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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 March 31, 2003
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 |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes |X| No |_|
There were 3,876,114 shares of the issuer's common stock, par value $.01,
outstanding as of May 10, 2003.
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CHESTERFIELD FINANCIAL CORP.
FORM 10-Q
Index
Part I. Financial Information Page (s)
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Item 1. Financial Statements
Consolidated Condensed Balance Sheets as of
March 31, 2003 and June 30, 2002 (unaudited) 3
Consolidated Condensed Statements of Income for the three
and nine months ended March 31, 2003 and 2002 (unaudited) 4
Consolidated Condensed Statements of Stockholders' Equity
for the nine months ended March 31, 2003 and 2002 (unaudited) 5
Consolidated Condensed Statements of Cash Flows for the nine
months ended March 31, 2003 and 2002 (unaudited) 6
Notes to Consolidated Condensed Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risks 15
Item 4. Controls and Procedures 16
Part II. Other Information
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signature Page 18
Certifications 19
Exhibit 10 21
Exhibit 99 24
2
CHESTERFIELD FINANCIAL CORP.
CONSOLIDATED CONDENSED BALANCE SHEETS (unaudited)
Dollars in thousands
March 31, June 30,
Assets 2003 2002
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Cash and due from financial institutions $ 7,692 $ 7,559
Interest-earning deposits 97,481 83,367
Federal funds sold 8,800 3,800
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Cash and cash equivalents 113,973 94,726
Securities available-for-sale 18,425 17,374
Securities held to maturity, at amortized cost (approximate fair value of
$52,119 at March 31, 2003 and $58,299 at June 30, 2002) 51,358 57,483
Loans receivable, net of allowance for loan losses of $1,304 at
March 31, 2003 and $1,576 at June 30, 2002 155,116 169,881
Federal Home Loan Bank stock 18,272 17,342
Premises and equipment 2,474 2,529
Accrued interest receivable and other assets 3,686 4,005
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Total assets $ 363,304 $ 363,340
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Liabilities and Stockholders' Equity
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Liabilities
Deposits $ 283,037 $ 278,126
Advance payments by borrowers for taxes and insurance 1,428 2,622
Accrued expenses and other liabilities 5,744 5,851
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Total liabilities 290,209 286,599
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; 3,896,314 and 4,239,738 shares outstanding at March 31, 2003
and June 30, 2002 43 43
Additional paid in capital 42,339 42,153
Retained earnings 42,887 41,085
Unearned ESOP shares (2,890) (3,056)
Unearned RRP shares (2,069) (2,496)
Treasury stock, at cost (7,444) (1,167)
Accumulated other comprehensive income 229 179
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Total stockholders' equity 73,095 76,741
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Total liabilities and stockholders' equity $ 363,304 $ 363,340
===============================================================================================================
See accompanying notes to unaudited consolidated condensed financial statements
3
CHESTERFIELD FINANCIAL CORP.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (unaudited)
Dollars in thousands, except per share data
Three months ended Nine months ended
March 31, March 31,
--------------------------------------------------
2003 2002 2003 2002
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Interest and dividend income
Loans, including fees $ 2,657 $ 2,890 $ 8,343 $ 8,835
Securities 585 1,063 2,168 3,898
Interest-earning deposits 332 337 1,012 1,236
Federal Home Loan Bank stock dividends 224 211 714 581
Other interest income 20 18 68 87
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Total interest and dividend income 3,818 4,519 12,305 14,637
Interest expense 1,285 1,769 4,417 6,388
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Net interest income before provision for loan losses 2,533 2,750 7,888 8,249
Provision for loan losses (75) -- (275) --
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Net interest income after provision for loan losses 2,608 2,750 8,163 8,249
Non-interest income
Insurance commissions 587 481 1,957 1,519
Service charges on deposit accounts 67 71 205 222
Other (26) 33 45 102
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Total non-interest income 628 585 2,207 1,843
Non-interest expense
Salaries and employee benefits 1,360 1,277 4,097 3,570
Occupancy 199 189 594 589
Equipment 110 223 346 490
Data processing 118 83 286 245
Federal deposit insurance 33 34 99 94
Insurance agency bad debt expense 14 5 217 14
Other 392 414 1,260 1,230
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Total non-interest expense 2,226 2,225 6,899 6,232
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Income before income taxes 1,010 1,110 3,471 3,860
Income tax expense 384 392 1,288 1,343
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Net income $ 626 $ 718 $ 2,183 $ 2,517
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Basic earnings per share $ 0.18 $ 0.19 $ 0.62 $ 0.64
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Diluted earnings per share $ 0.18 $ 0.19 $ 0.60 $ 0.64
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Comprehensive income $ 558 $ 710 $ 2,233 $ 2,539
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See accompanying notes to unaudited consolidated condensed financial statements.
