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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
Commission file number 0-32589
Chesterfield Financial Corp.
(Exact name of registrant as specified in its charter)
Delaware 36-4441126
(State of Incorporation) (I.R.S. Employer
Identification No.)
10801 S. Western Avenue, Chicago, Illinois, 60643
(Address of principal executive offices)
(773) 239-6000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all the reports
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report), and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes [X] No
(2) Yes [X] No
The number of shares outstanding of each of the issuer's classes of common
stock was 3,814,975 shares of common stock, par value $.01, outstanding as of
November 8, 2002.
- --------------------------------------------------------------------------------
CHESTERFIELD FINANCIAL CORP.
FORM 10-Q
Index
Part I. Financial Information Page (s)
- ------- --------------------- --------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets as of
September 30, 2002 and June 30, 2002 (unaudited) 1
Consolidated Condensed Statements of Income for the three
months ended September 30, 2002 and 2001 (unaudited) 2
Consolidated Condensed Statements of Stockholders' Equity
for the three months ended September 30, 2002 and 2001 (unaudited) 3
Consolidated Condensed Statements of Cash Flows for the three
months ended September 30, 2002 and 2001 (unaudited) 4
Notes to Consolidated Condensed Financial Statements (unaudited) 5-8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9-11
Item 3. Quantitative and Qualitative Disclosures about Market Risks 12
Item 4. Controls and Procedures 13
Part II. Other Information
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signature Page 15
Certifications 16-18
CHESTERFIELD FINANCIAL CORP.
CONSOLIDATED CONDENSED BALANCE SHEETS (unaudited)
Dollars in thousands
September 30, June 30,
2002 2002
--------------------------
Assets
Cash and due from financial institutions $ 6,634 $ 7,559
Interest-earning deposits 88,271 83,367
Federal funds sold 5,200 3,800
------------------------
Cash and cash equivalents 100,105 94,726
Securities available-for-sale 21,733 17,374
Securities held to maturity, at amortized cost (approximate fair value of
$48,024 at September 30, 2002 and $58,299 at June 30, 2002) 47,031 57,483
Loans receivable, net of allowance for loan losses of $1,579 at
September 30, 2002 and $1,576 at June 30, 2002 166,587 169,881
Federal Home Loan Bank stock 17,558 17,342
Premises and equipment 2,587 2,529
Accrued interest receivable and other assets 4,397 4,005
------------------------
Total assets $ 359,998 $ 363,340
=========================
Liabilities and Stockholders' Equity
Liabilities
Deposits $ 277,676 $ 278,126
Advance payments by borrowers for taxes and insurance 3,499 2,622
Accrued expenses and other liabilities 5,912 5,851
------------------------
Total liabilities 287,087 286,599
Stockholders' equity
Preferred stock, $.01 par value per share, 1,000,000 shares authorized, no
shares issued and outstanding -- --
Common stock, $.01 par value per share, 7,000,000 shares authorized; 4,304,738
shares issued; 3,821,975 and 4,088,495 outstanding at September 30, 2002
and June 30, 2002 43 43
Additional paid in capital 42,198 42,153
Retained earnings 41,854 41,085
Unearned Employee Stock Ownership Plan shares (3,001) (3,056)
Unearned Recognition and Retention Plan shares (2,353) (2,496)
Treasury stock, at cost (6,151) (1,167)
Accumulated other comprehensive income 321 179
------------------------
Total stockholders' equity 72,911 76,741
------------------------
Total liabilities and stockholders' equity $ 359,998 $ 363,340
=========================
See accompanying notes to unaudited consolidated condensed financial statements.
