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, 1997
[ ] 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
(Address of principal executive offices) (Zip Code)
(804) 435-1181
(Registrant's telephone number, including area code)
Not Applicable
(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 July 15, 1997.
Class Outstanding at July 15, 1997
Common Stock, voting, $5.00 par value 839,049
Common Stock, non-voting, $5.00 par value 0
CHESAPEAKE FINANCIAL SHARES, INC.
FORM 10-QSB
INDEX
PART I - FINANCIAL INFORMATION
Page
Item 1. Financial Statements.................................1-4
Consolidated Balance Sheets
June 30, 1997 and December 31,1996.....................1-2
Consolidated Statements of Earnings
Three months ended June 30, 1997 and 1996................3
Consolidated Statements of Earnings
Six months ended June 30, 1997 and 1996..................4
Consolidated Statements of Cash Flows
Six months ended June 30, 1997 and 1996..................5
Notes to Consolidated Financial Statements.............6-7
Item 2. Management's Discussion and Analysis of Financial
Condition Results of Operations.......................8-13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.............................14
Item 2. Changes in Securities.........................14
Item 3. Defaults Upon Senior Securities...............14
Item 4. Submission of Matters to a Vote of
Security Holders..............................14
Item 5. Other Information.............................14
Item 6. Exhibits and Reports on Form 8-K..............15
Signatures..............................................16
Page I
PART I. Item 1. - FINANCIAL INFORMATION
Chesapeake Financial Shares, Inc. June 30, December 31,
Consolidated Balance Sheets 1997 1996
ASSETS (Unaudited)
Cash and due from banks................ $5,777,093 $5,896,836
Federal funds sold..................... 0 0
Time deposits with banks............... 0 0
Securities available for sale
U.S. Treasury securities (book value
of $1,955,217-1997 and $3,058,460-1996) 1,940,406 3,042,469
U.S. Government agencies (book value of
$20,904,594-1997and $23,488,966-1996) 20,922,198 23,400,043
Obligations of state and political
subdivisions (book value of
$10,987,341-1997 and $10,539,035-1996) 11,087,432 10,528,470
Other Securities (book value of
$743,400-1997 and $711,500-1996) 743,400 711,500
Loans.................................. 96,013,692 92,078,667
Less: Reserve for loan loss............ (1,661,410) (1,652,843)
--------------------------
Net loans........................... 94,352,282 90,425,824
Bank premises and equipment, net....... 3,447,360 3,284,063
Accrued interest receivable............ 1,017,568 1,088,201
Intangible assets, net................. 42,000 84,000
Other assets........................... 3,691,690 4,414,212
--------------------------
Total assets........................ $144,849,094 $142,875,618
==========================
See accompanying notes to consolidated financial statements. Page: 1
PART I. Item 1. - FINANCIAL INFORMATION
Chesapeake Financial Shares, Inc. June 30, December 31,
Consolidated Balance Sheets 1997 1996
LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited)
Deposits
Noninterest bearing deposits......... $ 16,753,150 $ 16,646,453
Savings and interest bearing deposits 37,678,364 37,273,969
Certificates of deposit.............. 75,571,005 73,709,143
---------------------------
Total deposits..................... 130,002,519 127,629,565
Federal funds purchased................ 800,000 2,000,000
Accrued interest payable............... 265,361 272,546
Other liabilities...................... 988,280 964,536
Note payable........................... 0 0
---------------------------
Total liabilities................. 132,056,160 130,866,647
Commitments
Shareholders' equity
Preferred stock, par value $1 per share;
authorized 50,000 shares; none outstanding 0 0
Common stock, voting.................. 4,195,245 4,198,435
Common stock, non-voting.............. 0 0
voting non-voting
6/30/97 12/31/96 6/30/97 12/31/96
------- -------- ------- --------
Shares auth.2,000,000 2,000,000 635,000 635,000
Shares o/s. 839,049 839,687 0 0
Paid In Capital........................ 454,643 468,493
Unrealized gains (losses) on securities
available for sale.................. 67,525 (76,216)
Retained earnings...................... 8,075,521 7,418,259
--------------------------
Total shareholders'equity........... 12,792,934 12,008,971
---------------------------
Total liabilities and Shareholders'
equity.............................. $144,849,094 $142,875,618
===========================
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,
1997 1996
Interest Income (Unaudited)
Interest and fees on loans..................... $2,208,064 $2,005,573
