Memorandum on findings

CHESAPEAKE BANK

97 NORTH MAIN STREET
KILMARNOCK, Virginia 22482

STAR RATING: 4
Predictive Indicator
As of June 30, 2009
Federal Reserve System Identifier 214722

HOLDING COMPANY INFORMATION

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INTRODUCTION

U.S. commercial banks are chartered under either federal or state jurisdiction for the purposes of accepting funds for deposit and extending loans to either individual or business borrowers. Banks are subject to credit, interest rate, and operational risk, and, because of both their public purpose and their importance to the nation's economy, banks are the object of intense regulatory scrutiny.

The Bankrate proprietary commercial bank rating model analyzes capitalization, asset quality, earnings, and liquidity and produces composite and component "Star" ratings that can be used as a measure of the rated entity's financial safety and soundness. Additionally, early warning components of the model highlight operating characteristics of immediate concern and recommended follow-up actions.

Institution Commentary

OVERVIEW of Institution
Organized in 1900, CHESAPEAKE BANK is a state chartered commercial bank, which, as of June 30, 2009, reported $559.0800 million in total assets. At that date, loans and deposits held by the bank amounted to $382.2180 million and $474.2420 million, respectively. The bank's June 30, 2009 equity base of $41.0540 million produced an Equity/Assets ratio of 7.34%, as of that date.

COMPOSITE SUMMARY
Bankrate believes that, as of June 30, 2009, this bank exhibited a sound condition, characterized by very solid overall, sustainable profitability, a very high measure of asset quality, mid-range capitalization and near normal liquidity.

EARNINGS ANALYSIS
For the six months ended June 30, 2009, the bank recorded net income of $2.8260 million, which represented a return on average assets (ROA) of 1.04%. Year earlier six month results amounted to a net profit of $3.0070 million, or a 1.23% annualized ROA. An ROA of at least 1.0% is deemed satisfactory in accordance with banking industry standards, and the industry's ROA for the first six months of 2009 was approximately 0.4%. We have concluded that for the first six months of 2009, the bank achieved a very healthy return on equity. We deem net interest margin to have been meaningfully higher than peer. Noninterest income was better than normal. We also observed overhead ratios that were higher than average, and the composition of overhead should be thoroughly analyzed. Importantly, net interest margins, noninterest income components, and overhead expense levels represent operating factors that combine to impact overall operating results.

ASSET QUALITY ANALYSIS
The bank revealed, as previously stated, a very high measure of asset quality. Our conclusion with respect to asset quality incorporates our analysis of data depicting regional economic conditions as well as our computations of a relatively low June 30, 2009 nonperforming asset ratio, much better than normal reserve coverage for nonperforming loans, and approximately average holdings of commercial real estate and construction loans, two categories that can intensify credit risk.

Other asset categories, such as farm and consumer loans, which may carry more than usual default potential, should not have a substantial negative impact upon future results.
We do advise, due to reported levels of business lending, a review of commercial loan underwriting and administrative practices.

Loan yield can measure financial reward versus credit risk. Excessive loan yield may be an indicator of existing or future problems. Our loan review indicates that the bank has assumed a seemingly prudent position between credit risk and financial reward.

CAPITAL ANALYSIS
Balance sheet structural changes, through the one year period of time ended June 30, 2009, have possibly had a negative impact upon the bank's capital position. Our analytical methodology does take into account the quantity, quality, and durability of net worth, and, as set forth above, we have determined, based upon our series of tests, that the bank demonstrates mid-range capitalization. We have calculated the bank's June 30, 2009 Total Risk-Based Capital position, a computation used by industry regulators, and have concluded that this bank exceeded the requirement, set by regulation, for this test.

LIQUIDITY ANALYSIS
As of June 30, 2009, the bank displayed modest balance sheet liquidity and a possibly undue reliance upon wholesale, or non-core liabilities, which include all borrowings, such as Federal Home Loan Bank Advances, and CD's greater than $100,000.

Accounting principles require some securities to be categorized as "Available-for-Sale." Changes in market value of these securities are reflected through the GAAP (Generally Accepted Accounting Principles) net worth of the institution. Based upon the bank's present balance sheet, changes in the value of the current level of securities reported as "Available-for-Sale" could have a substantial impact upon future net worth of the bank.

INSTITUTION SUMMARY
This bank has been rated sound.
Positive factors that impacted that rating follow:

• Earnings
• Asset Quality

As noted previously, early warning indicators, possibly requiring specific investigation include:

• Commercial and Industrial Loans
• Puchased Liabilities

PREDICTIVE INDICATOR
As stated, we have determined a composite Star rating for this bank of 4 , indicative of a sound financial condition. At times, financial conditions of banks change rapidly and significantly. Hence, our Safe & Sound Star ratings should not be deemed predictive of likely future ratings. However, in view of early warning indicators set forth within this report, in combination with the institution's financial data, we believe that the Star rating for this institution is unlikely to change within the ensuing twelve month period.