U. S. Securities and Exchange commission
Washington, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
----------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE EXCHANGE ACT
For the transition period from to
Commission file number 0-18543
CHESAPEAKE FINANCIAL SHARES, INC.
- -----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Virginia 54-1210845
------------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
97 N. Main St., Kilmarnock, VA 22482
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(Address of principal executive offices) (Zip Code)
(804) 435-1181
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if
changed since last report.)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
and Exchange Act of 1934 during the preceding 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
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of June 15, 1996.
Class Outstanding at June 15, 1996
------ ------------------------------
Common Stock, voting, $5.00 par value 851,463
Common Stock, non-voting, $5.00 par value 0
<PAGE>
CHESAPEAKE FINANCIAL SHARES, INC.
FORM 10-QSB
INDEX
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PART I - FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements . . . . . . . . . . . . . 1-5
Consolidated Balance Sheets
June 30, 1996 and December 31, 1995. . . . . . 1-2
Consolidated Statements of Earnings
Three months ended June 30, 1996 and 1995. . . 3
Consolidated Statements of Earnings
Six months ended June 30, 1996 and 1995 . . . . 4
Consolidated Statements of Cash Flows
Six months ended June 30, 1996 and 1995. . . . 5
Notes to Consolidated Financial Statements . . 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition Results of Operations . . . . . . . 9-14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . 15
Item 2. Changes in Securities. . . . . . . . . . . . . 15
Item 3. Defaults Upon Senior Securities. . . . . . . . 15
Item 4. Submission of Matters to a Vote of Security
Holders. . . . . . . . . . . . . . . . . . . . 15
Item 5. Other Information. . . . . . . . . . . . . . . 15
Item 6. Exhibits and Reports on Form 8-K . . . . . . . 16
Signatures. . . . . . . . . . . . . . . . . . . . . . . . 17
(i)
PART I. Item 1. - FINANCIAL INFORMATION
Chesapeake Financial Shares, Inc. June 30, December 31,
Consolidated Balance Sheets 1996 1995
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
ASSETS (Unaudited)
Cash and due from banks................... $4,048,089 $4,906,634
Federal funds sold........................ 671,000 0
Time deposits with banks.................. 100,059 450,375
Securities available for sale
U.S. Treasury securities (book value of
$3,815,413-1996 and $4,577,242-1995)..... 3,771,953 4,583,406
U.S. Government agencies (book value of
$19,737,333-1996 and $22,229,225-1995).. 19,605,804 22,339,586
Obligations of state and political
subdivisions (book value of
$9,975,546-1996 and $9,637,280-1995)..... 9,674,899 9,636,988
Other Securities (book value $561,500-1996
and $541,300-1995........................ 561,500 541,300
Loans..................................... 85,799,672 82,454,851
Less: Unearned discount.................. 0 (1,019)
Less: Reserve for loan loss.............. (1,592,397) (1,463,181)
--------------------------
Net loans.............................. 84,207,275 80,990,651
Bank premises and equipment, net.......... 2,984,657 2,851,591
Accrued interest receivable............... 1,017,633 1,084,802
Intangible assets, net.................... 126,000 168,000
Other assets.............................. 3,987,423 3,704,219
--------------------------
Total assets...........................$130,756,292 $131,257,552
==========================
See accompanying notes to consolidated financial statements. Page: 1
PART I. Item 1. - FINANCIAL INFORMATION June 30, December 31,
Chesapeake Financial Shares, Inc. 1996 1995
Consolidated Balance Sheets
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LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited)
Deposits
Noninterest bearing deposits...........$ 14,014,937 $ 14,225,310
Savings and interest bearing deposits.. 40,007,239 37,292,683
Certificates of deposit................ 63,616,708 67,169,319
-------------------------
Total deposits....................... 117,638,884 118,687,312
Federal funds purchased................... 0 115,000
Accrued interest payable.................. 238,669 256,034
Other liabilities......................... 1,331,969 763,784
Note payable.............................. 312,500 387,500
-------------------------
Total liabilities.................... 119,522,022 120,209,630
Commitments
Shareholders' equity
Preferred stock, par value $1 per share;
authorized 50,000 shares; none
outstanding 0 0
Common stock, voting................... 4,257,315 4,275,685
Common stock, non-voting............... 0 0
voting non-voting
6/30/96 12/31/95 6/30/96 12/31/95
------- -------- ----------------
Shares auth.2,000,000 2,000,000 635,000 635,000
Shares o/s.. 851,463 855,137 0 0
Paid in capital........................... 578,809 605,669
Unrealized gains (losses) on securities
available for sale..................... (309,164) 78,860
Retained earnings......................... 6,707,310 6,087,708
----------------------
Total shareholders' equity 11,234,270 11,047,922
----------------------
Total liabilities and
Shareholders' equity........... $130,756,292 $131,257,552
See accompanying notes to consolidated financial statements. Page: 2
PART I. Item 1. - FINANCIAL INFORMATION (cont'd.)
