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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1999
Commission file number: 0-18543
CHESAPEAKE FINANCIAL SHARES, INC.
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Virginia 54-1210845
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(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
19 N. Main St., Kilmarnock, VA 22482
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (804)435-1181
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock ($5.00 par value)
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(Title of Class)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
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Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ ]
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State issuer's revenues for its most recent fiscal year $17,947,725.
The aggregate market value of Common Stock of Chesapeake Financial Shares,
Inc. held by nonaffiliates was approximately $15,421,109 based upon the
sales price per share of $20.50 on February 1, 2000.
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of March 1, 2000.
Class Outstanding at March 1, 2000
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Common Stock, $5.00 par value 1,232,807
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference.
(1)Portions of the Annual Report to Shareholders for the year ended
December 31, 1999 are incorporated into Part II, Items 5 through 7 of this
Form 10-KSB.
(2)Portions of the definitive proxy statement for the 2000 Annual Meeting
of Stockholders are incorporated into Part III, Items 9 through 12 of this
Form 10-KSB.
Transitional Small Business Disclosure Format Yes No X
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CHESAPEAKE FINANCIAL SHARES, INC.
FORM 10-KSB
INDEX
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PART I
Page
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Item 1. Description of Business...................................... 3-12
Statistical Information ..................................... 13-24
Item 2. Description of Property...................................... 25
Item 3. Legal Proceedings............................................ 25
Item 4. Submission of Matters to a Vote of Security Holders ......... 25
PART II
Item 5. Market for Common Equity and Related Stockholder
Matters................................................ 25
Item 6. Management's Discussion and Analysis or Plan of
Operation ............................................. 25
Item 7. Financial Statements......................................... 25
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ................... 25
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the
Exchange Act .......................................... 25
Item 10. Executive Compensation....................................... 26
Item 11. Security Ownership of Certain Beneficial Owners and
Management ............................................ 26
Item 12. Certain Relationships and Related Transactions............... 26
Item 13. Exhibits and Reports on Form 8-K............................. 26
Signatures ............................................................. 27
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PART I
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Item 1. Description of Business
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The Company
Chesapeake Financial Shares, Inc. (the "Company") is an independent,
community owned one-bank holding company based in Kilmarnock, Virginia. The
Company was incorporated under the laws of the Commonwealth of Virginia in 1982
in connection with the reorganization of Chesapeake Bank (the "Bank", organized
in 1900) into a one-bank holding company structure. The Company conducts
substantially all of its business activities through its wholly-owned subsidiary
- - the Bank. Additionally, the Company operates Chesapeake Financial Group, Inc.,
Chesapeake Mortgage Company, Inc. (Inactive), Chesapeake Insurance Agency, Inc.,
t/a Chesapeake Investment Services, and CNB Properties, Inc.
On December 31, 1999, the Company and its subsidiaries had 105 full-time
equivalent employees.
The Bank
The Bank is a full-service commercial bank incorporated under the laws of
the Commonwealth of Virginia, and traces its origins back to 1900. The current
Bank was formed by the merger on April 27, 1968 of Chesapeake Banking Company,
headquartered in Lively, Virginia, and Lancaster National Bank, headquartered in
Irvington, Virginia. Lancaster National Bank was originally chartered on April
14, 1900, and Chesapeake Banking Company was organized on October 15, 1920. The
Bank (formerly Chesapeake National Bank) converted from a national to a state
chartered bank on June 27, 1995.
The Bank has grown to provide a full range of banking and related financial
services, including checking, savings, certificates of deposit and other
depository services, commercial, residential real estate and consumer loan
services, safekeeping services and trust and estate services. Other products
include Touch Tone Teller, 24 hour access services, and annuity and brokerage
services. In February 2000, the Bank introduced internet banking products,
including a bill paying service. The Bank is a member of the Federal Reserve
System and its deposits are insured by the Bank Insurance Fund of the Federal
Deposit Insurance Corporation.
Total assets have increased 8.6%, 10.9%, and 14.7% for each of the years
ended December 31, 1999, 1998 and 1997, respectively over prior years. At
December 31, 1999, total loans amounted to $130.6 million, a 19.4% increase from
$109.4 million in total loans at December 31, 1998, which was a 7.1% increase
from the previous year-end total of $102.1 million at December 31, 1997. Growth
in total deposits has followed a similar pattern with increases of 6.2%, 11.6%,
and 15.6% during 1999, 1998 and 1997, respectively over prior years.
The Bank operates nine banking offices and thirteen ATMs. The Bank expanded
its market area to the James City County/Williamsburg area in May 1995 with the
opening of its James City County (JCC) Winn-Dixie office. The JCC office was
closed on January 31, 2000 as the initial lease term expires in April 2000. In
May 1996, the Bank opened its Five Forks/Williamsburg Office. The Bank also
operates a full service banking facility opened in June 1998, which is in
Williamsburg on Lafayette Street, near Merchant Square. This branch functions as
a regional office and houses Chesapeake Financial Group, Inc. and Chesapeake
Investment Services.
The Bank's existing market area covers most of the area north of the
Rappahannock River and south of the Potomac River known as the "Northern Neck",
the area bounded on the south by the York River and on the north by the
Rappahannock River, known as the "Middle Peninsula", and the Williamsburg area
north of the James River.
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The Bank's current market area is largely rural. The principal businesses
in the area are small commercial enterprises and businesses related to
residential real estate activities, both of which have benefited from the area's
popularity as a retirement and summer home location. The growth of the York
County - James City County/Williamsburg - Hampton triangle has provided
additional commercial and residential business activity, which diversifies
revenue sources.
With the exception of the Bank's Rappahannock Westminster-Canterbury Office
(RWC), the Gloucester Winn-Dixie Office, the JCC Office, and the Five Forks
Office, the Bank's Main Office and branch offices are held in fee, free of any
encumbrances. The RWC Office is leased under an agreement that expires May 31,
2000. The Gloucester and the JCC branches occupy facilities rented from Winn-
Dixie Raleigh. The second term on the Gloucester lease on the premises expires
in October of 2005 and has one five year renewal. The JCC lease expires May of
2000 and will not be renewed. The retail office at JCC closed on January 31,
2000. The Five Forks Office lease expires December 31, 2000.
The Bank's branch offices are located as follows:
Gloucester Winn-Dixie Office Hayes Office Lively Office
6569 Market Drive 3140 George Washington Route 3 & 201
The Shoppes at Gloucester Memorial Hiway Lively
Gloucester Hayes Shopping Center
Hayes
Rappahannock Westminster Kilmarnock Office Mathews Office
Canterbury Office 97 North Main Street Route 14 & 198
10 Lancaster Drive Kilmarnock Mathews Courthouse
Irvington Mathews
Irvington Office Five Forks Office Lafayette Street
King Carter Drive & 4492 John Tyler Highway Financial Center
Tavern Road Williamsburg 1229 Lafayette Street
Irvington Williamsburg
The Mortgage Company
Chesapeake Mortgage Company, Inc. (the "Mortgage Company"), which is a
wholly-owned subsidiary of the Company, is curently inactive.
See "Lending Activities" below for further information on the mortgage
lending services offered by the Bank.
The Investment Companies
Chesapeake Financial Group, Inc. ("CFG") was incorporated August 31, 1998
and opened for business at year end 1998. CFG has established unique
partnerships with premier investment managers to offer superior portfolio
management coupled with highly customized service to high net worth individuals
and institutions.
Chesapeake Insurance Agency, Inc., formerly T/A Chesapeake Title Company,
(the "Title Company"), which is a wholly-owned subsidiary of the Bank, completed
its ninth year of operations in 1999. Chesapeake Insurance Agency, Inc. is now
T/A Chesapeake Investment Services ("CIS") and offers fixed and variable annuity
products, mutual funds and discount brokerage products. The Bank, the Bank's
trust department, CIS, and CFG combine to offer services for every financial
need.
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Other Entities
CNB Properties, Inc. was formed September 23, 1991, to provide a corporate
entity to buy and hold properties (such as foreclosures) on a temporary basis.
Lending Activities
The Company provides a wide range of commercial, real estate, and consumer
loan services through the Bank.
Commercial Lending. Commercial lending activities to the Bank's commercial,
industrial, agricultural, and governmental customers include the making of
asset-based and other secured loans, making unsecured loans, and offering demand
and term loans. Management believes commercial loans offer the potential for
better yields and repricing characteristics than most other types of loans. At
December 31, 1999, the Bank's commercial loan portfolio amounted to $62.1
million, or 46.7% of its total loan portfolio. For a breakdown of the major loan
classifications, see Note 3 to the Consolidated Financial Statements included in
the Company's 1999 Annual Report to Shareholders, portions of which are provided
in Exhibit 13 to this report and are incorporated by reference herein. Of the
$62.1 million of commercial loans at December 31, 1999, 65.4% of such loans
either matured or were subject to repricing within one year. (see Table 4 at
page 18).
Unlike residential mortgage loans, which generally are made on the basis of
the borrower's ability to make repayment from his employment and other income,
commercial loans generally involve more risk. Commercial loans typically are
made on the basis of the borrower's ability to make repayment from the cash flow
of its business and are generally secured by business assets, such as accounts
receivable, equipment, and inventory. As a result, the availability of funds for
the repayment of commercial loans may be substantially dependent on the success
of the business itself. At December 31, 1999, 96.3% of the commercial loans were
secured by some form of collateral and 0.54% of the Bank's commercial loan
portfolio was 30 days or more delinquent. See Table 6 at page 20 showing the
amount of commercial loans charged off during 1999 and 1998.
Real Estate Lending. The Bank's second largest loan category is its real
estate loan portfolio (both mortgage and construction lending), which amounted
to $39.7 million at December 31, 1999, or 29.9% of the Bank's total loan
portfolio. The Bank offers permanent fixed and adjustable rate first mortgage
loans on one-to-four family residential properties. Most of the long-term fixed
rate mortgages and the adjustable rate mortgages are underwritten and documented
in accordance with the guidelines of the Federal Home Loan Mortgage Corporation
and are sold in the secondary market within fifteen to sixty days after the loan
closing date.
The Bank emphasizes the origination of adjustable rate mortgages in order
to increase the proportion of the Company's total loan portfolio with more
frequent repricing. At December 31, 1999, 50.2% of the mortgage portfolio was
subject to repricing or maturing within twelve months.
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The relative customer demand for adjustable-rate and fixed-rate residential
mortgage loans has varied considerably, depending on such factors as the level
of interest rates and expectations regarding future interest rates and the
supply of new housing units placed on the market in the Company's trade area. As
part of its residential lending program, the Bank offers construction loans with
80% loan-to-value ratios to qualified builders and individuals. Construction
loans generally have terms of up to twelve months and interest rates, which
generally are fixed commitments. Loan proceeds are disbursed in increments as
construction progresses and as inspections warrant. In addition to builders'
projects, the Bank finances the construction of individual, owner- occupied
houses where qualified contractors are involved. Construction loans are
structured either to be converted to permanent loans at the end of the
construction phase or to be paid off upon receiving financing from another
financial institution.
Construction loans afford the Bank the opportunity to charge higher loan
origination fees, to increase the frequency of repricing of its loan portfolio
and to earn yields higher than those obtainable on adjustable-rate loans secured
by existing one-to-four-family residential properties. These higher yields
reflect the higher risks associated with construction lending, principally the
difficulty in evaluating accurately the total funds required to complete a
project and the post-completion value of the project. As a result, the Bank
places a strong emphasis upon the borrower's ability to repay principal and
interest.
Consumer Lending. As the competitive and regulatory environments have
changed, the Company has sought to expand its retail banking services to
complement the range of traditional consumer services already offered. The Bank
has maintained its emphasis on consumer loans (a 25.5% increase in 1999 over
1998 and a 31.4% increase in 1998 over 1997) because of their attractive yields
and repricing characteristics. The Bank currently originates a variety of
consumer loans, including lines of credit secured by owner-occupied real estate,
real estate equity loans, boat loans, loans secured by deposits, unsecured loans
and automobile loans. The Bank's consumer loan portfolio was approximately $26.8
million at December 31, 1999, or 20.2% of its total loan portfolio.
Consumer loans generally are considered to entail greater risk than
residential mortgage loans secured by first liens on owner-occupied properties.
The Bank's underwriting and screening processes have been designed to reduce
this risk and have, to date, limited the Bank's consumer delinquency rate to
levels below industry averages. At December 31, 1999, only 0.40% of the Bank's
consumer loan portfolio was 30 days or more delinquent.
The Company has adopted FASB (Financial Accounting Standards Board) No.
114, "Accounting by Creditors for Impairment of a Loan". This statement has been
amended by FASB No. 118, "Accounting by Creditors for Impairment of a Loan-
Income Recognition and Disclosures". Statement 114, as amended, requires that
the impairment of loans that have been separately identified for evaluation is
to be measured based on present value of expected future cash flows or,
alternatively, the observable market price of the loans or the fair value of the
collateral. However, for those loans that are collateral dependent (that is, if
repayment of those loans is expected to be provided solely by the underlying
collateral) and for which management has determined foreclosure is probable, the
measure of impairment of those loans is to be based on the fair value of the
collateral. Statement 114, as amended, also requires certain disclosures about
investments in impaired loans and the allowance for credit losses and interest
income recognized on loans.
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The Company considers all consumer installment loans and residential
mortgage loans to be homogeneous loans. These loans are not subject to
impairment under FASB 114. A loan is considered impaired when it is probable
that the Company will be unable to collect all principal and interest amounts
according to the contractual terms of the loan agreement. Factors involved in
determining impairment include, but are not limited to, expected future cash
flows, financial condition of the borrower, and the current economic conditions.
A performing loan may be considered impaired if the factors above indicate a
need for impairment. A loan on nonaccrual status may not be considered impaired
if it is in the process of collection or there is an insignificant shortfall in
payment. An insignificant delay of less than 30 days or a shortfall of 5% of the
required principal and interest payment generally does not indicate an
impairment situation, if in management's judgment the loan will be paid in full.
Loans that meet the regulatory definitions of doubtful or loss generally qualify
as an impaired loan under FASB 114. Charge-offs for impaired loans occur when
the loan, or portion of the loan, is determined to be uncollectable. The Company
had no loans subject to FASB 114 at December 31, 1999, 1998, and 1997.
Long-Term Debt
See Note 5 to the Consolidated Financial Statements included in the
Company's 1999 Annual Report to Shareholders, portions of which are provided in
Exhibit B to this report and are incorporated by reference herein for
information concerning term loan agreements of the Company.
Competition
The Bank is subject to intense competition from various financial
institutions and other companies or firms that offer financial services. In its
market area, the Bank is and will be competing with several national and
regional banking institutions, including First Virginia Bank, Wachovia Bank,
SunTrust Bank, Bank of America, and First Union. The Bank competes for deposits
with other commercial banks, savings and loan associations, credit unions and
with issuers of commercial paper and securities, such as money market and mutual
funds. In making loans, the Bank competes with other commercial banks, savings
and loan associations, consumer finance companies, credit unions, leasing
companies and other lenders. Federal and state law changes in recent years have
significantly increased competition among financial institutions, and current
trends towards further deregulation may be expected to increase such competition
even further. Many of the financial organizations in competition with the
Company have greater financial resources than the Company and are able to offer
similar services at varying costs with greater loan capacities.
Supervision and Regulation
Bank holding companies and banks are extensively regulated under both
federal and state law. The following description briefly discusses certain
provisions of federal and state laws and certain regulations and proposed
regulations and the potential impact of such provisions on the Company and the
Bank.
Bank Holding Companies. As a bank holding company registered under The Bank
Holding Company Act of 1956 (the "BHCA"), the Company is subject to regulation
by the Federal Reserve Board. The Federal Reserve Board has jurisdiction under
the BHCA to approve any bank or nonbank acquisition, merger or consolidation
proposed by a bank holding company. The BHCA generally limits the activities of
a bank holding company and its subsidiaries to that of banking, managing or
controlling banks, or any other activity which is so closely related to banking
or to managing or controlling banks as to be a proper incident thereto.
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There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by federal law and
regulatory policy that are designed to reduce potential loss exposure to the
depositors of such depository institutions and to the FDIC insurance fund in the
event the depository institution becomes in danger of default or is in default.
For example, under a policy of the Federal Reserve Board with respect to bank
holding company operations, a bank holding company is required to serve as a
source of financial strength to is subsidiary depository institutions and to
commit resources to support such institutions in circumstances where it might
not do so absent such policy. In addition, the "cross guarantee" provision of
federal law requires insured depository institutions under common control to
reimburse the FDIC for any loss suffered or reasonably anticipated by either the
Savings Association Insurance Fund ("SAIF") or the Bank Insurance Fund ("BIF")
as a result of the default of a commonly controlled insured depository
institution or for any assistance provided by the FDIC to a commonly controlled
insured depository institution in danger of default. The FDIC may decline to
enforce the cross-guarantee provisions if it determines that a waiver is in the
best interest of the SAIF or the BIF or both. The FDIC's claim for damages is
superior to claims of stockholders of the insured depository institution or its
holding company but is subordinate to claims of depositors, secured creditors
and holders of subordinated debt (other than affiliates) of the commonly
controlled insured depository institutions.
The Federal Deposit Insurance Act ("FDIA") also provides that amounts
received from the liquidation or other resolution of any insured depository
institution by any receiver must be distributed (after payment of secured
claims) to pay the deposit liabilities of the institution prior to payment of
any other general or unsecured senior liability, subordinated liability, general
creditor or stockholder. This provision would give depositors a preference over
general and subordinated creditors and stockholders in the event a receiver is
appointed to distribute the assets of the Bank.
The Company is registered under the bank holding company laws of Virginia.
Accordingly, the Company and the Bank are subject to regulation and supervision
by the State Corporation Commission of Virginia (the "SCC").
Interstate Banking and Branching. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 authorizes the Federal Reserve Board to permit
adequately capitalized and adequately managed bank holding companies to acquire
all or substantially all of the assets of an out-of-state bank or bank holding
company, subject to certain conditions, including nationwide and state
concentration limits. Banks also are able to branch across state lines (unless
state law would permit such interstate branching at an earlier date), provided
certain conditions are met, including that applicable state law must expressly
permit such interstate branching. Virginia law permits branching across state
lines, provided there is reciprocity with the state in which the out-of-state
bank is based.
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Capital Requirements. The Federal Reserve Board, the Office of the
Comptroller of the Currency (the "OCC") and the FDIC have issued substantially
similar risk-based and leverage capital guidelines applicable to United States
banking organizations. In addition, those regulatory agencies may from time to
time require that banking organization maintain capital above the minimum levels
because of its financial condition or actual or anticipated growth. Under the
risk-based capital requirements of these federal bank regulatory agencies, the
Company and the Bank are required to maintain a minimum ratio of total capital
to risk-weighted assets of at least 8%. At least, half of the total capital is
required to the "Tier 1 capital", which consists principally of common and
certain qualifying preferred shareholders' equity, less certain intangibles and
other adjustments. The remainder ("Tier 2 capital") consists of a limited amount
of subordinated and other qualifying debt (including certain hybrid capital
instruments) and a limited amount of the general loan loss allowance. The Tier 1
and total capital to risk-weighted asset ratios of the Company as of December
31, 1999 were 10.4% and 11.7%, respectively, exceeding the minimums required.
In addition, each of the federal regulatory agencies has established a
minimum leverage capital ratio (Tier 1 capital to average tangible assets).
These guidelines provide for a minimum ratio of 3% for banks and bank holding
companies that meet certain specified criteria, including that they have the
highest regulatory examination rating and are not contemplating significant
growth or expansion. All other institutions are expected to maintain a leverage
ratio of at least 100 to 200 basis points above the minimum. The leverage ratio
of the Company as of December 31, 1999, was 8.3%, which is above the minimum
requirements. The guidelines also provide that banking organizations
experiencing internal growth or making acquisitions will be expected to maintain
strong capital positions substantially above the minimum supervisory levels,
without significant reliance on intangible assets.
Limits on Dividends and Other Payments. The Company is a legal entity
separate and distinct from its subsidiary institutions. Substantially all of the
revenues of the Company result from dividends paid to it by the Bank. There are
various legal limitations applicable to the payment of dividends to Company as
well as the payment of dividends by Company to its respective shareholders.
Under federal law, the Bank may not, subject to certain limited exceptions,
make loans or extensions of credit to, or investments in the securities of, the
Company or take securities of the Company as collateral for loans to any
borrower. The Bank is also subject to collateral security requirements from any
loans or extensions of credit permitted by such exceptions.
The Bank is subject to various statutory restrictions on its ability to pay
dividends to the Company. Under the current supervisory practices of the Bank's
regulatory agencies, prior approval from those agencies is required if cash
dividends declared in any given year exceed net income for that year plus
retained earnings of the two preceding years. Under these supervisory practices,
at December 31, 1999, the Bank could have paid additional dividends to the
Company of approximately $2.9 million, without obtaining prior regulatory
approval. The payment of dividends by the Bank or the Company may also be
limited by other factors, such as requirements to maintain capital above
regulatory guidelines. Bank regulatory agencies have authority to prohibit the
Bank or the Company from engaging in an unsafe or unsound practice in conducting
their business. The payment of dividends, depending upon the financial condition
of the Bank, or the Company, could be deemed to constitute such an unsafe and
unsound practice.
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Under the federal law, insured depository institutions such as the Bank are
prohibited from making capital distributions, including the payment of
dividends, if, after making such distribution, the institution would become
"undercapitalized" (as such term is used in the statute). Based on the Bank's
current financial condition, the Company does not expect that this provision
will have any impact on its ability to obtain dividends from the Bank.
The Bank. The Bank is supervised and regularly examined by the Federal
Reserve Board and the SCC. The various laws and regulations administered by the
regulatory agencies affect corporate practices, such as payment of dividends,
incurring debt and acquisition of financial institutions and other companies,
and affect business practices, such as payment of interest of deposits, the
charging of interest on loans, types of business conducted and locations of
offices.
The Bank is also subject to the requirements of the Community Reinvestment
Act (the "CRA"). The CRA imposes on financial institutions an affirmative and
ongoing obligation to meet the credit needs of the local communities, including
low and moderate income neighborhoods, consistent with the safe and sound
operation of those institutions. Each financial institution's efforts in meeting
community credit needs currently are evaluated as part of the examination
process pursuant to twelve assessment factors. These factors also are considered
in evaluating mergers, acquisitions and applications to open a branch or
facility.
As an institution with deposits insured by the BIF, the Bank also is
subject to insurance assessments imposed by the FDIC. The FDIC has implemented a
risk-based deposit insurance assessment system under which the assessment rate
for an insured institutions may vary according to regulatory capital levels of
the institution and other factors (including supervisory evaluations).
Depository institutions insured by the BIF that are "well capitalized," are
required to pay only the statutory minimum assessment of $2,000 annually for
deposit insurance, while all other banks are required to pay premiums ranging
from .03% to .27% of domestic deposits. These rate schedules are subject to
future adjustments by the FDIC. In addition, the FDIC has authority to impose
special assessments from time to time. However, because the legislation enacted
in 1996 requires that both Savings Association Insurance Fund insured and BIF-
insured deposits pay a pro rata portion of the interest due on the obligations
issued by the Financing Corporation, the FDIC is assessing BIF-insured deposits
an additional 1.30 basis points per $100 of deposits to cover those obligations.
Other Safety and Soundness Regulations. There are a number of obligations
and restrictions imposed on bank holding companies and their depository
institution subsidiaries by Federal law and regulatory policy that are designed
to reduce potential loss exposure to the depositors of such depository
institutions and to the FDIC insurance funds in the event the depository
institution becomes in danger of default or is in default. For example, under a
policy of the Federal Reserve Board with respect to bank holding company
operations, a bank holding company is required to serve as a source of financial
strength to its subsidiary depository institutions and to commit resources to
support such institutions in circumstances where it might not do so otherwise.
In addition, the "cross-guarantee" provisions of Federal law require insured
depository institutions under common control to reimburse the FDIC for any loss
suffered or reasonably anticipated by the BIF as a result of the default of a
commonly controlled insured depository institution or for any assistance
provided by the FDIC to a commonly controlled insured depository institution in
danger of default. The FDIC may decline to enforce the cross-guarantee provision
if it determines that a waiver is in the best interests of the BIF. The FDIC's
claim for reimbursement is superior to claims of shareholders of the insured
depository institution or its holding company but is subordinate to claims of
depositors, secured creditors and holders of subordinated debt (other than
affiliates) of the commonly controlled insured depository institution.
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The Federal banking agencies also have broad powers under current Federal
law to take prompt corrective action to resolve problems of insured depository
institutions. The FDIA requires that the federal banking agencies establish five
capital levels for insured depository institutions - "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized,"
and "critically undercapitalized." It also requires or permits such agencies to
take certain supervisory actions should an insured institution's capital level
fall. For example, an "adequately capitalized" institution is restricted from
accepting brokered deposits. An "undercapitalized" or "significantly
undercapitalized" institution must develop a capital restoration plan and is
subject to a number of mandatory and discretionary supervisory actions. These
powers and authorities are in addition to the traditional powers of the Federal
banking agencies to deal with undercapitalized institutions.
Federal regulatory authorities also have broad enforcement powers over the
Company and the Bank, including the power to impose fines and other civil and
criminal penalties, and to appoint a receiver in order to conserve the assets of
any such institution for the benefit of depositors and other creditors.
The Gramm-Leach-Bliley Act of 1999. The Gramm-Leach-Bliley Act of 1999
("GLBA") was signed into law on November 12, 1999. The main purpose of GLBA is
to permit greater affiliations within the financial services industry, primarily
banking, securities and insurance. While certain portions of GLBA became
effective upon enactment and on March 11, 2000, many other provisions do not
become effective until May 2001 and most of the regulations implementing the law
have not yet been issued. As a result, the overall impact of GLBA on the Company
cannot be predicted at this time. The provisions of GLBA that are believed to be
of most significance to the Company are discussed below.
GLBA repeals sections 20 and 32 of the Glass-Steagall Act, which separated
commercial banking from investment banking, and substantially amends the BHCA,
which limited the ability of bank holding companies to engage in the securities
and insurance businesses. To achieve this purpose, GLBA creates a new type of
company, the "financial holding company." A financial holding company may engage
in or acquire companies that engage in a broad range of financial services,
including
. securities activities such as underwriting, dealing, brokerage,
investment and merchant banking; and
. insurance underwriting, sales and brokerage activities.
