U. S. Securities and Exchange commission
Washington, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
[ ] 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 August 12, 1998.
Class Outstanding at August 12, 1998
Common Stock, voting, $5.00 par value 1,011,183
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......................................1-5
Consolidated Balance Sheets
June 30, 1998 and December 31, 1997.........................1-2
Consolidated Statements of Earnings
Three months ended June 30, 1998..............................3
Consolidated Statements of Earnings
Six months ended June 30, 1998................................4
Consolidated Statements of Cash Flows
Six months ended June 30, 1998................................5
Consolidated Statement of Changes in Stockholder's Equity
Six months ended June 30, 1998................................6
Notes to Consolidated Financial Statements..................7-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......10-15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...................................16
Item 2. Changes in Securities...............................16
Item 3. Defaults Upon Senior Securities.....................16
Item 4. Submission of Matters to a Vote of Security Holders.16
Item 5. Other Information...................................16
Item 6. Exhibits and Reports on Form 8-K....................17
Signatures....................................................18
Page I
PART I. Item 1. - FINANCIAL INFORMATION
Chesapeake Financial Shares, Inc. June 30, December 31,
Consolidated Balance Sheets 1998 1997
ASSETS
(Unaudited)
Cash and due from banks..................... $6,867,757 $5,123,586
Federal funds sold.......................... 1,300,000 1,900,000
Securities available for sale
U.S. Treasury securities (book value of
$1,701,598-1998 and $1,702,928-1997)....... 1,701,219 1,698,657
U.S. Government agencies (book value of
$33,254,470-1998 and $29,482,679-1997)..... 33,091,729 29,540,347
Obligations of state and political
subdivisions (book value of $11,474,572-1998
and $11,473,361-1997)...................... 11,956,334 11,925,467
Other Securities (book value $834,800-1998
and $743,400-1997.......................... 834,800 743,400
Loans....................................... 104,467,185 103,839,121
Less: Reserve for loan loss................. (1,798,941) (1,740,065)
----------- -----------
Net loans................................ 102,668,244 102,099,056
Bank premises and equipment, net............ 4,261,887 3,448,318
Accrued interest receivable................. 1,277,431 1,300,062
Business Manager Assets..................... 5,005,645 4,126,141
Other assets................................ 3,088,076 2,010,619
----------- -----------
Total assets............................. $172,053,122 $163,915,653
=========== ===========
See accompanying notes to consolidated financial statements. Page: 1
PART I. Item 1. - FINANCIAL INFORMATION
Chesapeake Financial Shares, Inc. June 30, December 31,
Consolidated Balance Sheets 1998 1997
LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited)
Deposits
Noninterest bearing deposits............. $ 23,264,825 $ 19,255,328
Savings and interest bearing deposits.... 44,376,754 40,445,981
Certificates of deposit.................. 87,187,881 87,817,759
----------- -----------
Total deposits........................ 154,829,460 147,519,068
Federal funds purchased.................... 0 1,250,000
Accrued interest payable................... 285,222 334,763
Other liabilities.......................... 1,557,401 897,147
Note payable............................... 885,498 0
----------- -----------
Total liabilities..................... 157,557,581 150,000,978
Commitments and contingent liabilities
Shareholders' equity
Preferred stock, par value $1 per share;
authorized 50,000 shares; none outstanding. 0 0
Common stock, voting....................... 5,055,915 5,054,440
Common stock, non-voting................... 0 0
voting non-voting
6/30/98 12/31/97 6/30/98 12/31/97
------- -------- ------- --------
Shares auth 2,000,000 2,000,000 635,000 635,000
Shares o/s 1,011,183 1,010,888 0 0
Paid in capital............................. 450,480 484,348
Accumulated other comprehensive income...... 207,116 328,577
Retained earnings........................... 8,782,030 8,047,310
--------- ---------
Total shareholders' equity............. 14,495,541 13,914,675
---------- ----------
Total liabilities and Shareholders'
equity................................. $172,053,122 $163,915,653
=========== ===========
See accompanying notes to consolidated financial statements. Page: 2
PART I. Item 1. - FINANCIAL INFORMATION (cont'd.)