1
CHESTERFIELD FINANCIAL CORP.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (unaudited)
Dollars in thousands, except per share data
For the three months
ended September 30,
2002 2001
--------------------
Interest income and dividend income
Loans, including fees $2,875 $2,987
Securities 875 1,440
Interest-earning deposits 347 580
Federal Home Loan Bank stock dividends 221 125
Other interest income 24 40
------ ------
Total interest and dividend income 4,342 5,172
Interest expense on deposits 1,665 2,504
------ ------
Net interest income before provision for loan losses 2,677 2,668
Provision for loan losses -- --
------ ------
Net interest income after provision for loan losses 2,677 2,668
Non-interest income
Insurance commissions 584 475
Service charges on deposit accounts 70 74
Other 43 32
------ ------
Total non-interest income 697 581
Non-interest expense
Salaries and employee benefits 1,346 1,083
Occupancy 194 190
Equipment 115 140
Data processing 83 79
Federal deposit insurance 33 30
Other 393 326
------ ------
Total non-interest expense 2,164 1,848
------ ------
Income before income taxes 1,210 1,401
Income tax expense 441 476
------ ------
Net income $ 769 $ 925
====== ======
Basic earnings per share $ 0.21 $ 0.23
Diluted earnings per share $ 0.21 $ 0.23
Comprehensive income $ 911 $1,090
See accompanying notes to unaudited consolidated condensed financial statement.
CHESTERFIELD FINANCIAL CORP.
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (unaudited)
Three months ended September 30, 2002 and 2001
Dollars in thousands
Accumulated
Additional Unearned Unearned Other Total
Common Paid-in Retained Treasury ESOP RRP Comprehensive Stockholders'
Stock Capital Earnings Stock Shares Shares Income (Loss) Equity
============================================================================================
Balance at July 1, 2001 $ 43 $ 41,999 $ 37,827 $ -- $ (3,293) $ -- $ (23) $ 76,553
Comprehensive income
Net income 925 925
Unrealized gain on securities
available-for-sale, net 165 165
--------
Total comprehensive income 1,090
ESOP shares committed to be released 36 68 104
-------- -------- -------- -------- -------- -------- -------- --------
Balance at September 30, 2001 $ 43 $ 42,035 $ 38,752 $ -- $ (3,225) $ -- $ 142 $ 77,747
======== ======== ======== ======== ======== ======== ======== ========
Balance at July 1, 2002 $ 43 $ 42,153 $ 41,085 $ (1,167) $ (3,056) $ (2,496) $ 179 $ 76,741
Comprehensive income
Net income 769 769
Unrealized gain on securities
available-for-sale, net 142 142
--------
Total comprehensive income 911
Purchases of treasury stock (4,984) (4,984)
Amortization of vested RRP shares 143 143
ESOP shares committed to be released 45 55 100
-------- -------- -------- -------- -------- -------- -------- --------
Balance at September 30, 2002 $ 43 $ 42,198 $ 41,854 $ (6,151) $ (3,001) $ (2,353) $ 321 $ 72,911
======== ======== ======== ======== ======== ======== ======== ========
See accompanying notes to unaudited consolidated condensed financial statements.
3
CHESTERFIELD FINANCIAL CORP.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (unaudited)
Dollars in thousands
Three months ended
September 30,
-----------------------
2002 2001
-----------------------
Cash flows from operating activities:
Net income $ 769 $ 925
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan losses -- --
Depreciation 92 113
Net amortization of securities (2) (1)
ESOP compensation expense 100 104
RRP compensation expense 143 --
Federal Home Loan Bank stock dividends (221) (125)
Net change in:
Deferred loan origination fees 35 (19)
Accrued interest receivable and other assets (387) (879)
Accrued expenses and other liabilities (12) 1,037
--------- ---------
Net cash from operating activities 517 1,155
--------- ---------
Cash flows from investing activities:
Activity in held-to-maturity securities:
Maturities, calls and payments 10,452 25,427
Purchases -- (20,000)
Activity in available-for-sale securities:
Payments 857 153
Purchases (5,000) --
Purchase of Federal Home Loan Bank stock -- (15,000)
Loan originations and payments, net 3,260 (1,399)
Additions to premises and equipment (150) (25)
--------- ---------
Net cash from investing activities 9,419 (10,844)
--------- ---------
Cash flows from financing activities:
Net change in deposits (450) 8,430
Net change in advance payments by borrowers for taxes and insurance 877 1,031
Purchase of treasury stock (4,984) --
--------- ---------
Net cash from financing activities (4,557) 9,461
--------- ---------
Net change in cash and cash equivalents 5,379 (228)
Cash and cash equivalents at beginning of period 94,726 66,921
--------- ---------
Cash and cash equivalents at end of period $ 100,105 $ 66,693
========= =========
4
See accompanying notes to unaudited consolidated condensed financial statements.
