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 March 31, 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 April 28, 1998.
Class Outstanding at April 28, 1998
Common Stock, voting, $5.00 par value 1,009,983
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
March 31, 1998 and December 31, 1997...............1-2
Consolidated Statements of Earnings
Three months ended March 31, 1998....................3
Consolidated Statements of Cash Flows
Three months ended March 31, 1998....................4
Statement of Changes in Stockholder's Equity
Three months ended March 31, 1998....................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. March 31, December 31,
Consolidated Balance Sheets 1998 1997
ASSETS (Unaudited)
Cash and due from banks................ $5,083,271 $5,123,586
Federal funds sold..................... 4,200,000 1,900,000
Time deposits with banks............... 0 0
Securities available for sale
U.S. Treasury securities (book value of
$1,702,231-1998 and $1,702,928 1997). 1,699,750 1,698,657
U.S. Government agencies (book value of
$32,823,577-1998 and $29,482,679 1997) 32,717,463 29,540,347
Obligations of state and political
subdivisions (book value of
$11,473,917-1998 and $11,473,361-1997). 11,855,165 11,925,467
Other Securities (book value of
$804,800-1998 and $743,400-1997)....... 804,800 743,400
Loans................................... 104,076,871 103,839,121
Less: Reserve for loanloss.............. (1,794,736) (1,740,065)
------------------------------
Net loans............................ 102,282,135 102,099,056
Bank premises and equipment, net........ 4,260,383 3,448,318
Accrued interest receivable............. 1,315,536 1,300,062
Business Manager Assets................. 4,248,994 4,126,141
Other assets............................ 2,348,030 2,010,619
------------------------------
Total assets......................... $170,815,527 $163,915,653
==============================
See accompanying notes to consolidated financial statements. Page: 1
PART I. Item 1. - FINANCIAL INFORMATION
Chesapeake Financial Shares, Inc. March 31, December 31,
Consolidated Balance Sheets 1998 1997
LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited)
Deposits
Noninterest bearing deposits......... $ 19,965,465 $ 19,255,328
Savings and interest bearing deposits 43,024,910 40,445,981
Certificates of deposit.............. 91,334,135 87,817,759
-----------------------------
Total deposits.................... 154,324,510 147,519,068
Federal funds purchased................ 0 1,250,000
Accrued interest payable............... 337,410 334,763
Other liabilities...................... 1,204,601 897,147
Note payable........................... 893,773 0
-----------------------------
Total liabilities................. 156,760,294 150,000,978
Commitments
Shareholders' equity
Preferred stock, par value $1 per share;
authorized 50,000 shares; none outstanding 0 0
Common stock, voting.................. 5,049,915 5,054,440
Common stock, non-voting.............. 0 0
voting non-voting
3/31/98 12/31/97 3/31/98 12/31/97
------- -------- ------- --------
Shares auth.2,000,000 2,000,000 635,000 635,000
Shares o/s 1,009,983 1,010,888 0 0
Paid in capital........................ 446,480 484,348
Accumulated other comprehensive income. 177,225 328577
Retained earnings...................... 8,381,613 8,047,310
-----------------------------
Total shareholders' equity.......... 14,055,233 13,914,675
-----------------------------
Total liabilities and Shareholders'
equity.............................. $170,815,527 $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 March 31,
1998 1997
Interest Income (Unaudited)
Interest and fees on loans............. $2,502,453 $2,164,039
Interest on federal funds sold......... 25,818 513
Interest on time deposits with banks... 4,111 2,019
Interest on U.S. Treasury securities... 22,137 35,768
Interest on obligations of U.S. Agency
Obligations........................... 482,527 338,266
Interest on obligations of state and
political subs........................ 165,158 143,608
--------------------------
Total interest income 3,202,204 2,684,213
Interest Expense
Interest on savings and interest bearing
deposits.............................. 267,339 238,905
Interest on certificates of deposit.... 1,263,193 999,147
Interest on federal funds purchased.... 13,617 24,558
Other interest expense................. 12,347 0
--------------------------
Total interest expense 1,556,496 1,262,610
--------------------------
Net interest income.................... 1,645,708 1,421,603
Provision for loan losses.............. 54,000 0
--------------------------
