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, 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 November 12, 1998.
Class Outstanding at November 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
September 30, 1998 and December 31, 1997...............1-2
Consolidated Statements of Earnings
Three months ended September 30, 1998....................3
Consolidated Statements of Earnings
Nine months ended September 30, 1998.....................4
Consolidated Statements of Cash Flows
Nine months ended September 30, 1998.....................5
Consolidated Statement of Changes in Stockholder's Equity
Nine months ended September 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. September 30, December 31,
Consolidated Balance Sheets 1998 1997
ASSETS
(Unaudited)
Cash and due from banks............. $5,643,673 $5,123,586
Federal funds sold.................. 0 1,900,000
Securities available for sale
U.S. Treasury securities (book value of
$1,201,104-1998 and $1,702,928-1997) 1,202,250 1,698,657
U.S. Government agencies (book value of
$31,913,913-1998 and $29,482,679-1997) 31,717,549 29,540,347
Obligations of state and political
subdivisions (book value of
$11,211,561-1998 and $11,473,361-1997) 11,831,345 11,925,467
Other Securities (book value of
$834,800-1998 and $743,400-1997).. 834,800 743,400
Loans............................... 105,275,759 103,839,121
Less: Reserve for loan loss......... (1,788,947) (1,740,065)
--------------------------------
Net loans........................ 103,486,812 102,099,056
Bank premises and equipment, net.... 4,546,659 3,448,318
Accrued interest receivable......... 1,287,836 1,300,062
Business Manager Assets............. 7,525,110 4,126,141
Other assets........................ 3,212,337 2,010,619
--------------------------------
Total assets..................... $171,288,371 $163,915,653
===============================
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 1998 1997
LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited)
Deposits
Noninterest bearing deposits....... $ 20,622,761 $ 19,255,328
Savings and interest bearing deposits 46,902,644 40,445,981
Certificates of deposit............ 83,146,009 87,817,759
------------------------------
Total deposits................... 150,671,414 147,519,068
Federal funds purchased............... 3,500,000 1,250,000
Accrued interest payable.............. 276,974 334,763
Other liabilities..................... 1,207,234 897,147
Note payable.......................... 881,062 0
------------------------------
Total liabilities................ 156,536,684 150,000,978
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
9/30/98 12/31/97 9/30/98 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................................ 280,213 328,577
Retained earnings..................... 8,965,079 8,047,310
---------------------------
Total shareholders' equity......... 14,751,687 13,914,675
---------------------------
Total liabilities and Shareholders'
equity............................. $171,288,371 $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 September 30,
1998 1997
Interest Income (Unaudited)
Interest and fees on loans.............. $ 2,480,640 $2,262,359
Interest on federal funds sold.......... 15,881 25,936
Interest on time deposits with banks.... 3,963 2,529
Interest on U.S. Treasury securities.... 18,185 25,540
Interest on U.S. Agency Obligations..... 435,055 398,031
Interest on obligations of state
and political subs..................... 162,827 159,634
--------------------------
Total interest income 3,116,551 2,874,029
Interest Expense
Interest on savings and interest bearing
deposits............................... 313,789 250,265
Interest on certificates of deposit..... 1,178,128 1,134,071
Interest on federal funds purchased..... 12,260 879
Other interest expense.................. 14,136 0
--------------------------
Total interest expense 1,518,313 1,385,215
--------------------------
Net interest income..................... 1,598,238 1,488,814
Provision for loan losses............... 0 37,500
--------------------------
Net interest income after provision for
loan losses............................ 1,598,238 1,451,314
--------------------------
Noninterest Income
Income from fiduciary activities........ 363,590 297,741
Service charges on deposit accounts..... 133,802 127,954
Securities gains (losses) - net......... 0
Merchant card income.................... 233,423 120,112
ATM income.............................. 44,126 57,632
Business manager income................. 307,857 194,378
Other income............................ 131,454 92,049
-------------------------
Total noninterest income 1,214,252 889,866
-------------------------
Noninterest Expense
Salaries................................ 874,669 654,654
Employee benefits....................... 144,842 133,753
