<PAGE>

                    U.S. Securities and Exchange Commission
                            Washington, D.C. 20549

                                  Form 10-QSB

(Mark One)

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

     For the quarterly period ended June 30, 2001.

[_]  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
     OF 1934

     For the transition period from          to

                       Commission File Number 333-51838


                           PENN MAR BANCSHARES, INC.
                           -------------------------
                (Name of small business issuer in its charter)

                Maryland                                         52-2196765
                --------                                         ----------
     (State or other jurisdiction of                          (I.R.S. Employer
      incorporation or organization)                         Identification No.)


          135 East Main Street, Westminster, Maryland          21157
          -------------------------------------------          -----
          (Address of principal executive offices)          (Zip Code)

                                (410) 848-3330
                                --------------
                          (Issuer's telephone number)

     Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.

Yes  X    No ___
    ---

     The number of shares outstanding of the issuer's Common Stock was 91,346 as
of August 12, 2001.

     Transitional Small Business Disclosure Format (check one):

                                Yes ___  No  X
                                            ---
<PAGE>

                         Part I FINANCIAL INFORMATION

Item 1   Financial Statements

                           Penn Mar Bancshares, Inc.
                         (A Development Stage Company)

                                Balance Sheets


<TABLE>
<CAPTION>
                                                                       June 30, 2001             December 31, 2000
------------------------------------------------------------------------------------------------------------------
                                                                        (unaudited)
<S>                                                                     <C>                      <C>
                                      Assets
Cash and cash equivalents                                                  $  42,919                     $ 379,527
Advances to related entity                                                    37,424                        53,833
Prepaid rent                                                                   - 0 -                        39,150
Accrued interest                                                               - 0 -                            30
Deferred income taxes                                                         10,643                        10,643
Premises and equipment                                                       322,883                       156,467
                                                                           ---------                     ---------
                                                                           $ 413,869                     $ 639,650
                                                                           =========                     =========

          Liabilities and Stockholders' Equity
Accounts payable and accrued expenses                                      $ 265,964                     $ 102,584
                                                                           ---------                     ---------

Stockholders' equity

     Common stock, par value $.01 per share;
      authorized 9,000,000 shares; issued and
      outstanding 91,346 at March 31, 2001 and
      December 31, 2000                                                          913                           913

     Preferred stock, par value $.01 per share;
      authorized, 1,000 shares, none issued and
      outstanding                                                                  -                             -

     Additional paid-in capital                                              965,606                       965,606

     Deficit accumulated during the development stage                       (818,614)                     (429,453)
                                                                           ---------                     ---------
                                                                             147,905                       537,066
                                                                           ---------                     ---------
                                                                           $ 413,869                     $ 639,650
                                                                           =========                     =========
</TABLE>

   The accompanying notes are an integral part of these financial statements

                                       2
<PAGE>

                           Penn Mar Bancshares, Inc.
                         (A Development Stage Company)

                              Statements of Loss


<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
                                                               Six Months               Six Months              Twenty-One
                                                                 Ended                    Ended                 Months From
                                                                June 30,                 June 30,              Inception to
                                                                  2001                     2000                June 30, 2001
-----------------------------------------------------------------------------------------------------------------------------
                                                               (unaudited)              (unaudited)             (unaudited)
<S>                                                            <C>                      <C>                    <C>
Interest and dividend income                                    $   4,418                $  23,134               $  53,015

Expenses
     Salary and benefits                                        $ 190,508                   22,932                 282,958
     Legal and consultant fees                                    160,177                   72,792                 383,752
     Other operating                                              134,609                    8,493                 204,919
                                                                ---------                ---------               ---------
                                                                  485,294                  104,217                 871,629
                                                                ---------                ---------               ---------
     Loss before income taxes                                    (480,876)                 (81,083)               (818,614)

Net loss                                                        $(480,876)               $ (81,083)              $(818,614)
                                                                =========                =========               =========