Net interest income after provision for
loan losses........................... 1,591,708 1,421,603
--------------------------
Noninterest Income
Income from fiduciary activities....... 231,641 189,428
Service charges on deposit accounts.... 132,141 132,429
Securities gains (losses) net.......... 0 (2,749)
Merchant card income................... 105,293 47,865
ATM income............................. 43,778 43,344
Business manager income................ 170,985 88,216
Other income........................... 119,180 88,277
--------------------------
Total noninterest income 803,018 586,810
--------------------------
Noninterest Expense
Salaries............................... 688,451 565,288
Employee benefits...................... 158,002 169,832
Occupancy expenses..................... 352,848 260,473
Merchant card expense.................. 90,279 50,489
ATM expense............................ 61,939 66,133
Business manager expense............... 67,167 55,881
Other expenses......................... 398,737 363,550
--------------------------
Total noninterest expense......... 1,817,423 1,531,646
--------------------------
Income before income taxes............. 577,303 476,767
Income taxes........................... 162,192 123,960
--------------------------
Net income........................ $ 415,111 $ 352,807
==========================
Earnings per share, basic.............. $0.41 $0.35
Earnings per share, assuming dilution.. $0.39 $0.34
See accompanying notes to consolidated financial statements. Page: 3
PART I. - FINANCIAL INFORMATION (cont'd.)
Chesapeake Financial Shares, Inc. Three Months Ended
Consolidated Statements of Cash Flows March 31,
1998 1997
(Unaudited)
Cash flows from operating activities:
Net income................................ $ 415,111 $ 352,808
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization............ 165,425 152,661
Provision for loan losses................ 54,000 0
(Accretion) of discount and amortization of
premiums, net............................ 129,967 51,142
Net (gain) loss on sale of securities... 0 2,749
Changes in assets and liabilities:
Decrease (increase) in accr. interest
receivable............................. (15,474) 70,541
Decrease (increase) in other assets.... (408,764) 497,856
Increase (decrease) in accrued interest
payable................................ 2,647 (8,081)
Increase (decrease) in other liabilities 307,454 98,537
-----------------------
Net cash provided by (used for) operating
activities............................... 650,366 1,218,213
-----------------------
Cash flows from investing activities:
Purchases of securities available for sale (7,261,460) (5,465,563)
Proceeds from sale or call of securities
available for sale....................... 970,207 6,187,073
Proceeds from maturities of securities
available for sale....................... 2,789,127 1,129,226
Origination of loans available for sale... (1,522,250) (537,850)
Proceeds from sale of loans available for
sale..................................... 1,522,250 537,850
Net (increase) decrease in loans outstanding (237,079 (2,321,610)
Other capital expenditures................ (977,490) (94,663)
-----------------------
Net cash provided by (used for) investing
activities.............................. (4,716,695) (565,537)
-----------------------
Cash flows from financing activities:
Net increase (decrease) in demand accounts,
interest bearing demand deposit accounts
and savings deposits..................... 3,289,066 (614,370)
Net increase (decrease) in certificates of
deposit.................................. 3,516,376 288,586
Net decrease in federal funds purchased... (1,250,000) (1,400,000)
Cash dividends............................ (80,808) (67,137)
Proceeds from issuance of voting common
stock.................................... 18,500 0
Acquisition of voting common stock........ (60,893) (6,840)
Increase in long-term borrowings.......... 900,000 0
Curtailment of long-term
borrowings............................... (6,227) 0
------------------------
Net cash provided by (used for) financing
activities............................... 6,326,014 (1,799,761)
Net (decrease) increase in cash and federal
funds sold............................... 2,259,685 (1,147,085)
Cash and federal funds sold at beginning of
period................................... 7,023,586 5,896,836
------------------------
Cash and federal funds sold at end of
period................................... $9,283,271 $4,749,751
========================
See accompanying notes to consolidated financial statements. Page: 4
<TABLE>
Statement of Changes in Stockholder's Equity
Chesapeake Financial Shares, Inc.