4
CHESTERFIELD FINANCIAL CORP.
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (unaudited)
Nine months ended March 31, 2003 and 2002
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
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Balance at July 1, 2001 $ 43 $ 41,999 $ 37,827 $ -- $ (3,293) $ -- $ (23) $ 76,553
Comprehensive income
Net income 2,517 2,517
Unrealized gain on securities
available-for-sale, net 22 22
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Total comprehensive income 2,539
Purchase of treasury stock (2,842) (2,842)
Grant of shares under RRP 2,842 (2,842) --
Amortization of vested RRP shares 202 202
ESOP shares committed to be released 107 178 285
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Balance at March 31, 2002 $ 43 $ 42,106 $ 40,344 $ -- $ (3,115) $ (2,640) $ (1) $ 76,737
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Balance at July 1, 2002 $ 43 $ 42,153 $ 41,085 $ (1,167) $ (3,056) $ (2,496) $ 179 $ 76,741
Comprehensive income
Net income 2,183 2,183
Unrealized gain on securities
available-for-sale, net 50 50
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Total comprehensive income 2,233
Dividends paid 2 (381) 2 (377)
Purchases of treasury stock (6,277) (6,277)
Amortization of vested RRP shares 427 427
Income tax benefit of RRP vesting 34 34
ESOP shares committed to be released 150 164 314
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Balance at March 31, 2003 $ 43 $ 42,339 $ 42,887 $ (7,444) $ (2,890) $ (2,069) $ 229 $ 73,095
=============================================================================================
See accompanying notes to unaudited consolidated condensed financial statements.
5
CHESTERFIELD FINANCIAL CORP.
Consolidated Condensed Statements of Cash Flows (unaudited)
Dollars in thousands
Nine months ended March 31,
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2003 2002
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Cash flows from operating activities:
Net income $ 2,183 $ 2,517
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan losses (275) --
Insurance agency bad debt expense 217 --
Depreciation and amortization 311 481
Net amortization of securities (88) (3)
ESOP compensation expense 314 285
RRP compensation expense 427 202
Federal Home Loan Bank stock dividends (930) (398)
Net change in:
Deferred loan origination fees 73 20
Accrued interest receivable and other assets 83 (334)
Accrued expenses and other liabilities (99) 785
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Net cash from operating activities 2,216 3,555
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Cash flows from investing activities:
Activity in held-to-maturity securities:
Maturities, calls and payments 46,086 76,660
Purchases (39,879) (35,000)
Activity in available-for-sale securities:
Payments 4,229 958
Purchases (5,199) --
Purchase of Federal Home Loan Bank Stock -- (15,000)
Loan originations and payments, net 14,968 (5,023)
Additions to premises and equipment (237) (226)
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Net cash from investing activities 19,968 22,369
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Cash flows from financing activities:
Net change in deposits 4,911 16,614
Net change in advance payments by borrowers for taxes and insurance (1,194) (1,123)
Dividends paid (377) --
Purchase of treasury stock (6,277) (2,842)
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Net cash from (used in) financing activities (2,937) 12,649
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Net change in cash and cash equivalents 19,247 38,573
Cash and cash equivalents at beginning of period 94,726 66,921
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Cash and cash equivalents at end of period $ 113,973 $ 105,494
=============================================================================================================
Supplemental disclosures of cash flow information:
Due to brokers for securities transactions $ -- $ 5,000
See accompanying notes to unaudited consolidated condensed financial statements.
6
Notes to Consolidated Condensed Financial Statements (unaudited)
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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 of America ("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 and nine months
ended March 31, 2003 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 offered for
sale 4,304,738 shares of its outstanding common stock in a public offering to
eligible depositors and members of the general public (the "Offering"), which
was completed on May 2, 2001. The accompanying unaudited consolidated condensed
financial statements for the three and nine months ended March 31, 2003 and 2002
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 under 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 March 31, 2003, the Bank met the
capital adequacy requirements to which it is subject. The Bank's tangible equity
ratio at March 31, 2003 was 16.79%. The Tier 1 capital ratio was 16.79%, the
Tier 1 risk-based ratio was 43.93%, and the total risk-based capital ratio was
44.86%.
