U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996.
Commission file number 0-18543
CHESAPEAKE FINANCIAL SHARES, INC.
Virginia 54-1210845
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
1 N. Main St., Kilmarnock, VA 22482
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (804)-435-1181
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock ($5.00 par value)
(Title of Class)
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State Issuer's Revenues for its most recent fiscal year $12,701,431.
As of March 1, 1997, the aggregate market value of Common Stock of Chesapeake
Financial Shares, Inc. held by nonaffiliates was approximately $7,507,065 based
upon the average sales price per share known to management during January and
February 1997.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of March 1, 1997:
Class Outstanding at March 1, 1997
---------------------------------
Common Stock, $5.00 par value 839,254
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference and the Part of
the Form 10-KSB into which the document is incorporated.
(1) Portions of the Annual Report to Shareholders for the year ended December
31, 1996 are incorporated into Part II, Items 5 through 7 of this Form
10-KSB.
(2) Portions of the definitive proxy statement for the 1997 Annual Meeting of
Stockholders are incorporated into Part III, Items 9 through 12 of this
Form 10-KSB.
Transitional Small Business Disclosure Format Yes No X
<PAGE>
CHESAPEAKE FINANCIAL SHARES, INC.
FORM 10-KSB
INDEX
PART I
<TABLE>
<CAPTION>
<S> <C>
Item 1. Description of Business
Statistical Information
Item 2. Description of Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Item 6. Management's Discussion and Analysis or Plan of Operation
Item 7. Financial Statements
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Item 10. Executive Compensation
Item 11. Security Ownership of Certain Beneficial Owners and Management
Item 12. Certain Relationships and Related Transactions
Item 13. Exhibits and Reports on Form 8-K
Signatures
</TABLE>
<PAGE>
PART I
Item 1. Description of Business
The Company
Chesapeake Financial Shares, Inc. (the "Company") is an independent,
community owned one-bank holding company based in Kilmarnock, Virginia. The
Company was incorporated under the laws of the Commonwealth of Virginia in 1982
in connection with the reorganization of Chesapeake Bank (the "Bank") into a
one-bank holding company structure. Today the Company conducts substantially all
of its business activities through the wholly-owned subsidiary - the Bank.
Additionally, the Company operates Chesapeake Mortgage Company, Inc., Chesapeake
Insurance Agency, Inc., and CNB Properties, Inc.
On December 31, 1996, the Company and its subsidiaries had 87 full-time
equivalent employees.
The Bank
The Bank is a full-service commercial bank incorporated under the laws
of the Commonwealth of Virginia and traces its origins back to 1900. The Bank
was formed by the merger on April 27, 1968 of Chesapeake Banking Company,
headquartered in Lively, Virginia, and Lancaster National Bank, headquartered in
Irvington, Virginia. Lancaster National Bank was originally chartered on April
14, 1900, and Chesapeake Banking Company was organized on October 15, 1920. The
Bank (formerly Chesapeake National Bank) converted from a national to a state
chartered bank on June 27,1995.
The Bank has grown to provide a full range of banking and related
financial services, including checking, savings, certificates of deposit and
other depository services, commercial, residential real estate and consumer loan
services, safekeeping services and trust and estate services. The Bank is a
member of the Federal Reserve System and its deposits are insured by the Bank
Insurance Fund ("BIF") of the Federal Deposit Insurance Corporation ("FDIC").
Total assets have increased 8.9%, 5.5%, and 3.0% for each of the years
1996, 1995, and 1994, respectively. Total loans increased to $90.4 or 11.6% at
December 31, 1996, to $81.0 million or 8.3% at December 31, 1995, and to $74.8
million or 10.2% at December 31, 1994. Growth in total deposits has followed a
similar pattern with increases of 7.5%, 5.7%, and 2.7%. The Gloucester Office
was relocated in a new Winn-Dixie store during the fall of 1994, and the James
City County Winn-Dixie Office was opened in May of 1995. The Five
Forks/Williamsburg Office was opened in May of 1996. The Bank operates nine
banking offices and seventeen ATMs.
The Bank expanded its market area to James City County in the spring of
1995. The second full service banking facility was opened at Route 5 and
Ironbound Road, southwest of Williamsburg. This branch has complimented the
Winn-Dixie branch and ATM facilities currently in the county. The Bank's
existing market area covers most of the area north of the Rappahannock River and
south of the Potomac River known as the "Northern Neck", the area bounded on the
south by the York River and on the north by the Rappahannock River, known as the
"Middle Peninsula", and the Williamsburg area north of the James River.
The Bank's current market area is largely rural. The principal business
activities are primarily related to the small commercial enterprises and
residential real estate due to the area's popularity as a retirement and summer
home location. The growth of the York County - Williamsburg - Hampton triangle
has provided additional commercial and residential business activity which
diversifies revenue sources.
With the exception of the Bank's Westminster Canterbury Office, the
Gloucester Winn-Dixie Office, the James City County Winn-Dixie Office, the Five
Forks Office, the Bank's Main Office and branch offices are held in fee, free of
any encumbrances. The Westminster Canterbury Office is leased under an agreement
that expires May 31, 2000. The Gloucester Courthouse and the James City County
branches occupy facilities rented from Winn-Dixie Raleigh. The initial
Gloucester lease on the premises expires in October of 1999, and the James City
lease expires May of 2000. Both Winn-Dixie contracts have two five year
renewals.
The Bank's branch offices are located as follows:
<TABLE>
<S> <C>
Gloucester Winn-Dixie Office Hayes Office Lively Office
Route 17 Route 17 Lively, Virginia
The Shoppes at Gloucester Hayes Shopping Center
Gloucester, Virginia Hayes, Virginia
Rappahannock Westminster Kilmarnock Office Mathews Office
Canterbury Office 97 North Main Street Mathews Courthouse
Irvington, Virginia Kilmarnock, Virginia Mathews, Virginia
Irvington Office James City County Five Forks Office
Irvington, Virginia Winn-Dixie Office Rt. 5 & Ironbound Rd
Williamsburg, Virginia Williamsburg, Va.
</TABLE>
The Company operates a separate office for its Loan Administration
Department at 19 North Main Street, Kilmarnock, Virginia. This office is leased
under an agreement that expires on April 1, 2002 and has a five year renewal.
The Company has an operations center at 1 North Main Street in Kilmarnock, which
it owns in fee and is unencumbered.
The Mortgage Company
Chesapeake Mortgage Company, Inc. (the "Mortgage Company"), which is a
wholly-owned subsidiary of the Company, completed its eleventh year of
operations in 1996. The Mortgage Company operations area was consolidated with
the Bank's loan operations/underwriting area at the end of 1995. This resulted
in improved customer service while reducing over all costs. The Bank offers the
same permanent fixed and adjustable rate home mortgage loans as the Mortgage
Company. The Bank also solicits customers in the counties of Lancaster,
Northumberland, Gloucester, Mathews, Middlesex, York and the James City County
area. The Bank and the Mortgage Company comply with the guidelines of the
Federal Home Loan Mortgage Corporation ("FHLMC"), and all loans are sold in the
secondary market within fifteen to sixty days after the loan closing date.
See "Lending Activities" below for further information on the mortgage
lending services offered by the Bank.
The Title Company
Chesapeake Insurance Agency, Inc., T/A Chesapeake Title Company, (the
"Title Company"), which is a wholly-owned subsidiary of the Bank, completed its
tenth year of operations in 1996. The Title Company has also had the operations
area consolidated with the Bank. The Title Company offers annuity products and
provides referrals to other companies for title insurance services.
Lending Activities
The Company provides a wide range of commercial, real estate, and
consumer loan services.
Real Estate Lending. The Company's real estate loan portfolio (both
mortgage and construction lending) continues to be its largest loan category as
it amounted to $41.4 million at December 31, 1996, or 45.0% of its total loan
portfolio. The Bank offers permanent fixed and adjustable rate first mortgage
loans on one-to-four family residential properties. Most of the long-term fixed
rate mortgages and the adjustable rate mortgages are underwritten and documented
in accordance with the guidelines of the FHLMC and are sold in the secondary
market within fifteen to sixty days after the loan closing date.
The Bank emphasizes the origination of adjustable rate mortgages in
order to increase the proportion of the Company's total loan portfolio with more
frequent repricing. At December 31, 1996, 49.3% of the mortgage portfolio was
subject to repricing or maturing within twelve months.
The relative customer demand for adjustable-rate and fixed-rate
residential mortgage loans has varied considerably, depending on such factors as
the level of interest rates and expectations regarding future interest rates and
the supply of new housing units placed on the market in the Company's trade
area. At December 31, 1996, the mortgage portfolio amounted to $38.3 million, or
41.6% of total loans.
As part of its residential lending program, the Bank offers
construction loans with 80% loan-to-value ratios to qualified builders and
individuals. Construction loans generally have terms of up to twelve months and
interest rates which generally are fixed commitments. Loan proceeds are
disbursed in increments as construction progresses and as inspections warrant.
In addition to builders' projects, the Bank finances the construction of
individual, owner-occupied houses where qualified contractors are involved.
Construction loans are structured either to be converted to permanent loans at
the end of the construction phase or to be paid off upon receiving financing
from another financial institution.
Construction loans afford the Bank the opportunity to charge higher
loan origination fees, to increase the frequency of repricing of its loan
portfolio and to earn yields higher than those obtainable on adjustable-rate
loans secured by existing one - to four - family residential properties. These
higher yields reflect the higher risks associated with construction lending,
principally the difficulty in evaluating accurately the total funds required to
complete a project and the post-completion value of the project. As a result,
the Bank places a strong emphasis upon the borrower's ability to repay principal
and interest.
Consumer Lending. As the competitive and regulatory environments have
changed, the Company has sought to expand its retail banking services to
complement the range of traditional consumer services already offered. The Bank
has placed increased emphasis on consumer loans (11.8% increase over 1995 and
43.2% increase in 1995 over 1994) because of their attractive yields and
repricing characteristics. The Bank currently originates a variety of consumer
loans, including lines of credit secured by owner-occupied real estate, real
estate equity loans, boat loans, loans secured by deposits, unsecured loans and
automobile loans. The Bank's consumer loan portfolio was approximately $14.6
million at December 31, 1996, or 15.8% of its total loan portfolio.
Consumer loans generally are considered to entail greater risk than
residential mortgage loans secured by first liens on owner-occupied properties.
The Bank's underwriting and screening processes have been designed to reduce
this risk and have, to date, limited the Bank's consumer delinquency rate to
levels below industry averages. At December 31, 1996, 0.36% of the Bank's
consumer loan portfolio was 30 days or more delinquent.
Commercial Lending. Commercial lending activities to the Bank's
commercial, industrial, agricultural, and governmental customers include the
making of asset-based and other secured loans, making unsecured loans, and
offering demand and term loans. Management believes commercial loans offer the
potential for better yields and repricing characteristics than most other types
of loans. At December 31, 1996, the Bank's commercial loan portfolio amounted to
$33.3 million, or 36.1% of its total loan portfolio. See Note 3 to the
Consolidated Financial Statements of the Company included in the Company's 1996
Annual Report to Shareholders ("1996 Annual Report"), specified portions of
which are incorporated by reference herein (attached as Exhibit 13.0 to this
Form 10-KSB), for a breakdown of the major loan classifications of the Bank. Of
the $33.3 million of commercial loans at December 31, 1996, 73.8% of such loans
either matured or were subject to repricing within one year. (see Table 4 at
page 16).
Unlike residential mortgage loans, which generally are made on the
basis of the borrower's ability to make repayment from his employment and other
income, commercial loans generally involve more risk. Commercial loans typically
are made on the basis of the borrower's ability to make repayment from the cash
flow of its business and are generally secured by business assets, such as
accounts receivable, equipment, and inventory. As a result, the availability of
funds for the repayment of commercial loans may be substantially dependent on
the success of the business itself. At December 31, 1996, 90.5% of the
commercial loans were secured by some form of collateral and 0.49% of the Bank's
commercial loan portfolio was 30 days or more delinquent. See Table 6 at page 18
showing the amount of commercial loans charged off during 1996 and 1995.
Long-Term Debt
See Note 6 to the Consolidated Financial Statements included in the
Company's 1996 Annual Report, specified portions of which are incorporated by
reference herein (attached as Exhibit 13.0 to this Form 10-KSB), for information
concerning past term loan agreements of the Company. The existing line of credit
agreement mentioned in Note 6 requires the Bank, among other things, to maintain
its reserve for loan losses and certain minimum capital ratios as required by
the Company's regulators.
There is no line of credit balance outstanding at December 31, 1996.
To secure this indebtedness of the Company to The Community Banker's
Bank, the Company pledged its entire stock ownership interest in the Bank to The
Community Banker's Bank. So long as no event of default shall occur under the
loan agreement and related documents, the Company will be entitled to continue
to receive all cash distributions and dividends with respect to the pledged
shares and to vote such shares, and otherwise to have all rights as owner of the
pledged shares, except the right to transfer or encumber such shares.
Competition
The Bank is subject to intense competition from various financial
institutions and other companies or firms that offer financial services. In its
market area, the Company is and will be competing with several statewide banking
institutions, including First Virginia Bank, Signet Bank, Crestar Bank,
NationsBank of Virginia, N.A. and First Union. The Bank competes for deposits
with other commercial banks, savings and loan associations, credit unions and
with issuers of commercial paper and securities, such as money market and mutual
funds. In making loans, the Bank competes with other commercial banks, savings
and loan associations, consumer finance companies, credit unions, leasing
companies and other lenders. Federal and state legislative changes since 1982
have significantly increased competition among financial institutions, and
current trends towards further deregulation may be expected to increase such
competition even further. Many of the financial organizations in competition
with the Company have greater financial resources than the Company and are able
to offer similar services at varying costs with greater loan capacities.
Supervision and Regulation
Bank holding companies and banks are extensively regulated under both
federal and state law. The following description briefly discusses certain
provisions of federal and state laws and certain regulations and proposed
regulations and the potential impact of such provisions on the Company and the
Bank.
Bank Holding Companies. As a bank holding company registered under The
Bank Holding Company Act of 1956 (the "BHCA"), the Company is subject to
regulation by the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board"). The Federal Reserve Board has jurisdiction under the BHCA to
approve any bank or nonbank acquisition, merger or consolidation proposed by a
bank holding company. The BHCA generally limits the activities of a bank holding
company and its subsidiaries to that of banking, managing or controlling banks,
or any other activity which is so closely related to banking or to managing or
controlling banks as to be a proper incident thereto.
