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, 2001.
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 Securities 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. [X]
Issuer's Revenues for its most recent fiscal year: $22,640,499.
As of March 1, 2002 the aggregate market value of Common Stock of Chesapeake
Financial Shares, Inc. held by nonaffiliates was approximately $16,060,999 based
upon the average sales price per share known to management during January and
February 2002.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of March 1, 2002.
Class Outstanding at March 1, 2002
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Common Stock, $5.00 par value 1,261,158
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended December 31,
2001 are incorporated into Part II, Items 5 through 7 of this Form 10-KSB.
Portions of the definitive proxy statement for the 2002 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 ....................................... 1-9
Statistical Information ....................................... 10-22
Item 2. Description of Property ....................................... 23
Item 3. Legal Proceedings ............................................. 23
Item 4. Submission of Matters to a Vote of Security Holders ........... 23
PART II
Item 5. Market for Common Equity and Related Stockholder Matters ...... 24
Item 6. Management's Discussion and Analysis or Plan of Operation ..... 24
Item 7. Financial Statements .......................................... 24
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ................................... 24
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act.. 24
Item 10. Executive Compensation ........................................ 24
Item 11. Security Ownership of Certain Beneficial Owners and
Management ................................................. 24
Item 12. Certain Relationships and Related Transactions ................ 24
Item 13. Exhibits and Reports on Form 8-K .............................. 25
Signatures ............................................................. 26
(i)
PART I
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Item 1. Description of Business
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The Company
Chesapeake Financial Shares, Inc. ("CFS" or "Chesapeake") is an
independent, community owned financial services holding company based in
Kilmarnock, Virginia. CFS 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. CFS
conducts substantially all of its business activities through its wholly-owned
subsidiaries - the Bank and Chesapeake Investment Group, Inc. Chesapeake
Investment Group, Inc. ("CIG") has as its subsidiaries Chesapeake Financial
Group, Inc. ("CFG"), Chesapeake Insurance Agency, Inc., d/b/a Chesapeake
Investment Services ("CIS"), and Chesapeake Trust Company ("CTC").
On December 31, 2001, Chesapeake and its subsidiaries had 121 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; and safekeeping services. Other products include Touch Tone Teller, 24
hour access services, internet banking with online billpayment, and check
imaging. The Bank is a member of the Federal Reserve System and the Bank
Insurance Fund of the Federal Deposit Insurance Corporation insures its
deposits.
Total assets have increased 9.3%, 13.6% and 8.6% for each of the years
ended December 31, 2001, 2000 and 1999, respectively, over prior years. At
December 31, 2001, total loans, net of reserves, amounted to $166.5 million, a
6.5% increase from $156.3 million in total loans at December 31, 2000, which was
a 19.7% increase from the previous year-end total of $130.6 million at December
31, 1999. Growth in total deposits has followed a similar pattern with increases
of 9.2%, 11.0% and 6.2% during 2001, 2000 and 1999, respectively, over prior
years.
The Bank operates nine banking offices and eleven ATMs. 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.
The Bank's current market area is largely rural. The principal business
activities in the area are related to small commercial enterprises and
residential real estate activities, each of which have benefited from the area's
popularity as a retirement and summer home location. The continued population
growth of the York County - James City County/Williamsburg - Hampton triangle
provides additional commercial and residential business activity, which has
diversified and expanded traditional revenue sources.
1
With the exception of the Bank's Rappahannock Westminster Canterbury Office
(the "RWC Office"), the Gloucester Winn-Dixie Supermarket Office, and the Five
Forks/Williamsburg 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, 2005. The Five Forks/Williamsburg Office lease expires December
31, 2005 with two five-year options. The Gloucester branch occupies facilities
rented from Winn-Dixie Raleigh. The Bank relocated this office in January 2002,
to a new banking facility on Bank owned property a short distance from the
Winn-Dixie facility. The second term on the Gloucester lease expires in October
of 2004 and this lease expense was recognized on the Bank's books at year-end.
The Bank's branch offices are located as follows:
Gloucester Winn-Dixie Office Hayes Office Lively Office
6793 George Washington George Washington Route 3 & 201
Memorial Highway Memorial Highway 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
98 King Carter Drive 4492 John Tyler Highway Financial Center
Irvington Williamsburg 1229 Lafayette Street
Williamsburg
CFS owns 2.647 acres of commercial property (formerly the Colonial Store
complex) on School Street in Kilmarnock. The building is approximately 27,000
square feet. Approximately half of the space is rented to two tenants, Advance
Auto and deMedici's Fine Italian Restaurante. The remaining space is being used
by the Bank' Administrative Support, Operations, and Loan Processing Center.
