U. S. Securities and Exchange commission
Washington, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE EXCHANGE ACT
For the transition period from to
Commission file number 0-18543
CHESAPEAKE FINANCIAL SHARES, INC.
(Exact name of registrant as specified in its charter)
Virginia 54-1210845
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
97 N. Main St., Kilmarnock, VA 22482
(Address of principal executive offices) (Zip Code)
(804) 435-1181
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if
changed since last report.)
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities and Exchange Act of 1934 during
the preceding 12 months (or for such shorter period
that the registrant was required to file such reports),
and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock as of October 15, 1997.
Class Outstanding at October 15, 1997
Common Stock, voting, $5.00 par value 1,006,554
Common Stock, non-voting, $5.00 par value 0
CHESAPEAKE FINANCIAL SHARES, INC.
FORM 10-QSB
INDEX
PART I - FINANCIAL INFORMATION
Page
Item 1. Financial Statements...............................1-4
Consolidated Balance Sheets
September 30, 1997 and December 31, 1996................1-2
Consolidated Statements of Earnings
Three months ended September 30, 1997 and 1996............3
Consolidated Statements of Earnings
Nine months ended September 30, 1997 and 1996.............4
Consolidated Statements of Cash Flows
Nine months ended September 30, 1997 and 1996.............5
Notes to Consolidated Financial Statements..............6-7
Item 2. Management's Discussion and Analysis of
Financial Condition Results of Operations.........8-13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..............................14
Item 2. Changes in Securities..........................14
Item 3. Defaults Upon Senior Securities................14
Item 4. Submission of Matters to a Vote of
Security Holders.............................14
Item 5. Other Information..............................14
Item 6. Exhibits and Reports on Form 8-K...............15
Signatures...............................................16
Page I
PART I. Item 1. - FINANCIAL INFORMATION
Chesapeake Financial Shares, Inc. September 30, December 31,
Consolidated Balance Sheets 1997 1996
ASSETS (Unaudited)
Cash and due from banks............... $5,710,534 $5,896,836
Federal funds sold.................... 400,000 0
Time deposits with banks.............. 0 0
Securities available for sale
U.S. Treasury securities (book value
of $1,953,885-1997 and $3,058,460-1996) 1,946,500 3,042,469
U.S. Government agencies (book value of
$26,393,447-1997 and $23,488,966-1996) 26,524,481 23,400,043
Obligations of state and political
subdivisions (book value of
$11,731,411-1997 and $10,539,035-1996) 12,002,099 10,528,470
Other Securities (book value
$743,400-1997 and $711,500-1996...... 743,400 711,500
Loans................................. 99,132,995 92,078,667
Less: Reserve for loan loss........... (1,682,042) (1,652,843)
------------ ------------
Net loans.......................... 97,450,953 90,425,824
Bank premises and equipment, net...... 3,744,182 3,284,063
Accrued interest receivable........... 1,081,700 1,088,201
Intangible assets, net................ 21,000 84,000
Business Manager Assets............... 4,644,693 1,708,075
Other assets.......................... 1,847,449 2,706,137
------------ ------------
Total assets....................... $156,116,991 $142,875,618
============ ============
See accompanying notes to consolidated financial statements. Page: 1
PART I. Item 1. - FINANCIAL INFORMATION
Chesapeake Financial Shares, Inc. September 30, December 31,
Consolidated Balance Sheets 1997 1996
LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited)
Deposits
Noninterest bearing deposits........... $ 18,172,178 $ 16,646,453
Savings and interest bearing deposits.. 39,103,480 37,273,969
Certificates of deposit................ 82,816,175 73,709,143
------------ ------------
Total deposits....................... 140,091,833 127,629,565
Federal funds purchased.................. 1,200,000 2,000,000
Accrued interest payable................. 285,107 272,546
Other liabilities........................ 1,114,274 964,536
Note payable............................. 0 0
------------ ------------
Total liabilities................... 142,691,214 130,866,647
Commitments
Shareholders' equity
Preferred stock, par value $1 per share;
authorized 50,000 shares; none outstanding 0 0
Common stock, voting.................... 4,194,245 4,198,435
Common stock, non-voting................ 0 0
voting non-voting
9/30/97 12/31/96 9/30/97 12/31/96
------- -------- ------- --------
Shares auth. 2,000,000 2,000,000 635,000 635,000
Shares o/s 838,849 839,687 0 0
Paid in capital.......................... 451,843 468,493
Unrealized gains (losses) on securities
available for sale...................... 256,319 (76,216)
Retained earnings........................ 8,523,370 7,418,259
----------- -----------
Total shareholders' equity.......... 13,425,777 12,008,971
----------- -----------
Total liabilities and Shareholders'
equity............................. $156,116,991 $142,875,618
============ ============
See accompanying notes to consolidated financial statements. Page: 2
PART I. Item 1. - FINANCIAL INFORMATION (cont'd.)