Chesapeake Financial Shares, Inc. Three Months Ended
Consolidated Statements of Earnings June 30,
1996 1995
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Interest Income (Unaudited)
Interest and fees on loans................. $2,005,573 $1,808,571
Interest on federal funds sold............. $3,662 18,033
Interest on time deposits with banks....... $26,585 23,339
Interest on U.S. Treasury securities....... $58,383 63,526
Interest on obligations of U.S. Agency
Obligations........................... $276,862 390,826
Interest on obligations of state and
political subs........................ $128,097 54,766
----------------------
Total interest income 2,499,162 2,359,061
Interest Expense
Interest on savings and interest bearing
deposits.............................. 250,612 371,041
Interest on certificates of deposit........ 880,370 748,000
Interest on federal funds purchased........ 10,321 1,137
Other interest expense..................... 7,307 11,864
----------------------
Total interest expense 1,148,610 1,132,042
----------------------
Net interest income........................ 1,350,552 1,227,019
Provision for loan losses.................. 37,500 30,000
----------------------
Net interest income after provision for
loan losses........................... 1,313,052 1,197,019
----------------------
Noninterest Income
Income from fiduciary activities........... 193,313 174,087
Service charges on deposit accounts........ 130,755 118,709
Securities gains (losses) -net............. 0 (355)
Merchant card income....................... 67,349 48,714
ATM income................................. 41,940 11,241
Business manager income.................... 107,351 66,898
Other income............................... 86,933 122,669
----------------------
Total noninterest income 627,641 541,963
----------------------
Noninterest Expense
Salaries................................... 543,341 474,383
Employee benefits.......................... 127,387 179,534
Occupancy expenses......................... 237,350 249,170
Trust expenses............................. 5,049 5,449
Amortization expense....................... 21,000 21,000
Deposit insurance.......................... 1,000 64,059
Merchant card expense...................... 53,412 39,274
ATM expense................................ 67,842 19,549
Business manager expense.................. 27,805 16,809
Other expenses............................ 277,219 190,088
-----------------------
Total noninterest expense............ 1,361,405 1,259,315
-----------------------
Income before income taxes................ 579,288 479,667
Income taxes.............................. 159,500 135,072
-----------------------
Net income........................... $ 419,788 $ 344,595
=======================
Earnings per share........................ $0.49 $0.40
See accompanying notes to consolidated financial statements. Page: 3
PART I. - FINANCIAL INFORMATION (cont'd.)