Notes to Consolidated Condensed Financial Statements (unaudited)
- --------------------------------------------------------------------------------
Note 1 - Basis of Presentation
The accompanying unaudited consolidated condensed financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States ("GAAP") for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and notes required by GAAP for complete
financial statements. In the opinion of management, all adjustments (consisting
of only normal recurring accruals) necessary for a fair presentation have been
included. The results of operations and other data for the three months ended
September 30, 2002 are not necessarily indicative of results that may be
expected for the entire fiscal year ending June 30, 2003.
Chesterfield Financial Corp. (the "Company") is a Delaware corporation that was
organized in January 2001 at the direction of the Board of Directors of
Chesterfield Federal Savings and Loan Association (the "Bank") for the purpose
of owning all of the outstanding capital stock of the Bank following the
completion of the Bank's mutual-to-stock conversion. The Company sold 4,304,738
shares of its common stock in a public offering to eligible depositors and
members of the general public (the "Offering"), which was completed on May 2,
2001. Prior to that date, the Company had no assets or liabilities. The
accompanying unaudited consolidated condensed financial statements for the three
months ended September 30, 2002 and 2001 represent the accounts of the Company,
the Bank and its wholly owned subsidiary, Chesterfield Insurance Services, LLC.
All intercompany accounts and transactions have been eliminated in
consolidation.
Note 2 - Capital Resources
The Bank is subject to regulatory capital requirements administered by the
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary actions by
regulators that, if undertaken, could have a material impact on the Bank's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the entity's assets,
liabilities, and certain off-balance sheet items as calculated for regulatory
accounting purposes. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total and Tier 1
capital to risk-weighted assets, and of Tier 1 capital to average assets and of
tangible capital to average assets. As of September 30, 2002, the Bank met the
capital adequacy requirements to which it is subject. The Bank's tangible equity
ratio at September 30, 2002 was 16.47%. The Tier 1 capital ratio was 16.47%, the
Tier 1 risk-based capital ratio was 42.60%, and the total risk-based capital
ratio was 41.70%.
The most recent notification from the federal banking agencies categorized the
Bank as well-capitalized under the regulatory framework for prompt corrective
action. To be categorized as well-capitalized, the Bank must maintain minimum
total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios. There are no
conditions or events since that notification that have changed the Bank's
category.
Note 3 - Commitments and Contingencies
At September 30, 2002, the Company had outstanding commitments to make loans of
$2.7 million and unused lines of credit outstanding of $19.8 million. At June
30, 2002, the Bank had outstanding commitments to make loans of $3.4 million and
unused lines of credit outstanding of $19.9 million.
5
Note 4 - Earnings Per Share
Basic earnings per share for the three months ended September 30, 2002 and 2001
are computed by dividing net income by the weighted average number of shares of
common stock outstanding for the period, which were 3,651,642 and 3,978,848,
respectively. Unearned Employee Stock Ownership Plan ("ESOP") shares and
Unearned Recognition and Retention Plan ("RRP") shares are not considered
outstanding for the calculation. Diluted earnings per share for the three months
ended September 30, 2002 and 2001 are computed by dividing net income by the
weighted average number of shares of common stock outstanding and additional
shares issuable under stock option and stock grant plans for the period, which
were 3,700,911 and 3,978,848, respectively.
