<PAGE>
                                                                     Exhibit 13

                                                                DEAR SHAREHOLDER

Was December 31, 1999 the real end of a millennium and the eve of a new one?
Whatever the answer, April 13, 2000 will be 100 years from the time of the
Bank's origin.

     In the fall elections Republicans gained control of both houses in the
Virginia General Assembly. Our Senator, John Chichester, was later elected
President Pro Tempore of the Senate, the first Republican to be chosen for that
office in its 142-year history. The year ended with unbelievable records in the
stock market. The NASDAQ, fueled by technology and "dot com" stocks, jumped
through the roof to 4,069.31, an 85.62% increase over 1998. The Virginia Tech
Hokies football team ended their finest season ever, undefeated and ranked #2
nationally with the opportunity to play for the National Championship in New
Orleans on January 4, 2000. The potential Y2K computer meltdown became a
nonevent; economic unification was begun in Europe evidenced by its currency,
the Euro; Boris Yeltsin, Russia's President, resigned; Richmond International
Raceway was sold with plans to move, while Colonial Downs barely limped along;
Alan Greenspan, Microsoft, and IPO's rode high along with sports utility
vehicles. Optimism everywhere was the stamp of the year.

     1999 was a banner year for Chesapeake with each member of the "family
group" surpassing expectations. Earnings were $2,061,269, $1.60 per share; at
yearend total assets stood at $197,435,133; loans and loan loss reserves were at
all- time highs, $132,893,500 and $2,253,676 respectively; and finally, net
noninterest income reached new highs. With loan loss reserves at 1.7% of gross
loans and past due loans at 0.84%, quality of assets was significantly stronger
than peer group banks.

     With a strong employee service culture instituted throughout, Chesapeake
continues to be an innovative financial provider. Moving into the next century
planning, preparation and installation of ONLINE Banking and ONLINE Bill Pay are
examples of progressive leadership. Chesapeake's website, www.chesbank.com, is
informative and interactive. To help carry our public, visual message, three
yellow VW "Bugs" decorated with the company's signature and website address,
were purchased to serve as runners between the branch offices.

     Chesapeake Investment Services ended the year managing assets of over
$22,000,000, more than double yearend 1998. Chesapeake Financial Group's
inaugural began slowly, but gained real traction during the second half of the
year. Plans for 2000 emphasize expanding market presence and communicating the
assistance of individual clients in total financial management. Chesapeake Bank
gained market share in all markets with special attention to our home base of
Lancaster County. New bank locations are being investigated along with new
products and services. All indicators are positive, creating optimism and
pointing to continued growth and records in the new millennium. Specific details
on the financial achievements of Chesapeake Financial Shares for 1999 are
contained in this report as required by the Securities and Exchange Commission
and other regulatory bodies. We hope that you will read the report focusing on
management's discussion and analysis of the financial condition and results of
operations.

     This year's 100th Anniversary Shareholders' meeting will be held at 4:00
p.m. on Friday, April 14, at Rappahannock Westminster-Canterbury in Irvington.

     Sincerely,

     /s/Douglas D. Monroe, Jr.          /s/Jeffrey M. Szyperski

     Douglas D. Monroe, Jr.             Jeffrey M. Szyperski
     Chairman of the Board &            President, Chesapeake Bank
     Chief Executive Officer
<PAGE>

SELECTED FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                                   1999              1998          1997           1996           1995
------------------------------------------------------------------------------------------------------------------------
                                                      (Dollars in thousands except ratios and per share amounts)
<S>                                          <C>              <C>           <C>            <C>            <C>
Results of Operations
Interest income                              $    13,423      $     12,763   $     11,361   $     10,142   $      9,556
Interest expense                                   6,174             6,153          5,407          4,755          4,556
------------------------------------------------------------------------------------------------------------------------

Net interest income                                7,249             6,610          5,954          5,387          5,000
Provision for loan losses                            211               620             75            150             84
-----------------------------------------------------------------------------------------------------------------------
Net interest income after
     provision for loan losses                     7,038             5,990          5,879          5,237          4,916
Noninterest income                                 4,524             3,838          2,982          2,559          2,120
Noninterest expenses                               8,811             8,104          6,556          5,720          5,351
------------------------------------------------------------------------------------------------------------------------

Income before tax                                  2,751             1,724          2,305          2,076          1,685
Income tax expense                                   690               335            554            501            420
------------------------------------------------------------------------------------------------------------------------
Net income                                   $     2,061      $      1,389   $      1,751   $      1,575   $      1,265
========================================================================================================================

Financial Condition
Total assets                                 $   197,435      $    181,861   $    163,916   $    142,876   $    131,258
Total deposits                                   174,823           164,639        147,519        127,630        118,687
Net loans                                        130,640           109,422        102,099         90,426         80,991
Note payable and
    subordinated debentures                            0                 0              0              0            388
Shareholders' Equity                              15,513            14,928         13,915         12,009         11,048
Average assets                                   187,429           171,987        148,948        133,376        127,230
Average shareholders'
 equity                                           15,339            14,429         12,866         11,426         10,421

Key Financial Ratios
Return on average assets                            1.10%             0.81%          1.18%          1.18%          0.99%
Return on average equity                           13.44%             9.62%         13.61%         13.78%         12.14%
Dividends paid as a percent
     of net income                                 19.73%            24.69%         16.21%         15.53%         16.97%

Per Share Data
Net income, assuming
 dilution                                    $      1.60      $       1.07   $       1.40   $       1.27   $       1.02
Cash dividends declared                      $       .32      $        .28   $       0.23   $        .20   $       0.18
Book value                                   $     12.65      $      12.14   $      11.49   $       9.93   $       8.98
</TABLE>

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

                                                     CONSOLIDATED BALANCE SHEETS

                                                      December 31, 1999 and 1998
                                                       1999             1998
--------------------------------------------------------------------------------
Assets
Cash and due from banks                            $  8,669,184    $  5,937,686
Federal funds sold                                           --       7,000,000
Securities, at approximate market value              39,396,667      42,474,916
Loans, net of allowance for loan losses of
   $2,253,676 in 1999 and $2,023,752 in 1998        130,639,824     109,422,041
Premises and equipment, net                           5,384,908       5,247,605
Accrued interest receivable                           1,337,111       1,346,616
Cash management accounts, net                         8,791,161       7,131,665
Other assets                                          3,216,278       3,300,746
--------------------------------------------------------------------------------
        Total assets                               $197,435,133    $181,861,275
================================================================================

Liabilities and Shareholders' Equity
Deposits:
   Demand accounts                                 $ 27,150,692    $ 23,830,189
   Savings and interest bearing demand deposits      67,238,177      55,718,469
   Certificates of deposit
        Denominations less than $100,000             64,458,093      69,582,581
        Denominations of $100,000 or more            15,985,253      15,507,962
--------------------------------------------------------------------------------
        Total deposits                             $174,832,215    $164,639,201


Federal Home Loan Bank advances                       4,800,000              --
Accrued interest payable                                301,247         303,269
Other liabilities                                     1,140,506       1,115,825
Long-term debt                                          847,713         874,574
Commitments and contingent liabilities                       --              --
--------------------------------------------------------------------------------
        Total liabilities                          $181,921,681    $166,932,869
--------------------------------------------------------------------------------

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 1,226,327 in 1999 and 1,229,599
   in 1998                                            6,131,635       6,147,995
Common stock, nonvoting, par value $5 per share;
   authorized 635,000 shares; no shares
   outstanding                                               --              --
Paid-in capital                                         264,745         523,795
Retained earnings                                     9,736,920       8,082,349
Accumulated other comprehensive income (loss)          (619,848)        174,267
--------------------------------------------------------------------------------
        Total shareholders' equity                 $ 15,513,452    $ 14,928,406
--------------------------------------------------------------------------------

        Total liabilities and shareholders' equity $197,435,133    $181,861,275
================================================================================

See Notes to Consolidated Financial Statements.