A bank holding company may elect to become a financial holding company only
if all of its depository institution subsidiaries are well-capitalized, well-
managed and have at least a satisfactory Community Reinvestment Act rating.
GLBA establishes a system of functional regulation under which the federal
banking agencies will regulate the banking activities of financial holding
companies and banks' financial subsidiaries, the Securities and Exchange
Commission ("SEC") will regulate their securities activities and state insurance
regulators will regulate their insurance activities.
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With regard to Federal securities laws, GLBA removes the blanket exemption
for banks from being considered brokers or dealers under the Securities Exchange
Act of 1934, and sets out a number of limited activities, including trust and
fiduciary activities, in which a bank may engage without being considered a
broker, and a set of activities in which a bank may engage without being
considered a dealer. The Investment Advisers Act of 1940 also will be amended to
eliminate certain provisions exempting banks from the registration requirements
of that statute, and the Investment Company Act of 1940 will be amended to
provide the SEC with regulatory authority over various bank mutual fund
activities.
GLBA also provides new protections against the transfer and use by
financial institutions of consumers nonpublic personal information. A financial
institution must provide to its customers, at the beginning of the customer
relationship and annually thereafter, the institution's policies and procedures
regarding the handling of customers' nonpublic personal financial information.
The new privacy provisions will generally prohibit a financial institution from
providing a customer's personal financial information to unaffiliated third
parties unless the institution discloses to the customer that the information
may be so provided and the customer is given the opportunity to opt out of such
disclosure.
At this time, the Company is unable to predict the impact GLBA may have
upon its or its subsidiaries' financial condition or results of operations. The
Company is currently reviewing the new law and at this time has not elected to
be treated as a financial holding company under GLBA.
Other
In December of 1997 the Company satisfactorily completed a Transfer Agent
Examination and the Bank satisfactorily completed a Phase I and Phase II Year
2000 Examination, all performed by the Federal Reserve Bank of Richmond. During
the second quarter of 1998, the Bank and the holding company satisfactorily
completed a comprehensive combined Safety and Soundness examination, Consumer
Compliance Examination and a Community Reinvestment Act Examination performed by
the Federal Reserve Bank of Richmond. As of September 30, 1999, the Bank
satisfactorily completed a 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 Company.
Forward-Looking Statements
This report contains certain forward-looking statements with respect to the
financial condition, results of operations, plans, objectives and business of
the Company. These forward-looking statements involve certain risks and
uncertainties. Factors that may cause actual results to differ materially from
those contemplated by such forward-looking statements include, among others, the
following possibilities: (a) competitive pressure in the financial services
industry increases significantly; (b) changes in the interest rate environment
reduce margins; (c) general economic conditions, either nationally or
regionally, are less favorable than expected, resulting in, among other things,
a deterioration in credit quality; (d) changes occur in the financial services
regulatory environment; and (e) changes occur in the securities markets.
12
<PAGE>
Item 1. Statistical Information
- --------------------------------
The following statistical information is furnished pursuant to the
requirements of Guide 3 (Statistical Disclosure by Bank Holding Companies)
promulgated under the Securities Act of 1933.
INDEX
Page
TABLE 1. Average Balance Sheets, Net Interest Income, and Rates.14-15
TABLE 2. Analysis of Change in Net Interest Income............... 16
TABLE 3. Types of Investment Securities.......................... 17
TABLE 4. Maturity Schedule of Selected Loans as of Dec. 31, 1999 18
TABLE 5. Risk Elements........................................... 19
TABLE 6. Summary of Reserve for Loan Losses...................... 20
TABLE 7. Allocation of the Reserve for Loan Losses............... 21
TABLE 8. Deposits................................................ 21
TABLE 9. Return on Equity and Assets............................. 22
TABLE 10. Short Term Borrowing.................................... 22
TABLE 11. Interest Sensitivity Analysis........................... 23
TABLE 12. Analysis of Capital..................................... 24
13
<PAGE>
TABLE 1
AVERAGE BALANCES, INCOME AND EXPENSES, YIELDS AND RATES
The following table depicts interest income on earnings assets and related
average yields as well as interest expense on interest-bearing liabilities and
related average rates paid for the periods indicated.
Year Ended December 31,
-----------------------
1999 1998
---- ----
Annual Annual
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- -----
(Dollars in Thousands)
Assets:
Securities:
Taxable $ 29,351 $1,688 5.75% $ 34,234 $1,886 5.51%
Tax-exempt(1) 13,291 684 7.82% 11,749 605 7.80%
-------- ------ -------- ------
Total securities 42,642 2,372 6.40% 45,983 2,491 6.10%
Loans (net of unearned
income):
Taxable(2) 119,470 10,859 9.09% 103,215 9,962 9.65%
Tax-exempt 1,846 138 11.36% 2,567 205 12.10%
-------- ------ -------- ------
Total loans 121,316 10,997 9.12 105,782 10,167 9.71%
Federal funds sold and
repurchase agreements 975 40 4.10% 1,702 89 5.23%
Interest-bearing deposits
in other banks 284 14 4.93% 346 16 4.62%
-------- ------ ---- -------- ------ ----
Total earning asset
165,217 13,423 8.38% 153,813 12,763 8.57%
Less: allowance for loan
losses (2,137) (1,806)
Total nonearning assets 24,349 19,980
------- -------
Total assets $187,429 $171,987
-------- --------
14
<PAGE>
TABLE 1 (cont.)
AVERAGE BALANCES, INCOME AND EXPENSES, YIELDS AND RATES
Year Ended December 31,
-----------------------
1999 1998
---- ----
Annual Annual
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- -----
(Dollars in Thousands)
Liabilities and Shareholder's Equity:
Interest-bearing deposits:
Checking $50,065 $1,654 3.30% $27,170 $ 728 2.68%
Regular savings 10,955 282 2.57% 12,305 332 2.70%
Money market savings
4,464 129 2.89% 6,189 178 2.88%
Certificates of deposit:
$100,000 and over 14,326 681 4.75% 16,908 897 5.31%
Under $100,000 63,159 3,232 5.12% 70,205 3,932 5.60%
------ ----- ---- ------ ----- ----
Total interest-bearing
deposits 142,969 5,978 4.18% 132,777 6,067 4.57
Federal funds purchased
and securities sold under
agreements to repurchase
2,737 149 5.44% 648 36 5.56%
Other borrowing 858 47 5.48% 884 49 5.54%
----- --- ---- ------ ---- ----
Total interest-bearing
liabilities 146,564 6,174 4.21% 134,309 6,152 4.58%
Noninterest bearing liabilities:
Demand deposits 23,996 21,861
Other liabilities 1,530 1,462
------ ------
Total liabilities 172,090 157,632
Shareholders' equity 15,339 14,355
Total liabilities and share-
holders' equity $187,429 $171,987
Net interest income/yield $7,249 4.65% $6,611 4.57%
Interest rate spread 4.17% 3.99%
1) Yields are reported on a taxable equivalent basis assuming a federal tax
rate of 34%.
2) Includes non-accrual loans.
15
<PAGE>
TABLE 2
VOLUME AND RATE ANALYSIS (1)
The following table analyzes changes in net interest income attributable to
changes in the volume of interest-bearing assets and liabilities compared to
changes in interest rates. Nonaccruing loans are included in average loans
outstanding.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 vs.1998 1998 vs. 1997
Increase (Decrease) Increase (Decrease)
Due to Changes in:(1) Due to Changes in:(2)
------------------------- ------------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Earning Assets:
Securities:
Taxable $ (268) $ 70 $ (198) $399 $ (149) $ 250
Tax-exempt 79 0 79 28 (12) 16
Loans
Taxable 1,567 (670) 897 799 291 1,090
Tax-exempt (57) (10) (67) 31 8 39
Federal funds sold
and repurchase
agreements (38) (11) (49) 34 (3) 31
Interest-bearing deposits
in other banks (3) 1 (2) (13) (11) (24)
------ ------ ------ ---- ------ ------
Total earning
assets $1,280 $ (620) $ 660 $1,278 $ 124 $1,402
------ ------ ------ ------ ------ ------
Interest-Bearing Liabilities:
Interest checking $ 615 $ 311 $ 926 $161 $ 59 $ 220
Regular savings (36) (14) (50) 23 1 24
Money market savings (50) 1 (49) 6 (2) 4
Time deposits:
CDS $100,000 or more (137) (79) (216) 87 (41) 46
CDS Other (396) (304) (700) 390 38 428
------ ------ ---- ------ ------ ------
Total interest-bearing
deposits (4) (85) (89) 667 55 722
Federal funds purchased
and securities sold
under agreements to
repurchase 116 (3) 113 (11) (4) (15)
Other borrowing (1) (1) (2) 37 1 38
------ ------ ------ ---- ------ ------
Total interest-bearing
liabilities $ 111 $ (89) $ 22 $ 693 $ 52 $ 745
------ ------ ------ ---- ------ ------
Change in net interest
income: $1,169 $ (531) $ 638 $ 585 $ 72 $ 657
------ ------ ------ ---- ------ ------
</TABLE>
(1) The change in interest due to both rate and volume has been allocated to
change due to volume and change due to rate in proportion to the relationship of
the absolute dollar amounts of the change in each.
(2) The combine effect of changes in both volume and rate which cannot be
separately identified has been allocated proportionately to the change due to
volume and change due to rate.
16
<PAGE>
TABLE 3
SECURITIES HELD FOR RESALE AND INVESTMENT
MATURITY DISTRIBUTION AND AVERAGE YIELD
December 31,
------------
1999 1998
------- -------
Book Value: (In thousands)
U.S. Government securities ......................... $24,195 $29,046
State and political subdivisions ................... 13,571 12,330
Other securities.................................... 2,555 835
------- -------
Total securities $40,321 $42,211
Maturities of Securities Held at December 31, 1999
<TABLE>
<CAPTION>
Over Ten
One One Five Years and
Year to Five to Ten Equity
or Less Years Years Securities Total
-------- -------- ------- ----------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
U.S. Agency Securities:
Book value $1,292 - - - $ 1,292
Market value 1,257 - - - 1,257
Weighted average yield(1)
5.88% 0% 0% 0% 5.88%
State and Political
Subdivisions:
Book value - 344 3,291 9,936 13,571
Market value - 353 3,219 9,595 13,167
Weighted average yield(1) 0% 9.06% 8.20% 8.26% 8.27%
Corporate Debt Securities:
Book value - - 1,059 507 1,566
Market value - - 1,027 486 1,513
Weighted average yield(1) 0% 0% 6.78% 6.56% 6.71%
Mortgage Backed Securities:
Book value 2,600 17,244 3,063 - 22,907
Market value 2,605 16,949 2,917 - 22,471
Weighted average yield(1) 6.14% 6.40%- 6.84% 0% 6.43%
Other Securities:
Book Value - 150 739 100 989
Market Value - 150 739 100 989
Weighted Average Yield(1) -% 6.52% 5.54% 5.83% 5.72%
Total Securities:
Book value $3,892 $17,738 $8,152 $10,543 $40,325
Market value 3,862 17,452 7,902 10,181 39,397
Weighted average yield(1) 6.05% 6.45% 7.26% 8.16% 7.06%
</TABLE>
(1) Yields on tax-exempt securities have been computed on a tax-equivalent
basis.
The Bank held only one issue, an agency security, that exceeded 10% of
Shareholder's Equity at December 31, 1998.
17
<PAGE>
TABLE 4
LOAN PORTFOLIO AND MATURITY SCHEDULE OF SELECTED LOANS
AS OF DECEMBER 31, 1999
For the table and accompanying notes addressing the loan portfolio, see
"Note 3. Loans" on page 14 of the Annual Report to Shareholders which is
incorporated by reference herein (attached as Exhibit 13 to this Form 10-KSB).
The maturity distribution and rate sensitivity of certain categories of
loans as of December 31, 1999 is presented below.
Management considers the liquidity of the Company to be adequate.
Sufficient assets are maintained on a short-term basis to meet the liquidity
demands anticipated by management. In addition, secondary sources are available
through the use of borrowed funds. See Table 10 at page 18.
<TABLE>
<CAPTION>
1 Year or Less 1-5 Years Over 5 Years
---------------- ----------------- ---------------
Fixed Variable Fixed Variable Fixed Variable
Rate Rate Rate Rate Rate Rate
---- ---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial and other $8,270 $32,323 $ 5,817 $13,032 $ 4,179 $ 0
Real estate-construction 1,463 11 0 0 1,320 0
Real estate mortgage 730 11,633 1,861 20,951 1,780 0
Consumer installment 7,989 2,804 10,661 83 5,295 0
------- ------- ------- ------- ------- -------
Total $18,452 $46,771 $18,339 $34,066 $12,574 0
------- ------- ------- ------- ------- -------
</TABLE>
18
<PAGE>
TABLE 5
RISK ELEMENTS
Risk elements associated with the loan portfolio are presented below. The
Company places a loan on nonaccrual status when management believes, after
considering economic and business conditions and collection efforts, that the
borrower's financial condition is such that collection of principal and interest
is doubtful. The Company's policy is to place loans on nonaccrual status if
principal or interest is past due for 90 days or more unless the debt is both
well secured and in the process of being collected.
December 31,
-----------
(Thousands)
1999 1998
---- -----
Nonaccrual loans(1) $ 155 $ 202
Restructured loans 0 0
Foreclosed properties 185 185
-------- ------
Total nonperforming assets $ 340 $ 387
-------- ------
Loans past due 90+ days and
accruing interest $ 4 $ 4
Reserve for loan losses
to period end loans 1.7% 1.8%
Reserve for loan losses to
nonaccrual loans 1,449.1% 999.7%
Nonperforming assets to
period-end loans and
foreclosed properties (2) 0.26% .35%
Net charge-offs (recoveries)
to average loans 0.02% (0.32%)
(1)There were no troubled debt restructurings in 1999 or 1998. The Bank expects
to charge off $586,076 in problem loans (fully reserved at December 31, 1999).
These loans present potential risk of non-payment and are not included in the
numbers above. The Bank expects to collect all other payments due. See the
discussion on page 31 of the 1999 Annual Report to Shareholders and Note 3 to
the Financial Statements contained therein for additional information on the
risk elements associated with the loan portfolio.
(2)As of December 31, 1999, performing loans totaling approximately $5.9 million
were identified as potential problem loans through internal loan review systems
and procedures. The Bank has specifically reserved for potential losses in these
loans as of year end.
Loan Concentrations: The Bank has no concentration of credit that exceeds
10% of gross loans, except real estate and consumer.
19
<PAGE>
TABLE 6
SUMMARY OF RESERVE FOR LOAN LOSS
The following table shows the Company's loan loss and recovery experience
for the past two years.
The Company tries to maintain a reserve for loan loss that represents an
estimate of all losses estimated in the Bank's loan portfolio. To achieve this
goal, the loan loss provision must be sufficient to cover charged-off loans plus
growth in the loan portfolio. The loan loss provision is a charge against
earnings necessary to maintain the reserve for loan losses at management's
targeted level. In considering the provision for loan loss, an evaluation of the
loan portfolio is conducted. Loans in non-accrual status and loans past due over
ninety days are considered in this evaluation as well as other loans the Company
feels may be a potential loss. The status of non-accrual and past due loans
varies from quarter to quarter based on seasonality and cash flow of customers.
Year ended December 31,
-----------------------
1999 1998
---- ----
(Dollars in thousands)
Reserve, beginning of period $2,024 $1,740
Loans charged off:
Commercial (8) (330)
Real estate construction 0 0
Real estate mortgage 0 0
Consumer (19) (25)
------ ------
Total loans charged off (27) (355)
------ ------
Recoveries of loans previously charged off:
Commercial 27 0
Real estate - construction 0 0
Real estate - mortgage 0 7
Consumer 19 12
------ ------
Total recoveries 46 19
------ ------
Net loans (charged off) recovered
19 (336)
Provision for (recovery off) loan losses
210 620
--- ---
Balance, end of period $2,253 $2,024
------ ------
Net charge-offs (recoveries) to average loans
0.02% (0.32%)
20
<PAGE>
TABLE 7
ALLOCATION OF THE RESERVE FOR LOAN LOSSES
The following table provides a breakdown of the allowance for loan losses by
major categories of the Company's loan portfolio. See Note 3 to the Financial
Statements for the amount of loans in each category.
<TABLE>
<CAPTION>
1999 1998
Percent of loans Percent of loans
in each category in each category
Amount to Total Loans Amount to Total Loans
------ --------------- ------ ----------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Commercial $1,559 46.7% $1,233 44.1%
Real estate - construction 0 2.1 0 4.9
Real estate - mortgage 408 27.8 463 29.6
Consumer 264 20.2 299 19.2
Other 23 1.1 29 0.8
Participations 0 2.1 0 1.4
------ ----- ------ -----
Total $2,254 100.0% $2,024 100.0%
------ ----- ------ -----
</TABLE>
TABLE 8
DEPOSITS
The average balance and rates for certain categories of deposits for the
last two years are shown in the following table:
Year ended December 31,
-----------------------
1999 1998
-------- --------
Average Average Average Average
Balance Rate Balance Rate
------- -------- -------- --------
(dollars in thousands)
Non-interest bearing demand deposits
$ 24,026 $ 21,141
-------- --------
Interest bearing deposits:
Interest checking 50,065 3.30% 27,170 2.68%
Regular savings 10,955 2.57 12,305 2.70
Money market savings 4,464 2.89 6,189 2.88
Time deposits:
Certificates of deposit $100,000 or
more
14,326 4.75 16,908 5.31
Other certificates of deposit
63,159 5.12 70,205 5.60
-------- --------
Total interest bearing deposits
142,969 4.18 132,777 4.57
-------- --------
Total deposits $166,965 3.58% $153,918 3.94%
-------- --------
Maturities of time certificates of deposits of $100,000 or more outstanding
at December 31, 1999 were (dollars in thousands):
1999
=======
3 months or less $ 6,592
3 - 6 months 2,683
6 - 12 months 5,257
Over 12 months 1,453
-------
Total $15,985
21
<PAGE>
TABLE 9
RETURN ON EQUITY AND ASSETS
The ratio of net income to average total assets and average shareholders'
equity and certain other ratios for the periods indicated are as follows:
Year ended December 31,
-----------------------
1999 1998
---------- ---------
Return on average assets 1.10% 0.81%
Return on average equity 13.44% 9.62%
Dividend payout ratio 19.73% 24.69%
Average equity to average assets 8.18% 8.39%
TABLE 10
SHORT TERM BORROWING
The Bank periodically borrows funds through federal funds from its
correspondent banks, through securities sold under agreements to repurchase,
through the Federal Home Loan Bank of Atlanta, and through the discount window
at the Federal Reserve Bank of Richmond. The borrowings mature daily for cash
flow requirements. The borrowed amounts and their corresponding rates during
1999 and 1998 are presented below:
Year ended December 31,
-----------------------
(Dollars in Thousands)
1999 1998
------ -------
Average daily amount outstanding $4,384 $ 648
Average interest rate 5.35% 5.56%
Maximum outstanding at any month end $9,000 $3,500
Balance at end of period $4,800 $ 0
22
<PAGE>
TABLE 11
INTEREST SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
December 31, 1999
-----------------
Within 90-365 1 to 5 Over
90 Days Days Years 5 Years Total
-------- -------- -------- -------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Earnings Assets:
Loans (2) $25,891 $ 41,001 $52,262 $ 12,720 $131,874
Securities & Time
Deposits with
other banks 2,086 4,248 15,965 17,097 39,396
Federal funds sold
and other short-
term investments 0 - - - 0
------- -------- ------- -------- --------
Total interest
earning assets
$ 27,977 $45,249 $68,227 $ 29,817 $171,270
------- -------- ------- -------- --------
Interest-Bearing
Liabilities:
Interest checking,
savings and money
market savings(3) $ 3,864 $ 8,695 $54,826 $ 0 $ 67,385
Certificates of
deposit:
$100,000 and over 6,592 7,940 1,453 - 15,985
Under $100,000 11,915 33,941 18,603 - 64,459
Federal funds
purchased and
securities sold
under agreements
to repurchase 4,800 - - - 4,800
Other borrowing 6 21 121 700 848
------- -------- ------- -------- --------
Total interest-
bearing liabilities $27,177 $50,597 $ 75,003 $ 700 $153,477
------- ------- -------- ------- --------
Period gap $ 800 $ (5,348) $(6,776) $ 29,117 $ 17,793
Cumulative gap $(4,548) $(11,324) $17,793
Ratio of cumulative
gap to total
earning assets(4) 0.47% -2.66% -6.61% 10.39%
</TABLE>
(1) The repricing dates may differ from maturity dates for certain assets due to
prepayment assumptions.
(2) Includes nonaccrual loans.
(3) The Bank's Asset Liability Management Committee has found that interest
bearing checking accounts and regular saving accounts are generally not
sensitive to changes in interest rates. However, current interest rate levels
have warranted placing approximately 6.0% of these balances in the 90 day
category.
(4) The Bank's Asset Liability Management Committee monitors interest rate risk
using gap analysis and rate shock - market value - duration analysis using
regulatory guidelines. The relative risk to earnings based on the gaps in the
table above are considered reasonable by management and is within limits
established by the Board of Directors.
23
<PAGE>
TABLE 12
ANALYSIS OF CAPITAL *
December 31,
1999 1998
--------- ---------
(thousands)
Tier 1 Capital:
Common stock $ 6,132 $ 6,148
Additional paid in capital 265 524
Retained earnings 9,737 8,082
Less: Goodwill 0 0
-------- --------
Total Tier 1 capital $ 16,134 $ 14,754
Tier 2 Capital:
Allowance for loan losses 1,939 1,633
Allowable long-term debt 0 0
-------- --------
Total Tier 2 Capital 1,939 1,633
Total risk-based capital $ 18,073 $ 16,387
-------- --------
Risk weighted assets $154,703 $130,167
Capital Ratios:
Tier 1 risk-based capital ratio 10.4% 11.3%
Total risk-based capital ratio 11.7 12.6
Tier 1 capital to average
adjusted total assets 8.3 8.4
* See the captioned "Note 17 Regulatory Matters" which is on page 26 of the
Company's 1999 Annual Report to Shareholders, portions of which are provided in
Exhibit 13 to this report and are incorporated by reference herein.
24
<PAGE>
ITEM 2. Description of Property
- --------------------------------
The Company acquired a 2.647 acre commercial property (formerly the
Colonial Store complex) on School Street in Kilmarnock on January 2, 1998. The
long term debt is secured by this property. The building is approximately
27,000 square feet. Just over one half of the space is rented to three tenants,
Advance Auto, deMedici's Fine Italian Restaurante, and Rappahannock General
Hospital. The remaining space is being used by the Administrative Support,
Operations, and Loan Processing Center. The vacated space at 1 North Main Street
was sold in September, 1999. The space at 19 N. Main Street is leased under an
agreement that expires on April 1, 2002 and has a five year renewal.
The Bank owns and leases properties also described in Item 1 of this
report.
ITEM 3. Legal Proceedings
- --------------------------
The Bank is currently not involved in any material legal proceeding other
than ordinary litigation incidental to its business.
ITEM 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
There were no matters submitted to a vote of security holders during the
quarter ended December 31, 1999.
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------
This information is included in the Company's 1999 Annual Report to
Shareholders at page 33-34 in the section captioned, "Dividend and Market
Information".
ITEM 6. Management's Discussion and Analysis or Plan of Operation
- ------------------------------------------------------------------
This information is included in the Company's 1999 Annual Report to
Shareholders at pages 31-35.
ITEM 7. Financial Statements
- -----------------------------
This information is included in the Company's 1999 Annual Report to
Shareholders at pages 3-30.
ITEM 8. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
- --------------------
There have been no disagreements between the Company and its independent
accountants for the past two years.
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons;
- ----------------------------------------------------------------------
Compliance with Section 16(a) of the Exchange Act
- -------------------------------------------------
This information is incorporated herein by reference from the Company's
Proxy Statement for the 2000 Annual Meeting of Shareholders at pages 2 through 4
and page 7 thereof.
In addition, the Company has the following executive officers:
Name Age Position for last five years
----------------------------------------------------------
John H. Hunt, II 52 CFO & Secretary for the Company
and the Bank
Marshall N. Warner 55 EVP since 3/97, SVP/SLO since 11/92
Of the Bank
25
<PAGE>
ITEM 10. Executive Compensation
- --------------------------------
This information is incorporated herein by reference from the Company's
Proxy Statement for the 2000 Annual Meeting of Shareholders at pages 4 through 7
thereof.
ITEM 11. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
This information is incorporated herein by reference from the Company's
Proxy Statement for the 2000 Annual Meeting of Shareholders at pages 2 and 3
thereof.
ITEM 12. Certain Relationships and Related Transactions
- --------------------------------------------------------
This information is incorporated herein by reference from the Company's
Proxy Statement for the 2000 Annual Meeting of Shareholders at page 10 thereof.
ITEM 13. Exhibits and Reports on Form 8-K
- ------------------------------------------
(a) Exhibit Index:
#3 (i) Articles of Incorporation and (ii) Bylaws. Incorporated by
reference to Exhibits 3.1 and 3.2 of previously filed Registration
Statement on Form S-18, Registration No. 33-27825, dated May 15,
1989, as amended.
#10 Material Contracts. Exhibits 10.1 through 10.3 are incorporated
by reference to Exhibit 10 and are filed as noted below:
10.1 Employee Stock Ownership Plan (previously filed)
10.2 Douglas D. Monroe, Jr. Deferred Compensation Agreement
(previously filed)
10.3 John H. Hunt, II Employment Agreement (previously filed)
10.4 401K Overflow Plan (filed herewith)
10.5 Employee Stock Option Plan (filed herewith)
#13 1999 Annual Report to Shareholders (filed herewith)
#21 Subsidiaries of the Registrant (filed herewith)
#22 None
#27 Financial data schedule (filed herewith)
(b) Reports on Form 8-K. No reports were filed by the registrant
during the fourth quarter of 1999.
26
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto, duly authorized.