Interest on federal funds sold................. 1,966 3,662
Interest on time deposits with banks........... 2,459 26,585
Interest on U.S. Treasury securities........... 25,595 58,383
Interest on obligations of U.S. Agency
Obligations.................................. 334,588 276,862
Interest on obligations of state and political
subs........................................... 171,335 128,097
Total interest income
2,744,007 2,499,162
Interest Expense
Interest on savings and interest bearing deposits 240,561 250,612
Interest on certificates of deposit............ 1,012,092 880,370
Interest on federal funds purchased............ 24,875 10,321
Other interest expense......................... 0 7,307
----------------------
Total interest expense 1,277,528 1,148,610
----------------------
Net interest income............................ 1,466,479 1,350,552
Provision for loan losses...................... 0 37,500
----------------------
Net interest income after provision for loan losses 1,466,479 1,313,052
----------------------
Noninterest Income
Income from fiduciary activities............... 218,971 193,313
Service charges on deposit accounts............ 137,277 130,755
Securities gains (losses) -net................. 384 0
Merchant card income........................... 84,999 67,349
ATM income..................................... 52,318 41,940
Business manager income........................ 139,451 107,351
Other income................................... 86,090 86,933
----------------------
Total noninterest income 719,490 627,641
----------------------
Noninterest Expense
Salaries....................................... 591,610 543,321
Employee benefits.............................. 143,430 127,387
Occupancy expenses............................. 325,792 237,350
Amortization expense........................... 21,000 21,000
Merchant card expense.......................... 88,383 53,412
ATM expense.................................... 70,144 67,842
Business manager expense....................... 80,572 27,805
Other expenses................................. 268,058 277,219
----------------------
Total noninterest expense................. 1,588,989 1,361,405
----------------------
Income before income taxes..................... 596,980 579,288
Income taxes................................... 158,265 159,500
----------------------
Net income................................. $ 438,715 $ 419,788
======================
Earnings per share............................. $0.51 $0.49
See accompanying notes to consolidated financial statements. Page: 3
PART I. Item 1. - FINANCIAL INFORMATION (cont'd.)
Chesapeake Financial Shares, Inc. Six Months Ended
Consolidated Statements of Earnings June 30,
1997 1996
Interest Income (Unaudited)
Interest and fees on loans...................... $4,372,103 $3,937,597
Interest on federal funds sold.................. 2,477 12,415
Interest on time deposits with banks............ 4,478 34,377
Interest on U.S. Treasury securities............ 61,363 119,939
Interest on obligations of U.S. Agency Obligations 672,854 585,504
Interest on obligations of state and political subs 314,943 254,064
-----------------------
Total interest income 5,428,218 4,943,896
Interest Expense
Interest on savings and interest bearing deposits 479,466 503,300
Interest on certificates of deposit............. 2,011,239 1,810,292
Interest on federal funds purchased............. 49,433 11,333
Other interest expense.......................... 0 15,568
-----------------------
Total interest expense 2,540,138 2,340,493
-----------------------
Net interest income............................. 2,888,080 2,603,403
Provision for loan losses....................... 0 75,000
-----------------------
Net interest income after provision for loan
losses......................................... 2,888,080 2,528,403
-----------------------
Noninterest Income
Income from fiduciary activities................ 408,399 366,074
Service charges on deposit accounts............. 269,706 252,633
Securities gains (losses) -net.................. (2,365) (4,958)
Merchant card income............................ 132,864 89,316
ATM income...................................... 95,662 58,787
Business manager income......................... 227,667 180,498
Other income.................................... 174,367 178,055
----------------------
Total noninterest income 1,306,300 1,120,405
----------------------
Noninterest Expense
Salaries........................................ 1,156,872 1,093,662
Employee benefits............................... 313,287 256,794
Occupancy expenses.............................. 535,776 479,779
Amortization expense............................ 42,000 42,000