Note 5 - Segment Reporting
The Company's operations are managed along two major operating segments: Banking
and Insurance. Loans, investments and deposits provide the revenues in the
banking segment. Insurance commissions provide the revenue in the insurance
segment. Holding company services have been included in other. All inter-segment
services provided are charged at the same rates as those charged to unaffiliated
customers. Such services are included in the revenues and net income of the
respective segments and are eliminated to arrive at consolidated totals. The
accounting policies are the same as those described in the summary of
significant accounting policies. Information reported for internal performance
assessment is summarized below:
Three months ended September 30, 2002
-----------------------------------------------------------
Banking Insurance
Segment Segment Other Consolidated
-----------------------------------------------------------
Net interest income $ 2,599 $ 2 $ 76 $ 2,677
Other revenue 159 601 697
(63)
Other expense (1,607) (565) (2,164)
8
Income taxes (418) (441)
(14) (9)
--------- --------- --------- ---------
Segment profit $ 733 $ 24 $ 12 $ 769
========= ========= ========= =========
Depreciation $ 77 $ 15 $ -- $ 92
Segment assets $ 358,935 $ 2,507 $ (1,444) $ 359,998
Three months ended September 30, 2001
-----------------------------------------------------------
Banking Insurance
Segment Segment Other Consolidated
-----------------------------------------------------------
Net interest income $ 2,519 $ 2 $ 147 $ 2,668
Other revenue 158 482 581
(59)
Other expense (1,435) 26 (1,848)
(439)
Income taxes (422) (476)
(15) (39)
--------- --------- --------- ---------
Segment profit $ 820 $ 30 $ 75 $ 925
========= ========= ========= =========
Depreciation $ 56 $ 21 $ -- $ 77
Segment assets $ 354,957 $ 1,984 $ (939) $ 356,002
6
Note 6 - New Accounting Pronouncements
Two new accounting standards were issued in July 2000. Statement No. 141 relates
to business combinations and Statement No. 142 relates to goodwill and other
intangible assets.
Statement No. 141 was issued to improve the transparency of the accounting and
reporting for business combinations by requiring that all business combinations
initiated after June 30, 2001 be accounted for under the purchase method of
accounting. Since this accounting standard applies to business combinations
initiated after June 30, 2001, it will have no effect on the Company's financial
statements unless the Company enters into a business combination transaction.
Statement No. 142 requires that goodwill no longer be amortized to earnings, but
instead be reviewed for impairment. This change provides investors with greater
transparency regarding the economic value of goodwill and its impact on
earnings. The amortization of goodwill ceased upon the adoption of Statement No.
142, which was July 1, 2002 for the Company. The Company has approximately
$450,000 of unamortized goodwill that it discontinued amortizing. Adoption of
this standard on July 1, 2002 will result in lower amortization expense of
approximately $72,000 annually. The Company performed an analysis of goodwill
for impairment as of June 30, 2002, and determined that the goodwill was not
impaired. The impact of this standard on the periods ended September 30, 2002
and 2001 was as follows:
Three Months Ended
Net Income September 30,
2002 2001
------------------
Reported net income $769 $925
Add back: goodwill amortization -- 18
---- ----
Adjusted net income $769 $943
==== ====
Three Months Ended
Basic and Diluted Earnings Per Common Share September 30,
2002 2001
Reported net income $0.21 $0.23
Add back: goodwill amortization -- 0.01
---- ----
Adjusted net income $0.21 $0.24
===== =====
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
143, "Accounting For Asset Retirement Obligations" (SFAS No. 143). SFAS No. 143
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. SFAS No. 143 is effective for financial statements issued for fiscal
years beginning after June 15, 2002. This pronouncement will not have a material
effect on the Company.
In August 2001, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," which replaced SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 144
established a single accounting model, based on the framework established in
SFAS No. 121, for long-lived assets to be disposed of by sale. SFAS No. 144 also
resolved significant implementation issues related to SFAS No. 121. The
provisions of SFAS No. 144 are effective for financial statements issued for
fiscal years beginning after December 15, 2001. This pronouncement will not have
a material effect on the Company. Note 6 - New Accounting Pronouncements
(continued)
7
Notes to Consolidated Condensed Financial Statements (unaudited)
- --------------------------------------------------------------------------------
Note 6-New Accounting Pronouncements (continued)
The FASB recently issued SFAS No. 145 and No. 146. SFAS No. 145 applies for
years beginning after May 14, 2002 and may be adopted sooner. SFAS No. 145
covers extinguishments of debt and leases and includes some minor technical
corrections. Under previous accounting guidance, gains or losses from
extinguishments of debt were always treated as extraordinary items. Under SFAS
No. 145, they will no longer be considered extraordinary, except under very
limited conditions. Upon adoption of SFAS No. 145, any prior gains and losses
from extinguishments of debt must be reclassified as ordinary gains and losses.
Under SFAS No. 145, if a capital lease is modified to become an operating lease,
it will be accounted for as a sale-leaseback, by following the accounting
guidance of SFAS No. 98, instead of being accounted for as a new lease.