CHESAPEAKE FINANCIAL SHARES, INC.
Date: March 29, 2000 By /s/ Douglas D. Monroe, Jr.
-------------- --------------------------
Douglas D. Monroe, Jr.
Chairman of the Board and
Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
/s/ Douglas D. Monroe, Jr. March 29, 2000
----------------------
Douglas D. Monroe, Jr.
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
/s/ John H. Hunt, II March 29, 2000
----------------
John H. Hunt, II
Chief Financial Officer and
Secretary (Principal Financial
Officer)
/s/ T. Nash Broaddus March 29, 2000
----------------
T. Nash Broaddus, Director
/s/ Eugene S. Hudnall March 29, 2000
-----------------
Eugene S. Hudnall, Director
/s/ Katherine W. Monroe March 29, 2000
-------------------
Katherine W. Monroe, Director
/s/ Bruce P. Robertson March 29, 2000
------------------
Bruce P. Robertson, Director
/s/ William F. Shumadine, Jr. March 29, 2000
-------------------------
William F. Shumadine, Jr., Director
/s/ Robert L. Stephens March 29, 2000
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Robert L. Stephens, Director
/s/ Jeffrey M. Szyperski March 29, 2000
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Jeffrey M. Szyperski, Director
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Exhibit 10.4
CHESAPEAKE FINANCIAL SHARES, INC
SUPPLEMENTAL RETIREMENT AND
401(K) OVERFLOW PLAN
Nonqualified Retirement Plan 7.5A
Effective October 1, 1996
TABLE OF CONTENTS
INTRODUCTION
ARTICLE I FORMAT AND DEFINITIONS
Section 1.01 ----- Format
Section 1.02 ----- Definitions
ARTICLE II PARTICIPATION
Section 2.01 ----- Active Participant
Section 2.02 ----- Inactive Participant
Section 2.03 ----- Cessation of Participation
ARTICLE III CONTRIBUTIONS
Section 3.01 ----- Salary Savings Contributions
Section 3.01A ----- Employer Contributions
Section 3.02 ----- Nonforfeitability of Contributions
Section 3.03 ----- Allocation
ARTICLE IV INVESTMENT OF CONTRIBUTIONS
Section 4.01 ----- Investment of Contributions
Section 4.01A ----- Agreement of Agency
ARTICLE V BENEFITS
Section 5.01 ----- Retirement Benefits
Section 5.02 ----- Death Benefits
Section 5.03 ----- Termination Benefits
Section 5.04 ----- When Benefits Start
Section 5.05 ----- Withdrawal Privileges
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ARTICLE VI DISTRIBUTION OF BENEFITS
Section 6.01 ----- Automatic Forms of Distribution
Section 6.02 ----- Optional Forms of Distribution
Section 6.03 ----- Election Procedures
Section 6.04 ----- Notice Requirements
ARTICLE VII TERMINATION OF PLAN
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ARTICLE VIII ADMINISTRATION OF PLAN
Section 8.01 ----- Administration
Section 8.02 ----- Records
Section 8.03 ----- Information Available
Section 8.04 ----- Claim and Appeal Procedures
Section 8.05 ----- Delegation of Authority
ARTICLE IX GENERAL PROVISIONS
Section 9.01 ----- Amendments
Section 9.02 ----- Mergers
Section 9.03 ----- Provisions Relating to the Insurer and
Other Parties
Section 9.04 ----- Employment Status
Section 9.05 ----- Rights to Plan Assets
Section 9.06 ----- Beneficiary
Section 9.07 ----- Nonalienation of Benefits
Section 9.08 ----- Construction
Section 9.09 ----- Legal Actions
Section 9.10 ----- Small Amounts
Section 9.11 ----- Word Usage
PLAN EXECUTION
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INTRODUCTION
The Employer is establishing a nonqualified, defined contribution
employees' retirement plan which has been designed as, and is intended to be, a
funded plan for purposes of the Employee Retirement Income Security Act of 1974,
as amended, and a nonqualified plan under the Internal Revenue Code of 1986,
including any later amendments to the Code. The Employer agrees to operate the
plan according to the terms, provisions and conditions set forth in this
document.
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ARTICLE I
FORMAT AND DEFINITIONS
SECTION 1.01--FORMAT.
Words and phrases defined in the DEFINITIONS SECTION of Article I shall
have that defined meaning when used in this Pan, unless the context clearly
indicates otherwise.
These words and phrases have an initial capital letter to aid in
identifying them as defined terms.
SECTION 1.02--DEFINITIONS.
ACCOUNT means, for a Participant, his share of the Investment Fund.
Separate accounting records are kept for those parts of his Account that result
from:
(a) Salary Savings Contributions.
(b) Discretionary Contributions.
A Participant's Account shall be reduced by any distribution of his Account. A
Participant's Account will participate in the earnings credited, expenses
charged and any appreciation or depreciation of the Investment Fund. His Account
is subject to any minimum guarantees applicable under the Group Contract or
other investment arrangement.
ACTIVE PARTICIPANT means an Eligible Employee who is actively participating in
the Plan according to the provisions in the ACTIVE PARTICIPANT SECTION of
Article II.
ANNUITY STARTING DATE means, for a Participant, the first day of the first
period for which an amount is payable as an annuity or any other form.
BENEFICIARY means the person or persons named by a Participant to receive any
benefits under this Plan upon the Participant's death. See the BENEFICIARY
SECTION of Article IX.
CLAIMANT means any person who has made a claim for benefits under this Plan. See
the CLAIM AND APPEAL PROCEDURES SECTION of Article VIII.
CODE means the Internal Revenue Code of 1986, as amended.
COMPENSATION means the total earnings paid or made available to an Employee by
the Employer during any specified period. Compensation shall exclude Employer
Contributions made under this Plan.
"Earnings" in this definition means an Employee's W-2 earnings.
Compensation shall also include employer contributions made pursuant to a salary
reduction agreement which are not includible in the gross income of the Employee
under Code Sections 125, 402(a)(8), 402(h), 403(b), or 457.
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CONTINGENT ANNUITANT means an individual named by the Participant to receive a
lifetime benefit after the Participant's death in accordance with a survivorship
life annuity.
CONTRIBUTIONS means
Salary Savings Contributions
Discretionary Contributions
as set out in Article III, unless the context clearly indicates otherwise.
DISCRETIONARY CONTRIBUTIONS means discretionary contributions made by the
employer to fund this Plan. See the EMPLOYER CONTRIBUTIONS SECTION of Article
III.
ELIGIBILITY BREAK IN SERVICE means an Eligibility Computation Period in which an
Employee is credited with 500 or fewer Hours-of-Service. An Employee incurs an
Eligibility Break in Service on the last day of an Eligibility Computation
Period in which he has an Eligibility Break in Service.
ELIGIBILITY COMPUTATION PERIOD means a 12-consecutive month period. The first
Eligibility Computation Period begins on an Employee's Employment Commencement
Date. Later Eligibility Computation Periods shall be 12-consecutive month
periods ending on the last day of each Plan Year that begins after his
Employment Commencement Date.
To determine an Eligibility Computation Period after an Eligibility Break in
Service, the Plan shall use the 12-consecutive month period beginning on an
Employee's Reemployment Commencement Date as if his Reemployment Commencement
Date were his Employment Commencement Date.
ELIGIBILITY SERVICE means one year of service for each Eligibility Computation
Period that has ended and in which an Employee is credited with at least 1,000
Hours-of-Service.
ELIGIBLE EMPLOYEE means any Employee of the Employer who represents a select
group of highly-compensated or management employees, as determined by the
Employer.
EMPLOYEE means an individual who is employed by the Employer.
EMPLOYER means Chesapeake Financial Shares, Inc. The Employer will act as Agent
for its Employees participating in this Plan. See the AGREEMENT OF AGENCY
SECTION of Article IV. This will also include any successor corporation or firm
of the Employer which shall, by written agreement, assume the obligations of
this Plan or any predecessor corporation or firm of the Employer (absorbed by
the Employer, or of which the Employer was once a part) which became a
predecessor because of a change of name, merger, purchase of stock or purchase
of assets and which maintained this Plan.
EMPLOYER CONTRIBUTIONS means
Discretionary Contributions
as set out in Article III, unless the context clearly indicates otherwise.
EMPLOYMENT COMMENCEMENT DATE means the date an Employee first performs an Hour-
of-Service.
ENTRY DATE means the date an Employee first enters the Plan as an Active
Participate. See the ACTIVE PARTICIPANT SECTION of Article II.
ERISA means the Employee Retirement Income Security Act of 1974, as amended.
FISCAL YEAR means the Employer's taxable year. The last day of the Fiscal Year
is December 31.
GROUP CONTRACT means the group annuity contract or contracts into which the
Employer enters with the Insurer for the investment of Contributions and the
payment of benefits under this Plan. The term Group Contract as it is used in
this Plan is deemed to include the plural unless the context clearly indicates
otherwise.
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HOUR-OF-SERVICE means the following;
(a) Each hour for which an employee is paid, or entitled to payment, for
performing duties for the Employer during the applicable computation
period.
(b) Each hour for which an Employee is paid, or entitled to payment, by the
Employer because of a period of time in which no duties are performed
(irrespective of whether the employment relationship has terminated) due to
vacation, holiday, illness, incapacity (including disability), layoff, jury
duty, military duty or leave of absence. Notwithstanding the preceding
provisions of this subparagraph (b), no credit will be given to the
Employee
(1) for more than 501 Hours-of-Service under this subparagraph (b) because
of any single continuous period in which the Employee performs no
duties (whether or not such period occurs in a single computation
period); or
(2) for an Hour-of-Service for which the Employee is directly or
indirectly paid, or entitled to payment, because of a period in which
no duties are performed if such payment is made or due under a plan
maintained solely for the purpose of complying with applicable
worker's or workmen's compensation, or unemployment compensation or
disability insurance laws; or
(3) for an Hour-of-Service for a payment which solely reimburses the
Employee for medical or medically related expenses incurred by him.
For purposes of this subparagraph (b), a payment shall be deemed to be made
by, or due from the Employer, regardless of whether such payment is made
by, or due from the Employer, directly or indirectly through, among others,
a trust fund or insurer, to which the Employer contributes or pays premiums
and regardless of whether contributions made or due to the trust fund,
insurer or other entity are for the benefit of particular employees or are
on behalf of a group of employees in the aggregate.
(c) Each hour for which back pay, irrespective of mitigation of damages, is
either awarded or agreed to by the Employer. The same Hours-of-Service
shall not be credited both under subparagraph (a) or subparagraph (b) above
(as the case may be) and under this subparagraph (c). Crediting of Hours-
of-Service for back pay awarded or agreed to with respect to periods
described in subparagraph (b) above will be subject to the limitations set
forth in that subparagraph.
The crediting of Hours-of-Service above shall be applied under the rules of
paragraphs (b) and (c) of the Department of Labor Regulation 2530.200b-2
(including any interpretations or opinions implementing said rules); which
rules, by this reference, are specifically incorporated in full within this
Plan. The reference to paragraph (b) applies to the special rule for determining
hours of service for reasons other than the performance of duties such as
payments calculated (or not calculated) on the basis of units of time and the
rule against double credit. The reference to paragraph (c) applies to the
crediting of hours of service to computation periods.
Solely for purposes of determining whether a one-year break in service has
occurred for eligibility or vesting purposes, during a Parental Absence an
Employee shall be credited with the Hours-of-Service which otherwise would
normally have been credited to the Employee but for such absence, or in any case
in which such hours cannot be determined, eight Hours-of-Service per day of such
absence. The Hours-of-
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Service credited under this paragraph shall be credited in the computation
period in which the absence begins if the crediting is necessary to prevent a
break in service in that period; or in all other cases, in the following
computation period.
INACTIVE PARTICIPANT means a former Active Participant who has an Account. See
the INACTIVE PARTICIPANT SECTION of Article II.
INSURER means Principal Mutual Life Insurance Company and any other insurance
company or companies named by the Employer.
INVESTMENT FUND means the total assets held for the purpose of providing
benefits for Participants. These funds result from Contributions made under the
Plan.
INVESTMENT MANAGER means any fiduciary (other than a trustee or Named Fiduciary)
(a) who has the power to manage, acquire, or dispose of any assets of the Plan;
and
(b) who (1) is registered as an investment adviser under the Investment
Advisers Act of 1940, or (2) is a bank , as defined in the Investment
Advisers Act of 1940, or (3) is an insurance company qualified to perform
services described in subparagraph (a) above under the laws of more than
one state; and
(c) who has acknowledged in writing being a fidicuary with respect to the Plan.
LATE RETIREMENT DATE means the first day of any month which is after a
Participant's Normal Retirement Date and on which retirement benefits begin. If
a Participant continues to work for the Employer after his Normal Retirement
Date, his Late Retirement Date shall be the earliest first day of the month on
or after he ceases to be an Employee. An earlier or a later Retirement Date may
apply if the Participant so elects. See the WHEN BENEFITS START SECTION of
Article V.
MONTHLY DATE means each Yearly Date and the same day of each following month
during the Plan Year beginning on such Yearly Date.
NAMED FIDUCIARY means the person or persons who have authority to control and
manage the operation and administration of the Plan.
The Named Fiduciary is the Employer.
NORMAL FORM means a single life annuity with installment refund.
NORMAL RETIREMENT AGE means age 65.
NORMAL RETIREMENT DATE means the first day of the month on or after the date the
Participant reaches his Normal Retirement Age. Unless otherwise provided in this
Plan, a Participant's retirement benefits shall begin on a Participant's Normal
Retirement Date if he has ceased to be an Employee on such date and has an
Account. Even if the Participant is an Employee on his Normal Retirement Date,
he may choose to have his retirement benefit begin on such date. See the WHEN
BENEFITS START SECTION of Article V.
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PARENTAL ABSENCE means an Employee's absence from work which begins on or after
the first Yearly Date after December 31, 1984.
(a) by reason of pregnancy of the Employee,
(b) by reason of birth of a child of the Employee,
(c) by reason of the placement of a child with the Employee in connection with
adoption of such child by such Employee, or
(d) for purposes of caring for such child for a period beginning immediately
following such birth or placement.
PARTICIPANT means either an Active Participant or an Inactive Participant.
PLAN means the nonqualified retirement plan of the Employer set forth in this
document, including any later amendments to it.
PLAN ADMINISTRATOR means the person or persons who administer the Plan.
The Plan Administrator is the Employer.
PLAN YEAR means a period beginning on a Yearly Date and ending on the day before
the next Yearly Date.
QUALIFIED JOINT AND SURVIVOR FORM means, for a Participant who has a spouse, a
survivorship life annuity with installment refund, where the survivorship
percentage is 50% and the Contingent Annuitant is the Participant's spouse. A
former spouse will be treated as the spouse to the extent provided under a
qualified domestic relations order as described in ERISA Act Section 206(d). If
a Participant does not have a spouse, the Qualified Joint and Survivor Form
means the Normal Form.
The amount of benefit payable under the Qualified Joint and Survivor Form shall
be the amount of benefit which may be provided by the Participant's Account.
QUALIFIED PLAN means Chesapeake Financial Shares, Inc. 401(k) Profit Sharing
Plan.
QUALIFIED PRERETIREMENT SURVIVOR ANNUITY means a single life annuity with
installment refund payable to the surviving spouse of a Participant who dies
before his Annuity Starting Date. A former spouse will be treated as the
surviving spouse to the extent provided under a qualified domestic relations
order as described in ERISA Act Section 206(d).
REEMPLOYMENT COMMENCEMENT DATE means the date an Employee first performs an
Hour-of-Service following an Eligibility Break in Service.
REENTRY DATE means the date a former Active Participant reenters the Plan. See
the ACTIVE PARTICIPANT SECTION of Article II.
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RETIREMENT DATE means the date a retirement benefit will begin and is a
Participant's Normal or Late Retirement Date, as the case may be.
SALARY SAVINGS CONTRIBUTIONS means salary deferral contributions made by the
Employer to fund this Plan. See the SALARY SAVINGS CONTRIBUTIONS SECTION of
Article III.
YEARLY DATE means October 1, 1996, and each following January 1.
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ARTICLE II
PARTICIPATION
SECTION 2.01--ACTIVE PARTICIPANT.
(a) An Employee shall first become an Active Participant (begin active
participation in the Plan) on the earliest Monthly Date on or after
October 1, 1996, on which he is an Eligible Employee and meets the
requirement below:
(i) He has completed 1 year of Eligibility Service
(ii) He is age 21 or older.
The date is his Entry Date.
If a person has been an Eligible Employee who has met all the
eligibility requirements stated above, but is not an Eligible Employee
on the date which would have been his Entry Date, he shall become an
Active Participant on the date he again becomes an Eligible Employee.
This date is his Entry Date.
(b) An Inactive Participant shall again become an Active Participant
(resume active participation in the Plan)on the date he again performs
an Hour of Service as an Eligible Employee. This date is his Reentry
Date.
Upon again becoming an Active Participant, he shall cease to be an
Inactive Participant.
(c) A former Participant shall again become an Active Participant (resume
active participation in the Plan) on the date he again performs an
Hour of Service as an Eligible Employee. This date is his Reentry
Date.
There shall be no duplication of benefits for a Participant under this Plan
because of more than one Period as an Active Participant.
SECTION 2.02--INACTIVE PARTICIPANT.
An Active Participant shall become an Inactive Participant on the
earlier of the following:
(a) The date on which he ceases to be an Eligible Employee (on his
Retirement Date if the date he ceases to be an Eligible Employee
occurs within one month of his Retirement Date).
(b) The effective date of complete termination of the Plan.
SECTION 2.03--CESSATION OF PARTICIPATION.
A Participant shall cease to be a Participant on the date he is no
longer an Eligible Employee and the value of his Account is zero.
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ARTICLE III
CONTRIBUTIONS
SECTION 3.01--SALARY SAVINGS CONTRIBUTIONS.
The amount of each Salary Savings Contribution for a Participant shall
be equal to any percentage of his Compensation for the pay period as elected in
his or her deferral agreement. An Employee who is eligible to participate in the
Plan may file a deferral agreement with the Employer. The deferral agreement to
start Salary Savings Contributions may be effective on a Participant's Entry
Date (Reentry Date, if applicable) or any following Monthly Date. The
Participant shall make any change or terminate the deferral agreement by filing
a new deferral agreement. A Participant's deferral agreement making a change may
be effective on any date a deferral agreement to start Salary Savings
Contributions could be effective. A Participant's deferral agreement to stop
Salary Savings Contributions may be effective on any date.
The deferral agreement must be in writing and effective before the
beginning of the pay period, in which Salary Savings Contributions are to start,
change or stop.
Salary Savings Contributions may include contributions the Employee
would have made to the Qualified Plan of the Employer under its contribution
formula but for the additional restrictions imposed by such plan to meet the
qualification requirements of the Internal Revenue Code.
SECTION 3.01A--EMPLOYER CONTRIBUTIONS.
Employer Contributions for each Plan Year will be equal to the
Employer Contributions as described below.
(a) Discretionary Contributions. The amount of each Discretionary
Contribution made by the Employer for the Participant shall be
determined by the Employer.
SECTION 3.02--NONFORFEITABILITY OF CONTRIBUTIONS.
All Contributions are fully vested and nonforfeitable when made.
SECTION 3.03--ALLOCATION.
The following Contributions for each Plan Year shall be allocated to
each Participant for whom such Contributions were made under the SALARY SAVINGS
CONTRIBUTIONS and EMPLOYER CONTRIBUTIONS SECTIONS of Article III:
Salary Savings Contributions
These Contributions shall be allocated when made and credited to the
Participant's Account.
The following Contributions for each Plan Year shall be allocated
among all eligible persons:
Discretionary Contributions
The eligible persons are all Participants and former Participants who were
Active Participants at any time in the Plan Year. The amount allocated to such a
person shall be determined below.
Discretionary Contributions are allocated as of the last day of each
Plan Year. The amount allocated to each eligible person for the Plan Year shall
be equal to the Discretionary Contributions for the Plan Year, multiplied by the
ratio of (i) his Annual Compensation as of the last day of the Plan Year to (ii)
the total of such compensation for all eligible persons. This amount is credited
to his Account.
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ARTICLE IV
INVESTMENT OF CONTRIBUTIONS
SECTION 4.01--INVESTMENT OF CONTRIBUTIONS.
All Contributions are forwarded by the Employer to the appropriate
funding arrangement for deposit in the Investment Fund.
Investment of Contributions is governed by the provisions of the Plan,
the Group Contract and any other funding arrangement in which the Investment
Fund is or may be invested. To the extent permitted by the Plan, Group Contract
or other funding arrangement, the Participant shall direct the Contributions to
any of the accounts available under the Plan or Group Contract and may request
the transfer of assets resulting from those Contributions between such accounts.
A Participant may not direct the Employer to invest the Participant's Account in
collectibles. To the extent that a Participant does not direct the investment of
his Account, such Account shall be invested ratably in the accounts available
under the Investment Fund or Group Contract in the same manner as the undirected
Accounts of all other Participants. The Accounts of all Inactive Participants
may be segregated and invested separately from the Accounts of all other
Participants.
The Investment Fund shall be valued at current fair market value as of
the last day of the last calendar month ending in the Plan Year and, at the
discretion of the Employer, may be valued more frequently. The valuation shall
take into consideration investment earnings credited, expenses charged, payments
made and changes in the value of the assets held in the Investment Fund. The
Account of a Participant shall be credited with its share of the gains and
losses of the Investment Fund. That part of a Participant's Account invested in
a funding arrangement which establishes an account or accounts for such
Participant thereunder shall be credited with the gain or loss from such account
or accounts. That part of a Participant's Account which is invested in other
funding arrangements shall be credited with a proportionate share of the gain or
loss of such investments. The share shall be determined by multiplying the gain
or loss of the investment by the ratio of the part of the Participant's Account
invested in such funding arrangement to the total of the Investment Fund
invested in such funding arrangement.
At least annually, the Named Fiduciary shall review all pertinent
Employee information and Plan data in order to establish the funding policy of
the Plan and to determine appropriate methods of carrying out the Plan's
objectives. The Named Fiduciary shall inform any Investment Manager of the
Plan's short-term and long-term financial needs so the investment policy can be
coordinated with the Plan's financial requirements.
SECTION 4.01A-AGREEMENT OF AGENCY.
The Employer agrees that it will act as Agent of its employees who are
Participants under this Plan for purposes of entering into a Group Contract and
collecting salary deferral amounts, if any, and any Employer deposits to the
Plan, and transmitting said amounts to the insurer for deposit under the Group
Contract.
As Agent, the Employer has the right to:
(i) agree to any amendments to such contract, as long as any such
amendment does not adversely affect the amounts accumulated for
a Participant or beneficiary before the effective date of said
amendment;
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(ii) terminate the Group Contract; and
(iii) direct benefit payments and exercise any other rights, duties
and privileges of the Contractholder.
The Insurer may rely on information given by the Agent and on
Contractholder decisions made By the Agent. Nothing in this agency agreement,
however, gives the Agent the right to direct payments from the Group Contract to
other than Participants or their beneficiaries without the express consent of
the Participant. In no event will the Agent convert assets held under the Group
Contract to its own use.
The Employer and its successors or assignees shall remain Agent until
it notifies each Participant hereunder that it will no longer serve as Agent.
The Employer's agency agreement will not terminate until the Group Contract has
been terminated by the Employer and distribution of the Participant accounts has
occurred.
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ARTICLE V
BENEFITS
SECTION 5.01--RETIREMENT BENEFITS.
On a Participant's Retirement Date, his Account shall be distributed
to him according to the distribution of benefits provisions of Article VI and
the provisions of the SMALL AMOUNTS SECTION of Article IX.
SECTION 5.02--DEATH BENEFITS.
If a Participant dies before his Annuity Starting Date, his Account
shall be distributed according to the distribution of benefits provisions of
Article VI and the provisions of the SMALL AMOUNTS SECTION of Article IX.
SECTION 5.03--TERMINATION BENEFITS.
A Participant may receive a distribution of his Account at any time
after he ceases to be an Employee, provided he has not again become an Employee.
If such amount is not payable under the provisions of the SMALL AMOUNTS SECTION
of Article IX, it will be distributed only if the Participant so elects. The
Participant's election shall be subject to the requirements in the ELECTION
PROCEDURES SECTION of Article VI for a qualified election of a retirement
benefit.
If a Participant does not receive an earlier distribution according to
the provisions of this section or the SMALL AMOUNTS SECTION of Article IX, upon
his Retirement Date or death, his Account shall be applied according to the
provisions of the RETIREMENT BENEFITS SECTION or the DEATH BENEFITS SECTION of
Article V.
SECTION 5.04--WHEN BENEFITS START.
Benefits under the Plan begin when a Participant retires, dies or
ceases to be an Employee, whichever applies, as provided in the preceding
sections of this article. The start of benefits is subject to the qualified
election procedures of Article VI.
Unless otherwise elected, benefits shall begin before the sixtieth day
following the close of the Plan Year in which the latest date below occurs:
(a) The date the Participant attains age 65 (Normal Retirement Age, if
earlier).
(b) The tenth anniversary of the Participant's Entry Date.
(c) The date the Participant ceases to be an Employee.
Notwithstanding the foregoing, the failure of a Participant and spouse
to consent to a distribution while a benefit is immediately distributable,
within the meaning of the ELECTION PROCEDURES SECTION of Article VI, shall be
deemed to be an election to defer commencement of payment of any benefit
sufficient to satisfy this section.
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The Participant may elect to have his benefits begin after the latest
date for beginning benefits described above, subject to the provisions of this
section. The Participant shall make the election in writing and deliver the
signed statement of election to the Plan Administrator before Normal Retirement
Date or the date he ceases to be an Employee, if later. The election must
describe the form of distribution and the date the benefits will begin.
SECTION 5.05--WITHDRAWAL PRIVILEGES.
Before he ceases to be an Employee, a Participant may withdraw all or
part of his Account, as permitted under the funding arrangement for this Plan,
and in accordance with the procedures and limitations set up by the Plan
Administrator.
A request for withdrawal shall be in writing on a form furnished for
that purpose and delivered to the Plan Administrator before the withdrawal is to
occur. The Participant's request shall be subject to the requirements in the
ELECTION PROCEDURES SECTION of Article VI for a qualified election of a
retirement benefit payable in a form other than a Qualified Joint and Survivor
Form.
