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Preliminary Proxy Statement

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Definitive Proxy Statement

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Definitive Additional Materials

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Soliciting Material Pursuant to Sec. 240.14a-11(c) or Sec. 240.14a-12

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No fee required.

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Fee computed on table below per Exchange Act Rules 14a-6(i)(l) and 0-11.

(1)

Title of each class of securities to which transaction applies:    Common Stock

(2)

Aggregate number of securities to which transaction applies:    83,217

(3)

Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined):    $27.00, which is the per share price to be paid in the transaction subject to this Schedule 14A filing.

(4)

Proposed maximum aggregate value of transaction:    $2,246,859 + fees of $132,800 for a total of $2,379,659

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(5)

Total fee paid:    $207

x

Fee paid previously with preliminary materials.

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Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

(1)

Amount previously paid:    $182

(2)

Form, Schedule or Registration Statement No.:    Schedule 14A

(3)

Filing Party:    Chesapeake Financial Shares, Inc.

(4)

Date Filed:    October 17, 2002

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To consider and vote upon a proposal to amend the articles of incorporation of Chesapeake that will provide for a reverse 1-for-500 stock split followed immediately by a forward 500-for-1 stock split of Chesapeake’s common stock (the “transaction”). As a result of the transaction, (a) each share of Chesapeake common stock held by a shareholder owning fewer than 500 shares immediately before the effective time of the transaction will be converted into the right to receive from Chesapeake $27.00 in cash, without interest, per share, and (b) each share of common stock held by a shareholder owning 500 or more shares will continue to represent one share of Chesapeake common stock after completion of the transaction. A copy of the proposed amendment is attached as Annex A to the accompanying proxy statement; and

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To transact any other business that may properly come before the meeting or any adjournment or postponement of the meeting.

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holding fewer than 500 shares of Chesapeake common stock at the time of the transaction will receive $27.00 cash, without interest, per share from Chesapeake; or

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holding 500 or more shares at the time of the transaction will continue to hold the same number of shares after completion of the transaction and will not receive any cash payment from Chesapeake.

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Chesapeake shareholders holding fewer than 500 shares of Chesapeake common stock at the effective time of the transaction will receive a cash payment from Chesapeake of $27.00 per share, without interest, for each share of common stock held immediately before the transaction.

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Chesapeake shareholders holding 500 or more shares at the effective time of the transaction will continue to hold the same number of shares of Chesapeake common stock after completion of the transaction and will not receive any cash payment.

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the officers and directors of Chesapeake at the effective time of the transaction will continue to serve as the officers and directors of Chesapeake immediately after the transaction.

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outstanding options held by our employees to acquire Chesapeake common stock will continue to be outstanding under their existing terms and conditions.

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Chesapeake is a Virginia corporation and registered financial holding company under the Bank Holding Company Act of 1956.

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The principal executive offices of Chesapeake are located at 97 North Main Street, Kilmarnock, Virginia 22482.

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The telephone number for Chesapeake is (804) 435-1181.

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relieve Chesapeake of the administrative burden and cost associated with filing reports and otherwise complying with the requirements of registration under the Securities Exchange Act of 1934 (the “Exchange Act”), by deregistering its common stock under the Exchange Act;

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eliminate the expense and burden of dealing with Chesapeake’s high number of shareholders holding small positions in Chesapeake’s stock;

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afford shareholders who own less than 500 shares of Chesapeake immediately before the transaction the opportunity to receive cash for their shares at a price that represents a premium of 20.7% and 18.1% over the average 30 and 60 trading closing price before the public announcement of the proposed going private transaction and without having to pay brokerage commissions; and

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increase management’s flexibility to consider and initiate actions that may produce long-term benefits and growth without the pressure and expectation to produce quarterly earnings per share growth.