--------------------------------------------------------------------------------
1999 Annual Report                                                            3
<PAGE>

CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                   Years Ended December 31, 1999, 1998 and 1997

                                                       1999            1998            1997
------------------------------------------------------------------------------------------------
<S>                                                <C>             <C>             <C>
Interest Income
     Interest and fees on loans                    $ 10,996,836    $ 10,167,293    $  9,038,054
     Interest on federal funds sold                      40,061          88,899          58,076
     Interest on time deposits with banks                13,929              --              --
     Interest and dividends on securities
          available for sale:
          Taxable                                     1,624,324       1,854,898       1,636,219
          Nontaxable                                    684,166         604,730         589,059
          Dividends                                      63,978          47,049          40,060
------------------------------------------------------------------------------------------------
               Total interest income               $ 13,423,294    $ 12,762,869    $ 11,361,468
------------------------------------------------------------------------------------------------

Interest Expense
     Savings and interest bearing accounts         $  2,065,450    $  1,237,949    $    990,450
     Certificates of deposit
          Denominations less than $100,000            3,231,757       3,932,247       3,503,931
          Denominations of $100,000 or more             680,696         896,847         850,604
     Short-term borrowings and FHLB advances            148,914          36,630          62,454
     Long-term debt                                      47,431          48,865              --
------------------------------------------------------------------------------------------------
          Total interest expense                   $  6,174,248    $  6,152,538    $  5,407,439
------------------------------------------------------------------------------------------------

          Net interest income                      $  7,249,046    $  6,610,331    $  5,954,029

     Provision for loan losses                          210,713         620,000          75,000
------------------------------------------------------------------------------------------------

          Net interest income after provision
               for loan losses                     $  7,038,333    $  5,990,331    $  5,879,029
------------------------------------------------------------------------------------------------

Noninterest Income
     Trust income                                  $  1,057,293    $  1,042,136    $    923,483
     Service charges                                    651,962         531,227         527,107
     Net (loss) on other real estate owned                   --         (59,500)             --
     (Loss) on securities available for sale           (100,003)             --          (2,365)
     Other income                                     2,915,179       2,324,592       1,533,427
------------------------------------------------------------------------------------------------
          Total noninterest income                 $  4,524,431   $  3,838,455   $  2,981,652
------------------------------------------------------------------------------------------------
</TABLE>

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

                                               CONSOLIDATED STATEMENTS OF INCOME


                                             1999          1998          1997
--------------------------------------------------------------------------------
Noninterest Expenses
     Salaries and benefits               $ 3,923,512   $ 3,529,694   $ 3,079,538
     Occupancy expenses                    1,692,987     1,625,083     1,365,534
     Other expenses                        3,194,954     2,949,648     2,110,722
--------------------------------------------------------------------------------
          Total noninterest expenses     $ 8,811,453   $ 8,104,425   $ 6,555,794
--------------------------------------------------------------------------------

          Income before income taxes     $ 2,751,311   $ 1,724,361   $ 2,304,887

Income tax expense                           690,042       335,628       554,378
--------------------------------------------------------------------------------

          Net income                     $ 2,061,269   $ 1,388,733   $ 1,750,509
================================================================================

Earnings per share, basic                $      1.67   $      1.13   $      1.45
================================================================================

Earnings per share, assuming dilution    $      1.60   $      1.07   $      1.40
================================================================================

See Notes to Consolidated Financial Statements.



--------------------------------------------------------------------------------
1999 Annual Report                                                            5
<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                      Years Ended December 31, 1999, 1998 and 1997
                                                           1999           1998           1997
--------------------------------------------------------------------------------------------------
<S>                                                   <C>            <C>            <C>
Cash Flows from Operating Activities
     Net income                                       $  2,061,269   $  1,388,733   $  1,750,509
     Adjustments to reconcile net income to
          net cash provided by operating activities:
               Depreciation and amortization               645,873        657,339        575,598
               Provision for loan losses                   210,713        620,000         75,000
               Provision for cash management
                    account losses                          72,500         67,500             --
               Deferred income tax expense (benefit)       (26,730)      (302,046)         1,681
               Amortization of premiums, net               578,018        738,887        217,385
               Net (gain) loss on sale of premises
                    and equipment                          (96,477)            --         28,806
               Loss on disposal of premises
                    and equipment                          100,779             --             --
               Loss on securities available for sale       100,003             --          2,365
               Net loss on other real estate owned              --         59,500             --
               Origination of loans available for sale  (5,918,250)    (7,881,750)    (4,251,450)
               Proceeds from sale of loans available
                    for sale                             6,012,250      8,005,750      4,033,450
               Issuance of common stock for services        42,545         62,000         54,175
               Changes in other assets and liabilities:
                    (Increase) decrease in accrued
                         interest receivable                 9,505        (46,554)      (211,861)
                    (Increase) in other assets            (214,895)      (937,928)       (52,695)
                    Increase (decrease) in accrued
                         interest payable                   (2,022)       (31,494)        62,217
                    Increase (decrease) in other
                         liabilities                        24,681        218,678        (67,389)
--------------------------------------------------------------------------------------------------
                         Net cash provided by
                              operating activities    $  3,599,762   $  2,618,615   $  2,217,791
--------------------------------------------------------------------------------------------------

Cash Flows from Investing Activities
     Purchases of securities available for sale       $(19,608,771)  $(19,242,766)  $(18,499,317)
     Proceeds from sales and calls of securities
          available for sale                             6,845,807        970,207      7,217,090
     Proceeds from maturities of securities
          available for sale                            13,970,328     18,725,164      5,458,072
     Proceeds from sale of bank premises                   187,500             --             --
     Net (increase) in loans                           (21,522,496)    (8,066,985)   (11,530,232)
     Net (increase) in cash management accounts         (1,731,996)    (3,095,524)    (1,887,724)
     Other capital expenditures                           (250,136)    (2,456,626)      (684,660)
--------------------------------------------------------------------------------------------------
          Net cash (used in) investing activities     $(22,109,764)  $(13,166,530)  $(19,926,771)
--------------------------------------------------------------------------------------------------
</TABLE>


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

                                           CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                              1999            1998          1997
-----------------------------------------------------------------------------------------------------
<S>                                                       <C>            <C>            <C>
Cash Flows from Financing Activities
     Proceeds from issuance of long-term debt             $         --   $    900,000   $         --
     Net increase (decrease) in short-term
          borrowings                                         4,800,000     (1,250,000)      (750,000)
     Net increase in demand accounts,
          interest-bearing demand accounts
          and savings accounts                              14,840,211     19,847,349      5,780,887
     Net increase (decrease) in certificates of deposits    (4,647,197)    (2,727,216)    14,108,616
     Net proceeds from issuance of common stock                129,312        123,175         15,914
     Acquisition of common stock                              (447,267)       (62,943)       (36,754)
     Cash dividends                                           (406,698)      (342,924)      (282,933)
     Curtailment of long-term debt                             (26,861)       (25,426)            --
-----------------------------------------------------------------------------------------------------
          Net cash provided by financing activities       $ 14,241,500   $ 16,462,015   $ 18,835,730
-----------------------------------------------------------------------------------------------------

          Net increase (decrease) in cash and
               federal funds sold                         $ (4,268,502)  $  5,914,100   $  1,126,750

     Cash and federal funds sold at beginning of year       12,937,686      7,023,586      5,896,836
-----------------------------------------------------------------------------------------------------

     Cash and federal funds sold at end of year           $  8,669,184   $ 12,937,686   $  7,023,586
-----------------------------------------------------------------------------------------------------

Supplemental Disclosures of Cash Flow Information
     Cash paid during the year for:
          Interest                                        $  6,176,270   $  6,184,032   $  5,345,222
-----------------------------------------------------------------------------------------------------

     Income taxes                                         $    807,267   $    594,326   $    479,719
-----------------------------------------------------------------------------------------------------

Supplemental Schedule of Noncash Investing
     and Financing Activities
          Unrealized gain (loss) on securities
               available for sale                         $ (1,192,864)  $   (241,463)  $    613,324
-----------------------------------------------------------------------------------------------------

          Common stock issued for services                $     42,545   $     62,000   $     54,175
-----------------------------------------------------------------------------------------------------

          Common stock dividend                           $         --   $  1,010,770   $    838,525
-----------------------------------------------------------------------------------------------------
</TABLE>

See Notes to Consolidated Financial Statements.

--------------------------------------------------------------------------------
1999 Annual Report                                                            7
<PAGE>

CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>

                                                        Years Ended December 31, 1999, 1998 and 1997
                                                                          Accumulated
                                   Common                                    Other
                                   Stock,      Paid-In      Retained     Comprehensive     Comprehensive
                                   Voting      Capital      Earnings        Income            Income         Total
----------------------------------------------------------------------------------------------------------------------
<S>                             <C>            <C>        <C>             <C>                <C>           <C>
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 on securities
                available for sale,
                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
     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             --
======================================================================================================================
</TABLE>


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

                                             CONSOLIDATED STATEMENTS OF  CHANGES
                                                         IN SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                          Accumulated
                                   Common                                    Other
                                   Stock,      Paid-In      Retained     Comprehensive     Comprehensive
                                   Voting      Capital      Earnings        Income            Income         Total
----------------------------------------------------------------------------------------------------------------------
<S>                             <C>            <C>        <C>             <C>                <C>           <C>
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
----------------------------------------------------------------------------------------------------------------------
     Comprehensive income:
          Net income                    --           --     2,061,269             --         $2,061,269      2,061,269
            Other comprehensive income:
              Unrealized losses on
              securities available
              for sale:
              Unrealized holding
                losses on securities
                available for sale,
                net of deferred income
                taxes of $432,750       --           --            --             --           (860,117)            --
              Add: reclassification
                adjustment, net of
                income taxes of $34,001 --           --            --             --             66,002             --
----------------------------------------------------------------------------------------------------------------------
Other comprehensive
     income, net of tax                 --           --            --       (794,115)          (794,115)      (794,115)
----------------------------------------------------------------------------------------------------------------------
Total comprehensive income              --           --            --             --         $1,267,154             --
===================================================================================================================
Exercise of stock options           77,040       52,272            --             --                           129,312
Issuance of common stock
     for services                   16,335       26,210            --             --                            42,545
Acquisition of
     common stock                 (109,735)    (337,532)           --             --                          (447,267)
Cash dividends
     ($.33 per share)                   --           --      (406,698)            --                          (406,698)
----------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1999               $6,131,635     $264,745    $9,736,920     $ (619,848)                      $15,513,452
======================================================================================================================
</TABLE>

See Notes to Consolidated Financial Statements.