Chesapeake Financial Shares, Inc. Three Months Ended
Consolidated Statements of Earnings June 30,
1998 1997
Interest Income (Unaudited)
Interest and fees on loans................. $2,569,022 $2,208,064
Interest on federal funds sold............. 12,215 1,966
Interest on time deposits with banks....... 3,950 2,459
Interest on U.S. Treasury securities....... 22,441 25,595
Interest on U.S. Agency Obligations........ 464,501 334,588
Interest on obligations of state
and political subs......................... 167,653 171,335
--------- ---------
Total interest income 3,239,782 2,744,007
Interest Expense
Interest on savings and interest bearing
deposits.................................. 270,917 240,561
Interest on certificates of deposit........ 1,242,761 1,012,092
Interest on federal funds purchased........ 7,673 24,875
Other interest expense..................... 10,297 0
--------- ---------
Total interest expense 1,531,648 1,277,528
Net interest income........................ 1,708,134 1,466,479
Provision for loan losses.................. 0 0
--------- ---------
Net interest income after provision for
loan losses............................... 1,708,134 1,466,479
--------- ---------
Noninterest Income
Income from fiduciary activities........... 214,713 218,971
Service charges on deposit accounts........ 131,426 137,277
Securities gains (losses) - net............ 0 384
Merchant card income....................... 147,319 84,999
ATM income................................. 50,292 52,318
Business manager income.................... 193,762 139,451
Other income............................... 130,526 86,090
------- -------
Total noninterest income 868,038 719,490
------- -------
Noninterest Expense
Salaries................................... 662,464 591,610
Employee benefits.......................... 144,569 143,430
Occupancy expenses......................... 337,356 346,792
Merchant card expense...................... 168,173 88,383
ATM expense................................ 55,149 70,144
Business manager expense................... 101,414 80,572
Other expenses............................. 468,340 268,058
--------- ---------
Total noninterest expense................. 1,937,465 1,588,989
--------- ---------
Income before income taxes................. 638,707 596,980
Income taxes............................... 157,396 158,265
--------- ---------
Net income............................... $ 481,311 $ 438,715
========= =========
Earnings per share, basic.................. $0.48 $0.44
Earnings per share, assuming dilution...... $0.45 $0.43
See accompanying notes to consolidated financial statements. Page: 3
PART I. Item 1. - FINANCIAL INFORMATION (cont'd.)
Chesapeake Financial Shares, Inc. Six Months Ended
Consolidated Statements of Earnings June 30,
1998 1997
Interest Income (Unaudited)
Interest and fees on loans................ $5,071,475 $4,372,103
Interest on federal funds sold............ 38,033 2,477
Interest on time deposits with banks...... 8,061 4,478
Interest on U.S. Treasury securities...... 44,578 61,363
Interest on obligations of U.S. Agency
Obligations.............................. 947,028 672,854
Interest on obligations of state and political
subs..................................... 332,811 314,943
--------- ---------
Total interest income 6,441,986 5,428,218
Interest Expense
Interest on savings and interest bearing
deposits................................. 538,256 479,466
Interest on certificates of deposit....... 2,505,954 2,011,239
Interest on federal funds purchased....... 21,290 49,433
Other interest expense.................... 22,644 0
--------- ---------
Total interest expense 3,088,144 2,540,138
--------- ---------
Net interest income....................... 3,353,842 2,888,080
Provision for loan losses................. 54,000 0
--------- ---------
Net interest income after provision for
loan losses.............................. 3,299,842 2,888,080
--------- ---------
Noninterest Income
Income from fiduciary activities.......... 446,354 408,399
Service charges on deposit
accounts................................. 263,567 269,706
Securities gains (losses) - net........... 0 (2,365)
Merchant card income...................... 252,612 132,864
ATM income................................ 94,070 95,662
Business manager income................... 364,747 227,667
Other income.............................. 249,706 174,367
--------- ---------
Total noninterest income 1,671,056 1,306,300
--------- ---------
Noninterest Expense
Salaries.................................. 1,350,915 1,156,872
Employee benefits......................... 302,571 313,287
Occupancy expenses........................ 690,204 577,776
Merchant card expense..................... 258,452 138,872
ATM expense............................... 117,088 136,277
Business manager expense.................. 168,581 136,393
Other expenses............................ 867,077 661,157
--------- ---------
Total noninterest expense.............. 3,754,888 3,120,634
--------- ---------
Income before income taxes................ 1,216,010 1,073,746
Income taxes.............................. 319,588 282,225
--------- ---------
Net income............................... $ 896,422 $ 791,521
Earnings per share, basic................. $0.89 $0.79
Earnings per share, assuming dilution..... $0.84 $0.77
See accompanying notes to consolidated financial statements. Page: 4
PART I. - FINANCIAL INFORMATION (cont'd.)