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the registration of Chesapeake common stock under the Exchange Act will be terminated, and Chesapeake will no longer be a public company subject to the reporting and other requirements of the Exchange Act;

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Chesapeake common stock will no longer be traded on the OTC Bulletin Board and price quotations for our common stock will no longer be available—any trading in our common stock after the transaction will only occur in the “pink sheets” or in privately negotiated sales;

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shareholders who own fewer than 500 shares at the effective time of the transaction will no longer have an interest in or be a shareholder of Chesapeake and will not be able to participate in Chesapeake’s future earnings and growth, if any, unless they subsequently acquire shares of our common stock;

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the number of our shareholders of record will be reduced from approximately 457 to approximately 240, and the number of outstanding shares of Chesapeake common stock will decrease by approximately 6.5% from 1,288,227 to approximately 1,205,000;

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the percentage of ownership of Chesapeake common stock beneficially owned by the current executive officers and directors of Chesapeake as a group will increase from 41.1% to approximately 43.9%;

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aggregate shareholders’ equity of Chesapeake as of September 30, 2002, will be reduced from approximately $23,669,000 on a historical basis to approximately $21,289,474 on a pro forma basis, but Chesapeake will continue to be a “well capitalized” institution under the applicable bank capital guidelines;

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the book value per share of common stock as of September 30, 2002, will be reduced from $18.43 per share on a historical basis to approximately $17.73 per share on a pro forma basis;

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Chesapeake’s capital will be reduced, including a decrease in Chesapeake’s Tier 1 capital as of September 30, 2002, from $29,456,000 on a historical basis (as adjusted to reflect the private placement of trust preferred securities) to $26,494,000 on a pro forma basis;

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net income per share of common stock (including non-recurring income and expenses) for the year ended December 31, 2001, will increase from $2.12 on a historical basis to $2.17 on a pro forma basis ($2.07 to $2.11 on a fully-diluted basis); and

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net income per share of common stock (including non-recurring income and expenses) for the nine months ended September 30, 2002, will increase from $1.78 on a historical basis to $1.88 on a pro forma basis ($1.74 to $1.84 on a fully-diluted basis).

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Each member of the board of directors and each executive officer holds of record 500 or more shares of Chesapeake common stock and will retain their shares after the transaction; and

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As a result of the transaction, the shareholders who own of record on January 17, 2003, 500 or more shares, such as our directors and some executive officers, will increase their percentage ownership interest in Chesapeake as a result of the transaction. For example, assuming the transaction is approved, the ownership percentage of the directors and executive officers will increase from 41.1% to approximately 43.9% as a result of the reduction of the number of shares of the common stock outstanding by an estimated 83,217 shares.

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Q:

Why did you send me this proxy statement?

A:

We sent you this proxy statement and the enclosed proxy card because our board of directors is soliciting your votes for use at our special meeting of shareholders.

This proxy statement provides information that you need to know in order to cast an informed vote at the meeting. However, you do not need to attend the meeting to vote your shares. Instead, you may simply complete, sign and return the enclosed proxy card.

We began sending this proxy statement, notice of special meeting and the enclosed proxy card on or about February    , 2003 to all shareholders entitled to notice of and to vote at the special meeting. The record date for shareholders entitled to vote is January 17, 2003. On that date, there were 1,288,227 shares of our common stock outstanding. Shareholders are entitled to the one vote for each share of common stock held as of the record date.

Q:

Should I send in my stock certificates now?

A:

No. After the transaction is completed, we will send instructions on how to receive any cash payments you may be entitled to receive.

Q:

What is the time and place of the special meeting?

A:

The special meeting will be held at the Chesapeake Bank Operations Center at 35 School Street, Kilmarnock, Virginia at 4:00 p.m., Eastern time, on February    , 2003.

Q:

What am I being asked to vote on?

A:

You are being asked to vote on the approval of the proposed amendment to our articles of incorporation that will provide for a reverse 1-for-500 stock split followed immediately by a forward 500-for-1 stock split. Shareholders whose shares are converted into less than 1 share in the reverse split (meaning they held fewer than 500 shares at the effective time of the transaction) will receive a cash payment from Chesapeake for their fractional share interests equal to $27.00 cash, without interest, for each share of common stock they held immediately before the transaction. Shareholders who own 500 or more shares at the effective time of the transaction will continue to own the same number of shares after the transaction as they did before. After the transaction, Chesapeake will no longer be subject to the reporting and related requirements of the Securities Exchange Act of 1934, and its common stock will cease to be traded on the OTC Bulletin Board. Any trading in our common stock after the transaction will only occur in the “pink sheets” or in privately negotiated sales.

Q:

Who may be present at the special meeting and who may vote?

A:

All holders of our common stock may attend the special meeting in person. However, only holders of our common stock of record as of January 17, 2003 may cast their votes in person or by proxy at the special meeting.