Chesapeake's long term debt is secured by this property.
The Investment Companies
Chesapeake Financial Group, Inc. ("CFG") was incorporated August 31, 1998
and opened for business at the end of 1998. CFG offers superior portfolio
management coupled with highly customized service to high net worth individuals
and institutions. Chesapeake Investment Services offers annuity products (fixed
and variable), mutual funds and discount brokerage products.
CFS chartered Chesapeake Investment Group, Inc. and Chesapeake Trust
Company, Inc. during 2000. These two companies were part of a corporate
restructuring that was completed during the first quarter of 2001. CIG is now a
wholly owned subsidiary of Chesapeake Financial Shares, Inc. CTC has become a
wholly owned subsidiary of CIG, as have CIS and CFG. The Bank has transferred a
significant portion of the Trust Department's business to CTC. The Bank has
retained its trust powers for certain unique accounts.
The motivation for this reorganization was to make more effective the
presentation of Chesapeake's broad array of financial services, and to increase
customer awareness of the financial expertise offered.
The Mortgage Company
Chesapeake Mortgage Company, Inc. (the "Mortgage Company"), which is a
wholly owned subsidiary of CFS, is currently inactive.
See "Lending Activities" below for further information on the mortgage
lending services offered by the Bank.
2
Other Entities
CNB Properties, Inc., a wholly owned subsidiary of the Bank, was formed
September 23, 1991, to provide a corporate vehicle 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. At December 31, 2001, the Bank's commercial loan
portfolio amounted to $84.4 million, or 49.9% of its total loan portfolio.
Commercial lending activities to the Bank's commercial, industrial, 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. See Note 3 to the consolidated
financial statements included in the Company's 2001 Annual Report to
Shareholders (the "Annual Report") in Exhibit 13 to this report and incorporated
by reference in this report for a breakdown of the major loan classifications.
Of the $84.4 million of commercial loans at December 31, 2001, 64.2% of such
loans either matured or were subject to repricing within one year. (Also 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 real estate and the 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, 2001, some form
of collateral secured 95.4% of the commercial loans and 0.75% 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 2001 and 2000.
Real Estate Lending. The Bank's second largest loan category is its real
estate loan portfolio (both mortgage and construction lending), which amounted
to $54.6 million at December 31, 2001, or 32.3% 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, 2001, 32.7% of the mortgage portfolio was
subject to repricing or maturing within twelve months.
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, expectations regarding future interest rates, and the supply
of new housing units placed on the market in the Chesapeake'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, with interest rates generally
as 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.
3
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, Chesapeake 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 lending notwithstanding the recent
decrease in the consumer portfolio (an 11.3% decrease in 2001 from 2000, an
18.5% increase in 2000 over 1999 and a 25.5% increase in 1999 over 1998) due to
the recent economic recession. 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 $28.2
million at December 31, 2001, or 16.7% 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, 2001, only 0.62% of the Bank's
consumer loan portfolio was 30 days or more delinquent.
CFS has adopted Financial Accounting Standards Board ("FASB") Statement No.
114, "Accounting by Creditors for Impairment of a Loan". This statement has been
amended by FASB Statement No. 118, "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures". FASB Statement No. 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. FASB Statement No. 114, as amended also requires
certain disclosures about investments in impaired loans and the allowance for
credit losses and interest income recognized on loans.
CFS considers all consumer installment loans and residential mortgage loans
to be homogeneous loans. These loans are not subject to impairment under FASB
Statement No. 114. A loan is considered impaired when it is probable that CFS
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 impaired loans under FASB Statement No. 114.
4
Charge-offs for impaired loans occur when the loan, or portion of the loan is
determined to be uncollectible, as is the case for all loans. See Note 3 to the
consolidated financial statements included in the Company's 2001 Annual Report
to Shareholders (the "Annual Report") in Exhibit 13 to this report and
incorporated by reference in this report for information about nonaccrual loans
subject to FASB Statement No. 114.
Long-Term Debt
See Note 5 to the consolidated financial statements included in the Annual
Report for information concerning term loan agreements of CFS.
Competition
CFS is subject to intense competition from various financial institutions
and other companies or firms that offer financial services. In its market area,
CFS is and will be competing with several national and regional banking
institutions, including First Virginia Bank, Wachovia Bank, SunTrust Bank,
Wachovia and Bank of America. CFS 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, Chesapeake 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 Chesapeake have greater
financial resources and are able to offer similar services at varying costs with
greater loan capacities.