SFAS No. 146 covers accounting for costs associated with exit or long-lived
asset disposal activities, such as restructurings, consolidation or closing of
facilities, lease termination costs, or employee relocation or severance costs.
SFAS No. 146 replaces Emerging Issues Task Force (EITF) 94-3, and is to be
applied prospectively to exit or disposal activities initiated after December
31, 2002 and may be adopted sooner. A company may not restate its previously
issued financial statements. SFAS No. 146 requires exit or long-lived asset
disposal costs to be recognized as an expense when the liability is incurred and
can be measured at fair value, rather than at the date of making a commitment to
an exit or disposal plan. Management does not expect the effects of the future
adoptions of SFAS No. 145 and SFAS No. 146 to be material to the Company's
consolidated financial statements.
On October 1, 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 147, "Acquisitions of
Certain Financial Institutions." SFAS No. 147 is effective October 1, 2002, and
may be early applied. SFAS No. 147 supersedes SFAS No. 72, "Accounting for
Certain Acquisitions of Banking or Thrift Institutions." SFAS No. 147 provides
guidance on the accounting for the acquisition of a financial institution, and
applies to all such acquisitions except those between two or more mutual
enterprises. Under SFAS No. 147, the excess of the fair value of liabilities
assumed over the fair value of tangible and identifiable intangible assets
acquired in a financial institution business combination represents goodwill
that should be accounted for under SFAS No. 142, "Goodwill and Other Intangible
Assets." If certain criteria are met, the amount of the unidentifiable
intangible asset resulting from prior financial institutions acquisitions is to
be reclassified to goodwill upon adoption of this Statement. Financial
institutions meeting conditions outlined in SFAS No. 147 are required to restate
previously issued financial statements. The objective of the restatement is to
present the balance sheet and income statement as if the amount accounted for
under SFAS No. 72 as an unidentifiable intangible asset had been reclassified to
goodwill as of the date the Company adopted SFAS No. 142. Adoption of SFAS No.
147 on October 1, 2002 did not have a material effect on the Company's
consolidated financial position or results of operations.
8
Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
General
The Company's results of operations depend primarily on its net interest income.
Net interest income is the difference between the interest income we earn on our
interest-earning assets, consisting primarily of loans, securities and
interest-earning deposits with other financial institutions, and the interest we
pay on our interest-bearing liabilities, primarily savings accounts and time
deposits. Provisions for loan losses, non-interest income, and non-interest
expense also affect our results of operations. Non-interest income consists
primarily of insurance commissions and service charges on deposit accounts.
Non-interest expense consists primarily of salaries and employee benefits,
occupancy, equipment, data processing and deposit insurance premiums. Our
results of operations may also be affected significantly by general and local
economic and competitive conditions, particularly those with respect to changes
in market interest rates, governmental policies and actions of regulatory
authorities.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
This report contains certain forward looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Company and the
Bank, are generally identifiable by use of the words such as "believe,"
"expect," "intend," "anticipate," "estimate," "project" or similar expressions.
The Company's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material adverse
affect on the operations and future prospects of the Company and the
subsidiaries include, but are not limited to, changes in: interest rates,
general economic conditions, legislative/regulatory changes, monetary and fiscal
policies of the U.S. Government, including policies of the U.S. Treasury and the
Federal Reserve Board, the quality or composition of the loan or investment
portfolios, demand for loan products, deposit flows, competition, demand for
financial services in the Company's market area, our implementation of new
technologies, our ability to develop and maintain secure and reliable electronic
systems and accounting principles, policies and guidelines. These risks and
uncertainties should be considered in evaluating forward-looking statements and
undue reliance should not be placed on such statements. Further information
concerning the Company and its business, including additional factors that could
materially affect the Company's financial results, is included in the Company's
filings with the Securities and Exchange Commission.
Liquidity
The Company and Bank's liquidity management objective is to ensure the
availability of sufficient cash flows to meet all financial commitments and to
capitalize on opportunities for expansion. Liquidity management addresses the
ability to meet deposit withdrawals on demand or at contractual maturity, and to
fund new loans and investments as opportunities arise. The Bank's primary
sources of internally generated funds are principal and interest payments on
loans receivable, cash flows generated from operations, and cash flows generated
by investments. External sources of funds primarily consist of increases in
deposits. Federal regulations require the Bank to maintain sufficient liquidity
to ensure its safe and sound operation. The Bank believes it was in compliance
with Office of Thrift Supervision ("OTS") liquidity requirements at September
30, 2002.