Chesapeake Financial Shares, Inc. Six Months Ended
Consolidated Statements of Cash Flows June 30,
1998 1997
(Unaudited)
Cash flows from operating activities:
Net income............................... $ 896,422 $ 791,521
Adjustments to reconcile net income to net
cash provided by
(used for) operating activities:
Depreciation and amortization........... 259,119 316,028
Provision for loan losses.............. 54,000 0
(Accretion) of discount and amortization
of premiums, net...................... 315,309 94,090
Net (gain) loss on sale of securities.. 0 2,365
Changes in assets and liabilities:
Decrease (increase) in accr. interest
receivable............................ 22,631 70,633
Decrease (increase) in other assets.... (1,891,560) (1,179,764)
Increase (decrease) in accrued interest
payable............................... (49,541) (7,185)
Increase (decrease) in other liabilities 660,254 23,744
--------- ---------
Net cash provided by (used for) operating
activities.............................. 266,634 111,432
--------- ---------
Cash flows from investing activities:
Purchases of securities available for sale (10,541,891) (6,549,626)
Proceeds from sale or call of securities
available for sale...................... 0 7,216,092
Proceeds from maturities of securities
available for sale...................... 6,363,509 2,444,488
Origination of loans available for
sale.................................... (4,077,850) (1,506,950)
Proceeds from sale of loans available for
sale.................................... 4,077,850 1,506,950
Net (increase) decrease in loans
outstanding............................. (628,188) (3,926,458)
Other capital expenditures............... (1,072,688) (437,325)
--------- ---------
Net cash provided by (used for) investing
activities.............................. (5,874,258) (1,252,829)
--------- ---------
Cash flows from financing activities:
Net increase (decrease) in demand accounts,
interest bearing demand deposit accounts
and savings deposits.................... 7,940,270 511,092
Net increase (decrease) in certificates of
deposit................................. (629,878) 1,861,862
Net decrease in federal funds purchased.. (1,250,000) (1,200,000)
Cash dividends........................... (161,702) (134,260)
Proceeds from issuance of voting common
stock................................... 28,500 5,000
Acquisition of voting common stock....... (60,893) (22,840)
Increase in long-term borrowings......... 900,000 0
Curtailment of long-term borrowings...... (14,502) 0
--------- ---------
Net cash provided by (used for) financing
activities.............................. 6,751,795 1,021,654
Net (decrease) increase in cash and federal
funds sold.............................. 1,144,171 (119,743)
Cash and federal funds sold at beginning of
period.................................. 7,023,586 5,896,836
--------- ---------
Cash and federal funds sold at end of
period.................................. $8,167,757 $5,777,093
========= =========
See accompanying notes to consolidated financial statements. Page: 5
<TABLE>
Statement of Changes in Stockholder's Equity
Chesapeake Financial Shares, Inc.
Six Months Ended June 30, 1998
<CAPTION>
Accumulated Additional
Comprehensive Retained Other Compr. Common Paid-In
Total Income Earnings Income Stock Capital
--------- --------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Beginning balance $13,914,675 $ $8,047,310 $328,577 $5,054,440 $484,348
Comprehensive Income:
Net Income 896,422 896,422 896,422
Other comprehensive
income, net of tax:
Unrealized (loss) on securities
available for sale: (121,461) (121,461) (121,461)
Total comprehensive income,
net of tax: $ 774,961
==========
Acquisition of common stock (60,893) (14,925) (45,968)
Issuance of common stock 28,500 16,400 12,100
Dividends declared (161,702) (161,702)
---------- --------- ------- --------- -------
Ending balance $14,495,541 $8,782,030 $207,116 $5,055,915 $450,480
=========== ========== ======== ========== ========
Page 6
</TABLE>
PART I. Item 1. - FINANCIAL INFORMATION (cont'd.)