Chesapeake Financial Shares, Inc. Three Months Ended
Consolidated Statements of Earnings September 30,
1997 1996
Interest Income (Unaudited)
Interest and fees on loans.............. $2,262,359 $2,034,675
Interest on federal funds sold.......... 25,936 5,028
Interest on time deposits with banks.... 2,529 0
Interest on U.S. Treasury securities.... 25,540 50,283
Interest on obligations of U.S. Agency
Obligations........................... 398,031 280,941
Interest on obligations of state and
political subs........................ 159,634 152,686
Total interest income 2,874,029 2,523,613
Interest Expense
Interest on savings and interest bearing
deposits.............................. 250,265 251,931
Interest on certificates of deposit..... 1,134,071 886,304
Interest on federal funds purchased..... 879 10,441
Other interest expense.................. 0 6,267
Total interest expense 1,385,215 1,154,943
----------- -----------
Net interest income..................... 1,488,814 1,368,670
Provision for loan losses............... 37,500 37,500
----------- -----------
Net interest income after provision for
loan losses 1,451,314 1,331,170
Noninterest Income
Income from fiduciary activities........ 297,741 253,064
Service charges on deposit accounts..... 127,954 122,700
Securities gains (losses) -net.......... 0 10,889
Merchant card income.................... 120,112 76,584
ATM income.............................. 57,632 40,820
Business manager income................. 194,378 97,505
Other income............................ 92,049 215,259
Total noninterest income 889,866 816,821
Noninterest Expense
Salaries................................ 654,654 580,792
Employee benefits....................... 133,753 152,193
Occupancy expenses...................... 284,153 368,002
Amortization expense.................... 21,000 21,000
Merchant card expense................... 114,377 76,982
ATM expense............................. 72,641 48,148
Business manager expense................ 48,526 18,780
Other expenses.......................... 319,765 315,299
Total noninterest expense 1,648,869 1,581,196
----------- -----------
Income before income taxes.............. 692,311 566,795
Income taxes............................ 177,338 164,870
----------- -----------
Net income......................... $ 514,973 $ 401,925
Earnings per share...................... $0.59 $0.48
See accompanying notes to consolidated financial statements. Page: 3
PART I. Item 1. - FINANCIAL INFORMATION (cont'd.)
Chesapeake Financial Shares, Inc. Nine Months Ended
Consolidated Statements of Earnings September 30,
1997 1996
Interest Income (Unaudited)
Interest and fees on loans.............. $6,634,462 $5,972,272
Interest on federal funds sold.......... 28,413 17,443
Interest on time deposits with banks.... 7,007 17,066
Interest on U.S. Treasury securities.... 86,903 170,222
Interest on obligations of U.S. Agency
Obligations........................... 1,070,885 883,756
Interest on obligations of state and
political subs........................ 474,577 406,750
Total interest income 8,302,247 7,467,509
Interest Expense
Interest on savings and interest bearing
deposits.............................. 729,731 755,231
Interest on certificates of deposit..... 3,145,310 2,696,596
Interest on federal funds purchased..... 50,312 21,774
Other interest expense.................. 0 21,835
Total interest expense 3,925,353 3,495,436
---------- ----------
Net interest income..................... 4,367,894 3,972,073
Provision for loan losses............... 37,500 112,500
---------- ----------
Net interest income after provision for
loan losses........................... 4,339,394 3,859,573
Noninterest Income
Income from fiduciary activities........ 706,140 619,138
Service charges on deposit accounts..... 397,660 375,333
Securities gains (losses) -net.......... (2,365) 5,931
Merchant card income.................... 252,976 165,900
ATM income.............................. 153,294 99,607
Business manager income................. 422,045 278,003
Other income............................ 266,416 393,314
Total noninterest income 2,196,166 1,937,226
Noninterest Expense
Salaries................................ 1,788,165 1,625,704
Employee benefits....................... 433,040 428,487
Occupancy expenses...................... 822,524 740,658
Amortization expense.................... 63,000 63,000
Merchant card expense................... 253,249 151,149
ATM expense............................. 208,918 155,271
Business manager expense................ 184,919 59,367
Other expenses.......................... 1,015,688 1,013,312
Total noninterest expense 4,769,503 4,236,948
--------- ---------
Income before income taxes.............. 766,057 1,559,851
Income taxes............................ 459,563 429,370
--------- ---------
Net income......................... $ 1,306,494 $ 1,130,481
Earnings per share...................... $1.51 $1.33
See accompanying notes to consolidated financial statements. Page: 4
PART I. - FINANCIAL INFORMATION (cont'd.)
