)
           Increase (decrease) in other liabilities                     18,333                    6,000                    (9,624)
                                                                --------------            -------------            --------------
             Net cash provided by operating
                 activities                                     $      379,734            $     945,825            $    1,730,131
                                                                --------------            -------------            --------------

Cash Flows from Investing Activities
   Purchase of investment securities                            $         --              $    (574,284)           $     (907,718)
   Proceeds from maturities of
      investment securities                                                --                    100,000                   200,625
   Purchases of premises and equipment                                (900,000)                     --                         --
   Investment in subsidiary                                            (29,312)                     --                         --
                                                                --------------            -------------            --------------
             Net cash (used in) investing
                 activities                                     $     (929,312)           $    (474,284)           $     (707,093)
                                                                --------------            -------------            --------------

Cash Flows from Financing Activities
   Dividends paid                                               $     (342,924)           $    (282,933)           $     (244,585)
   Proceeds from issuance of long-term debt                            900,000                     --                        --
   Curtailment of note payable                                         (25,426)                    --                    (387,500)
   Acquisitions of common stock                                        (62,943)                 (36,754)                 (293,631)
   Net proceeds from issuance of common stock                          123,175                   15,914                    41,825
                                                                --------------            -------------            --------------
             Net cash provided by (used in)
                 financing activities                           $      591,882            $    (303,773)           $     (883,891)
                                                                --------------            -------------            --------------

             Net increase in cash                               $       42,304            $     167,768            $      139,147

Cash at beginning of year                                              366,397                  198,629                    59,482
                                                                --------------            -------------            --------------

Cash at end of year                                             $      408,701            $     366,397            $      198,629
                                                                ==============            =============            ==============

Supplemental Disclosure of Noncash Investing
   Activities, contribution of securities to capital
   of a subsidiary bank                                         $      970,207            $        --              $          --
                                                                ==============            =============            ==============

</TABLE>

--------------------------------------------------------------------------------
26


<PAGE>

                                                              1998 Annual Report
--------------------------------------------------------------------------------

       (YHB LOGO)
Yount, Hyde & Barbour, P.C.
Certified Public Accountants
      and Consultants


Independent Auditor's Report


To the Boards of Directors and Shareholders
Chesapeake Financial Shares, Inc. and Subsidiaries
Kilmarnock, Virginia

      We have audited the accompanying consolidated balance sheets of Chesapeake
Financial Shares, Inc. and Subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of income, changes in shareholders' equity,
and cash flows for the years ended December 31, 1998, 1997 and 1996. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

      We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Chesapeake
Financial Shares, Inc. and Subsidiaries as of December 31, 1998 and 1997, and
the results of its operations and its cash flows for the years ended December
31, 1998, 1997 and 1996, in conformity with generally accepted accounting
principles.


/s/ Yount, Hyde & Barbour, P.C.

Winchester, Virginia
January 15, 1999

--------------------------------------------------------------------------------
                                                                              27

<PAGE>

Chesapeake Financial Shares, Inc.
--------------------------------------------------------------------------------

Management's Discussion and Analysis of
Financial Condition and Results of Operations

      The following discussion is intended to assist the reader in understanding
and evaluating Chesapeake Financial's consolidated financial condition and
results of operations. This discussion should be read in conjunction with the
Company's audited consolidated financial statements, the accompanying notes, the
Letter to Shareholders, and other information contained elsewhere in this Annual
Report. There were 20% stock splits effective October 15, 1997, and October 15,
1998. All per share information has been adjusted accordingly.

Financial Condition

      On December 31, 1998, Chesapeake Financial Shares, Inc. (CFS) had total
assets of $181.9 million, representing a 10.9% increase over the December 31,
1997 balance of $163.9 million, which followed an increase of 10.8% from total
assets of $142.9 on December 31, 1996. The Company had gross total loans of
$111.4 million, total deposits of $164.6 million and total shareholder's equity
of $14.4 million on December 31, 1998. The return on average equity in 1998 was
9.6% and return on average assets was 0.81% compared to 13.6% and 1.18%,
respectively, in 1997 (see "Summary of Results of Operations").