Supervision and Regulation
General. As a bank holding company and, effective December 7, 2000, a
financial holding company under the Gramm-Leach-Bliley Act of 1999, the Company
is subject to regulation under the Bank Holding Company Act of 1956, as amended
(the "BHCA"), and the examination and reporting requirements of the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board"). As a
state-chartered commercial bank, the Bank is subject to regulation, supervision
and examination by the State Corporation Commission of Virginia (the "SCC"). The
Company also is registered under the bank holding company laws of Virginia and,
accordingly, the Company is subject to regulation and supervision by the SCC.
The following description summarizes the significant state and Federal laws
to which the Company and the Bank are subject. To the extent statutory or
regulatory provisions or proposals are described, the description is qualified
in its entirety by reference to the particular statutory or regulatory
provisions or proposals.
The Gramm-Leach-Bliley Act of 1999. The Gramm-Leach-Bliley Act of 1999 (the
"GLB Act" or the "Act"), signed into law on November 12, 1999, amended a number
of Federal banking laws that affect the Company and the Bank, and the provisions
of the Act that are believed to be of most significance to the Company are
discussed below. In particular, the GLB Act permits a bank holding company to
elect to become a financial holding company. In order to become and maintain its
status as a financial holding company, the bank holding company and all of its
affiliated depository institutions must be well-capitalized, well-managed, and
have at least a satisfactory Community Reinvestment Act rating. The Company
filed an election and on December 7, 2000, became a financial holding company.
Under the BHCA, a bank holding company, including a financial holding
company, may not directly or indirectly acquire ownership or control of more
than 5% of the voting shares or substantially all of the assets of any bank or
merge or consolidate with another bank holding company without the prior
5
approval of the Federal Reserve Board. The BHCA, as amended by the GLB Act, now
generally limits the activities of a bank holding company that is a financial
holding company to that of banking, managing or controlling banks; performing
certain servicing activities for subsidiaries; and engaging in any activity, or
acquiring and retaining the shares of any company engaged in any activity, that
is either (1) financial in nature or incidental to such financial activity, as
determined by the Federal Reserve Board in consultation with the Secretary of
the Treasury; or (2) complementary to a financial activity and does not pose a
substantial risk to the safety and soundness of depository institutions or the
financial system generally, as determined by the Federal Reserve Board.
Activities that are "financial in nature" include those activities that the
Federal Reserve Board had determined, by order or regulation in effect prior to
enactment of the GLB Act, to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto.
The GLB Act covers a broad range of issues, including a repeal of most
of the restrictions on affiliations among depository institutions, securities
firms and insurance companies. In particular, the GLB Act repeals sections 20
and 32 of the Glass-Stegall Act, thus permitting unrestricted affiliations
between banks and securities firms. The Act also provides that, while the states
continue to have the authority to regulate insurance activities, in most
instances they are prohibited from preventing or significantly interfering with
the ability of a bank, directly or through an affiliate, to engage in insurance
sales, solicitations or cross-marketing activities. A financial holding company,
therefore, 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. Although the states generally must regulate bank
insurance activities in a nondiscriminatory manner, the states may continue to
adopt and enforce rules that specifically regulate bank insurance activities in
certain areas identified in the Act.
The GLB Act, and certain new regulations issued by federal banking
agencies, 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 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.
Many of the GLB Act's provisions, including the customer privacy
protection provisions, require the federal bank regulatory agencies and other
regulatory bodies to adopt regulations to implement those respective provisions.
Most of the required implementing regulations have been proposed and/or adopted
by the bank regulatory agencies as of December 31, 2001.
Interstate Banking. 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. Effective June 1, 1997, 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 has adopted legislation
that permits branching across state lines effective July 1, 1995, provided there
is reciprocity with the state in which the out-of-state bank is based.
6
Capital Requirements. The Federal Reserve Board, the Office of the
Comptroller of the Currency 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 organizations 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, CFS
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 be "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, 2001 were 10.2% and 11.5%, 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 4% 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 CFS as of December 31, 2001, was 8.4%, 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. Chesapeake Financial Shares,
Inc. 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 CFS as well as the payment of dividends by CFS 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, CFS or take securities of CFS 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 Chesapeake. 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, 2001, the Bank could have paid additional dividends to CFS of
approximately $3.5 million, without obtaining prior regulatory approval. The
payment of dividends by the Bank or CFS 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 CFS 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 CFS, could be
deemed to constitute such an unsafe and unsound practice.
7
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, Chesapeake does not expect that this provision will
have any impact on its ability to obtain dividends from the Bank.
Community Reinvestment Act. 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.