Chesapeake Financial Shares, Inc. Six Months Ended
Consolidated Statements of Earnings June 30,
1996 1995
- ----------------------------------------------------------------------
Interest Income (Unaudited)
Interest and fees on loans................. $3,937,597 $3,515,945
Interest on federal funds sold............. 12,415 19,385
Interest on time deposits with banks....... 34,377 46,995
Interest on U.S. Treasury Securities 119,939 126,676
Interest on obligations of U.S. Agency
Obligations........................... 585,504 792,409
Interest on obligations of state of
Political subs........................ 254,064 114,537
----------------------
Total interest income 4,943,896 4,615,947
----------------------
Interest Expense
Interest on savings and interest bearing
deposits............................. 503,300 744,922
Interest on certificates of deposit....... 1,810,292 1,348,305
Interest on federal funds purchased....... 11,333 23,485
Other interest expense.................... 15,568 24,149
----------------------
Total interest expense 2,340,493 2,140,861
----------------------
Net interest income....................... 2,603,403 2,475,086
Provision for loan loss................... 75,000 45,000
----------------------
Net interest income after provision for
loan losses.......................... 2,528,403 2,430,086
----------------------
Non-interest Income
Income from fiduciary activities.......... 366,074 307,249
Service charges on deposit accounts....... 252,633 241,830
Securities gains (losses) -net............ (4,958) (2,268)
Merchant card income...................... 89,316 61,269
ATM income................................ 58,787 18,240
Business manager income................... 180,498 66,898
Other income.............................. 178,055 221,614
----------------------
Total non-interest income............ 1,120,405 914,832
----------------------
Non-interest Expense
Salaries.................................. 1,093,662 967,593
Employee Benefits......................... 256,794 344,962
Occupancy expenses........................ 479,779 359,922
Trust expenses............................ 12,754 19,027
Amortization Expense...................... 42,000 42,000
Deposit Insurance......................... 1,500 128,118
Merchant card expense..................... 74,167 53,890
ATM expense............................... 107,123 30,736
Business manager expense................. 40,587 16,809
Other expenses........................... 547,386 500,783
----------------------
Total non-interest expense.......... 2,655,752 2,463,840
----------------------
Income before income taxes............... 993,056 881,078
Applicable income taxes.................. 264,500 250,000
----------------------
Net income.......................... $ 728,556 $ 631,078
======================
Earnings per share - Primary............. $0.84 $0.73
See accompanying notes to consolidated financial statements. Page: 4
PART I. - FINANCIAL INFORMATION (cont'd.)
Chesapeake Financial Shares, Inc. Six Months Ended
Consolidated Statements of Cash Flows June 30,
1996 1995
- ----------------------------------------------------------------------
(Unaudited)
Cash flows from operating activities:
Net income................................. $ 728,556 $ 631,078
Adjustments to reconcile net income to
net cash provided by (used for)
operating activities:
Depreciation and amortization............ 247,443 113,902
Provision for loan losses................. 75,000 45,000
(Accretion) of disc. And amort.
of premiums, net...................... 165,231 141,568
Net (gain) loss on sale of securities..... 4,958 2,268
Changes in assets and liabilities:
Decrease (increase) in accr. interest
receivable........................... 67,169 44,675
Decrease (increase) in other assets..... (79,359) (1,026,258)
Increase (decrease) in accrued
interest payable (17,365) 30,131
Increase (decrease) in other liabilities 568,185 (196,427)
----------------------
Net cash provided by (used for) operating
activities.............................. 1,759,818 (214,063)
----------------------
Cash flows from investing activities:
Net (increase) decrease in time deposits
with banks.............................. 350,316 582,380
Proceeds from maturities of investment
securities.............................. 0 755,000
Purchases of securities available for sale. (6,742,216) (200,000)
Proceeds from sale or call of securities
available for sale...................... 4,658,677 499,204
Proceeds from maturities of securities
available for sale...................... 4,808,605 1,010,806
Origination of loans available for sale.... (2,164,502) (244,000)
Proceeds from sale of loans available
For sale................................ 1,723,900 244,000
Net (increase) decrease in loans outstanding (2,851,022) (2,954,470)
Other capital expenditures................. (338,509) (291,793)
----------------------
Net cash provided by (used for) investing
activities.............................. (554,751) (598,873)
----------------------
Cash flows from financing activities:
Net increase (decrease) in demand accounts,
Interest bearing demand deposit accounts
and savings deposits.................... 2,504,183 (3,059,210)
Net increase (decrease) in certificates
of deposit.............................. (3,552,611) 5,413,796
Net decrease in federal funds purchased.... (115,000) (850,000)
Cash dividends............................. (119,252) (103,690)
Proceeds from issuance of voting common
stock................................... 10,000 0
Acquisition of voting common stock......... (44,932) (83,683)
Curtailment of long-term borrowings........ (75,000) (75,000)
---------------------
Net cash provided by (used for) financing
activities.............................. (1,392,612) 1,242,213
Net (decrease) increase in cash and federal
funds sold.............................. (187,545) 429,277
Cash and federal funds sold at beginning
of period............................... 4,906,634 3,586,697
--------------------
Cash and federal funds sold at end of period. $4,719,089 $4,015,974
=====================
See accompanying notes to consolidated financial statements. Page: 5
PART I. Item 1. - FINANCIAL INFORMATION (cont'd.) 6/96-10QSB
Chesapeake Financial Shares, Inc.