--------------------------------------------------------------------------------
1999 Annual Report                                                            9
<PAGE>

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
     Debt securities that management has the positive intent and ability to hold
to maturity are classified as "held to maturity" and recorded at amortized cost.
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. Securities not classified as held to maturity or trading,
including equity securities with readily determinable fair values, are
classified as "available for sale" and recorded at fair value, with unrealized
gains and losses excluded from earnings and reported in other comprehensive
income. CFS classifies all securities as available for sale.

     Purchase premiums and discounts are recognized in interest income using the
interest method over the terms of the securities. Declines in the fair value of
available-for-sale securities below their cost that are deemed to be other than
temporary are reflected in earnings as realized losses. Gains and losses on the
sale of securities are recorded on the trade date and are determined using the
specific identification method.

Loans
     CFS grants mortgage, commercial and consumer loans to customers. A
substantial portion of the loan portfolio is represented by mortgage loans
throughout the Northern Neck, Middle Peninsula, Williamsburg, and James City
County areas of Virginia. The ability of CFS's debtors to honor their contracts
is dependent upon the real estate and general economic conditions in these
areas.

     Loans are stated at face value, net of unearned discount and the allowance
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.

     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.


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

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     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
collateral. CFS had no loans subject to FASB No. 114 at December 31, 1999 and
1998.

Allowance for Loan Losses
     The allowance 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 allowance is based on management's evaluation of
the collectibility of the loan portfolio, including the nature of the portfolio,
credit concentration, trends in historical loss experience, specific impaired
loans, and economic conditions. Allowances for impaired loans are generally
determined based on collateral values or the present value of estimated cash
flows. The allowance is increased by a provision for loan losses, which is
charged to expense and reduced by charge-offs, net of recoveries. Changes in the
allowance 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 allowance 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 allowance 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 of foreclosed
properties in other assets at December 31, 1999 and 1998. No real estate was
acquired in settlement of loans during 1999 and 1998.

Trust Department Assets
     Securities and other property held by the Trust Department in a fiduciary
or agency capacity are not assets of CFS 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.


--------------------------------------------------------------------------------
1999 Annual Report                                                           11
<PAGE>

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
     In preparing consolidated financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the balance sheet and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant change in the near
term relate to the determination of the allowance for loan losses, and the
valuation of foreclosed real estate and deferred tax assets.

Earnings Per Share
     Basic earnings per share represents income available to common stockholders
divided by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share reflects additional common shares that would
have been outstanding if dilutive potential common shares had been issued, as
well as any adjustment to income that would result from the assumed issuance.
Potential common shares that may be issued by CFS relate solely to outstanding
stock options, and are determined using the treasury stock method.

Defined Benefit Plan
     The cost of an employee's pension benefit is recognized on the net periodic
pension cost method over the employee's approximate service period. The
aggregate cost method is utilized for funding purposes.


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

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2.  Securities

Amortized cost and fair values of securities available for sale as of December
31, 1999 and 1998, are as follows:

<TABLE>
<CAPTION>
                                                     1999
---------------------------------------------------------------------------------
                                               Gross        Gross
                                Amortized    Unrealized   Unrealized      Fair
                                  Cost         Gains       (Losses)       Value
---------------------------------------------------------------------------------
<S>                            <C>            <C>         <C>         <C>
U.S. Government agencies       $ 1,292,311    $      6    $ (35,100)  $ 1,257,217
Securities of state and
     political subdivisions     13,571,303      32,458     (436,859)   13,166,902
Corporate debt securities        1,565,962          --      (52,712)    1,513,250
Mortgage-backed securities      22,907,013     28,1444     (464,759)   22,470,398
Other                              988,900          --           --       988,900
---------------------------------------------------------------------------------
     Total                     $40,325,489    $ 60,608    $(989,430)  $39,396,667
=================================================================================

                                                     1998
---------------------------------------------------------------------------------
                                               Gross        Gross
                                Amortized    Unrealized   Unrealized     Fair
                                   Cost        Gains       (Losses)      Value
---------------------------------------------------------------------------------
U.S. Treasury securities       $   500,187    $  1,219   $       --   $   501,406
U.S. Government agencies         3,402,796      11,895       (6,327)    3,408,364
Securities of state and
     political subdivisions     12,329,706     602,780          (57)   12,932,429
Mortgage-backed securities      25,143,386      26,280     (377,999)   24,791,667
Other                              834,800       6,250           --       841,050
---------------------------------------------------------------------------------
     Total                     $42,210,875    $648,424    $(384,383)  $42,474,916
=================================================================================
</TABLE>

  The amortized cost and fair value of securities available for sale as of
December 31, 1999, 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                   $ 3,895,097  $ 3,864,403
Due after one year through five years      18,646,914   18,326,044
Due after five years through ten years      6,858,700    6,622,836
Due after ten years                         9,935,878    9,594,484
Other                                         988,900      988,900
--------------------------------------------------------------------------------
     Total                                $40,325,489  $39,396,667
================================================================================
</TABLE>

  Proceeds from sales and calls of securities available for sale during 1999,
1998 and 1997 were $6,845,807, $970,207 and $7,217,090, respectively. Gross
gains of $14,776 and $22,319 and gross losses of $114,779 and $24,684 were
realized on sales and calls of securities in 1999 and 1997, respectively. There
were no realized gains or losses on sales and calls of securities during 1998.
The tax benefit applicable to these net realized losses amounted to $34,001 and
$804 in 1999 and 1997, respectively.



--------------------------------------------------------------------------------
1999 Annual Report                                                           13
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     The amortized cost of securities pledged to secure public deposits,
borrowings from the Federal Reserve Bank and fiduciary powers amounted to
$17,916,012 and $7,214,920, at December 31, 1999 and 1998, respectively.

Note 3.  Loans

Major classifications of loans are summarized as follows:

                                                December 31,
--------------------------------------------------------------------------------
                                            1999            1998
--------------------------------------------------------------------------------
Commercial                             $ 62,099,957    $ 49,058,143
Real estate mortgage                     36,955,312      33,003,161
Real estate construction                  2,794,205       5,468,068
Consumer                                 26,831,609      21,378,419
Participations with other banks           2,691,628       1,610,393
Other                                     1,520,789         927,609
--------------------------------------------------------------------------------
                                       $132,893,500    $111,445,793
     Less allowance for loan losses       2,253,676       2,023,752
--------------------------------------------------------------------------------
                                       $130,639,824    $109,422,041
================================================================================

     Participations with other banks are secured by residential property.

     Nonaccrual loans excluded from impaired loan disclosure under FASB No. 114
amounted to $155,520 and $202,434 at December 31, 1999 and 1998, respectively.
If interest on these loans had been accrued, such income would have approximated
$11,960 and $11,502 at December 31, 1999 and 1998, respectively.

     Changes in the allowance for loan losses are as follows:

                                                       December 31,
--------------------------------------------------------------------------------
                                           1999           1998           1997
--------------------------------------------------------------------------------
Balance at beginning of
 year                                  $2,023,752     $1,740,065     $1,652,844
     Provision for loan losses            210,713        620,000         75,000
     Loans charged off                    (27,057)      (355,637)       (41,956)
     Recoveries on loans
          previously charged off           46,268         19,324         54,177
--------------------------------------------------------------------------------
Balance at end of year                 $2,253,676     $2,023,752     $1,740,065
================================================================================


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

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4. Premises and Equipment

Major classifications of premises and equipment are summarized as follows:

                                                       December 31,
--------------------------------------------------------------------------------
                                                 1999              1998
--------------------------------------------------------------------------------
Land                                          $  762,335        $  762,335
Buildings                                      3,645,589         3,795,886
Furniture, fixtures and improvements           1,000,326         1,001,452
Mechanical equipment                           3,102,483         3,246,239
Leasehold improvements                         1,121,901           762,001
--------------------------------------------------------------------------------
                                              $9,632,634        $9,567,913
Less accumulated depreciation                  4,247,726         4,320,308
--------------------------------------------------------------------------------
                                              $5,384,908        $5,247,605
================================================================================

     For the years ended December 31, 1999, 1998 and 1997, depreciation expense
was $557,201, $657,339 and $491,598, respectively.