Chesapeake Financial Shares, Inc. Nine Months Ended
Consolidated Statements of Cash Flows September 30,
1997 1996
(Unaudited)
Cash flows from operating activities:
Net income................................ $1,306,494 $1,130,481
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization............. 800,876 576,390
Provision for loan losses................. 37,500 112,500
(Accretion) of discount and amortization of
premiums, net............................ 147,955 212,460
Net (gain) loss on sale of securities..... 2,365 (5,931)
Changes in assets and liabilities:
Decrease (increase) in accr. interest
receivable.............................. 6,501 117,061
Decrease (increase) in other assets...... (2,255,212) (265,402)
Increase (decrease) in accrued interest
payable................................. 12,561 (17,174)
Increase (decrease) in other liabilities. 149,738 933,690
--------- ---------
Net cash provided by (used for) operating
activities............................... 208,778 2,794,075
--------- ---------
Cash flows from investing activities:
Net (increase) decrease in time deposits
with banks............................... 0 450,375
Purchases of securities available for sale (13,891,862) (12,467,472)
Proceeds from sale or call of securities
available for sale....................... 7,268,908 7,861,407
Proceeds from maturities of securities
available for sale....................... 3,448,452 6,298,078
Origination of loans available for sale... (2,174,300) (3,684,776)
Proceeds from sale of loans available for
sale..................................... 2,174,300 3,684,776
Proceeds from sale of OREO................ 0 12,788
Net (increase) decrease in loans outstanding (7,062,627) (6,433,035)
Other capital expenditures................ (1,197,995) (749,726)
---------- ----------
Net cash provided by (used for) investing
activities............................... (11,435,124) (5,027,585)
---------- ---------
Cash flows from financing activities:
Net increase (decrease) in demand accounts,
interest bearing demand deposit accounts
and savings deposits..................... 3,355,236 1,040,931
Net increase (decrease) in certificates of
deposit.................................. 9,107,032 1,937,026
Net decrease in federal funds purchased... (800,000) (115,000)
Cash dividends............................ (201,384) (177,659)
Proceeds from issuance of voting common
stock.................................... 5,000 31,850
Acquisition of voting common stock........ (25,840) (235,521)
Curtailment of long-term borrowings....... 0 (112,500)
---------- ----------
Net cash provided by (used for) financing
activities............................... 11,440,044 2,369,127
---------- ----------
Net (decrease) increase in cash and federal
funds sold............................... 213,698 135,617
Cash and federal funds sold at beginning of
period................................... 5,896,836 4,906,634
---------- ----------
Cash and federal funds sold at end of
period................................... $6,110,534 $5,042,251
========== ==========
See accompanying notes to consolidated financial statements. Page: 5
PART I. Item 1. - FINANCIAL INFORMATION (cont'd.) 9/97-10QSB
Chesapeake Financial Shares, Inc.
Notes to Consolidated Financial Statements
1. Chesapeake Financial Shares, Inc. ("CFS) owns 100%
of Chesapeake Bank (the "Bank"). Two additional
subsidiaries, Chesapeake Mortgage Company, Inc. and
Chesapeake Insurance Agency, Inc. are wholly-owned
subsidiaries of CFS and the Bank, respectively. The
consolidated financial statements include the accounts
of CFS and its wholly-owned subsidiaries. All
significant intercompany accounts have been eliminated.
2. The accounting and reporting policies of the
registrant conform to generally accepted accounting
principles and to the general practices within the
banking industry. The interim financial statements
have not been audited; however, in the opinion of
management, all adjustments, consisting only of normal
recurring adjustments, necessary for a fair
presentation of the consolidated financial statements
have been included.