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ARTICLE VI
DISTRIBUTION OF BENEFITS
SECTION 6.01--AUTOMATIC FORMS OF DISTRIBUTION.
Unless a qualified election of an optional form of benefit has been
made within the election period (see the ELECTION PROCEDURES SECTION of Article
VI), the automatic form of benefit payable to or on behalf of a Participant is
determined as follows:
(a) The automatic form of retirement benefit for a Participant who does
not die before his Annuity Starting Date shall be the Qualified Joint
and Survivor Form.
(b) The automatic form of death benefit for a Participant who dies before
his Annuity Starting Date shall be:
(1) A Qualified Preretirement Survivor Annuity for a Participant who
has a spouse to whom he has been continuously married throughout
the one-year period ending on the date of his death. The spouse
may elect to start receiving the death benefit on any first day
of the month on or after the Participant dies. If the spouse dies
before benefits start, the Participant's Account, determined as
of the date of the spouse's death, shall be paid to the spouse's
Beneficiary.
(2) A single-sum payment to the Participant's Beneficiary for a
Participant who does not have a spouse who is entitled to a
Qualified Preretirement Survivor Annuity.
Before a death benefit will be paid on account of the death of a
Participant who does not have a spouse who is entitled to a Qualified
Preretirement Survivor Annuity, it must be established to the
satisfaction of a plan representative that the Participant does not
have such a spouse.
SECTION 6.02--OPTIONAL FORMS OF DISTRIBUTION.
(a) The optional forms of retirement benefit shall be the following: a straight
life annuity; single life annuities with certain periods of five, ten or
fifteen years; a single life annuity with installment refund; survivorship
life annuities with installment refund and survivorship percentages of 50,
66 2/3 or 100; fixed period annuities for any period of whole months which
is not less than 60 nor more than 360; and a series of installments chosen
by the Participant with a minimum payment each year beginning with the year
the Participant turns age 70 1/2. The minimum payment will be based on a
period equal to the joint and last survivor expectancy of the Participant
and the Participant's spouse, if any, where the joint and last survivor
expectancy is recalculated. The balance of the Participant's Account, if
any, will be payable on the Participant's death to his Beneficiary in a
single sum. The Participant may also elect to receive his Account in a
single-sum payment.
Election of an optional form is subject to the qualified election
provisions of Article VI.
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(b) The optional forms of death benefits are a single-sum payment and any
annuity that is an optional form of retirement benefit. However, a series
of installments shall not be available if the Beneficiary is not the spouse
of the decreased Participant.
SECTION 6.03--ELECTION PROCEDURES.
The Participant, Beneficiary, or spouse shall make any election under
this section in writing. The Plan Administrator may require such individual to
complete and sign any necessary documents as to the provisions to be made. Any
election permitted under (a) and (b) shall be subject to the election provisions
of (c) below.
(a) Retirement Benefits. A Participant may elect his Beneficiary or
Contingent Annuitant and may elect to have retirement benefits
distributed under any of the optional forms of retirement benefit
described in the OPTIONAL FORMS OF DISTRIBUTION SECTION of Article VI.
(b) Death Benefits. A Participant may elect his Beneficiary and may elect
to have death benefits distributed under any of the optional forms of
death benefit described in the OPTIONAL FORMS OF DISTRIBUTION SECTION
of Article VI.
If the Participant has not elected an optional form of distribution
for the death benefit payable to his Beneficiary, the Beneficiary may,
for his own benefit, elect the form of distribution, in like manner as
a Participant.
The Participant may waive the Qualified Preretirement Survivor Annuity
by naming someone other than his spouse as Beneficiary.
In lieu of the Qualified Preretirement Survivor Annuity described in
the AUTOMATIC FORMS OF DISTRIBUTION SECTION of Article VI, the spouse
may, for his own benefit, waive the Qualified Preretirement Survivor
Annuity by electing to have the benefit distributed under any of the
optional forms of death benefit described in the OPTIONAL FORMS OF
DISTRIBUTION SECTION of Article VI.
(c) Qualified Election. The Participant, Beneficiary or spouse may make an
election at any time during the election period. The Participant,
Beneficiary, or spouse may revoke the election made (or make a new
election) at any time and any number of times during the election
period. An election is effective only if it meets the consent
requirements below.
The election period as to retirement benefits is the 90-day period
ending on the Annuity Starting Date. An election to waive the
Qualified Joint and Survivor Form may not be made before the date he
is provided with the notice of the ability to waive the Qualified
Joint and Survivor Form. If the Participant elects the series of
installments, he may elect on any later date to have the balance of
his Account paid under any of the optional forms of retirement benefit
available under the Plan. His election period for this election is the
90-day period ending on the Annuity Starting Date for the optional
form of retirement benefit elected.
A Participant may make an election as to death benefits at any time
before he dies. The spouse's election period begins on the date the
Participant dies and ends on the date benefits begin. The
Beneficiary's election period begins on the date the Participant dies
and ends on the date benefits
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begin. An election to waive the Qualified Preretirement Survivor
Annuity may not be made by the Participant before the date he is
provided with the notice of the ability to waive the Qualified
Preretirement Survivor Annuity. A Participant's election to waive the
Qualified Preretirement Survivor Annuity which is made before the
first day of the Plan Year in which he reaches age 35 shall become
invalid on such date. An election made by a Participant after he
ceases to be an Employee will not become invalid on the first day of
the Plan Year in which he reaches age 35 with respect to death
benefits from that part of his Account resulting from Contributions
made before he ceased to be an Employee.
If the Participant's Account has at any time exceeded $3,500, any
benefit which is (1) immediately distributable or (2) payable in a
form other than a Qualified Joint and Survivor Form or a Qualified
Preretirement Survivor Annuity requires the consent of the Participant
and the Participant's spouse (or where either the Participant or the
spouse has died, the survivor). The consent of the Participant or
spouse to a benefit which is immediately distributable must not be
made before the date the Participant or spouse is provided with the
notice of the ability to defer the distribution. Such consent shall be
made in writing. The consent shall not be made more than 90 days
before the Annuity Starting Date. Spousal consent is not required for
a benefit which is immediately distributable in a Qualified Joint and
Survivor Form. Furthermore, if spousal consent is not required because
the Participant is electing an optional form of retirement benefit
that is not a life annuity pursuant to (d) below, only the Participant
need consent to the distribution of a benefit payable in a form that
is not a life annuity and which is immediately distributable.
A benefit is immediately distributable if any part of the benefit
could be distributed to the Participant (or surviving spouse) before
the Participant attains (or would have attained if not deceased) the
older of Normal Retirement Age or age 62. If the Qualified Joint and
Survivor Form is waived, the spouse has the right to limit consent
only to a specific Beneficiary or a specific form of benefit. The
spouse can relinquish one or both rights. Such consent shall be made
in writing. The consent shall not be made more than 90 days before the
Annuity Starting Date. If the Qualified Preretirement Survivor Annuity
is waived, the spouse has the right to limit consent only to a
specific Beneficiary. Such consent shall be in writing. The spouse's
consent shall be witnessed by a plan representative or notary public.
The spouse's consent must acknowledge the effect of the election,
including that the spouse had the right to limit consent only to a
specific Beneficiary or a specific form of benefit, if applicable, and
that the relinquishment of one or both such rights was voluntary.
Unless the consent of the spouse expressly permits designations by the
Participant without a requirement of further consent by the spouse,
the spouse's consent must be limited to the form of benefit, if
applicable, and the Beneficiary (including any Contingent Annuitant),
class of Beneficiaries, or contingent Beneficiary named in the
election. Spousal consent is not required, however, if the Participant
establishes to the satisfaction of the plan representative that the
consent of the spouse cannot be obtained because there is no spouse or
the spouse cannot be located. A spouse's consent under this paragraph
shall not be valid with respect to any other spouse. A Participant may
revoke a prior election without the consent of the spouse. Any new
election will require a new spousal consent, unless the consent of the
spouse expressly permits such election by the Participant without
further consent by the spouse. A spouse's consent may be revoked at
any time within the Participant's election period.
(d) Special Rule for Profit Sharing Plan. As provided in the preceding
provisions of the Plan,if a Participant has a spouse to whom he has
been continuously married throughout the one-year period ending on the
date of his death, the Participant's Account shall be paid to such
spouse. However,
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if there is no such spouse of if the surviving spouse had already
consented in a manner conforming to the election requirements in (c)
above, the Account shall be payable to the Participant's Beneficiary
in the event of the Participant's death.
The Participant may waive the spousal death benefit described above at
any time provided that no such waiver shall be effective unless it
satisfies the conditions of (c) above (other than the notification
requirement referred to therein) that would apply to the Participant's
waiver of the Qualified Preretirement Survivor Annuity.
Because this is a profit sharing plan which pays death benefits as
described above, this subsection (d) applies if the following
condition is met: with respect to the Participant, this Plan is not a
direct or indirect transferee after December 31, 1984, of a defined
benefit plan, money purchase plan (including a target plan), stock
bonus plan or profit sharing plan which is subject to the survivor
annuity requirements of ERISA Act Section 205. If the above condition
is met, spousal consent is not required for electing a benefit payable
in a form that is not a life annuity. If the above condition is not
met, the consent requirements of this article shall be operative.
SECTION 6.04--NOTICE REQUIREMENTS.
(a) Optional forms of retirement benefit. The Plan Administrator shall
furnish to the Participant and the Participant's spouse a written
explanation of the optional forms of retirement benefit in the
OPTIONAL FORMS OF DISTRIBUTION SECTION of Article VI, including the
material features and relative values of these options, in a manner
that would satisfy the notice requirements of ERISA Act Section 205
and the right of the Participant and the Participant's spouse to defer
distribution until the benefit is no longer immediately distributable.
The Plan Administrator shall furnish the written explanation by a
method reasonably calculated to reach the attention of the Participant
and the Participant's spouse no less than 30 days and no more than 90
days before the Annuity Starting Date.
(b) Qualified Joint and Survivor Form. The Plan Administrator shall
furnish to the Participant a written explanation of the following: the
terms and conditions of the Qualified Joint and Survivor Form; the
Participant's right to make, and the effect of, an election to waive
the Qualified Joint and Survivor Form; the rights of the Participant's
spouse; and the right to revoke an election and the effect of such a
revocation. The Plan Administrator shall furnish the written
explanation by a method reasonably calculated to reach the attention
of the Participant no less than 30 days and no more than 90 days
before the Annuity Starting Date.
After the written explanation is given, a Participant or spouse may
make written request for additional information. The written
explanation must be personally delivered or mailed (first class mail,
postage prepaid) to the Participant or spouse within 30 days from the
date of the written request. The Plan Administrator does not need to
comply with more than one such request by Participant or spouse.
The Plan Administrator's explanation shall be written in nontechnical
language and will explain the terms and conditions of the Qualified
Joint and Survivor Form and the financial effect upon the
Participant's benefit (in terms of dollars per benefit payment) of
electing not to have benefits distributed in accordance with the
Qualified Joint and Survivor Form.
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(c) Qualified Preretirement Survivor Annuity. As required by the Code and
Federal regulation, the Plan Administrator shall furnish to the
Participant a written explanation of the following: the terms and
conditions of the Qualified Preretirement Survivor Annuity; the
Participant's right to make, and the effect of, an election to waive
the Qualified Preretirement Survivor Annuity; the rights of the
Participant's spouse; and the right to revoke an election and the
effect of such a revocation. The Plan Administrator shall furnish the
written explanation by a method reasonably calculated to reach the
attention of the Participant within the applicable period. The
applicable period for a Participant is whichever of the following
periods ends last:
(1) the period beginning one year before the date the individual
becomes a Participant and ending one year after such date; or
(2) the period beginning one year before the date the Participant's
spouse is first entitled to a Qualified Preretirement Survivor
Annuity and ending one year after such date.
If such notice is given before the period beginning with the first day
of the Plan Year in which the Participant attains age 32 and ending
with the close of the Plan Year preceding the Plan Year in which the
Participant attains age 35, an additional notice shall be given
within such period. If a Participant ceases to be an Employee before
attaining age 35, an additional notice shall be given within the
period beginning one year before the date he ceases to be an Employee
and ending one year after such date.
After the written explanation is given, a Participant or spouse may
make written request for additional information. The written
explanation must be personally delivered or mailed (first class mail,
postage prepaid) to the Participant or spouse within 30 days from the
date of the written request. The Plan Administrator does not need to
comply with more than one such request by a Participant or spouse.
The Plan Administrator's explanation shall be written in nontechnical language
and will explain the terms and conditions of the Qualified Preretirement
Survivor Annuity and the financial effect upon the spouse's benefit (in terms of
dollars per benefit payment) of electing not to have benefits distributed in
accordance with the Qualified Preretirement Survivor Annuity.
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<PAGE>
ARTICLE VII
TERMINATION OF PLAN
The Employer expects to continue the Plan indefinitely but reserves
the right to terminate the Plan in whole or in part at any time upon giving
written notice to all parties concerned. Complete discontinuance of
Contributions under the Plan constitutes complete termination of Plan.
The Participant's Account shall continue to participate in the
earnings credited, expenses charged and any appreciation or depreciation of the
Investment Fund until the Account is distributed. A distribution under this
article will be a retirement benefit and shall be distributed to the Participant
according to the provisions of Article VI.
Upon complete termination of Plan, no more Employee shall become
Participants and no more Contributions shall be made.
The assets of this Plan shall not be paid to the Employer at any time.
23
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ARTICLE VIII
ADMINISTRATION OF PLAN
SECTION 8.01--ADMINISTRATION.
Subject to the provisions of this article, the Plan Administrator has
complete control of the administration of the Plan. The Plan Administrator has
all the powers necessary for it to properly carry out its administrative duties.
Not in limitation, but in amplification of the foregoing, the Plan Administrator
has the power to construe the Plan and to determine all questions that may arise
under the Plan, including all questions relating to the eligibility of Employees
to participate in the Plan and the amount of benefit to which any Participant,
Beneficiary, spouse or Contingent Annuitant may become entitled. The Plan
Administrator's decisions upon all matters within the scope of its authority
shall be final.
Unless otherwise set out in the Plan, Group Contract or other funding
arrangement, the Plan Administrator may delegate recordkeeping and other duties
which are necessary for the administration of the Plan to any person or firm
which agrees to accept such duties. The Plan Administrator shall be entitled to
rely upon all tables, valuations, certificates and reports furnished by the
consultant or actuary appointed by the Plan Administrator and upon all opinions
given by any counsel selected or approved by the Plan Administrator.
The Plan Administrator shall receive all claims for benefits by
Participants, former Participants, Beneficiaries, spouses and Contingent
Annuitants. The Plan Administrator shall determine all facts necessary to
establish the right of any Claimant to benefits and the amount of those benefits
under the provisions of the Plan. The Plan Administrator may establish rules and
procedures to be followed by Claimants in filing claims for benefits, in
furnishing and verifying proofs necessary to determine age, and in any other
matters required to administer the Plan.
SECTION 8.02--RECORDS.
All acts and determinations of the Plan Administrator shall be duly
recorded. All these records, together with other documents necessary for the
administration of the Plan, shall be preserved in the Plan Administrator's
custody.
Writing (handwriting, typing, printing), photostating, photographing,
microfilming, magnetic impulse, mechanical or electrical recording or other
forms of data compilation shall be acceptable means of keeping records.
SECTION 8.03--INFORMATION AVAILABLE.
Any Participant in the Plan or any Beneficiary may examine copies of
the Plan description, latest annual report, any bargaining agreement, this Plan,
the Group Contract or any other instrument under which the Plan was established
or is operated. The Plan Administrator shall maintain all of the items listed in
this section in its office, or in such other place or places as it may designate
in order to comply with governmental regulations. These items may be examined
during reasonable business hours. Upon the written request of a Participant or
Beneficiary receiving benefits under the Plan, the Plan Administrator will
furnish him with a copy of any of these items. The Plan Administrator may make a
reasonable charge to the requesting person for the copy.
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<PAGE>
SECTION 8.04--CLAIM AND APPEAL PROCEDURES.
A Claimant must submit any required forms and pertinent information
when making a claim for benefits under the Plan.
If a claim for benefits under the Plan is denied, the Plan
Administrator shall provide adequate written notice to the Claimant whose claim
for benefits under the Plan has been denied. The notice must be furnished within
90 days of the date that the claim is received by the Plan Administrator. The
Claimant shall be notified in writing within this initial 90-day period if
special circumstances require an extension of time needed to process the claim
and the date by which the Plan Administrator's decision is expected to be
rendered. The written notice shall be furnished no later than 180 days after the
date the claim was received by the Plan Administrator.
The Plan Administrator's notice to the Claimant shall specify the
reason for the denial; specify references to pertinent Plan provisions on which
denial is based; describe any additional material and information needed for the
Claimant to perfect his claim for benefits; explain why the material and
information is needed; inform the Claimant that any appeal he wishes to make
must be in writing to the Plan Administrator within 60 days after receipt of the
Plan Administrator's notice of denial of benefits and that failure to make the
written appeal within such 60-day period shall render the Plan Administrator's
determination of such denial final, binding and conclusive.
If the Claimant appeals to the Plan Administrator, the Claimant, or
his authorized representative, may submit in writing whatever issues and
comments the Claimant, or his representative, feels are pertinent. The Claimant,
or his authorized representative may review pertinent Plan documents. The Plan
Administrator shall reexamine all facts related to the appeal and make a final
determination as to whether the denial of benefits is justified under the
circumstances. The Plan Administrator shall advise the Claimant of its decision
within 60 days of his written request for review, unless special circumstances
(such as a hearing) would make rendering a decision within the 60-day limit
unfeasible. The Claimant must be notified within the 60-day limit if an
extension is necessary. The Plan Administrator shall render a decision on a
claim for benefits no later than 120 days after the request for review is
received.
SECTION 8.05--DELEGATION OF AUTHORITY.
All or any part of the administrative duties and responsibilities
under this article may be delegated by the Plan Administrator to a retirement
committee. The duties and responsibilities of the retirement committee shall be
set out in a separate written agreement.
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ARTICLE IX
GENERAL PROVISIONS
SECTION 9.01--AMENDMENTS.
The Employer may amend this Plan at any time, including any remedial
retroactive changes (within the specified period of time as may be determined by
Internal Revenue Service regulations) to comply with the requirements of any law
or regulation issued by any governmental agency to which the Employer is
subject. An amendment may not diminish or adversely affect any accrued interest
or benefit of Participants or their Beneficiaries or eliminate an optional form
of distribution with respect to benefits attributable to service before the
amendment nor allow reversion or diversion of Plan assets to the Employer at any
time, except as may be necessary to comply with the requirements of any law or
regulation issued by any governmental agency to which the Employer is subject.
No amendment to this Plan shall be effective to the extent that it has the
effect of decreasing a Participant's accrued benefit. For purposes of this
paragraph, a Plan amendment which has the effect of decreasing a Participant's
Account or eliminating an optional form of benefit, with respect to benefits
attributable to service before the amendment shall be treated as reducing an
accrued benefit. Furthermore, if the vesting schedule of the Plan is amended, in
the case of an Employee who is a Participant as of the later of the date such
amendment is adopted or the date it becomes effective, the nonforfeitable
percentage (determined as of such date) of such Employee's employer-derived
accrued benefit will not be less than his percentage computed under the Plan
without regard to such amendment.
SECTION 9.02--MERGERS.
The Plan may not be merged or consolidated with, nor have its assets
or liabilities transferred to, any other retirement plan, unless each
Participant in the plan would (if the plan then terminated) receive a benefit
immediately after the merger, consolidation or transfer which is equal to or
greater than the benefit the Participant would have been entitled to receive
immediately before the merger, consolidation or transfer (if this Plan had then
terminated).
SECTION 9.03--PROVISIONS RELATING TO THE INSURER AND OTHER PARTIES.
The obligations of an Insurer shall be governed solely by the
provisions of the Group Contract. The Insurer shall not be required to perform
any act not provided in or contrary to the provisions of the Group Contract. See
the CONSTRUCTION SECTION of this article.
Any issuer or distributor of investment contracts or securities is
governed solely by the terms of its policies, written investment contract,
prospectuses, security instruments, and any other written agreements entered
into with the Employer or Participant.
Such insurer, issuer or distributor is not a party to the Plan, nor
bound in any way by the Plan provisions. Such parties shall not be required to
look to the terms of this Plan, nor to determine whether the Employer, the Plan
Administrator, or the Named Fiduciary have the authority to act in any
particular manner or to make any contract or agreement.
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Until notice of any amendment or termination of this Plan has been received
by the Insurer at its home office or an issuer or distributor at their principal
address, they are and shall be fully protected in assuming that the Plan has not
been amended or terminated and in dealing with any party acting as Agent
according to the latest information which they have received at their home
office or principal address.
SECTION 9.04--EMPLOYMENT STATUS.
Nothing contained in this Plan gives an Employee the right to be
retained in the Employer's employ or to interfere with the Employer's right to
discharge any Employee.
SECTION 9.05--RIGHTS TO PLAN ASSETS.
No Employee shall have any right to or interest in any assets of the
Plan upon termination of his employment or otherwise except as specifically
provided under this Plan, and then only to the extent of the benefits payable to
such Employee in accordance with Plan provisions.
Any final payment or distribution to a Participant or his legal
representative or to any Beneficiaries, spouse or Contingent Annuitant of such
Participant under the Plan provisions shall be in full satisfaction of all
claims against the Plan, the Named Fiduciary, the Plan Administrator, the
Insurer, and the Employer arising under or by virtue of the Plan.
SECTION 9.06--BENEFICIARY.
Each Participant may name a Beneficiary to receive any death benefit
(other than any income payable to a Contingent Annuitant) that may arise out of
his participation in the Plan. The Participant may change his Beneficiary from
time to time. Unless a qualified election has been made, for purposes of
distributing any death benefits before Retirement Date, the Beneficiary of a
Participant who has a spouse who is entitled to a Qualified Preretirement
Survivor Annuity shall be the Participant's spouse. The Participant's
Beneficiary designation and any change of Beneficiary shall be subject to the
provisions of the ELECTION PROCEDURES SECTION of Article VI. It is the
responsibility of the Participant to give written notice to the Insurer of the
name of the Beneficiary on a form furnished for that purpose.
With the Employer's consent, the Plan Administrator may maintain
records of Beneficiary designations for Participants before their Retirement
Dates. In that event, the written designations made by Participants shall be
filed with the Plan Administrator. If a Participant dies before his Retirement
Date, the Plan Administrator shall certify to the Insurer the Beneficiary
designation on its records for the Participant.
If, at the death of a Participant, there is no Beneficiary named or
surviving, any death benefit under the Group Contract shall be paid under the
applicable provisions of the Group Contract.
SECTION 9.07--NONALIENATION OF BENEFITS.
Benefits payable under the Plan are not subject to the claims of any
creditor of any Participant, Beneficiary, spouse or Contingent Annuitant. A
Participant, Beneficiary, spouse or Contingent Annuitant does not have any
rights to alienate, anticipate, commute, pledge, encumber or assign any of such
benefits. The preceding sentences shall also apply to the creation, assignment,
or recognition of a right to any benefit payable with respect to a Participant
according to a domestic relations order, unless such order is determined by the
Plan
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Administrator to be a qualified domestic relations order, as defined in ERISA
Act Section 206(d), or any domestic relations order entered before January 1,
1985.
SECTION 9.08--CONSTRUCTION.
The validity of the Plan or any of its provisions is determined under
and construed according to Federal law and, to the extent permissible, according
to the laws of the state in which the Employer has its principal office. In case
any provision of this Plan is held illegal or invalid for any reason, such
determination shall not affect the remaining provisions of this Plan, and the
Plan shall be construed and enforced as if the illegal or invalid provision had
never been included.
In the event of any conflict between the provisions of the Plan and
the terms of any contract or policy issued hereunder, the provisions of the Plan
control the operation and administration of the Plan.
SECTION 9.09--LEGAL ACTIONS.
The Plan, the Plan Administrator, and the Named Fiduciary are the
necessary parties to any action or proceeding involving the assets held with
respect to the Plan or administration of the Plan. No person employed by the
Employer, no Participant, former Participant or their Beneficiaries or any other
person having or claiming to have an interest in the Plan is entitled to any
notice of process. A final judgment entered in any such action or proceeding
shall be binding and conclusive on all persons having or claiming to have an
interest in the Plan.
SECTION 9.10--SMALL AMOUNTS.
If the Account of a Participant has never exceeded $3,500, the entire
Account shall be payable in a single sum as of the earliest of his Retirement
Date, the date he dies, or the date he ceases to be an Employee for any other
reason. This is a small amounts payment. If a small amount is payable as of the
date the Participant dies, the small amounts payment shall be made to the
Participant's Beneficiary (spouse if the death benefit is payable to the
spouse). If a small amount is payable while the Participant is living, the small
amounts payment shall be made to the Participant. The small amounts payment is
in full settlement of all benefits otherwise payable. The service credited to a
Participant who is reemployed by the Employer is not diminished as a result of
receiving a small amounts payment.
No other small amounts payments shall be made.
SECTION 9.11--WORD USAGE.
The masculine gender, where used in this Plan, shall include the
feminine gender and the singular words as used in this Plan may include the
plural, unless the context indicates otherwise.
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By executing this Plan, the Primary Employer acknowledges having
counseled to the extent necessary with selected legal and tax advisors regarding
the Plan's legal and tax implications.
Executed this 18th day of December, 1997.
CHESAPEAKE FINANCIAL SHARES, INC.
By: illegible
-------------
Sec & CFO
---------
Title
29
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Exhibit 10.5
CHESAPEAKE FINANCIAL SHARES
INCENTIVE STOCK PLAN
ARTICLE I.
Establishment, Purpose, and Duration
1.1 Establishment of the Plan. Chesapeake Financial Shares, Inc., a
Virginia corporation, hereby establishes an incentive compensation plan to be
known as the "Incentive Stock Plan", as set forth in this document. Unless
otherwise defined herein, all capitalized terms shall have the meanings set
forth in Section 2.1 herein. The Plan permits the grant of Incentive Stock
Options, Non-qualified Stock Options, and Restricted Stock.