The Company's cash flows are comprised of three classifications: cash flows from
operating activities, cash flows from investing activities, and cash flows from
financing activities. Cash flows provided by operating activities, consisting
primarily of interest and dividends received less interest paid on deposits, was
$517,000 for the three months ended September 30, 2002. Investing activities
provided $9.4 million for the three months ended September 30, 2002. Loan
principal payments exceeded originations received by $3.3 million. Maturities,
calls and payments on securities totaled $11.3 million, while purchases of new
securities amounted to $5.0 million. Net cash used in financing activities
amounted to $4.6 million for the three months ended September 30, 2002. The
Bank's deposits decreased by $450,000 during the three months ended September
30, 2002. The Company repurchased 275,200 shares of its common stock for $5.0
million, or an average price of $18.11 per share.
9
Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
At September 30, 2002, the Bank had outstanding commitments to make loans of
$2.7 million and unused lines of credit outstanding of $19.8 million. Management
anticipates that it will have sufficient funds available to meet its current
loan commitments. Certificates of deposit scheduled to mature in one year or
less from September 30, 2002 totaled $131.9 million. Consistent with historical
experience, management believes that a significant portion of such deposits will
remain with the Bank, and that their maturity and repricing will not have a
material adverse impact on the operating results of the Bank.
Changes in Financial Condition
At September 30, 2002, total assets were $360.0 million, down $3.3 million, or
0.9%, from $363.3 million at June 30, 2002. Loans receivable at September 30,
2002, were $166.6 million, down $3.3 million, or 1.9%, from $169.9 million at
June 30, 2002. Securities held-to-maturity decreased $10.5 million, or 18.2%, to
$47.0 million at September 30, 2002, from $57.5 million at June 30, 2002. The
funds generated by the decrease in loans and securities held-to-maturity were
deposited into interest-earning accounts and used to purchase securities
available-for-sale and to repurchase the Company's common stock.
Total deposits at September 30, 2002, were $277.7 million, down $450,000, or
0.2%, from $278.1 million at June 30, 2002. Total stockholders' equity as of
September 30, 2002, was $72.9 million, or 20.3% of total assets, compared to
$76.7 million, or 21.1% of total assets at June 30, 2002. During the quarter
ended September 30, 2002, the Company repurchased 275,200 shares of its stock
for $5.0 million, or an average price of $18.11per share. At September 30, 2002,
there were 3,821,975 shares of common stock outstanding with a book value of
$19.08 per share.
Asset Quality
The Company's non-performing loans were $723,000, or 0.43% of loans receivable
as of September 30, 2002, compared to $222,000 as of June 30, 2002. The increase
in non-performing loans was primarily due to placing nine additional community
development loans ($354,000), and one single-family loan ($147,000) in process
of refinancing , on non-accrual status.
From August 1997 through December 1999, the Company originated $508,900 of
community development loans to a real estate development company to acquire
vacant lots and deteriorated buildings. The borrower is attempting to find
developers to upgrade the acquired parcels with commercial development. As of
September 30, 2002, all of these loans were on non-accrual status. The Company
has closely monitored these loans since origination and has established $300,000
in specific valuation reserves on these loans through provisions for loan losses
recorded in 1998, 1999, 2000, and 2001. Management has determined that no
additional provision for loan loss is required at this time for these community
development loans.
The $1.6 million allowance for losses on loans to loans receivable was 0.95% as
of September 30, 2002, compared to 0.93% as of June 30, 2002. During the current
quarter the Company recorded recoveries on previously charged-off loans of
$3,000, and experienced no charge-offs.
Comparison of Operating Results for the Quarters Ended September 30, 2002 and
2001
General. Net income for the quarter ended September 30, 2002, was $769,000 or
$0.21 per diluted share. Net income for the quarter was $156,000 less than net
income for the quarter ended September 30, 2001, of $925,000, or $0.23 per
diluted share. The Company's return on average assets for the quarter ended
September 30, 2002, was 0.85%, compared to 1.05% for the quarter ended September
30, 2001. Return on equity was 4.14% for the quarter ended September 30, 2002,
compared to 4.80% for the same period last year.