The BHCA currently prohibits the Federal Reserve Board from approving
an application from a bank holding company to acquire shares of a bank located
outside the state in which the operations of the holding company's banking
subsidiaries are principally conducted, unless such an acquisition is
specifically authorized by statute of the state in which the bank whose shares
are to be acquired is located. However, under recently enacted federal
legislation, the restriction on interstate acquisitions will be abolished
effective one year from enactment of such legislation, and thereafter bank
holding companies from any state will be able to acquire banks and bank holding
companies located in any other state subject to certain conditions, including
nationwide and state concentration limits. Banks also will be able to branch
across state lines effective June 1, 1997 (unless state law would permit such
interstate branching at an earlier date), provided certain conditions are met,
including that applicable state law must expressly permit such interstate
branching. Virginia has adopted legislation that will permit branching across
state lines effective July 1, 1995, provided there is reciprocity with the state
in which the out-of-state bank is based.
There are a number of obligations and restrictions imposed on bank
holding companies and their depository institution subsidiaries by federal law
and regulatory policy that are designed to reduce potential loss exposure to the
depositors of such depository institutions and to the FDIC insurance fund in the
event the depository institution becomes in danger of default or is in default.
For example, under a policy of the Federal Reserve Board with respect to bank
holding company operations, a bank holding company is required to serve as a
source of financial strength to is subsidiary depository institutions and to
commit resources to support such institutions in circumstances where it might
not do so absent such policy. In addition, the "cross guarantee" provision of
federal law requires insured depository institutions under common control to
reimburse the FDIC for any loss suffered or reasonably anticipated by either the
Savings Association Insurance Fund ("SAIF") or the BIF as a result of the
default of a commonly controlled insured depository institution or for any
assistance provided by the FDIC to a commonly controlled insured depository
institution in danger of default. The FDIC may decline to enforce the
cross-guarantee provisions if it determines that a waiver is in the best
interest of the SAIF or the BIF or both. The FDIC's claim for damages is
superior to claims of stockholders of the insured depository institution or its
holding company but is subordinate to claims of depositors, secured creditors
and holders of subordinated debt (other than affiliates) of the commonly
controlled insured depository institutions.
The Federal Deposit Insurance Act ("FDIA") also provides that amounts
received from the liquidation or other resolution of any insured depository
institution by any receiver must be distributed (after payment of secured
claims) to pay the deposit liabilities of the institution prior to payment of
any other general or unsecured senior liability, subordinated liability, general
creditor or stockholder. This provision would give depositors a preference over
general and subordinated creditors and stockholders in the event a receiver is
appointed to distribute the assets of the Bank.
The Company is registered under the bank holding company laws of
Virginia. Accordingly, the Company and the Bank are subject to regulation and
supervision by the State Corporation Commission of Virginia (the "SCC").
Capital Requirements. The Federal Reserve Board, the Office of the
Comptroller of the Currency (the "OCC") and the FDIC have issued substantially
similar risk-based and leverage capital guidelines applicable to United States
banking organizations. In addition, those regulatory agencies may from time to
time require that banking organization maintain capital above the minimum levels
because of its financial condition or actual or anticipated growth. Under the
risk-based capital requirements of these federal bank regulatory agencies, the
Company and the Bank are required to maintain a minimum ratio of total capital
to risk-weighted assets of at least 8%. At least, half of the total capital is
required to be "Tier 1 capital", which consists principally of common and
certain qualifying preferred shareholders' equity, less certain intangibles and
other adjustments. The remainder ("Tier 2 capital") consists of a limited amount
of subordinated and other qualifying debt (including certain hybrid capital
instruments) and a limited amount of the general loan loss allowance. The Tier 1
and total capital to risk-weighted asset ratios of the Company as of December
31, 1996 were 12.5% and 13.7%, respectively, exceeding the minimums required.
In addition, each of the federal regulatory agencies has established a
minimum leverage capital ratio (Tier 1 capital to average tangible assets).
These guidelines provide for a minimum ratio of 3% for banks and bank holding
companies that meet certain specified criteria, including that they have the
highest regulatory examination rating and are not contemplating significant
growth or expansion. All other institutions are expected to maintain a leverage
ratio of at least 100 to 200 basis points above the minimum. The leverage ratio
of the Company as of December 31, 1996, was 8.5%, which is above the minimum
requirements. The guidelines also provide that banking organizations
experiencing internal growth or making acquisitions will be expected to maintain
strong capital positions substantially above the minimum supervisory levels,
without significant reliance on intangible assets.
On August 2, 1995, the OCC, the Federal Reserve Board, and the FDIC
issued a final rule which implements minimum capital standards for interest rate
risk exposures in a two-step process. The final rule implements the first step
of that process by revising the capital standards to explicitly include a bank's
exposure to declines in the economic value of its capital due to changes in
interest rates as a factor that the federal banking agencies will consider in
evaluating a bank's capital adequacy. This rule will be implemented on a
case-by-case basis during the examination process. In the second step, the
federal banking agencies will issue a proposed rule that would establish an
explicit minimum capital charge for interest rate risk, based on the level of
the bank's measured interest rate risk exporue. Due to the subjective nature of
the first phase of this final rule, the Bank is unable to determine what effect,
if any, this rule may ultimately have on its regulatory capital requirements.
Limits on Dividends and Other Payments. The Company is a legal entity
separate and distinct from its subsidiary institutions. Substantially all of the
revenues of the Company result from dividends paid to it by the Bank. There are
various legal limitations applicable to the payment of dividends to Company as
well as the payment of dividends by Company to its respective shareholders.
Under federal law, the Bank may not, subject to certain limited
exceptions, make loans or extensions of credit to, or investments in the
securities of, the Company or take securities of the Company as collateral for
loans to any borrower. The Bank is also subject to collateral security
requirements from any loans or extensions of credit permitted by such
exceptions.
The Bank is subject to various statutory restrictions on its ability to
pay dividends to the Company. Under the current supervisory practices of the
Bank's regulatory agencies, prior approval from those agencies is required if
cash dividends declared in any given year exceed net income for that year plus
retained earnings of the two preceding years. Under these supervisory practices,
at December 31, 1996, the Bank could have paid additional dividends to the
Company of approximately $1.1 million, without obtaining prior regulatory
approval. The payment of dividends by the Bank or the Company may also be
limited by other factors, such as requirements to maintain capital above
regulatory guidelines. Bank regulatory agencies have authority to prohibit the
Bank or the Company from engaging in an unsafe or unsound practice in conducting
their business. The payment of dividends, depending upon the financial condition
of the Bank, or the Company, could be deemed to constitute such an unsafe and
unsound practice.
Under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), insured depository institutions such as the Bank are prohibited from
making capital distributions, including the payment of dividends, if, after
making such distribution, the institution would become "undercapitalized" (as
such term is used in the statute). Based on the Bank's current financial
condition, the Company does not expect that this provision will have any impact
on its ability to obtain dividends from the Bank.
The Bank. The Bank is supervised and regularly examined by the Federal
Reserve Board and the SCC. The various laws and regulations administered by the
regulatory agencies affect corporate practices, such as payment of dividends,
incurring debt and acquisition of financial institutions and other companies,
and affect business practices, such as payment of interest of deposits, the
charging of interest on loans, types of business conducted and locations of
offices.
The Bank is also subject to the requirements of the Community
Reinvestment Act (the "CRA"). The CRA imposes on financial institutions an
affirmative and ongoing obligation to meet the credit needs of the local
communities, including low and moderate income neighborhoods, consistent with
the safe and sound operation of those institutions. Each financial institution's
efforts in meeting community credit needs currently are evaluated as part of the
examination process pursuant to twelve assessment factors. These factors also
are considered in evaluating mergers, acquisitions and applications to open a
branch or facility.
As an institution with deposits insured by the BIF, the Bank also is
subject to insurance assessments imposed by the FDIC. In September 1995, the BIF
met its target reserve level and consequently, effective January 1996, the FDIC
revised its risk-based assessment schedule, imposing assessments ranging from
0.0% (subject to an annual minimum of $2,000) to 0.27% of an institution's
average assessment base. The actual assessment to be paid by each BIF member is
based on whether the institution is considered "well capitalized," "adequately
capitalized" or "undercapitalized," as such terms have been defined in
applicable federal regulations, and whether such institution is considered by
its supervisory agency to be financially sound or to have supervisory concerns.
Other Safety and Soundness Regulations. The federal banking agencies
have broad powers under current federal law to take prompt corrective action to
resolve problems of insured depository institutions. The extent of these powers
depends upon whether the institutions in question are "well capitalized,""
adequately capitalized," "undercapitalized," "significantly undercapitalized" or
"critically undercapitalized," all such terms are defined under uniform
regulations defining such capital levels issued by each of the federal banking
agencies.
In addition, for institutions with assets exceeding $500 million, FDIC
regulations now require that management report on its institution's
responsibility for preparing financial statements, and establishing and
maintaining an internal control structure and procedures for financial reporting
and compliance with designated laws and regulations concerning safety and
soundness; and that independent auditors attest to and report separately on
assertions in management's reports concerning compliance with such laws and
regulations, using FDIC-approved audit procedures.
Current federal law also requires each of the federal banking agencies
to develop regulations addressing certain safety and soundness standards for
insured depository institutions and depository institution holding companies,
including operational and managerial standards, asset quality, earnings and
stock valuation standards, as well as compensation standards (but not dollar
levels of compensation). Each of the federal banking agencies have issued a
joint notice of proposed rulemaking, which requested comment on the
implementation of these standards. The proposed rule sets forth general
operational and managerial standards in the areas of internal controls,
information systems and internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth and compensation, fees and
benefits. The proposal contemplates that each federal agency would determine
compliance with these standards throughout the examination process, and if
necessary to correct weaknesses, require an institution to file a written safety
and soundness compliance plan. The Company has not yet determined the effect
that the proposed rule would have on its operations if it is enacted
substantially as proposed.
<PAGE>
Item 1. Statistical Information
The following statistical information is furnished pursuant to the
requirements of Guide 3 (Statistical Disclosure by Bank Holding Companies)
promulgated under the Securities Act of 1933.
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
TABLE 1. Average Balance Sheets, Net Interest Income, and Rates.... 13-14
TABLE 2. Analysis of Change in Net Interest Income................. 15
TABLE 3. Types of Investment Securities............................ 16
TABLE 4. Maturity Schedule of Selected Loans as of Dec. 31, 1996... 17
TABLE 5. Risk Elements............................................. 18
TABLE 6. Summary of Reserve for Loan Losses........................ 19
TABLE 7. Allocation of the Reserve for Loan Losses................. 20
TABLE 8. Deposits.................................................. 21
TABLE 9. Return on Equity and Assets............................... 22
TABLE 10. Short Term Borrowing...................................... 22
TABLE 11. Interest Sensitivity Analysis............................. 23
TABLE 12. Analysis of Capital....................................... 24
</TABLE>
<PAGE>
TABLE 1
AVERAGE BALANCES, INCOME AND EXPENSES, YIELDS AND RATES
The following table depicts interest income on earnings assets and
related average yields as well as interest expense on interest-bearing
liabilities and related average rates paid for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1996 1995
----------------------- --------------------
Annual Annual
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
--------- -------- ------ -------- -------- ------
(Dollars in Thousands)
<S> <C>
Assets:
Securities:
Taxable $ 24,881 $ 1,466 5.89% $ 29,559 $ 1,705 5.77%
Tax-exempt(1) 10,101 514 7.71 6,911 343 7.52%
--------- --------- --------- ---------
Total securities 34,982 1,980 6.42 36,470 2,048 6.10%
Loans (net of unearned income):
Taxable(2) 83,935 7,929 9.45 76,240 7,224 9.48%
Tax-exempt 2,669 175 9.93 2,488 133 8.10%
--------- --------- --------- ---------
Total loans 86,604 8,104 9.46 78,728 7,357 9.43%
Federal funds sold and
repurchase agreements 750 40 5.33 1,771 102 5.76%
Interest-bearing deposits
in other banks 396 18 4.55 941 49 5.21%
--------- --------- ---- --------- --------- ----
Total earning asset 122,732 10,142 8.55% 117,910 9,556 8.31%
Less: allowance for loan
losses (1,587) (1,418)
Total nonearning assets 12,231 10,917
--------- ---------
Total assets $ 133,376 $ 127,409
--------- ---------
</TABLE>
13
<PAGE>
TABLE 1 (cont.)
AVERAGE BALANCES, INCOME AND EXPENSES, YIELDS AND RATES
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1996 1995
----------------------- ----------------------
Annual Annual
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- ------- ------ ------- ------- -----
(Dollars in Thousands)
<S> <C>
Liabilities and Shareholder's Equity:
Interest-bearing deposits:
Checking 20,552 503 2.45% $ 19,345 $ 514 2.65%
Regular savings 11,064 299 2.70 10,893 298 2.74
Money market savings 6,692 199 2.97 8,111 240 2.96
Certificates of deposit:
$100,000 and over 14,022 781 5.57 8,164 620 7.59
Under $100,000 53,049 2,922 5.51 55,346 2,817 5.09
------- ------ ----- ------- ------ -----
Total interest-bearing
deposits 105,379 4,704 4.46 101,859 4,489 4.41
Federal funds purchased 452 25 5.53 385 24 6.23
Other borrowing 286 26 9.09 463 44 9.50
------- ------ ------- ------ -----
Total interest-bearing
liabilities 106,117 4,755 4.48% 102,707 4,557 4.44%
Noninterest bearing liabilities:
Demand deposits 14,362 12,958
Other liabilities 1,471 1,323
------- -------
Total liabilities 121,950 116,988
Shareholders' equity 11,426 10,421
------- -------
Total Liabilities and
Shareholders' equity $133,376 $127,409
Net interest income/yield 5,387 4.68 $ 4,999 4.45%
Interest rate spread 4.07% 3.87%
</TABLE>
1) Yields are reported on a taxable equivalent basis assuming a federal
tax rate of 34%.
2) Includes non-accrual loans.