Notes to Consolidated Financial Statements
- ---------------------------------------------------------------------
1. Chesapeake Financial Shares, Inc. ("CFS) owns 100% of Chesapeake
Bank (the "Bank"). Two additional subsidiaries, Chesapeake Mortgage
Company, Inc. and Chesapeake Insurance Agency, Inc. 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.
2. The accounting and reporting policies of the registrant conform to
generally accepted accounting principles and to the general practices
within the banking industry. The interim financial statements have
not been audited; however, in the opinion of management, all
adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the consolidated financial
statements have been included.
These financial statements should be read in conjunction with the
financial statements and the footnotes included in the registrant's
1995 Annual Report to Shareholders.
3. Earnings per share are based on the weighted average number of
common shares and common stock equivalents outstanding during the
year. The number of common shares and common stock equivalents used
for June 30, 1996 and December 31, 1995 were 865,642 and 868,608,
respectively.
4. CFS adopted FASB No. 115, "Accounting for Certain Investment in
Debt and Equity Securities" effective beginning January l, 1994. This
statement addresses the accounting and reporting for investments in
equity securities that have readily determinable fair market values
and for all investment in debt securities. Those investments are
classified in three categories and accounted for as follows:
a. Securities Held to Maturity- Securities classified as held to
maturity are those debt securities CFS has both the intent and the
ability to hold to maturity regardless of changes in general economic
conditions. These securities are carried at cost, adjusted for
amortization of premium and accretion of discount, computed by the
interest method over their contractual lives. CFS held no assets
classified as Held to Maturity at December 31, 1995 or June 30, 1996.
b. Securities Available for Sale- Securities classified as
available for sale are those debt and equity securities that CFS
intends to hold for an indefinite period of time, but not necessarily
to maturity. Any decision to sell a security classified as available
for sale would be based on various factors, including significant
movements in interest rates, changes in the maturity mix of CFS's
assets and liabilities, liquidity needs, regulatory capital
Page: 6
PART I. Item 1. - FINANCIAL INFORMATION (cont'd.) 6/96-10QSB
Chesapeake Financial Shares, Inc.
Notes to Consolidated Financial Statements
- ---------------------------------------------------------------------
considerations, and other factors. Securities available for sale are
carried at fair market value. Unrealized gains or losses are reported
as increases or decreases in shareholder's equity, net of the related
deferred tax effect. Realized gains or losses, determined on the
basis of the cost of specific securities sold, are included in
earnings.
c. Trading Securities- Trading securities, which are generally
held for short term in anticipation of market gains, are carried at
fair market value. Realized and unrealized gains and losses on
trading account assets are included in interest income on trading
account securities. The Corporation held no assets classified as
Trading Securities at December 31, 1995 or June 31, 1996.
5. Loans are stated at face value, net of unearned discount and the
reserve for loan losses. Interest is computed by methods which result
in level rates of return on principal. Generally, interest is not
accrued on loans over ninety days past due. Interest on loans that
are placed on nonaccrual status and which management considers to be
uncollectible is charged off. 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.
Mortgage loans held for resale are stated at the lower of cost or
market on an individual 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.
6. Statement of Financial Accounting Standards NO. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," establishes standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related
to those assets to be held and used and for long-lived assets and
certain identifiable intangibles to be disposed of. This statement
requires that long-lived assets and certain identifiable intangibles
to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. The Statement was effective for
fiscal years beginning after December 31, 1995. The Statement does
not have a material impact on CFS.
Statement of Financial Accounting Standards No. 122, "Accounting
for Mortgaging Servicing Rights," amends FASB No. 65, "Accounting for
Certain Mortgage Banking Activities," to require that a mortgage
banking enterprise recognize as separate assets rights to servicing
Page: 7 PART I. Item 1. - FINANCIAL INFORMATION (cont'd.) 6/96-10QSB
Chesapeake Financial Shares, Inc.