Basic and diluted loss per share                                $   (5.26)               $   (0.89)              $   (8.96)
                                                                =========                =========               =========
</TABLE>

   The accompanying notes are an integral part of these financial statements

                                       3
<PAGE>

                           Penn Mar Bancshares, Inc.
                         (A Development Stage Company)

                           Statements of Cash Flows

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
                                                           Six Months        Six Months          Twenty-One Months
                                                         Ended June 30,    Ended June 30,        From Inception to
                                                              2001              2000               June 30, 2001
-------------------------------------------------------------------------------------------------------------------------------
                                                           (unaudited)       (unaudited)            (unaudited)
<S>                                                      <C>
Cash flows from operating activities
     Interest and dividend revenue                          $   4,418         $  22,817             $   53,015
     Cash paid for operating expenses                        (215,708)         (182,069)              (598,160)
     Income taxes paid                                      (  10,819)                -              (  10,819)
                                                            ---------         ---------             ----------
                                                             (222,109)         (159,252)              (555,964)
Cash flows from investing activities
     Cash paid for premises and fixed  assets               $ 170,058)         (  4,127)            $  330,212)
     Proceeds from (to) related entity                         55,559          ( 39,150)            $   37,424)
                                                            ---------         ---------             ----------
                                                             (114,499)         ( 43,277)              (367,636)
Cash flow from financing activities
     Common stock sold                                              -           100,000              1,363,460
     Common stock redeemed                                          -          ( 88,930)            (  396,941)
                                                            ---------         ---------             ----------
                                                                    -            11,070                966,519
Net decrease in cash and cash equivalents                    (336,608)         (191,459)                     -
     Cash and cash equivalents at
      beginning of Period                                     379,527           848,639
                                                            ---------         ---------             ----------
     Cash and cash equivalents at end of period             $  42,919         $ 657,180             $   42,919
Reconciliation of net loss to net                           =========         =========             ==========
 cash provided by operating activities
     Net loss                                               $(480,876)        $( 81,083)            $( 818,614)
        Adjustment to reconcile net
        loss to net cash used in
        operating activities
       Depreciation and amortization                            3,642                 -                  7,329
       Deferred income taxes                                        -                 -             (   10,643)
     Decrease (increase) in:
       Accrued interest                                             -          (    317)                     -
       Prepaid rent                                                 -             4,500                      -
     (Decrease) increase in:
       Accounts payable and accrued expenses                  199,566          ( 43,202)               265,964
       (Increase) decrease in prepaid expenses                 55,559          ( 39,150)            ----------
                                                            ---------         ---------
                                                            $(222,109)        $(159,252)            $ (555,964)
                                                            =========         =========             ==========
</TABLE>

  The accompanying notes are an integral part of these financial statements.

                                       4
<PAGE>

1.     Summary of Significant Accounting Policies

General

       The foregoing financial statements are unaudited; however, in the opinion
of management, all adjustments (comprising only normal recurring accruals)
necessary for a fair presentation of the results of the interim period have been
included.  These statements should be read in conjunction with the financial
statements and accompanying notes included in Penn Mar Bancshares, Inc.'s 2000
Annual Report on Form 10-KSB.  The results shown in this interim report are not
necessarily indicative of results to be expected for the full year 2001.

       The accounting and reporting policies of Penn Mar Bancshares, Inc. (the
"Company") conform to generally accepted accounting principles.

Organization costs

       Expenses incurred in the organization and development of the Bank and the
Holding Company are recorded as expense as incurred.  For income tax purposes
these amounts are capitalized and amortized over 60 months beginning on the date
business commences.

                                       5
<PAGE>

2.   Initial Public Offering

     On February 7, 2001 the Company began offering between 500,000 and
1,000,000 shares of its common stock at $10.00 per share pursuant to a
registration statement filed with the Securities and Exchange Commission. The
proceeds of the public offering are being held in escrow until the Company
receives subscriptions for 500,000 shares and other conditions are satisfied.