The Plan was adopted by the Board of Directors on, January 11, 1996 and
shall become effective on April 5, 1996 (the "Effective Date"), subject to the
approval by vote of shareholders of the Company in accordance with applicable
laws.
1.2 Purpose of the Plan. The purpose of the Plan is to promote the success
of the Company and its Subsidiaries by providing incentives to Key Employees
that will promote the identification of their personal interest with the
long-term financial success of the Company and with growth in shareholder value.
The Plan is designed to provide flexibility to the Company in its ability to
motivate, attract, and retain the services of Key Employees upon whose judgment,
interest, and special effort the successful conduct of its operation is largely
dependent.
1.3 Duration of the Plan. The Plan shall commence on the Effective Date, as
described in Section 1.1 herein, and shall remain in effect, subject to the
right of the Board of Directors to terminate the Plan at any time pursuant to
Article 12 herein, until March 31, 2006, at which time it shall terminate except
with respect to Awards made prior to, and outstanding on, that date which shall
remain valid in accordance with their terms.
ARTICLE II.
Definitions
2.1 Definitions. Except as otherwise defined in the Plan, the following
terms shall have the meanings set forth below:
(a) "Affiliate" and "Associate" shall have the respective meanings ascribed
to such terms in Rule 12b-2 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act").
(b) "Agreement" means a written agreement implementing the grant of each
Award signed by an authorized officer of the Company and by the Participant.
(c) "Award" means, individually or collectively, a grant under this Plan of
Incentive Stock Options, Non-qualified Stock Options, and Restricted Stock.
<PAGE>
(d) "Award Date" or "Grant Date" means the date on which an Award is made
by the Committee under this Plan.
(e) "Beneficial Owner" shall have the meaning ascribed to such term in Rule
13d-3 under the Exchange Act.
(f) "Board" or "Board of Directors" means the Board of Directors of the
Company.
(g) "Change in Control" shall be deemed to have occurred if the conditions
set forth in any one of the following paragraphs shall have been satisfied:
(i) any Person (other than the Company, any Subsidiary, a trustee or other
fiduciary holding securities under any employee benefit plan of the Company
or its Subsidiaries), who or which, together with all Affiliates and
Associates of such Person, is or becomes the Beneficial Owner, directly or
indirectly, of securities of the Company representing 20% or more of the
combined voting power of the Company's then outstanding securities; or
(ii) if, at any time after the Effective Date, the composition of the Board
of Directors shall change such that a majority of the Board shall no longer
consist of Continuing Directors; or
(iii) if at any time, (1) the Company shall consolidate with, or merge
with, any other Person and the Company shall not be the continuing or
surviving corporation, (2) any Person shall consolidate with or merge with
the Company, and, the Company shall be the continuing or surviving
corporation and in connection therewith, all or part of the outstanding
Stock shall be changed into or exchanged for stock or other securities of
any other Person or cash or any other property, (3) the Company shall be a
party to a statutory share exchange with any other Person after which the
Company is a subsidiary of any other Person, or (4) the Company shall sell
or otherwise transfer 50% or more of the assets or earning power of the
Company and its Subsidiaries (taken as a whole) to any Person or Persons.
(h) "Code" means the Internal Revenue Code of 1986, as amended from time to
time.
(i) "Committee" means the committee of the Board appointed to administer
the Plan pursuant to Article 3 herein, all of the members of which shall be
"disinterested persons" as defined in Rule 16b-3, as amended, under the Exchange
Act or any similar or successor rule. Unless otherwise determined by the Board,
the members of the committee responsible for executive compensation who are not
employees of the Company or its Subsidiaries shall constitute the Committee.
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(j) "Company" means Chesapeake Financial Shares, Inc., or any successor
thereto as provided in Article 13 herein.
(k) "Continuing Director" means an individual who was a member of the Board
of Directors on the Effective Date or whose subsequent nomination for election
or re-election to the Board of Directors was recommended or approved by the
affirmative vote of two-thirds of the Continuing Directors then in office.
(1) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(m) "Fair Market Value" of a Share means the mean between the high and low
sales price of the Stock on the relevant date if it is a trading date or, if
not, on the most recent date on which the Stock was traded prior to such date as
reported by NASDAQ or if, in the opinion of the Committee, this method is
inapplicable or inappropriate for any reason, the fair market value as
determined pursuant to a reasonable method adopted by the Committee in good
faith for such purpose.
(n) "Incentive Stock Option' or "ISO" means an option to purchase Stock,
granted under Article 6 herein, which is designated as an incentive stock option
and is intended to meet the requirements of Section 422A of the Code.
(o) "Key Employee" means an officer or other key employee of the Company or
its Subsidiaries, who, in the opinion of the Committee, can contribute
significantly to the growth and profitability of, or perform services of major
importance to, the Company and its Subsidiaries.
(p) "Non-qualified Stock Option" or "NQSO" means an option to purchase
Stock, granted under Article 6 herein, which is not intended to be an Incentive
Stock Option.
(q) "Option" means an Incentive Stock Option or a Non-qualified Stock
Option.
(r) "Participant" means a Key Employee who is granted an Award under the
Plan.
(s) "Period of Restriction" means the period during which the transfer of
Shares of Restricted Stock is restricted, pursuant to Article 7 herein.
(t) "Person" shall have the meaning ascribed to such term in Section
3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof,
including a "group" as defined in Section 13(d).
(u) "Plan" means the Incentive Stock Plan of Chesapeake Financial Shares,
Inc., as described and as hereafter from time to time amended.
3
<PAGE>
(v) "Restricted Stock" means an Award of Stock granted to a Participant
pursuant to Article 7 herein.
(w) "Stock" or "Shares" means the common stock of the Company.
(x) "Subsidiary" shall mean a corporation at least 50% of the total
combined voting power of all classes of stock of which is owned by the Company,
either directly or through one or more of its Subsidiaries.
ARTICLE III.
Administration
3.1 The Committee. The Plan shall be administered by the Committee which
shall have all powers necessary or desirable for such administration. The
express grant in this Plan of any specific power to the Committee shall not be
construed as limiting any power or authority of the Committee. In addition to
any other powers and, subject to the provisions of the Plan, the Committee shall
have the following specific powers: (i) to determine the terms and conditions
upon which the Awards may be made and exercised; (ii) to determine all terms and
provisions of each Agreement, which need not be identical; (iii) to construe and
interpret the Agreements and the Plan; (iv) to establish, amend or waive rules
or regulations for the Plan's administration; (v) to accelerate the
exercisability of any Award or the termination of any Period of Restriction; and
(vi) to make all other determinations and take all other actions necessary or
advisable for the administration of the Plan.
3.2 Selection of Participants. The Committee shall have the authority to
grant Awards under the Plan, from time to time, to such Key Employees as may be
selected by it. Each Award shall be evidenced by an Agreement.
3.3 Decisions Binding,. All determinations and decisions made by the Board
or the Committee pursuant to the provisions of the Plan shall be final,
conclusive and binding.
3.4 Rule 16b-3 Requirements. Notwithstanding any other provision of the
Plan, the Board or the Committee may impose such conditions on any Award, and
amend the Plan in any such respects, as may be required to satisfy the
requirements of Rule 16b-3, as amended (or any successor or similar rule), under
the Exchange Act.
3.5 Indemnification of Committee. In addition to such other rights of
indemnification as they may have as directors or as members of the Committee,
the members of the Committee shall be indemnified by the Company against
reasonable expenses, including attorneys' fees, actually and reasonably incurred
in connection with the defense of any action, suit or proceeding, or in
connection with any appeal therein, to which they or any of them may be a party
by reason of any action taken or failure to act under or in connection with the
Plan or any Award granted or made hereunder, and against all amounts reasonably
paid by them in settlement thereof or paid by them in satisfaction of a judgment
in any such action, suit or proceeding, if such members acted in good faith and
in a manner which they believed to be in, and not opposed to, the best interests
of the Company and its Subsidiaries.
4
<PAGE>
ARTICLE IV.
Stock Subject to the Plan
4.1 Number of Shares. Subject to adjustment as provided in Section 4.3
herein, the maximum aggregate number of Shares that may be issued pursuant to
Awards made under the Plan shall not exceed 45,000. No more than one-third of
the aggregate number of such Shares shall be issued in connection with
Restricted Stock Awards. Except as provided in Sections 4.2 herein, the issuance
of Shares in connection with the exercise of, or as other payment for Awards,
under the Plan shall reduce the number of Shares available for future Awards
under the Plan.
4.2 Lapsed Awards or Forfeited Shares. If any Award granted under this Plan
(for which no material benefits of ownership have been received, including
dividends) terminates, expires, or lapses for any reason other than by virtue of
exercise of the Award, or if Shares issued pursuant to Awards (for which no
material benefits of ownership have been received, including dividends) are
forfeited, any Stock subject to such Award again shall be available for the
grant of an Award under the Plan.
4.3 Capital Adjustments. The number and class of Shares subject to each
outstanding Award, the Option Price and the aggregate number and class of Shares
for which Awards thereafter may be made shall be subject to such adjustment, if
any, as the Committee in its sole discretion deems appropriate to reflect such
events as stock dividends, stock splits, recapitalizations, mergers,
consolidations or reorganizations of or by the Company.
ARTICLE V.
Eligibility
Persons eligible to participate in the Plan include all employees of the
Company and its Subsidiaries who, in the opinion of the Committee, are Key
Employees. Key Employees may not include directors of the Company who are not
employees of the Company or its Subsidiaries.
ARTICLE VI.
Stock Options
6.1 Grant of Options. Subject to the terms and provisions of the Plan,
Options may be granted to Key Employees at any time and from time to time as
shall be determined by the Committee. The Committee shall have complete
discretion in determining the number of Shares subject to Options granted to
each Participant, provided, however, that the aggregate Fair Market Value
(determined at the time the Award is made) of Shares with respect to which any
Participant may first exercise ISOs granted under the Plan during any calendar
year may not exceed $100,000 or such amount as shall be specified in Section
422A of the Code and rules and regulation thereunder.
5
<PAGE>
6.2 Option Agreement. Each Option grant shall be evidenced by an Agreement
that shall specify the type of Option granted, the Option Price (as hereinafter
defined), the duration of the Option, the number of Shares to which the Option
pertains, any conditions imposed upon the exercisability of Options in the event
of retirement, death, disability or other termination of employment, and such
other provisions as the Committee shall determine. The Agreement shall specify
whether the Option is intended to be in Incentive Stock Option within the
meaning of Section 422A of the Code, or Nonqualified Stock Option not intended
to be within the provisions of Section 422A of the Code.
6.3 Option Price. The exercise price per share of Stock covered by an
Option ("Option Price") shall be determined by the Committee subject to the
following limitations. The Option Price shall not be less than 100% of the Fair
Market Value of such Stock on the Grant Date. An ISO granted to an employee who,
at the time of grant, owns (within the meaning of Section 425(d) of the Code)
Stock possessing more than 10% of the total combined voting power of all classes
of Stock of the Company, shall have an Option Price which is at least 110% of
the Fair Market Value of the Stock.
6.4 Duration of Options. Each Option shall expire at such time as the
Committee shall determine at the time of grant provided, however, that no ISO
shall be exercisable later than the tenth (10th) anniversary date of its Award
Date.
6.5 Exercisability. Options granted under the Plan shall be exercisable at
such times and be subject to such restrictions and conditions as the Committee
shall determine, which need not be the same for all Participants. No Option,
however, shall be exercisable until the expiration of at least six months after
the Award Date, except that such limitation shall not apply in the case of death
or disability of the Participant.
6.6 Method of Exercise. Options shall be exercised by the delivery of a
written notice to the Company in the form prescribed by the Committee setting
forth the number of Shares with respect to which the Option is to be exercised,
accompanied by full payment for the Shares. The Option Price shall be payable to
the Company in full either in cash, by delivery of Shares of Stock valued at
Fair Market Value at the time of exercise, or by a combination of the foregoing.
As soon as practicable, after receipt of written notice and payment, the Company
shall deliver to the Participant, stock certificates in an appropriate amount
based upon the number of Options exercised, issued in the Participant's name. No
Participant who is awarded Options shall have rights as a shareholder until the
date of exercise of the Options.
6.7 Restrictions on Stock Transferability. The Committee shall impose such
restrictions on any Shares acquired pursuant to the exercise of an Option under
the Plan as it may deem advisable, including, without limitation, restrictions
under the applicable Federal securities law, under the requirements of the
National Association of Securities Dealers, Inc. or any stock exchange upon
which such Shares are then listed and under any blue sky or state securities
laws applicable to such Shares.
6
<PAGE>
6.8 Nontransferability of Options. No Option granted under the Plan may be
sold, transferred, pledged, assigned, or otherwise alienated or hypothecated,
otherwise than by will or by the laws of descent and distribution. Further, all
Options granted to a Participant under the Plan shall be exercisable during his
lifetime only by such Participant or his guardian or legal representative.
ARTICLE VII.
Restricted Stock
7.1 Grant of Restricted Stock. Subject to the terms and provisions of the
Plan, the Committee, at any time and from time to time, may grant shares of
Restricted Stock under the Plan to such Participants and in such amounts as it
shall determine. Participants receiving Restricted Stock Awards are not required
to the pay the Company therefor (except for applicable tax withholding) other
than the rendering of services.
7.2 Restricted Stock Agreement. Each Restricted Stock grant shall be
evidenced by an Agreement that shall specify the Period of Restriction, the
number of Restricted Stock Shares granted, and such other provisions as the
Committee shall determine.
7.3 Transferability. Except as provided in this Article 7 and subject to
the limitation in the next sentence, the Shares of Restricted Stock granted
hereunder may not be sold, transferred, pledged, assigned, or otherwise
alienated or hypothecated until the termination of the applicable Period of
Restriction or upon earlier satisfaction of other conditions as specified by the
Committee in its sole discretion and set forth in the Agreement. No shares of
Restricted Stock shall be sold until the expiration of at least six months after
the Award Date, except that such limitation shall not apply in the case of death
or disability of the Participant. All rights with respect to the Restricted
Stock granted to a Participant under the Plan shall be exercisable during his
lifetime only by such Participant or his guardian or legal representative.
7.4 Other Restrictions. The Committee shall impose such other restrictions
on any Shares of Restricted Stock granted pursuant to the Plan as it may deem
advisable including, without limitation, restrictions under applicable Federal
or state securities laws, and may legend the certificates representing
Restricted Stock to give appropriate notice of such restrictions.
7.5 Certificate Legend. In addition to any legends placed on certificates
pursuant to Section 7.4 herein, each certificate representing shares of
Restricted Stock granted pursuant to the Plan shall bear the following legend:
The sale or other transfer of the Shares of Stock represented by this
certificate, whether voluntary, involuntary, or by operation of law, is
subject to certain restrictions on transfer set forth in the Incentive
Stock Plan of Chesapeake Financial Shares, Inc., in the rules and
administrative procedures adopted pursuant to such Plan, and in an
Agreement dated __________________. A copy of the Plan, such rules and
procedures, and such Restricted Stock Agreement may be obtained from the
Secretary of Chesapeake Financial Shares, Inc.
7
<PAGE>
7.6 Removal of Restrictions. Except as otherwise provided in this Article,
Shares of Restricted Stock covered by each Restricted Stock Award made under the
Plan shall become freely transferable by the Participant after the last day of
the Period of Restriction. Once the Shares are released from the restrictions,
the Participant shall be entitled to have the legend required by Section 7.5
herein removed from his Stock certificate.
7.7 Voting Rights. During the Period of Restriction, Participants holding
Shares of Restricted Stock granted hereunder may exercise full voting rights
with respect to those Shares.
7.8 Dividends and Other Distributions. During the Period of Restriction,
Participants holding shares of Restricted Stock granted hereunder shall be
entitled to receive all dividends and other distributions paid with respect to
those shares while they are so held. If any such dividends or distributions are
paid in Shares, the Shares shall be subject to the same restrictions on
transferability as the Shares of Restricted Stock with respect to which they
were distributed.
7.9 Termination of Employment Due to Retirement. Unless otherwise provided
in the Agreement, in the event that a Participant terminates his employment with
the Company or one of its Subsidiaries because of normal retirement (as defined
in the rules of the Company in effect at the time), any remaining Period of
Restriction applicable to the Restricted Stock Shares pursuant to Section 8.3
herein shall automatically terminate and, except as otherwise provided in
Section 7.4 herein the Shares of Restricted Stock shall thereby be free of
restrictions and freely transferable. Unless otherwise provided in the
Agreement, in the event that a Participant terminates his employment with the
Company because of early retirement (as defined in the rules of the Company in
effect at the time), the Committee, in its sole discretion, may waive the
restrictions remaining on any or all Shares of Restricted Stock pursuant to
Section 7.3 herein and add such new restrictions to those Shares of Restricted
Stock as it deems appropriate.
7.10 Termination of Employment Due to Death or Disability. In the event a
Participant's employment is terminated because of death or disability during the
Period of Restriction, any remaining Period of Restriction applicable to the
Restricted Stock pursuant to Section 7.3 herein shall automatically terminate
and, except as otherwise provided in Section 7.4 herein the shares of Restricted
Stock shall thereby be free of restrictions and fully transferable.
7.11 Termination of Employment for Other Reasons. Unless otherwise
provided in the Agreement, in the event that a Participant terminates his
employment with the Company for any reason other than for death, disability, or
retirement, as set forth in Sections 7.9 and 7.10 herein, during the Period of
Restriction, then any shares of Restricted Stock still subject to restrictions
as of the date of such termination shall automatically be forfeited and returned
to the Company.
8
<PAGE>
ARTICLE VIII.
Change in Control
In the event of a Change in Control of the Company, the Committee, as
constituted before such Change in Control, in its sole discretion may, as to any
outstanding Award, either at the time the Award is made or any time thereafter,
take any one or more of the following actions: (i) provide for the acceleration
of any time periods relating to the exercise or realization of any such Award so
that such Award may be exercised or realized in full on or before a date
initially fixed by the Committee; (ii) provide for the purchase or settlement of
any such Award by the Company, upon a Participant's request, for an amount of
cash equal to the amount which could have been obtained upon the exercise of
such Award or realization of such Participant's rights had such Award been
currently exercisable or payable; (iii) make such adjustment to any such Award
then outstanding as the Committee deems appropriate to reflect such Change in
Control; or (iv) cause any such Award then outstanding to be assumed, or new
rights substituted therefor, by the acquiring or surviving corporation in such
Change in Control.
ARTICLE IX.
Modification, Extension and Renewals of Awards
Subject to the terms and conditions and within the limitations of the Plan,
the Committee may modify, extend or renew outstanding Awards, or, if authorized
by the Board, accept the surrender of outstanding Awards (to the extent not yet
exercised) granted under the Plan and authorize the granting of new Awards
pursuant to the Plan in substitution therefor, and the substituted Awards may
specify a lower exercise price than the surrendered Awards, a longer term than
the surrendered Awards or may contain any other provisions that are authorized
by the Plan. The Committee may also modify the terms of any outstanding
Agreement. Notwithstanding the foregoing, however, no modification of an Award,
shall, without the consent of the Participant, adversely affect the rights or
obligations of the Participant.
ARTICLE X.
Amendment, Modification and Termination of the Plan
11.1 Amendment, Modification and Termination. At any time and from time to
time, the Board may terminate, amend, or modify the Plan. Such amendment or
modification may be without shareholder approval except to the extent that such
approval is required by the Code, pursuant to the rules under Section 16 of the
Exchange Act, by any national securities exchange or system on which the Stock
is then listed or reported, by any regulatory body having jurisdiction with
respect thereto or under any other applicable laws, rules or regulations.
11.2 Awards Previously Granted. No termination, amendment or modification
of the Plan other than pursuant to Section 4.4 herein shall in any manner
adversely affect any Award theretofore granted under the Plan, without the
written consent of the Participant.
ARTICLE XI.
Withholding
12.1 Tax Withholding. The Company shall have the power and the right to
deduct or withhold, or require a Participant to remit to the Company, an amount
sufficient to satisfy Federal, State and local taxes (including the
Participant's FICA obligation) required by law to be withheld with respect to
any grant, exercise, or payment made under or as a result of this Plan.
9
<PAGE>
12.2 Stock Withholding. With respect to withholding required upon the
exercise of Nonqualified Stock Options, or upon the lapse of restrictions on
Restricted Stock, or upon the occurrence of any other similar taxable event,
participants may elect, subject to the approval of the Committee, to satisfy the
withholding requirement, in whole or in part, by having the Company withhold
Shares of Stock having a Fair Market Value equal to the amount required to be
withheld. The value of the Shares to be withheld shall be based on Fair Market
Value of the Shares on the date that the amount of tax to be withheld is to be
determined. All elections shall be irrevocable and be made in writing, signed by
the Participant on forms approved by the Committee in advance of the day that
the transaction becomes taxable.
ARTICLE XII.
Successors
All obligations of the Company under the Plan, with respect to Awards
granted hereunder, shall be binding on any successor to the Company, whether the
existence of such successor is the result of a direct or indirect purchase,
merger, consolidation or otherwise, of all or substantially all of the business
and/or assets of the Company.
ARTICLE XIII.
General
14.1 Requirements of Law. The granting of Awards and the issuance of Shares
of Stock under this Plan shall be subject to all applicable laws, rules, and
regulations, and to such approvals by any governmental agencies or self-
regulatory organizations as may be required.
14.2 Effect of Plan. The establishment of the Plan shall not confer upon
any Key Employee any legal or equitable right against the Company, a Subsidiary
or the Committee, except as expressly provided in the Plan. The Plan does not
constitute an inducement or consideration for the employment of any Key
Employee, nor is it a contract between the Company or any of its Subsidiaries
and any Key Employee. Participation in the Plan shall not give any Key Employee
any right to be retained in the service of the Company or any of its
Subsidiaries.
14.3 Creditors. The interests of any Participant under the Plan or any
Agreement are not subject to the claims of creditors and may not, in any way, be
assigned, alienated or encumbered.
14.4 Governing Law. The Plan, and all Agreements hereunder, shall be
governed, construed and administered in accordance with and governed by the laws
of the Commonwealth of Virginia and the intention of the Company is that ISOs
granted under the Plan qualify as such under Section 422A of the Code.
10
<PAGE>
14.5 Severability. In the event any provision of the Plan shall be held
illegal or invalid for any reason, the illegality or invalidity shall not affect
the remaining parts of the Plan, and the Plan shall be construed and enforced as
if the illegal or invalid provision had not been included.
11
<PAGE>
Exhibit 13
DEAR SHAREHOLDER
Was December 31, 1999 the real end of a millennium and the eve of a new one?
Whatever the answer, April 13, 2000 will be 100 years from the time of the
Bank's origin.
In the fall elections Republicans gained control of both houses in the
Virginia General Assembly. Our Senator, John Chichester, was later elected
President Pro Tempore of the Senate, the first Republican to be chosen for that
office in its 142-year history. The year ended with unbelievable records in the
stock market. The NASDAQ, fueled by technology and "dot com" stocks, jumped
through the roof to 4,069.31, an 85.62% increase over 1998. The Virginia Tech
Hokies football team ended their finest season ever, undefeated and ranked #2
nationally with the opportunity to play for the National Championship in New
Orleans on January 4, 2000. The potential Y2K computer meltdown became a
nonevent; economic unification was begun in Europe evidenced by its currency,
the Euro; Boris Yeltsin, Russia's President, resigned; Richmond International
Raceway was sold with plans to move, while Colonial Downs barely limped along;
Alan Greenspan, Microsoft, and IPO's rode high along with sports utility
vehicles. Optimism everywhere was the stamp of the year.
1999 was a banner year for Chesapeake with each member of the "family
group" surpassing expectations. Earnings were $2,061,269, $1.60 per share; at
yearend total assets stood at $197,435,133; loans and loan loss reserves were at
all- time highs, $132,893,500 and $2,253,676 respectively; and finally, net
noninterest income reached new highs. With loan loss reserves at 1.7% of gross
loans and past due loans at 0.84%, quality of assets was significantly stronger
than peer group banks.
With a strong employee service culture instituted throughout, Chesapeake
continues to be an innovative financial provider. Moving into the next century
planning, preparation and installation of ONLINE Banking and ONLINE Bill Pay are
examples of progressive leadership. Chesapeake's website, www.chesbank.com, is
informative and interactive. To help carry our public, visual message, three
yellow VW "Bugs" decorated with the company's signature and website address,
were purchased to serve as runners between the branch offices.
Chesapeake Investment Services ended the year managing assets of over
$22,000,000, more than double yearend 1998. Chesapeake Financial Group's
inaugural began slowly, but gained real traction during the second half of the
year. Plans for 2000 emphasize expanding market presence and communicating the
assistance of individual clients in total financial management. Chesapeake Bank
gained market share in all markets with special attention to our home base of
Lancaster County. New bank locations are being investigated along with new
products and services. All indicators are positive, creating optimism and
pointing to continued growth and records in the new millennium. Specific details
on the financial achievements of Chesapeake Financial Shares for 1999 are
contained in this report as required by the Securities and Exchange Commission
and other regulatory bodies. We hope that you will read the report focusing on
management's discussion and analysis of the financial condition and results of
operations.
This year's 100th Anniversary Shareholders' meeting will be held at 4:00
p.m. on Friday, April 14, at Rappahannock Westminster-Canterbury in Irvington.