14
<PAGE>
TABLE 2
VOLUME AND RATE ANALYSIS (1)
The following table analyzes changes in net interest income
attributable to changes in the volume of interest-bearing assets and liabilities
compared to changes in interest rates. Nonaccruing loans are included in average
loans outstanding.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1996 vs.1995 1995 vs. 1994
Increase (Decrease) Increase (Decrease)
Due to Changes in:(1) Due to Changes in:(2)
------------------------------ ---------------------------
Volume Rate Total Volume Rate Total
--------- -------- ------- -------- ------ --------
(In thousands)
<S> <C>
Earning Assets:
Securities:
Taxable $ (269) $ 30 $ (239) $ (158) $ 29 $ (129)
Tax-exempt 185 (14) 171 116 (160) (44)
Loans
Taxable 730 (25) 705 507 514 1,021
Tax-exempt 4 38 42 75 (24) 51
Federal funds sold
and repurchase
agreements (59) (3) (62) 7 30 37
Interest-bearing deposits
in other banks (28) (3) (31) (54) 6 (48)
------- ------- ------- ------- ------- -------
Total earning
assets $ 563 $ 23 $ 586 $ 493 $ 395 $ 888
------- ------- ------- ------- ------- -------
Interest-Bearing Liabilities:
Interest checking $ 30 $ (41) $ (11) $ (22) $ 97 $ 75
Regular savings 5 (4) 1 (39) 1 (38)
Money market savings (42) 1 (41) (117) (5) (122)
Time deposits:
CDS $100,000 or more 444 (283) 161 152 124 276
CDS Other (118) 223 105 180 415 595
------- ------- ------- ------- ------- -------
Total interest-bearing
deposits 319 (104) 215 154 632 786
Federal funds purchased
and securities sold
under agreements to
repurchase 4 (3) 1 7 6 13
Other borrowing (17) (1) (18) 16 (28) (12)
------- ------- ------- ------- ------- -------
Total interest-bearing
liabilities $ 306 $ (108) $ 198 $ 177 $ 610 $ 787
------- ------- ------- ------- ------- -------
Change in net interest
income: $ 257 $ 131 $ 388 $ 316 $ (215) $ 101
------- ------- ------- ------- ------- -------
</TABLE>
(1) The change in interest due to both rate and volume has been allocated to
change due to volume and change due to rate in proportion to the relationship of
the absolute dollar amounts of the change in each.
(2) The combine effect of changes in both volume and rate which cannot be
separately identified has been allocated proportionately to the change due to
volume and change due to rate.
15
<PAGE>
TABLE 3
SECURITIES HELD FOR RESALE AND INVESTMENT
MATURITY DISTRIBUTION AND AVERAGE YIELD
December 31,
-----------------
1996 1995
-------- -------
(In thousands)
Book Value:
U.S. Government securities. . . . . . . . .$26,547 $26,806
State and political subdivisions. . . . . . 10,540 9,637
Other securities. . . . . . . . . . . . . 711 541
-------- -------
Total securities $37,798 $36,984
Maturities of Securities Held at December 31, 1996
<TABLE>
<CAPTION>
Over Ten
One One Five Years and
Year to Five to Ten Equity
or Less Years Years Securities Total
-------- -------- -------- ---------- ------
(Dollars in thousands)
<S> <C>
U.S. Agency Securities:
Book value $ 2,040 $ 6,884 $ 3,786 $10,779 $23,489
Market value 1,951 6,830 3,764 10,855 23,400
Weighted average yield(1) 6.42% 5.46% 7.04% 7.68% 6.75%
U.S. Treasury Securities:
Book value 1,103 1,955 -- -- 3,058
Market value 1,101 1,941 -- -- 3,042
Weighted average yield(1) 5.34% 5.24% -- % -- % 5.28%
State and Political Subdivisions:
Book value 226 261 812 9,241 10,540
Market value 227 262 814 9,226 10,529
Weighted average yield(1) 7.56% 6.61% 7.62% 8.32% 8.20%
Other Securities:
Book Value -- -- -- 711 711
Market Value -- -- -- 711 711
Weighted Average Yield(1) -- % -- % -- % 4.76% 4.76%
Total Securities:
Book value $ 3,369 $ 9,100 $ 4,598 $20,731 $37,798
Market value 3,279 9,033 4,578 20,792 37,682
Weighted average yield(1) 6.14% 5.44% 7.14% 7.87% 6.99%
</TABLE>
(1) Yields on tax-exempt securities have been computed on a tax-equivalent
basis.
The Bank held no issues that exceeded 10% of Shareholder's Equity at
December 31, 1996.
16
<PAGE>
TABLE 4
LOAN PORTFOLIO AND MATURITY SCHEDULE OF SELECTED LOANS
AS OF DECEMBER 31, 1996
For the table and accompanying notes addressing the loan portfolio, see
"Note 3 - Loans" on page 18 of the Annual Report to Shareholders which is
incorporated by reference herein (attached as Exhibit 13 to this Form 10-KSB).
The maturity distribution and rate sensitivity of certain categories of
loans as of December 31, 1996 is presented below.
Management considers the liquidity of the Company to be adequate.
Sufficient assets are maintained on a short-term basis to meet the liquidity
demands anticipated by management. In addition, secondary sources are available
through the use of borrowed funds. See Table 10 at page 20.
<TABLE>
<CAPTION>
1 Year or Less 1-5 Years Over 5 Years
-------------- ------------------ -----------------
Fixed Variable Fixed Variable Fixed Variable
Rate Rate Rate Rate Rate Rate
------ ------- ------- ------- -------- -------
(Dollars in thousands)
<S> <C>
Commercial and other $2,638 $21,979 $ 4,742 $ 3,714 $ 578 $ 0
Real estate-construction 3,109 0 0 0 0 0
Real estate mortgage 5,707 12,169 1,618 17,817 1,023 0
Consumer installment 3,983 2,085 5,285 1,124 2,078 0
------- ------- ------- ------- ------- -------
Total $15,437 $36,233 $11,645 $22,655 $ 3,679 $ 0
------- ------- ------- ------- ------- -------
</TABLE>
17
<PAGE>
TABLE 5
RISK ELEMENTS
Risk elements associated with the loan portfolio are presented below.
The Company places a loan on nonaccrual status when management believes, after
considering economic and business conditions and collection efforts, that the
borrower's financial condition is such that collection of principal and interest
is doubtful. The Company's policy is to place loans on nonaccrual status if
principal or interest is past due for 90 days or more unless the debt is both
well secured and in the process of being collected.
December 31,
----------------
1996 1995
------ ------
(Thousands)
Nonaccrual loans(1) $ 143 $ 138
Restructured loans 0 0
Foreclosed properties 245 272
----- -----
Total nonperforming assets $ 388 $ 410
----- -----
Loans past due 90+ days and
accruing interest $ 8 $ 72
Reserve for loan losses
to period end loans 1.8% 1.8%
Reserve for loan losses to
nonaccrual loans 1,156.3% 1,060.3%
Nonperforming assets to
period-end loans and
foreclosed properties 0.42% .50%
Net charge-offs (recoveries)
to average loans (0.05%) (0.01)%
(1)There were no troubled debt restructurings in 1996 or 1995. The Bank expects
to charge off $39,765 in problem loans (fully reserved at December 31, 1996).
These loans present potential risk of non-payment and are not included in the
numbers above. The Bank expects to collect all other payments due. See the
discussion on page 5 of the 1996 Annual Report to Shareholders and Note 3 to the
Financial Statements contained therein for additional information on the risk
elements associated with the loan portfolio.
Loan Concentrations: The Bank has no concentration of credit that
exceeds 10% of gross loans.
18
<PAGE>
TABLE 6
SUMMARY OF RESERVE FOR LOAN LOSS
The following table shows the Company's loan loss and recovery
experience for the past two years.
The Company tries to maintain a reserve for loan loss that represents
an estimate of all losses estimated in the Bank's loan portfolio. To achieve
this goal, the loan loss provision must be sufficient to cover charged-off loans
plus growth in the loan portfolio. The loan loss provision is a charge against
earnings necessary to maintain the reserve for loan losses at management's
targeted level. In considering the provision for loan loss, an evaluation of the
loan portfolio is conducted. Loans in non-accrual status and loans past due over
ninety days are considered in this evaluation as well as other loans the Company
feels may be a potential loss. The status of non-accrual and past due loans
varies from quarter to quarter based on seasonality and cash flow of customers.
Year ended December 31,
------------------------
1996 1995
-------- --------
(Dollars in thousands)
Reserve, beginning of period $ 1,463 $ 1,371
Loans charged off:
Commercial (92) (4)
Real estate construction 0 0
Real estate mortgage 0 (8)
Consumer (65) (16)
------- -------
Total loans charged off (157) (28)
------- -------
Recoveries of loans previously charged off:
Commercial 180 28
Real estate - construction 0 0
Real estate - mortgage 0 0
Consumer 17 8
------- -------
Total recoveries 197 36
------- -------
Net loans (charged off) recovered 40 8
Provision for loan losses 150 84
------- -------
Balance, end of period $ 1,653 $ 1,463
------- -------
Net charge-offs (recoveries) to average loans (0.05%) (0.01)%
19
<PAGE>
TABLE 7
ALLOCATION OF THE RESERVE FOR LOAN LOSSES
The following table provides a breakdown of the allowance for loan
losses by major categories of the Company's loan portfolio. See Note 3 to the
Financial Statements for the amount of loans in each category.
<TABLE>
<CAPTION>
1996 1995
Percent of loans Percent of loans
in each category in each category
Amount to Total Loans Amount to Total Loans
------- ---------------- ------ ----------------
(dollars in thousands)
<S> <C>
Commercial $ 344 36.1% $ 311 35.4%
Real estate - construction 0 3.4 0 2.4
Real estate - mortgage 1,107 41.6 849 42.6
Consumer 202 15.8 303 15.8
Other 0 0.5 0 0.6
Participations 0 2.6 0 3.2
------ ----- ------ -----
Total $1,653 100.0% $1,463 100.0%
------ ----- ------ -----
</TABLE>
20
<PAGE>
TABLE 8
DEPOSITS
The average balance and rates for certain categories of deposits for
the last two years are shown in the following table:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
1996 1995
----------- --------------
Average Average Average Average
Balance Rate Balance Rate
-------- ------- -------- -------
(dollars in thousands)
<S> <C>
Non-interest bearing demand deposits $ 14,362 $ 12,958
-------- --------
Interest bearing deposits:
Interest checking 20,552 2.45% 19,345 2.65%
Regular savings 11,064 2.70 10,893 2.74
Money market savings 6,692 2.97 8,111 2.96
Time deposits:
Certificates of deposit $100,000 or more 14,022 5.57 8,164 7.59
Other certificates of deposit 53,049 5.51 55,346 5.09
-------- --------
Total interest bearing deposits 105,379 4.46 101,859 4.41
-------- --------
Total deposits 119,741 3.93% 114,817 3.91%
-------- --------
</TABLE>
Maturities of time certificates of deposits of $100,000 or more
outstanding at December 31, 1996 were (dollars in thousands):
1996
-------
3 months or less $ 6,984
3 - 6 months 2,303
6 - 12 months 3,949
Over 12 months 2,520
-------
Total $15,756
21
<PAGE>
TABLE 9
RETURN ON EQUITY AND ASSETS
The ratio of net income to average total assets and average
shareholders' equity and certain other ratios for the periods indicated are as
follows:
Year ended December 31,
--------------------------
1996 1995
-------- -------
Return on average assets 1.18% .99%
Return on average equity 13.78% 12.14%
Dividend payout ratio 15.53% 16.97%
Average equity to average assets 8.57% 8.18%
TABLE 10
SHORT TERM BORROWING
The Bank periodically borrows funds through federal funds from its
correspondent banks, through securities sold under agreements to repurchase, and
through the discount window at the Federal Reserve Bank of Richmond. The
borrowings mature daily for cash flow requirements. The borrowed amounts and
their corresponding rates during 1996 and 1995 are presented below:
Year ended December 31,
----------------------
(Dollars in Thousands)
1996 1995
-------- ---------
Average daily amount outstanding $452 $ 385
Average interest rate 5.53% 6.23%
Maximum outstanding at any month end $2,400 $1,040
Balance at end of period $2,000 $ 115
22
<PAGE>
TABLE 11
INTEREST SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
December 31, 1996
------------------------------------------------
Within 90-365 1 to 5 Over
90 Days Days Years 5 Years Total
-------- ----- ----- ------- -----
(dollars in thousands)
<S> <C>
Earnings Assets:
Loans (2) $ 23,790 $ 29,897 $ 34,300 $ 3,948 $ 91,935
Securities 1,211 5,177 20,781 10,513 37,682
Federal funds sold
and other short-
term investments 0 -- -- -- 0
-------- -------- -------- -------- --------
Total interest
earning assets $ 25,001 $ 35,074 $ 55,081 $ 14,461 $129,617
-------- -------- -------- -------- --------
Interest-Bearing
Liabilities:
Interest checking,
savings and money
market savings(3) $ 2,148 $ 5,028 $ 30,098 $ 0 $ 37,274
Certificates of
deposit:
$100,000 and over 6,987 6,252 2,517 -- 15,756
Under $100,000 13,306 29,620 15,027 -- 57,953
Federal funds
purchased and
securities sold
under agreements
to repurchase 2,000 -- -- -- 2,000
Other borrowing -- -- -- -- --
-------- -------- -------- -------- --------
Total interest-
bearing liabilities $ 24,441 $ 40,900 $ 47,642 $ 0 $112,983
-------- -------- -------- -------- --------
Period gap $ 560 $ (5,826) $ 7,439 $ 14,461 $ 16,634
Cumulative gap $ (5,266) $ 2,173 $ 16,634
Ratio of cumulative
gap to total
earning assets(4) 0.43% -4.06% 1.68% 12.83%
</TABLE>
(1) The repricing dates may differ from maturity dates for certain assets due to
prepayment assumptions.
(2) Excludes nonaccrual loans.
(3) The Bank's Asset Liability Management Committee has found that interest
bearing checking accounts and regular saving accounts are generally not
sensitive to changes in interest rates. However, current interest rate levels
have warranted placing approximately 5.6% of these balances in the 90 day
category.
(4) The Bank's Asset Liability Management Committee monitors interest rate risk
using gap analysis and rate shock - market value - duration analysis using
regulatory guidelines. The relative risk to earnings based on the gaps in the
table above are considered reasonable by management and is within limits
established by the Board of Directors.