These financial statements should be read in
conjunction with the financial statements and the
footnotes included in the registrant's 1996 Annual
Report to Shareholders.
3. Earnings per share are based on the weighted
average number of common shares and common stock
equivalents outstanding during the year. The number of
common shares and common stock equivalents used for
September 30, 1997 and December 31, 1996 were 866,210
and 860,062, respectively.
4. CFS adopted FASB No. 115, "Accounting for Certain
Investment in Debt and Equity Securities" effective
beginning January l, 1994. This statement addresses
the accounting and reporting for investments in equity
securities that have readily determinable fair market
values and for all investment in debt securities.
Those investments are classified in three categories
and accounted for as follows:
a. Securities Held to Maturity- Securities
classified as held to maturity are those debt
securities CFS has both the intent and the ability to
hold to maturity regardless of changes in general
economic conditions. These securities are carried at
cost, adjusted for amortization of premium and
accretion of discount, computed by the interest method
over their contractual lives. CFS held no assets
classified as Held to Maturity at December 31, 1996 or
September 30, 1997.
b. Securities Available for Sale- Securities
classified as available for sale are those debt and
equity securities that CFS intends to hold for an
indefinite period of time, but not necessarily to
maturity. Any decision to sell a security classified
as available for sale would be based on various
factors, including significant movements in interest
rates, changes in the maturity mix of CFS's assets and
liabilities, liquidity needs, regulatory capital
considerations, and other factors. Securities
available for sale are carried at fair market value.
Unrealized gains or losses are reported as increases or
decreases in shareholder's equity, net of the related
deferred tax effect. Realized gains or losses,
determined on the basis of the cost of specific
securities sold, are included in earnings.
c. Trading Securities- Trading securities, which
are generally held for short term in anticipation of
market gains, are carried at fair market value.
Realized and unrealized gains and losses on trading
account assets are included in interest income on
trading account securities. The Corporation held no
assets classified as Trading Securities at December 31,
1996 or September 30, 1997.
Page: 6
PART I. Item 1. - FINANCIAL INFORMATION (cont'd.) 9/97-10QSB
Chesapeake Financial Shares, Inc.
Notes to Consolidated Financial Statements
5. Loans are stated at face value, net of unearned
discount and the reserve for loan losses. Interest is
computed by methods which result in level rates of
return on principal. Generally, interest is not
accrued on loans over ninety days past due. Interest
on loans that are placed on nonaccrual status and which
management considers to be uncollectable is charged
off. Nonrefundable loan fees and direct loan
origination costs are recognized in operations when
received and incurred, respectively. The impact of
this methodology is not significantly different from
recognizing the net of these fees and costs over the
contractual life of the related loan.
Mortgage loans held for resale are stated at the
lower of cost or market on an individual basis. Loan
discounts and origination fees received on loans held
for resale are deferred until the related loans are
sold to third party investors. Gains are recognized at
the time of sale.
6. Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of,"
establishes standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill
related to those assets to be held and used and for
long-lived assets and certain identifiable intangibles
to be disposed of. This statement requires that long-
lived assets and certain identifiable intangibles to be
held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be
recoverable. The Statement was effective for fiscal
years beginning after December 31, 1995. The Statement
does not have a material impact on CFS.
Statement of Financial Accounting Standards No.
122, "Accounting for Mortgaging Servicing Rights,"
amends FASB No. 65, "Accounting for Certain Mortgage
Banking Activities," to require that a mortgage banking
enterprise recognize as separate assets rights to
servicing mortgage loans for others, however those servicing
rights are acquired. A mortgage banking enterprise
that acquires mortgage servicing rights through either
the purchase or origination of mortgage loans and sells
or securitizes those loans with servicing rights should
allocate the total cost of the mortgage loans to the
servicing rights and the loans (without the mortgage
servicing rights) based on their fair values if it is
practicable to estimate those fair values. If it is
not practicable to estimate the fair values of the
mortgage servicing rights and the mortgage loans
(without the mortgage servicing rights), the entire
cost of purchasing or originating the loans should be
allocated to the mortgage loans (without the servicing
rights) and no cost should be allocated to the mortgage
servicing rights. The statement was effective for
transactions in the fiscal years beginning after
December 31, 1995. The statement does not have a
material impact on CFS.