Merchant card expense........................... 138,872 74,167
ATM expense..................................... 136,277 107,123
Business manager expense........................ 136,393 40,587
Other expenses.................................. 661,157 547,386
-----------------------
Total noninterest expense.................. 3,120,634 2,655,752
-----------------------
Income before income taxes...................... 1,073,746 993,056
Income taxes.................................... 282,225 264,500
-----------------------
Net income................................. $ 791,521 $ 728,556
=======================
Earnings per share.............................. $0.92 $0.84
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,
1997 1996
(Unaudited)
Cash flows from operating activities:
Net income..................................... $ 91,521 $ 728,556
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization................ 316,028 247,443
Provision for loan losses.................... 0 75,000
(Accretion) of discount and amortization of
premiums, net................................ 94,090 165,231
Net (gain) loss on sale of securities........ 2,365 4,958
Changes in assets and liabilities:
Decrease (increase) in accr. interest
receivable.................................. 70,633 67,169
Decrease (increase) in other assets......... (1,179,764) (79,359)
Increase (decrease) in accrued interest
payable..................................... (7,185) (17,365)
Increase (decrease) in other liabilities.... 23,744 568,185
----------------------
Net cash provided by (used for) operating
activities..................................... 111,432 1,759,818
Cash flows from investing activities:
Net (increase) decrease in time deposits with
banks......................................... 0 350,316
Purchases of securities available for sale..... (6,549,626) (6,742,216)
Proceeds from sale or call of securities
available for sale............................ 7,216,092 4,658,677
Proceeds from maturities of securities available
for sale...................................... 2,444,488 4,808,605
Origination of loans available for sale........ (1,506,950) (2,164,502)
Proceeds from sale of loans available for
sale.......................................... 1,506,950 1,723,900
Net (increase) decrease in loans outstanding... (3,926,458) (2,851,022)
Other capital expenditures..................... (437,325) (338,509)
----------------------
Net cash provided by (used for) investing
activities.................................... (1,252,829) (554,751)
----------------------
Cash flows from financing activities:
Net increase (decrease) in demand accounts,
interest bearing demand deposit accounts
and savings deposits.......................... 511,092 2,504,183
Net increase (decrease) in certificates of
deposit....................................... 1,861,862 (3,552,611)
Net decrease in federal funds purchased........ (1,200,000) (115,000)
Cash dividends................................. (134,260) (119,252)
Proceeds from issuance of voting common stock.. 5,000 10,000
Acquisition of voting common stock............. (22,040) (44,932)
Curtailment of long-term borrowings............ 0 (75,000)
----------------------
Net cash provided by (used for) financing
activities.................................... 1,021,654 (1,392,612)
Net (decrease) increase in cash and federal
funds sold.................................... (119,743) (187,545)
Cash and federal funds sold at beginning of
period........................................ 5,896,836 4,906,634
----------------------
Cash and federal funds sold at end of period... $5,777,093 $4,719,089
======================
See accompanying notes to consolidated financial statements. Page: 5
PART I. Item 1. - FINANCIAL INFORMATION (cont'd.) 6/97-10QSB
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 1996 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, 1997 and December 31, 1996 were 862,033 and
860,062, 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, 1996 or
June 30, 1997.
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
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,
1996 or June 30, 1997.
Page: 6
PART I. Item 1. - FINANCIAL INFORMATION (cont'd.) 6/97-10QSB
Chesapeake Financial Shares, Inc.
Notes to Consolidated Financial Statements
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 uncollectable 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 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: 7
PART I. Item 2. - FINANCIAL INFORMATION (cont'd.) 6/97-10QSB
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, 1997 was approximately $3,768,000,
compared to $9,501,000 one year ago and $6,388,000 at
December 31, 1996.