      In June of 1998, CFS opened a new regional office in Williamsburg and in
October, consolidated the two operation support areas in a newly remodeled
Operations Center in Kilmarnock. The Bank now operates ten banking offices. At
year end, the Company opened Chesapeake Financial Group, Inc., a wholly owned
subsidiary of the Company offering comprehensive, individualized, portfolio
management services. New interest bearing products were introduced through the
Bank to fulfill customer needs for the new millennium and CFS initiated programs
to ensure compliance with Year 2000 standards by June of 1999. Simultaneously
with the Year 2000 effort, management built a technology infrastructure to
position the Company to maintain and further develop the competitive advantage
available to a community bank.

      Loan growth reached record highs during 1998 and the average annual loan
growth rate for the last five years has exceeded 10.0%. Asset quality was
maintained during this growth period with past due loans at record lows and the
reserve for loan loss remained at adequate levels. The Bank maintained its "well
capitalized" status, the highest ranking available from the Federal Deposit
Insurance Corporation.

Summary of Results of Operations

      Earnings for 1998 were $1,388,733 or $1.07 per share (fully diluted)
compared to $1,750,509 or $1.40 per share in 1997, a decrease of 23.6% or
$361,776. The results of operations would have exceeded the prior year's
performance except for two non-recurring events. The Company wrote off $297,102
or $0.15 per share, based on a series of disputed international electronic
transactions involving VISA International. The Company also added $410,000 or
$0.21 per share, to the provision for loan losses to provide for a specific
loan, which was classified as "doubtful." Precautions were taken to prevent the
recurrence of these two unique events.

      Net interest income during 1998 increased $656,302 or 11.0% over the
$5,954.029 reported in 1997. Noninterest income increased to $3,838,455 in 1998,
up 28.7% over the 1997 level of $2,981,652. All noninterest income items
exceeded 1997 results, except for ATM fee income and FHLMC servicing fee income.
Cash management fee income was up 59.6% or $356,502, merchant card income was up
77.6% or $286,749 and trust fee income was up 12.9% or $118,653. Other
noninterest income was up 68.8% or $168,216, due in part to increased fee income
from annuity sales and other nondeposit investment products. FHLMC servicing
income was down 2.4% or $2,933 from 1997. Total noninterest expenses for 1998
were $8,104,425, up 23.6% over the 1997 total of $6,555,794.

      Earnings for 1997 of $1,750,509 or $1.40 (fully diluted) compared to
$1,575,136 or $1.27 per share in 1996 completed a three year string of double
digit earnings growth. The 11.1% increase in net income resulted primarily from
a 10.5% increase or $566,773 in net interest income. Noninterest income
increased to $2,981,652 in 1997, up 16.5% over the 1996 level of $2,559,496. All
noninterest income items were up for 1997, except other income and FHLMC
servicing fee income. Cash management fee income was up 56.6% or $216,018,
merchant card income was up 80.7% or $165,003, trust income was up 12.8% or
$104,595, and ATM income was up 33.6% or $50,087. Other income was down 32.5% or
$118,053 due to a one time recovery in 1996. FHLMC servicing income was down
7.13% or $9,337 from 1996. Total noninterest expenses for 1997 were $6,555,794,
up 14.6% over the 1996 total of $5,720,313.

--------------------------------------------------------------------------------
28

<PAGE>

                                                              1998 Annual Report
--------------------------------------------------------------------------------

      In 1996 earnings were $1,575,136 or $1.27 compared to $1,264,702 or $1.02
per share in 1995. The 24.6% increase in net income resulted from a 20.7%
increase in noninterest income, an increase of 6.5% in net interest income after
provision for loan losses, and holding noninterest expense to a 6.9% increase.
Most noninterest income items were up for 1996, with trust income up 12.4%, cash
management income up 47.6%, and ATM income up 160.7%. Net interest income
increased to $5,387,256 in 1996, up 7.7% over the 1995 level of $4,999,818.

Assets:  Loan Portfolio

      The net loan portfolio totaled $109.4, $102.1, and $90.4 million for 1998,
1997, and 1996, respectively, representing an increase of 7.2% for 1998 from
1997, 12.9% for 1997 from 1996, and 11.6% for 1996 from 1995. All loan
categories except real estate - mortgage and participations were up during 1998.
Consumer loans increased 31.4% or $5.1 million for 1998 over 1997 levels of
$16.3 million. Participations with other banks decreased $0.3 million or 17.2%
and real estate construction loans increased 88.5% or $2.6 million during 1998.
Real estate - mortgage loans were down 15.3% or $5.9 million. The real estate -
mortgage totals are not indicative of the volume of loans processed during the
year. Over $35.7 million in real estate related loans were closed. Of this total
$27.0 million were sold in the secondary market. Commercial loans increased
13.1% or $5.7 million.