6/98-10QSB
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. (t/a Chesapeake
Investment Services) are wholly-owned subsidiaries of
CFS and the Bank, respectively. The Bank also is the
100% owner of CNB Properties, Inc. 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 1997 Annual
Report to Shareholders.
3. In 1997, the Financial Accounting Standards Board
issued Statement 128, "Earnings per Share." Statement
128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted
earnings per share. Basic earnings per share excludes
any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is
very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for
all periods have been presented, and where appropriate
restated to conform to the statement 128 requirements.
The following data shows the amounts used in
computing earnings per share and the effect on the
weighted average number of shares of dilutive potential
common stock. The potential common stock will not have
a significant impact on net income. The number of
shares used in the calculation for June 30, 1997
reflect a 20% stock dividend paid on October 15, 1997.
June 30, 1998 June 30, 1997
Weighted average number of common
shares, basic 1,011,073 1,007,149
Effect of dilutive stock options 57,419 26,785
--------- ---------
Weighted number of common shares and dilutive
potential common stock used in diluted EPS 1,068,492 1,033,934
========= =========
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, 1997 or
June 30, 1998.
Page: 7
PART I. Item 1. - FINANCIAL INFORMATION (cont'd.)6/98-10QSB
Chesapeake Financial Shares, Inc.
Notes to Consolidated Financial Statements
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,
1997 or June 30, 1998.
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. Effective January 1, 1998, the company adopted
Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income." This statement
establishes standards for reporting and display of
comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general
purpose financial statements. Financial statements for
prior periods have been restated as required.
7. During June 1997, the FASB issued FASB No. 131,
"Disclosures about Segments of an Enterprise and
Related Information." FASB No. 131 establishes
standards for the way that public enterprises report
information about operating segments in annual
financial statements and requires that those
enterprises report selected information about operating
segments in interim reports issued to shareholders. It
also establishes standards for related disclosures
about products and services, geographic areas and major
customers. This statement becomes effective for
financial statements for periods beginning after
December 31, 1997. The effects of this statement on the
Corporation's consolidated financial statements is not
expected to be material.
Page: 8
PART I. Item 1. - FINANCIAL INFORMATION (cont'd.)6/98-10QSB
Chesapeake Financial Shares, Inc.
Notes to Consolidated Financial Statements
In February 1998, the Financial Accounting
Standards Board issued Statement of Financial
Accounting Standards No. 132, "Employers Disclosure
about Pensions and Other Post Retirement Benefits."
This statement revises employers' disclosures about
pension and other postretirement benefit plans. It
does not change the measurement or recognition of those
plans. This statement standardizes the disclosure
requirements for pensions and other postretirement
benefits to the extent practicable, requires additional
information on changes in the benefit obligations and
fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures.
Restatement of disclosures for earlier periods is
required. This statement is effective for the Company's
financial statements for the year ended December 31,
1998.
In June 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting
Standards No. 133, " Accounting for Derivative
Instruments and Hedging Activities." This statement
requires companies to record derivatives on the balance
sheet as assets and liabilities, measured at fair
value. Gains or losses resulting from changes in the
values of those derivatives would be accounted for
depending on the use of the derivative and whether it
qualifies for hedge accounting. This statement is not
expected to have a material impact on the Company's
financial statements. This statement is effective for
years beginning after June 15, 1999, with earlier
adoption encouraged. The Company will adopt this
accounting standard by January 1 ,2000.
In March 1998, the American Institute of Certified
Public Accountants (AICPA) issued Statement of Position
("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use."
This SOP provides guidance on accounting for the costs
of computer software developed or obtained for internal
use. This SOP requires that entities capitalize certain
internal use software costs once certain criteria are
met. This statement is not expected to have a material
impact on the Company's financial statements.