The liquidity ratio at June 30, 1997 was 27.1%,
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 9.8% at June 30, 1997
and 9.5% at December 31, 1996, 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, 1997 and December 31, 1996 the Bank's ratio of
Tier 1 risk based capital to risk-adjusted assets was
11.2% and 11.3%, respectively. Total risked based
capital to risk weighted assets was 12.4% and 12.5% at
June 30, 1997 and December 31, 1996, respectively.
Tier one leverage capital was 7.8% and 7.7% at June 30,
1997 and December 31, 1996, respectively.
Page: 8
PART I. Item 2. - FINANCIAL INFORMATION (cont'd.) 6/97-10QSB
Chesapeake Financial Shares, Inc.
Management's Discussion and Analysis of Financial
Condition or Plan of Operation (Unaudited)
B. Results of operations:
Earnings Summary:
Net income was $791,521 for the six months ended
June 30, 1997, compared with income of $728,556 for the
same period in 1996. On a per share basis, the net
profit was $0.92 for the first six months, compared
with $0.84 per share for the same period in the prior
year. The increase in earnings resulted primarily from
a $359,677 or 14.2% increase in net interest income
after provision and a $185,895 or 16.6% increase in
noninterest income. The Company experienced a net
increase in noninterest expense of $464,882 or 17.5%.
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, 1997, the Company's interest-
earning assets exceeded its interest-bearing
liabilities by approximately $15.4 million, compared
with a $13.6 million excess one year ago.
Net interest margins are 4.60% at June 30, 1997
compared to 4.49% at June 30, 1996. Chesapeake Bank
maintained competitive rates throughout the first nine
months of last year without being aggressive. During
the fourth quarter of 1996 a deposit offering generated
approximately $7 million dollars in new money The
March 97 increase in the New York prime rate had a
positive impact on margins during the past quarter as
prime-adjusted loans have repriced. Margins also
improved as our loan to deposit ratio has risen from
73% at June 30, 1996, to over 76% during the second
quarter of 1997.
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,
1997 supports the adequacy of the current loan loss
level of $1.7 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: 9
PART I. Item 2. - FINANCIAL INFORMATION (cont'd.) 6/97-10QSB
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 1.7% and 1.8% of gross loans as of June 30, 1997
and December 31, 1996 respectively.
Noninterest Income:
Noninterest income is up 16.6% or $185,895 from
the same period last year. Trust income is up 11.6%,
or $42,325, from June 30, 1996. This increase was due
to volume increases in total managed assets this
quarter and the general level of business. Service
charges on deposit accounts were up $17,073 or 6.8%
from June 30, 1996.
Bank management changed the merchant card program
to a principal member of the VISA/MASTERCARD Network in
the beginning of 1995. Since that time we have been
rebuilding our merchant card customer base. This has
generated approximately $43,548 or 48.8% more in gross
merchant card revenue through June of this year than in
the same period last year. The ATM fee income to date
is $95,662, up 62.7%. The Bank had $58,787 from ATM
fee income as of June 30, 1996. The Bank has 12 ATMs
operational as of the end of June 30, 1997. The Bank
charges a nominal fee for use of its ATMs by non-
customers. This practice started in July of 1996 and
covers most of the ATMs.
Chesapeake Banks Business Manager product
generated $227,667 in gross revenue for the first six
months ended June 30, 1997, compared to the same period
last year of $180,498. Managed assets in the business
manager program were $3,691,690 at June 30, 1997, and
$1,708,075 at June 30, 1996.
Page: 10
PART I. Item 2. - FINANCIAL INFORMATION (cont'd.) 6/97-10QSB
Chesapeake Financial Shares, Inc.
Management's Discussion and Analysis of Financial
Condition or Plan of Operation (Unaudited)
Noninterest Expenses:
Employee salaries expenses amounted to $1,156,872
and $1,093,662 as of June 30, 1997 and 1996,
respectively. We opened a new branch in Williamsburg
in July of 1996 and additional staff was added during
the second quarter of last year. Benefits expense is
up 22.0% or $56,493 over June 30, 1996 due primarily to
deferred compensation expenses and incentive accruals.