Quarter Ended March 31, 1998
<CAPTION>
Accumulated Additional
Compr. Retained Other Compr. Common Paid-In
Total Income Earnings Income Stock Capital
------ ------- -------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Beg. balance $13,914,675 $ - $8,047,310 $328,577 $5,054,440 $484,348
Comprehensive Income:
Net Income 415,111 415,111 415,111
Other comprehensive
income, net of tax:
Unrealized (loss) on securities
available for sale: (151,352) (151,352) (151,352)
Total comprehensive income,
net of tax: $ 263,759
=======
Acquisition of common stock (60,893) (14,925) (45,968)
Issuance of common stock 18,500 10,400 8,100
Dividends declared (80,808)
------- ------- -------- ------- --------
Ending balance $14,055,233 $8,381,613 $177,225 $5,049,915 $446,480
=========== ======== ======= ========= =======
Page 5
</TABLE>
PART I. Item 1. - FINANCIAL INFORMATION (cont'd.) 3/98-10QSB
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 wher 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 March
31, 1997 reflect a 20% stock dividend paid on October
15, 1997.
March 31, 1998 March 31, 1997
Weighted average number of common
shares, basic 1,011,055 1,007,263
Effect of dilutive stock options
57,580 25,346
--------- ---------
Weighted number of common shares and dilutive
potential common stock used in diluted EPS
1,068,635 1,032,609
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
March 31, 1998.
Page: 6
PART I. Item 1. - FINANCIAL INFORMATION (cont'd.) 3/98-10QSB
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 March 31, 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. 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: 7
PART I. Item 2. - FINANCIAL INFORMATION (cont'd.) 3/98-10QSB
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 March 31, 1998
was approximately $15,729,000, compared to $5,603,000
one year ago and $12,066,000 at December 31,1997.
The liquidity ratio at March 31, 1998 was 33.5%,
compared with 27.6% 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 9.1% at March 31, 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 March 31, 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 March
31, 1998 and December 31, 1997, respectively. Tier
one leverage capital was 8.3% and 8.5% at March 31,
1998 and December 31, 1997, respectively.
Page: 8
PART I. Item 2. - FINANCIAL INFORMATION (cont'd.) 3/98-10QSB
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 $415,111 for the three months
ended March 31, 1998, compared with income of $352,807
for the same period in 1997. On a per share basis,
the net profit was $0.39 for the first three months,
compared with $0.34 per share for the same period in
the prior year. The increase in earnings resulted
primarily from a $216,208 or 36.8% increase in
noninterest income and a $224,105 or 15.8% increase in
net interest income before provision. The Company
experienced a net increase in noninterest expense of
$285,777 or 18.7%.
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 March 31, 1998, the Company's
interestearning assets exceeded its interest-bearing
liabilities by approximately $19.8 million, compared
with a $16.4 million excess one year ago.
Net interest margins are 4.47% at March 31, 1998
compared to 4.57% at March 31, 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. However, margins have narrowed since then as
our loan to deposit ratio has dropped from over 74% at
March, 1997, to under 69% at the end of the first
quarter of 1998. Management has reduced deposit rates
on all products during the first quarter in response
to record low bond offerings. 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.
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
March 31, 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: 9
PART I. Item 2. - FINANCIAL INFORMATION (cont'd.) 3/98-10QSB
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 March 31, 1998
and December 31, 1997.
Noninterest Income:
Noninterest income is up 36.8% or $216,208 from
the same period last year. Chesapeake Bank's Business
Manager product generated $170,985 in gross revenue
for the first three months ended March 31, 1998,
compared to the same period last year of $88,216.