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 March 31, 2003, the Company had outstanding commitments to make loans of $6.1
million and unused lines of credit outstanding of $20.0 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.
Note 4 - Earnings Per Share
Basic earnings per share for the three months ended March 31, 2003 and 2002 was
computed by dividing net income by the weighted average number of shares of
common stock outstanding for the period, which were 3,475,006 and 3,846,381,
respectively. Basic earnings per share for the nine months ended March 31, 2003
and 2002 was computed by dividing net income by the weighted average number of
shares of common stock outstanding for the period, which
7
Notes to Consolidated Condensed Financial Statements (unaudited)
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Note 4 - Earnings Per Share (continued)
were 3,540,247 and 3,927,399, 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 March 31, 2003 and 2002 was 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 3,565,956 and 3,871,930, respectively. Diluted earnings per
share for the nine months ended March 31, 2003 and 2002 was 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 3,610,493 and 3,936,684, 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:
Dollars in thousands Nine months ended March 31, 2003
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Banking Insurance
Segment Segment Other Consolidated
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Net interest income $ 7,740 $ 5 $ 143 $ 7,888
Provision for loan losses (275) -- -- (275)
Other revenue 368 1,920 (81) 2,207
Other expense (4,962) (1,917) (20) (6,899)
Income taxes (1,266) (3) (19) (1,288)
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Segment profit $ 2,155 $ 5 $ 23 $ 2,183
===============================================================
Depreciation (239) (53) -- (292)
Amortization of non-compete contract -- (19) -- (19)
Segment assets $ 362,541 $ 1,920 $ (1,157) $ 363,304
Nine months ended March 31, 2002
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Banking Insurance
Segment Segment Other Consolidated
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Net interest income $ 7,888 $ 7 $ 354 $ 8,249
Provision for loan losses -- -- -- --
Other revenue 386 1,541 (84) 1,843
Other expense (4,665) (1,537) (30) (6,232)
Income taxes (1,236) (4) (103) (1,343)
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Segment profit $ 2,373 $ 7 $ 137 $ 2,517
===============================================================
Depreciation $ (371) $ (51) -- $ (422)
Amortization of goodwill -- (49) -- (49)
Amortization of non-compete contract -- (10) -- (10)
Segment assets $ 365,380 $ 1,573 $ (1,183) $ 365,770
8
Notes to Consolidated Condensed Financial Statements (unaudited)
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Note 6 - New Accounting Pronouncements
Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other
Intangible Assets," was issued by the Financial Accounting Standards Board
("FASB") in July 2000 and 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
SFAS No. 142, which was on 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 resulted in lower amortization
expense. 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 three- and the nine-month periods ended March 31, 2003 and 2002
was as follows:
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------------------------------
2003 2002 2003 2002
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Net Income
Reported net income $ 626 $ 718 $ 2,183 $ 2,517
Add back: goodwill amortization -- 19 -- 49
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Adjusted net income $ 626 $ 737 $ 2,183 $ 2,566
===================================================
Basic and Diluted Earnings per Common Share
Reported net income $ 0.18 $ 0.19 $ 0.62 $ 0.64
Add back: goodwill amortization -- -- -- 0.01
---------------------------------------------------
Adjusted net income $ 0.18 $ 0.19 $ 0.62 $ 0.65
===================================================
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" was issued in December 2002. It applies to annual financial
statements for fiscal years ending after December 15, 2002 and to interim
financial statements for interim periods beginning after December 15, 2002. SFAS
No. 148 requires more prominent disclosure of how an entity's accounting policy
for compensation affects net income; amends SFAS No. 123, "Accounting for
Stock-Based Compensation," to provide three choices regarding how to adopt SFAS
No. 123; and amends Accounting Principles Board Opinion ("APBO") No. 28,
"Interim Financial Reporting," to require companies still using APBO No.25 for
stock-based compensation to provide tabular disclosure in interim financial
statements of the effects that using SFAS No. 123 would have on compensation
expense, net income, and earnings per share.