Notes to Consolidated Financial Statements
- ---------------------------------------------------------------------
mortgage loans for others, however those servicing rights are
acquired. A mortgage banking enterprise that acquires mortgage
servicing rights through either the purchase or origination of
mortgage loans and sells or securitizes those loans with servicing
rights should allocate the total cost of the mortgage loans to the
servicing rights and the loans (without the mortgage servicing rights)
based on their fair values if it is practicable to estimate those fair
values. If it is not practicable to estimate the fair values of the
mortgage servicing rights and the mortgage loans (without the mortgage
servicing rights), the entire cost of purchasing or originating the
loans should be allocated to the mortgage loans (without the servicing
rights) and no cost should be allocated to the mortgage servicing
rights. The statement was effective for transactions in the fiscal
years beginning after December 31, 1995. The statement does not have
a material impact on CFS.
Page: 8
PART I. Item 2. - FINANCIAL INFORMATION (cont'd.) 6/96-10QSB
Chesapeake Financial Shares, Inc.
Management's Discussion and Analysis of Financial
Condition or Plan of Operation (Unaudited)
- ------------------------------------------------------------------
A. Summary - liquidity and capital resources
Sufficient short-term assets are maintained at Chesapeake
Financial Shares to meet cash needs anticipated by management. The
CFS's primary sources of liquidity continue to be federal funds sold,
time deposits with banks and securities maturing within one year. The
repayment and sale of loans also provides liquidity. The total of
federal funds sold, time deposits with banks and securities maturing
within one year at June 30, 1996 was approximately $9,501,000,
compared to $7,354,000 one year ago and $7,370,000 at December 31,
1995.
The liquidity ratio at June 30, 1996 was 30%, compared with 30%
one year ago. This ratio is arrived at by dividing net liquid assets
(sum of total Cash and Due from Banks, including Federal Reserve,
unpledged and over pledged portions of Investment Securities at market
value, and federal funds sold less reserves required at the Federal
Reserve Bank) by net liabilities (total liabilities excluding
valuation reserves and capital). Management has found in the past
that 18% represents a sufficient level of liquidity to meet cash
needs.
Management believes capital is adequate to meet current needs.
Since Chesapeake Financial Shares has total assets of less than $150
million, the capital requirements of only the subsidiary, Chesapeake
Bank are used for regulatory purposes. Unencumbered capital (total
capital net of unrealized securities gains/losses less intangibles
plus reserves) as a percent of total adjusted assets (total assets
less intangibles plus reserves) was 9.6% at June 30, 1996 and 9.3% at
December 31, 1995, for CFS.
Chesapeake Bank must have a ratio of Tier 1 capital (common
equity, retained earnings less certain goodwill) to risk-adjusted
assets of at least 4.0%. At June 30, 1996 and December 31, 1995 the
Bank's ratio of Tier 1 risk based capital to risk-adjusted assets was
13.2% and 12.9%, respectively. Total risked based capital to risk
weighted assets was 14.4% and 14.2% at June 30, 1996 and December 31,
1995, respectively. Tier one leverage capital was 8.7% and 8.3% at
June 30, 1996 and December 31, 1995, respectively.
B. Results of operations:
Earnings Summary:
Net income was $728,556 for the six months ended June 30,
1996, compared with income of $631,078 for the same period in 1995.
Page: 9
<PAGE>
PART I. Item 2. - FINANCIAL INFORMATION (cont'd.) 6/96-10QSB
Chesapeake Financial Shares, Inc.
Management's Discussion and Analysis of Financial
Condition or Plan of Operation (Unaudited)
- ------------------------------------------------------------------
On a per share basis, the net profit was $.84 for the first six
months, compared with $.73 per share for the same period in the prior
year. The increase in earnings resulted primarily from a $98,317 or
4.0% increase in net interest income after provision and a $205,573 or
22.5% increase in noninterest income. The Company experienced a net
increase in noninterest expense of $191,912 or 7.8%.
Net Interest Income:
Chesapeake Financial Shares' results of operation are
significantly affected by its ability to manage effectively the
interest rate sensitivity and maturity of its interest-earning assets
and interest-bearing liabilities. At June 30, 1996, the Company's
interest-earning assets exceeded its interest-bearing liabilities by
approximately $13.6 million, compared with a $16.2 million excess one
year ago.
Net interest margins are up at 4.49% at June 30, 1996
compared to 4.40% at June 30, 1995. Chesapeake Bank has maintained
competitive rates throughout the last year without being aggressive.