Occupancy expenses...................... 374,866 305,153
Merchant card expense................... 226,489 114,377
ATM expense............................. 50,601 72,641
Business manager expense................ 205,012 48,526
Other expenses.......................... 553,920 319,765
-------------------------
Total noninterest expense.............. 2,430,399 1,648,869
-------------------------
Income before income taxes.............. 382,091 692,311
Income taxes............................ 95,918 177,338
-------------------------
Net income........................... $ 286,173 $ 514,973
=========================
Earnings per share, basic............... $0.28 $0.51
Earnings per share, assuming dilution... $0.27 $0.49
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,
1998 1997
Interest Income (Unaudited)
Interest and fees on loans................. $ 7,552,115 $6,634,462
Interest on federal funds sold............. 53,914 28,413
Interest on time deposits with banks....... 12,024 7,007
Interest on U.S. Treasury securities....... 62,763 86,903
Interest on obligations of U.S. Agency
Obligations............................... 1,382,083 1,070,885
Interest on obligations of state and
political subs............................ 495,638 474,577
-------------------------
Total interest income 9,558,537 8,302,247
Interest Expense
Interest on savings and interest bearing
deposits.................................. 852,045 729,731
Interest on certificates of deposit........ 3,684,082 3,145,310
Interest on federal funds purchased........ 33,550 50,312
Other interest expense..................... 36,780 0
------------------------
Total interest expense 4,606,457 3,925,353
------------------------
Net interest income........................ 4,952,080 4,376,894
Provision for loan losses.................. 54,000 37,500
------------------------
Net interest income after provision for
loan losses............................... 4,898,080 4,339,394
------------------------
Noninterest Income
Income from fiduciary activities........... 809,944 706,140
Service charges on deposit accounts........ 397,369 397,660
Securities gains (losses)-net.............. 0 (2,365)
Merchant card income....................... 486,035 252,976
ATM income................................. 138,196 153,294
Business manager income.................... 672,604 422,045
Other income............................... 381,160 266,416
------------------------
Total noninterest income 2,885,308 2,196,166
------------------------
Noninterest Expense
Salaries................................... 2,225,584 1,788,165
Employee benefits.......................... 447,413 433,040
Occupancy expenses......................... 1,065,070 885,524
Merchant card expense...................... 484,941 253,249
ATM expense................................ 167,689 208,918
Business manager expense................... 373,593 184,919
Other expenses............................. 1,420,997 1,015,688
------------------------
Total noninterest expense.............. 6,185,287 4,769,503
------------------------
Income before income taxes................. 1,598,101 1,766,057
Income taxes............................... 415,506 459,563
------------------------
Net income............................ $ 1,182,595 $ 1,306,494
========================
Earnings per share, basic.................. $1.17 $1.30
Earnings per share, assuming dilution...... $1.11 $1.26
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,
1998 1997
(Unaudited)
Cash flows from operating activities:
Net income.................................... $1,182,595 $1,306,494
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization............... 407,935 800,876
Provision for loan losses................... 54,000 37,500
(Accretion) of discount and amortization of
premiums, net.............................. 514,376 147,955
Net (gain) loss on sale of securities....... 0 2,365
Changes in assets and liabilities:
Decrease (increase) in accr. interest
receivable................................ 12,226 6,501
Decrease (increase) in other assets........ (4,569,114) (2,255,212)
Increase (decrease) in accrued interest
payable................................... (57,789) 12,561
Increase (decrease) in other liabilities... 310,087 149,738
-----------------------
Net cash provided by (used for) operating
activities................................... (2,145,684) 208,778
-----------------------
Cash flows from investing activities:
Purchases of securities available for sale.... (14,451,682) (13,891,862)
Proceeds from sale or call of securities
available for sale............... ....... 0 7,268,908
Proceeds from maturities of securities
available for sale........................... 12,178,296 3,448,452
Origination of loans available for sale....... (6,243,550) (2,174,300)
Proceeds from sale of loans available for sale 6,243,550 2,174,300