In April 1998, the AICPA issued SOP 98-5,
"Reporting on the Costs of Start Up Activities," which
requires the costs of start up activities and
organization costs to be expensed as incurred. This
statement is effective for the fiscal year 1999
financial statements. This statement is not expected to
have a material impact on the Company's financial
statements.
Page: 9
PART I. Item 2. - FINANCIAL INFORMATION (cont'd.)6/98-10QSB
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, securities maturing within one
year, and estimated principal payments on mortgage-
backed securities within one year at June 30, 1998 was
approximately $14,800,000, compared to $3,768,000 one
year ago and $12,066,000 at December 31,1997.
The liquidity ratio at June 30, 1998 was 33.0%,
compared with 27.1% 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 accumulated other comprehensive income less
intangibles plus reserves) as a percent of total
adjusted assets (total assets less intangibles plus
reserves) was 9.3% at June 30, 1998 and 9.3% at
December 31, 1997, for CFS.
Chesapeake Financial Shares and Chesapeake Bank
must have a ratio of Tier 1 capital (common equity,
retained earnings less certain goodwill) to risk-
adjusted assets of at least 4.0%. At June 30, 1998 and
December 31, 1997 the consolidated ratio of Tier 1 risk
based capital to risk-adjusted assets was 12.0% and
12.2%, respectively. Total risked based capital to
risk weighted assets was 13.3% and 13.5% at June 30,
1998 and December 31, 1997, respectively. Tier one
leverage capital was 8.4% and 8.5% at June 30, 1998 and
December 31, 1997, respectively.
Page: 10
PART I. Item 2. - FINANCIAL INFORMATION (cont'd.)6/98-10QSB
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 $896,422 for the six months ended
June 30, 1998, compared with income of $791,521 for the
same period in 1997. On a fully diluted per share
basis, the net profit was $0.84 for the first six
months, compared with $0.77 per share for the same
period in the prior year. The increase in earnings
resulted primarily from a $465,762 or 16.1% increase in
net interest income before provision and a $364,756 or
27.9% increase in noninterest income. The Company
experienced a net increase in noninterest expense of
$634,254 or 20.3%.
Net Interest Income:
Chesapeake Financial Shares' results of operation
are significantly affected by its ability to manage
effectively the interest rate sensitivity and maturity
of its interest-earning assets and interest-bearing
liabilities. At June 30, 1998, the Company's interest-
earning assets exceeded its interest-bearing
liabilities by approximately $20.9 million, compared
with a $15.4 million excess one year ago.
Net interest margins are 4.68% at June 30, 1998
compared to 4.60% at June 30, 1997. The March 97
increase in the New York prime rate had a positive
impact on margins during the second quarter of 1997 as
prime-adjusted loans repriced at generally higher
levels. Margins narrowed since then as our loan to
deposit ratio has dropped from over 76% at June, 1997,
to under 68% at the end of the second quarter of 1998.
Management has reduced deposit rates on all products
during the first quarter of 1998 in response to reduced
loan demand and this has contributed to the improved
margins. There has been significant growth in deposits
in all of the trade area due, in part, to the large
bank "merger-mania" and apparent customer
dissatisfaction with that banking sector. A
significant portion of this deposit growth has been
noninterest bearing.
Provision for Loan Losses:
The loan loss provision is a charge against
earnings necessary to maintain the reserve for loan
losses at a level consistent with management's
evaluation of the credit quality and risk adverseness
of the portfolio. Management makes a quarterly
evaluation as to the adequacy of the current loan loss
reserve. Management's detailed analysis as of June 30,
1998 supports the adequacy of the current loan loss
level of $1.8 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: 11
PART I. Item 2. - FINANCIAL INFORMATION (cont'd.)6/98-10QSB
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% of gross loans as of June 30, 1998
and December 31, 1997.
Noninterest Income:
Noninterest income is up 27.9% or $364,756 from
the same period last year. Chesapeake Bank's Business
Manager product generated $364,747 in gross revenue for
the first six months ended June 30, 1998, compared to
the same period last year of $227,667. Managed assets
in the business manager program were $5,006,000 at June
30, 1998, and $3,692,000 at June 30, 1997.