Page: 7
PART I. Item 2. - FINANCIAL INFORMATION (cont'd.) 9/97-10QSB
Chesapeake Financial Shares, Inc.
Management's Discussion and Analysis of Financial
Condition or Plan of Operation (Unaudited)
A. Summary - liquidity and capital resources
Sufficient short-term assets are maintained at
Chesapeake Financial Shares to meet cash needs
anticipated by management. The CFS's primary sources
of liquidity continue to be federal funds sold, short
term borrowing from Federal Home Loan Bank Atlanta,
securities maturing within one year, and principal
payments from mortgage securities. The repayment and
sale of loans also provides liquidity. The total of
federal funds sold and securities maturing within one
year at September 30, 1997 was approximately
$7,789,000, compared to $3,538,000 one year ago and
$6,388,000 at December 31,1996.
The liquidity ratio at September 30, 1997 was
29.7%, compared with 30% one year ago. This ratio is
arrived at by dividing net liquid assets (sum of total
Cash and Due from Banks, including Federal Reserve,
unpledged and over pledged portions of Investment
Securities at market value, and federal funds sold less
reserves required at the Federal Reserve Bank) by net
liabilities (total liabilities excluding valuation
reserves and capital). Management has found in the
past that 18% represents a sufficient level of
liquidity to meet cash needs.
Management believes capital is adequate to meet
current needs. Unencumbered capital (total capital net
of unrealized securities gains/losses less intangibles
plus reserves) as a percent of total adjusted assets
(total assets less intangibles plus reserves) was 9.6%
at September 30, 1997 and 9.5% at December 31, 1996,
for CFS.
Chesapeake Bank must have a ratio of Tier 1
capital (common equity, retained earnings less certain
goodwill) to risk-adjusted assets of at least 4.0%. At
September 30, 1997 and December 31, 1996 the Bank's
ratio of Tier 1 risk based capital to risk-adjusted
assets was 10.8% and 11.3%, respectively. Total risked
based capital to risk weighted assets was 12.0% and
12.5% at September 30, 1997 and December 31, 1996,
respectively. Tier one leverage capital was 7.6% and
7.7% at September 30, 1997 and December 31, 1996,
respectively.
Page: 8
PART I. Item 2. - FINANCIAL INFORMATION (cont'd.) 9/97-10QSB
Chesapeake Financial Shares, Inc.
Management's Discussion and Analysis of Financial
Condition or Plan of Operation (Unaudited)
B. Results of operations:
Earnings Summary:
Net income was $1,306,494 for the nine months
ended September 30, 1997, compared with income of
$1,130,481 for the same period in 1996. On a per share
basis, the net profit was $1.51 for the first nine
months, compared with $1.33 per share for the same
period in the prior year. The increase in earnings
resulted primarily from a $429,917 or 10.3% increase in
net interest income before provision and a $258,940 or
13.4% increase in noninterest income. The Company
experienced a net increase in noninterest expense of
$552,555 or 12.6%.
Net Interest Income:
Chesapeake Financial Shares' results of operation
are significantly affected by its ability to manage
effectively the interest rate sensitivity and maturity
of its interest-earning assets and interest-bearing
liabilities. At September 30, 1997, the Company's
interest-earning assets exceeded its interest-bearing
liabilities by approximately $16.4 million, compared
with a $15.2 million excess one year ago.
Net interest margins are 4.58% at September 30,
1997 compared to 4.60% at September 30, 1996.
Chesapeake Bank maintained competitive deposit rates
throughout the first nine months of last year without
being aggressive. During the fourth quarter of 1996 a
deposit offering generated approximately $7 million
dollars in new money The March 97 increase in the New
York prime rate had a positive impact on margins during
the second quarter as prime-adjusted loans have
repriced. Margins have narrowed slightly as our loan
to deposit ratio has dropped from over 76% at April,
1996, to under 71% at the end of the third quarter of
1997. During the end of the second quarter and part of
the third quarter we had another deposit campaign which
precipitated this drop.
Provision for Loan Losses:
The loan loss provision is a charge against
earnings necessary to maintain the reserve for loan
losses at a level consistent with management's
evaluation of the credit quality and risk adverseness
of the portfolio. Management makes a quarterly
evaluation as to the adequacy of the current loan loss
reserve. Management's detailed analysis as of
September 30, 1997 supports the adequacy of the current
loan loss level of $1.7 million.