The January 96 decrease in the New York prime rate had a negative
impact on margins during the first quarter. However, margins have
improved as our loan to deposit ratio has risen from below 70% at
December 31, 1995, to 73% at June 30, 1996.
Loan returns continue to improve as loans reprice to a mix
of some higher and some lower, prime based indexes. The securities
portfolio has been repositioned for improved yields with no
significant increases in risk. This has improved the overall
contribution from the investment portfolio.
Provision for Loan Losses:
The loan loss provision is a charge against earnings
necessary to maintain the reserve for loan losses at a level
consistent with management's evaluation of the credit quality and risk
adverseness of the portfolio. Management makes a quarterly evaluation
as to the adequacy of the current loan loss reserve. Management's
detailed analysis as of June 30, 1996 supports the adequacy of the
current loan loss level of $1.6 million.
Chesapeake Bank's management maintains a reserve for loan
loss which they feel represents a conservative estimate of potential
losses in the Bank's loan portfolio. The methodology incorporates
subjective factors into the evaluation of the adequacy of the ALLL
such as:
Page: 10
PART I. Item 2. - FINANCIAL INFORMATION (cont'd.) 6/96-10QSB
Chesapeake Financial Shares, Inc.
Management's Discussion and Analysis of Financial
Condition or Plan of Operation (Unaudited)
- ------------------------------------------------------------------
The effect of volume and trends in delinquencies and
nonaccruals
The effect of trends in portfolio volume, maturity, and
composition
An estimate of future loss on all significant loans and
assessment of underwriting and lending policies and
procedures including those for charge off, collection
and recovery
Experience, ability and depth of lending management and
staff
The effect of national and local economic conditions and
downturns in specific industries
Concentrations of credit that might affect loss experience
across one or more components of the portfolio
Taking into account results of any independent reviews of
the portfolio
The loan loss reserve is 1.9% and 1.8% of gross loans as of
June 30, 1996 and December 31, 1995 respectively. The loan portfolio
is reviewed on an annual basis by outside parties.
Noninterest Income:
Noninterest income is up 22.5% or $205,573 from the same
period last year. Trust income is up 19.1%, or $58,825, from June 30,
1995. This increase was due to the timing of executor and estate fees
this quarter and the general level of business. Service charges on
deposit accounts were up $10,803 or 4.5% from June 30, 1995.
Bank management has changed the merchant card program to a
principal member of the VISA/MASTERCARD Network and completed the
first year on the program as of March this year. This has generated
approximately $28,047 more in gross revenue than in the same period
last year. The ATM fee income to date is $58,787. The Bank had only
$18,240 from ATM fee income as of June 30, 1995. The Bank has 16 ATMs
operational as of the end of June, 1996.
Chesapeake Bank is also offering an accounting/bookkeeping
service to assist business owners in their cash management. This
service, called Business Manager, has generated $180,498 in gross
revenue for the first six months ended June 30, 1996, compared to the
same period last year of $66,898. All mortgage related fees are down
due to the interest rate environment, including inspection fees,
mortgage insurance income, and appraisal fees. Other income is down
Page: 11 PART I. Item 2. - FINANCIAL INFORMATION (cont'd.) 6/96-10QSB
Chesapeake Financial Shares, Inc.
Management's Discussion and Analysis of Financial
Condition or Plan of Operation (Unaudited)
- ------------------------------------------------------------------
$43,559 or 19.7% from the 1995 level of $221,614 due to a tax refund
last year of $38,312.
Noninterest Expenses:
Employee salaries expenses amounted to $1,093,662 and
$967,593 as of June 30, 1996 and 1995, respectively. The company has
been in the process of retraining and restaffing through attrition to
provide a more sales and incentive oriented environment. Some
positions have not been filled and those tasks have been eliminated or
reassigned. Further effeciencies are expected as we utilize the
features of a new banking software system installed in February of
this year. We have opened a new branch in Williamsburg in July and
additional staff was added during the second quarter. Benefits
expense is down 25.9% or $88,168 over June 30, 1995 due primarily to
reduced expenses related to the pension plan and keyman insurance
coverage. Occupancy expenses are up 33.3% or $119,857 from June 30,
1995 primarily due to leasehold improvements and rent increases at the
Bank's Loan Processing Center, leasehold expenses at the James City
County Winn-Dixie Office and some one-time maintenance expenses at
other branches. There are additional expenses associated with
renovations to the Operations Center and the new Branch opening in
Williamsburg.