Sincerely,
/s/Douglas D. Monroe, Jr. /s/Jeffrey M. Szyperski
Douglas D. Monroe, Jr. Jeffrey M. Szyperski
Chairman of the Board & President, Chesapeake Bank
Chief Executive Officer
<PAGE>
SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands except ratios and per share amounts)
<S> <C> <C> <C> <C> <C>
Results of Operations
Interest income $ 13,423 $ 12,763 $ 11,361 $ 10,142 $ 9,556
Interest expense 6,174 6,153 5,407 4,755 4,556
- ------------------------------------------------------------------------------------------------------------------------
Net interest income 7,249 6,610 5,954 5,387 5,000
Provision for loan losses 211 620 75 150 84
- -----------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 7,038 5,990 5,879 5,237 4,916
Noninterest income 4,524 3,838 2,982 2,559 2,120
Noninterest expenses 8,811 8,104 6,556 5,720 5,351
- ------------------------------------------------------------------------------------------------------------------------
Income before tax 2,751 1,724 2,305 2,076 1,685
Income tax expense 690 335 554 501 420
- ------------------------------------------------------------------------------------------------------------------------
Net income $ 2,061 $ 1,389 $ 1,751 $ 1,575 $ 1,265
========================================================================================================================
Financial Condition
Total assets $ 197,435 $ 181,861 $ 163,916 $ 142,876 $ 131,258
Total deposits 174,823 164,639 147,519 127,630 118,687
Net loans 130,640 109,422 102,099 90,426 80,991
Note payable and
subordinated debentures 0 0 0 0 388
Shareholders' Equity 15,513 14,928 13,915 12,009 11,048
Average assets 187,429 171,987 148,948 133,376 127,230
Average shareholders'
equity 15,339 14,429 12,866 11,426 10,421
Key Financial Ratios
Return on average assets 1.10% 0.81% 1.18% 1.18% 0.99%
Return on average equity 13.44% 9.62% 13.61% 13.78% 12.14%
Dividends paid as a percent
of net income 19.73% 24.69% 16.21% 15.53% 16.97%
Per Share Data
Net income, assuming
dilution $ 1.60 $ 1.07 $ 1.40 $ 1.27 $ 1.02
Cash dividends declared $ .32 $ .28 $ 0.23 $ .20 $ 0.18
Book value $ 12.65 $ 12.14 $ 11.49 $ 9.93 $ 8.98
</TABLE>
- --------------------------------------------------------------------------------
2 Chesapeake Financial Shares, Inc.
<PAGE>
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
1999 1998
- --------------------------------------------------------------------------------
Assets
Cash and due from banks $ 8,669,184 $ 5,937,686
Federal funds sold -- 7,000,000
Securities, at approximate market value 39,396,667 42,474,916
Loans, net of allowance for loan losses of
$2,253,676 in 1999 and $2,023,752 in 1998 130,639,824 109,422,041
Premises and equipment, net 5,384,908 5,247,605
Accrued interest receivable 1,337,111 1,346,616
Cash management accounts, net 8,791,161 7,131,665
Other assets 3,216,278 3,300,746
- --------------------------------------------------------------------------------
Total assets $197,435,133 $181,861,275
================================================================================
Liabilities and Shareholders' Equity
Deposits:
Demand accounts $ 27,150,692 $ 23,830,189
Savings and interest bearing demand deposits 67,238,177 55,718,469
Certificates of deposit
Denominations less than $100,000 64,458,093 69,582,581
Denominations of $100,000 or more 15,985,253 15,507,962
- --------------------------------------------------------------------------------
Total deposits $174,832,215 $164,639,201
Federal Home Loan Bank advances 4,800,000 --
Accrued interest payable 301,247 303,269
Other liabilities 1,140,506 1,115,825
Long-term debt 847,713 874,574
Commitments and contingent liabilities -- --
- --------------------------------------------------------------------------------
Total liabilities $181,921,681 $166,932,869
- --------------------------------------------------------------------------------
Shareholders' equity:
Preferred stock, par value $1 per share;
authorized 50,000 shares; no shares
outstanding $ -- $ --
Common stock, voting, par value $5 per share;
authorized 2,000,000 shares; issued and
outstanding 1,226,327 in 1999 and 1,229,599
in 1998 6,131,635 6,147,995
Common stock, nonvoting, par value $5 per share;
authorized 635,000 shares; no shares
outstanding -- --
Paid-in capital 264,745 523,795
Retained earnings 9,736,920 8,082,349
Accumulated other comprehensive income (loss) (619,848) 174,267
- --------------------------------------------------------------------------------
Total shareholders' equity $ 15,513,452 $ 14,928,406
- --------------------------------------------------------------------------------
Total liabilities and shareholders' equity $197,435,133 $181,861,275
================================================================================
See Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
1999 Annual Report 3
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income
Interest and fees on loans $ 10,996,836 $ 10,167,293 $ 9,038,054
Interest on federal funds sold 40,061 88,899 58,076
Interest on time deposits with banks 13,929 -- --
Interest and dividends on securities
available for sale:
Taxable 1,624,324 1,854,898 1,636,219
Nontaxable 684,166 604,730 589,059
Dividends 63,978 47,049 40,060
- ------------------------------------------------------------------------------------------------
Total interest income $ 13,423,294 $ 12,762,869 $ 11,361,468
- ------------------------------------------------------------------------------------------------
Interest Expense
Savings and interest bearing accounts $ 2,065,450 $ 1,237,949 $ 990,450
Certificates of deposit
Denominations less than $100,000 3,231,757 3,932,247 3,503,931
Denominations of $100,000 or more 680,696 896,847 850,604
Short-term borrowings and FHLB advances 148,914 36,630 62,454
Long-term debt 47,431 48,865 --
- ------------------------------------------------------------------------------------------------
Total interest expense $ 6,174,248 $ 6,152,538 $ 5,407,439
- ------------------------------------------------------------------------------------------------
Net interest income $ 7,249,046 $ 6,610,331 $ 5,954,029
Provision for loan losses 210,713 620,000 75,000
- ------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses $ 7,038,333 $ 5,990,331 $ 5,879,029
- ------------------------------------------------------------------------------------------------
Noninterest Income
Trust income $ 1,057,293 $ 1,042,136 $ 923,483
Service charges 651,962 531,227 527,107
Net (loss) on other real estate owned -- (59,500) --
(Loss) on securities available for sale (100,003) -- (2,365)
Other income 2,915,179 2,324,592 1,533,427
- ------------------------------------------------------------------------------------------------
Total noninterest income $ 4,524,431 $ 3,838,455 $ 2,981,652
- ------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
4 Chesapeake Financial Shares, Inc.
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
1999 1998 1997
- --------------------------------------------------------------------------------
Noninterest Expenses
Salaries and benefits $ 3,923,512 $ 3,529,694 $ 3,079,538
Occupancy expenses 1,692,987 1,625,083 1,365,534
Other expenses 3,194,954 2,949,648 2,110,722
- --------------------------------------------------------------------------------
Total noninterest expenses $ 8,811,453 $ 8,104,425 $ 6,555,794
- --------------------------------------------------------------------------------
Income before income taxes $ 2,751,311 $ 1,724,361 $ 2,304,887
Income tax expense 690,042 335,628 554,378
- --------------------------------------------------------------------------------
Net income $ 2,061,269 $ 1,388,733 $ 1,750,509
================================================================================
Earnings per share, basic $ 1.67 $ 1.13 $ 1.45
================================================================================
Earnings per share, assuming dilution $ 1.60 $ 1.07 $ 1.40
================================================================================
See Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
1999 Annual Report 5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $ 2,061,269 $ 1,388,733 $ 1,750,509
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 645,873 657,339 575,598
Provision for loan losses 210,713 620,000 75,000
Provision for cash management
account losses 72,500 67,500 --
Deferred income tax expense (benefit) (26,730) (302,046) 1,681
Amortization of premiums, net 578,018 738,887 217,385
Net (gain) loss on sale of premises
and equipment (96,477) -- 28,806
Loss on disposal of premises
and equipment 100,779 -- --
Loss on securities available for sale 100,003 -- 2,365
Net loss on other real estate owned -- 59,500 --
Origination of loans available for sale (5,918,250) (7,881,750) (4,251,450)
Proceeds from sale of loans available
for sale 6,012,250 8,005,750 4,033,450
Issuance of common stock for services 42,545 62,000 54,175
Changes in other assets and liabilities:
(Increase) decrease in accrued
interest receivable 9,505 (46,554) (211,861)
(Increase) in other assets (214,895) (937,928) (52,695)
Increase (decrease) in accrued
interest payable (2,022) (31,494) 62,217
Increase (decrease) in other
liabilities 24,681 218,678 (67,389)
- --------------------------------------------------------------------------------------------------
Net cash provided by
operating activities $ 3,599,762 $ 2,618,615 $ 2,217,791
- --------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Purchases of securities available for sale $(19,608,771) $(19,242,766) $(18,499,317)
Proceeds from sales and calls of securities
available for sale 6,845,807 970,207 7,217,090
Proceeds from maturities of securities
available for sale 13,970,328 18,725,164 5,458,072
Proceeds from sale of bank premises 187,500 -- --
Net (increase) in loans (21,522,496) (8,066,985) (11,530,232)
Net (increase) in cash management accounts (1,731,996) (3,095,524) (1,887,724)
Other capital expenditures (250,136) (2,456,626) (684,660)
- --------------------------------------------------------------------------------------------------
Net cash (used in) investing activities $(22,109,764) $(13,166,530) $(19,926,771)
- --------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
6 Chesapeake Financial Shares, Inc.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1999 1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Financing Activities
Proceeds from issuance of long-term debt $ -- $ 900,000 $ --
Net increase (decrease) in short-term
borrowings 4,800,000 (1,250,000) (750,000)
Net increase in demand accounts,
interest-bearing demand accounts
and savings accounts 14,840,211 19,847,349 5,780,887
Net increase (decrease) in certificates of deposits (4,647,197) (2,727,216) 14,108,616
Net proceeds from issuance of common stock 129,312 123,175 15,914
Acquisition of common stock (447,267) (62,943) (36,754)
Cash dividends (406,698) (342,924) (282,933)
Curtailment of long-term debt (26,861) (25,426) --
- -----------------------------------------------------------------------------------------------------
Net cash provided by financing activities $ 14,241,500 $ 16,462,015 $ 18,835,730
- -----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and
federal funds sold $ (4,268,502) $ 5,914,100 $ 1,126,750
Cash and federal funds sold at beginning of year 12,937,686 7,023,586 5,896,836
- -----------------------------------------------------------------------------------------------------
Cash and federal funds sold at end of year $ 8,669,184 $ 12,937,686 $ 7,023,586
- -----------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest $ 6,176,270 $ 6,184,032 $ 5,345,222
- -----------------------------------------------------------------------------------------------------
Income taxes $ 807,267 $ 594,326 $ 479,719
- -----------------------------------------------------------------------------------------------------
Supplemental Schedule of Noncash Investing
and Financing Activities
Unrealized gain (loss) on securities
available for sale $ (1,192,864) $ (241,463) $ 613,324
- -----------------------------------------------------------------------------------------------------
Common stock issued for services $ 42,545 $ 62,000 $ 54,175
- -----------------------------------------------------------------------------------------------------
Common stock dividend $ -- $ 1,010,770 $ 838,525
- -----------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
1999 Annual Report 7
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years Ended December 31, 1999, 1998 and 1997
Accumulated
Common Other
Stock, Paid-In Retained Comprehensive Comprehensive
Voting Capital Earnings Income Income Total
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1996 $4,198,435 $468,493 $ 7,418,259 $ (76,216) -- $12,008,971
Comprehensive income:
Net income -- -- 1,750,509 -- $1,750,509 1,750,509
Other comprehensive income:
Unrealized gains on
securities available
for sale:
Unrealized holding
gains on securities
available for sale,
net of deferred income
taxes of $207,727 -- -- -- -- 403,232 --
Add: reclassification
adjustment, net of
income taxes of $804 -- -- -- -- 1,561 --
- ----------------------------------------------------------------------------------------------------------------------
Other comprehensive
income, net of tax -- -- -- 404,793 $ 404,793 404,793
- ----------------------------------------------------------------------------------------------------------------------
Total comprehensive income -- -- -- -- $2,155,302 --
===================================================================================================================
Sale of common stock 2,500 4,664 -- -- 7,164
Exercise of stock options 5,000 3,750 -- -- 8,750
Issuance of common stock
for services 21,670 32,505 -- -- 54,175
Acquisition of
common stock (11,690) (25,064) -- -- (36,754)
Cash dividends
($.23 per share) -- -- (282,933) -- (282,933)
Stock dividend 838,525 -- (838,525) -- --
- ----------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1997 $5,054,440 $484,348 $8,047,310 $ 328,577 $13,914,675
Comprehensive income:
Net income -- -- 1,388,733 -- $1,388,733 1,388,733
Other comprehensive income:
Unrealized holding
losses on securities
available for sale,
net of deferred
income taxes
of $79,493 -- -- -- (154,310) (154,310) (154,310)
- ----------------------------------------------------------------------------------------------------------------------
Total comprehensive income -- -- -- -- $1,234,423 --
======================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
8 Chesapeake Financial Shares, Inc.
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Common Other
Stock, Paid-In Retained Comprehensive Comprehensive
Voting Capital Earnings Income Income Total
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Exercise of stock options 79,260 43,915 -- -- 123,175
Issuance of common
stock for services 18,950 43,050 -- -- 62,000
Acquisition of
common stock (15,425) (47,518) -- -- (62,943)
Cash dividends
($.28 per share) -- -- (342,924) -- (342,924)
Stock dividend 1,010,770 -- (1,010,770) -- --
- ----------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1998 $6,147,995 $523,795 $8,082,349 $ 174,267 $14,928,406
- ----------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income -- -- 2,061,269 -- $2,061,269 2,061,269
Other comprehensive income:
Unrealized losses on
securities available
for sale:
Unrealized holding
losses on securities
available for sale,
net of deferred income
taxes of $432,750 -- -- -- -- (860,117) --
Add: reclassification
adjustment, net of
income taxes of $34,001 -- -- -- -- 66,002 --
- ----------------------------------------------------------------------------------------------------------------------
Other comprehensive
income, net of tax -- -- -- (794,115) (794,115) (794,115)
- ----------------------------------------------------------------------------------------------------------------------
Total comprehensive income -- -- -- -- $1,267,154 --
===================================================================================================================
Exercise of stock options 77,040 52,272 -- -- 129,312
Issuance of common stock
for services 16,335 26,210 -- -- 42,545
Acquisition of
common stock (109,735) (337,532) -- -- (447,267)
Cash dividends
($.33 per share) -- -- (406,698) -- (406,698)
- ----------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1999 $6,131,635 $264,745 $9,736,920 $ (619,848) $15,513,452
======================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
1999 Annual Report 9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
General
Chesapeake Financial Shares, Inc. ("CFS") owns 100% of Chesapeake Bank (the
"Bank"). Two additional subsidiaries, Chesapeake Financial Group, Inc. and
Chesapeake Insurance Agency, Inc. T/A Chesapeake Investment Services are wholly-
owned subsidiaries of CFS and the Bank, respectively. The consolidated financial
statements include the accounts of CFS and its wholly-owned subsidiaries. All
significant intercompany accounts have been eliminated.
The accounting and reporting policies of CFS are in accordance with
generally accepted accounting principles and conform to general practices within
the banking industry. The more significant of these policies are summarized
below.
Securities
Debt securities that management has the positive intent and ability to hold
to maturity are classified as "held to maturity" and recorded at amortized cost.
Trading securities, which are generally held for the short term in anticipation
of market gains, are carried at fair value. Realized and unrealized gains and
losses on trading account assets are included in interest income on trading
account securities. Securities not classified as held to maturity or trading,
including equity securities with readily determinable fair values, are
classified as "available for sale" and recorded at fair value, with unrealized
gains and losses excluded from earnings and reported in other comprehensive
income. CFS classifies all securities as available for sale.
Purchase premiums and discounts are recognized in interest income using the
interest method over the terms of the securities. Declines in the fair value of
available-for-sale securities below their cost that are deemed to be other than
temporary are reflected in earnings as realized losses. Gains and losses on the
sale of securities are recorded on the trade date and are determined using the
specific identification method.
Loans
CFS grants mortgage, commercial and consumer loans to customers. A
substantial portion of the loan portfolio is represented by mortgage loans
throughout the Northern Neck, Middle Peninsula, Williamsburg, and James City
County areas of Virginia. The ability of CFS's debtors to honor their contracts
is dependent upon the real estate and general economic conditions in these
areas.
Loans are stated at face value, net of unearned discount and the allowance
for loan losses. Interest is computed by methods which result in level rates of
return on principal. Nonrefundable loan fees and direct loan origination costs
are recognized in operations when received and incurred, respectively. The
impact of this methodology is not significantly different from recognizing the
net of these fees and costs over the contractual life of the related loan.
Loans are placed on nonaccrual status when a loan is specifically
determined to be impaired or when principal or interest is delinquent for 90
days or more. Any unpaid interest previously accrued on those loans is reversed
from income. Interest income generally is not recognized on specific impaired
loans unless the likelihood of further loss is remote. Interest payments
received on such loans are applied as a reduction of the loan principal balance.
Interest income on other nonaccrual loans is recognized only to the extent of
interest payments received.
Mortgage loans held for resale are stated at the lower of cost or market on
an individual loan basis. Loan discounts and origination fees received on loans
held for resale are deferred until the related loans are sold to third party
investors. Gains are recognized at the time of sale.
- --------------------------------------------------------------------------------
10 Chesapeake Financial Shares, Inc.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The impairment of loans that have been separately identified for evaluation
is measured based on the present value of expected future cash flows or,
alternatively, the observable market price of the loans or the fair value of the
collateral. However, for those loans that are collateral dependent (that is, if
repayment of those loans is expected to be provided solely by the underlying
collateral) and for which management has determined foreclosure is probable, the
measure of impairment of those loans is to be based on the fair value of
collateral. CFS had no loans subject to FASB No. 114 at December 31, 1999 and
1998.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent in the loan
portfolio. The amount of the allowance is based on management's evaluation of
the collectibility of the loan portfolio, including the nature of the portfolio,
credit concentration, trends in historical loss experience, specific impaired
loans, and economic conditions. Allowances for impaired loans are generally
determined based on collateral values or the present value of estimated cash
flows. The allowance is increased by a provision for loan losses, which is
charged to expense and reduced by charge-offs, net of recoveries. Changes in the
allowance relating to impaired loans are charged or credited to the provision
for loan losses. Because of uncertainties inherent in the estimation process,
management's estimate of credit losses inherent in the loan portfolio and the
related allowance may change in the near term.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using both straight-line and accelerated methods over
the assets' estimated useful lives. Estimated useful lives range from 10 to 39
years for buildings and 3 to 7 years for furniture, fixtures and equipment.
Foreclosed Properties
Foreclosed properties are recorded at the lower of the outstanding loan
balance at the time of foreclosure or the estimated fair value less estimated
costs to sell. At foreclosure any excess of loan balance over the fair value of
the property is charged to the allowance for loan losses. Such carrying value is
periodically reevaluated and written down if there is an indicated decline in
fair value. Costs to bring a property to salable condition are capitalized up to
the fair value of the property while costs to maintain a property in salable
condition are expensed as incurred. The Bank has included $185,000 of foreclosed
properties in other assets at December 31, 1999 and 1998. No real estate was
acquired in settlement of loans during 1999 and 1998.
Trust Department Assets
Securities and other property held by the Trust Department in a fiduciary
or agency capacity are not assets of CFS and are not included in the
accompanying consolidated financial statements.
Income Taxes
Deferred taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences, operating loss
carryforwards, and tax credit carryforwards. Deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
bases. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.
- --------------------------------------------------------------------------------
1999 Annual Report 11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Statement of Cash Flows
For purposes of the statement of cash flows, CFS considers cash equivalents
to include cash on hand, amounts due from banks and federal funds sold.
Advertising Costs
CFS follows the policy of charging the production costs of advertising to
expense as incurred.
Use of Estimates
In preparing consolidated financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the balance sheet and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant change in the near
term relate to the determination of the allowance for loan losses, and the
valuation of foreclosed real estate and deferred tax assets.
Earnings Per Share
Basic earnings per share represents income available to common stockholders
divided by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share reflects additional common shares that would
have been outstanding if dilutive potential common shares had been issued, as
well as any adjustment to income that would result from the assumed issuance.
Potential common shares that may be issued by CFS relate solely to outstanding
stock options, and are determined using the treasury stock method.
Defined Benefit Plan
The cost of an employee's pension benefit is recognized on the net periodic
pension cost method over the employee's approximate service period. The
aggregate cost method is utilized for funding purposes.
- --------------------------------------------------------------------------------
12 Chesapeake Financial Shares, Inc.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Securities
Amortized cost and fair values of securities available for sale as of December
31, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
1999
- ---------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government agencies $ 1,292,311 $ 6 $ (35,100) $ 1,257,217
Securities of state and
political subdivisions 13,571,303 32,458 (436,859) 13,166,902
Corporate debt securities 1,565,962 -- (52,712) 1,513,250
Mortgage-backed securities 22,907,013 28,1444 (464,759) 22,470,398
Other 988,900 -- -- 988,900
- ---------------------------------------------------------------------------------
Total $40,325,489 $ 60,608 $(989,430) $39,396,667
=================================================================================
1998
- ---------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
- ---------------------------------------------------------------------------------
U.S. Treasury securities $ 500,187 $ 1,219 $ -- $ 501,406
U.S. Government agencies 3,402,796 11,895 (6,327) 3,408,364
Securities of state and
political subdivisions 12,329,706 602,780 (57) 12,932,429
Mortgage-backed securities 25,143,386 26,280 (377,999) 24,791,667
Other 834,800 6,250 -- 841,050
- ---------------------------------------------------------------------------------
Total $42,210,875 $648,424 $(384,383) $42,474,916
=================================================================================
</TABLE>
The amortized cost and fair value of securities available for sale as of
December 31, 1999, by contractual maturity are shown below. Expected maturities
may differ from contractual maturities because issuers may have the right to
call or prepay obligations without any penalties.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 3,895,097 $ 3,864,403
Due after one year through five years 18,646,914 18,326,044
Due after five years through ten years 6,858,700 6,622,836
Due after ten years 9,935,878 9,594,484
Other 988,900 988,900
- --------------------------------------------------------------------------------
Total $40,325,489 $39,396,667
================================================================================
</TABLE>
Proceeds from sales and calls of securities available for sale during 1999,
1998 and 1997 were $6,845,807, $970,207 and $7,217,090, respectively. Gross
gains of $14,776 and $22,319 and gross losses of $114,779 and $24,684 were
realized on sales and calls of securities in 1999 and 1997, respectively. There
were no realized gains or losses on sales and calls of securities during 1998.
The tax benefit applicable to these net realized losses amounted to $34,001 and
$804 in 1999 and 1997, respectively.
- --------------------------------------------------------------------------------
1999 Annual Report 13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost of securities pledged to secure public deposits,
borrowings from the Federal Reserve Bank and fiduciary powers amounted to
$17,916,012 and $7,214,920, at December 31, 1999 and 1998, respectively.
Note 3. Loans
Major classifications of loans are summarized as follows:
December 31,
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
Commercial $ 62,099,957 $ 49,058,143
Real estate mortgage 36,955,312 33,003,161
Real estate construction 2,794,205 5,468,068
Consumer 26,831,609 21,378,419
Participations with other banks 2,691,628 1,610,393
Other 1,520,789 927,609
- --------------------------------------------------------------------------------
$132,893,500 $111,445,793
Less allowance for loan losses 2,253,676 2,023,752
- --------------------------------------------------------------------------------
$130,639,824 $109,422,041
================================================================================
Participations with other banks are secured by residential property.
Nonaccrual loans excluded from impaired loan disclosure under FASB No. 114
amounted to $155,520 and $202,434 at December 31, 1999 and 1998, respectively.
If interest on these loans had been accrued, such income would have approximated
$11,960 and $11,502 at December 31, 1999 and 1998, respectively.
Changes in the allowance for loan losses are as follows:
December 31,
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Balance at beginning of
year $2,023,752 $1,740,065 $1,652,844
Provision for loan losses 210,713 620,000 75,000
Loans charged off (27,057) (355,637) (41,956)
Recoveries on loans
previously charged off 46,268 19,324 54,177
- --------------------------------------------------------------------------------
Balance at end of year $2,253,676 $2,023,752 $1,740,065
================================================================================
- --------------------------------------------------------------------------------
14 Chesapeake Financial Shares, Inc.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Premises and Equipment
Major classifications of premises and equipment are summarized as follows:
December 31,
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
Land $ 762,335 $ 762,335
Buildings 3,645,589 3,795,886
Furniture, fixtures and improvements 1,000,326 1,001,452
Mechanical equipment 3,102,483 3,246,239
Leasehold improvements 1,121,901 762,001
- --------------------------------------------------------------------------------
$9,632,634 $9,567,913
Less accumulated depreciation 4,247,726 4,320,308
- --------------------------------------------------------------------------------
$5,384,908 $5,247,605
================================================================================
For the years ended December 31, 1999, 1998 and 1997, depreciation expense
was $557,201, $657,339 and $491,598, respectively.
Note 5. Note Payable
The Bank has unsecured lines of credit with correspondent banks totaling
$21,600,000 available for overnight borrowing. The Bank also has a line of
credit secured by mortgage loans totaling 10% of the Bank's total assets and a
line of credit available secured by assets specifically pledged for long or
short-term borrowing. As of December 31, 1999, $4,800,000 was drawn on these
lines of credit. CFS has an undrawn line of credit available of $2,000,000,
secured by bank stock. There were no amounts drawn at December 31, 1998.
CFS's fixed-rate long-term debt of $847,713 at December 31, 1999 matures in
2018. The long-term debt is secured by a deed of trust on property located in
Lancaster County, Virginia. Aggregate maturities during the next five years are:
2000, $25,951; 2001, $29,840; 2002, $31,523; 2003, $33,301; and 2004, $35,180.