FDIC Insurance Assessment. As an institution with deposits insured by
the Bank Insurance Fund, 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). Under the final risk-based
assessment system there are nine assessment risk classifications (i.e.,
combinations of capital groups and supervisory subgroups) to which different
assessment rates are applied. Assessment rates for deposit insurance currently
range from zero basis points to 27 basis points. The capital and supervisory
subgroup to which an institution is assigned by the FDIC is confidential and may
not be disclosed. A bank's rate of deposit insurance assessments will depend
upon the category and subcategory to which the bank is assigned by the FDIC. Any
increase in insurance assessments could have an adverse effect on the earnings
of insured institutions, including the Bank.
Under the Federal Deposit Insurance Act, insurance of deposits may be
terminated by the FDIC upon a finding that the institution has engaged in unsafe
and unsound practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation, rule, order, or
condition imposed by the FDIC. Management does not know of any practice,
condition, or violation that might lead to termination of deposit insurance.
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.
8
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.
Other
During the fourth quarter of 2000, the Company satisfactorily
completed a Combined Safety and Soundness Examination performed by the Federal
Reserve Bank of Richmond. As of February 2001, the Bank and the Company
satisfactorily completed Transfer Agent Examination, also performed by the
Federal Reserve Bank. During the first quarter of 2002, the Company had
substantially completed a safety and soundness examination by the Virginia
Bureau of Financial Institutions that was the first regulatory review since the
corporate restructuring. 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 CFS.
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 and the Bank. 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.
9
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 ........ 11-12
TABLE 2. Analysis of Change in Net Interest Income ..................... 13
TABLE 3. Types of Investment Securities ................................ 14
TABLE 4. Maturity Schedule of Selected Loans as of Dec. 31, 2001 ....... 15
TABLE 5. Risk Elements ................................................. 16
TABLE 6. Summary of Allowance for Loan Losses .......................... 17
TABLE 7. Allocation of the Allowance for Loan Losses ................... 18
TABLE 8. Deposits ...................................................... 19
TABLE 9. Return on Equity and Assets ................................... 20
TABLE 10. Short Term Borrowing .......................................... 20
TABLE 11. Interest Sensitivity Analysis ................................. 21
TABLE 12. Analysis of Capital ........................................... 22
10
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,
-----------------------
2001 2000 1999
---- ---- ----
Annual Annual Annual
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ----- ------- ------- ----
(Dollars in thousands)
Assets:
Securities:
Taxable $ 21,708 $ 1,333 6.14% $ 24,909 $ 1,671 6.71% $ 29,351 $ 1,688 5.75%
Tax-exempt(1) 16,091 899 8.49% 15,224 838 8.34% 13,291 684 7.80%
-------- ------- -------- ------- -------- -------
Total securities 37,799 2,232 7.14% 40,133 2,509 7.33% 42,642 2,372 6.39%
Loans (net of unearned income):
Taxable(2) 162,527 14,442 8.89% 143,960 13,073 9.08% 119,470 10,859 9.09%
Tax-exempt (1) 889 60 10.26% 1,145 79 10.48% 1,846 138 11.33%
-------- ------- -------- ------- -------- -------
Total loans 163,416 14,502 8.89% 145,105 13,152 9.09% 121,316 10,997 9.12%
Federal funds sold and
repurchase agreements 3,690 116 3.17% 75 6 8.00% 975 40 4.10%
Interest-bearing deposits
in other banks 0 0 0% 0 0 0% 284 14 4.93%
-------- ------- ---- -------- ------- ---- -------- -------
Total earning assets 204,905 16,850 8.47% 185,313 15,667 8.71% 165,217 13,423 8.38%
Less: allowance for loan losses (2,403) (2,324) (2,137)
Total nonearning assets 30,787 28,066 24,349
-------- -------- --------
Total assets $233,289 $211,055 $187,429
-------- -------- --------
11
TABLE 1 (cont.)
AVERAGE BALANCES, INCOME AND EXPENSES, YIELDS AND RATES
Year Ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
Annual Annual Annual
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- ------- ------ ------- ------- ------ ------- ------- ------
(Dollars in thousands)
Liabilities and Shareholder's Equity:
Interest-bearing deposits:
Checking $ 57,893 $1,385 2.39% $ 52,221 $1,798 3.44% $ 50,065 $1,654 3.30%
Regular savings 10,393 203 1.95% 10,172 275 2.70% 10,955 282 2.57%
Money market savings 4,289 105 2.45% 3,860 113 2.93% 4,464 129 2.89%
Certificates of deposit:
$100,000 and over 27,649 1,477 5.34% 21,543 1,353 6.28% 14,326 681 4.75%
Under $100,000 72,381 3,963 5.48% 68,284 3,894 5.70% 63,159 3,232 5.12%
-------- ------ -------- ------ -------- ------
Total interest-bearing deposits 172,605 7,133 4.13% 156,080 7,433 4.76% 142,969 5,978 4.18%
Federal funds purchased 7,219 347 4.81% 5,745 396 6.89% 2,737 149 5.44%
Other borrowings 808 44 5.45% 835 42 5.03% 858 47 5.48%
-------- ------ -------- ------ -------- ------
Total interest-bearing liabilities 180,632 7,524 4.17% 162,660 7,871 4.84% 146,564 6,174 4.21%
Noninterest bearing liabilities:
Demand deposits 30,044 28,734 23,996
Other liabilities 3,514 2,956 1,530
-------- -------- --------
Total liabilities 214,190 194,350 172,090
Shareholders' equity 19,099 16,705 15,339
Total liabilities and shareholders'
equity $233,289 $211,055 $187,429
-------- -------- --------
Net interest income/yield $9,326 4.80% $7,796 4.46% $7,249 4.64%
Interest rate spread 4.30% 3.87% 4.17%
1) Yields are reported on a taxable equivalent basis assuming a federal ax
rate of 34%.