Q:

What is the vote required to approve the transaction?

A:

The proposal to approve the transaction must receive the affirmative vote of the holders of at least a majority of the shares of Chesapeake common stock issued and outstanding as of the record date. If you do not vote your shares, either in person or by proxy, or if you abstain from

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voting on this matter, it has the same effect as if you voted against the transaction. In addition, if you do not instruct your broker on how to vote on the transaction, your broker will not be able to vote for you. This will have the same effect as a vote against the transaction.

Q:

Who is soliciting my proxy?

A:

The board of directors of Chesapeake.

Q:

What is the recommendation of our board of directors regarding the proposal?

A:

Our board of directors has determined that the transaction is advisable and in the best interests of Chesapeake and its shareholders. Our board of directors has therefore unanimously approved the transaction and recommends that you vote “FOR” approval of this matter at the special meeting.

Q:

What do I need to do now?

A:

Please sign, date and complete your proxy card and promptly return it in the enclosed, self addressed, prepaid envelope so that your shares can be represented at the special meeting.

Q:

If my shares are held in “street name” by my broker, will my broker vote my shares for me?

A:

Your broker will vote your shares for you ONLY if you instruct your broker how to vote for you. Your broker should mail information to you that will explain how to give these instructions.

Q:

Can I change my vote after I have mailed my signed proxy card?

A:

Yes. Just send by mail a written revocation or a later-dated, completed and signed proxy card before the special meeting or simply attend the special meeting and vote in person. You may not change your vote by facsimile or telephone.

Q:

What if I don’t send back a proxy card or vote my shares in person at the special meeting?

A:

If you don’t return your proxy card or vote your shares in person at the special meeting, each of those shares will be treated as a non-vote and will have the effect described above under “What is the vote required to approve the transaction?”

Q:

What happens if I sell my Chesapeake shares before the special meeting?

A:

The record date for the special meeting is earlier than the targeted effective time of the transaction. If you own shares of Chesapeake common stock on the record date but transfer your shares after the record date, but before the transaction, you will retain your right to vote at the special meeting based on the number of shares you owned on the record date. If you sell a sufficient number of shares so that you own fewer than 500 shares at the effective time of the transaction, you will receive $27.00 cash for each share you own immediately before the effective time of the transaction.

Q:

What happens if the special meeting is postponed or adjourned?

A:

Your proxy will be good and may be voted at the postponed or adjourned meeting. You will still be able to change or revoke your proxy until it is voted.

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Q:

What will I receive in the transaction?

A:

If you own fewer than 500 shares of Chesapeake common stock immediately before the effective time of the transaction, you will receive $27.00 in cash, without interest, from Chesapeake for each share you own. If you own 500 or more shares of Chesapeake common stock at the effective time of the transaction, you will not receive any cash payment for your shares in connection with the transaction and will continue to hold the same number of shares of Chesapeake common stock as you did before the transaction. Please read the discussion under “Special Factors—Conversion of Shares” for a description of the treatment of shares held in street name.

Q:

What if I hold shares in street name?

A:

Chesapeake intends for the transaction to treat shareholders holding common stock in street name through a nominee (such as a bank or broker) in the same manner as shareholders whose shares are registered in their names. However, nominees may have different procedures and shareholders holding common stock in street name should contact their nominees. Please read the discussion under “Special Factors—Conversion of Shares” for a description of the treatment of shares held in street name.

Q:

How will Chesapeake be operated after the transaction?

A:

After the transaction, Chesapeake will no longer be subject to the reporting and related requirements under the federal securities laws that are applicable to public companies. Chesapeake expects its business and operations to continue as they are currently being conducted and, except as disclosed in this proxy statement, the transaction is not anticipated to have any effect upon the conduct of such business. As a result of the transaction, shareholders of Chesapeake who receive cash for their shares in the transaction will no longer have a continuing interest as shareholders of Chesapeake and will not share in any future earnings and growth of Chesapeake. Also, Chesapeake expects that after the transaction, its common stock will be delisted from the OTC Bulletin Board. Any trading in our common stock will only occur in the “pink sheets” or in privately negotiated sales which may adversely affect the liquidity of the common stock.

Q:

When do you expect the transaction to be completed?

A:

We are working toward completing the transaction as quickly as possible, and we expect the transaction to be completed at 6:01 p.m. on February     , 2003 or as soon as reasonably practicable thereafter.