The merchant card program has generated $252,612
or 90.1% more in gross revenue through June of this
year than in the same period last year due to an
increased customer base. Trust income is up 9.3%, or
$37,955, from June 30, 1997. This increase was due to
volume increases in total managed assets and the
general level of business Other income is up 43.2% or
$75,339 due primarily to increases in fees on the sale
of mutual funds and annuities.
The ATM fee income to date is $94,070, no
significant change from $95,662 of one year ago. The
Bank has 13 ATMs operational as of the end of June,
1998. 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, 1997. This has improved operating costs
(down 14.1% or $19,189 from one year ago) and control
of the Bank's ATMs. Driving our ATMs in-house has also
reduced "float" and the withdrawal limit exposure for
the Bank reducing overall risks inherent in an ATM
operation.
Page: 12
PART I. Item 2. - FINANCIAL INFORMATION (cont'd.)6/98-10QSB
Chesapeake Financial Shares, Inc.
Management's Discussion and Analysis of Financial
Condition or Plan of Operation (Unaudited)
Noninterest Expenses:
Employee salaries expenses amounted to $1,350,915
and $1,156,872 for the six months ended June 30, 1998
and 1997, respectively. Management opened a new branch
in Williamsburg (the Five Forks Office) in July of
1996 and additional staff was added during the second
quarter of 1997 and a leasing specialist was added
during the first quarter of 1998. The third
Williamsburg office was opened in June of 1998 in the
City of Williamsburg (the Lafayette Street office).
Benefits expense is down 3.4% or $10,716 from June 30,
1997.
Occupancy expenses are up 19.5% or $112,428 from
June 30, 1997 primarily due to maintenance expenses at
branches and the acquisition/maintenance of the School
Street property in Kilmarnock.. This building will be
the future Operations Center for the Company housing
the existing Loan Processing Center, Administrative
Support, and Operations. Equipment maintenance as well
as insurance costs have also increased.
Merchant Card expenses are up 86.1% due to
increased volume in the program. The merchant card
program was break even at the end of June 1998. ATM
expenses are down due to the reduced costs of providing
service through the in-house system and removing low
volume ATM's from service. As of this report date the
Bank has 13 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 of the Best Value department store in Mathews,
in a convenience store at Glenns, in the lobby of the
Rappahannock General Hospital. The two ATMs that were
installed at the Williamsburg Pottery facility were
removed in July of 1998 to reduce costs.
Additional ATMs were opened during the summer of
1996 at the new Williamsburg Office at Route 5 and
Ironbound Road, and the Zooms Convenience Store on
Route 5 in Williamsburg. The Bank has installed a
machine in the Zooms on By-Pass Road in Williamsburg,
also in the Lively office as of April of 1998, and at
the new Lafayette Street office in June of 1998.
Other expenses were $867,077 for the six month
period ended June 30, 1998, compared with $661,157 for
the same period one year ago. Increases in this area
are primarily related to increases in advertising
expenses, start up expenses for the leasing product,
credit/debit card loss provision, and the opening of
the new Lafayette Street office.
At the end of June, 1998 the Bank (along with
others) was a victim of a credit card fraud scheme that
operates world wide. Steps have been taken to prevent
further losses and exposure to such future losses. The
Bank is processing claims for reimbursement within the
credit card system. Based on information available at
this reporting date management expects to reserve an
additional $133,500 during this fiscal year. Management
expects the impact on the 1998 financial results to be
immaterial.
Page: 13
PART I. Item 2. - FINANCIAL INFORMATION (cont'd.)6/98-10QSB
Chesapeake Financial Shares, Inc.
Management's Discussion and Analysis of Financial
Condition or Plan of Operation (Unaudited)
Assets and Loans:
At June 30, 1998, Chesapeake Financial Shares had
total assets of $172.1 million, up 4.9% from $163.9
million at December 31, 1997 and up 18.8% from $144.4
million of one year ago. Management has budgeted a
4.9% growth in total assets for 1998.
Total loans (gross) at June 30, 1998 were $104.4
million, representing an increase of less than 1% from
December 31, 1997, when loans were $103.8 million.
Chesapeake Bank's loan quality is good as the following
table shows. Management is confident that no serious
delinquency trends are developing.