Net (increase) decrease in loans outstanding.. (1,441,756) (7,062,627)
Other capital expenditures.................... (1,505,276) (1,197,995)
------------------------
Net cash provided by (used for) investing
activities................................... (5,220,418) (11,435,124)
------------------------
Cash flows from financing activities:
Net increase (decrease) in demand accounts,
interest bearing demand deposit accounts
and savings deposits......................... 7,824,096 3,355,236
Net increase (decrease) in certificates of
deposit...................................... (4,671,750) 9,107,032
Net increase (decrease) in federal funds
purchased.................................... 2,250,000 (800,000)
Cash dividends................................ (264,826) (201,384)
Proceeds from issuance of voting common
stock........................................ 28,500 5,000
Acquisition of voting common stock............ (60,893) (25,840)
Increase in long-term borrowings.............. 900,000 0
Curtailment of long-term borrowings........... (18,938) 0
-----------------------
Net cash provided by (used for) financing
activities................................... 5,986,189 11,440,044
-----------------------
Net (decrease) increase in cash and federal
funds sold.................................. (1,379,913) 213,698
Cash and federal funds sold at beginning of
period....................................... 7,023,586 5,896,836
-----------------------
Cash and federal funds sold at end of period.. $5,643,673 $ 6,110,534
=======================
See accompanying notes to consolidated financial statements. Page: 5
<TABLE>
Statement of changes in Stockholder's Equity
Chesapeake Financial Shares, Inc.
Nine Months Ended September 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 1,182,595 1,182,595 1,182,595
Other comprehensive income,
net of tax: Unrealized
(loss) on securities
available for sale: (48,364) (48,364) (48,364)
--------- --------- ---------
Total comprehensive income,
net of tax: $ 1,134,231
==========
Acquisition of common stock (60,893) (14,925) (45,968)
Issuance of common stock 28,500 16,400 12,100
Dividends declared (264,826) (264,826)
--------- -------- --------- -------- --------
Ending balance $14,751,687 $8,965,079 $ 280,213 $5,055,915 $450,480
========== ========= ========= ========= ========
</TABLE>
Page 6
PART I. Item 1. - FINANCIAL INFORMATION (cont'd.) 9/98-10QSB
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. CFS chartered
Chesapeake Financial Group, Inc. (CFG) on August 31,
1998. The purpose of CFG is to provide investment
advice and management to the upscale customer. 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 September 30, 1998
reflects a 20% stock dividend paid on October 15, 1997.
There was a second 20% stock dividend issued on October
15, 1998 that is NOT included in this calculation.
September 30, 1998 September 30, 1997
Weighted average number of common
shares, basic 1,011,110 1,007,028
Effect of dilutive stock options 58,371 32,424
--------- ---------
Weighted number of common shares
and dilutive potential common
stock used in diluted EPS 1,069,481 1,039,452
Securities
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 September 30, 1998.
Page: 7
PART I. Item 1. - FINANCIAL INFORMATION (cont'd.) 9/98-10QSB
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 September 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.) 9/98-10QSB
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.) 9/98-10QSB
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. Management'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 September
30, 1998 was approximately $10,571,000, compared to
$7,789,000 one year ago and $12,066,000 at December
31,1997.
The liquidity ratio at September 30, 1998 was
30.4%, compared with 29.7% 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 9.4% at September 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 September 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
September 30, 1998 and December 31, 1997, respectively.
Tier one leverage capital was 8.5% and 8.5% at
September 30, 1998 and December 31, 1997, respectively.
Page: 10
PART I. Item 2. - FINANCIAL INFORMATION (cont'd.) 9/98-10QSB
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 $1,182,595 for the nine months
ended September 30, 1998, compared with income of
$1,306,494 for the same period in 1997. On a fully
diluted per share basis, the net profit was $1.11 for
the first nine months, compared with $1.26 per share
for the same period in the prior year. The decrease in
earnings resulted primarily from a $405,309 or 39.9%
increase in other expenses. Net interest income before
provision increased $575,186 or 13.1% and noninterest
income increased $689,142 or 31.4%. The Company
experienced a net increase in noninterest expense
(which includes other expense) of $1,415,784 or 29.7%.