23
<PAGE>
TABLE 12
ANALYSIS OF CAPITAL *
December 31,
1996 1995
-------- --------
(thousands)
Tier 1 Capital:
Common stock $ 2,000 $ 2,000
Additional paid in capital 1,952 1,952
Retained earnings 6,861 6,999
Less: Goodwill (84) (168)
-------- --------
Total Tier 1 capital $ 10,729 $ 10,783
Tier 2 Capital:
Allowance for loan losses 1,196 1,051
Allowable long-term debt 0 0
-------- --------
Total Tier 2 Capital 1,196 1,051
Total risk-based capital $ 11,925 $ 11,834
-------- --------
Risk weighted assets $ 95,149 $ 84,133
Capital Ratios:
Tier 1 risk-based capital ratio 11.3% 12.9%
Total risk-based capital ratio 12.5 14.2
Tier 1 capital to average
adjusted total assets 7.7 8.3
* Regulatory requirements relate to only the bank capital ratings since the
total assets of the Company are less than $150 million. See the captioned "Note
16 - Regulatory Matters" which is included in the Annual Report to Shareholders.
24
<PAGE>
Accounting Rule Changes
FASB Statement No. 125," Accounting for Transfers and Servicing of
Financial Assets and Extinquishments of Liabilities", was issued in June, 1996
and establishes, among other things, new criteria for determining whether a
transfer of financial assets in exchange for cash or other consideration should
be accounted for as a sale or as a pledge of collateral in a secured borrowing.
Statement 125 also establishes new accounting requirements for pledged
collateral. As issued, Statement 125 is effective for all transfers and
servicing of financial assets and extinquishments of liabilities occurring after
December 1996.
FASB Statement No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125", defers for one year the effective date
(a) paragraph 15 of Statement 125 and (b) for repurchase agreement, dollar-roll,
securities lending, or similar transactions, of paragraph 9-12 and 237(b) of
Statement 125.
The effects of these Statements on the Company's consolidated financial
statements are not expected to be material.
ITEM 2. Description of Properties
The Company owns no properties; however, its subsidiary, the Bank owns
and leases properties as described in Item 1 of this report.
ITEM 3. Legal Proceedings
The Company is not involved in any pending legal proceedings other than
non-material legal proceedings occurring in the ordinary course of business.
ITEM 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during
the quarter ended December 31, 1996.
25
<PAGE>
PART II
ITEM 5. Market for the Common Equity and Related Shareholder Matters
This information is incorporated herein by reference from page 7 of
the Company's 1996 Annual Report to Shareholders ("1996 Annual Report").
ITEM 6. Management's Discussion and Analysis or Plan of Operations
This information is incorporated herein by reference from pages 3
through 7 of the 1996 Annual Report.
ITEM 7. Financial Statements
This information is incorporated herein by reference from pages 8
through 30 of the 1996 Annual Report.
ITEM 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There have been no disagreements between the Company and its
independent accountants for the Company's most recent two fiscal years.
26
<PAGE>
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons,
Compliance with Section 16(a) of the Exchange Act
This information is incorporated herein by reference from pages 2
through 4 and page 7 of the Company's 1997 definitive proxy statement
("Definitive Proxy Statement") filed with the Commission on or about March 11,
1997.
ITEM 10. Executive Compensation
This information is incorporated herein by reference from pages 4
through 7 of the Company's Definitive Proxy Statement.
ITEM 11. Security Ownership of Certain Beneficial Owners and Management
This information is incorporated herein by reference from pages 2
through 4 of the Company's Definitive Proxy Statement.
ITEM 12. Certain Relationships and Related Transactions
This information is incorporated herein by reference from page 7 of the
Company's Definitive Proxy Statement. For further information see Note 12 to the
Consolidated Financial Statements included in the Company's 1996 Annual Report.
27
<PAGE>
ITEM 13. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this Form 10-KSB
and this list includes the Exhibit Index.
No. Description
3.1 Articles of Incorporation of Chesapeake Financial Shares,
Inc.1
3.2 Bylaws of Chesapeake Financial Shares, Inc.1
10.1 Employee Stock Option Plan1
10.2 Douglas D. Monroe, Jr. Deferred Compensation Agreement1
10.3 Thomas B. Denegre, Jr. Deferred Compensation Agreement1
10.4 Ted M. Kattmann Employment Agreement2
10.5 John H. Hunt, II Employment Agreement2
13.0 1996 Annual Report to Shareholders, specified portion
(pp. 3 to 30) of the Company's 1996 Annual Report to
Shareholders for the year ended December 31, 1996.
21.0 Subsidiaries of the Registrant -- Reference is made to
"Item 1. Business" for the required information.
27.0 Financial Data Schedule
(b) Reports on Form 8-K. No reports were filed by the registrant
during the quarter ended December 31, 1996.
- ------------------
1 Incorporated herein by reference from the Company's Registration Statement
on Form S-18 (Registration No. 33-27825), filed by the Company with the
Commission on May 15, 1989, as subsequently amended.
2 Incorporated herein by reference from the Company's Annual Report on Form
10-KSB for the year ended December 31, 1995.
28
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) 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.
Date: March 28, 1997 By /s/ Douglas D. Monroe, Jr.
-------------- --------------------------
Douglas D. Monroe, Jr.
Chairman of the Board and
Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
/s/ Douglas D. Monroe, Jr. March 28, 1997
- --------------------------
Douglas D. Monroe, Jr.
Chairman of the Board and
Chief Executive Officer
/s/ T. Nash Broaddus March 28, 1997
- --------------------
T. Nash Broaddus, Director
/s/ Thomas B. Denegre, Jr. March 28, 1997
- --------------------------
Thomas B. Denegre, Jr., Director
/s/ Eugene S. Hudnall March 28, 1997
- ---------------------
Eugene S. Hudnall, Director
/s/ Kathrine W. Monroe March 28, 1997
- ----------------------
Kathrine W. Monroe, Director
/s/ Robert S. Scheu March 28, 1997
- -------------------
Robert S. Scheu, Director
/s/ Robert L. Stephens March 28, 1997
- ----------------------
Robert L. Stephens, Director
29
EXHIBIT 13.0
Chesapeake Financial Shares, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Summary of Results of Operations
1996 Compared to 1995
Record earnings for 1996 of $1,575,136 or $1.86 compared to $1,264,702
or $1.47 per share in 1995 highlights an outstanding year of accomplishment and
change for Chesapeake Financial Shares, Inc. The 24.5% increase in net income
resulted from a 20.7% increase in other operating income, an increase of 6.5% in
net interest income after provision for loan losses, and holding other operating
expense to a 6.9% increase. Other operating income increased to $2,559,496 in
1996, up 20.7% over the 1995 level of $2,120,189. Most other operating income
items were up for 1996, with trust income up 12.4%, business manager (see note
13) income up 47.6%, and ATM income up 160.7%. Net interest income increased to
$5,387,256 in 1996, up 7.7% over the 1995 level of $4,999,818. Total other
operating expenses for 1996 were $5,720,313, up only 6.9% over 1995 totals of
$5,351,608.
1995 Compared to 1994
Chesapeake Financial Shares' recorded earnings for 1995 of $1,264,702
or $1.47 per share compared to $1,035,116 or $1.19 per share in 1994. The 22.2%
increase in net income resulted from increases in other operating income,
controlling expenses, and maintaining net interest income. Total other operating
income increased to $2,120,189 in 1995, up 30.4% over the 1994 level of
$1,625,999. All other operating income items were up for 1995, with trust income
up 3.7%, service charge income up 25.5%, and other income up 84.4%. Total other
operating expenses for 1995 were $5,351,608, up only 3.6% over 1994 totals of
$5,167,469. Net interest income increased to $4,999,818 in 1995, up 2.1% over
the 1994 level of $4,897,451.
1994 Compared to 1993
Earnings for 1994 were $1,035,116 or $1.19 per share compared to
$996,552 or $1.15 per share in 1993. The 3.9% increase in net income resulted
from increases in net interest income and controlling expense increases. Net
interest income increased to $4,897,451 in 1994, up 6.6% over the 1993 level of
$4,595,377. The favorable trend in the net interest income contribution was due
to increased yields on loans, combined with a lower interest expense in a rising
rate environment. There was a net recovery in the provision for loan losses of
$96,530 in 1994 compared to additions to the provision of $300,000 in 1993. The
reserve for loan loss balance again reached historical highs for the Company -
$1,370,598 compared to $1,312,318 in 1993. The Bank had collections of past
debts that far exceeded the year's bad debts expense. Total other operating
expense was down less than 1% from 1993.
Net Interest Income
The principal source of earnings for Chesapeake is net interest income.
Net interest income is the difference between interest and fees generated by
earning assets and interest expense paid to fund those assets. As such, net
interest income represents the gross profit from the Bank's lending, investment,
and funding activities.
A large number of variables interact to affect net interest income.
Included are variables such as changes in the mix and volume of earning assets
and interest bearing liabilities, market interest rates, and the statutory
Federal tax rate. It is management's on-going policy to maximize net interest
income through the development of balance sheet and pricing strategies while
maintaining appropriate risk levels as set by the board.
Net interest income totaled $5.4, $5.0, and $4.9 million for 1996,
1995, and 1994, respectively, representing an increase of 7.7% for 1996 over
1995, 2.1% for 1995 over 1994, and 6.6% for 1994 over 1993. Loan demand was
strong again this year with total net loans up 11.6% or $9.4 million for 1996
over 1995. Total interest expense was $4.8, $4.6, and $3.8 million for 1996,
1995 and 1994, respectively. On a tax equivalent annualized basis, the net
interest margin was 4.6%, 4.4% and 4.2% for 1996, 1995 and 1994, respectively.
Other Operating Income
For the year ended December 31, 1996, other operating income was $2.6
million, a 20.7% increase over the 1995 amount of $2.1 million, which was a
30.4% increase over the 1994 amount of $1.6 million. The increase in 1996 was
due to a 12.4% or $90,037 increase in trust income and a 33.9% or $311,371
increase in other income. The increase in other income was a result of new
product offerings and a restitution payment. A small business cash management
service (Business Manager) earned $381,985 in gross fee income. This service was
first offered in 1995. Bank management revamped the merchant card program at the
end of 1994 and merchant card income was up over $53,595 from 1995 levels.
Other Operating Expenses
Total other operating expenses increased 6.9% or $368,705 in 1996 over
1995. In 1995, total operating expenses increased 3.6% over 1994 and decreased
0.4% in 1994 over 1993. The 1996 increase was due primarily to a 29.5% or
$275,512 increase in occupancy expenses related to leasehold improvements and
rent increases at the Bank's Loan Processing Center, leasehold expenses at the
James City County Winn-Dixie Office (first full year of operation), the Five
Forks Office (opened in July), and the Operations Center, and some one-time
maintenance expenses at other branches. The Bank now operates nine banking
offices. Our ATM network increased from twelve to seventeen sites during the
year. Salaries and benefits were up 5.0%, or $134,928, over 1995 levels of
$2,705,334. This increase was due to additional staffing, incentives, and cost
of living increases.
Total other expenses decreased 2.4% or $41,735 compared to 1995 which
was down 6.8% or $124,142 from the 1994 level of $1,835,394. The FDIC Insurance
assessment was down 53.0% or $148,207 for 1995 over 1994, compared to a decrease
of less than 1% for 1994 over 1993. The assessment was at nominal levels of
$2,000 for 1996 as a result of the Bank's "well capitalized" status.
Professional fees and expenses were down 33.7% or $42,650 for 1996 over 1995,
compared to an increase of 185.7% or $82,278 for 1995 over 1994. The primary
reason for the increase in 1995 was related to a comprehensive technology review
and mainframe software selection and implementation process. This culminated in
a February 1996 banking software conversion. As a result of that prior year's
effort networking productivity has been enhanced, and additional customer
services have been provided including Touch Tone Loan (a computerized telephone
based loan application product), Touch Tone Teller (24 hour banking) and the ATM
network expansion. Additionally, work processes have also been changed to
improve operating efficiency. Merchant card expenses increased 46.3% or $67,029
from 1995 as a result of increases in volume. Advertising expense increased only
6.0% or $7,711.
Assets
On December 31, 1996, the Company had total assets of $142.9 million,
representing a 8.9% increase over the December 31, 1995 balance of $131.3
million, following an increase of 5.5% from December 31, 1994. Loan growth has
been strong during the last three years due to the growth of the local economy
and the Company's expansion into the James City County/Williamsburg area.
Loans
The net loan portfolio (excluding unearned discounts and reserve for
loan loss) totaled $90.4, $80.9, and $74.8 million for 1996, 1995, and 1994,
respectively, representing an increase of 11.6% for 1996 from 1995, 8.3% for
1995 from 1994, and 10.2% for 1994 from 1993. All loan categories were up during
1996 except participations with other bank's and other loans, which were down
only $306,518 on a combined basis. Real estate loans (both mortgage and
construction) increased 11.7% or $4,345,016. Consumer loans increased 11.8% or
$1.5 million during 1996. Commercial loans increased 13.9% or $4.0 million for
1996 over 1995 levels of $29.2 million.
On December 31, 1996, the loan portfolio consisted of 45.0% of single
family residential and residential construction loans and 36.1% of commercial
loans. The commercial loans consist principally of business loans such as
seafood, hospitality, retail, and commercial real estate loans where real estate
is the primary collateral, plus a very small portion of agriculture loans.
Management attempts to reduce the Bank's exposure to the risks of the local real
estate market by limiting the aggregate size of its commercial portfolio and by
primarily making such loans directly to the business occupants. The Bank has
historically engaged in limited mortgage lending secured by multi family and
agricultural properties. At year end, residential real estate construction
accounted for 3.4% of total loans outstanding. The Bank's consumer installment
portfolio remains its third largest loan category.
Consistent with its focus on providing community based financial
services, Chesapeake Bank generally does not make loans outside its principal
market regions. By policy it does not originate or purchase highly leveraged
loans or loans to foreign entities or individuals.
Total nonperforming assets consist of nonaccrual loans, restructured
loans, repossessed and foreclosed properties. Nonperforming assets were $0.4
million at December 31, 1996, representing no change from $0.4 million from
December 31, 1995. Past due loans were at record lows of 0.97% of total loans at
December 31, 1996.
As of December 31, 1996, performing loans totaling approximately $4.5
million were identified as potential problem loans through internal loan review
systems and procedures. The Bank has specifically reserved for potential losses
in these loans as of year end.
Provision/Reserve for Loan Losses
The provision for loan losses 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 loan portfolio.