The Company uses the intrinsic method of accounting for the compensation effect
of stock options described in APBO No. 25. No stock-based compensation cost is
reflected in net income, as all options granted had an exercise price equal to
the market price of the underlying common stock at date of grant. The following
table illustrates the effect on net income and earnings per share if
compensation expense was measured using the fair value recognition provisions of
SFAS No. 123 in the interim financial statements for the three- and nine-month
periods ended March 31, 2003 and 2002:
9
Notes to Consolidated Condensed Financial Statements (unaudited)
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Note 6 - New Accounting Pronouncements (continued)
Three months ended Nine months ended
March 31, March 31,
-----------------------------------------------
2003 2002 2003 2002
-----------------------------------------------
Net income as reported $ 626 $ 718 $ 2,183 $ 2,517
Pro forma net income 518 610 1,853 2,359
Basic earnings per share as reported $ 0.18 $ 0.19 $ 0.62 $ 0.64
Pro forma basic earnings per share $ 0.15 $ 0.16 $ 0.52 $ 0.60
Diluted earnings per share as reported $ 0.18 $ 0.19 $ 0.60 $ 0.64
Pro forma diluted earnings per share $ 0.15 $ 0.16 $ 0.51 $ 0.60
The pro forma effects are computed using option pricing models, using the
following weighted-average assumptions as of the date of grant: fair value of
options granted in fiscal 2002 of $5.11; risk free rate of return of 4.78%;
expected option life of seven years; expected stock price volatility of 14.21%;
and dividend yield of 0%.
10
Management's Discussion and Analysis of Financial Condition and Results of
Operations
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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, investment 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's and the 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. At March 31, 2003, the Bank believes it
was in compliance with Office of Thrift Supervision ("OTS") liquidity
requirements.
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, $2.2 million
for the nine months ending March 31, 2003, consisted primarily of interest and
dividends received less interest paid on deposits. Loan principal repayments
exceeded originations by $15.0 million. Maturities, calls and payments on
securities totaled $50.3 million, while purchases of new securities amounted to
$45.1 million. Net cash used by financing activities amounted to $2.9 million
for the nine months ended March 31, 2003. The Company repurchased $6.3 million
of its common stock, at an average cost of $18.28 per share, during the nine
months ended March 31, 2003, funded in part by a $4.9 million increase in
deposits.
11
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
At March 31, 2003, the Bank had outstanding commitments to make loans of $6.1
million and unused lines of credit outstanding of $20.0 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 March 31, 2003 totaled $155.6 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 March 31, 2003, total assets were $363.3 million, approximately the same as
at June 30, 2002. Cash and cash equivalents increased $19.2 million, or 20.3%,
to $114.0 million at March 31, 2003, compared to $94.7 million at June 30, 2002.
Loans receivable at March 31, 2003, were $155.1 million, down $14.8 million, or
8.7%, from $169.9 million at June 30, 2002. Total deposits at March 31, 2003
were $283.0 million, up $4.9 million, or 1.8%, from $278.1 million at June 30,
2002.
Total stockholders' equity as of March 31, 2003 was $73.1 million, or 20.1% of
total assets, compared to $76.7 million, or 21.1% of total assets at June 30,
2002. On October 22, 2002 the Board of Directors of the Company declared its
first quarterly dividend of $0.05 per share that was paid on December 2, 2002 to
stockholders of record as of November 15, 2002. On January 21, 2003, the Board
of Directors of the Company declared a dividend of $0.06 per share that was paid
on March 3, 2003 to stockholders of record as of February 14, 2003. On April 15,
2003, the Board of Directors of the Company declared a dividend of $0.06 per
share to be paid on June 2, 2003 to stockholders of record on May 15, 2003.
On July 25, 2002, the Company announced the completion of the stock repurchase
program begun on May 13, 2002, and its intent to initiate a new program to
repurchase up to 197,300 shares of the Company's common stock. On November 25,
2002, the Company announced the completion of the stock repurchase program begun
on July 25, 2002, and its intent to initiate a new program to repurchase up to
188,000 shares of the Company's common stock. During the nine months ended March
31, 2003, the Company repurchased 343,424 shares at a total cost of $6.3
million, or an average cost of $18.28 per share. The Company has not repurchased
any shares under the November 25th program. At March 31, 2003, there were
3,896,314 shares outstanding with a book value of $18.76 per share, compared to
4,239,738 shares with a book value of $18.10 per share at June 30, 2002.
Asset Quality
The Company's non-performing loans were $248,000, or 0.16% of loans receivable
as of March 31, 2003, compared to $222,000 as of June 30, 2002. The $1.3 million
allowance for losses on loans to loans receivable was 0.84% as of March 31,
2003, compared to 0.93% as of June 30, 2002. During the current nine-month
period the Company recorded recoveries on previously charged-off loans of $3,000
and recorded no charge-offs. (Also see "Provision for Loan Losses.")