      On December 31, 1998, the loan portfolio consisted of 44.0% of commercial
loans and 34.5% of single family residential and residential construction loans.
The commercial loans consist principally of business loans such as retail,
hospitality, service and professional, marine industry, and commercial real
estate loans where real estate is the primary collateral, plus a very small
portion of agriculture loans. Management attempts to reduce the Bank's exposure
to the risks of the local real estate market by limiting the aggregate size of
its commercial portfolio and by primarily making such loans directly to the
business occupants. The Bank has historically engaged in limited mortgage
lending secured by multi family and agricultural properties. At year end,
residential real estate construction accounted for 4.9% of total loans
outstanding. The Bank's consumer installment portfolio remains its third largest
major loan category.

      Consistent with its focus on providing community based financial services,
the Bank generally does not make loans outside its principal market regions. By
policy it does not originate or purchase highly leveraged loans or loans to
foreign entities or individuals.

      Total nonperforming assets consist of nonaccrual loans, restructured
loans, repossessed and foreclosed properties. Nonperforming assets were $747,916
at December 31, 1998, representing no substantial change from $791,344 million
from December 31, 1997. Past due loans were 0.7% of total loans at December 31,
1998, the lowest in the Bank's recent history.

Asset Quality-Provision/Reserve for Loan Losses

      The provision for loan losses is a charge against earnings necessary to
maintain the reserve for loan losses at a level consistent with management's
evaluation of the credit quality and risk adverseness of the loan portfolio.

      The 1998 provision of $620,000 brought the net reserve for loan losses to
$2,023,752 or 1.82% of gross loans. There was a provision of $75,000 in 1997
compared to the 1996 provision of $150,000. Management and the Board of
Directors believe that the total reserve at year end was adequate relative to
current levels of risk in the portfolio. Continued loan growth may warrant
additional provisions in the future. The reserve for loan losses as a percent of
gross loans less unearned discounts was 1.82% on December 31, 1998, 1.72% in
1997 and 1.80% in 1996. Loan charge offs totaled $335,637 in 1998, $41,956 in
1997, and $157,448 in 1996. Recoveries for the same periods were $19,324,
$54,177, and $197,111, respectively.

      The Bank maintains a reserve for loan loss which management believes
represents a conservative estimate of potential losses inherent in the Bank's
loan portfolio. To achieve this goal, the loan loss provision must be sufficient
to cover loans charged off plus the growth (if any) in the loan portfolio. In
determining the adequacy of the reserve for loan losses, management uses a
methodology, which specifically identifies and reserves for higher risk loans. A
general reserve is established of non-specifically reserved loans. Loans in a
nonaccrual status and over ninety days past due are considered in this
evaluation as well as other loans, which may be a potential loss. The status of
nonaccrual and past due loans varies from quarter to quarter based on
seasonality, local economic conditions, and cash flow of customers.

--------------------------------------------------------------------------------
                                                                              29
<PAGE>

Chesapeake Financial Shares, Inc.
--------------------------------------------------------------------------------

      Management has periodically contracted outside professionals to perform an
independent loan quality review to enhance the internal loan review process. A
review was performed in late 1997 and the results were consistent with those of
the internal loan review officer and management's reserve analysis process. The
maintenance of high loan quality objectives has been key to the Company's
current levels of performance. Management intends to schedule a similar review
33 during 1999.

Investment Securities
---------------------

      At year end, total securities and time deposits with other banks were
$42.5 million, down 3.3% from the $43.9 million on December 31, 1997, which was
up 16.5% from $37.7 million on December 31, 1996. Investment portfolio liquidity
and deposit growth provided funding for the increases in the loan portfolio.

      All of the Company's securities are classified as securities available for
sale. Securities may be classified as investment securities when management has
the intent and the Company has the ability at the time of purchase to hold the
securities to maturity. Investment securities are carried at cost adjusted for
amortization of premiums and accretion of discounts. Securities available for
sale include securities that may be sold in response to changes in market
interest rates, changes in the securities prepayment risk, increases in loan
demand, general liquidity needs and other similar factors. Securities available
for sale are carried at fair market value.