2) Includes non-accrual loans.
12
TABLE 2
VOLUME AND RATE ANALYSIS
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.
Year Ended December 31,
-----------------------
2001 vs.2000 2000 vs. 1999 1999 vs. 1998
Increase (Decrease) Increase (Decrease) Increase (Decrease)
Due to Changes in:(1)(2) Due to Changes in:(1)(2) Due to Changes in:(1)(2)
------------------------ ------------------------ ------------------------
Volume Rate Total Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- ----- ------ ---- -----
(In thousands)
Earning Assets:
Securities:
Taxable $ (215) $ (123) $ (338) $ (255) $ 238 $ (17) $ (285) $ 87 $ (198)
Tax-exempt 48 13 61 99 55 154 79 0 79
Loans:
Taxable 1,686 (317) 1,369 2,226 (12) 2,214 1,420 (523) 897
Tax-exempt (17) (2) (19) (52) (7) (59) (55) (12) (67)
Federal funds sold 288 (178) 110 (37) 3 (34) (33) (16) (49)
Interest-bearing deposits in other
banks 0 0 0 (14) 0 (14) (3) 1 (2)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total earning
assets $ 1,790 $ (607) $ 1,183 $ 1,967 $ 277 $ 2,224 $ 1,123 $ (463) $ 660
-------- ------------------- -------- -------- -------- -------- -------- --------
Interest-Bearing Liabilities:
Interest checking $ 195 $ (608) $ (413) $ 71 $ 73 $ 144 $ 727 $ 199 $ 926
Regular savings 6 (78) (72) 13 (20) (7) (35) (15) (50)
Money market savings 12 (20) (8) (17) 1 (16) (50) 1 (49)
Time deposits:
CDS $100,000 or more 383 (259) 124 342 330 672 (128) (88) (216)
CDS Other 233 (164) 69 262 400 662 (378) (322) (700)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total interest-bearing deposits 829 (1,129) (300) 671 784 1,455 136 (255) (89)
Federal funds purchased 101 (150) (49) 163 84 247 114 (1) 113
Other borrowing 1 1 2 (1) (4) (5) (1) (1) (2)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total interest-bearing liabilities $ 931 $ (1,278) $ (347) $ 833 $ 864 $ 1,697 $ 249 $ (227) $ 22
-------- -------- -------- -------- -------- -------- -------- -------- --------
Change in net interest income: $ 859 $ 671 $ 1,530 $ 1,134 $ (587) $ 547 $ 874 $ (236) $ 638
-------- -------- -------- -------- -------- -------- -------- -------- --------
(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 combined effect of changes in both volume and rate that cannot be
separately identified has been allocated proportionately to the change due to
volume and change due to rate.
13
TABLE 3
SECURITIES HELD FOR RESALE AND INVESTMENT
MATURITY DISTRIBUTION AND AVERAGE YIELD
December 31,
2001 2000 1999
---- ---- ----
Book Value: (In thousands)
U.S. Government securities............... $17,701 $21,054 $24,199
State and political subdivisions......... 15,152 15,110 13,571
Other securities......................... 2,488 2,552 2,555
------- ------- -------
Total securities...................... $35,341 $38,716 $40,325
Maturities of Securities Held at December 31, 2001
Over Ten
One One Five Years and
Year to Five to Ten Equity
or Less Years Years Securities Total
------- ----- ----- ---------- -----
(Dollars in thousands)
State and Political Subdivisions:
Book value 852 708 2,517 11,075 15,152
Market value 913 682 2,611 11,450 15,656
Weighted average yield(1) 10.50% 8.35% 8.18% 8.28% 8.40%
Corporate Debt Securities:
Book value -- 1,539 0 -- 1,539
Market value -- 1,551 0 -- 1,551
Weighted average yield(1) 0% 6.71% 0% 0% 6.71%
Mortgage Backed Securities:
Book value 3,717 12,737 1,247 -- 17,701
Market value 3,772 12,926 1,267 -- 17,965
Weighted average yield(1) 7.81% 6.68% 7.99% 0% 7.01%
Other Securities:
Book Value -- -- -- 949 949
Market Value -- -- -- 949 949
Weighted Average Yield(1) 0% 0% --% 5.07% 5.07%
Total Securities:
Book value $ 4,569 $14,984 $ 3,764 $12,024 $35,341
Market value 4,685 15,759 3,878 12,399 36,121
Weighted average yield(1) 8.30% 6.74% 7.87% 8.10% 7.55%
(1) Yields on tax-exempt securities have been computed on a tax-equivalent
basis.