Comparison of Operating Results for the Quarters Ended March 31, 2003 and 2002
General. Net income for the quarter ended March 31, 2003 was $626,000, or $0.18
diluted earnings per share, compared to net income of $718,000, or $0.19 diluted
earnings per share for the quarter ended March 31, 2002. The Company's return on
average assets for the quarter ended March 31, 2003, was 0.69%, compared to
0.80% for the quarter ended March 31, 2002. Return on average equity for the
current quarter was 3.48%, compared to 3.79% for the same quarter last year.
Interest Income. Total interest income decreased by $701,000, or 15.5%, to $3.8
million for the quarter ended March 31, 2003, from $4.5 million for the quarter
ended March 31, 2002. A decrease in average interest-earning assets of $2.3
million between periods, combined with a decrease in yield on interest-earning
assets to 4.41%, from 5.18% for the same quarter last year, and a change in the
mix of interest-earning assets favoring shorter-term, lower-yielding
12
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
interest-earning deposits, caused the decline in interest income. The average
balance of securities for the quarter ended March 31, 2003, decreased $30.9
million from the average balance for the quarter ended March 31, 2002, while the
average balance of interest-earning deposits and federal funds sold increased
$34.7 million.
Interest Expense. Interest expense on deposits decreased by $484,000, or 27.4%,
to $1.3 million for the quarter ended March 31, 2003, from $1.8 million for the
same period in 2002. The decrease was primarily attributable to reductions in
deposit rates paid, with the average cost of funds decreasing to 1.83% for the
current period, from 2.57% for the same period last year, offset to some extent
by a $5.6 million increase in the average balances of deposit accounts,
primarily passbook savings and NOW accounts.
Net Interest Income. Net interest income decreased by $217,000, or 7.9%, to $2.5
million for the quarter ended March 31, 2003, from $2.8 million for the same
period in 2002. The net interest rate spread decreased three basis points, to
2.58% in 2003, from 2.61% in 2003, while the net interest margin decreased 23
basis points, to 2.92% in 2003, from 3.15% in 2002. The ratio of average
interest-earning assets to average interest-bearing liabilities was 123.5% in
2003, compared to 126.8% in 2002.
Provision for Loan Losses. From August 1997 through December 1999, the Company
originated $508,900 of community development loans (thirteen loans) to a real
estate development company to acquire vacant lots and deteriorated buildings for
future development. The Company has closely monitored these loans since
origination and established $300,000 in specific valuation reserves on these
loans through provisions for loan losses recorded in 1998, 1999, 2000, and 2001.
During October 2002 nine of these parcels were sold and the entire principal
balances of the related loans were recovered. Therefore, $200,000 of the
$300,000 specific valuation reserve was recovered during the quarter ended
December 31, 2002, as a negative loan loss provision. A further review by
management of the four remaining loans during the quarter ended March 31, 2003,
indicated an additional $75,000 of the specific loan valuation reserve could be
recovered. These loans, with principal balances of $196,000, or $171,000 net of
the specific loan valuation reserve, remain on non-accrual status.
Non-interest Income. Non-interest income increased $43,000, or 7.4%, to
$628,000 for the quarter ended March 31, 2003, from $585,000 for the same period
in 2002. Insurance commissions generated by the Company's insurance subsidiary
increased $106,000, or 22.0%, to $587,000 in 2003, compared to $481,000 in 2002.
Other non-interest income (which is reported as a loss of $26,000 for the
current quarter) includes a $78,000 loss on the Company's equity investment in a
community development company.
Non-interest Expense. Total non-interest expense remained approximately the same
at $2.2 million for the quarters ended March 31, 2003 and 2002. Salaries and
employee benefits increased $83,000, or 6.5%, to $1.4 million for the quarter
ended March 31, 2003, compared to $1.3 million for the quarter ended March 31,
2002. Data processing expenses increased $35,000, or 42.2%, to $118,000 for
2003, compared to $83,000 in 2002, primarily due to additional software costs
associated with upgrading internal systems. Equipment expense decreased
$113,000, or 50.7% to $110,000 in 2003, compared to $223,000 in 2002, primarily
due to a $90,000 acceleration of depreciation expense recorded in the quarter
ended March 31, 2002, and the subsequent replacement of computer equipment with
newer, more cost effective systems. The annualized ratio of non-interest expense
to average assets was 2.47% in 2003 and in 2002 and the Company's efficiency
ratio was 70.4% for the current quarter, compared to 66.7% for the same period
last year.