Item 2  Management's Plan of Operation

General

     Penn Mar Bancshares, Inc. was organized on October 7, 1999. Since
inception, Penn Mar Bancshares, Inc.'s activities have been limited to those
related to its organization and capitalization and the organization and
capitalization of its proposed Maryland State-chartered bank subsidiary, Penn
Mar Community Bank (in organization). These limited activities have been
financed solely by Penn Mar Bancshares Inc.'s sale of an aggregate of 91,346
shares of common stock at a purchase price of $10.00 per share in its
organizational offering. These shares were issued without registration under the
Securities Act of 1933, as amended, in reliance on the exemption provided by
Section 4(2) of the Securities Act and the rules of the Securities and Exchange
Commission promulgated under Section 4(2).

     Penn Mar Bancshares, Inc. has filed a registration statement on Form SB-2
with the Securities and Exchange Commission for an offering of a minimum of
500,000 shares and a maximum of 1,000,000 shares of its common stock, at an
offering price of $10.00 per share.  The Registration Statement became effective
on February 7, 2001.  The offering was ongoing as of the date of this report.
The primary purpose of the offering is to raise the necessary capital to form
and capitalize Penn Mar Community Bank.  Subscription funds received during the
offering are placed in an escrow account and are invested temporarily in bank
accounts, short-term certificates of deposit or short-term securities issued or
guaranteed by the United States government.  Pursuant to the terms of the
offering, certain conditions must be met before subscription proceeds are
released from escrow, including, but not limited to, the sale of at least
500,000 shares.  As of the date of this report, such condition had not been
satisfied.

     Penn Mar Bancshares, Inc. and Penn Mar Community Bank have not commenced
active business operations and neither will do so unless this offering is
successfully completed and Penn Mar Community Bank meets the conditions of the
Maryland Commissioner of Financial Regulation to commence the business of
banking and of the Federal Deposit Insurance Corporation to receive deposit
insurance.  Penn Mar Bancshares, Inc. also must obtain approval from the Federal
Reserve Board to become a bank holding company.  Lastly, Penn Mar Community Bank
must obtain approval from the Federal Reserve Board to become a member of the
Federal Reserve System.

Plan of Operations

     If Penn Mar Community Bank meets conditions for opening, it will begin
business from its offices in Westminster, Maryland. Penn Mar Community Bank will
accept checking and savings deposits, and will offer a wide range of commercial
and industrial, real estate, consumer and residential mortgage loans.

                                       6
<PAGE>

     We expect that Penn Mar Community Bank will incur approximately $400,000 in
expenses in leasehold improvements for its offices and for furniture, fixtures
and equipment if the minimum number of shares is sold, or $550,000 if the
proceeds are at least $7,000,000 and Penn Mar Community Bank opens a branch in
Frederick, Maryland.  The furniture and equipment was delivered in June 2001.

     Penn Mar Community Bank has contracted with an outside vendor for its data
processing. The data processing equipment was delivered in June 2001. Penn Mar
Bancshares, Inc. incurred a one-time capital expenditure of $200,000 and
anticipates annual costs in the first year of operations of approximately
$50,000 for data processing services.

     Penn Mar Community Bank anticipates incurring expenses of approximately
$550,000 in salary and benefits in the first year of operation.  As of June 30,
2001, Penn Mar Bancshares, Inc. has spent approximately $191,000 in salary and
benefits for its employees during the first and second quarters of 2001.
Additionally, $294,000 of expenses has been incurred for professional fees and
other operating expenses in the first and second quarters of 2001.

Cash Requirements

     As of June 30, 2001, Penn Mar Bancshares, Inc. did not have sufficient cash
or other liquid assets to meet its financial obligations. Penn Mar Bancshares,
Inc. will seek to obtain loans from its organizers to fund its obligations. As
of the date of this report no such arrangements for a loan from the organizers
have been made and there can be no assurances that the organizers would agree to
loan money to Penn Mar Bancshares, Inc. If Penn Mar Bancshares, Inc. does not
receive a loan from its organizers or if a loan from its organizers is not
sufficient to meet Penn Mar Bancshares, Inc.'s financial obligations, Penn Mar
Bancshares, Inc. will liquidate its assets.