      At December 31, 1998, securities available for sale totaled $42.5 million
and at December 31, 1997 the total was $43.9 million. Fair market value of the
portfolio exceeded book value by $174,267 and $328,577, net of the tax effect,
at December 31, 1998 and 1997, respectively. This is within risk limits
established by the Board and the Asset/Liability Management Committee.

      The securities portfolio decreased 3.3% or $1.4 million in 1998, following
an increase of 16.5% or $6.2 million in 1997 over 1996. U. S. Government
Agencies decreased 4.5% or $1.3 million during 1998. Investments in state and
political subdivisions increased 8.4% or $1.0 million during 1998. Investments
in U.S. Treasury issues decreased $1.2 million or 70.5% from 1997, which
decreased $1.3 million, or 44.2% from 1996. Management increased the investment
in securities of state and political subdivisions to utilize the tax free
income. Management has also changed the investment strategy to increase the
mortgage-backed securities portfolio. This long term strategy is expected to
increase current income and improve the total return of the overall portfolio
without assuming amounts of risk greater than limits established and monitored
by the Board.

Liabilities:  Deposits
----------------------

      Deposits totaled $164.6, $147.5, and $127.6 million for 1998, 1997, and
1996, respectively, representing an increase of 11.6% for 1998 from 1997 and an
increase of 15.6% for 1997 from 1996. There was a 3.1% decrease in certificates
of deposit. Noninterest bearing deposits increased to $4.6 million or 23.8% from
$19.3 million on December 31, 1997 and savings balances increased during 1998 by
37.8% or $15.3 million to $55.7 million. This is a reverse of the prior year's
reported results when most deposit growth resulted in increases in certificates
of deposit. Marketing and sales efforts have focused on growing these deposit
categories and that strategy will be continued.

Shareholders' Equity
--------------------

      Future growth and expansion of the Company is dictated by the ability to
produce capital, which is generated principally by the earnings of the Bank. As
of December 31, 1998, the Company's primary capital to asset ratio was 9.2%. The
Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
established a capital based supervisory system for all insured depository
institutions including state chartered, Federal Reserve member banks. Under this
new requirement, the Bank continues to be certified as a "well capitalized"
institution, which is the highest level of this ranking.

      Federal regulators also have adopted minimum capital standards.
Specifically, the guidelines categorize assets and off balance sheet items into
four risk weighted categories. The minimum ratio of qualifying total capital to
risk weighted assets is 8%. For Chesapeake, Tier 1 capital is composed of common
equity and retained earnings. Tier 1 capital to risk weighted assets and Tier 1
capital to average assets (called leveraged capital) must be 4%. On December 31,
1998, the Company had ratios of Tier 1 risk based capital to risk weighted
assets of 11.3%, total risk based capital to risk weighted assets of 12.6%, and
Tier 1 leverage capital of 8.4%. At December 31, 1997, these ratios were 12.2%,
13.5% and 8.5%, respectively, well above the regulatory minimums and exceed the
minimums for the "well capitalized" designation.

--------------------------------------------------------------------------------
30

<PAGE>
                                                              1998 Annual Report
--------------------------------------------------------------------------------

      The adequacy of the Company's capital is reviewed by management on an
ongoing basis with reference to the size, composition and quality of the
Company's asset and liability levels and consistent with regulatory requirements
and industry standards. Management seeks to maintain a capital structure that
assures an adequate level to support anticipated asset growth and absorb
potential losses.

Dividend and Market Information
--------------------------------

      The Company raised its dividend to $0.28 per share in 1998, an increase of
$0.05 over 1997. This increase followed another $0.03 per share dividend
increase from $0.20 in 1996 to $0.23 in 1997.

      Trades in the Company's common stock have occurred infrequently on a local
basis and generally involve a relatively small number of shares. Based on
information made available to them, management believes that the selling price
for the Company's common stock ranged 1997 from $10.59 to $16.67, and during
1998, from $16.67 to $22.91. Such transactions may not be representative of all
transactions during the indicated periods of the fair value of the stock at the
time of such transactions due to the infrequency of trades and the limited
market for the stock. At December 31, 1998, there were 1,229,599 shares of
Company's common stock outstanding held by approximately 451 holders of record.