- --------------------------------------------------------------------------------
1999 Annual Report 15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Income Taxes
Net deferred tax assets consist of the following components as of December 31,
1999 and 1998:
1999 1998
- --------------------------------------------------------------------------------
Deferred tax assets:
Allowance for loan losses $ 712,170 $ 615,878
Securities available for sale 308,975 --
Deferred compensation 118,149 130,108
Accrued pension expense 78,075 106,686
Intangible assets 22,052 56,439
Other 74,561 51,144
- --------------------------------------------------------------------------------
$1,313,982 $ 960,255
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Securities available for sale $ -- $ 89,774
Accumulated discount accretion 5,820 4,576
Premises and equipment 171,397 154,619
- --------------------------------------------------------------------------------
$ 177,217 $ 248,969
- --------------------------------------------------------------------------------
Net deferred tax assets: $1,136,765 $ 711,286
================================================================================
The provision for income taxes charged to operations for the years ended
December 31, 1999, 1998 and 1997, consists of the following:
1999 1998 1997
- --------------------------------------------------------------------------------
Current tax expense $ 716,772 $ 637,674 $552,697
Deferred tax expense (benefit) (26,730) (302,046) 1,681
- --------------------------------------------------------------------------------
$ 690,042 $ 335,628 $554,378
================================================================================
The income tax provision differs from the amount of income tax determined
by applying the U.S. federal income tax rate to pretax income for the years
ended December 31, 1999, 1998 and 1997, due to the following:
1999 1998 1997
- --------------------------------------------------------------------------------
Computed "expected" tax expense $ 935,446 $ 586,283 $ 783,662
Increase (decrease) in income taxes
resulting from:
Tax exempt interest income (247,005) (242,660) (204,598)
Other 1,601 (7,995) (24,686)
- --------------------------------------------------------------------------------
$ 690,042 $ 335,628 $ 554,378
================================================================================
- --------------------------------------------------------------------------------
16 Chesapeake Financial Shares, Inc.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. Employee Benefit Plans
Pension Plan
CFS has a noncontributory, defined benefit pension plan for all full-time
employees over 21 years of age. Benefits are generally based upon years of
service and the employees' compensation. CFS funds pension costs in accordance
with the funding provisions of the Employee Retirement Income Security Act.
The following tables provide a reconciliation of the changes in the plan's
benefit obligations and fair value of assets over the three-year period ending
December 31, 1999, computed as of October 1st of each respective year:
1999 1998 1997
- --------------------------------------------------------------------------------
Change in Benefit Obligation
Benefit obligation, beginning $1,192,692 $1,577,250 $1,311,102
Service cost 118,317 121,141 105,702
Interest cost 89,071 117,913 97,952
Actuarial (gain) loss (52,197) 132,795 81,391
Benefits paid (19,536) (756,407) (18,897)
- --------------------------------------------------------------------------------
Benefit obligation, ending $1,328,347 $1,192,692 $1,577,250
================================================================================
Change in Plan Assets
Fair value of plan assets,
beginning $1,007,885 $1,770,008 $1,255,666
Actual return on plan assets 140,927 (5,716) 287,179
Employer contributions 76,398 -- 246,060
Benefits paid (19,536) (756,407) (18,897)
- --------------------------------------------------------------------------------
Fair value of plan assets, ending $1,205,674 $1,007,885 $1,770,008
================================================================================
Funded Status $ (122,673) $ (184,807) $ 192,758
Unrecognized net actuarial (gain) (306,504) (207,851) (520,835)
Unrecognized net obligation at
transition 40,694 44,764 48,834
Unrecognized prior service cost 31,489 34,113 36,737
- --------------------------------------------------------------------------------
Accrued benefit cost included in
other liabilities $ (356,994) $ (313,781) $ (242,506)
================================================================================
- --------------------------------------------------------------------------------
1999 Annual Report 17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides the components of net periodic benefit cost
for the plans for the years ended December 31, 1999, 1998 and 1997:
1999 1998 1997
- --------------------------------------------------------------------------------
Components of Net Periodic Benefit Cost
Service cost $118,317 $ 121,141 $ 105,702
Interest cost 89,071 117,913 97,952
Expected return on plan assets (90,253) (158,844) (112,553)
Amortization of prior service cost 2,624 2,624 2,624
Amortization of net obligation at
transition 4,070 4,070 4,070
Recognized net actuarial (loss) (4,218) (15,629) (14,119)
- --------------------------------------------------------------------------------
Net periodic benefit cost $119,611 $ 71,275 $ 83,676
================================================================================
The assumptions used in the measurement of CFS's benefit obligation are shown in
the following table:
1999 1998 1997
- --------------------------------------------------------------------------------
Weighted-Average Assumptions
Discount rate 7.50% 7.50% 7.50%
Expected return on plan assets 9.00% 9.00% 9.00%
Rate of compensation increase 5.00% 5.00% 6.00%
Deferred Compensation Agreements
The Bank and CFS have deferred compensation agreements providing for
monthly payments to an officer of each company commencing at retirement. The
liabilities under these agreements are being accrued over the officers'
remaining periods of employment such that the then present value of the monthly
payments will have been accrued by retirement date. CFS funds the deferred
compensation commitments through life insurance policies on the officers. One of
the officers is currently retired and receiving benefits under this plan.
Employee Stock Ownership Plan
Generally, full-time employees who have completed one calendar year of
service are eligible. Contributions each year are at the discretion of the Board
of Directors, within certain limitations prescribed by Federal tax regulations.
CFS made cash contributions to the plan of $19,993, $19,993 and $20,000 in 1999,
1998 and 1997, respectively. These contributions are included in salaries and
benefits in the accompanying income statements. An employee's proportional
ownership in the plan assets vests on an increasing scale over 7 years, or
sooner under certain circumstances. The plan intends to invest contributions
received in shares of CFS common stock. Dividends paid on shares held by the
plan are charged to retained earnings. All shares held by the plan are treated
as outstanding in computing CFS earnings per share.
401(k) Plan
CFS has adopted a contributory 401(k) plan which covers substantially all
employees. Under the plan, employees may elect to defer up to 15% of their
salary, subject to Internal Revenue Service limits. The Corporation makes a
matching contribution of up to 6% of the employee's salary. Total expense
related to the plan was $30,991, $28,916 and $25,590 for 1999, 1998 and 1997.
- --------------------------------------------------------------------------------
18 Chesapeake Financial Shares, Inc.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8. Stock Option Plan
CFS had a stock option plan in which options for 172,800 shares of voting
common stock and 112,500 shares of nonvoting common stock were reserved for
issuance. The stock option plan required that options be granted at an exercise
price equal to at least 100% of the fair market value of the common stock on the
date of grant; however, for those individuals who owned more than 10% of the
stock of CFS, the option price was at least 110% of the fair market value on the
date of grant. Such options were generally not exercisable until after three
years from the date of issuance and required continuous employment during the
period prior to exercise. This plan expired in 1995. Options previously granted
may be exercised by the participants until the options expire, which is ten
years after the date of the original option grant.
CFS applies APB Opinion 25 and related interpretations in accounting for
the stock option plan. Accordingly, no compensation cost has been recognized.
Had compensation cost for CFS's stock option plan been determined based on the
fair value at the grant dates for awards under the plan consistent with the
method prescribed by FASB Statement No. 123, CFS's net income and earnings per
share would have been adjusted to the pro forma amounts indicated below:
Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
- --------------------------------------------------------------------------------
Net income As reported $2,061,269 $1,388,733 $1,750,509
Pro forma $2,029,208 $1,367,255 $1,731,244
Earnings per share -- As reported $ 1.67 $ 1.13 $ 1.45
basic Pro forma $ 1.65 $ 1.12 $ 1.43
Earnings per share -- As reported $ 1.60 $ 1.07 $ 1.40
assuming dilution Pro forma $ 1.58 $ 1.06 $ 1.38
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
- --------------------------------------------------------------------------------
Dividend yield 1.59% 1.58% 1.63%
Expected life 7 years 7 years 7 years
Expected volatility 15.22% 16.15% 14.86%
Risk-free interest rate 6.50% 4.50% 5.31%
- --------------------------------------------------------------------------------
1999 Annual Report 19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the status of the expired plan at December 31, 1999, 1998 and
1997 and the changes during the years ended on those dates is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- -----------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 73,008 $6.92 89,460 $7.66 90,900 $7.02
Options exercised (15,408) 6.70 (16,452) 7.49 (1,440) 6.08
- -----------------------------------------------------------------------------------------------
Outstanding at end of year 57,600 6.98 73,008 6.92 89,460 7.66
===============================================================================================
Options exercisable, end
of year 57,600 73,008 64,260
</TABLE>
In 1996, CFS adopted an incentive stock plan under which options may be
granted to certain key employees for purchase of CFS's common stock. The
effective date of the plan was April 5, 1996 with an expiration date of March
31, 2006. The plan reserves for issuance 64,800 shares of CFS's voting common
stock. The stock option plan requires that options be granted at an exercise
price equal to at least 100% of the fair market value of the common stock on the
date of the grant; however for those individuals who own more than 10% of the
stock of CFS, the option price must be at least 110% of the fair market value on
the date of grant. Such options are generally not exercisable until three years
from the date of issuance and require continuous employment during the period
prior to exercise. The options will expire in no more than ten years after the
date of grant.
A summary of the status of the 1996 plan at December 31, 1999, 1998 and
1997 and the changes during the years ended on those dates are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- -----------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 37,920 $ 12.08 25,920 $ 9.77 13,680 $ 9.41
Options granted 13,500 20.96 12,000 17.07 12,240 10.16
- -----------------------------------------------------------------------------------------------
Outstanding at end of year 51,420 14.41 37,920 12.08 25,920 9.77
===============================================================================================
Options exercisable, end
of year 13,680 -- --
Options available for
grant, end of year 13,380 26,880 38,880
</TABLE>
- --------------------------------------------------------------------------------
20 Chesapeake Financial Shares, Inc.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The status of the options outstanding at December 31, 1999 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- -----------------------------------------------------------------------------------
Weighted Weighted
Remaining Range of Average Average
Contractual Exercise Number Exercise Number Exercise
Life Price Outstanding Price Exercisable Price
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
0.3 $6.94 to 7.64 12,960 $ 7.41 12,960 $7.41
1.3 $6.08 to 6.85 20,880 6.41 20,880 6.41
2.3 $6.94 to 7.64 23,760 7.26 23,760 7.26
3.3 $9.03 to 18.33 16,560 10.96 13,680 9.41
4.3 $9.93 to 22.55 16,320 12.87 -- --
5.3 $16.67 8,040 16.67 -- --
6.3 $20.50 10,500 20.50 -- --
</TABLE>
Note 9. Shareholders' Equity
During 1999, 1998 and 1997, CFS issued 3,267 shares, 3,790 shares and 4,334
shares, respectively, of common stock to its Directors for partial compensation.
Note 10. Commitments and Contingencies
CFS leases certain facilities and equipment under operating leases which
expire at various dates through 2007. These leases generally contain renewal
options and require CFS to pay taxes, insurance, maintenance and other expenses
in addition to the minimum normal rentals.
Minimum rental payments under these operating lease agreements as of
December 31, 1999 are as follows:
Year Ending
December 31,
- --------------------------------------------------------------------------------
2000 $63,264
2001 15,864
2002 7,088
2003 2,700
2004 2,700
Rent expense under operating leases aggregated $147,966, $142,610 and
$129,130 for the years ended December 31, 1999, 1998 and 1997, respectively.
As a member of the Federal Reserve System, the Bank is required to maintain
certain average reserve balances. For the final weekly reporting period in the
years ended December 31, 1999 and 1998, the aggregate amounts of daily average
required balances were approximately $4,586,000 and $2,492,000, respectively.
CFS has entered an agreement to invest a minimum of $230,000 in the
Virginia Bankers Insurance Center, LLC. As of December 31, 1999, $23,000 had
been invested.
- --------------------------------------------------------------------------------
1999 Annual Report 21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11. Related Party Transactions
Officers, Directors and their affiliates had borrowings of $7,203,324 and
$5,967,946 at December 31, 1999 and 1998, respectively, with the Bank.
Changes in borrowings during 1999 were as follows:
Balance, December 31, 1998 $ 5,967,946
Additions 2,933,815
Payments (1,698,437)
- --------------------------------------------------------------------------------
Balance, December 31, 1999 $ 7,203,324
================================================================================
These transactions occurred in the ordinary course of business on
substantially the same terms as those prevailing at the time for comparable
transactions with unrelated persons.
Note 12. Other Income and Expenses
The principal components of "Other Income" in the consolidated statements of
income are:
1999 1998 1997
- --------------------------------------------------------------------------------
Cash management fees and discount $1,194,408 $ 954,505 $ 598,003
FHLMC servicing fee income 112,156 118,601 121,534
Merchant discount 853,152 656,190 369,441
ATM fee income 240,326 181,960 199,329
Other (includes no items in
excess of 1% of total revenue) 515,137 413,336 245,120
- --------------------------------------------------------------------------------
$2,915,179 $2,324,592 $1,533,427
================================================================================
The principal components of "Other Expenses" in the consolidated statements of
income are:
1999 1998 1997
- --------------------------------------------------------------------------------
Advertising $ 199,662 $ 225,829 $ 211,136
Merchant card 844,975 668,407 368,320
Cash management royalties 357,444 189,887 138,615
Check card losses -- 297,102 --
Other (includes no items in
excess of 1% of total revenue) 1,792,873 1,568,423 1,392,651
- --------------------------------------------------------------------------------
$3,194,954 $2,949,648 $2,110,722
================================================================================
- --------------------------------------------------------------------------------
22 Chesapeake Financial Shares, Inc.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13. Earnings Per Share
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 did not have an impact on net income.
1999 1998 1997
- --------------------------------------------------------------------------------
Weighted average number
of common shares, basic 1,232,655 1,224,531 1,208,310
Effect of dilutive stock options 55,180 68,078 43,159
- --------------------------------------------------------------------------------
Weighted average number
of common shares and dilutive
potential common stock
used in diluted EPS 1,287,835 1,292,609 1,251,469
================================================================================
Note 14. Time Deposits
Remaining maturities on certificates of deposit are as follows:
2000 $55,940,651
2001 17,751,550
2002 5,183,379
2003 1,189,543
2004 and thereafter 378,223
- --------------------------------------------------------------------------------
$80,443,346
================================================================================
Note 15. Financial Instruments With Off-Balance-Sheet Risk
CFS is a party to credit related financial instruments with
off-balance-sheet risk in the normal course of business to meet the financial
needs of its customers. These financial instruments include commitments to
extend credit, standby letters of credit and commercial letters of credit. Such
commitments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the consolidated balance sheets.
CFS's exposure to credit loss is represented by the contractual amount of
these commitments. CFS follows the same credit policies in making commitments as
it does for on-balance-sheet instruments.
At December 31, 1999 and 1998, the following financial instruments were
outstanding whose contract amounts represent credit risk:
Contract Amount
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
Commitments to grant loans $ 3,097,978 $ 3,780,941
Unfunded commitments under lines of credit 23,419,795 23,519,261
Commercial and standby letters of credit 2,026,730 1,063,440
- --------------------------------------------------------------------------------
1999 Annual Report 23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. The commitments for equity lines of credit may
expire without being drawn upon. Therefore, the total commitment amounts do not
necessarily represent future cash requirements. The amount of collateral
obtained, if it is deemed necessary by CFS, is based on management's credit
evaluation of the customer.
Unfunded commitments under commercial lines of credit, revolving credit
lines and overdraft protection agreements are commitments for possible future
extensions of credit to existing customers. These lines of credit usually do not
contain a specified maturity date and may not be drawn upon to the total extent
to which CFS is committed. The amount of collateral obtained, if it is deemed
necessary by CFS, is based on management's credit evaluation of the customer.
Commercial and standby letters of credit are conditional commitments issued
by CFS to guarantee the performance of a customer to a third party. Those
letters of credit are primarily issued to support public and private borrowing
arrangements. Essentially all letters of credit issued have expiration dates
within one year. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
CFS generally holds collateral supporting those commitments if deemed necessary.
CFS maintains its cash accounts in several correspondent banks. The total
amount by which cash on deposit in those banks exceeds the federally insured
limits is approximately $40,920 at December 31, 1999.
Note 16. Disclosures About Fair Value of Financial Instruments
The fair value of a financial instrument is the current amount that would
be exchanged between willing parties, other than in a forced liquidation. Fair
value is best determined based upon quoted market prices. However, in many
instances, there are no quoted market prices for CFS's various financial
instruments. In cases where quoted market prices are not available, fair values
are based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. Accordingly, the fair value
estimates may not be realized in an immediate settlement of the instrument. SFAS
107 excludes certain financial instruments and all nonfinancial instruments from
its disclosure requirements. Accordingly, the aggregate fair value amounts
presented may not necessarily represent the underlying fair value of the
Corporation.
The following methods and assumptions were used by CFS in estimating fair
value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts of cash and short-term
instruments approximate fair values.
Securities: Fair values for securities, excluding Federal Home Loan Bank stock,
are based on quoted market prices. The carrying value of Federal Home Loan Bank
stock approximates fair value based on the redemption provisions of the Federal
Home Loan Bank.
Mortgage loans held for sale: Fair values of mortgage loans held for sale are
based on commitments on hand from investors or prevailing market prices.
Loans receivable: For certain homogeneous categories of loans, such as some
residential mortgages, and other consumer loans, fair value is estimated using
the quoted market prices for securities backed by similar loans, adjusted for
differences in loan characteristics. The fair value of other types of loans is
estimated by discounting the future
- --------------------------------------------------------------------------------
24 Chesapeake Financial Shares, Inc.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities.
Deposit liabilities: The fair value of demand deposits, savings accounts and
certain money market deposits is the amount payable on demand at the reporting
date. The fair value of fixed-maturity certificates of deposit is estimated
using the rates currently offered for deposits of similar remaining maturities.
Short-term borrowings: The carrying amounts of federal funds purchased,
borrowings under repurchase agreements, and other short-term borrowings maturing
within ninety days approximate their fair values. Fair values of other short-
term borrowings are estimated using discounted cash flow analyses based on CFS's
current incremental borrowing rates for similar types of borrowing arrangements.
Long-term borrowings: The fair value of CFS's long-term borrowings are estimated
using discounted cash flow analyses based on CFS's current incremental borrowing
rates for similar types of borrowing arrangements.
Accrued interest: The carrying amounts of accrued interest approximate fair
value.
Off-balance-sheet instruments: Fair values for off-balance-sheet, credit-related
financial instruments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counterparties' credit standing. Fair values for off-balance-sheet derivative
financial instruments, for other than trading purposes, are based upon quoted
market prices, except in the case of certain options and swaps where pricing
models are used.
The estimated fair values, and related carrying or notional amounts, of
CFS's financial instruments are as follows:
1999 1998
- --------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- --------------------------------------------------------------------------------
(In Thousands) (In Thousands)
- --------------------------------------------------------------------------------
Financial assets:
Cash and short-term investments $ 8,669 $ 8,669 $ 12,938 $ 12,938
Securities 39,397 39,397 42,475 42,475
Loans 130,640 129,610 109,422 110,071
Accrued interest receivable 1,337 1,337 1,347 1,347
- --------------------------------------------------------------------------------
Total financial assets $180,043 $179,013 $166,182 $166,831
================================================================================
Financial liabilities:
Deposits $174,832 $175,606 $164,639 $165,008
Short-term borrowings 4,800 4,800 -- --
Long-term debt 848 694 875 601
Accrued interest
payable 301 301 303 303
- --------------------------------------------------------------------------------
Total financial
liabilities $180,781 $181,401 $165,817 $165,912
================================================================================
- --------------------------------------------------------------------------------
1999 Annual Report 25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17. Regulatory Matters
CFS is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory--possibly additional discretionary--actions by
regulators that, if undertaken, could have a direct material effect on CFS's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, financial institutions must meet
specific capital guidelines that involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. A financial institutions' capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors. Prompt corrective action
provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy
require financial institutions to maintain minimum amounts and ratios (set forth
in the table below) of total and Tier 1 capital (as defined in the regulations)
to risk-weighted assets, and of Tier 1 capital to average assets. Management
believes, as of December 31, 1999 and 1998, that CFS meets all capital adequacy
requirements to which it is subject.
As of December 31, 1999, the most recent notification from the Federal
Reserve Bank categorized CFS as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized, CFS must
maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's category.
- --------------------------------------------------------------------------------
26 Chesapeake Financial Shares, Inc.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CFS's actual capital amounts and ratios are also presented in the
table.
<TABLE>
<CAPTION>
For Capital
Actual Adequacy Purposes
- ------------------------------------------------------------------------------------------------------------------------------------
(Amount in Thousands) Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
As of December 31, 1999:
Total Capital (to Risk
Weighted Assets):
Consolidated $18,073 11.7% greater than or equal to $12,376 greater than or equal to 8.0%
Chesapeake Bank $17,019 11.1% greater than or equal to $12,288 greater than or equal to 8.0%
Tier 1 Capital (to Risk
Weighted Assets):
Consolidated $16,134 10.4% greater than or equal to $ 6,188 greater than or equal to 4.0%
Chesapeake Bank $15,093 9.8% greater than or equal to $ 6,144 greater than or equal to 4.0%
Tier 1 Capital (to
Average Assets):
Consolidated $16,134 8.3% greater than or equal to $ 7,782 greater than or equal to 4.0%
Chesapeake Bank $15,093 7.9% greater than or equal to $ 7,686 greater than or equal to 4.0%
As of December 31, 1998:
Total Capital (to Risk
Weighted Assets):
Consolidated $16,387 12.6% greater than or equal to $10,413 greater than or equal to 8.0%
Chesapeake Bank $15,436 12.0% greater than or equal to $10,340 greater than or equal to 8.0%
Tier 1 Capital (to Risk
Weighted Assets):
Consolidated $14,754 11.3% greater than or equal to $ 5,207 greater than or equal to 4.0%
Chesapeake Bank $13,820 10.7% greater than or equal to $ 5,170 greater than or equal to 4.0%
Tier 1 Capital (to
Average Assets):
Consolidated $14,754 8.4% greater than or equal to $ 7,029 greater than or equal to 4.0%
Chesapeake Bank $13,820 7.9% greater than or equal to $ 6,966 greater than or equal to 4.0%
<CAPTION>
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
- --------------------------------------------------------------------------------------------------------------
(Amount in Thousands) Amount Ratio
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
As of December 31, 1999:
Total Capital (to Risk
Weighted Assets):
Consolidated N/A
Chesapeake Bank greater than or equal to $15,360 greater than or equal to 10.0%
Tier 1 Capital (to Risk
Weighted Assets):
Consolidated N/A
Chesapeake Bank greater than or equal to $ 9,216 greater than or equal to 6.0%
Tier 1 Capital (to
Average Assets):
Consolidated N/A
Chesapeake Bank greater than or equal to $ 9,608 greater than or equal to 5.0%
As of December 31, 1998:
Total Capital (to Risk
Weighted Assets):
Consolidated N/A
Chesapeake Bank greater than or equal to $12,924 greater than or equal to 10.0%
Tier 1 Capital (to Risk
Weighted Assets):
Consolidated N/A
Chesapeake Bank greater than or equal to $ 7,755 greater than or equal to 6.0%
Tier 1 Capital (to
Average Assets):
Consolidated N/A
Chesapeake Bank greater than or equal to $ 8,707 greater than or equal to 5.0%
</TABLE>
- --------------------------------------------------------------------------------
1999 Annual Report 27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 18. Parent Company Financial Statements
The following parent company accounting policies should be read in conjunction
with the related condensed balance sheets, statements of income, and statements
of cash flows.
Investments in subsidiaries are accounted for using the equity method of
accounting. The parent company and its subsidiaries file a consolidated federal
income tax return. The subsidiaries' individual tax provisions and liabilities
are stated as if they filed separate returns and any benefits or detriments of
filing the consolidated tax return are absorbed by the parent company.
The parent company's principal assets are its investments in its wholly-owned
subsidiaries. Dividends from the Bank are the primary source of funds for the
parent company. The payment of dividends by the Bank is restricted by various
statutory limitations. Banking regulations also prohibit extensions of credit by
the Bank to the parent company unless appropriately secured by assets. As of
December 31, 1999, the amount available for payment of additional dividends
without prior regulatory approval from the Bank to the parent company is
$3,222,639 or 20.8% of consolidated net assets.
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash $ 146,817 $ 408,701
Securities 671,548 550,052
Investment in subsidiaries 14,438,087 13,982,051
Premises and equipment, net 905,659 860,377
Other assets 199,054 30,132
- --------------------------------------------------------------------------------
Total assets $16,361,165 $15,831,313
================================================================================
Liabilities and Shareholders' Equity
Long-term debt $ 847,713 $ 874,574
Other liabilities -- 28,333
Shareholders' equity 15,513,452 14,928,406
- --------------------------------------------------------------------------------
Total liabilities and shareholders' equity $16,361,165 $15,831,313
================================================================================
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income - Dividends - Bank $ 953,000 $ 325,000 $ 930,000
Other 138,264 151,088 87,830
- ---------------------------------------------------------------------------------------
Total income $1,091,264 $ 476,088 $1,017,830
- ---------------------------------------------------------------------------------------
Expenses - Interest expense $ 47,431 $ 48,865 $ --
Other expenses 226,213 206,692 144,747
- ---------------------------------------------------------------------------------------
Total expenses $ 273,644 $ 255,557 $ 144,747
- ---------------------------------------------------------------------------------------
Income before income taxes and equity
in undistributed earnings of subsidiaries $ 817,620 $ 220,531 $ 873,083
Allocated income tax benefit 33,230 30,856 25,552
- ---------------------------------------------------------------------------------------
Income before equity in undistributed
earnings of subsidiaries $ 850,850 $ 251,387 $ 898,635
Equity in undistributed earnings of subsidiaries 1,210,419 1,137,346 851,874
- ---------------------------------------------------------------------------------------
Net income $2,061,269 $1,388,733 $1,750,509
================================================================================
</TABLE>
28 Chesapeake Financial Shares, Inc.
<PAGE>
STATEMENTS OF CASH FLOW (CONDENSED)
<TABLE>
<CAPTION>
Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $ 2,061,269 $ 1,388,733 $ 1,750,509
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 42,869 39,623 --
Equity in undistributed earnings
of subsidiaries (1,210,419) (1,137,346) (851,874)
Loss on securities available for sale 3,902 -- --
Issuance of common stock for services 42,545 62,000 54,175
Amortization of premium (1,606) (3,742) (2,960)
Changes in other assets and liabilities:
(Increase) decrease in other assets (158,794) 12,133 (10,025)
Increase (decrease) in other liabilities (28,333) 18,333 6,000
- --------------------------------------------------------------------------------------------
Net cash provided by
operating activities $ 751,433 $ 379,734 $ 945,825
- --------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Purchase of investment securities $ (541,652) $ -- $ (574,284)
Proceeds from maturities of
investment securities 368,000 -- 100,000
Purchases of premises and equipment (88,151) (900,000) --
Investment in subsidiary -- (29,312) --
- --------------------------------------------------------------------------------------------
Net cash provided by (used in)
investing activities $ (261,803) $ (929,312) $ (474,284)
- --------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Dividends paid $ (406,698) $ (342,924) $ (282,933)
Proceeds from issuance of long-term debt -- 900,000 --
Curtailment of note payable (26,861) (25,426) --
Acquisitions of common stock (447,267) (62,943) (36,754)
Net proceeds from issuance of common stock 129,312 123,175 15,914
- --------------------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities $ (751,514) $ 591,882 $ (303,773)
- --------------------------------------------------------------------------------------------
Net increase (decrease) in cash (261,884) 42,304 167,768
Cash at beginning of year 408,701 366,397 198,629
- --------------------------------------------------------------------------------------------
Cash at end of year $ 146,817 $ 408,701 $ 366,397
- --------------------------------------------------------------------------------------------
Supplemental Disclosure of Noncash
Investing Activities, contribution of
securities to capital of a subsidiary bank $ -- $ 970,207 $ --
- --------------------------------------------------------------------------------------------
</TABLE>
1999 Annual Report 29
<PAGE>
INDEPENDENT AUDITOR'S REPORT
YHB
Yount, Hyde & Barbour, P.C.