Note 5.    Note Payable

     The Bank has unsecured lines of credit with correspondent banks totaling
$21,600,000 available for overnight borrowing. The Bank also has a line of
credit secured by mortgage loans totaling 10% of the Bank's total assets and a
line of credit available secured by assets specifically pledged for long or
short-term borrowing. As of December 31, 1999, $4,800,000 was drawn on these
lines of credit. CFS has an undrawn line of credit available of $2,000,000,
secured by bank stock. There were no amounts drawn at December 31, 1998.

     CFS's fixed-rate long-term debt of $847,713 at December 31, 1999 matures in
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:
2000, $25,951; 2001, $29,840; 2002, $31,523; 2003, $33,301; and 2004, $35,180.


--------------------------------------------------------------------------------
1999 Annual Report                                                           15
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6.    Income Taxes

Net deferred tax assets consist of the following components as of December 31,
1999 and 1998:

                                                    1999         1998
--------------------------------------------------------------------------------
Deferred tax assets:
     Allowance for loan losses                  $  712,170   $ 615,878
     Securities available for sale                 308,975          --
     Deferred compensation                         118,149     130,108
     Accrued pension expense                        78,075     106,686
     Intangible assets                              22,052      56,439
     Other                                          74,561      51,144
--------------------------------------------------------------------------------
                                                $1,313,982   $ 960,255
--------------------------------------------------------------------------------

Deferred tax liabilities:
     Securities available for sale              $       --   $  89,774
     Accumulated discount accretion                  5,820       4,576
     Premises and equipment                        171,397     154,619
--------------------------------------------------------------------------------
                                                $  177,217   $ 248,969
--------------------------------------------------------------------------------
Net deferred tax assets:                        $1,136,765   $ 711,286
================================================================================

     The provision for income taxes charged to operations for the years ended
December 31, 1999, 1998 and 1997, consists of the following:

                                              1999          1998         1997
--------------------------------------------------------------------------------
Current tax expense                       $  716,772     $ 637,674     $552,697
Deferred tax expense (benefit)               (26,730)     (302,046)       1,681
--------------------------------------------------------------------------------
                                          $  690,042     $ 335,628     $554,378
================================================================================

     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, 1999, 1998 and 1997, due to the following:

                                             1999           1998         1997
--------------------------------------------------------------------------------
Computed "expected" tax expense           $ 935,446      $ 586,283    $ 783,662
Increase (decrease) in income taxes
     resulting from:
     Tax exempt interest income            (247,005)      (242,660)    (204,598)
     Other                                    1,601         (7,995)     (24,686)
--------------------------------------------------------------------------------
                                          $ 690,042      $ 335,628    $ 554,378
================================================================================


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

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7.  Employee Benefit Plans

Pension Plan
     CFS 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. CFS 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 three-year period ending
December 31, 1999, computed as of October 1st of each respective year:

                                             1999         1998         1997
--------------------------------------------------------------------------------
Change in Benefit Obligation
     Benefit obligation, beginning        $1,192,692   $1,577,250   $1,311,102
     Service cost                            118,317      121,141      105,702
     Interest cost                            89,071      117,913       97,952
     Actuarial (gain) loss                   (52,197)     132,795       81,391
     Benefits paid                           (19,536)    (756,407)     (18,897)
--------------------------------------------------------------------------------
     Benefit obligation, ending           $1,328,347   $1,192,692   $1,577,250
================================================================================

Change in Plan Assets
     Fair value of plan assets,
      beginning                           $1,007,885   $1,770,008   $1,255,666
     Actual return on plan assets            140,927       (5,716)     287,179
     Employer contributions                   76,398           --      246,060
     Benefits paid                           (19,536)    (756,407)     (18,897)
--------------------------------------------------------------------------------
     Fair value of plan assets, ending    $1,205,674   $1,007,885   $1,770,008
================================================================================

Funded Status                             $ (122,673)  $ (184,807)  $  192,758
     Unrecognized net actuarial (gain)      (306,504)    (207,851)    (520,835)
     Unrecognized net obligation at
      transition                              40,694       44,764       48,834
     Unrecognized prior service cost          31,489       34,113       36,737
--------------------------------------------------------------------------------
     Accrued benefit cost included in
      other liabilities                   $ (356,994)  $ (313,781)  $ (242,506)
================================================================================


--------------------------------------------------------------------------------
1999 Annual Report                                                           17
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     The following table provides the components of net periodic benefit cost
for the plans for the years ended December 31, 1999, 1998 and 1997:

                                                  1999        1998        1997
--------------------------------------------------------------------------------
Components of Net Periodic Benefit Cost
     Service cost                              $118,317   $ 121,141   $ 105,702
     Interest cost                               89,071     117,913      97,952
     Expected return on plan assets             (90,253)   (158,844)   (112,553)
     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)             (4,218)    (15,629)    (14,119)
--------------------------------------------------------------------------------
          Net periodic benefit cost            $119,611   $  71,275   $  83,676
================================================================================

The assumptions used in the measurement of CFS's benefit obligation are shown in
the following table:

                                            1999       1998       1997
--------------------------------------------------------------------------------
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%      5.00%      6.00%


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.
CFS made cash contributions to the plan of $19,993, $19,993 and $20,000 in 1999,
1998 and 1997, respectively. These contributions are included in salaries and
benefits in the accompanying income statements. 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. Dividends paid on shares held by the
plan are charged to retained earnings. All shares held by the plan are treated
as outstanding in computing CFS earnings per share.

401(k) Plan
     CFS has adopted a contributory 401(k) plan which covers substantially all
employees. Under the plan, employees may elect to defer up to 15% of their
salary, subject to Internal Revenue Service limits. The Corporation makes a
matching contribution of up to 6% of the employee's salary. Total expense
related to the plan was $30,991, $28,916 and $25,590 for 1999, 1998 and 1997.


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

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

     CFS applies APB Opinion 25 and related interpretations in accounting for
the stock option plan. Accordingly, no compensation cost has been recognized.
Had compensation cost for CFS's stock option plan been determined based on the
fair value at the grant dates for awards under the plan consistent with the
method prescribed by FASB Statement No. 123, CFS's net income and earnings per
share would have been adjusted to the pro forma amounts indicated below:


                                   Years Ended December 31, 1999, 1998 and 1997

                                            1999          1998          1997
--------------------------------------------------------------------------------
Net income                As reported    $2,061,269    $1,388,733    $1,750,509
                          Pro forma      $2,029,208    $1,367,255    $1,731,244

Earnings per share --     As reported    $     1.67    $     1.13    $     1.45
     basic                Pro forma      $     1.65    $     1.12    $     1.43

Earnings per share --     As reported    $     1.60    $     1.07    $     1.40
     assuming dilution    Pro forma      $     1.58    $     1.06    $     1.38


     The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions:

                                   Years Ended December 31, 1999, 1998 and 1997

                                            1999          1998          1997
--------------------------------------------------------------------------------
Dividend yield                              1.59%         1.58%         1.63%

Expected life                             7 years        7 years       7 years

Expected volatility                        15.22%        16.15%        14.86%

Risk-free interest rate                     6.50%         4.50%         5.31%


--------------------------------------------------------------------------------
1999 Annual Report                                                           19
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     A summary of the status of the expired plan at December 31, 1999, 1998 and
1997 and the changes during the years ended on those dates is as follows:

<TABLE>
<CAPTION>

                                      1999                  1998                 1997
-----------------------------------------------------------------------------------------------
                                         Weighted              Weighted              Weighted
                                         Average               Average               Average
                                         Exercise              Exercise              Exercise
                               Shares     Price       Shares    Price      Shares     Price
-----------------------------------------------------------------------------------------------
<S>                           <C>        <C>         <C>        <C>        <C>        <C>
Outstanding at beginning
     of year                    73,008    $6.92       89,460    $7.66      90,900     $7.02
Options exercised              (15,408)    6.70      (16,452)    7.49      (1,440)     6.08
-----------------------------------------------------------------------------------------------
Outstanding at end of year      57,600     6.98       73,008     6.92      89,460      7.66
===============================================================================================
Options exercisable, end
     of year                    57,600                73,008               64,260
</TABLE>

     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, 1999, 1998 and
1997 and the changes during the years ended on those dates are as follows:

<TABLE>
<CAPTION>

                                      1999                  1998                 1997
-----------------------------------------------------------------------------------------------
                                         Weighted              Weighted              Weighted
                                         Average               Average               Average
                                         Exercise              Exercise              Exercise
                               Shares     Price       Shares    Price      Shares     Price
-----------------------------------------------------------------------------------------------
<S>                           <C>        <C>         <C>       <C>        <C>        <C>
Outstanding at beginning
     of year                   37,920    $ 12.08      25,920   $  9.77     13,680     $ 9.41
Options granted                13,500      20.96      12,000     17.07     12,240      10.16
-----------------------------------------------------------------------------------------------
Outstanding at end of year     51,420      14.41      37,920     12.08     25,920       9.77
===============================================================================================
Options exercisable, end
     of year                   13,680                     --                              --
Options available for
 grant, end of year            13,380                 26,880                          38,880
</TABLE>


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

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The status of the options outstanding at December 31, 1999 is as follows:

<TABLE>
<CAPTION>
                                      Options Outstanding      Options Exercisable
-----------------------------------------------------------------------------------
                                                    Weighted               Weighted
 Remaining         Range of                          Average                Average
Contractual       Exercise            Number        Exercise    Number     Exercise
   Life            Price           Outstanding       Price    Exercisable   Price
-----------------------------------------------------------------------------------
<S>            <C>             <C>                  <C>       <C>          <C>
  0.3          $6.94 to 7.64          12,960        $ 7.41      12,960      $7.41
  1.3          $6.08 to 6.85          20,880          6.41      20,880       6.41
  2.3          $6.94 to 7.64          23,760          7.26      23,760       7.26
  3.3          $9.03 to 18.33         16,560         10.96      13,680       9.41
  4.3          $9.93 to 22.55         16,320         12.87          --         --
  5.3              $16.67              8,040         16.67          --         --
  6.3              $20.50             10,500         20.50          --         --
</TABLE>

Note 9.  Shareholders' Equity

     During 1999, 1998 and 1997, CFS issued 3,267 shares, 3,790 shares and 4,334
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 2007. 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, 1999 are as follows:

               Year Ending
               December 31,
--------------------------------------------------------------------------------
                  2000                            $63,264
                  2001                             15,864
                  2002                              7,088
                  2003                              2,700
                  2004                              2,700

     Rent expense under operating leases aggregated $147,966, $142,610 and
$129,130 for the years ended December 31, 1999, 1998 and 1997, 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, 1999 and 1998, the aggregate amounts of daily average
required balances were approximately $4,586,000 and $2,492,000, respectively.

     CFS has entered an agreement to invest a minimum of $230,000 in the
Virginia Bankers Insurance Center, LLC. As of December 31, 1999, $23,000 had
been invested.


--------------------------------------------------------------------------------
1999 Annual Report                                                           21
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 11.  Related Party Transactions

     Officers, Directors and their affiliates had borrowings of $7,203,324 and
$5,967,946 at December 31, 1999 and 1998, respectively, with the Bank.

     Changes in borrowings during 1999 were as follows:

          Balance, December 31, 1998               $ 5,967,946
               Additions                             2,933,815
               Payments                             (1,698,437)
--------------------------------------------------------------------------------
          Balance, December 31, 1999               $ 7,203,324
================================================================================

     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.


Note 12.  Other Income and Expenses

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

                                                  1999        1998        1997
--------------------------------------------------------------------------------
Cash management fees and discount             $1,194,408  $  954,505  $  598,003
FHLMC servicing fee income                       112,156     118,601     121,534
Merchant discount                                853,152     656,190     369,441
ATM fee income                                   240,326     181,960     199,329
Other (includes no items in
     excess of 1% of total revenue)              515,137     413,336     245,120
--------------------------------------------------------------------------------
                                              $2,915,179  $2,324,592  $1,533,427
================================================================================

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

                                                  1999        1998        1997
--------------------------------------------------------------------------------
Advertising                                   $  199,662  $  225,829  $  211,136
Merchant card                                    844,975     668,407     368,320
Cash management royalties                        357,444     189,887     138,615
Check card losses                                     --     297,102          --
Other (includes no items in
     excess of 1% of total revenue)            1,792,873   1,568,423   1,392,651
--------------------------------------------------------------------------------
                                              $3,194,954  $2,949,648  $2,110,722
================================================================================


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

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 an impact on net income.

                                                  1999        1998        1997
--------------------------------------------------------------------------------
Weighted average number
     of common shares, basic                   1,232,655   1,224,531   1,208,310
Effect of dilutive stock options                  55,180      68,078      43,159
--------------------------------------------------------------------------------
Weighted average number
     of common shares and dilutive
     potential common stock
     used in diluted EPS                       1,287,835   1,292,609   1,251,469
================================================================================

Note 14.  Time Deposits

Remaining maturities on certificates of deposit are as follows:

             2000                           $55,940,651
             2001                            17,751,550
             2002                             5,183,379
             2003                             1,189,543
             2004 and thereafter                378,223
--------------------------------------------------------------------------------
                                            $80,443,346
================================================================================

Note 15.  Financial Instruments With Off-Balance-Sheet Risk

     CFS is a party to credit related financial instruments with
off-balance-sheet risk in the normal course of business to meet the financial
needs of its customers. These financial instruments include commitments to
extend credit, standby letters of credit and commercial letters of credit. Such
commitments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the consolidated balance sheets.

     CFS's exposure to credit loss is represented by the contractual amount of
these commitments. CFS follows the same credit policies in making commitments as
it does for on-balance-sheet instruments.

     At December 31, 1999 and 1998, the following financial instruments were
outstanding whose contract amounts represent credit risk:

                                                      Contract Amount
--------------------------------------------------------------------------------
                                                   1999              1998
--------------------------------------------------------------------------------
Commitments to grant loans                     $ 3,097,978       $ 3,780,941
Unfunded commitments under lines of credit      23,419,795        23,519,261
Commercial and standby letters of credit         2,026,730         1,063,440


--------------------------------------------------------------------------------
1999 Annual Report                                                           23
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     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.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. The commitments for equity lines of credit may
expire without being drawn upon. Therefore, the total commitment amounts do not
necessarily represent future cash requirements. The amount of collateral
obtained, if it is deemed necessary by CFS, is based on management's credit
evaluation of the customer.

     Unfunded commitments under commercial lines of credit, revolving credit
lines and overdraft protection agreements are commitments for possible future
extensions of credit to existing customers. These lines of credit usually do not
contain a specified maturity date and may not be drawn upon to the total extent
to which CFS is committed. The amount of collateral obtained, if it is deemed
necessary by CFS, is based on management's credit evaluation of the customer.

     Commercial and standby letters of credit are conditional commitments issued
by CFS to guarantee the performance of a customer to a third party. Those
letters of credit are primarily issued to support public and private borrowing
arrangements. Essentially all letters of credit issued have expiration dates
within one year. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
CFS generally holds collateral supporting those commitments if deemed necessary.

     CFS 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 $40,920 at December 31, 1999.


Note 16.  Disclosures About Fair Value of Financial Instruments

     The fair value of a financial instrument is the current amount that would
be exchanged between willing parties, other than in a forced liquidation. Fair
value is best determined based upon quoted market prices. However, in many
instances, there are no quoted market prices for CFS's various financial
instruments. In cases where quoted market prices are not available, fair values
are based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. Accordingly, the fair value
estimates may not be realized in an immediate settlement of the instrument. SFAS
107 excludes certain financial instruments and all nonfinancial instruments from
its disclosure requirements. Accordingly, the aggregate fair value amounts
presented may not necessarily represent the underlying fair value of the
Corporation.

     The following methods and assumptions were used by CFS in estimating fair
value disclosures for financial instruments:

Cash and cash equivalents: The carrying amounts of cash and short-term
instruments approximate fair values.

Securities: Fair values for securities, excluding Federal Home Loan Bank stock,
are based on quoted market prices. The carrying value of Federal Home Loan Bank
stock approximates fair value based on the redemption provisions of the Federal
Home Loan Bank.

Mortgage loans held for sale: Fair values of mortgage loans held for sale are
based on commitments on hand from investors or prevailing market prices.

Loans receivable: 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


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

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

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.

Short-term borrowings: The carrying amounts of federal funds purchased,
borrowings under repurchase agreements, and other short-term borrowings maturing
within ninety days approximate their fair values. Fair values of other short-
term borrowings are estimated using discounted cash flow analyses based on CFS's
current incremental borrowing rates for similar types of borrowing arrangements.

Long-term borrowings: The fair value of CFS's long-term borrowings are estimated
using discounted cash flow analyses based on CFS's current incremental borrowing
rates for similar types of borrowing arrangements.

Accrued interest: The carrying amounts of accrued interest approximate fair
value.