Liquidity, Interest Rate Sensitivity, and Inflation
---------------------------------------------------

      The objectives of the Company's liquidity management policy include
providing adequate funds to meet the needs of depositors and borrowers at all
times, as well as providing funds to meet the basic needs for ongoing operations
of the Company, and to allow funding of longer-term investment opportunities and
regulatory requirements. Sufficient assets are maintained on a short term basis
to meet the liquidity demands anticipated by management.

      The most immediate and efficient source of liquidity is the Bank's pool of
short-term investments. The Bank's primary sources of liquidity continue to be
federal funds sold, time deposits with other banks, and securities maturing or
repricing within one year. On December 31, 1998, approximately 36.2% of the
total invested portfolio dollars mature within one year as compared to 26.4% on
December 31, 1997. The Bank's loan portfolio enhances the liquidity position
with 50.9% of all loan dollars maturing or repricing within one year. This loan
liquidity ratio was 57.6% on December 31, 1998. Management considers the
Company's liquidity to be adequate.

      Other sources of liquidity include repayment of loans, the sale of loans,
and proceeds from the sale of repossessed assets and other real estate owned.
The sale of loans through the secondary market operation enhances this liquidity
position by providing both fixed and adjustable rate long-term mortgage options
to our client base. Mortgage loans held for resale are stated at the lower of
cost or market (or contract value), however, due to the quick turning of these
assets, seldom do these loans represent more than 1% of total assets.

      Bank management maintains overnight borrowing relationships with
correspondent banks for up to $10,300,000, unsecured. The Bank has other
borrowing relationships for up to $13,000,000, secured.

      As of December 31, 1998, the Bank had $185,000 in repossessed assets and
other real estate owned. These assets are being aggressively marketed for sale
and represent a near term secondary source of liquidity. The Bank expects to
realize full book value for these assets.

      Since the assets and liabilities of a bank are primarily monetary in
nature (payable in fixed, determinable amounts), the performance of a bank is
affected more by changes in interest rates than by inflation. Interest rates
generally increase as the rate of inflation increases, but the magnitude of the
change in rates may not be the same.

      While the effect of inflation is normally not as significant as is its
influence on those businesses that have large investments in plant and
inventories, it does have an effect. There are normally corresponding increases
in the money supply, and banks will normally experience above average growth in
assets, loans and deposits. Also, general increases in the prices of goods and
services will result in increased operating expenses.

--------------------------------------------------------------------------------
                                                                              31
<PAGE>
Chesapeake Financial Shares, Inc.
--------------------------------------------------------------------------------

Net Interest Income
-------------------

      The principal source of earnings for CFS is net interest income. Net
interest income is the difference between interest and fees generated by earning
assets and interest expense paid to fund those assets. As such, net interest
income represents the gross profit from the Bank's lending, investment, and
funding activities.

      A large number of variables interact to affect net interest income.
Included are variables such as changes in the mix and volume of earning assets
and interest bearing liabilities, market interest rates, and the statutory
federal tax rate. It is management's ongoing policy to maximize net interest
income through the development of balance sheet and pricing strategies while
maintaining appropriate risk levels as set by the board.

      Net interest income totaled $6.6, $6.0, and $5.4 million for 1998, 1997,
and 1996, respectively, representing an increase of 11.0% for 1998 over 1997,
10.5% for 1997 over 1996, and 7.7% for 1996 over 1995. Loan demand was strong
again this year with gross total loans up 7.3% or $7.6 million for 1998 over
1997. Total interest expense was $6.2, $5.4, and $4.8 million for 1998, 1997 and
1996, respectively. On a tax equivalent annualized basis, the net interest
margin was 4.5%, 4.6% and 4.6% for 1998, 1997 and 1996, respectively.

Noninterest Income
------------------

      For the year ended December 31, 1998, noninterest income was $3.8 million,
a 28.7% increase over the 1997 amount of $3.0 million, which was a 16.5%
increase over the 1996 amount of $2.6 million. The increase in 1998 was due to a
59.6% or $356,502 increase in our cash management service, and an increase of
$286,749 or 77.6% in merchant card income. Trust income was also up 12.9% or
$118,653, and ATM income was down 8.7% or $17,369. Other income was up 68.6% or
$168,216 from the same period in 1997.