Q:

What are the federal income tax consequences of the transaction to me?

A:

The receipt of cash in the transaction will be taxable for federal income tax purposes. Shareholders who do not receive cash in the transaction should not be subject to taxation as a result of the transaction. To review the material tax consequences in greater detail, please read the discussion under “Special Factors—U.S. Federal Income Tax Consequences.”

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Q:

May I buy additional shares in order to remain a shareholder of Chesapeake?

A:

Yes. The key date is how many shares of common stock you own at the effective time of the transaction. So long as you are able to acquire a sufficient number of shares so that you own 500 or more shares at the effective time of the transaction, which we expect to occur at 6:01 p.m. on February     , 2003 or as soon as reasonably practicable thereafter, your shares of Chesapeake common stock will not be cashed-out in the transaction.

Q:

Who can help answer my questions?

A:

If you have any questions concerning the transaction or the special meeting, or if you would like additional copies of this proxy statement or proxy card, please contact: Jeffrey M. Szyperski, or John H. Hunt, II, Chesapeake Financial Shares, Inc., 97 North Main Street, Kilmarnock, Virginia 22482. Their telephone number is (804) 435-1181.

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(1)

Historical book value per share is computed by dividing shareholders’ equity by the number of common shares outstanding at the end of the respective periods excluding the dilutive effect of options.

(2)

Pro forma earnings per share from continuing operations is computed by dividing pro forma net income from continuing operations by the historical weighted average shares outstanding for the respective periods minus the 83,217 shares of Chesapeake common stock assumed to be cashed out in the transaction.

(3)

Pro forma book value per share of Chesapeake is computed by dividing pro forma shareholders equity by the number of common shares outstanding at the end of the period minus the 83,217 shares of Chesapeake common stock assumed to be cashed-out in the transaction.

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Quarterly Reports on Form 10-QSB;

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Annual Reports on Form 10-KSB;

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Proxy statements and annual shareholder reports as required by Regulation 14A under the Exchange Act; and

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Current Reports on Form 8-K.

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Tender offer at a similar price per share.    The board of directors was uncertain as to whether this alternative would result in shares being tendered by a sufficient number of record shareholders so as to accomplish the going private objective and reducing recurring costs. The board found it unlikely that many holders of small numbers of shares would make the effort to tender their shares.

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Purchase of shares in the open market.    The board of directors rejected this alternative because it concluded it was unlikely that Chesapeake could acquire shares from a sufficient number of holders to accomplish the board’s objectives.

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Reverse stock split.    This alternative would accomplish the objective of reducing the number of record shareholders below the 300 threshold, assuming approval of the reverse stock split by Chesapeake’s shareholders. In a reverse stock split, Chesapeake would acquire the interests of the cashed-out shareholders pursuant to an amendment to Chesapeake’s articles of incorporation to reduce the number of issued and outstanding shares of common stock such that the cashed-out shareholders would own less than one full share of Chesapeake common stock. Chesapeake would then distribute cash for the resulting fractional share interests held by each shareholder (as compared to this transaction in which only those shareholders whose shares are converted to less than 1 share in the reverse split—meaning they held fewer than 500 shares immediately before the effective time of the transaction—are entitled to receive any cash payment). The board rejected this alternative due to the higher costs involved.

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our small public float and market capitalization;

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our low trading volume;

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the board’s concern that there was little likelihood that the liquidity of our common stock will improve in the future;

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the lack of research attention from market analysts being given to Chesapeake; and

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the performance of our stock price which, in management’s opinion, was undervalued.

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the going private transaction was not structured to require separate approval by a majority of those shareholders who are not executive officers or directors of Chesapeake; and

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the board of directors did not retain any unaffiliated representative to act solely on behalf of shareholders who are not officers or directors for purposes of negotiating the terms of the going private transaction or to prepare a report regarding the fairness of the transaction.

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to permit cashed-out shareholders to receive cash for their shares without having to pay brokerage commissions at a price that represents a premium of 20.7% and 18.1% over the average 30 and 60 trading day closing price before the public announcement of the proposed going private transaction. If the transaction is implemented, the officers and directors of Chesapeake (and other holders of 500 or more shares) will benefit by an increase in their percentage ownership of

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to relieve Chesapeake of the administrative burden and increasing costs associated with filing reports and otherwise complying with the requirements of registration under the Exchange Act, by deregistering its common stock under the Exchange Act;

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to decrease the expense and burden of dealing with Chesapeake’s high number of shareholders holding small positions in Chesapeake’s stock; and

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to increase management’s flexibility to consider and initiate actions that may produce long-term benefits and growth without the pressure and expectation to produce quarterly earnings per share growth.