The 1996 provision of $150,000 brought the net reserve for loan losses
to $1,652,844 or 1.80% of gross loans. There was a provision of $84,000 in 1995
compared to the 1994 recapture of the provision of $96,530. Management and the
Board of Directors believe the total reserve at year end was adequate relative
to current levels of risk in the portfolio. The 1994 recapture was related to
specific management reserves assigned to loans that have since paid out
completely or have improved in overall risk rating. Continued loan growth may
warrant additional provisions in the future. The reserve for loan losses as a
percent of gross loans less unearned discounts was 1.8% on December 31, 1996,
1.8% in 1995 and 1.8% in 1994.
Loan charge offs totaled $157,448 in 1996, $27,530 in 1995, and $21,154
in 1994. Recoveries for the same periods were $197,111, $36,113, and $175,964,
respectively. Management does not expect to have similar recovery experience in
1997.
The Bank maintains a reserve for loan loss which management believes
represents a conservative estimate of potential losses in the Bank's loan
portfolio. To achieve this goal, the loan loss provision must be sufficient to
cover loans charged off plus the growth (if any) in the loan portfolio. In
determining the adequacy of the reserve for loan losses, management uses a
methodology which specifically identifies and reserves for higher risk loans. A
general reserve is established of non-specifically reserved loans. Loans in a
non-accrual status and over ninety days past due are considered in this
evaluation as well as other loans which may be a potential loss. The status of
nonaccrual and past due loans varies from quarter to quarter based on
seasonality, local economic conditions, and cash flow of customers.
Securities
At year end, total securities and time deposits with other banks were
$37.7 million, basically the same as the $37.6 million on December 31, 1995,
which was down 7.1% from $40.4 million on December 31, 1994. Investment
portfolio liquidity and deposit growth provided funding for the increases in the
loan portfolio.
All of the Company's securities are classified as securities available
for sale. Securities may be classified as investment securities when management
has the intent and the Company has the ability at the time of purchase to hold
the securities to maturity. Investment securities are carried at cost adjusted
for amortization of premiums and accretion of discounts. Securities available
for sale include securities that may be sold in response to changes in market
interest rates, changes in the securities prepayment risk, increases in loan
demand, general liquidity needs and other similar factors. Securities available
for sale are carried at fair market value.
At December 31, 1996, securities available for sale totaled $37.7
million and at December 31, 1995 the total was $37.1 million. Book value of the
portfolio exceeded fair market value by $76,216 net of the tax effect. Debt
securities with an amortized cost of $29.0 million were transferred from
held-to-maturity to available-for-sale on December 1, 1995 (see Note 2). The
reclassification of securities for 1995 had no effect on the Company's financial
condition or results of operations as the aggregate market value of the
portfolio exceeded its book value by $78,860. The original reclassification in
1994 warranted a capital reserve at December 31, 1994 for unrealized losses on
securities available for sale of $259,974. This is within risk limits
established and monitored by the board and the asset/liability management
committee.
The securities portfolio increased 1.6% or $0.6 million in 1996 and
decreased 4.8% or $1.9 million in 1995 over 1994. Investments in U.S. Treasury
issues decreased $1.5 million or 33.6% from 1995, which had a decrease of $0.7
million, or 13.4% from 1994. Investments in U. S. Government Agencies increased
during 1996 4.7% or $1.1 million during 1996. Investments in state and political
subdivisions increased during 1996 9.3% or $0.9 million during 1996. Management
has increased the investment in securities of state and political subdivisions
including some local municipalities to utilize the tax free income.
Deposits
Deposits totaled $127.6, $118.7, and $112.3 million for 1996, 1995, and
1994, respectively, representing an increase of 7.5% for 1996 from 1995, and an
increase of 5.7% for 1995 from 1994. The composition of deposits continued to
change this year with changing interest rates. There was a 9.7% increase in
certificates of deposit. Noninterest bearing deposits increased to $16.6 million
or 17.0% from $14.2 million on December 31, 1995.
Shareholders' Equity
Future growth and expansion of the Company is dictated by the ability
to generate capital which is generated principally by the earnings of the Bank.
As of December 31, 1996, the Company's primary capital to asset ratio was 9.4%.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
established a capital based supervisory system for all insured depository
institutions including state chartered, Federal Reserve member banks. Under this
new requirement, the Bank continues to be certified as a "well capitalized"
institution, which is the highest level of this ranking.
Federal regulators adopted minimum capital standards. Specifically, the
guidelines categorize assets and off balance sheet items into four risk weighted
categories. After a transition period which ended December 31, 1992, the minimum
ratio of qualifying total capital to risk weighted assets is 8%. For Chesapeake,
Tier 1 capital is composed of common equity and retained earnings less certain
goodwill items. Tier 1 must be 4%. Because the Company has total consolidated
assets of less than $150 million, the capital adequacy rules apply only to the
Bank.
On December 31, 1996, the Bank had ratios of Tier 1 risk based capital
to risk weighted assets of 11.3%, total risk based capital to risk weighted
assets of 12.5% and Tier 1 leverage capital of 7.7%. At December 31, 1995, these
ratios were 12.9%, 14.2% and 8.3%, respectively.
The adequacy of the Company's capital is reviewed by management on an
on going basis with reference to the size, composition and quality of the
company's asset and liability levels and consistent with regulatory requirements
and industry standards. Management seeks to maintain a capital structure that
assures an adequate level to support anticipated asset growth and absorb
potential losses.
Dividend and Market Information
The Company raised its dividend to $.29 per share in 1996, an increase
of $.04 over 1995. This increase followed another $.04 per share dividend
increase from $.21 in 1994 to $.25 in 1995.
Trades in the Company's common stock have occurred infrequently on a
local basis and generally involve a relatively small number of shares. Based on
information made available to them, management believes that the selling price
for the Company's common stock ranged during 1994 from $9.00 to $9.75; during
1995, from $9.75 to $11.00; and during 1996, from $12.75 to $15.25. Such
transactions may not be representative of all transactions during the indicated
periods or of the fair value of the stock at the time of such transactions due
to the infrequency of trades and the limited market for the stock. At December
31, 1996, there were 839,687 shares of Company stock outstanding held by
approximately 479 holders of record.
Liquidity, Interest Rate Sensitivity, and Inflation
The objectives of the Company's liquidity management policy include
providing adequate funds to meet the needs of depositors and borrowers at all
times, as well as providing funds to meet the basic needs for on-going
operations of the Company, to allow funding of longer-term investment
opportunities and regulatory requirements. Sufficient assets are maintained on a
short term basis to meet the liquidity demands anticipated by management.
The most immediate and efficient source of liquidity is the Bank's pool
of short-term investments. The Bank's primary sources of liquidity continue to
be federal funds sold, time deposits with banks, and securities maturing or
repricing within one year. On December 31, 1996, approximately 9.0% of the total
invested portfolio dollars mature within one year as compared to 19.8% on
December 31, 1995. The Bank's loan portfolio is also liquid with 58.3% of all
loan dollars maturing or repricing within one year. This loan liquidity ratio
was 53.9% on December 31, 1995. Management considers the Company's liquidity to
be adequate. Other sources of liquidity include repayment of loans, the sale of
loans, and proceeds from the sale of repossessed assets and Other Real Estate
Owned. The sale of loans through the secondary market operation enhances this
liquidity position by providing both fixed and adjustable rate long-term
mortgage options to our client base. Mortgage loans held for resale are stated
at the lower of cost or market (or contract value), however, due to the quick
turning of these assets, seldom do the loans represent more than 1% of total
assets. Bank management maintains overnight borrowing relationships with
correspondent banks for up to $5,000,000. The Company also has an unused
revolving line of credit for $2,000,000.
As of December 31, 1996, the Bank had $253,000 in repossessed assets
and Other Real Estate Owned. These assets are being aggressively marketed for
sale and represent a near term secondary source of liquidity. The Bank expects
to realize full book value for these assets.
Since the assets and liabilities of a bank are primarily monetary in
nature (payable in fixed, determinable amounts), the performance of a bank is
affected more by changes in interest rates than by inflation. Interest rates
generally increase as the rate of inflation increases, but the magnitude of the
change in rates may not be the same.
While the effect of inflation is normally not as significant as is its
influence on those businesses which have large investments in plant and
inventories, it does have an effect. There are normally corresponding increases
in the money supply, and banks will normally experience above average growth in
assets, loans and deposits. Also, general increases in the prices of goods and
services will result in increased operating expenses.
<PAGE>
C O N T E N T S
INDEPENDENT AUDITOR'S REPORT
ON THE FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS OF
CHESAPEAKE FINANCIAL SHARES, INC. AND SUBSIDIARIES
Consolidated balance sheets
Consolidated statements of income
Consolidated statements of cash flows
Consolidated statements of changes in shareholders' equity
Notes to Consolidated financial statements
Independent Auditor's Report
<PAGE>
CHESAPEAKE FINANCIAL SHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>
Assets 1996 1995
----------------- -----------------
<S> <C>
Cash and due from banks $ 5 896 836 $ 4 906 634
Time deposits with banks - - 450 375
Securities, at approximate market value (Note 2) 37 682 482 37 101 280
Loans, net (Notes 3 and 12) 90 425 824 80 990 651
Premises and equipment, net (Note 4) 3 284 063 2 851 591
Accrued interest receivable 1 088 201 1 084 802
Intangible assets, net (Note 5) 84 000 168 000
Other assets (Note 7) 4 414 212 3 704 219
----------------- -----------------
Total assets $ 142 875 618 $ 131 257 552
================= =================
Liabilities and Shareholders' Equity
Deposits:
Demand accounts $ 16 646 453 $ 14 225 310
Savings and interest bearing demand deposits 37 273 969 37 292 683
Certificates of deposit
Denominations less than $100,000 57 952 834 54 125 100
Denominations of $100,000 or more 15 756 309 13 044 219
----------------- -----------------
Total deposits $ 127 629 565 $ 118 687 312
Federal funds purchased 2 000 000 115 000
Accrued interest payable 272 546 256 034
Other liabilities 964 536 763 784
Note payable (Note 6) -- 387 500
Commitments and contingent liabilities (Notes 11 and 14) -- --
----------------- -----------------
Total liabilities $ 130 866 647 $ 120 209 630
----------------- -----------------
Shareholders' equity: (Note 10)
Preferred stock, par value $1 per share; authorized
50,000 shares; no shares outstanding $ -- $ --
Common stock, voting, par value $5 per share; authorized
2,000,000 shares; issued and outstanding 839,687 in 1996
and 855,137 in 1995 4 198 435 4 275 685
Common stock, nonvoting, par value $5 per share; authorized
635,000 shares; no shares outstanding -- --
Paid-in capital 468 493 605 669
Retained earnings (Note 17) 7 418 259 6 087 708
Unrealized gain (loss) on securities available for sale, net (76 216) 78 860
----------------- -----------------
Total shareholders' equity $ 12 008 971 $ 11 047 922
----------------- -----------------
Total liabilities and shareholders' equity $ 142 875 618 $ 131 257 552
================= =================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
CHESAPEAKE FINANCIAL SHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
-------------- -------------- --------------
<S> <C>
Interest Income
Interest and fees on loans $ 8 103 829 $ 7 357 399 $ 6 284 562
Interest on federal funds sold 40 281 102 481 64 424
Interest on time deposits with banks 18 431 48 996 97 136
Interest on investment securities
Taxable - - 1 412 518 1 602 416
Nontaxable - - 193 552 296 073
Interest on securities available for sale
Taxable 1 428 063 260 175 203 853
Nontaxable 514 213 149 158 91 175
Dividends 37 118 31 964 28 054
-------------- -------------- --------------
Total interest income $ 10 141 935 $ 9 556 243 $ 8 667 693
-------------- -------------- --------------
Interest Expense
Savings and interest bearing accounts $ 1 001 072 $ 1 051 747 $ 1 241 933
Certificates of deposit
Denominations less that $100,000 2 922 308 2 816 698 2 116 635
Denominations of $100,000 or more 780 509 619 895 344 571
Federal funds purchased 24 764 23 706 10 683
Long-term debt 26 026 44 379 56 420
-------------- -------------- --------------
Total interest expense $ 4 754 679 $ 4 556 425 $ 3 770 242
-------------- -------------- --------------
Net interest income $ 5 387 256 $ 4 999 818 $ 4 897 451
Provision for (recovery of) loan losses (Note 3) 150 000 84 000 (96 530)
-------------- -------------- ---------------
Net interest income after provision
for (recovery of) loan losses $ 5 237 256 $ 4 915 818 $ 4 993 981
-------------- -------------- --------------
Other Operating Income
Trust income $ 818 888 $ 728 851 $ 703 173
Service charges 499 705 506 125 403 225
Net gain (loss) on other real estate owned 12 788 (26 740) 53 965
(Loss) on securities available for sale (1 593) (6 384) (32 478)
Other income (Note 13) 1 229 708 918 337 498 114
-------------- -------------- --------------
Total other operating income $ 2 559 496 $ 2 120 189 $ 1 625 999
-------------- -------------- --------------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
CHESAPEAKE FINANCIAL SHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Continued)
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
-------------- -------------- ---------
<S> <C>
Other Operating Expenses
Salaries and benefits $ 2 840 262 $ 2 705 334 $ 2 663 148
Occupancy expenses 1 210 534 935 022 668 927
Other expenses (Note 13) 1 669 517 1 711 252 1 835 394
-------------- -------------- --------------
Total other operating expenses $ 5 720 313 $ 5 351 608 $ 5 167 469
-------------- -------------- --------------
Income before income taxes $ 2 076 439 $ 1 684 399 $ 1 452 511
Income tax expense (Note 7) 501 303 419 697 417 395
-------------- -------------- --------------
Net income $ 1 575 136 $ 1 264 702 $ 1 035 116
============== ============== ==============
Earnings per share $ 1.86 $ 1.47 $ 1.19
============== ============== ==============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
CHESAPEAKE FINANCIAL SHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
--------------- ---------------- --------------
<S> <C>
Cash Flows from Operating Activities
Net income $ 1 575 136 $ 1 264 702 $ 1 035 116
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization 472 537 335 557 440 212
Provision for (recovery of) loan losses 150 000 84 000 (96 530)
Deferred income tax expense (benefit) (66 298) 8 826 13 631
Amortization of premiums, net 251 642 258 648 278 082
Net (gain) loss on sale of bank premises 523 653 (51 577)
Loss on securities available for sale 1 593 6 384 32 478
Net (gain) loss on other real estate owned (12 788) 26 740 (53 965)
Issuance of common stock for services 37 380 33 420 --