Please see the section that follows on noninterest
expense.
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, 1998, the Company's
interest-earning assets exceeded its interest-bearing
liabilities by approximately $15.2 million, compared
with a $16.4 million excess one year ago.
Net interest margins are 4.60% at September 30,
1998 compared to 4.58% at September 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 70% at the end of the third quarter of 1998.
Management has reduced deposit rates on all products
during the first and third quarters of 1998 in response
to reduced loan demand and changes in the short term
interest rate environment. These changes have
contributed to the improved margins.
However, there has been significant growth in
deposits in all of the trade areas 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. Offsetting this will be the effect
of loans with interest rates that are tied to prime
repricing at lower rates which will negatively impact
margins in the future
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, 1998 supports the adequacy of the current
loan loss level of $1.8 million.
Chesapeake Bank's management maintains a reserve
for loan loss that 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.) 9/98-10QSB
Chesapeake Financial Shares, Inc.
Management's Discussion and Analysis of Financial
Condition or Plan of Operation (Unaudited)
o The effect of volume and trends in
delinquencies and nonaccrual loans.
o The effect of trends in portfolio volume,
maturity, and composition.
o 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.
o Experience, ability and depth of lending management and staff.
o The effect of national and local economic conditions and downturns
in specific industries.
o Concentrations of credit that might affect loss experience across
one or more components of the portfolio.
o The results of any independent reviews of the portfolio.
The loan loss reserve is 1.7% of gross loans as of September 30, 1998
and December 31, 1997.
Noninterest Income:
Noninterest income is up 31.4% or $689,142 from
the same period last year. Chesapeake Bank's Business
Manager product generated $672,604 in gross revenue for
the first nine months ended September 30, 1998,
compared to the same period last year of $422,045.
Managed assets in the business manager program were
$7,525,110 at September 30, 1998, and $4,126,141 at
September 30, 1997.
The merchant card program has generated $486,035
or 92.1% more in gross revenue through September of
this year than in the same period last year due to an
increased customer base. Trust income is up 14.7%, or
$103,804, from September 30, 1997. This increase was
due to volume increases in total managed assets, fee
structure changes, and the general level of business.
Other income is up 43.1% or $114,744 due primarily to
increases in fees on the sale of mutual funds and
annuities.
The ATM fee income to date is $138,196, down
slightly from $153,294 of one year ago. The Bank has 13
ATMs operational as of the end of September, 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
changed the ATM processing to an in-house system at the
beginning of September, 1997. This has improved
operating costs (down 19.7% or $41,229 from one year
ago) and control of the Bank's ATMs. Driving the 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.) 9/98-10QSB
Chesapeake Financial Shares, Inc.
Management's Discussion and Analysis of Financial
Condition or Plan of Operation (Unaudited)
Noninterest Expenses:
Employee salary expense amounted to $2,225,584 and
$1,788,165 for the nine months ended September 30, 1998
and 1997, respectively. Management opened a new office
in the City of Williamsburg (the Lafayette Street
Office) in June of 1998 and a leasing specialist was
added during the first quarter of 1998. This was the
third Williamsburg office. We have also hired an
Investment Advisor for the Chesapeake Financial Group.
Benefits expense is up 3.3% or $14,373 from September
30, 1997.
Occupancy expenses are up 20.3% or $179,546 from
September 30, 1997 primarily due to maintenance
expenses at branches and the acquisition/development
and maintenance of the School Street property in
Kilmarnock. This building was occupied on the first of
October. The building houses the Operations Center Loan
Processing Center, Administrative Support, and Data
Processing/Operations. Equipment maintenance as well
as insurance costs have also increased.
Merchant Card expenses are up 98.0% due to
increased volume in the program. The merchant card
program was break even at the end of September 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.