Employees

     On June 15, 2001, the Vice President of Penn Mar Bancshares, Inc. signed an
employment agreement with Michael W. Hunter, effective as of June 18, 2001.
Board of Directors approval for this employment agreement was subject to two
conditions which have not been fulfilled as of the date of this report. The
terms of the agreement provide for Mr. Hunter to serve as vice president of Penn
Mar Bancshares, Inc. at an annual base salary of $125,000. The term of this
agreement is three years, and unless terminated, is automatically renewed for
one-year terms unless Penn Mar Bancshares, Inc. gives 90 days prior written
notice. This employment agreement is terminated if Penn Mar Community Bank fails
to open for any reason.

     Penn Mar Bancshares, Inc. may terminate Mr. Hunter's employment agreement
for cause immediately upon written notice.  Cause for termination includes a
conviction or the entry of a guilty plea to any crime involving moral turpitude
or willful misconduct or the failure to perform his responsibilities in the best
interests of Penn Mar Bancshares, Inc.  In order to terminate Mr. Hunter for
willful misconduct or failure to perform his responsibilities in the best
interests of

                                       7
<PAGE>

Penn Mar Bancshares, Inc., Penn Mar Bancshares, Inc. must provide Mr. Hunter
with written notice. Mr. Hunter then has 45 days to correct and cure or commence
and continue to pursue the correction or curing of his misconduct or failure to
perform. Mr. Hunter may terminate his employment with Penn Mar Bancshares, Inc.
upon 45 days written notice if the employment agreement is materially breached
or there is a material reduction in his responsibilities. If Mr. Hunter is
terminated under these provisions, Penn Mar Bancshares, Inc. will no longer be
obligated to pay any salary or benefits to Mr. Hunter. However, if Mr. Hunter is
terminated within 180 days of the expiration of the agreement, Penn Mar
Bancshares, Inc. must pay Mr. Hunter six months of his base salary in effect at
the time of his termination in addition to a pro rata share of the prior year's
bonus. In addition, Penn Mar Bancshares, Inc. must continue his medical benefits
for six months.

     In his employment agreement with Penn Mar Bancshares, Inc., Mr. Hunter
agrees that for a period of six months after employment with Penn Mar
Bancshares, Inc. or any affiliate, he will not, directly or indirectly, own
operate or otherwise be associated with, any financial institution which is
located in Frederick, Carroll or Howard Counties.  Mr. Hunter also agrees that
after one year of employment with Penn Mar Bancshares, Inc., he will not either
directly or indirectly, solicit the employment of any person who was employed by
Penn Mar Community Bank or any of its affiliates on a full or part time basis at
the time of Mr. Hunter's termination unless that employee (i) was involuntarily
discharged by Penn Mar Bancshares, Inc. or any of its affiliates, or (ii)
voluntarily terminated his relationship with Penn Mar Bancshares, Inc. or any
affiliate prior to Mr. Hunter's termination of employment.