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Historical Market Prices of Chesapeake’s Common Stock.    Chesapeake’s common stock is quoted on the OTC Bulletin Board. The common stock is thinly traded. During the 12 months prior to the public announcement of the proposed transaction, the stock traded infrequently with reported trades occurring on only 54 days with an average trading volume on those days of approximately 1,500 shares per day.

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Net Book Value.    As of June 30, 2002, the book value per share was $17.48. Although book value was a factor that was considered by the board among others in determining the consideration to be paid to cashed-out shareholders in the transaction, the board determined that it was not directly relevant. However, the board noted that the per share cash price of $27.00 payable in the transaction reflected a multiple of 1.54 on Chesapeake’s June 30, 2002, book value per share.

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Going Concern Value.    In determining the cash amount to be paid to cashed-out shareholders in the transaction, the board valued Chesapeake’s shares on the basis of a going concern, without giving effect to any anticipated effects of the transaction. Also, the board did not consider the amount per share that might be realized in a sale of 100% of the stock of Chesapeake, as the board determined that consideration of such an amount was inappropriate in the context of a transaction that would not result in a change of control of Chesapeake. In determining the going concern value of Chesapeake’s shares, the board adopted the analyses and conclusions of its financial advisor, which are described under “Opinion of the Financial Advisor.”

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Earnings.    The board reviewed the earnings of Chesapeake for the previous three years and for the first two quarters of 2002. For the three years ended December 31, 1999, 2000 and 2001, Chesapeake reported net income of $2,061,269, $2,227,972 and $2,640,429, respectively. For the quarter ended June 30, 2002, Chesapeake reported net income of $1,446,988.

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Opinion of the Financial Advisor.    The board considered the opinion of Scott & Stringfellow, Inc. rendered to the board on August 30, 2002 to the effect that, as of the date of such opinion and based upon and subject to certain matters stated therein, the cash

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Opportunity to Liquidate Shares of Common Stock.    The board considered the opportunity the transaction presents for shareholders owning fewer than 500 shares to liquidate their holdings without incurring brokerage costs, particularly given the relatively illiquid market for shares of Chesapeake’s common stock at a price that represents a premium of 20.7% and 18.1% over the average 30 and 60 trading day closing price before the public announcement of the proposed transaction.

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Chesapeake’s audited financial statements for the three years ended December 31, 2001;

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Chesapeake’s unaudited financial statements for the six months ended June 30, 2002 and 2001, and other internal information relating to Chesapeake prepared by Chesapeake’s management;

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information regarding the trading market for Chesapeake’s common stock and the price range within which the stock has traded;

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certain publicly available business and financial information relating to Chesapeake as well as certain financial forecasts and other information on Chesapeake provided by management;

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the consideration to be paid as set forth in the going private transaction in relation to, among other things, current and historical market prices of Chesapeake common stock;

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Scott & Stringfellow also conducted such other studies, analysis and investigations particularly of the banking industry, and considered such other information as it deemed appropriate, the material portion of which is described below;

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Scott & Stringfellow also took into account its assessment of general economic, market and financial conditions and its experience in other transactions, as well as its experience in securities valuations and knowledge of the commercial banking industry generally; and

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Scott & Stringfellow also has discussed with members of Chesapeake’s management past and current business operations, the background of the merger, the reasons and basis for the merger, results of regulatory examinations, and the business and future prospects of Chesapeake, as well as other matters relevant to its inquiry.

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*

Average closing price of Chesapeake common stock for the 20 actual trading days prior to August 30, 2002.

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Market price multiples based on a transaction price of $27.00 per share.