Occupancy expenses are up 11.7% or $55,997 from
June 30, 1996 primarily due to leasehold improvement
expenses at the new branch in Williamsburg and some one-
time maintenance expenses at other branches. There are
additional expenses associated with renovations to the
Operations Center.
Merchant Card expenses are up 87.2% due to
increased volume in the program. Profit margins on the
merchant card program are expected to improve in 1997
as business volume increases. ATM expenses are up due
to the depreciation expenses associated with the
expansion of the Bank's ATM network and volumes are
still below break even targets. The ATM program was
expected to break even by the end of 1996. However,
expected operational expense reductions will not be
realized in the ATM program until the third quarter of
1997 when we will change our ATM processing vendor.
As of this report date the Bank has 12 ATM/cash
dispensers in operation. Three were completed by
December 31, 1994 in the Hayes 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 had ATM machines in the East Coast
Convenience Stores at Fredericksburg, Disputania,
Ashland, Opal, and Route 17, Gloucester, which have
since been closed as part of the expense reduction of
the program.. Additional ATMs were opened during the
summer of 1996 at the new Williamsburg Office at Route
5 and Ironbround Road, and the Zooms Convenience Store
on Route 5 in Williamsburg. The Bank has made
arrangements to relocate two of the machines removed
from East Coast to more productive areas.
Other expenses were $661,157 for the six month
period, compared with $561,640 for the same period one
year ago. Increases in this area are primarily related
to increases in delivery and transportation,
miscellaneous professional fees, and advertising
expenses related to a new product, Colonial Education
Trust (CET). CET is a college tuition trust product.
Page: 11
PART I. Item 2. - FINANCIAL INFORMATION (cont'd.) 6/97-10QSB
Chesapeake Financial Shares, Inc.
Management's Discussion and Analysis of Financial
Condition or Plan of Operation (Unaudited)
Assets and Loans:
At June 30, 1997, Chesapeake Financial Shares had
total assets of $144.8 million, up 1.4% from $142.9
million at December 31, 1996 and up 10.8% from $130.8
million of one year ago. Management has budgeted a
6.5% growth in total assets for 1997. Management still
feels the growth targets will be met. Growth objectives
have been set in loan production, funded in part by the
securities portfolio and by deposit growth. Management
is considering other sources of liquidity such as long
term borrowing from the Federal Home Loan Bank in
Atlanta.
Total loans (gross) at June 30, 1997 were $96.0
million, representing an increase of 4.3% from December
31, 1996, when loans were $92.1 million. Chesapeake
Bank's loan quality is exceptionally good as the
following table shows. While the absolute numbers are
up from December 31, 1996, they are nominal as a per
cent of loans or capital compared to peer group.
Management is confident that no serious delinquency
trends are developing.
6/30/97 12/31/96
Nonaccrual loans $ 638,490 $ 142,944
90 days past due 0 8,850
Restructured loans 0 0
________ ________
Totals $ 638,490 $ 151,794
Management is also 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, 1997 where $8,406 as compared to $124,841 as
of June 30, 1996. Recoveries through June 30, 1997
were $16,973 as compared to $179,057 as of June 30,
1996. This positive recovery trend is not expected to
continue.
Page: 12
PART I. Item 2. - FINANCIAL INFORMATION (cont'd.) 6/97-10QSB
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 nine months which would warrant above average
additions to the reserve. The Bank's only
concentrations of credit greater than 70% of capital
are in residential real estate (195% of total capital),
the hospitality sector (80% of total capital),
individual consumer (72% of capital), the retail sector
(74% of total capital), and the services/professional
sector (73% 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 up 1.9% or $2.4 million from $127.6
million at December 31, 1996. Deposits were $130.0
million and $117.6 million at June 30, 1997 and June
30, 1996, respectively. Competition for deposit
dollars is keen with the record performance of the
stock market. Management has grown the Bank during the
past year with specific deposit offerings to offset the
loan demand.