Merchant Card expenses are up 37.6% due to increased volume
in the program. Profit margins are expected to improve in 1997. ATM
expenses are up due to the depreciation expenses associated with the
expansion of the Bank's ATM network (now 16 ATMs). The ATM program is
expected to break even during this quarter on fee income. Additional
expense reduction will be realized in the ATM program due to planned
changes in our ATM processing vendor.
Deposit insurance costs were down due to a nationwide
reduction in insurance premiums for well-capitalized banks. Other
expenses were $547,386 for the six month period, compared with
$500,783 for the same period one year ago. Increases in this area are
primarily related to increases in travel and entertainment and
training expenses. There is also a pare off expense of $10,037
related to the sale of loans held for resale.
We completed the transition to the new Jack Henry &
Associates Banking Software product "Silverlake" during the first
quarter of 1996.
As of this report date the Bank has 16 ATM/cash dispensers
in operation. Three were completed by December 31, 1994 in the Hayes
Page: 12<PAGE>
PART I. Item 2. - FINANCIAL INFORMATION (cont'd.) 6/96-10QSB
Chesapeake Financial Shares, Inc.
Management's Discussion and Analysis of Financial
Condition or Plan of Operation (Unaudited)
- ------------------------------------------------------------------
office, the Gloucester Winn-Dixie Office and a cash dispenser at Cobbs
Creek, in a convenience store. During 1995 Chesapeake Bank installed
ATMs at the Kilmarnock office, James City County Winn-Dixie office, in
front the Best Value department store in Mathews, in a convenience
store at Glenns, in the lobby of the Rappahannock General Hospital,
and two ATMs were installed at the Williamsburg Pottery facility.
The Bank also has ATM machines at Fredericksburg,
Disputania, Ashland, and in the East Coast Convenience Store, Route
17, and the Zooms Convenience Store on Route 5 in Williamsburg. An
additional ATM was opened in July at the new Williamsburg Office at
Route 5 and Ironbround Road.
Assets and Loans:
At June 30, 1996, Chesapeake Financial Shares had total
assets of $130.8 million, down less than 1% from $131.3 million at
December 31, 1995 and up 3.4% from $126.5 million of one year ago.
Management has budgeted a 5.0% growth in total assets for 1996.
Growth objectives have been set in loan growth, funded in part by the
securities portfolio and by deposit growth.
Total loans (gross) at June 30, 1996 were $85.8 million,
representing an increase of 3.9% from December 31, 1995, when loans
were $82.5 million. Chesapeake Bank's loan quality is exceptionally
good as the following table shows:
6/30/96 12/31/95
Nonaccrual loans $ 169,049 $ 138,200
90 days past due 17,826 71,505
Restructured loans 0 0
________ ________
Totals $ 186,875 $ 209,705
Management is confident there will be no loss incurred as
the Bank is well secured on these assets. There are no troubled debt
restructurings outstanding at the end of either period.
Chesapeake Bank has experienced greatly reduced loan charge
offs and increased recoveries as the credit quality has improved and
effective collection techniques are used. Year to date charge offs
through June 30, 1996 where $124,841 as compared to $12,438 as of June
30, 1995. Recoveries through June 30, 1996 were $179,057 as compared
to $21,094 as of June 30, 1995. The recovery trend is not expected to
continue.
Page: 13
PART I. Item 2. - FINANCIAL INFORMATION (cont'd.) 6/96-10QSB
Chesapeake Financial Shares, Inc.
Management's Discussion and Analysis of Financial
Condition or Plan of Operation (Unaudited)
- ------------------------------------------------------------------
Concentrations of credit in loans are compiled quarterly by
management and reviewed with the Board of Director's Loan Review
Committee. There have been no material changes in the concentrations
of credit within the past six months which would warrant any
additional reserve. The Bank's only concentrations of credit greater
than 60% of capital are in residential real estate (290% of total
capital) and commercial real estate (80% of total capital). Bank
management feels that the current levels are consistent with the
objectives of the Bank and do not represent unwarranted risk.