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. The
two ATMs that were installed at the Williamsburg
Pottery facility were removed in July of 1998 to reduce
costs.
Other expenses were $1,420,977 for the nine month
period ended September 30, 1998, compared with
$1,015,688 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 a
large brokerage firm and several banks of various
sizes) was a victim of a credit card fraud scheme that
operates world wide. The Bank is processing claims for
reimbursement within the credit card system. Based on
information available at this reporting date management
has written off $214,000 during the third quarter.
Steps have been taken to prevent further losses and
exposure to such future losses. Any future additional
write-offs are expected to be minimal.
Page: 13
PART I. Item 2. - FINANCIAL INFORMATION (cont'd.) 9/98-10QSB
Chesapeake Financial Shares, Inc.
Management's Discussion and Analysis of Financial
Condition or Plan of Operation (Unaudited)
Assets and Loans:
At September 30, 1998, Chesapeake Financial Shares
had total assets of $171.3 million, up 4.5% from $163.9
million at December 31, 1997 and up 9.7% from $156.1
million of one year ago. Management has budgeted for a
4.9% growth in total assets for 1998.
Total loans (gross) at September 30, 1998 were
$105.3 million, representing an increase of 1.4% 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.
9/30/98 12/31/97
Nonaccrual loans $ 670,674 $ 581,000
90 days past due 1,419 13,698
Restructured loans 0 0
________ ________
Totals $ 672,093 $ 594,698
Management is also confident there will be no loss
incurred as the Bank is well secured on these assets.
There are no impaired loans 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, 1998 were $23,467 as compared to $36,253
as of September 30, 1997. Recoveries through September
30, 1998 were $18,348 as compared to $27,952 as of
September 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 (106% of total capital),
individual consumer (112% of capital), the retail
sector (76% of total capital), and the hospitality
sector (74% 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
one repossessed asset valued at $1,300.
Page: 14
PART I. Item 2. - FINANCIAL INFORMATION (cont'd.) 9/98-10QSB
Chesapeake Financial Shares, Inc.
Management's Discussion and Analysis of Financial
Condition or Plan of Operation (Unaudited)
Deposits:
Deposits are up 2.1% or $3.2 million from $147.5
million at December 31, 1997. Deposits were $150.7
million and $140.1 million at September 30, 1998 and
September 30, 1997, respectively. Competition for
deposit dollars has not been as keen this quarter as
the record performance of the stock market and the
correction that followed has made some money run to the
quality of the certificate of deposit. The current low
inflation rate has helped this process.
Other:
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. Management is
performing independent tests on the banking application
software in October of 1998. The majority of the other
vendors have been contacted and have indicated that
their hardware/software will be Year 2000 compliant.
Testing has been or will be performed on all other
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 and informational mailings
will go to all customers.
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. Additionally, many of the Bank's
security systems, such as vaults, alarms, and other
functional equipment, have been identified as potential
sources of year 2000 problems and are in the process of
being tested, with the help of the manufacturers, to
confirm year 2000 compliance.
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. While
management believes that it is taking the necessary
steps to resolve its year 2000 issues in a timely
manner, there can be no assurance that there will be no
year 2000 problems. If any such problems occur,
management will work to solve them as quickly as
possible. At present, management does not expect that
any such problems will have a material adverse effect
on its business.
Page: 15
PART II. Item l. - OTHER INFORMATION 9/98-10QSB
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 July, 1998.
The 6 for 5 stock dividend was to be issued to
shareholders of record on October 1, 1998. It was
payable on or about October 15, 1998. As a result
202,154 shares were issued and $2,230.20 was paid in
cash as a result of fractional shares.
Page: 16
PART II. Item 6. - OTHER INFORMATION 9/98-10QSB
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 9/98
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)
11/12/98
(Date) (Signature)
Douglas D. Monroe, Jr.
Chairman and Chief Executive Officer
11/12/98
(Date) (Signature)
John H. Hunt, II
Secretary and Chief Financial Officer
Page: 18
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<PERIOD-END> SEP-30-1998
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