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aggregate shareholders’ equity of Chesapeake as of September 30, 2002, will be reduced from approximately $23,669,000 on a historical basis to approximately $21,289,000 on a pro forma basis;

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the book value per share of common stock as of September 30, 2002, will be reduced from $18.43 per share on a historical basis to approximately $17.73 per share on a pro forma basis;

•

net income per share of common stock (including non-recurring income and expenses) for the year ended December 31, 2001, will increase from $2.12 on a historical basis to approximately $2.17 on a pro forma basis ($2.07 to $2.11 on a fully-diluted basis); and

•

net income per share of common stock (including non-recurring income and expenses) for the nine months ended September 30, 2002, will increase from $1.78 on a historical basis to approximately $1.88 on a pro forma basis ($1.74 and $1.84 on a fully-diluted basis).

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Cashed-Out Affiliated Shareholders.    Affiliated shareholders owning fewer than 500 shares immediately prior to the effective time of the transaction will, upon consummation of the transaction:

¨

receive $27.00 in cash, without interest, per share;

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no longer have any equity interest in Chesapeake and therefore will not participate in its future potential earnings or growth, if any;

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other than upon the exercise of stock options that have previously been or may in the future be granted by Chesapeake, not be able to re-acquire an equity interest in Chesapeake unless they purchase shares from the remaining shareholders, although Chesapeake does not anticipate that the remaining shareholders will transfer their shares to third parties;

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be required to pay federal and, if applicable, state and local income taxes on the cash amount received in the transaction.

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Remaining Affiliated Shareholders.    Potential effects on affiliated shareholders who remain as shareholders after the transaction include:

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Reduced reporting requirements for officers and directors.    The directors and executive officers will no longer be subject to the reporting and short-swing profit provisions under the Exchange Act with respect to changes in their beneficial ownership of Chesapeake common stock.

¨

Reduced capital.    Chesapeake’s capital will be reduced, including a decrease in Chesapeake’s Tier 1 capital as of September 30, 2002, from approximately $29,456,000 on a historical basis (as adjusted to reflect the private placement of trust preferred securities) to approximately $26,494,000 on a pro forma basis.

¨

Reduced book value per share.    The book value per share of common stock as of September 30, 2002, will be reduced from $18.43 per share on a historical basis to approximately $17.73 per share on a pro forma basis.

¨

Effect on net income per share.    Net income per share of common stock (including non-recurring income and expenses) for the year ended December 31, 2001, will increase from $2.12 on a historical basis to approximately $2.17 on a pro forma basis ($2.07 to $2.11 on a fully-diluted basis). Net income per share of common stock (including non-recurring income and expenses) for the nine months ended September 30, 2002, will increase from $1.78 on a historical basis to approximately $1.88 on a pro forma basis ($1.74 and $1.84 on a fully-diluted basis).

¨

Decreased liquidity.    The liquidity of the shares of common stock held by shareholders may be further reduced by the transaction due to the termination of the registration of the common stock under the Exchange Act and the delisting of the common stock from the OTC Bulletin Board. Any trading in our common stock after the transaction will only occur in the “pink sheets” or in privately negotiated sales.

•

Cashed-Out Unaffiliated Shareholders.    Unaffiliated shareholders owning fewer than 500 shares immediately prior to the effective time of the transaction will;

¨

receive $27.00 in cash, without interest, per share;

¨

no longer have any equity interest in Chesapeake and therefore will not participate in its future potential earnings or growth, if any;

¨

not be able to re-acquire an equity interest in Chesapeake unless they purchase shares from the remaining shareholders, although Chesapeake does not anticipate that the remaining shareholders will transfer their shares to third parties;

¨

be required to pay federal and, if applicable, state and local income taxes on the cash amount received in the transaction.

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Remaining Unaffiliated Shareholders.    Potential effects on unaffiliated Chesapeake shareholders who remain as shareholders after the transaction include:

¨

Decreased Access to Information.    If the transaction is effected, we intend to terminate the registration of our common stock under the Exchange Act. As a result, Chesapeake will no longer be subject to the periodic reporting requirements and the proxy rules of the Exchange Act. Similarly, executive officers, directors and other affiliates would no longer be subject to many of the reporting requirements and restrictions of the Exchange Act, including without limitation the reporting and short-swing profit provisions of Section 16.

¨

Decreased Liquidity.    The liquidity of the shares of common stock held by unaffiliated shareholders may be further reduced by the transaction due to the termination of the registration of the common stock under the Exchange Act and the delisting of the common stock from the OTC Bulletin Board. Any trading in our common stock after the transaction will only occur in the “pink sheets” or in privately negotiated sales.