Total Interest Income. Total interest income decreased by $830,000, or 16.1%, to
$4.3 million for the quarter ended September 30, 2002, from $5.2 million for the
quarter ended September 30, 2001. An increase in average interest
10
Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
earning assets of $7.5 million between periods was offset by a decrease in yield
on interest earning assets to 4.99% for the quarter ended September 30, 2002,
from 6.07% for the same quarter last year, as a result of the general decline in
market interest rates and management's decision to reinvest funds in short term
investments.
Interest Expense. Interest expense on deposits decreased by $839,000, or 33.5%,
to $1.7 million for the quarter ended September 30, 2002, from $2.5 million for
the same period in 2001. The decrease was primarily attributable to the decline
in market interest rates for insured deposits, with the average cost of funds
decreasing to 2.39% for the current period, from 3.79% for the same period last
year, offset to some extent by a $13.2 million increase in the average balances
of deposit accounts.
Net Interest Income. Net interest income was $2.7 million for each of the
quarters ended September 30, 2002 and 2001. The net interest rate spread
increased and the net interest margin decreased between the periods as a result
of the combination of a drop in market interest rates and a $5.7 million
decrease in net interest-earning assets. The net interest rate spread was 2.60%
for quarter ended September 30, 2002, compared to 2.28% for the same quarter
last year, while the net interest margin decreased to 3.07% from 3.12%. The
ratio of average interest-earning assets to average interest-bearing liabilities
decreased to 124.98% for the quarter in 2002, from 128.61% for the same period
in 2001.
Provision for Loan Losses. Management made no additional provision for loans
losses for the quarters ended September 30, 2002 and 2001. The allowance for
loan losses increased to 0.95% of loans outstanding at September 30, 2002, from
0.93% at June 30, 2002. The amount of the allowance is based on estimates and
the ultimate losses may vary from the estimates. The allowance for loan losses
as of September 30, 2002 is maintained at a level that represents management's
best estimate of probable losses in the loan portfolio.
Non-interest Income. Non-interest income increased $116,000, or 20.0%, to
$697,000 for the quarter ended September 30, 2002, compared to $581,000 for the
same period in 2001. Insurance commissions generated by the Bank's insurance
subsidiary increased $109,000, to $584,000 in 2002, compared to $475,000 in
2001.
Non-interest Expense. Total non-interest expenses increased $316,000, or 17.1%,
to $2.2 million for the quarter ended September 30, 2002, from $1.8 million for
the quarter ended September 30, 2001. The primary causes for the increase in
non-interest expense were salaries and benefits and other expenses. Salaries and
benefits increased $263,000, or 24.3% during the period primarily as a result of
the amortization of shares granted in November 2001 under the Company's
Recognition and Retention Plan ("RRP"). The Company's RRP expense for the
quarter ended September 30, 2002, was $146,000.
Direct selling expenses incurred by the insurance agency increased $67,000, to
$124,000 for the quarter ended September 30, 2002, compared to $57,000 for the
quarter ended September 30, 2001, leaving a gross margin of $480,000 in 2002,
compared to $428,000 in 2001. The increase in selling expenses was primarily due
to producer and broker commissions. Direct selling expenses are included on
other non-interest expense in the consolidated financial statements.
The annualized ratio of non-interest expense to average assets increased to
2.39% in 2002, compared to 2.10% in 2001, while the Company's efficiency ratio
was 64.14% for the current quarter, compared to 56.88% for the same period last
year.
Provision for Income Taxes. The provision for income taxes of $441,000 for the
quarter ended September 30, 2002, resulted in an effective tax rate of 36.45%,
compared to a provision of $476,000 and a 33.98% effective tax rate for the same
quarter last year. The primary reason for the increase was a $40,000 increase in
state income taxes resulting from a decrease in U. S. Government and Agency
interest that reduces state taxable income.