      Merchant card and cash management income was up due to product promotions,
including incentives and aggressive pricing. We expect our market share to
continue to grow in these product areas. The Company continuously seeks
additional sources of noninterest income.

Noninterest Expenses
--------------------

      Total noninterest expenses increased 23.6% or $1,548,631 in 1998 over
1997. In 1997, total noninterest expenses increased 14.6% over 1996 and
increased 6.9% in 1996 over 1995. The 1998 increase was due primarily to a 39.7%
or $838,926 increase in other expenses. The principal components of other
expenses include: merchant card expenses which were up 81.5% or $300,087, over
the 1997 amount of $368,320; the check card loss of $297,102; miscellaneous
expenses which were up 12.6% or $175,772 over the 1997 amount of $1,392,651;
cash management expenses which were up 37.0% or $51,272 over the 1997 amount of
$138,615; and advertising expenses which were up 7.0% or $14,693 over the 1997
amount of $211,136.

      Salaries and benefits were up 14.6%, or $450,156, over 1997 levels of
$3,079,538. This increase was due to additional staffing for the Williamsburg
office opened in June, performance incentives, and cost of living increases.
Total occupancy expenses increased 19.0% or $259,549 compared to 1997, which was
up 12.8%, or $155,000 from the 1996 level of $1,210,534.

      Chesapeake Financial Shares, Inc. chartered Chesapeake Financial Group,
Inc. (CFG) in August of 1998. CFG has established unique partnerships with
premier investment managers to offer high net worth individuals and institutions
superior portfolio management coupled with highly customized service.

      Other accomplishments in 1998 include the opening of the Lafayette Street
Financial Services Center in Williamsburg and the move of two support groups
into a single Operations Center on School Street in Kilmarnock. These two events
were significant additions to job descriptions of the employees involved, during
a year of unprecedented loan growth. The staff also finished an upgrade of the
entire technology backbone of the Company and a complete review of hardware and
software for Year 2000 compliance. Two new products were introduced, Business
Cash Management for the commercial customer and ChesVest Preferred for the
consumer.
--------------------------------------------------------------------------------
32

<PAGE>
                                                              1998 Annual Report
--------------------------------------------------------------------------------

Year 2000 Readiness Disclosure
------------------------------

      Chesapeake Financial Shares, Inc. utilizes and is dependent upon data
processing systems and software, generally referred to as Information Technology
or IT, to conduct its business. The IT systems include a mainframe processing
system licensed to the Bank by an outside vendor and various purchased software
packages which are run on in-house computers and computer networks. Non-IT
systems include most other equipment and machinery, such as elevators and
thermostats, that may have microcontrollers.

      Many currently installed IT systems are programmed to assume that the
century portion of a date was "19" to conserve the use of storage and memory.
This assumption resulted in the use of two digits (rather than four) to define
the applicable year. Accordingly, computer systems that rely on two digits to
define an applicable year may recognize a date using "00" as the year 1900,
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process or transmit data or engage in normal
business activities.

      In 1997, the Company initiated a review and assessment of all IT and
non-IT systems to confirm that they will function properly in the Year 2000. The
Bank successfully completed three reviews by regulatory authorities assessing
progress toward Year 2000 compliance. To date, the incremental costs of the
Company's Year 2000 remediation program have been approximately $65,000.
Approximately 20% of these costs were incurred in 1997 and approximately 80%
were incurred in 1998. The Company estimates that expenditures in 1999 will
total $ 25,000 and are expected to relate primarily to testing, contingency
planning and internal certification.

      For computer systems that it has determined to be most critical, CFS
expects to complete development, test, and adopt business contingency plans by
June 30, 1999. These plans will conform to recently issued guidance from the
FFIEC on business contingency planning for Year 2000 readiness. Contingency
plans will include, among other actions, manual workarounds and identification
of resource requirements and alternative solutions for resuming critical
business processes in the event of a Year 2000 related failure. While management
believes that it is taking the necessary steps to resolve its Year 2000 issues
in a timely manner, there can be no guarantees that there will be no Year 2000
problems. At present, management does not expect that any such problems will
have a material adverse effect on its business.