Changes in other assets and liabilities:
(Increase) decrease in accrued interest receivable (3 399) 39 537 (162 993)
(Increase) decrease in other assets (404 721) (2 046 451) 175 598
Increase in accrued interest payable 16 512 61 134 13 111
Increase (decrease) in other liabilities 200 752 (134 028) (359 777)
-------------- ---------------- ------------
Net cash provided by (used in)
operating activities $ 2 218 869 $ (60 878) $ 1 263 386
-------------- ---------------- ------------
Cash Flows from Investing Activities
Net decrease in time deposits with banks $ 450 375 $ 984 555 $ 1 442 558
Purchase of investment securities -- (264 215) (5 397 404)
Proceeds from sale and call of investment securities -- 250 000 --
Proceeds from maturities of investment securities -- 1 945 000 2 180 000
Purchases of securities available for sale (18 784 158) (6 938 447) (2 462 541)
Proceeds from sales and calls of securities available for sale 9 216 346 4 487 354 2 751 223
Proceeds from maturities of securities available for sale 8 501 663 2 650 000 1 652 532
Origination of loans available for sale (3 635 002) (4 145 550) (5 064 910)
Proceeds from sale of loans available for sale 3 635 002 4 145 550 5 064 910
Proceeds from sale of other real estate 35 905 -- 78 559
Proceeds from sale of bank premises 600 -- 356 746
Net (increase) in loans (9 563 173) (6 314 258) (6 602 988)
Other capital expenditures (1 029 587) (674 111) (784 153)
--------------- ---------------- --------------
Net cash (used in)
investing activities $ (11 172 029) $ (3 874 122) $ (6 785 468)
--------------- ---------------- --------------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
CHESAPEAKE FINANCIAL SHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Continued)
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
--------------- ---------------- --------------
<S> <C>
Cash Flows from Financing Activities
Net increase (decrease) in federal funds purchased $ 1 885 000 $ (605 000) $ 720 000
Net increase (decrease) in demand accounts, interest
bearing demand accounts and savings accounts 2 402 429 (3 419 149) (2 800 086)
Net increase in certificates of deposits 6 539 824 9 811 362 5 786 097
Net proceeds from issuance of common stock 41 825 -- 49 500
Acquisition of common stock (293 631) (167 630) (58 842)
Cash dividends (244 585) (214 646) (182 973)
Curtailment of note payable (387 500) (150 000) (350 000)
--------------- ---------------- --------------
Net cash provided by
financing activities $ 9 943 362 $ 5 254 937 $ 3 163 696
--------------- ---------------- --------------
Net increase (decrease) in cash
and federal funds sold $ 990 202 $ 1 319 937 $ (2 358 386)
Cash and federal funds sold at beginning of year 4 906 634 3 586 697 5 945 083
--------------- ---------------- --------------
Cash and federal funds sold at end of year $ 5 896 836 $ 4 906 634 $ 3 586 697
=============== ================ ==============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 4 738 167 $ 4 495 292 $ 3 757 131
=============== ================ ==============
Income taxes $ 531 684 $ 534 398 $ 398 000
=============== ================ ==============
Supplemental Schedule of Noncash Investing and
Financing Activities
Other real estate acquired in settlement of loans $ -- $ 43 655 $ --
=============== =============== ==============
Sale of other real estate by issuance of new loans $ 30 000 $ -- $ 216 000
=============== =============== ==============
Unrealized gain (loss) on securities available for sale $ (234 964) $ 513 386 $ (393 900)
=============== =============== ==============
Common stock issued for services $ 37 380 $ 33 420 $ --
=============== ================ ==============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
CHESAPEAKE FINANCIAL SHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders'
Equity Years Ended December 31, 1996, 1995
and 1994
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
Common Common on Securities
Stock, Stock, Paid-In Retained Available
Voting Nonvoting Capital Earnings for Sale, Net Total
------------- ------------ ------------- ------------- -------------- --------------
<S> <C>
Balance, December 31, 1993 $ 4 338 865 $ -- $ 686 041 $ 4 185 508 $ -- $ 9 210 414
Net income -- -- -- 1 035 116 -- 1 035 116
Exercise of stock options -- 33 750 15 750 -- -- 49 500
Acquisition of common stock (31 950) -- (26 892) -- -- (58 842)
Cash dividends ($.21 per share) -- -- -- (182 972) -- (182 972)
Change in unrealized gain (loss)
on securities available for
sale, net of deferred income
taxes of $133,926 -- -- -- -- (259 974) (259 974)
------------- ------------ ------------- ------------- -------------- --------------
Balance, December 31, 1994 $ 4 306 915 $ 33 750 $ 674 899 $ 5 037 652 $ (259 974) $ 9 793 242
Net income -- -- -- 1 264 702 -- 1 264 702
Issuance of common stock for
services 16 710 -- 16 710 -- -- 33 420
Acquisition of common stock (47 940) (33 750) (85 940) -- -- (167 630)
Cash dividends ($.25 per share) -- -- -- (214 646) -- (214 646)
Change in unrealized gain (loss)
on securities available for
sale, net of deferred income
taxes of $174,552 -- -- -- -- 338 834 338 834
------------- ------------ ------------- ------------- -------------- --------------
Balance, December 31, 1995 $ 4 275 685 $ -- $ 605 669 $ 6 087 708 $ 78 860 $ 11 047 922
Net income -- -- -- 1 575 136 -- 1 575 136
Exercise of stock options 20 375 -- 21 450 -- -- 41 825
Issuance of common stock for
services 15 575 -- 21 805 -- -- 37 380
Acquisition of common stock (113 200) -- (180 431) -- -- (293 631)
Cash dividends ($.29 per share) -- -- -- (244 585) -- (244 585)
Change in unrealized gain (loss)
on securities available for
sale, net of deferred income
taxes of $79,888 -- -- -- -- (155 076) (155 076)
------------- ------------ ------------- ------------- -------------- --------------
Balance, December 31, 1996 $ 4 198 435 $ -- $ 468 493 $ 7 418 259 $ (76 216) $ 12 008 971
============ ============ ============= ============= ============== =============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
CHESAPEAKE FINANCIAL SHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 Summary of Significant Accounting Policies
General
Chesapeake Financial Shares, Inc. ("CFS") owns 100% of
Chesapeake National 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.
The accounting and reporting policies of CFS are in accordance
with generally accepted accounting principles and conform to
general practices within the banking industry. The more
significant of these policies are summarized below.
Securities
The Corporation has adopted FASB No. 115, "Accounting
for Certain Investment in Debt and Equity
Securities." This statement addresses the accounting
and reporting for investments in equity securities
that have readily determinable fair values and for
all investments 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 the Corporation
has both the intent and ability to hold to
maturity regardless of changes in market
conditions, liquidity needs or 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. The
Corporation held no assets classified as
held to maturity at December 31, 1996 or
1995.
b. Securities Available for Sale
Securities classified as available for sale
are those debt and equity securities that
the Corporation 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 the
Corporation's assets and liabilities,
liquidity needs, regulatory capital
considerations, and other similar factors.
Securities available for sale are carried at
fair value. Unrealized gains or losses are
reported as increases or decreases in
shareholders' 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 the short term in anticipation of market
gains, are carried at fair 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
1995.
Derivatives
The Corporation has no securities defined as
derivatives by FASB No. 119, "Disclosures for
Derivative Financial Instruments."
Loans
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. 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.
Loans are placed on nonaccrual status when a loan is
specifically determined to be impaired or when
principal or interest is delinquent for 90 days or
more. Any unpaid interest previously accrued on those
loans is reversed from income. Interest income
generally is not recognized on specific impaired
loans unless the likelihood of further loss is
remote. Interest payments received on such loans are
applied as a reduction of the loan principal balance.
Interest income on other nonaccrual loans is
recognized only to the extent of interest payments
received.
Mortgage loans held for resale are stated at the
lower of cost or market on an individual loan 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.
On January 1, 1995, the Corporation adopted FASB No.
114, "Accounting by Creditors for Impairment of a
Loan." This statement has been amended by FASB No.
118, "Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosures". Statement
114, as amended, requires that the impairment of
loans that have been separately identified for
evaluation is to be measured based on the present
value of expected future cash flows or,
alternatively, the observable market price of the
loans or the fair value of the collateral. However,
for those loans that are collateral dependent (that
is, if repayment of those loans is expected to be
provided solely by the underlying collateral) and for
which management has determined foreclosure is
probable, the measure of impairment of those loans is
to be based on the fair value of the collateral.
Statement 114, as amended, also requires certain
disclosures about investments in impaired loans and
the allowance for credit losses and interest income
recognized on loans. The Corporation had no loans
subject to FASB No. 114 at December 31, 1996 and
1995.
Reserve for Loan Losses
The reserve for loan losses is maintained at a level
which, in management's judgment, is adequate to
absorb credit losses inherent in the loan portfolio.
The amount of the reserve is based on management's
evaluation of the collectibility of the loan
portfolio, including the nature of the portfolio,
credit concentrations, trends in historical loss
experience, specific impaired loans, and economic
conditions. Reserves for impaired loans are generally
determined based on collateral values or the present
value of estimated cash flows. The reserve is
increased by a provision for loan losses, which is
charged to expense and reduced by charge-offs, net of
recoveries. Changes in the reserve relating to
impaired loans are charged or credited to the
provision for loan losses. Because of uncertainties
inherent in the estimation process, management's
estimate of credit losses inherent in the loan
portfolio and the related reserve may change in the
near term.
Premises and Equipment
Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed
using both straight line and accelerated methods over
the assets' estimated useful lives. Estimated useful
lives range from 10 to 39 years for buildings and 3
to 7 years for furniture, fixtures and equipment.
Foreclosed Properties
Foreclosed properties are recorded at the lower of
the outstanding loan balance at the time of
foreclosure or the estimated fair value less
estimated costs to sell. At foreclosure any excess of
loan balance over the fair value of the property is
charged to the reserve for loan losses. Such carrying
value is periodically reevaluated and written down if
there is an indicated decline in fair value. Costs to
bring a property to salable condition are capitalized
up to the fair value of the property while costs to
maintain a property in salable condition are expensed
as incurred. The Bank has included $245,000 and
$271,914 of foreclosed properties in other assets at
December 31, 1996 and 1995, respectively. Real estate
acquired in settlement of loans totalled $43,655
during 1995. No real estate was acquired in
settlement of loans during 1996.
Intangible Assets
The franchise asset is being amortized on an
accelerated basis over a ten year period, which is
the estimated life of the acquired customer base.
Trust Department Assets
Securities and other property held by the Trust
Department in a fiduciary or agency capacity are not
assets of the Corporation and are not included in the
accompanying consolidated financial statements.
Income Taxes
Deferred taxes are provided on a liability method
whereby deferred tax assets are recognized for
deductible temporary differences, operating loss
carryforwards, and tax credit carryforwards. Deferred
tax liabilities are recognized for taxable temporary
differences. Temporary differences are the
differences between the reported amounts of assets
and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in
the opinion of management, it is more likely than not
that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes
in tax laws and rates on the date of enactment.
Statement of Cash Flows
For purposes of the statement of cash flows, CFS
considers cash and federal funds sold to be cash
equivalents.
Earnings Per Share
Earnings per share is calculated based on the
weighted average number of common shares and common
stock equivalents outstanding during the year.
Advertising Costs
CFS follows the policy of charging the production
costs of advertising to expense as incurred.
Use of Estimates
The preparation of financial statements in conformity
with generally accepted accounting principles
requires management to make estimates and assumptions
that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements,
and the reported amounts of revenues and expenses
during the reporting period. Actual results could
differ from those estimates.
Note 2. Securities
Amortized cost and fair values of securities available for
sale as of December 31, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
1996
----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
------------ ------------ ------------ ------------
<S> <C>
U.S. Treasury securities $ 3 058 460 $ 3 180 $ (19 171) $ 3 042 469
U.S. Government agencies 23 488 966 47 414 (136 337) 23 400 043
Securities of state and
political subdivisions 10 539 035 44 924 (55 489) 10 528 470
Other 711 500 -- -- 711 500
------------ ------------ ------------ ------------
Total $ 37 797 961 $ 95 518 $ (210 997) $ 37 682 482
============ ============ ============ ============
1995
----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
------------ ------------ ------------ ------------
U.S. Treasury securities $ 4 577 242 $ 11 589 $ (5 425) $ 4 583 406
U.S. Government agencies 22 229 225 169 135 (58 774) 22 339 586
Securities of state and
political subdivisions 9 637 280 83 632 (83 924) 9 636 988
Other 541 300 -- -- 541 300
------------ ------------ ------------ ------------
Total $ 36 985 047 $ 264 356 $ (148 123) $ 37 101 280
============ ============ ============ ============
</TABLE>
The amortized cost and fair value of securities available for
sale as of December 31, 1996, by contractual maturity are
shown below. Expected maturities may differ from contractual
maturities because issuers may have the right to call or
prepay obligations without any penalties.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
-------------- --------------
Due in one year or less $ 3 369 043 $ 3 376 693
Due after one year through five years 9 100 924 9 034 147
Due after five years through ten years 4 599 402 4 579 613
Due after ten years 20 017 092 19 980 529
Other 711 500 711 500
-------------- --------------
Total $ 37 797 961 $ 37 682 482
============== ==============
There were no securities being held to maturity at December
31, 1996 or 1995.
Proceeds from sales and calls of securities being held to
maturity during 1996, 1995 and 1994 were $-0-, $250,000 and
$-0-, respectively. There were no gross gains or losses
realized on the sales and calls during 1995.
Proceeds from sales and calls of securities available for sale
during 1996, 1995 and 1994 were $9,216,346, $4,487,354 and
$2,751,223, respectively. Gross gains of $37,526, $10,967 and
$185 and gross losses of $39,119, $17,351 and $32,663 were
realized on those sales and calls, respectively.
As allowed by the Question and Answer Guide to FASB No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities" issued in November of 1995, debt securities with
an amortized cost of $28,960,443 were transferred from
held-to-maturity to available-for-sale on December 1, 1995.
The securities had an unrealized gain of approximately
$39,700.