Chesapeake Bank's management maintains a reserve
for loan loss which they feel represents a conservative
estimate of potential losses in the Bank's loan
portfolio. The methodology incorporates subjective
factors into the evaluation of the adequacy of the ALLL
such as:
Page: 9
PART I. Item 2. - FINANCIAL INFORMATION (cont'd.) 9/97-10QSB
Chesapeake Financial Shares, Inc.
Management's Discussion and Analysis of Financial
Condition or Plan of Operation (Unaudited)
The effect of volume and trends in delinquencies and nonaccruals.
The effect of trends in portfolio volume, maturity, and composition.
An estimate of future loss on all significant loans and assessment of
underwriting and lending policies and procedures including those
for charge off, collection and recovery.
Experience, ability and depth of lending management and staff.
The effect of national and local economic conditions and downturns in
specific industries.
Concentrations of credit that might affect loss experience across one
or more components of the portfolio.
Taking into account results of any independent reviews of the portfolio.
The loan loss reserve is 1.7% and 1.8% of gross loans as of
September 30, 1997 and December 31, 1996 respectively.
Noninterest Income:
Noninterest income is up 13.4% or $258,940 from
the same period last year. Trust income is up 14.1%,
or $87,002, from September 30, 1996. This increase was
due to volume increases in total managed assets this
quarter and the general level of business. Service
charges on deposit accounts were up $22,327 or 5.9%
from September 30, 1996.
Bank management changed the merchant card program
to a principal member of the VISA/MASTERCARD Network in
the beginning of 1995. Since that time we have been
rebuilding our merchant card customer base. This has
generated approximately $87,076 or 52.5% more in gross
merchant card revenue through September of this year
than in the same period last year.
The ATM fee income to date is $153,294, up 53.9%.
The Bank had $99,607 from ATM fee income as of
September 30, 1996. The Bank has 14 ATMs operational
as of the end of September, 1997. The Bank charges a
nominal fee for use of its ATMs by non-customers. This
practice started in July of 1996 and covers most of the
ATMs.
Chesapeake's management has recently changed the
ATM processing to an in-house system. This was
effective at the beginning of September. This will
improve operating cost and control of the Bank's ATMs.
Driving our ATMs in-house will also reduce float and
withdrawal limit exposure for the Bank reducing overall
risks inherent in an ATM operation.
Chesapeake Bank's Business Manager product
generated $422,045 in gross revenue for the first nine
months ended September 30, 1997, compared to the same
period last year of $278,003. Managed assets in the
business manager program were $4,644,693 at September
30, 1997, and $1,922,005 at September 30, 1996.
Page: 10
PART I. Item 2. - FINANCIAL INFORMATION (cont'd.) 9/97-10QSB
Chesapeake Financial Shares, Inc.
Management's Discussion and Analysis of Financial
Condition or Plan of Operation (Unaudited)
Noninterest Expenses:
Employee salaries expenses amounted to $1,788,165
and $1,625,704 as of September 30, 1997 and 1996,
respectively. We opened a new branch in Williamsburg
in July of 1996 and additional staff was added during
the second quarter of last year. Benefits expense is
up only 1.1% or $4,553 over September 30, 1996.
Occupancy expenses are up 11.1% or $81,866 from
September 30, 1996 primarily due to leasehold
improvement expenses at the new branch in Williamsburg
and some one-time maintenance expenses at other
branches. There are additional expenses associated
with renovations to the Operations Center that are
being amortized beginning the third quarter of 1996.
Merchant Card expenses are up 67.5% due to
increased volume in the program. We hope to show a
profit on the merchant card program by the end of 1997
as business volume increases. ATM expenses are up due
to the depreciation expenses associated with the
expansion of the Bank's ATM network and volumes at
several ATMs are still below break even targets. The
ATM program is now expected to break even by the end of
1997. Operational expense reductions will be realized
in the month of October as a result changing our ATM
processing vendor and driving our own ATMs in-house.
As of this report date the Bank has 14 ATM/cash
dispensers in operation. Three were completed by
December 31, 1994 in the Hayes office, the Gloucester
Winn-Dixie Office and a cash dispenser at Cobbs Creek,
in a convenience store. During 1995 Chesapeake Bank
installed ATMs at the Kilmarnock office, James City
County Winn-Dixie office, in front the Best Value
department store in Mathews, in a convenience store at
Glenns, in the lobby of the Rappahannock General
Hospital, and two ATMs were installed at the
Williamsburg Pottery facility.