Other:
The Bank has submitted an application to the State
Banking Commissioner and the Federal Reserve Bank of
Richmond for a branch in Williamsburg on Lafayette
Street. Management has entered into a contract (with
contingencies) to acquire the land and bank building
from First Union. The facility had been closed by First
Union over two years ago. We will not be acquiring any
banking assets or liabilities. Chesapeake does not
expect the branch to be operational before the spring
of 1998.
Page: 13
PART II. Item l. - OTHER INFORMATION 6/97-10QSB
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 4, 1997 in
Irvington, Virginia. We have previously forwarded to
the Commission copies of the letter to shareholders,
the notice of the meeting, the proxy statement, and the
proxy. Over 85% of the shareholders were represented
at the meeting in person or by proxy with over 84%
voting in favor of the proposal submitted.
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 since January of 1995,
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.
During the second quarter of 1996 the Bank was
examined by the Federal Reserve Bank of Richmond Trust
and EDP Examiners. During the first quarter of 1997,
the Bank satisfactorily completed another Consumer
Compliance Examination and a Community Reinvestment Act
Examination performed by the Federal Reserve Bank of
Richmond. During the second quarter of 1997, the Bank
and the holding company satisfactorily completed
another safety and soundness examination performed by
the Bureau of Financial Institutions, State Corporation
Commission, Commonwealth of Virginia. 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.
Page: 14
PART II. Item 6. - OTHER INFORMATION 6/97-10QSB
Chesapeake Financial Shares, Inc.
Exhibits and Reports on Form 8-K
(Unaudited)
(a) Exhibit 2 Plan of acquisition, reorganization,
arrangement, liquidation or succession N/A
Exhibit 4 Instruments defining the rights of security
holders, including indentures N/A
Exhibit 10 Material contracts N/A
Exhibit 11 Statement re: computation of earnings per share N/A
Exhibit 15 Letter re: unaudited interim financial
information N/A
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 submitted
to vote of security holders Previously Filed
Exhibit 23 Consents of experts and counsel N/A
Exhibit 24 Power of attorney N/A
Exhibit 27 Financial Data Schedule Attached
Exhibit 99 Additional exhibits N/A
(b) No filings were made on Form 8-K for the period.
Page: 15
SIGNATURES
Chesapeake Financial Shares, Inc. SEC 10-QSB 6/97
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)
7/22/97
------------ -------------------------
(Date) (Signature)
Douglas D. Monroe, Jr.
Chairman and Chief Executive
Officer
7/22/97
--------------- -------------------------
(Date) (Signature)
John H. Hunt, II
Secretary and Chief Financial
Officer
Page: 16
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 5,777,093
<INT-BEARING-DEPOSITS> 37,678,364
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 34,693,436
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 96,013,692
<ALLOWANCE> 1,661,410
<TOTAL-ASSETS> 144,849,094
<DEPOSITS> 130,002,519
<SHORT-TERM> 800,000
<LIABILITIES-OTHER> 1,253,641
<LONG-TERM> 0
0
0
<COMMON> 4,195,245
<OTHER-SE> 8,597,689
<TOTAL-LIABILITIES-AND-EQUITY> 144,849,094
<INTEREST-LOAN> 4,372,103
<INTEREST-INVEST> 1,049,160
<INTEREST-OTHER> 6,955
<INTEREST-TOTAL> 5,428,218
<INTEREST-DEPOSIT> 2,490,705
<INTEREST-EXPENSE> 2,060,672
<INTEREST-INCOME-NET> 2,888,080
<LOAN-LOSSES> 0
<SECURITIES-GAINS> (2,365)
<EXPENSE-OTHER> 3,120,634
<INCOME-PRETAX> 1,073,746
<INCOME-PRE-EXTRAORDINARY> 791,521
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 791,521
<EPS-PRIMARY> .92
<EPS-DILUTED> .92
<YIELD-ACTUAL> 4.65
<LOANS-NON> 638,490
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,663,608
<CHARGE-OFFS> 4,000
<RECOVERIES> 1,802
<ALLOWANCE-CLOSE> 1,661,410
<ALLOWANCE-DOMESTIC> 1,661,410
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