The amortized value of securities pledged to secure public
deposits, borrowings from the Federal Reserve Bank and
fiduciary powers amounted to $8,538,977 and $10,121,373, at
December 31, 1996 and 1995, respectively.
Note 3. Loans
Major classifications of loans are summarized as follows:
<S> <C>
Commercial $ 33 256 921 $ 29 210 862
Real estate - mortgage 38 333 737 35 126 253
Real estate - construction 3 109 470 1 971 938
Consumer 14 554 795 13 015 535
Participations with other banks 2 429 715 2 617 700
Other 394 030 512 563
---------------- ----------------
$ 92 078 668 $ 82 454 851
Less:
Reserve for loan losses 1 652 844 1 463 181
Unearned discounts -- 1 019
---------------- ----------------
$ 90 425 824 $ 80 990 651
================ ================
</TABLE>
Participations with other banks are secured by commercial real
estate.
Nonaccrual loans excluded from impaired loan disclosure under
FASB No. 114 amounted to $142,944 and $138,200 at December 31,
1996 and 1995, respectively. If interest on these loans had
been accrued, such income would have approximated $5,313 and
$3,028 at December 31, 1996 and 1995, respectively.
Changes in the reserve for loan losses are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------
1996 1995 1994
-------------- --------------- ---------------
<S> <C>
Balance at beginning of year $ 1 463 181 $ 1 370 598 $ 1 312 318
Provision for (recovery of) loan
losses 150 000 84 000 (96 530)
Loans charged off (157 448) (27 530) (21 154)
Recoveries on loans previously
charged-off 197 111 36 113 175 964
-------------- --------------- ---------------
Balance at end of year $ 1 652 844 $ 1 463 181 $ 1 370 598
============== =============== ===============
</TABLE>
Note 4. Premises and Equipment
Major classifications of premises and equipment are summarized
as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1996 1995
---------------- ----------------
<S> <C>
Land $ 428 135 $ 428 135
Buildings 2 232 418 2 184 955
Furniture, fixtures and improvements 813 391 750 429
Mechanical equipment 2 401 214 2 055 395
Leasehold improvements 759 033 427 135
---------------- ----------------
$ 6 634 191 $ 5 846 049
Less: accumulated depreciation 3 350 128 2 994 458
---------------- ----------------
$ 3 284 063 $ 2 851 591
================ ================
</TABLE>
For the years ended December 31, 1996, 1995 and 1994,
depreciation expense was $388,537, $251,557 and $200,389,
respectively.
Note 5. Intangible Assets
Intangible assets consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1996 1995
---------------- ----------------
<S> <C>
Franchise asset associated with customer deposits
assumed, net of accumulated amortization of
$1,116,000 and $1,032,000,
respectively $ 84 000 $ 168 000
================ ================
</TABLE>
For the years ended December 31, 1996, 1995 and 1994,
amortization expense was $84,000, $84,000 and $240,894,
respectively.
Note 6. Note Payable
CFS had a term loan bearing interest at prime plus 1.0% (9.5%
at December 31, 1995) that was payable $37,500 quarterly
commencing April 1, 1993 and a final payment of $25,000 on
October 1, 1999. The principal balance remaining at December
31, 1995 of $387,500 was paid during 1996.
During 1996, CFS entered into a $2,000,000 line of credit
agreement with the Community Bankers' Bank. The line of credit
bears interest at The Wall Street Journal prime rate and is
secured by all issued and outstanding shares of capital stock
of Chesapeake Bank. The loan agreement also contains certain
covenants including restrictions on changes in control of CFS
and the Bank, redemption of stock, payment of dividends, and
capital expenditures. CFS was in compliance with all of the
covenants at December 31, 1996. There was no amount drawn on
this line of credit at December 31, 1996.
Note 7. Income Taxes
Net deferred tax assets consist of the following components as
of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---------------- ----------------
<S> <C>
Deferred tax assets:
Reserve for loan losses $ 356 629 $ 305 628
Deferred compensation 101 642 88 126
Accrued pension expense 105 056 106 629
Intangible asset 84 568 88 649
Securities available for sale 37 391 --
Other 19 146 1 030
--------------- ----------------
$ 704 432 $ 590 062
--------------- ----------------
Deferred tax liabilities:
Securities available for sale $ -- $ 40 626
Accumulated discount accretion 1 009 1 118
Premises and equipment 165 338 154 545
---------------- ----------------
$ 166 347 $ 196 289
---------------- ----------------
$ 538 085 $ 393 773
=============== ================
</TABLE>
The provision for income taxes charged to operations for the
years ended December 31, 1996, 1995 and 1994, consists of the
following:
<TABLE>
<CAPTION>
1996 1995 1994
-------------- -------------- ---------------
<S> <C>
Current tax expense $ 567 601 $ 410 871 $ 403 764
Deferred tax expense (benefit) (66 298) 8 826 13 631
-------------- -------------- ---------------
$ 501 303 $ 419 697 $ 417 395
============== ============== ===============
</TABLE>
The income tax provision differs from the amount of income tax
determined by applying the U.S. federal income tax rate to
pretax income for the years ended December 31, 1996, 1995 and
1994, due to the following:
<TABLE>
<CAPTION>
1996 1995 1994
-------------- -------------- ---------------
<S> <C>
Computed "expected" tax expense $ 705 989 $ 572 696 $ 493 854
Increase (decrease) in income taxes
resulting from:
Tax exempt interest income (203 087) (137 588) (123 020)
Goodwill amortization -- -- 45 184
Other (1 599) (15 411) 1 377
-------------- -------------- ---------------
$ 501 303 $ 419 697 $ 417 395
============== ============== ===============
</TABLE>
Note 8. Employee Benefit Plans
Pension Plan
The Corporation has a noncontributory, defined benefit pension
plan for all full-time employees over 21 years of age.
Benefits are generally based upon years of service and the
employees' compensation. The Corporation funds pension costs
in accordance with the funding provisions of the Employee
Retirement Income Security Act.
The following table sets forth the plan's funded status and
amounts recognized as of December 31, 1996 and 1995, computed
as of October 1, 1996 and 1995, respectively:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1996 1995
-------------- -----------------
<S> <C>
Accumulated benefit obligation, including vested
benefits of $842,198 and $751,146 in 1996
and 1995, respectively $ 871 146 $ 775 701
============== =================
Projected benefit obligation for service rendered to
date $ (1 311 102) $ (1 185 703)
Plan assets at fair value 1 255 666 1 023 643
--------------- -----------------
Projected benefit obligation in excess of plan assets $ (55 436) $ (162 060)
Unrecognized net obligation 52 904 56 974
Unrecognized prior service cost 39 361 41 985
Unrecognized net gain (441 719) (397 616)
--------------- -----------------
Accrued pension liability at October 1 $ (404 890) $ (460 717)
Contribution made in fourth quarter 95 902 147 486
--------------- -----------------
Accrued pension liability at December 31 $ (308 988) $ (313 231)
=============== =================
</TABLE>
Net pension costs for 1996, 1995 and 1994 include the
following:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1996 1995 1994
-------------- -------------- --------------
<S> <C>
Service cost-benefits earned during
the period $ 102 467 $ 90 630 $ 99 417
Interest costs on projected benefit
obligation 88 547 78 506 76 887
Actual return on plan assets (91 671) (78 656) (82 928)
Net amortization (5 990) (2 423) (4 938)
-------------- -------------- --------------
Net periodic pension cost $ 93 353 $ 88 057 $ 88 438
============== ============== ==============
</TABLE>
The discount rate and rate of increase in future compensation
levels used in determining the actuarial present value of the
projected benefit obligation were 7.5% and 6.0%, respectively.
The expected long-term rate of return on plan assets was 9.0%.
Deferred Compensation Agreements
The Bank and CFS have deferred compensation agreements
providing for monthly payments to an officer of each company
commencing at retirement. The liabilities under these
agreements are being accrued over the officers' remaining
periods of employment such that the then present value of the
monthly payments will have been accrued by retirement date.
CFS funds the deferred compensation commitments through life
insurance policies on the officers. One of the officers is
currently retired and receiving benefits under this plan.
Employee Stock Ownership Plan
Generally, full-time employees who have completed one calendar
year of service are eligible. Contributions each year are at
the discretion of the Board of Directors, within certain
limitations prescribed by Federal tax regulations.
Compensation expense related to the plan was $19,992, $10,000
and $10,000 in 1996, 1995 and 1994, respectively. An
employee's proportional ownership in the plan assets vests on
an increasing scale over 7 years, or sooner under certain
circumstances. The plan intends to invest contributions
received in shares of CFS common stock.
401-K Plan
CFS has adopted a contributory 401-k plan which covers
substantially all employees. Total expense related to the plan
was $20,381, $20,687 and $10,338 for 1996, 1995 and 1994.
Note 9. Stock Option Plan
CFS had a stock option plan in which options for 144,000
shares of voting common stock and 112,500 shares of nonvoting
common stock are reserved for issuance. The stock option plan
required that options be granted at an exercise price equal to
at least 100% of the fair market value of the common stock on
the date of grant; however, for those individuals who own more
than 10% of the stock of CFS, the option price must be at
least 110% of the fair market value on the date of grant. Such
options are generally not exercisable until after three years
from the date of issuance and require continuous employment
during the period prior to exercise. This plan expired in
1995. Options previously granted may be exercised by the
participants until the options expire, which is ten years
after the date of the original option grant.
A summary of the status the expired plan at December 31,
1996, 1995 and 1994 and the changes during the years ended on
those dates is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------ --------------------------- -----------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------- ------------ ----------- ------------ -------------- -----------
<S> <C>
Outstanding at beginning
of year 67 200 $ 10.11 49 700 $ 10.00 59 564 $ 9.36
Options granted -- -- 17 500 10.43 17 000 9.06
Options exercised (4 075) 10.26 -- -- (6 750) (7.33)
Options forfeited -- -- -- -- (20 114) (8.21)
------------- ----------- --------------
Outstanding at end of year 63 125 10.10 67 200 10.11 49 700 10.00
============= =========== ==============
Options exercisable,
end of year 28 625 32 700 32 700
Options available for
grant, end of year -- -- 140 936
</TABLE>
In 1996, CFS adopted an incentive stock plan under which
options may be granted to certain key employees for purchase
of CFS's common stock. The effective date of the plan was
April 5, 1996 with an expiration date of March 31, 2006. The
plan reserves for issuance 45,000 shares of CFS's voting
common stock. The stock option plan requires that options be
granted at an exercise price equal to at least 100% of the
fair market value of the common stock on the date of the
grant; however for those individuals who own more than 10% of
the stock of CFS, the option price must be at least 110% of
the fair market value on the date of grant. Such options are
generally not exercisable until three years from the date of
issuance and require continuous employment during the period
prior to exercise. The options will expire in no more than ten
years after the date of grant.
A summary of the status of the 1996 plan at December 31, 1996
and the changes during the year ended on that date is as
follows:
<TABLE>
<CAPTION>
1996
---------------------------
Weighted
Average
Exercise
Shares Price
----------- -------------
<S> <C>
Outstanding at beginning of year -- $ --
Options granted 10 500 13.50
Options exercised -- --
Options forfeited -- --
-----------
Outstanding at end of year 10 500 13.50
===========
Options exercisable, end of year --
Options available for grant, end of year 34 500
</TABLE>
The status of the options outstanding at December 31, 1996 is
as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------- ------------------------
<S> <C>
Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life Price Exercisable Price
---------------- --------------- -------------- ----------- ----------- ----------
$10.00 to $11.00 16 625 2.3 $ 10.54 16 625 $ 10.54
$10.00 to $11.00 10 500 3.3 10.57 10 500 10.57
$9.86 1 500 4.3 9.86 1 500 9.86
$13.00 to $14.30 10 500 6.3 13.5 -- --
$8.75 to $9.63 17 000 7.3 9.06 -- --
$10.00 to $11.00 17 500 8.3 10.43 -- --
</TABLE>
CFS applies APB Opinion 25 in accounting for its stock option
plans, accordingly no compensation expense has been recognized
for 1996 and 1995. Had compensation cost been determined on
the basis of fair value pursuant to FASB Statement No. 123,
there would not have been a significant impact on net income
or earnings per share.
Note 10. Shareholders' Equity
During 1996 and 1995, CFS issued 3,115 and 3,342 shares,
respectively, of common stock to its Directors for partial
compensation. CFS did not issue shares of common stock to its
Directors for partial compensation in 1994.
The voting and nonvoting common stock have equal dividend and
participation rights.
Note 11. Commitments
CFS leases certain facilities and equipment under operating
leases which expire at various dates through 2000. These
leases generally contain renewal options and require CFS to
pay taxes, insurance, maintenance and other expenses in
addition to the minimum normal rentals.
Minimum rental payments under these operating lease agreements
as of December 31, 1996 are as follows:
Year Ending
December 31,
1997 $89 040
1998 85 200
1999 79 800
2000 47 400
Rent expense under operating leases aggregated $129,707,
$85,879 and $49,527 for the years ended December 31, 1996,
1995 and 1994, respectively.
As a member of the Federal Reserve System, the Bank is
required to maintain certain average reserve balances. For the
final weekly reporting period in the years ended December 31,
1996 and 1995, the aggregate amounts of daily average required
balances were approximately $196,000 for both periods.
Note 12. Related Party Transactions
Officers, Directors and their affiliates had borrowings of
$5,071,174 and $5,427,873 at December 31, 1996 and 1995,
respectively, with the Bank.
Changes in borrowings during 1996 were as follows:
Balance, December 31, 1995 5,427,873
Additions 455,109
Payments (811,808)
---------
Balance, December 31, 1996 $5,071,174
==========
These transactions occurred in the ordinary course of business
on substantially the same terms as those prevailing at the
time for comparable transactions with unrelated persons.