     IN ADDITION TO THE HISTORICAL INFORMATION CONTAINED IN PART I OF THIS
QUARTERLY REPORT ON FORM 10-QSB, THE DISCUSSION IN PART I OF THIS QUARTERLY
REPORT ON FORM 10-QSB CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS SUCH AS
STATEMENTS OF PENN MAR BANCHSHARES, INC.'S PLANS, OBJECTIVES, EXPECTATIONS AND
INTENTIONS THAT INVOLVE RISKS AND UNCERTAINTIES. THESE RISKS AND UNCERTAINTIES
INCLUDE, AMONG OTHERS, THOSE DISCUSSED IN PENN MAR BANCSHARES, INC.'S
REGISTRATION STATEMENT UNDER THE CAPTION "RISK FACTORS," SUCH AS THE LACK OF AN
OPERATING HISTORY AND EXPECTATION OF LOSSES; THE PROSPECT THAT PENN MAR
COMMUNITY BANK WILL FAIL TO OPEN; DEPENDENCE ON KEY PERSONNEL; RISKS RELATED TO
PENN MAR COMMUNITY BANK'S LENDING LIMIT; RISKS OF A COMPETITIVE MARKET; IMPACT
OF GOVERNMENT REGULATION ON OPERATING RESULTS; AND EFFECTS OF DEVELOPMENTS IN
TECHNOLOGY. PENN MAR BANCSHARES, INC.'S ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE DISCUSSED HEREIN.

                                       8
<PAGE>

                           Part II OTHER INFORMATION

Item 1    Legal Proceedings

          None

Item 2    Changes in Securities and Use of Proceeds

          (a)  Not applicable

          (b)  Not applicable

          (c)  Not applicable

          (d)  Use of Proceeds

               (1)  The effective date of the Securities Act registration
statement for which the use of proceeds information is being disclosed was
February 7, 2001. The commission file number assigned to the registration
statement was 333-51838.

               (2)  The offering commenced on February 7, 2001.

               (3)  As of the date of this report, the offering has not
terminated.

               (4)  (i)    As of the date of this report, the offering has not
terminated.

                    (ii)   The offering was not underwritten.

                    (iii)  Penn Mar Bancshares, Inc.'s common stock, $0.01 par
value per share, was registered in the offering.

                    (iv)  Penn Mar Bancshares, Inc. registered 1,000,000 shares
of common stock in the offering, with an aggregate price of $10,000,000.
Pursuant to the terms of the offering, certain conditions must be met before
subscription proceeds are released from escrow, including, but not limited to
the sale of 500,000 shares. As of the date of this report such condition has not
been satisfied and no proceeds have been released from escrow.

                    (v)   Not applicable. The conditions of the offering were
not satisfied as of June 30, 2001 and, accordingly, there has been no issuance
or distribution of any securities in connection with this offering.

                    (vi)  Not applicable. As of the date of this report, the
conditions of the offering have not been satisfied and proceeds have not been
released.

                    (vii)  Not applicable. As of the date of this report, the
conditions of the offering have not been satisfied and proceeds have not been
released.

                    (viii) Not applicable.

                                       9
<PAGE>

Item 3    Defaults Upon Senior Securities

          Not applicable

Item 4    Submission of Matters to a Vote of Security Holders

          Not applicable

Item 5    Other Information

     Subsequent Events

     On July 27, 2001, the Board of Directors of Penn Mar Bancshares, Inc.
deemed it in the best interests of Penn Mar Bancshares, Inc. to abandon efforts
to raise the minimum of $5,000,000 in capital for the purpose of capitalizing
Penn Mar Community Bank and terminate the public offering. Consequently, the
Board of Directors passed resolutions to abandon efforts to raise capital and
terminate the public offering. Additionally, on August 2, 2001, Penn Mar
Bancshares, Inc. filed Post-Effective No. 1 to its registration statement on
Form SB-2 deregistering the unsold 1,000,000 shares of common stock, $0.01 par
value per share.

Item 6    Exhibits and Reports on Form 8-K

          (a)  None

          (b)  None

                                      10
<PAGE>

                                  SIGNATURES

     In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                              PENN MAR BANCSHARES, INC.

Date: August 18, 2001                       By: /s/ Geoffrey Sturgill, Jr.
                                                --------------------------------
                                                J. Geoffrey Sturgill, President
                                                (Principal Executive Officer)

Date: August 18, 2001                       By: /s/ Ronald Krablin, M.D.
                                                --------------------------------
                                                Ronald Krablin, M.D., Treasurer
                                                (Principal Accounting and
                                                Financial Officer)

                                      11