11
Quantitative and Qualitative Disclosures about Market Risks
- --------------------------------------------------------------------------------
Quantitative and Qualitative Disclosures about Market Risks
The OTS provides all institutions that file a Consolidated Maturity/Rate
schedule as a part of their quarterly Thrift Financial Report with an interest
rate sensitivity report of Net Portfolio Value ("NPV"). The OTS simulation model
uses a discounted cash flow analysis and an option-based pricing approach to
measuring the interest rate sensitivity of NPV. The OTS model estimates the
economics value of each type of asset, liability, and off-balance sheet contract
under the assumption that the U.S. Treasury yield curve shifts instantaneously
and parallel up and down 100 to 300 basis points in 100 basis point increments.
The OTS provides thrifts the results of their interest rate sensitivity model,
which is based on information provided by the Bank, to estimate the sensitivity
of NPV.
The OTS model utilizes an option-based pricing approach to estimate the
sensitivity of mortgage loans. The most significant embedded option in these
types of assets is the prepayment option of the borrowers. The OTS model uses
various price indications and prepayment assumptions to estimate sensitivity of
mortgage loans.
In the OTS model, the value of deposit accounts appears on the asset and
liability side of the NPV analysis. In estimating the value of certificate of
deposit accounts ("CD"), the liability portion of the CD is represented by the
implied value when comparing the difference between the CD face rate and
available wholesale CD rates. On the asset side of the NPV calculation, the
value of the "customer relationship" due to the rollover of retail CD deposits
represents an intangible asset in the NPV calculation.
Other deposit accounts such as transaction accounts, money market deposit
accounts, passbook accounts, and non-interest bearing accounts also are included
on the asset and liability side of the NPV calculation in the OTS model. The
accounts are valued at 100% of the respective account balances on the liability
side. On the assets side of the analysis, the value of the "customer
relationship" of the various types of deposit accounts is reflected as a deposit
intangible.
The table below sets forth, as of June 30, 2002 (the most recent date
available), the estimated changes in the Bank's NPV that would result from the
designated instantaneous changes in the U.S. Treasury yield curve.
Net Portfolio Value as a % of
Net Portfolio Value Present Value of Assets
--------------------------------------------------- ----------------------------------
Change in Estimated NPV Amount of Percent NPV Ratio Percent
Interest Rates
(basis points) Change Change
- ---------------------------------------------------------------------------------------------------------------------
(in thousands)
+300 bp $ 59,921 $ (15,796) (21)% 16.48% (3.39)%
+200 65,360 (10,357) (14) 17.69 (2.18)
+100 70,797 (4,920) (6) 18.85 (1.02)
0 75,717 -- -- 19.87 --
- 100 77,915 2,198 3 20.29 0.42
For the June 30, 2002 reporting cycle the OTS suppressed all model outputs
associated with the negative 200 basis point and negative 300 basis point
scenarios because of the abnormally low prevailing interest rate environment.
12
Controls and Procedures
- --------------------------------------------------------------------------------
Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer have
concluded, based on their evaluation within 90 days prior to the filing date of
this report, that the Company's disclosure controls and procedures (as defined
in Securities Exchange Act Rules 13a-14(c) and 15d-14(c)) are effective to
ensure that information required to be disclosed in the reports that the Company
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commission's rules and forms. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect these controls subsequent to the date of the
foregoing evaluation.
13
Part II - Other Information
Item 1. Legal Proceedings
The Company and the Bank are not engaged in any legal proceedings of
a material nature at the present time.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99 Certification of the Chief Executive Officer and Chief
Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
None
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Chesterfield Financial Corp.
Dated: November 8, 2002 /s/ Michael E. DeHaan
----------------------------------------------
Michael E. DeHaan
President and Chief Executive Officer
(Principal Executive Officer)
Dated: November 8, 2002 /s/ Karen M. Wirth
----------------------------------------------
Karen M. Wirth
Treasurer
(Principal Financial and Accounting Officer)
15
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Michael E. DeHaan, Chairman, President and Chief Executive Officer, certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Chesterfield
Financial Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the period presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
November 8, 2002 /s/ Michael E. DeHaan
- ---------------- ---------------------------------
Date Michael E. DeHaan
Chairman, President and
Chief Executive Officer
16
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Karen M. Wirth, Treasurer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Chesterfield
Financial Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the period presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
November 8, 2002 /s/ Karen M. Wirth
- ---------------- -----------------------------------
Date Karen M. Wirth
Treasurer (Chief Financial Officer)
17