The Bank also had ATM machines in the East Coast
Convenience Stores at Fredericksburg, Disputania,
Ashland, Opal, and Route 17, Gloucester, which have
since been closed as part of the expense reduction of
the program.. Additional ATMs were opened during the
summer of 1996 at the new Williamsburg Office at Route
5 and Ironbround Road, and the Zooms Convenience Store
on Route 5 in Williamsburg. The Bank has relocated two
of the machines removed from East Coast to the Moose
Lodge in Gloucester and By-Pass Road in Williamsburg.
Other expenses were $1,015,688 for the nine month
period, compared with $1,013,312 for the same period
one year ago. Increases in this area are primarily
related to increases in delivery and transportation,
miscellaneous professional fees, and advertising
expenses related to a new product, Colonial Education
Trust (CET). CET is a college tuition trust product.
Page: 11
PART I. Item 2. - FINANCIAL INFORMATION (cont'd.) 9/97-10QSB
Chesapeake Financial Shares, Inc.
Management's Discussion and Analysis of Financial
Condition or Plan of Operation (Unaudited)
Assets and Loans:
At September 30, 1997, Chesapeake Financial Shares
had total assets of $156.1 million, up 9.2% from $142.9
million at December 31, 1996 and up 15.0% from $135.7
million of one year ago. Management has budgeted a
6.5% growth in total assets for 1997. Management is
comfortable with the increased growth rate. The growth
has been led by loans funded by deposits and short term
borrowing.
Total loans (gross) at September 30, 1997 were
$99.1 million, representing an increase of 7.6% from
December 31, 1996, when loans were $92.1 million.
Chesapeake Bank's loan quality is good as the following
table shows. While the absolute numbers are up from
December 31, 1996, they are nominal as a percent of
loans or capital compared to peer group. Management is
confident that no serious delinquency trends are
developing.
9/30/97 12/31/96
Nonaccrual loans $ 480,761 $ 142,944
90 days past due 0 8,850
Restructured loans 0 0
________ ________
Totals $ 480,761 $ 151,794
Management is also confident there will be no loss
incurred as the Bank is well secured on these assets.
There are no troubled debt restructuring outstanding at
the end of either period.
Chesapeake Bank has experienced greatly reduced
loan charge offs and increased recoveries as the credit
quality has improved and effective collection
techniques are used. Year to date charge offs through
September 30, 1997 where $36,253 as compared to
$137,465 as of September 30, 1996. Recoveries through
September 30, 1997 were $27,952 as compared to $194,155
as of September 30, 1996.
Page: 12
PART I. Item 2. - FINANCIAL INFORMATION (cont'd.) 9/97-10QSB
Chesapeake Financial Shares, Inc.
Management's Discussion and Analysis of Financial
Condition or Plan of Operation (Unaudited)
Concentrations of credit in loans are compiled
quarterly by management and reviewed with the Board of
Director's Loan Review Committee. There have been no
material changes in the concentrations of credit within
the past nine months which would warrant above average
additions to the reserve. The Bank's only
concentrations of credit greater than 70% of capital
are in residential real estate (179% of total capital),
the retail sector (90% of total capital), individual
consumer (89% of capital), and the
services/professional sector (73% of total capital).
Bank management feels that the current levels are
consistent with the objectives of the Bank and do not
represent unwarranted risk.
The Bank's Other Real Estate Owned (OREO)
portfolio currently has two properties with a total
written down value of $245,000. Bank management is
aggressively marketing these properties. The Bank also
has 2 repossessed assets valued at $5,300.
Deposits:
Deposits are up 9.8% or $12.5 million from $127.6
million at December 31, 1996. Deposits were $140.1
million and $121.2 million at September 30, 1997 and
September 30, 1996, respectively. Competition for
deposit dollars is keen with the record performance of
the stock market. Management has grown the Bank during
the past year with specific deposit offerings to offset
the loan demand.
Other:
The Bank has received approval from the State
Banking Commissioner and the Federal Reserve Bank of
Richmond for a branch in Williamsburg on Lafayette
Street. Management has closed on the purchase from
First Union of the land and bank building. The facility
had been closed by First Union over two years ago. We
did not acquire any banking assets or liabilities.