14
TABLE 4
LOAN PORTFOLIO AND MATURITY SCHEDULE OF SELECTED LOANS
AS OF DECEMBER 31, 2001
December 31,
------------
(In thousands)
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Commercial $ 84,398 $ 76,315 $ 62,100 $ 49,058 $ 43,370
Real estate mortgage 46,605 41,674 36,955 33,003 38,946
Real estate construction 7,947 5,464 2,794 5,468 2,900
Consumer 28,192 31,792 26,832 21,379 16,268
Participations with other banks 1,608 2,378 2,691 1,610 1,946
Other 265 833 1,521 928 409
-------- -------- -------- -------- --------
Total $169,015 $158,456 $132,893 $111,446 $103,839
For the 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, 2001 is presented below. Management considers the
liquidity of CFS 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 22.
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)
Commercial and other $ 5,725 $48,651 $ 6,802 $19,221 $ 3,442 $ 823
Real estate-construction 0 574 0 7,373 0 0
Real estate mortgage 4,475 12,787 6,829 14,584 7,663 267
Consumer installment 6,177 4,093 6,481 570 10,837 34
------- ------- ------- ------- ------- -------
Total $16,377 $66,105 $20,112 $41,748 $21,942 $ 1,124
------- ------- ------- ------- ------- -------
15
TABLE 5
RISK ELEMENTS
Risk elements associated with the loan portfolio are presented below. CFS
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. Chesapeake'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,
------------
(Dollars in thousands)
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Nonaccrual loans(1) $ 822 $ 563 $ 155 $ 202 $ 581
Restructured loans 0 0 0 0 0
Foreclosed properties 45 175 185 185 245
--------- ------ -------- ------- ------
Total nonperforming
Assets $ 867 $ 738 $ 340 $ 387 $ 826
--------- ------ -------- ------- ------
Loans past due 90+ days and
accruing interest $ 22 $ 28 $ 4 $ 4 $ 14
Allowance for loan losses
to period end loans 1.5% 1.3% 1.7% 1.8% 1.7%
Allowance for loan losses to
nonaccrual loans 309.0% 377.6% 1,449.1% 999.7% 299.5%
Nonperforming assets to
period-end loans and
foreclosed properties 0.51% 0.47% 0.26% 0.35% 0.80%
Net charge-offs (recoveries)
to average loans 0.17% 0.37% (0.02%) 0.32% (0.01%)
(1) During 2001, approximately $91,000 in additional interest income
would have been recorded if CFS's nonaccrual loans had been current and
in accordance with original terms.
(2) There were no troubled debt restructurings in 2001, 2000, 1999, 1998,
or 1997. The Bank expects to charge off $637,926 in problem loans (fully
reserved at December 31, 2001). 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
2001 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.
(3) As of December 31, 2001, performing loans totaling approximately $9.6
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 individual consumer.
16
TABLE 6
SUMMARY OF ALLOWANCE FOR LOAN LOSS
The following table shows Chesapeake's loan loss and recovery experience for the
past five years.
Chesapeake tries to maintain an allowance 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 allowance 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 CFS 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,
-----------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(Dollars in thousands)
Balance, beginning of period $ 2,125 $ 2,254 $ 2,024 $ 1,740 $ 1.653
Loans charged off:
Commercial (278) (532) (8) (330) (29)
Real estate construction 0 0 0 0 0
Real estate mortgage (20) (57) 0 0 (3)
Consumer (32) (23) (19) (25) (10)
------- ------- ------- ------- -------
Total loans charged off (330) (612) (27) (355) (42)
------- ------- ------- ------- -------
Recoveries of loans previously charged off:
Commercial 45 2 27 0 35
Real estate - construction 0 0 0 0 0
Real estate - mortgage 2 1 0 7 0
Consumer 2 75 19 12 19
------- ------- ------- ------- -------
Total recoveries 49 78 46 19 54
------- ------- ------- ------- -------
Net loans(charged off)recovered (281) (534) 19 (336) 12
Provision for loan losses 697 405 211 620 75
------- ------- ------- ------- -------
Balance, end of period $ 2,541 $ 2,125 $ 2,254 $ 2,024 $ 1,740
------- ------- ------- ------- -------
17
TABLE 7
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
The following table provides a breakdown of the allowance for loan losses
by major categories of Chesapeake's loan portfolio.