The Bank's Other Real Estate Owned (OREO) portfolio
currently has two properties with a total written down value of
$245,000. Bank management is aggressively marketing these properties.
Deposits:
Deposits are down less than 1%, with total deposits
amounting to $117.6 million, compared with $118.7 million at December
31, 1995. Deposits were $114.6 million at June 30, 1995. Competition
for deposit dollars is keen with the past year's run up in interest
rates and the volatility in the bond and equity markets. Management
expects to grow the bank during the second six months to offset the
loan demand.
Page: 14
PART II. Item l. - OTHER INFORMATION 6/96-10QSB
Chesapeake Financial Shares, Inc.
Legal Proceedings
- ---------------------------------------------------------------------
None to report
PART II. Item 2. - OTHER INFORMATION
Chesapeake Financial Shares, Inc.
Changes in Securities
- ---------------------------------------------------------------------
None to report.
PART II. Item 3. - OTHER INFORMATION
Chesapeake Financial Shares, Inc.
Default Upon Senior Securities
- ---------------------------------------------------------------------
None to report.
PART II. Item 4. - OTHER INFORMATION
Chesapeake Financial Shares, Inc.
Submission of Matters to a Vote of Security Holders
- ---------------------------------------------------------------------
Chesapeake Financial Shares' annual meeting of shareholders was
held on Friday, April 5, 1996 in Irvington, Virginia. Information
about the meeting and exhibits were provided with the Company's March
31, 1996, 10-QSB filing with the commission.
PART II. Item 5. - OTHER INFORMATION
Chesapeake Financial Shares, Inc.
Other Information
- ---------------------------------------------------------------------
The first quarter of 1995 the Company had an examination of the
corporate family by the Bureau of Financial Institutions, State
Corporation Commission, Commonwealth of Virginia, and the Bank had a
similar examination. Both examinations were as of December 31, 1994.
The Bank also had an examination of its Transfer Agent Function by the
Federal Reserve Bank of Richmond.
During the third quarter of 1995, the Bank satisfactorily
completed a Consumer Compliance Examination and a Community
Reinvestment Act Examination performed by the Federal Reserve Bank of
Richmond.
During the first quarter of 1996 the Bank and CFS were examined
by the Federal Reserve Bank of Richmond. As a result of all
examinations during the last fifteen months, management is not aware
of any current recommendations of the regulatory authorities which, if
Page: 15
they were implemented, would have a material effect on liquidity,
capital resources or operations.
During the second quarter of 1996 the Bank was examined by the
Federal Reserve Bank of Richmond Trust and EDP Examiners. As a result
of these examinations management is not aware of any current
recommendations of the regulatory authorities which, if they were
implemented, would have a material effect on liquidity, capital
resources or operations of the Bank.
PART II. Item 6. - OTHER INFORMATION 6/96-10QSB
Chesapeake Financial Shares, Inc.
Exhibits and Reports on Form 8-K
(Unaudited)
- ---------------------------------------------------------------------
(a) Exhibit 2 Plan of acquisition, reorganization, N/A
arrangement, liquidation or succession
Exhibit 4 Instruments defining the rights of security N/A
holders, including indentures
Exhibit 10 Material contracts N/A
Exhibit 11 Statement re: computation of earnings per N/A
share
Exhibit 15 Letter re: unaudited interim financial N/A
information
Exhibit 18 Letter re: change in accounting principles N/A
Exhibit 19 Report furnished to security holders N/A
Exhibit 22 Published report regarding matters N/A
submitted to vote of security holders
Exhibit 23 Consents of experts and counsel N/A
Exhibit 24 Power of attorney N/A
Exhibit 99 Additional exhibits N/A
(b) No filings ere made on Form 8-K for the period.
Page: 16
SIGNATURES
Chesapeake Financial Shares, Inc.
- ----------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Chesapeake Financial Shares, Inc.
---------------------------------
(Registrant)
8/7/96 s/s Douglas D. Monroe, Jr.
- ----------------------------- ---------------------------------
(Date) (Signature)
Douglas D. Monroe, Jr.
Chairman and Chief Executive Officer
8/7/96 s/s John H. Hunt, II
- ----------------------------- ---------------------------------
(Date) (Signature)
John H. Hunt, II
Secretary and Chief Financial Officer
Page: 17