Chesapeake does not expect the branch to be operational
before the spring of 1998.
Page: 13
PART II. Item l. - OTHER INFORMATION 9/97-10QSB
Chesapeake Financial Shares, Inc.
Legal Proceedings
None to report
PART II. Item 2. - OTHER INFORMATION
Chesapeake Financial Shares, Inc.
Changes in Securities
None to report.
PART II. Item 3. - OTHER INFORMATION
Chesapeake Financial Shares, Inc.
Default Upon Senior Securities
None to report.
PART II. Item 4. - OTHER INFORMATION
Chesapeake Financial Shares, Inc.
Submission of Matters to a Vote of Security Holders
Chesapeake Financial Shares' annual meeting of
shareholders was held on Friday, April 4, 1997 in
Irvington, Virginia. We have previously forwarded to
the Commission copies of the letter to shareholders,
the notice of the meeting, the proxy statement, and the
proxy. Over 85% of the shareholders were represented
at the meeting in person or by proxy with over 84%
voting in favor of the proposal submitted.
PART II. Item 5. - OTHER INFORMATION
Chesapeake Financial Shares, Inc.
Other Information
During the first quarter of 1996 the Bank and CFS
were examined by the Federal Reserve Bank of Richmond.
As a result of all examinations since January of 1995,
management is not aware of any current recommendations
of the regulatory authorities which, if they were
implemented, would have a material effect on liquidity,
capital resources or operations. During the second
quarter of 1996 the Bank was examined by the Federal
Reserve Bank of Richmond Trust and EDP Examiners.
During the first quarter of 1997, the Bank
satisfactorily completed another Consumer Compliance
Examination and a Community Reinvestment Act
Examination performed by the Federal Reserve Bank of
Richmond. As of June 9, 1997, the Bank and the holding
company satisfactorily completed another safety and
soundness examination performed by the Bureau of
Financial Institutions, State Corporation Commission,
Commonwealth of Virginia. As a result of these
examinations management is not aware of any current
recommendations of the regulatory authorities which, if
they were implemented, would have a material effect on
liquidity, capital resources or operations of the Bank.
Chesapeake Financial Shares' Board of Directors
declared a stock dividend to be effected in the form of
a stock split at their regular meeting in August. The 6
for 5 stock dividend was payable to shareholders of
record on October 1, 1997. It was paid on October 15,
1997. As a result 167,705 shares were issued and
$1,025.72 was paid in cash as a result of fractional
shares.
Page: 14
PART II. Item 6. - OTHER INFORMATION 9/97-10QSB
Chesapeake Financial Shares, Inc.
Exhibits and Reports on Form 8-K
(Unaudited)
(a) Exhibit 2 Plan of acquisition, reorganization, arrangement,
liquidation or succession N/A
Exhibit 4 Instruments defining the rights of security
holders, including indentures N/A
Exhibit 10 Material contracts N/A
Exhibit 11 Statement re: computation of earnings per share N/A
Exhibit 15 Letter re: unaudited interim financial
information N/A
Exhibit 18 Letter re: change in accounting principles N/A
Exhibit 19 Report furnished to security holders N/A
Exhibit 22 Published report regarding matters submitted
to vote of security holders Previously Filed
Exhibit 23 Consents of experts and counsel N/A
Exhibit 24 Power of attorney N/A
Exhibit 27 Financial Data Schedule Attached
Exhibit 99 Additional exhibits N/A
(b) No filings were made on Form 8-K for the period.
Page: 15
SIGNATURES
Chesapeake Financial Shares, Inc. SEC 10-QSB 9/97
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Chesapeake Financial Shares, Inc.
(Registrant)
11/12/97 Douglas D. Monroe, Jr.
---------- -----------------------------
(Date) (Signature)
Douglas D. Monroe, Jr.
Chairman and Chief Executive Officer
11/12/97
--------- ---------------------------
(Date) (Signature)
John H. Hunt, II
Secretary and Chief Financial Officer
Page: 16
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 5,710,534
<INT-BEARING-DEPOSITS> 39,103,480
<FED-FUNDS-SOLD> 400,000
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0
0
<COMMON> 4,194,245
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<INCOME-PRETAX> 1,766,057
<INCOME-PRE-EXTRAORDINARY> 1,306,494
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<NET-INCOME> 1,306,494
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<ALLOWANCE-OPEN> 1,652,844
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