6/30/98 12/31/97
Nonaccrual loan s $ 484,043 $ 581,000
90 days past due 9,063 13,698
Restructured loans 0 0
________ ________
Totals $ 493,106 $ 594,698
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
June 30, 1998 were $6,185 as compared to $8,406 as of
June 30, 1997. Recoveries through June 30, 1998 were
$11,061 as compared to $16,973 as of June 30, 1997.
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 three 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 (121% of total capital),
individual consumer (108% of capital), the retail
sector (79% of total capital), and the hospitality
sector (77% 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
carrying value of $245,000. Bank management is
currently marketing these properties. The Bank also has
two repossessed assets valued at $4,300.
Page: 14
PART I. Item 2. - FINANCIAL INFORMATION (cont'd.)6/98-10QSB
Chesapeake Financial Shares, Inc.
Management's Discussion and Analysis of Financial
Condition or Plan of Operation (Unaudited)
Deposits:
Deposits are up 5.0% or $7.3 million from $147.5
million at December 31, 1997. Deposits were $154.8
million and $130.0 million at June 30, 1998 and June
30, 1997, respectively. Competition for deposit
dollars has not been as keen this quarter as the record
performance of the stock market has made some money run
to the quality of certificate of deposit. The current
low inflation rate has helped this process.
Other:
As reported earlier, management received approval
from the State Banking Commissioner and the Federal
Reserve Bank of Richmond for a branch in Williamsburg
on Lafayette Street. The land and bank building were
purchased from First Union. The facility had been
closed by First Union over two years ago. We did not
acquire any banking assets or liabilities. Chesapeake
opened the office on June 19, 1998.
The Bank utilizes and is dependent upon data
processing systems and software to conduct business.
The data processing systems and software include a
mainframe processing system licensed to the Bank by an
outside vendor and various purchased software packages
which are run on in-house computers and computer
networks. In 1997, the Bank initiated a review and
assessment of all hardware and software to confirm that
it will function properly in the year 2000.
The Bank's mainframe hardware and banking software
are currently Year 2000 compliant. The majority of the
other vendors have been contacted and have indicated
that their hardware/software will be Year 2000
compliant. Testing will be performed on all systems
and hardware for compliance. While there may be some
additional expenses incurred during the next two years,
Year 2000 compliance is not expected to have a material
effect on the Company's consolidated financial
statements.
Bank management recognizes the potential credit
risk within the commercial portfolio for Year 2000
noncompliance. Management has mailed a certification
request to all commercial credit customers with
relationships greater than $50,000 to verify Year 2000
compliance or that they have a plan to be compliant.
Bank sponsored public seminars on the issues have been
conducted in all trade areas.
The Bank has completed a Phase I and a Phase II
Y2K Federal Examination. 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
or Holding Company. Additional independent testing of
the Bank's software will begin in October of 1998.
Bank management has made several estimates about
costs, performance of other parties, and assumptions of
future events related to the Y2K issue. Many specific
factors or events may cause results significantly
different than those management has anticipated.
Specific factors that may cause such material
differences include, but are not limited to, the
availability of personnel trained in this area, the
ability of third party vendors to correct their
software and hardware, and similar uncertainties.
Page: 15
PART II. Item l. - OTHER INFORMATION 6/98-10QSB
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 3, 1998 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 86% of the shareholders were represented
at the meeting in person or by proxy with over 85%
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.
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 of May 30, 1998, the Bank and Holding Company
completed another safety and soundness examination, an
Information Systems examination, a Phase II Y2K
examination, and a Trust examination, performed by the
Federal Reserve Bank of Richmond.
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 or Holding Company.
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, 1997.
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: 16
PART II. Item 6 - OTHER INFORMATION 6/98-10QSB
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: 17
SIGNATURES
Chesapeake Financial Shares, Inc. SEC 10-QSB 6/98
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Chesapeake Financial Shares, Inc.
(Registrant)
8/12/98
________ ______________________________
(Date) (Signature)
Douglas D. Monroe, Jr.
Chairman and Chief Executive Officer
8/12/98
________ -----------------------------
(Date) (Signature)
John H. Hunt, II
Secretary and Chief Financial Officer
Page: 18
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