Forward-Looking Statements:
---------------------------

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



--------------------------------------------------------------------------------
                                                                              33

<PAGE>

(CHESAPEAKE FINANCIAL SHARES, INC. LOGO)

Chesapeake Financial Shares, Inc. - Directors
--------------------------------------------------------------------------------
Douglas D. Monroe, Jr.
Chairman of the Board
Chief Executive Officer

Eugene S. Hudnall, Jr.
Chairman, Noblett, Inc.
Retailer

Robert L. Stephens
Owner
The Tides Inn, Inc.
Resort Operations

T. Nash Broaddus
Chairman of the Board
Prodesco, Inc.
Textile Manufacturer

Robert S. Scheu
Retired CEO
Marine Midland Trust
Company of Western New York

Katherine W. Monroe
Shareholder

Thomas B. Denegre, Jr.
Retired Vice Chairman &
Senior Trust Officer
Chesapeake Bank

William F. Shumadine, Jr.
Senior Vice President
Lowe, Brockenbrough & Co.
Registered Investment Advisor


Chesapeake Bank - Directors
--------------------------------------------------------------------------------
Rexford F. Beckwith, III
President
Rappahannock Westminster-Canterbury

Charles C. Chase, II
President, Rappahannock
Seafood Company, Inc.

James F. Chase, Jr.
Farmer

C. Irwin Clark, III
Chairman of the Board
Hubbard Insurance Agency, Inc.

James M. Holmes, Jr.
President, Administrator
Rappahannock General Hospital

Eugene S. Hudnall, Jr.
Chairman
Noblett, Inc.

Douglas D. Monroe, Jr.
Chairman and CEO
Chesapeake Bank

Harvey B. Morgan
Pharmacist and Legislator

L. Frank Phillips, Jr.
President
L. F. Phillips & Son Oil Co., Inc.

Albert C. Pollard
President
Pollard Properties, Inc.

Robert L. Stephens
Owner
The Tides Inn, Inc.

Jeffrey M. Szyperski
President
Chesapeake Bank

Harry M. Ward
Superintendent of Schools
Mathews County


Chesapeake Bank - Officers
--------------------------------------------------------------------------------
Douglas D. Monroe, Jr.
Jeffrey M. Szyperski
Marshall N. Warner
John H. Hunt, II
Ted M. Kattmann
Larry T. Lawrence
John K. O'Shaughnessy
Ray H. Hargett
Betty Sue Spence
Jean H. Harper
Paul L. Wegkamp, Jr.
Dianne D. Hall
Tony K. Griggs
Suzanne D. Keyser
Cecelia G. Klink
Linda J. Bisulca
Bert H. Heath, Jr.
Brenda S. Sims
Heidi L. Wilkins
Julie A. Williams
Carlie H. Gill
Kathleen S. Banks
Doris C. Bussells
Patricia R. Lewis
Pattie G. R. Matthews
Ann Marie Pruitt
Carol C. Rakes
Becky A. Foster

Chesapeake Insurance Agency, Inc. and Chesapeake Mortgage Company, Inc. -
Directors
--------------------------------------------------------------------------------
Douglas D. Monroe, Jr.
Robert L. Stephens
Eugene S. Hudnall, Jr.
Katherine W. Monroe
T. Nash Broaddus

Chesapeake Financial Group, Inc. - Directors
--------------------------------------------------------------------------------
Douglas D. Monroe, Jr.
Robert L. Stephens
T. Nash Broaddus
Robert S. Scheu
William F. Shumadine, Jr.


Chesapeake Bank Business Advisory Committees
--------------------------------------------------------------------------------
Middle Peninsula
Alvin L. Newton
L. Frank Phillips, Jr.
William J. Pointer

Peninsula
Henry S. Branscome
John D. Briggs
Patrick G. Duffeler
Vernon M. Geddy, III
Bruce P. Robertson
Thomas G. Tingle

Northern Neck/Mathews
Elwood G. Everington
Hank J. George
Weldon M. Howard
B.H.B. Hubbard, III
Leland T. James
John C. Miller
F. Stuart Painter
Harry Lee Self
Donald E. Smiley
R. Lee Stephens, Jr.
Robert J. Stewart, Jr.
Norman R. Tingle, Jr.


<PAGE>

(CHESAPEAKE FINANCIAL SHARES, INC. LOGO)


P.O. Box 1419
Kilmarnock, VA 22482
804-435-1181

www.chesbank.com

Ticker Symbol    CPKF