Certified Public Accountants
and Consultants
To the Board of Directors and Shareholders
Chesapeake Financial Shares, Inc. and Subsidiaries
Kilmarnock, Virginia
We have audited the accompanying consolidated balance sheets of Chesapeake
Financial Shares, Inc. and Subsidiaries as of December 31, 1999 and 1998, and
the related consolidated statements of income, changes in shareholders' equity,
and cash flows for the years ended December 31, 1999, 1998 and 1997. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Chesapeake
Financial Shares, Inc. and Subsidiaries as of December 31, 1999 and 1998, and
the results of its operations and its cash flows for the years ended December
31, 1999, 1998 and 1997, in conformity with generally accepted accounting
principles.
/s/ Yount, Hyde & Barbour, P.C.
Winchester, Virginia
January 14, 2000
30 Chesapeake Financial Shares, Inc.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to assist the reader in understanding and
evaluating Chesapeake Financial Shares' consolidated financial condition and
results of operations. This discussion should be read in conjunction with the
Company's audited consolidated financial statements, the accompanying notes, the
Letter to Shareholders, and other information contained elsewhere in this Annual
Report.
Financial Condition
During 1999, the U.S. economy continued its ninth successive year of expansion
amidst higher domestic wages and the rebound in foreign markets. Based on
advance estimates, gross domestic product for the year may exceed the prior year
in spite of several increases in short-term interest rates. The economic growth
of Chesapeake Financial Shares, Inc. (CFS) reached record levels during the year
as well. At the end of 1999, CFS had total assets of $197.4 million,
representing an 8.5% increase over the December 31, 1998 balance of $181.9
million. The Company ended the year with total gross loans of $132.9 million,
and total deposits of $174.8 million on December 31, 1999, up 19.4% and 6.2%,
respectively. The return on average equity in 1999 was 13.4% and return on
average assets was 1.10% compared to 9.6% and 0.81%, respectively, in 1998. (see
"Summary of Results of Operations").
The record loan growth of 19.4% for 1999 brought the average annual loan
growth rate for the last six years to over 11.8%. The increased lending activity
is consistent with Chesapeake Financial Shares' commitment to meet the economic
needs of the communities served. Asset quality was maintained during this growth
period with past due loans near record lows and the reserve for loan loss
remaining at adequate levels, far above peer group comparisons. The Bank
continued to maintain its "well capitalized" status, the highest ranking
available from the Federal Deposit Insurance Corporation (FDIC).
Summary of Results of Operations
Chesapeake Financial Shares recorded earnings of $2,061,269 for 1999 or $1.60
per share (fully diluted) compared to $1,388,733 or $1.07 per share in 1998, an
increase of 48.4% or $672,536. During 1999, the increase in earnings was
primarily due to net interest income after provision for loan losses of
$7,038,333, up $1,048,002 or 17.5% over $5,990,331 reported in 1998. Noninterest
income increased $685,976 to $4,524,431 in 1999, up 17.9% over the 1998 level of
$3,838,455, while total noninterest expense increased $707,028 to $8,811,453, up
8.7% over the 1998 total of $8,104,425. All noninterest income items exceeded
1998 results except FHLMC servicing income (see "Noninterest Income").
Management repositioned tax-free securities during the year as part of
investment and tax strategy. Net losses for securities sold were $100,003 for
1999.
Earnings for 1998 were $1,388,733 or $1.07 per share (fully diluted) compared
to $1,750,509 or $1.40 per share in 1997, a decrease of 20.7% or $361,776. The
results of operations would have exceeded the prior year's performance except
for two non-recurring events. The Company wrote off $297,102 or $0.15 per share,
based on a series of disputed international electronic transactions involving
VISA International. The Company also added $410,000 or $0.21 per share, to the
provision for loan losses to provide for a specific loan, which was classified
as "doubtful." Precautions were taken to prevent the recurrence of these two
unique events.
In 1997 earnings were $1,750,509 or $1.40 compared to $1,575,136 or $1.27 per
share in 1996. The 11.1% increase in net income resulted from a 10.5% increase
or $566,773 in net interest income. Noninterest income increased to $2,981,652
in 1997, up 16.5% over the 1996 level of $2,559,496. Total noninterest expenses
for 1997 were $6,555,794, up 14.6% over the 1996 total of $5,720,313.
Assets: Loan Portfolio
The loan portfolio is the largest component of earning assets for the Company
and accounts for the greatest portion of total interest income. The net loan
portfolio totaled $130.6, $109.4, and $102.1 million for 1999, 1998, and 1997,
respectively, representing an increase of 19.4% for 1999 over 1998, 7.2% for
1998 over 1997, and 12.9% for 1997 over 1996. This growth was primarily in
commercial and consumer loans.
- --------------------------------------------------------------------------------
1999 Annual Report 31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
All loan categories except real estate-construction were up during 1999.
Commercial loans increased 26.6% or $13.0 million and consumer loans increased
25.5% or $5.5 million. Real estate-mortgage loans were up 12.0% or $4.0 million.
Participations with other banks increased $1.1 million or 67.1% and real estate
construction loans decreased 48.9% or $2.7 million during 1999.
On December 31, 1999, the loan portfolio consisted of 46.7% commercial loans,
29.9% single family residential and residential construction loans, and 20.2%
consumer loans. The commercial loans consisted principally of business loans
such as retail, service and professional, marine industry, commercial real
estate loans where real estate is the primary collateral, and hospitality, plus
a very small portion of agricultural loans. Management attempted to reduce the
Bank's exposure to the risks of the local real estate market by limiting the
aggregate size of its commercial portfolio and by primarily making such loans
directly to the business occupants. Historically, the Bank has engaged in
limited mortgage lending secured by multi family and agricultural properties. At
year end, residential real estate construction accounted for 2.1% of total
outstanding loans.
Consistent with its focus on providing community based financial services, the
Bank generally does not make loans outside its principal market regions. By
policy it does not originate or purchase highly leveraged loans or loans to
foreign entities or individuals.
Total nonperforming assets consist of nonaccrual loans, restructured loans,
repossessed and foreclosed properties. Nonperforming assets were $340,520 at
December 31, 1999, which represented a substantial decrease from $932,916, at
December 31, 1998. Past due loans were 0.8% of total loans at December 31, 1999.
Asset Quality-Provision/Allowance for Loan Losses
The provision for loan losses is a charge against earnings necessary to
maintain the allowance for loan losses at a level consistent with management's
evaluation of the credit quality and risk adverseness of the loan portfolio. The
allowance for loan losses represents management's estimate of the amount
adequate to provide for potential losses inherent in the loan portfolio. To
achieve this goal, the loan loss provision must be sufficient to cover loans
charged off plus any growth in the loan portfolio. In determining the adequacy
of the allowance for loan losses, management uses a methodology, which
specifically identifies and reserves for higher risk loans. A general reserve is
established of non- specifically reserved loans. Loans in a non-accrual status
and over ninety days past due are considered in this evaluation as well as other
loans, which may be a potential loss. The status of nonaccrual and past due
loans varies from quarter to quarter based on seasonality, local economic
conditions, and cash flow of customers.
The 1999 provision of $210,713 brought the net allowance for loan losses to
$2,253,676 or 1.7% of gross loans. The allowance for loan losses as a percent of
gross loans less unearned discounts was 1.8% on December 31, 1998, and 1.7% in
1997. There was a provision of $620,000 in 1998 compared to the 1997 provision
of $75,000. Continued loan growth may warrant additional provisions in the
future. Loans charged off totaled $27,057 in 1999, $355,637 in 1998, and $41,956
in 1997. Recoveries for the same periods were $46,268, $19,324, and $54,177,
respectively. Management and the Board of Directors believe that the total
allowance at year end was adequate relative to current levels of risk in the
portfolio
Management has periodically contracted outside professionals to perform an
independent loan quality review to enhance the internal loan review process. A
review was performed in late 1997 and the results were consistent with those of
the internal loan review officer and management's reserve analysis process. The
maintenance of high loan quality objectives has been key to the Company's
current levels of performance. A similar review will be completed during the
first quarter of 2000.
Investment Securities
All of the Company's securities are classified as securities available for
sale. Securities may be classified as investment securities (held to maturity)
when management has the intent and the Company has the ability at the time of
purchase to hold the securities to maturity. Investment securities are carried
at cost adjusted for amortization of premiums and accretion of discounts.
Securities available for sale include securities that may be sold in response
- --------------------------------------------------------------------------------
32 Chesapeake Financial Shares, Inc.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
to changes in market interest rates, changes in the securities prepayment risk,
increases in loan demand, general liquidity needs and other similar factors.
Securities available for sale are carried at fair market value. Deposit growth,
short term borrowing, and investment portfolio liquidity provided funding for
the increases in the loan portfolio.
The book value of the portfolio exceeded fair market value by $613,023, net of
the tax effect, at December 31, 1999, and fair market value exceeded book value
by $174,267, net of the tax effect, at December 31, 1998. This is within risk
limits established by the Board and the Asset/Liability Management Committee.
At year end, total securities were $39.4 million, down 7.3% from the $42.5
million on December 31, 1998, which was also down 3.3% from $43.9 million on
December 31, 1997. U. S. Government Agencies decreased 62.0% or $2.1 million
during 1999. Investments in state and political subdivisions (book value)
increased 10.1% or $1.2 million during 1999 and investments in corporate debt
securities increased 100% to $1,513,250. Investments in U.S. Treasury issues and
mortgage-backed securities also decreased from 1998 levels. Management increased
the investment in securities of state and political subdivisions to utilize the
tax free income. This strategy further diversified the portfolio and improved
the total return of the overall portfolio without assuming amounts of risk
greater than limits established and monitored by the Board.
Liabilities: Deposits
The Company depends on deposits to fund most of its lending activities,
generate fee income opportunities, and create a market for other financial
service products. Deposits are also the largest component of the Company's
liabilities and account for the greatest portion of interest expense.
Deposits totaled $174.8, $164.6, and $147.5 million for 1999, 1998, and 1997,
respectively, and represented an increase of 6.2% for 1999 over 1998 and an
increase of 11.6% for 1998 over 1997. There was a 5.5% decrease in certificates
of deposit during 1999. Noninterest bearing deposits increased to $27.1 million
or 14.3% from $23.8 million on December 31, 1998 and savings balances increased
during 1999 by 20.7% or $11.5 million to $67.2 million. Marketing and sales
efforts were successful relative to growing the various deposit categories.
Shareholders' Equity
Capital represents funds, earned or obtained, over which management can
exercise greater control in comparison with deposits and borrowed funds. Future
growth and expansion of the Company is dictated by the ability to produce
capital. The adequacy of the Company's capital is reviewed by management on an
ongoing basis with reference to the size, composition and quality of the
Company's asset and liability levels and consistent with regulatory requirements
and industry standards. Management seeks to maintain a capital structure that
assures an adequate level to support anticipated asset growth and absorb
potential losses.
Federal regulators have adopted minimum capital standards. Specifically, the
guidelines categorize assets and off balance sheet items into four risk weighted
categories. The minimum ratio of qualifying total capital to risk weighted
assets is 8%. For CFS, Tier 1 capital is composed of common equity and retained
earnings. Tier 1 capital to risk weighted assets and Tier 1 capital to average
assets (called leveraged capital) must be 4%. On December 31, 1999, the Company
had ratios of Tier 1 risk based capital to risk weighted assets of 10.4%, total
risk based capital to risk weighted assets of 11.7%, and Tier 1 leverage capital
of 8.3%. At December 31, 1998, these ratios were 11.3%, 12.6% and 8.4%,
respectively, well above the regulatory minimums and exceeded the requirements
for FDIC's "well capitalized" designation. As of December 31, 1999,the Company's
primary capital to asset ratio was 8.9%.
Dividend and Market Information
The Company's stock has traded on the "OTC" (Over The Counter) market under
the symbol "CPKF" for several years. The Company raised its dividend to $0.33
per share in 1999, an increase of $0.05 over 1998. This increase followed
another $0.05 per share dividend increase from $0.23 in 1997 to $0.28 in 1998.
Trades in the Company's common stock occurred infrequently and generally
involved a relatively small number of shares. Based on information available the
selling price for the Company's common stock ranged during 1998 from $16.67 to
$22.91, and during 1999, from $16.50 to $25.00. Such transactions may not be
representative of all transactions
- --------------------------------------------------------------------------------
1999 Annual Report 33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
during the indicated periods, of the fair value of the stock at the time of such
transactions, due to the infrequency of trades and the limited market for the
stock. At December 31, 1999, there were 1,226,327 shares of Company's common
stock outstanding held by approximately 453 holders of record.
Liquidity, Interest Rate Sensitivity, and Inflation
The objectives of the Company's liquidity management policy includes providing
adequate funds to meet the needs of depositors and borrowers at all times, as
well as providing funds to meet the basic needs for ongoing operations of the
Company, and to allow funding of longer-term investment opportunities and
regulatory requirements. The objective of providing adequate funding should be
accomplished at reasonable costs and on a timely basis. Management considers the
Company's liquidity to be adequate.
The Bank's primary sources of liquidity continue to be federal funds
purchased, time deposits with other banks, securities maturing within one year,
loan curtailment, and short term borrowing. On December 31, 1999, approximately
16.1% of the total invested portfolio dollars mature within one year as compared
to 36.2% on December 31, 1998. The Bank's loan portfolio was also liquid with
50.2% of all loan dollars maturing or repricing within one year. This loan
liquidity ratio was 50.9% on December 31, 1998. The reduction in investment
liquidity was consistent with the current investment strategy and was offset by
increases in liability liquidity as discussed later in this section.
Other sources of liquidity include the sale of loans, and proceeds from the
sale of repossessed assets and other real estate owned. The sale of loans
through the secondary market operation enhances the liquidity position by
providing both fixed and adjustable rate long-term mortgage options to our
client base. Mortgage loans held for resale are stated at the lower of cost or
market (or contract value), however, due to the quick turning of these assets,
seldom do these loans represent more than 1% of total assets.
Bank management maintains overnight borrowing relationships with correspondent
banks for up to $21,600,000, unsecured. The Bank and CFS have other secured
borrowing relationships for up to $11,400,000.
As of December 31, 1999, the Bank held $185,000 in repossessed assets and
other real estate owned. These assets have been aggressively marketed for sale
and represented a near term secondary source of liquidity. The Bank should
realize full book value on disposal of these assets.
Since the assets and liabilities of a bank are primarily monetary in nature
(payable in fixed, determinable amounts), the performance of a bank is affected
more by changes in interest rates than by inflation. Interest rates generally
increase as the rate of inflation increases, but the magnitude of the change in
rates may not be the same. Interest rate sensitivity refers to the difference
between assets and liabilities subject to repricing, maturity, or volatility
during a specified period. Management's objective in controlling interest rate
sensitivity is to reprice loans and deposits and make investments that will
maintain a profitable net interest margin (see Net Interest Income).
While the effect of inflation is normally not as significant as is its
influence on those businesses that have large investments in plant and
inventories, it does have an effect. There are normally corresponding increases
in the money supply, and banks will normally experience above average growth in
assets, loans and deposits. Also, general increases in the prices of goods and
services will result in increased operating expenses.
Net Interest Income
The principal source of earnings for CFS is net interest income. Net interest
income is the difference between interest plus fees generated by earning assets
and interest expense paid to fund those assets. As such, net interest income
represents the gross profit from the Bank's lending, investment, and funding
activities.
A large number of variables interact to affect net interest income. Included
are variables such as changes in the mix and volume of earning assets and
interest bearing liabilities, market interest rates, and the statutory Federal
tax rate. It is management's ongoing policy to maximize net interest income
through the development of balance sheet and pricing strategies while
maintaining appropriate risk levels as set by the Board.
- --------------------------------------------------------------------------------
34 Chesapeake Financial Shares, Inc.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net interest income totaled $7.2, $6.6, and $6.0 million for 1999, 1998, and
1997, respectively, representing an increase of 9.7% for 1999 over 1998, 11.0%
for 1998 over 1997, and 10.5% for 1997 over 1996. Loan demand was strong again
this year with gross total loans up 19.2% or $21.4 million for 1999 over 1998.
Total interest expense was $6.2, $6.2, and $5.4 million for 1999, 1998 and 1997,
respectively. On a tax equivalent annualized basis, the net interest margin was
4.6%, 4.5% and 4.6% for 1999, 1998 and 1997, respectively. The improved margin
resulted from improved returns on loans and investments during a rising rate
environment. During this same period noninterest bearing deposits increased and
certificates of deposits decreased, which kept total liability cost increases to
a minimum.
Noninterest Income
For the year ended December 31, 1999, noninterest income was $4.5 million, a
17.9% increase over the 1998 amount of $3.8 million, which was a 28.7% increase
over the 1997 amount of $3.0 million. The increase in 1999 was due to a 25.1% or
$239,903 increase in our cash management service, an increase of $196,962 or
30.0% in merchant card income, and an increase in other income of 24.6% or
$101,801. As a result of management repositioning municipal securities as part
of tax and investment strategies, losses on the sale of securities amounted to
$100,003 for 1999.
Cash management service and merchant card income was up due to general levels
of business activity and product promotions, including incentives and aggressive
pricing. Management expected the market share to continue to grow in these
product areas. Other noninterest income was up primarily due to the sale of the
Bank's former operations center in Kilmarnock, and to increased fee income from
annuity sales and other nondeposit investment products.
Noninterest Expenses
Total noninterest expenses increased 8.7% or $707,028 in 1999 over 1998. In
1998, total noninterest expenses increased 23.6% over 1997 and increased 14.6%
in 1997 over 1996. The 1999 increase was due primarily to a 11.2% or $393,818
increase in salaries and benefits; merchant card expenses which were up 26.4% or
$176,568, over the 1998 amount of $668,407; and cash management service expenses
were up 88.2% or $167,557 over the 1998 amount of $189,887. Miscellaneous
expenses were down 14.3% or $224,450 over the 1998 amount of $1,568,423.
Salaries and benefits were up due to performance incentives and cost of living
increases. Increases in merchant card and cash management services expenses were
directly related to increases in gross income from these services. Total
occupancy expenses increased 4.2% or $67,904 compared to 1998, which was up
19.0%, or $259,549 from the 1997 level of $1,365,534. 1999 was the first full
year of occupancy for the financial services center at Lafayette Street in
Williamsburg, and for the new operations center in Kilmarnock. Chesapeake
Financial Group, Inc. also completed its first full year.
Other accomplishments in 1999 included customer service training for all
Company employees, the launching and upgrading of the Bank's web site, and the
installation and testing of online Banking and online Bill Pay services. The
focus of the year was on customer service and utilizing deployed assets while
managing unprecedented loan growth. The Year 2000 rollover was completed
uneventfully. Year 2000 preparation expenses were approximately $150,000 over
the last three years.
Forward-Looking Statements
The foregoing discussion may contain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act with respect to the
plans, objectives, future performance and business of the Company. These
forward-looking statements involve certain risks and uncertainties. Factors that
may cause actual results to differ materially from those contemplated by such
forward-looking statements include, among others, the following possibilities:
(1) competitive pressure in the banking industry increases significantly; (2)
changes in the interest rate environment reduce margins; (3) general economic
conditions, either nationally or regionally, are less favorable than expected,
resulting in, among other things, a deterioration in credit quality; (4) changes
in the regulatory environment; (5) changes in business conditions, impacting,
among others, the Company's customers and vendors; and (6) changes in the
securities market.
- --------------------------------------------------------------------------------
1999 Annual Report 35
<PAGE>
DIRECTORS AND OFFICERS
Chesapeake Financial Shares, Inc. --
Directors
- -------------------------------------
Douglas D. Monroe, Jr.
Chairman of the Board
Chief Executive Officer
Eugene S. Hudnall, Jr.
Chairman, Noblett, Inc.
Retailer
Robert L. Stephens
Owner
The Tides Inn, Inc.
Resort Operations
T. Nash Broaddus
Chairman of the Board
Prodesco, Inc.
Textile Manufacturer
Katherine W. Monroe
Shareholder
Bruce P. Robertson
President
Shirley Pewter Shops, Inc. and
The Porcelain Collector of
Williamsburg, Ltd.
William F. Shumadine, Jr.
Senior Vice President
Lowe, Brockenbrough & Co., Inc.
Registered Investment Advisor
Jeffrey M. Szyperski
President
Chesapeake Bank
Chesapeake Bank -- Directors
- -------------------------------------
Rexford F. Beckwith, III
President
Rappahannock Westminster-Canterbury
Charles C. Chase, II
President, Rappahannock
Seafood Company, Inc.
James F. Chase, Jr.
Farmer
James M. Holmes, Jr.
President, Administrator
Rappahannock General Hospital
Eugene S. Hudnall, Jr.
Chairman
Noblett, Inc.
Douglas D. Monroe, Jr.
Chairman and CEO
Chesapeake Bank
Harvey B. Morgan
Pharmacist and Legislator
L. Frank Phillips, Jr.
President
L. F. Phillips & Son
Oil Co., Inc.
Albert C. Pollard
President
Pollard Properties, Inc.
Robert L. Stephens
Owner
The Tides Inn, Inc.
Jeffrey M. Szyperski
President
Chesapeake Bank
Harry M. Ward
Superintendent of Schools
Mathews County
Corporate Officers
- -------------------------------------
Douglas D. Monroe, Jr.
Jeffrey M. Szyperski
Marshall N. Warner
John H. Hunt, II
Ted M. Kattmann
Larry T. Lawrence
John K. O'Shaughnessy
Ray H. Hargett
Betty Sue Spence
Jean H. Light
Paul L. Wegkamp, Jr.
Dianne D. Hall
Suzanne D. Keyser
J. Mark Monroe
Tony K. Griggs
Cecelia G. Klink
Timothy P. Wilson
Brenda S. Sims
Carol C. Rakes
Vickie M. Tucker
Julie A. Williams
Linda J. Bisulca
Carlie H. Gill
Heidi L. Wilkins
Rebecca A. Foster
Kathleen S. Banks
Patricia R. Lewis
Ann Marie Pruitt
Chesapeake Insurance Agency, Inc.
and Chesapeake Mortgage Company,
Inc. -- Directors
- -------------------------------------
Douglas D. Monroe, Jr.
Robert L. Stephens
Eugene S. Hudnall, Jr.
Katherine W. Monroe
T. Nash Broaddus
Chesapeake Financial Group, Inc. --
Directors
- -------------------------------------
Douglas D. Monroe, Jr.
Robert L. Stephens
T. Nash Broaddus
Robert S. Scheu
William F. Shumadine, Jr.
Chesapeake Bank Business Advisory --
Committees
- -------------------------------------
Peninsula
Vincent A. Campana
Perry M. DePue
Nancy H. Dykeman
Patrick G. Duffeler
Vernon M. Geddy, III
Bruce P. Robertson
Thomas G. Tingle
Northern Neck/Mathews
Elwood G. Everington
Hank J. George
Weldon M. Howard
B.H.B. Hubbard, III, Esq.
Leland T. James
John C. Miller
F. Stuart Painter
Harry Lee Self
Donald E. Smiley
R. Lee Stephens, Jr.
Robert J. Stewart, Jr., M.D.
Norman R. Tingle, Jr., M.D.
- --------------------------------------------------------------------------------
36 Chesapeake Financial Shares, Inc.
<PAGE>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
Chesapeake Bank
Chesapeake Financial Group, Inc.
Chesapeake Investment Services
CNB Properties, Inc.
28
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 8,669,184
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 39,396,667
<INVESTMENTS-CARRYING> 40,325,489
<INVESTMENTS-MARKET> 39,396,667
<LOANS> 132,893,500
<ALLOWANCE> 2,253,676
<TOTAL-ASSETS> 197,435,133
<DEPOSITS> 174,832,215
<SHORT-TERM> 4,800,000
<LIABILITIES-OTHER> 1,441,753
<LONG-TERM> 847,713
0
0
<COMMON> 6,131,635
<OTHER-SE> 9,381,817
<TOTAL-LIABILITIES-AND-EQUITY> 197,435,133
<INTEREST-LOAN> 10,996,836
<INTEREST-INVEST> 2,372,468
<INTEREST-OTHER> 53,990
<INTEREST-TOTAL> 13,423,294
<INTEREST-DEPOSIT> 5,977,903
<INTEREST-EXPENSE> 6,174,248
<INTEREST-INCOME-NET> 7,249,046
<LOAN-LOSSES> 210,713
<SECURITIES-GAINS> (96,101)
<EXPENSE-OTHER> 8,811,453
<INCOME-PRETAX> 2,751,311
<INCOME-PRE-EXTRAORDINARY> 2,751,311
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,061,269
<EPS-BASIC> 1.67
<EPS-DILUTED> 1.60
<YIELD-ACTUAL> 4.65
<LOANS-NON> 155,520
<LOANS-PAST> 3,554
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 766,327
<ALLOWANCE-OPEN> 2,023,752
<CHARGE-OFFS> 27,057
<RECOVERIES> 46,268
<ALLOWANCE-CLOSE> 2,253,676
<ALLOWANCE-DOMESTIC> 2,253,676
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