Note 13. Other Income and Expenses
The principal components of "Other Income" in the consolidated
statements of income are:
<TABLE>
<CAPTION>
1996 1995 1994
-------------- -------------- ---------------
<S> <C>
Business manager fees and discount $ 381 985 $ 258 870 $ --
FHLMC servicing fee income 130 871 131 328 130 941
Merchant discount 204 438 150 843 --
Other (includes no items in
excess of 1% of total revenue) 512 414 377 296 367 173
-------------- -------------- ---------------
$ 1 229 708 $ 918 337 $ 498 114
============== ============== ===============
</TABLE>
The principal components of "Other Expenses" in the
consolidated statements of income are:
<TABLE>
<CAPTION>
1996 1995 1994
-------------- -------------- ---------------
<S> <C>
Advertising $ 135 468 $ 127 757 $ 186 895
Amortization 84 000 84 000 240 894
Deposit insurance 2 000 131 568 279 775
Merchant card 211 815 144 786 419
Professional 83 925 126 575 44 297
Other (includes no items in
excess of 1% of total revenue) 1 152 309 1 096 566 1 083 114
-------------- -------------- ---------------
$ 1 669 517 $ 1 711 252 $ 1 835 394
============== ============== ===============
</TABLE>
Note 14. Financial Instruments With Off-Balance-Sheet Risk
The Corporation is a party to financial instruments with
off-balance-sheet risk in the normal course of business to
meet the financing needs of its customers. These financial
instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying
degrees, elements of credit and interest rate risk in excess
of the amount recognized in the balance sheet. The contract
amounts of those instruments reflect the extent of involvement
the Corporation has in particular classes of financial
instruments.
The Corporation's exposure to credit loss in the event of
nonperformance by the other party to the financial instruments
for commitments to extend credit and standby letters of credit
is represented by the contractual amounts of those
instruments. The Corporation uses the same credit policies in
making commitments and conditional obligations as they do for
on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition
established in the contract. Standby letters of credit are
conditional commitments issued by the Corporation to guarantee
the performance of a customer to a third party. Commitments
generally have fixed expiration dates or other termination
clauses and may require payment of a fee. At December 31,
1996, the Corporation's total commitments to extend credit and
standby letters of credit were $15,140,458 and $3,000,
respectively. At December 31, 1995, the Corporation's total
commitments to extend credit and standby letters of credit
were $11,466,833 and $188,978, respectively. The Corporation
evaluates each customer's credit worthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary
by the Corporation upon extension of credit, is based on
management's credit evaluation of the counter-party.
Collateral held varies but may include accounts receivable,
inventory, property, plant, and equipment, and
income-producing commercial properties. Since most of the
letters of credit are expected to expire without being drawn
upon, they do not necessarily represent future cash
requirements.
The Corporation grants commercial, real estate and consumer
loans to customers primarily in the Northern Neck, Middle
Peninsula, and James City County areas of Virginia. Although
the Corporation has a diversified loan portfolio, the ability
of debtors to honor their contracts is highly dependent upon
the real estate development market in this area.
Note 15. Disclosures About Fair Value of Financial Instruments
The following methods and assumptions were used to estimate
the fair value of each class of financial instruments for
which it is practicable to estimate that value:
Cash and Short-Term Investments
For those short-term instruments, the carrying amount
is a reasonable estimate of fair value.
Securities
For securities held for investment purposes, fair
values are based on quoted market prices or dealer
quotes.
Loan Receivables
For certain homogeneous categories of loans, such as
some residential mortgages, and other consumer loans,
fair value is estimated using the quoted market
prices for securities backed by similar loans,
adjusted for differences in loan characteristics. The
fair value of other types of loans is estimated by
discounting the future cash flows using the current
rates at which similar loans would be made to
borrowers with similar credit ratings and for the
same remaining maturities.
Deposit Liabilities
The fair value of demand deposits, savings accounts
and certain money market deposits is the amount
payable on demand at the reporting date. The fair
value of fixed-maturity certificates of deposit is
estimated using the rates currently offered for
deposits of similar remaining maturities.
Off-Balance Sheet Financial Instruments
The fair value of commitments is estimated using the
fees currently charged to enter into similar
agreements, taking into account the remaining terms
of the agreements and the present creditworthiness of
the counterparties. For fixed-rate loan commitments,
fair value also considers the difference between
current levels of interest rates and the committed
rates. The fair value of letters of credit is based
on fees currently charged for similar agreements or
on the estimated cost to terminate them or otherwise
settle the obligations with the counterparties at the
reporting date.
At December 31, 1996 and 1995, the carrying amounts
and fair values of loan commitments and stand-by
letters of credit were deemed immaterial.
The estimated fair values of CFS's financial instruments are as
follows:
<TABLE>
<CAPTION>
1996 1995
---------------------------------- -------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ----------- ------------ -------------
(In Thousands) (In Thousands)
<S> <C>
Financial assets:
Cash and short-term investments $ 5 897 $ 5 897 $ 4 907 $ 4 907
Time deposits with banks -- -- 450 450
Securities 37 682 37 682 37 101 37 101
Loans 92 079 91 905 82 454 75 110
Less: reserve for loan losses (1 653) -- (1 463) --
------------ ----------- ------------ ------------
Total financial assets $ 134 005 $ 135 484 $ 123 449 $ 117 568
============ =========== ============ ============
Financial liabilities:
Deposits $ 127 629 $ 127 816 $ 118 687 $ 104 790
Federal funds purchased 2 000 2 000 115 115
Note payable -- -- 388 388
------------ ----------- ------------ ------------
Total financial liabilities $ 129 629 $ 129 816 $ 119 190 $ 105 293
============ =========== ============ ============
</TABLE>
Note 16. Regulatory Matters
The Corporation is subject to various regulatory capital
requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate
certain mandatory - possibly additional discretionary -
actions by regulators that, if undertaken, could have a direct
material effect on the Corporation's financial statements.
Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Corporation must meet
specific capital guidelines that involve quantitative measures
of the Corporation's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory
accounting practices. The Corporation's capital amounts and
classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure
capital adequacy require the Corporation to maintain minimum
amounts and ratios (set forth in the table below) of total and
Tier 1 capital (as defined in the regulations) to
risk-weighted assets, and of Tier 1 capital to average assets.
Management believes, as of December 31, 1996, that the
Corporation meets all capital adequacy requirements to which
it is subject.
As of December 31, 1996, the most recent notification from the
Federal Reserve Bank categorized the Corporation as well
capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the
Corporation must maintain minimum total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the
table. There are no conditions or events since that
notification that management believes have changed the
institution's category.
The Corporation's actual capital amounts and ratios are also
presented in the table.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital
Prompt Corrective Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------- ------------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ----------- --------- --------- --------
(Amount in Thousands)
<S> <C>
As of December 31, 1996:
Total Capital (to Risk
Weighted Assets):
Consolidated $ 13 121 13.7% >=$ 7 656 >= 8.0% N/A
Chesapeake Bank $ 11 925 12.5% >=$ 7 612 >= 8.0% >=$ 9 515 >= 10.0%
Tier 1 Capital (to Risk
Weighted Assets):
Consolidated $ 11 925 12.5% >=$ 3 828 >= 4.0% N/A
Chesapeake Bank $ 10 729 11.3% >=$ 3 806 >= 4.0% >=$ 5 709 >= 6.0%
Tier 1 Capital (to
Average Assets):
Consolidated $ 11 925 8.5% >=$ 5 590 >= 4.0% N/A
Chesapeake Bank $ 10 729 7.7% >=$ 5 556 >= 4.0% >=$ 6 945 >= 5.0%
As of December 31, 1995:
Total Capital (to Risk
Weighted Assets):
Consolidated $ 11 927 14.2% >=$ 6 699 >= 8.0% N/A
Chesapeake Bank $ 11 913 14.2% >=$ 6 684 >= 8.0% >=$ 8 355 >= 10.0%
Tier 1 Capital (to Risk
Weighted Assets):
Consolidated $ 10 880 13.0% >=$ 3 349 >= 4.0% N/A
Chesapeake Bank $ 10 863 12.9% >=$ 3 342 >= 4.0% >=$ 5 013 >= 6.0%
Tier 1 Capital (to
Average Assets):
Consolidated $ 10 880 8.4% >=$ 5 199 >= 4.0% N/A
Chesapeake Bank $ 10 863 8.3% >=$ 5 183 >= 4.0% >=$ 6 479 >= 5.0%
</TABLE>
Note 17. Parent Company Financial Statements
The following parent company accounting policies should be
read in conjunction with the related condensed balance sheets,
statements of income, and statements of cash flows.
Investments in subsidiaries are accounted for using the equity
method of accounting. The parent company and its subsidiaries
file a consolidated federal income tax return. The
subsidiaries' individual tax provisions and liabilities are
stated as if they filed separate returns and any benefits or
detriments of filing the consolidated tax return are absorbed
by the parent company.
The parent company's principal assets are its investments in
its wholly-owned subsidiaries. Dividends from the Bank are the
primary source of funds for the parent company. The payment of
dividends by the Bank is restricted by various statutory
limitations. Banking regulations also prohibit extensions of
credit by the Bank to the parent company unless appropriately
secured by assets. The amount available for payment of
additional dividends without prior regulatory approval in 1996
from the Bank to the parent company is $1,092,143 or 9.1% of
consolidated net assets.
Balance Sheets (Condensed)
<TABLE>
<CAPTION>
December 31,
----------------------------------
1996 1995
--------------- ---------------
Assets
<S> <C>
Cash $ 198 629 $ 59 482
Securities 1 000 839 302 050
Investment in subsidiaries 10 767 716 11 055 511
Other assets 45 787 32 003
--------------- ---------------
Total assets $ 12 012 971 $ 11 449 046
=============== ===============
Liabilities and Shareholders' Equity
Other liabilities $ 4 000 $ 13 624
Note payable -- 387 500
Shareholders' equity 12 008 971 11 047 922
--------------- ---------------
Total liabilities and shareholders' equity $ 12 012 971 $ 11 449 046
=============== ===============
</TABLE>
Statements of Income (Condensed)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
<S> <C>
Income - Dividends - Bank $ 1 800 000 $ 600 000 $ 320 000
Dividends - Mortgage Co. -- 3 632 361 772
Other 21 858 19 947 18 340
--------------- --------------- ---------------
Total income $ 1 821 858 $ 623 579 $ 700 112
--------------- --------------- ---------------
Expenses - Interest expense $ 26 026 $ 44 379 $ 56 420
Other expenses 103 912 133 023 86 216
--------------- --------------- ---------------
Total expenses $ 129 938 $ 177 402 $ 142 636
--------------- --------------- ---------------
Income before income taxes and
equity in undistributed earnings
of subsidiaries $ 1 691 920 $ 446 177 $ 557 476
Allocated income tax benefit 21 158 24 373 41 707
--------------- --------------- ---------------
Income before equity in undistri-
buted earnings of subsidiaries $ 1 713 078 $ 470 550 $ 599 183
Equity (deficit) in undistributed
earnings of subsidiaries (137 942) 794 152 435 933
--------------- --------------- ---------------
Net income $ 1 575 136 $ 1 264 702 $ 1 035 116
=============== =============== ===============
</TABLE>
Statements of Cash Flows (Condensed)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
<S> <C>
Cash Flows from Operating Activities
Net income $ 1 575 136 $ 1 264 702 $ 1 035 116
Adjustments to reconcile net income
to net cash provided by operating
activities:
Equity in undistributed earnings
(losses) of subsidiaries 137 942 (794 152) (435 933)
Issuance of common stock for services 37 380 33 420 --
Amortization of premium 144 2 435 --
Changes in other assets and liabilities:
(Increase) decrease in other assets (10 847) 21 682 40 540
Increase (decrease) in other liabilities (9 624) 1 090 (7 870)
------------- -------------- ---------------
Net cash provided by
operating activities $ 1 730 131 $ 529 177 $ 631 853
------------- -------------- ---------------
Cash Flows from Investing Activities
Purchase of investment securities $ (907 718) $ -- $ (100 000)
Proceeds from maturities of
investment securities 200 625 -- --
------------- -------------- --------------
Net cash (used in)
investing activities $ (707 093) $ -- $ (100 000)
------------- -------------- --------------
Cash Flows from Financing Activities
Dividends paid $ (244 585) $ (214 646) $ (182 972)
Proceeds from note payable -- -- --
Curtailment of note payable (387 500) (150 000) (350 000)
Acquisitions of common stock (293 631) (167 630) (58 842)
Exercise of stock options 41 825 -- 49 500
------------- -------------- --------------
Net cash (used in)
financing activities $ (883 891) $ (532 276) $ (542 314)
------------- -------------- --------------
Net increase (decrease) in cash $ 139 147 (3 099) $ (10 461)
Cash at beginning of year 59 482 62 581 73 042
------------- -------------- --------------
Cash at end of year $ 198 629 $ 59 482 $ 62 581
============= ============== ==============
</TABLE>
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
Chesapeake Financial Shares, Inc. and Subsidiaries
Kilmarnock, Virginia
We have audited the accompanying consolidated balance sheets of
Chesapeake Financial Shares, Inc. and Subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for the years ended December 31, 1996, 1995
and 1994. These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Chesapeake
Financial Shares, Inc. and Subsidiaries as of December 31, 1996 and 1995, and
the results of its operations and its cash flows for the years ended December
31, 1996, 1995 and 1994, in conformity with generally accepted accounting
principles.
YOUNT, HYDE & BARBOUR, P.C.
Winchester, Virginia
January 17, 1997
32
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 5,896,836
<INT-BEARING-DEPOSITS> 37,273,969
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 37,682,482
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 92,078,668
<ALLOWANCE> 1,652,844
<TOTAL-ASSETS> 142,875,618
<DEPOSITS> 127,629,565
<SHORT-TERM> 2,000,000
<LIABILITIES-OTHER> 964,536
<LONG-TERM> 0
4,198,435
0
<COMMON> 0
<OTHER-SE> 7,810,536
<TOTAL-LIABILITIES-AND-EQUITY> 142,875,618
<INTEREST-LOAN> 8,103,829
<INTEREST-INVEST> 1,979,394
<INTEREST-OTHER> 58,712
<INTEREST-TOTAL> 10,141,935
<INTEREST-DEPOSIT> 3,923,380
<INTEREST-EXPENSE> 4,754,679
<INTEREST-INCOME-NET> 5,387,256
<LOAN-LOSSES> 150,000
<SECURITIES-GAINS> (1,593)
<EXPENSE-OTHER> 5,720,313
<INCOME-PRETAX> 2,076,439
<INCOME-PRE-EXTRAORDINARY> 2,076,439
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,575,136
<EPS-PRIMARY> 1.86
<EPS-DILUTED> 1.86
<YIELD-ACTUAL> 4.64
<LOANS-NON> 142,944
<LOANS-PAST> 8,850
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 70,738
<ALLOWANCE-OPEN> 1,463,181
<CHARGE-OFFS> 157,448
<RECOVERIES> 197,111
<ALLOWANCE-CLOSE> 1,652,844
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