¨

Reduced Capital.    Chesapeake’s capital will be reduced, including a decrease in Chesapeake’s Tier 1 capital as of September 30, 2002, from approximately $29,456,000 on a historical basis (as adjusted to reflect the private placement of trust preferred securities) to approximately $26,494,000 on a pro forma basis.

¨

Reduced Book Value Per Share.    The book value per share of common stock as of September 30, 2002, will be reduced from $18.43 per share on a historical basis to approximately $17.73 per share on a pro forma basis.

¨

Effect On Net Income Per Share.    Net income per share of common stock (including non-recurring income and expenses) for the year ended December 31, 2001, will increase from $2.12 on a historical basis to approximately $2.17 on a pro forma basis ($2.07 to $2.11 on a fully-diluted basis). Net income per share of common stock (including non-recurring income and expenses) for the nine months ended September 30, 2002, will increase from $1.78 on a historical basis to approximately $1.88 on a pro forma basis ($1.74 and $1.84 on a fully-diluted basis).

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Increased Share Ownership of Officers and Directors.    As a result of the transaction, we expect that (a) the percentage of beneficial ownership of common stock of Chesapeake held by executive officers and directors of Chesapeake as a group will increase from 40.9% to approximately 43.3%, (b) the collective book value as of September 30, 2002, of the shares of Chesapeake common stock held by Chesapeake’s current officers and directors, as a group, will decrease from $9,506,267 (non beneficial) on a historical basis to approximately $9,145,205 on a pro forma basis, and (c) the collective pro rata interest of Chesapeake’s current officers and directors, as a group, in the net income of Chesapeake for the year ended December 31, 2001, will increase from $1,141,739 on a historical basis (based on the number of shares beneficially owned by such officers and directors as of the record date) to approximately $1,168,667 on a pro forma basis (based on the number of shares Chesapeake anticipates such officers and directors to beneficially own immediately after the transaction).

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filing of articles of amendment with the State Corporation Commission of the Commonwealth of Virginia in accordance with the Virginia Stock Corporation Act after the approval of the transaction by Chesapeake’s shareholders; and

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complying with federal and state securities laws, including Chesapeake’s filing, prior to the date of this proxy statement, of a Rule 13e-3 Transaction Statement on Schedule 13E-3 with the Securities and Exchange Commission.

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We have assumed that the transaction occurred as of September 30, 2002, for purposes of the consolidated balance sheet, and as of January 1, 2001, and January 1, 2002, respectively, with respect to the consolidated income statements for the year ended December 31, 2001, and the nine months ended September 30, 2002.

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We have assumed that a total of 83,017 shares are cashed-out in the transaction at a price of $27.00 per share for a total of $2,246,859. Additionally, we have assumed that we have incurred or will incur $132,800 in costs and expenses relating to the transaction.

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All of the cash required to consummate the transaction including for the payment of expenses was financed through a private placement of our trust preferred securities as described under “Special Factors—Financial Effects of the Transaction; Financing the Transaction.”

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We have not reflected the anticipated special cost savings, estimated to be approximately $75,600 per year that we expect as a result of the transaction.

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(1)

Issuance of $10,000,000 Trust Preferred Securities.

(2)

Retirement of repurchased shares with $5 par value (83,217 shares at $27).

(3)

Filing and transaction costs.

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(1)

Income shown from earnings assets (est. at 8.36%).

(2)

Interest expense on trust preferred to finance transaction (est. at 7.12%)

(3)

Tax effect on interest expense (effective rate of 26.13%).

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(1)

Income shown from earnings assets (est. at 6.88%).

(2)

Interest expense on trust preferred to finance transaction (est. at 4.77%).

(3)

Tax effect on interest expense (effective rate of 27.69%).

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*

Represents less than 1.0% of the total outstanding shares of common stock.

(1)

For purposes of this table, a person is deemed to be the beneficial owner of shares of Chesapeake’s common stock if he or she has or shares the power to vote or to direct the voting of the security or the power to dispose of or to direct the disposition of the security, or if he has the right to acquire beneficial ownership of the security within 60 days.

(2)

The percentage of class represents the number of shares beneficially owned as a percentage of all outstanding shares of Chesapeake stock plus all exercisable stock options issued to directors and executive officers of Chesapeake. The pro forma percentages reflect the percentages of the class that each such person is anticipated to hold after giving effect to the transaction, assuming that approximately shares are cashed-out in the transaction.