Off-balance-sheet instruments: Fair values for off-balance-sheet, credit-related
financial instruments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counterparties' credit standing. Fair values for off-balance-sheet derivative
financial instruments, for other than trading purposes, are based upon quoted
market prices, except in the case of certain options and swaps where pricing
models are used.

     The estimated fair values, and related carrying or notional amounts, of
CFS's financial instruments are as follows:

                                                 1999              1998
--------------------------------------------------------------------------------
                                         Carrying     Fair     Carrying   Fair
                                          Amount      Value     Amount    Value
--------------------------------------------------------------------------------
                                           (In Thousands)        (In Thousands)
--------------------------------------------------------------------------------
Financial assets:
     Cash and short-term investments     $  8,669   $  8,669  $ 12,938  $ 12,938
     Securities                            39,397     39,397    42,475    42,475
     Loans                                130,640    129,610   109,422   110,071
     Accrued interest receivable            1,337      1,337     1,347     1,347
--------------------------------------------------------------------------------
       Total financial assets            $180,043   $179,013  $166,182  $166,831
================================================================================

Financial liabilities:
     Deposits                            $174,832   $175,606  $164,639  $165,008
     Short-term borrowings                  4,800      4,800        --        --
     Long-term debt                           848        694       875       601
     Accrued interest
      payable                                 301        301       303       303
--------------------------------------------------------------------------------
       Total financial
        liabilities                      $180,781   $181,401  $165,817  $165,912
================================================================================


--------------------------------------------------------------------------------
1999 Annual Report                                                           25
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 17.  Regulatory Matters

     CFS 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 CFS's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, financial institutions must meet
specific capital guidelines that involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. A financial institutions' capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors. Prompt corrective action
provisions are not applicable to bank holding companies.

     Quantitative measures established by regulation to ensure capital adequacy
require financial institutions 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, 1999 and 1998, that CFS meets all capital adequacy
requirements to which it is subject.

     As of December 31, 1999, the most recent notification from the Federal
Reserve Bank categorized CFS as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized, CFS 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.


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

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>


                                                                                                For Capital
                                                 Actual                                      Adequacy Purposes
------------------------------------------------------------------------------------------------------------------------------------
(Amount in Thousands)                       Amount     Ratio                   Amount                               Ratio
------------------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>          <C>       <C>                                  <C>
As of December 31, 1999:
     Total Capital (to Risk
       Weighted Assets):
         Consolidated                      $18,073      11.7%     greater than or equal to $12,376     greater than or equal to 8.0%
         Chesapeake Bank                   $17,019      11.1%     greater than or equal to $12,288     greater than or equal to 8.0%
     Tier 1 Capital (to Risk
       Weighted Assets):
         Consolidated                      $16,134      10.4%     greater than or equal to $ 6,188     greater than or equal to 4.0%
         Chesapeake Bank                   $15,093       9.8%     greater than or equal to $ 6,144     greater than or equal to 4.0%
     Tier 1 Capital (to
       Average Assets):
         Consolidated                      $16,134       8.3%     greater than or equal to $ 7,782     greater than or equal to 4.0%
         Chesapeake Bank                   $15,093       7.9%     greater than or equal to $ 7,686     greater than or equal to 4.0%
As of December 31, 1998:
     Total Capital (to Risk
       Weighted Assets):
         Consolidated                      $16,387      12.6%     greater than or equal to $10,413     greater than or equal to 8.0%
         Chesapeake Bank                   $15,436      12.0%     greater than or equal to $10,340     greater than or equal to 8.0%
     Tier 1 Capital (to Risk
       Weighted Assets):
         Consolidated                      $14,754      11.3%     greater than or equal to $ 5,207     greater than or equal to 4.0%
         Chesapeake Bank                   $13,820      10.7%     greater than or equal to $ 5,170     greater than or equal to 4.0%
     Tier 1 Capital (to
       Average Assets):
         Consolidated                      $14,754       8.4%     greater than or equal to $ 7,029     greater than or equal to 4.0%
         Chesapeake Bank                   $13,820       7.9%     greater than or equal to $ 6,966     greater than or equal to 4.0%

<CAPTION>
                                                                        To Be Well
                                                                     Capitalized Under
                                                                     Prompt Corrective
                                                                     Action Provisions
--------------------------------------------------------------------------------------------------------------
(Amount in Thousands)                                   Amount                                Ratio
--------------------------------------------------------------------------------------------------------------
<S>                                        <C>                              <C> <C>
As of December 31, 1999:
     Total Capital (to Risk
       Weighted Assets):
         Consolidated                                                       N/A
         Chesapeake Bank                   greater than or equal to $15,360     greater than or equal to 10.0%
     Tier 1 Capital (to Risk
       Weighted Assets):
         Consolidated                                                       N/A
         Chesapeake Bank                   greater than or equal to $ 9,216     greater than or equal to  6.0%
     Tier 1 Capital (to
       Average Assets):
         Consolidated                                                       N/A
         Chesapeake Bank                   greater than or equal to $ 9,608     greater than or equal to  5.0%
As of December 31, 1998:
     Total Capital (to Risk
       Weighted Assets):
         Consolidated                                                       N/A
         Chesapeake Bank                   greater than or equal to $12,924     greater than or equal to 10.0%
     Tier 1 Capital (to Risk
       Weighted Assets):
         Consolidated                                                       N/A
         Chesapeake Bank                   greater than or equal to $ 7,755     greater than or equal to  6.0%
     Tier 1 Capital (to
       Average Assets):
         Consolidated                                                       N/A
         Chesapeake Bank                   greater than or equal to $ 8,707     greater than or equal to  5.0%
</TABLE>

--------------------------------------------------------------------------------
1999 Annual Report                                                           27
<PAGE>

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, 1999, the amount available for payment of additional dividends
without prior regulatory approval from the Bank to the parent company is
$3,222,639 or 20.8% of consolidated net assets.

<TABLE>
<CAPTION>
                                                            1999          1998
--------------------------------------------------------------------------------
<S>                                                    <C>           <C>
Assets
 Cash                                                  $   146,817   $   408,701
 Securities                                                671,548       550,052
 Investment in subsidiaries                             14,438,087    13,982,051
 Premises and equipment, net                               905,659       860,377
 Other assets                                              199,054        30,132
--------------------------------------------------------------------------------
       Total assets                                    $16,361,165   $15,831,313
================================================================================
Liabilities and Shareholders' Equity
 Long-term debt                                        $   847,713   $   874,574
 Other liabilities                                              --        28,333
 Shareholders' equity                                   15,513,452    14,928,406
--------------------------------------------------------------------------------
       Total liabilities and shareholders' equity      $16,361,165   $15,831,313
================================================================================
</TABLE>
<TABLE>
<CAPTION>
                                           Years Ended December 31, 1999, 1998 and 1997
                                                       1999         1998         1997
---------------------------------------------------------------------------------------
<S>                                                <C>          <C>          <C>
Income - Dividends - Bank                          $  953,000   $  325,000   $  930,000
Other                                                 138,264      151,088       87,830
---------------------------------------------------------------------------------------
       Total income                                $1,091,264   $  476,088   $1,017,830
---------------------------------------------------------------------------------------
Expenses - Interest expense                        $   47,431   $   48,865   $       --
Other expenses                                        226,213      206,692      144,747
---------------------------------------------------------------------------------------
       Total expenses                              $  273,644   $  255,557   $  144,747
---------------------------------------------------------------------------------------
Income before income taxes and equity
  in undistributed earnings of subsidiaries        $  817,620   $  220,531   $  873,083
Allocated income tax benefit                           33,230       30,856       25,552
---------------------------------------------------------------------------------------
Income before equity in undistributed
  earnings of subsidiaries                         $  850,850   $  251,387   $  898,635
Equity in undistributed earnings of subsidiaries    1,210,419    1,137,346      851,874
---------------------------------------------------------------------------------------
       Net income                                  $2,061,269   $1,388,733   $1,750,509
================================================================================
</TABLE>
28                                             Chesapeake Financial Shares, Inc.
<PAGE>