Managed assets in the business manager program were
$4,248,994 at March 31, 1998, and $1,764,619 at March
31, 1997.
The merchant card program has generated $105,293
or 120.0% more in gross revenue through March of this
year than in the same period last year due to an
increased customer base. Trust income is up 22.3%, or
$42,213, from March 31, 1997. This increase was due
to volume increases in total managed assets and the
general level of business Other income is up 35.0%
or $30,903 due primarily to increases in fees on the
sale of mutual funds and annuities.
The ATM fee income to date is $43,778, no
significant change from $43,344 of one year ago. The
Bank has 13 ATMs operational as of the end of March,
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 and control of the Bank's ATMs.
Driving our ATMs inhouse has also reduced "float" and
the withdrawal limit exposure for the Bank reducing
overall risks inherent in an ATM operation.
Page: 10
PART I. Item 2. - FINANCIAL INFORMATION (cont'd.) 3/98-10QSB
Chesapeake Financial Shares, Inc.
Management's Discussion and Analysis of Financial
Condition or Plan of Operation (Unaudited)
Noninterest Expenses:
Employee salaries expenses amounted to $688,451
and $565,288 as of March 31, 1998 and 1997,
respectively. We opened a new branch in Williamsburg
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. Benefits expense is down 7.0% or $11,830 from
March 31, 1997.
Occupancy expenses are up 35.5% or $92,375 from
March 31, 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 the existing Operations area.
Merchant Card expenses are up 78.8% due to
increased volume in the program. The merchant card
program was profitable at the end of 1997 as business
volume increased. 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, and two ATMs were
installed at the Williamsburg Pottery facility.
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 a machine on By
Pass Road in Williamsburg, has installed a machine in
the Lively office in April, and expects to have a
machine operational at the new Lafayette Street
branch in June .
Other expenses were $398,737 for the three month
period ended March 31, 1998, compared with $363,550
for the same period one year ago. Increases in this
area are primarily related to increases in
advertising expenses and start up expenses for a
leasing product.
Page: 11
PART I. Item 2. - FINANCIAL INFORMATION (cont'd.) 3/98-10QSB
Chesapeake Financial Shares, Inc.
Management's Discussion and Analysis of Financial
Condition or Plan of Operation (Unaudited)
Assets and Loans:
At March 31, 1998, Chesapeake Financial Shares
had total assets of $170.8 million, up 4.2% from
$163.9 million at December 31, 1997 and up 20.8% from
$141.4 million of one year ago. Management has
budgeted a 4.9% growth in total assets for 1998.
Management is comfortable with the increased growth
rate.
Total loans (gross) at March 31, 1998 were
$104.1 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.
3/31/98 12/31/97
Nonaccrual loans $ 464,904 $ 581,000
90 days past due 18,701 13,698
Restructured loans 0 0
________ ________
Totals $ 493,605 $ 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 March 31, 1998 were zero as compared to
$4,406 as of March 31, 1997. Recoveries through
March 31, 1998 were $671 as compared to $15,171 as of
March 31, 1997.
Page: 12
PART I. Item 2. - FINANCIAL INFORMATION (cont'd.) 3/98-10QSB
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 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 (136% of total
capital), individual consumer (111% of capital), the
retail sector (86% of total capital), and the
hospitality sector (78% 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.
Deposits:
Deposits are up 4.1% or $6.8 million from $147.5
million at December 31, 1997. Deposits were $154.3
million and $127.3 million at March 31, 1998 and
March 31, 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:
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 expects the branch to be
operational on June 17, 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 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. Public seminars on the issues are also
being conducted in all trade areas.
Page: 13
PART II. Item l. - OTHER INFORMATION 3/98-10QSB
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 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.
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 3/98-10QSB
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: 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)
5/4/98
(Date) (Signature)
Douglas D. Monroe, Jr.
Chairman and Chief Executive Officer
5/4/98
(Date) (Signature)
John H. Hunt, II
Secretary and Chief Financial Officer
Page: 16
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