(3)

Includes: (i) 47,884 shares which are held jointly with his wife Katherine W. Monroe (see footnote (4) below); (ii) 11,640 shares that may be acquired pursuant to presently exercisable stock options; and (iii) 15,840 shares held in trust for which he serves as joint trustee.

(4)

Douglas D. Monroe, Jr., and Katherine W. Monroe are husband and wife. Mr. Monroe has sole voting power over 235,397 shares of common stock. Mrs. Monroe has sole voting power over 57,966 shares. Mr. and Mrs. Monroe share voting power over 47,884 shares, which are reflected in Mr. Monroe’s stock ownership information in order to avoid double counting. In the aggregate, Mr. and Mrs. Monroe beneficially own 368,727 shares of common stock.

(5)

Includes: (i) 14,140 shares which are held by Mr. Szyperski’s spouse; (ii) 11,640 shares that may be acquired pursuant to presently exercisable stock options; and (iii) 23,040 shares held in trust for his children, nieces, and nephews for which he has a proxy to vote those shares.

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all outstanding shares of Chesapeake common stock, whether record shares (as defined below) or street shares (as defined below), held of record by a holder (as defined below) holding fewer than 500 shares of Chesapeake stock immediately prior to the effective time shall, without any action on the part of the holder thereof, be converted into the right to receive cash equal to $27.00 per share (the “transaction consideration”);

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all outstanding shares of Chesapeake common stock other than those described above as being converted into the right to receive the transaction consideration shall remain outstanding with all rights, privileges, and powers existing immediately before the transaction;

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no holder holding, of record or beneficially, immediately prior to the effective time 500 or more shares (including any combination of record shares or street shares) in the aggregate shall be entitled to receive any transaction consideration with respect to the shares so held; and

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it is a condition precedent to the right of any holder to receive the transaction consideration, if any, payable with respect to the shares held by such holder that such holder certify to Chesapeake in the letter of transmittal delivered by Chesapeake as described below that such holder held, of record and beneficially, immediately prior to the transaction fewer than 500 shares (including any combination of record shares and street shares) in the aggregate.

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the term “record shares” means shares of Chesapeake stock other than street shares, and any record share shall be deemed to be held by the registered holder thereof as reflected on the books of Chesapeake;

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the term “street shares” means shares of Chesapeake stock held of record in street name, and any street share shall be deemed to be held by the beneficial owner thereof as reflected on the books of the nominee holder thereof;

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the term “holder” means

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make such inquiries, whether of any shareholder(s) or otherwise, as it may deem appropriate for purposes of effecting the transaction; and

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resolve and determine, in its sole discretion, all ambiguities, questions of fact and interpretive and other matters relating to such provisions, including, without limitation, any questions as to the number of shares held by any holder immediately prior to the effective time. All such determinations by Chesapeake shall be final and binding on all parties, and no person or entity shall have any recourse against Chesapeake or any other person or entity with respect thereto.

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presume that any shares of Chesapeake common stock held in a discrete account (whether record or beneficial) are held by a person distinct from any other person, notwithstanding that the registered or beneficial holder of a separate discrete account has the same or a similar name as the holder of a separate discrete account; and

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aggregate the shares held (whether of record or beneficially) by any person or persons that Chesapeake determines to constitute a single holder for purposes of determining the number of shares held by such holder.

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In any case where the records of security holders have not been maintained in accordance with accepted practice, any additional person who would be identified as such an owner on such records if they had been maintained in accordance with accepted practice shall be included as a holder of record.

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Securities identified as held of record by a corporation, a partnership, a trust whether or not the trustees are named, or other organization shall be included as so held by one person.

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Securities identified as held of record by one or more persons as trustees, executors, guardians, custodians or in other fiduciary capacities with respect to a single trust, estate or account shall be included as held of record by one person.

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Securities held by two or more persons as co-owners shall be included as held by one person.

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Securities registered in substantially similar names where the issuer has reason to believe because of the address or other indications that such names represent the same person, may be included as held of record by one person.

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Chesapeake’s Annual Report on Form 10-KSB for the year ended December 31, 2001.

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Chesapeake’s Quarterly Report on Form 10-QSB, as amended, for the quarter ended September 30, 2002.

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