                                             STATEMENTS OF CASH FLOW (CONDENSED)
<TABLE>
<CAPTION>
                                                Years Ended December 31, 1999, 1998 and 1997
                                                      1999          1998         1997
--------------------------------------------------------------------------------------------
<S>                                              <C>            <C>            <C>
Cash Flows from Operating Activities
 Net income                                      $ 2,061,269    $ 1,388,733    $ 1,750,509
 Adjustments to reconcile net income to net
  cash provided by operating activities:
    Depreciation                                      42,869         39,623           --
    Equity in undistributed earnings
     of subsidiaries                              (1,210,419)    (1,137,346)      (851,874)
    Loss on securities available for sale              3,902           --             --
    Issuance of common stock for services             42,545         62,000         54,175
    Amortization of premium                           (1,606)        (3,742)        (2,960)
     Changes in other assets and liabilities:
      (Increase) decrease in other assets           (158,794)        12,133        (10,025)
      Increase (decrease) in other liabilities       (28,333)        18,333          6,000
--------------------------------------------------------------------------------------------
        Net cash provided by
         operating activities                    $   751,433    $   379,734    $   945,825
--------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
 Purchase of investment securities               $  (541,652)   $      --      $  (574,284)
 Proceeds from maturities of
  investment securities                              368,000           --          100,000
 Purchases of premises and equipment                 (88,151)      (900,000)          --
 Investment in subsidiary                               --          (29,312)          --
--------------------------------------------------------------------------------------------
        Net cash provided by (used in)
         investing activities                    $  (261,803)   $  (929,312)   $  (474,284)
--------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
 Dividends paid                                  $  (406,698)   $  (342,924)   $  (282,933)
 Proceeds from issuance of long-term debt               --          900,000           --
 Curtailment of note payable                         (26,861)       (25,426)          --
 Acquisitions of common stock                       (447,267)       (62,943)       (36,754)
 Net proceeds from issuance of common stock          129,312        123,175         15,914
--------------------------------------------------------------------------------------------
       Net cash provided by (used in)
        financing activities                     $  (751,514)   $   591,882    $  (303,773)
--------------------------------------------------------------------------------------------
       Net increase (decrease) in cash              (261,884)        42,304        167,768
Cash at beginning of year                            408,701        366,397        198,629
--------------------------------------------------------------------------------------------
Cash at end of year                              $   146,817    $   408,701    $   366,397
--------------------------------------------------------------------------------------------
Supplemental Disclosure of Noncash
 Investing Activities, contribution of
 securities to capital of a subsidiary bank       $    --       $   970,207    $      --
--------------------------------------------------------------------------------------------
</TABLE>

1999 Annual Report                                                            29
<PAGE>

INDEPENDENT AUDITOR'S REPORT

          YHB

Yount, Hyde & Barbour, P.C.
Certified Public Accountants
    and Consultants


To the Board 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, 1999 and 1998, and
the related consolidated statements of income, changes in shareholders' equity,
and cash flows for the years ended December 31, 1999, 1998 and 1997. 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, 1999 and 1998, and
the results of its operations and its cash flows for the years ended December
31, 1999, 1998 and 1997, in conformity with generally accepted accounting
principles.

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

Winchester, Virginia
January 14, 2000

30                                             Chesapeake Financial Shares, Inc.
<PAGE>

                                         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 Shares' 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.

Financial Condition

  During 1999, the U.S. economy continued its ninth successive year of expansion
amidst higher domestic wages and the rebound in foreign markets. Based on
advance estimates, gross domestic product for the year may exceed the prior year
in spite of several increases in short-term interest rates. The economic growth
of Chesapeake Financial Shares, Inc. (CFS) reached record levels during the year
as well. At the end of 1999, CFS had total assets of $197.4 million,
representing an 8.5% increase over the December 31, 1998 balance of $181.9
million. The Company ended the year with total gross loans of $132.9 million,
and total deposits of $174.8 million on December 31, 1999, up 19.4% and 6.2%,
respectively. The return on average equity in 1999 was 13.4% and return on
average assets was 1.10% compared to 9.6% and 0.81%, respectively, in 1998. (see
"Summary of Results of Operations").

  The record loan growth of 19.4% for 1999 brought the average annual loan
growth rate for the last six years to over 11.8%. The increased lending activity
is consistent with Chesapeake Financial Shares' commitment to meet the economic
needs of the communities served. Asset quality was maintained during this growth
period with past due loans near record lows and the reserve for loan loss
remaining at adequate levels, far above peer group comparisons. The Bank
continued to maintain its "well capitalized" status, the highest ranking
available from the Federal Deposit Insurance Corporation (FDIC).

Summary of Results of Operations

  Chesapeake Financial Shares recorded earnings of $2,061,269 for 1999 or $1.60
per share (fully diluted) compared to $1,388,733 or $1.07 per share in 1998, an
increase of 48.4% or $672,536. During 1999, the increase in earnings was
primarily due to net interest income after provision for loan losses of
$7,038,333, up $1,048,002 or 17.5% over $5,990,331 reported in 1998. Noninterest
income increased $685,976 to $4,524,431 in 1999, up 17.9% over the 1998 level of
$3,838,455, while total noninterest expense increased $707,028 to $8,811,453, up
8.7% over the 1998 total of $8,104,425. All noninterest income items exceeded
1998 results except FHLMC servicing income (see "Noninterest Income").
Management repositioned tax-free securities during the year as part of
investment and tax strategy. Net losses for securities sold were $100,003 for
1999.

  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 20.7% 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.

  In 1997 earnings were $1,750,509 or $1.40 compared to $1,575,136 or $1.27 per
share in 1996. The 11.1% increase in net income resulted 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. Total noninterest expenses
for 1997 were $6,555,794, up 14.6% over the 1996 total of $5,720,313.

Assets: Loan Portfolio

  The loan portfolio is the largest component of earning assets for the Company
and accounts for the greatest portion of total interest income. The net loan
portfolio totaled $130.6, $109.4, and $102.1 million for 1999, 1998, and 1997,
respectively, representing an increase of 19.4% for 1999 over 1998, 7.2% for
1998 over 1997, and 12.9% for 1997 over 1996. This growth was primarily in
commercial and consumer loans.

--------------------------------------------------------------------------------
1999 Annual Report                                                            31
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS


  All loan categories except real estate-construction were up during 1999.
Commercial loans increased 26.6% or $13.0 million and consumer loans increased
25.5% or $5.5 million. Real estate-mortgage loans were up 12.0% or $4.0 million.
Participations with other banks increased $1.1 million or 67.1% and real estate
construction loans decreased 48.9% or $2.7 million during 1999.

  On December 31, 1999, the loan portfolio consisted of 46.7% commercial loans,
29.9% single family residential and residential construction loans, and 20.2%
consumer loans. The commercial loans consisted principally of business loans
such as retail, service and professional, marine industry, commercial real
estate loans where real estate is the primary collateral, and hospitality, plus
a very small portion of agricultural loans. Management attempted 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. Historically, the Bank has engaged in
limited mortgage lending secured by multi family and agricultural properties. At
year end, residential real estate construction accounted for 2.1% of total
outstanding loans.

  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 $340,520 at
December 31, 1999, which represented a substantial decrease from $932,916, at
December 31, 1998. Past due loans were 0.8% of total loans at December 31, 1999.

Asset Quality-Provision/Allowance for Loan Losses

  The provision for loan losses is a charge against earnings necessary to
maintain the allowance for loan losses at a level consistent with management's
evaluation of the credit quality and risk adverseness of the loan portfolio. The
allowance for loan losses represents management's estimate of the amount
adequate to provide for potential losses inherent in the loan portfolio. To
achieve this goal, the loan loss provision must be sufficient to cover loans
charged off plus any growth in the loan portfolio. In determining the adequacy
of the allowance 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 non-accrual 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.

  The 1999 provision of $210,713 brought the net allowance for loan losses to
$2,253,676 or 1.7% of gross loans. The allowance for loan losses as a percent of
gross loans less unearned discounts was 1.8% on December 31, 1998, and 1.7% in
1997. There was a provision of $620,000 in 1998 compared to the 1997 provision
of $75,000. Continued loan growth may warrant additional provisions in the
future. Loans charged off totaled $27,057 in 1999, $355,637 in 1998, and $41,956
in 1997. Recoveries for the same periods were $46,268, $19,324, and $54,177,
respectively. Management and the Board of Directors believe that the total
allowance at year end was adequate relative to current levels of risk in the
portfolio

  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. A similar review will be completed during the
first quarter of 2000.

Investment Securities

  All of the Company's securities are classified as securities available for
sale. Securities may be classified as investment securities (held to maturity)
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
--------------------------------------------------------------------------------
32                                             Chesapeake Financial Shares, Inc.
<PAGE>

                                         MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                                   FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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. Deposit growth,
short term borrowing, and investment portfolio liquidity provided funding for
the increases in the loan portfolio.

  The book value of the portfolio exceeded fair market value by $613,023, net of
the tax effect, at December 31, 1999, and fair market value exceeded book value
by $174,267, net of the tax effect, at December 31, 1998. This is within risk
limits established by the Board and the Asset/Liability Management Committee.

  At year end, total securities were $39.4 million, down 7.3% from the $42.5
million on December 31, 1998, which was also down 3.3% from $43.9 million on
December 31, 1997. U. S. Government Agencies decreased 62.0% or $2.1 million
during 1999. Investments in state and political subdivisions (book value)
increased 10.1% or $1.2 million during 1999 and investments in corporate debt
securities increased 100% to $1,513,250. Investments in U.S. Treasury issues and
mortgage-backed securities also decreased from 1998 levels. Management increased
the investment in securities of state and political subdivisions to utilize the
tax free income. This strategy further diversified the portfolio and improved
the total return of the overall portfolio without assuming amounts of risk
greater than limits established and monitored by the Board.