2001 2000 1999 1998 1997
Percent of loans in each category
Amount % of Loans Amount % of Loans Amount % of Loans Amount % of Loans Amount % of Loans
------ ---------- ------ ---------- ------ ---------- ------ ---------- ------- ----------
(Dollars in thousands)
Commercial $1,536 49.9% $1,236 48.2% $1,559 46.7% $1,233 44.1 $ 366 39.3%
Real estate construction 0 4.6 0 3.4 0 2.1 0 4.9 0 2.8
Real estate mortgage 508 27.7 482 26.3 408 27.8 463 29.6 1,154 37.5
Consumer 422 16.6 364 20.1 264 20.2 299 19.2 220 15.7
Other 75 0.2 43 0.5 23 1.1 29 0.8 0 0.4
Participations 0 1.0 0 1.5 0 2.1 0 1.4 0 4.3
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total $2,541 100.0% $2,125 100.0% $2,254 100.0% $2,024 100.0% $1,740 100.0%
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
18
TABLE 8
DEPOSITS
The average balance and rates for certain categories of deposits for
the last three years are shown in the following table:
Year ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ----
(Dollars in thousands)
Non-interest bearing
demand deposits $ 30,044 $ 28,734 $ 23,996
-------- -------- --------
Interest bearing deposits:
Interest checking 57,893 2.39% 52,221 3.44% 50,065 3.30%
Regular savings 10,393 1.95 10,172 2.70 10,955 2.57
Money market savings 4,289 2.45 3,860 2.93 4,464 2.89
Time deposits:
Certificates of deposit
$100,000 or more 27,649 5.34 21,543 6.28 14,326 4.75
Other certificates
of deposit 72,381 5.48 68,284 5.70 63,159 5.12
-------- -------- --------
Total interest bearing
deposits 172,605 4.13 156,080 4.76 142,969 4.18
-------- -------- --------
Total deposits $202,649 3.52% $184,814 4.02% 166,965 3.58%
-------- -------- --------
Maturities of time certificates of deposits of $100,000 or more
outstanding at December 31, 2001 were:
2001
----
(Dollars in thousands)
3 months or less $11,810
3 - 6 months 4,165
6 - 12 months 3,226
Over 12 months 7,465
-------
Total $26,666
19
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,
-----------------------
2001 2000 1999
---- ---- ----
Return on average assets 1.13% 1.06% 1.10%
Return on average equity 13.82% 13.34% 13.44%
Dividend payout ratio 21.22% 22.10% 19.73%
Average equity to average assets 8.19% 7.91% 8.18%
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 generally mature daily
for cash flow requirements, however, short term borrowing may extend to 18
months. The borrowed amounts and their corresponding rates during 2001, 2000 and
1999 are presented below:
Year ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
(Dollars in thousands)
Average daily amount outstanding $ 7,219 $ 5,745 $2,737
Average interest rate 4.81% 6.89% 5.44%
Maximum outstanding at any month end $11,400 $11,100 $9,000
Balance at end of period $10,000 $ 9,500 $4,800
20
TABLE 11
INTEREST SENSITIVITY ANALYSIS
December 31, 2001
-----------------
Within 90-365 1 to 5 Over
90 Days Days Years 5 Years Total
-------- ------ ----- ------- -----
(Dollars in thousands)
Earnings Assets:
Loans (2) $ 49,150 $ 35,731 $ 61,067 $ 23,068 $169,016
Securities & Time
Deposits with
other banks 2,228 5,305 11,513 17,074 36,120
Federal funds sold
and other short-
term investments(3) 19,521 -- -- -- 19,521
-------- -------- -------- -------- --------
Total interest
earning assets
$ 70,899 $ 41,036 $ 72,580 $ 40,142 $224,657
-------- -------- -------- -------- --------
Interest-Bearing
Liabilities:
Interest checking,
savings and money
market savings(4) $ 4,990 $ 10,712 $ 67,644 $ -- $ 83,346
Certificates of
deposit:
$100,000 and over 11,810 7,391 7,465 -- 26,666
Under $100,000 26,259 21,214 20,741 -- 68,214
Federal funds
purchased and
securities sold
under agreements
to repurchase 0 7,500 2,500 -- 10,000
Other borrowing 6 21 121 644 792
-------- -------- -------- -------- --------
Total interest-
bearing liabilities $ 43,065 $ 46,838 $ 98,471 $ 644 $189,018
-------- -------- -------- -------- --------
Period gap $ 27,834 $ (5,802) $(25,891) $ 39,498 $ 35,639
Cumulative gap $ 22,032 $ (3,859) $ 35,639
Ratio of cumulative
gap to total
earning assets(4) 12.39% 9.81% -1.72% 15.86%
(1) The repricing dates may differ from maturity dates for certain assets due to
prepayment assumptions.