Liabilities: Deposits

  The Company depends on deposits to fund most of its lending activities,
generate fee income opportunities, and create a market for other financial
service products. Deposits are also the largest component of the Company's
liabilities and account for the greatest portion of interest expense.

  Deposits totaled $174.8, $164.6, and $147.5 million for 1999, 1998, and 1997,
respectively, and represented an increase of 6.2% for 1999 over 1998 and an
increase of 11.6% for 1998 over 1997. There was a 5.5% decrease in certificates
of deposit during 1999. Noninterest bearing deposits increased to $27.1 million
or 14.3% from $23.8 million on December 31, 1998 and savings balances increased
during 1999 by 20.7% or $11.5 million to $67.2 million. Marketing and sales
efforts were successful relative to growing the various deposit categories.

Shareholders' Equity

  Capital represents funds, earned or obtained, over which management can
exercise greater control in comparison with deposits and borrowed funds. Future
growth and expansion of the Company is dictated by the ability to produce
capital. 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.

  Federal regulators 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 CFS, 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, 1999, the Company
had ratios of Tier 1 risk based capital to risk weighted assets of 10.4%, total
risk based capital to risk weighted assets of 11.7%, and Tier 1 leverage capital
of 8.3%. At December 31, 1998, these ratios were 11.3%, 12.6% and 8.4%,
respectively, well above the regulatory minimums and exceeded the requirements
for FDIC's "well capitalized" designation. As of December 31, 1999,the Company's
primary capital to asset ratio was 8.9%.

Dividend and Market Information

  The Company's stock has traded on the "OTC" (Over The Counter) market under
the symbol "CPKF" for several years. The Company raised its dividend to $0.33
per share in 1999, an increase of $0.05 over 1998. This increase followed
another $0.05 per share dividend increase from $0.23 in 1997 to $0.28 in 1998.
Trades in the Company's common stock occurred infrequently and generally
involved a relatively small number of shares. Based on information available the
selling price for the Company's common stock ranged during 1998 from $16.67 to
$22.91, and during 1999, from $16.50 to $25.00. Such transactions may not be
representative of all transactions
--------------------------------------------------------------------------------
1999 Annual Report                                                            33
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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, 1999, there were 1,226,327 shares of Company's common
stock outstanding held by approximately 453 holders of record.

Liquidity, Interest Rate Sensitivity, and Inflation

  The objectives of the Company's liquidity management policy includes 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. The objective of providing adequate funding should be
accomplished at reasonable costs and on a timely basis. Management considers the
Company's liquidity to be adequate.

  The Bank's primary sources of liquidity continue to be federal funds
purchased, time deposits with other banks, securities maturing within one year,
loan curtailment, and short term borrowing. On December 31, 1999, approximately
16.1% of the total invested portfolio dollars mature within one year as compared
to 36.2% on December 31, 1998. The Bank's loan portfolio was also liquid with
50.2% of all loan dollars maturing or repricing within one year. This loan
liquidity ratio was 50.9% on December 31, 1998. The reduction in investment
liquidity was consistent with the current investment strategy and was offset by
increases in liability liquidity as discussed later in this section.

  Other sources of liquidity include 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 the 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 $21,600,000, unsecured. The Bank and CFS have other secured
borrowing relationships for up to $11,400,000.

  As of December 31, 1999, the Bank held $185,000 in repossessed assets and
other real estate owned. These assets have been aggressively marketed for sale
and represented a near term secondary source of liquidity. The Bank should
realize full book value on disposal of 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. Interest rate sensitivity refers to the difference
between assets and liabilities subject to repricing, maturity, or volatility
during a specified period. Management's objective in controlling interest rate
sensitivity is to reprice loans and deposits and make investments that will
maintain a profitable net interest margin (see Net Interest Income).

  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.

Net Interest Income

  The principal source of earnings for CFS is net interest income. Net interest
income is the difference between interest plus 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.

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

                                         MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                                   FINANCIAL CONDITION AND RESULTS OF OPERATIONS

  Net interest income totaled $7.2, $6.6, and $6.0 million for 1999, 1998, and
1997, respectively, representing an increase of 9.7% for 1999 over 1998, 11.0%
for 1998 over 1997, and 10.5% for 1997 over 1996. Loan demand was strong again
this year with gross total loans up 19.2% or $21.4 million for 1999 over 1998.
Total interest expense was $6.2, $6.2, and $5.4 million for 1999, 1998 and 1997,
respectively. On a tax equivalent annualized basis, the net interest margin was
4.6%, 4.5% and 4.6% for 1999, 1998 and 1997, respectively. The improved margin
resulted from improved returns on loans and investments during a rising rate
environment. During this same period noninterest bearing deposits increased and
certificates of deposits decreased, which kept total liability cost increases to
a minimum.

Noninterest Income

  For the year ended December 31, 1999, noninterest income was $4.5 million, a
17.9% increase over the 1998 amount of $3.8 million, which was a 28.7% increase
over the 1997 amount of $3.0 million. The increase in 1999 was due to a 25.1% or
$239,903 increase in our cash management service, an increase of $196,962 or
30.0% in merchant card income, and an increase in other income of 24.6% or
$101,801. As a result of management repositioning municipal securities as part
of tax and investment strategies, losses on the sale of securities amounted to
$100,003 for 1999.

  Cash management service and merchant card income was up due to general levels
of business activity and product promotions, including incentives and aggressive
pricing. Management expected the market share to continue to grow in these
product areas. Other noninterest income was up primarily due to the sale of the
Bank's former operations center in Kilmarnock, and to increased fee income from
annuity sales and other nondeposit investment products.

Noninterest Expenses

  Total noninterest expenses increased 8.7% or $707,028 in 1999 over 1998. In
1998, total noninterest expenses increased 23.6% over 1997 and increased 14.6%
in 1997 over 1996. The 1999 increase was due primarily to a 11.2% or $393,818
increase in salaries and benefits; merchant card expenses which were up 26.4% or
$176,568, over the 1998 amount of $668,407; and cash management service expenses
were up 88.2% or $167,557 over the 1998 amount of $189,887. Miscellaneous
expenses were down 14.3% or $224,450 over the 1998 amount of $1,568,423.

  Salaries and benefits were up due to performance incentives and cost of living
increases. Increases in merchant card and cash management services expenses were
directly related to increases in gross income from these services. Total
occupancy expenses increased 4.2% or $67,904 compared to 1998, which was up
19.0%, or $259,549 from the 1997 level of $1,365,534. 1999 was the first full
year of occupancy for the financial services center at Lafayette Street in
Williamsburg, and for the new operations center in Kilmarnock. Chesapeake
Financial Group, Inc. also completed its first full year.

  Other accomplishments in 1999 included customer service training for all
Company employees, the launching and upgrading of the Bank's web site, and the
installation and testing of online Banking and online Bill Pay services. The
focus of the year was on customer service and utilizing deployed assets while
managing unprecedented loan growth. The Year 2000 rollover was completed
uneventfully. Year 2000 preparation expenses were approximately $150,000 over
the last three years.

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
in the regulatory environment; (5) changes in business conditions, impacting,
among others, the Company's customers and vendors; and (6) changes in the
securities market.

--------------------------------------------------------------------------------
1999 Annual Report                                                            35
<PAGE>

DIRECTORS AND OFFICERS

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

Katherine W. Monroe
Shareholder

Bruce P. Robertson
President
Shirley Pewter Shops, Inc. and
The Porcelain Collector of
Williamsburg, Ltd.

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

Jeffrey M. Szyperski
President
Chesapeake Bank

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

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

Corporate 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. Light
Paul L. Wegkamp, Jr.
Dianne D. Hall
Suzanne D. Keyser
J. Mark Monroe
Tony K. Griggs
Cecelia G. Klink
Timothy P. Wilson
Brenda S. Sims
Carol C. Rakes
Vickie M. Tucker
Julie A. Williams
Linda J. Bisulca
Carlie H. Gill
Heidi L. Wilkins
Rebecca A. Foster
Kathleen S. Banks
Patricia R. Lewis
Ann Marie Pruitt

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
-------------------------------------
Peninsula
Vincent A. Campana
Perry M. DePue
Nancy H. Dykeman
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, Esq.
Leland T. James
John C. Miller
F. Stuart Painter
Harry Lee Self
Donald E. Smiley
R. Lee Stephens, Jr.
Robert J. Stewart, Jr., M.D.
Norman R. Tingle, Jr., M.D.

--------------------------------------------------------------------------------

36                                             Chesapeake Financial Shares, Inc.