(2) Includes nonaccrual loans.
(3) Includes cash management accounts
(4) 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.
(5) 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 is considered reasonable by management and is within limits
established by the Board of Directors.
21
TABLE 12
ANALYSIS OF CAPITAL *
December 31,
2001 2000
---- ----
(Dollars in thousands)
Tier 1 Capital:
Common stock $ 6,277 $ 6,149
Additional paid in capital 230 154
Retained earnings 13,553 11,473
Less: Goodwill 0 0
-------- --------
Total Tier 1 capital $ 20,060 $ 17,776
Tier 2 Capital:
Allowance for loan losses 2,457 2,272
Allowable long-term debt 0 0
-------- --------
Total Tier 2 Capital 2,457 2,272
Total risk-based capital $ 22,517 $ 20,048
-------- --------
Risk weighted assets $196,040 $180,199
Capital Ratios:
Tier 1 risk-based capital ratio 10.2% 9.8%
Total risk-based capital ratio 11.5 11.0
Tier 1 capital to average
adjusted total assets 8.4 8.1
* See the captioned "Note 17 Minimum Regulatory Capital Requirements" which is
included in Exhibit #13 at page 25, The Annual Report to Shareholders was filed
with the Commission on March 6, 2002.
22
PART I cont'd.
ITEM 2. Description of Property
--------------------------------
CFS owns one property at December 31, 2001 which was purchased on January
2, 1998 that is described in PART I, Item 1. The Bank, however, owns and leases
properties as also described in PART 1, 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, 2001.
23
PART II
ITEM 5. Market for Common Equity and Related Shareholder Matters
-----------------------------------------------------------------
This information is included in the 2001 Annual Report to Shareholders
at page 32 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 2001 Annual Report to Shareholders
at pages 30-34.
ITEM 7. Financial Statements
-----------------------------
This information is included in the 2001 Annual Report to Shareholders
at pages 3-29.
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 2002 Annual Meeting of Shareholders at pages 2 through 4
and page 8 thereof.
ITEM 10. Executive Compensation
--------------------------------
This information is incorporated herein by reference from the Company's
Proxy Statement for the 2002 Annual Meeting of Shareholders at pages 5 through 8
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 2002 Annual Meeting of Shareholders at pages 2 and 4
thereof.
ITEM 12. Certain Relationships and Related Transactions
--------------------------------------------------------
This information is incorporated herein by reference from the Company's
Proxy Statement for the 2002 Annual Meeting of Shareholders at page 8 thereof.
24
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 - 10.3 are incorporated by
reference to Exhibit 10 to previously filed Registration
Statement on Form S-18, Registration No. 33- 27825, dated May 15,
1989, as amended.
10.1 Employee Stock Ownership Plan
10.2 Douglas D. Monroe, Jr. Deferred Compensation Agreement
10.3 Thomas B. Denegre, Jr. Deferred Compensation Agreement
10.4 John H. Hunt, II Employment Agreement (filed with the
December 1997 10KSB)
#13 Annual Report to Security Holders is filed herewith
#21 Subsidiaries of the Registrant is filed herewith.
#22 None
(b) Reports on Form 8-K. No reports were filed by the registrant
during the fourth quarter of 2001.
25
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 26, 2002 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 26, 2002
----------------------
Douglas D. Monroe, Jr.
Chairman of the Board and
Chief Executive Officer
/s/ T. Nash Broaddus March 26, 2002
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T. Nash Broaddus, Director
/s/ Eugene S. Hudnall March 26, 2002
-----------------
Eugene S. Hudnall, Director
/s/ Katherine W. Monroe March 26, 2002
-------------------
Katherine W. Monroe, Director
/s/ Bruce P. Robertson March 26, 2002
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Bruce P. Robertson, Director
/s/ William F. Shumadine, Jr. March 26, 2002
-------------------------
William F. Shumadine, Jr., Director
/s/ Robert L. Stephens March 26, 2002
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Robert L. Stephens, Director
/s/ Jeffrey M. Szyperski March 26, 2002
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Jeffrey M. Szyperski, Director
26