Provision for Income Taxes. The provision for income taxes of $384,000 for the
quarter ended March 31, 2003, resulted in an effective tax rate of 38.0%,
compared to a provision of $392,000 and a 35.3% effective tax rate for the same
quarter last year. The increase in the effective income tax rate results
primarily from increased state income taxes due to reduced amounts of U.S.
Government and Agency interest income.
13
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
Comparison of Operating Results for the Nine Months Ended March 31, 2003 and
2002
General. Net income for the nine months ended March 31, 2003, was $2.2 million,
or $0.60 diluted earnings per share, compared to net income of $2.5 million, or
$0.64 diluted earnings per share for the nine months ended March 31, 2002. The
Company's return on average assets for the nine months ended March 31, 2003, was
0.81%, compared to 0.94% for the same period last year. Return on average equity
for the nine months was 4.02%, compared to 4.39% for the same period last year.
Interest Income. Total interest income decreased by $2.3 million, or 15.9%, to
$12.3 million for the nine months ended March 31, 2003, from $14.6 million for
the nine months ended March 31, 2002. A decrease in yield on interest-earning
assets to 4.74% for the nine months ended March 31, 2003, from 5.65% for the
same period last year, and a change in the mix of interest-earning assets
favoring shorter-term, lower-yielding interest-earning deposits, caused the
decline in interest income. The average balance of securities for the nine
months ended March 31, 2003, decreased $32.1 million from the average balance
for the nine months ended March 31, 2002, while the average balance of
interest-earning deposits and federal funds sold increased $28.6 million.
Interest Expense. Interest expense on deposits decreased by $2.0 million, or
30.9%, to $4.4 million for the nine months ended March 31, 2003, from $6.4
million for the same period in 2002. The decrease was primarily attributable to
reductions in deposit rates paid, with the average cost of funds decreasing to
2.11% for the current period, from 3.15% for the same period last year, offset
to some extent by a $8.7 million increase in the average balances of deposit
accounts.
Net Interest Income. Net interest income decreased by $361,000, or 4.4%, to $7.9
million for the nine months ended March 31, 2003, from $8.2 million for the same
period in 2002. The net interest rate spread increased 14 basis points, to 2.63%
in 2003, from 2.49% in 2002, while the net interest margin decreased 14 basis
points, to 3.04% in 2003, from 3.18% in 2002. The ratio of average
interest-earning assets to average interest-bearing liabilities was 124.0% for
the nine months ended March 31, 2003, compared to 127.9% for the same period
last year.
Non-interest Income. Non-interest income increased $364,000, or 19.8%, to $2.2
million for the nine months ended March 31, 2003, from $1.8 million for the same
period in 2002. Insurance commissions generated by the Company's insurance
subsidiary increased $438,000, or 28.8% to $2.0 million in 2003, compared to
$1.5 million in 2002. Other non-interest income of $45,000 for the nine months
ended March 31, 2003, includes a $105,000 loss on the Company's equity
investment in a community development company.
Non-interest Expense. Total non-interest expense increased $667,000, or 10.7%,
to $6.9 million for the nine months ended March 31, 2003, from $6.2 million for
the nine months ended March 31, 2002. The primary causes for the increase were a
$527,000, or 14.8% increase in salaries and employee benefits, which included a
$79,000 increase in expense from the amortization of shares granted in November
2001 under the Company's 2001 RRP, and a $203,000 increase in insurance agency
bad debt expense. The increase in insurance agency bad debt expense was the
result of a $194,000 provision for loss on an insurance premium receivable from
a long-term commercial client of the Company's insurance agency subsidiary,
Chesterfield Insurance Services LLC ("CIS"). CIS continues to aggressively
pursue collection of this receivable. Management has reviewed all similar
commercial premium receivables and determined that no additional bad debt
provisions are required. The annualized ratio of non-interest expense to average
assets was 2.55% in 2003, compared to 2.33% in 2002, and the Company's
efficiency ratio was 68.3% for 2003, compared to 61.8% for 2002.
Provision for Income Taxes. The provision for income taxes of $1.3 for the nine
months ended March 31, 2003 resulted in an effective tax rate of 37.1%, compared
to a provision of $1.3 million and a 34.8% effective tax rate for the same
period last year. The increase in the effective income tax rate results
primarily from increased state income taxes due to reduced amounts of U.S.
Government and Agency interest income.
14
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
measure 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 December 31, 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
Interest Rates Estimated Amount of Percent
(basis points) NPV Change Percent NPV Ratio Change
- -------------------------------------------------------------------------------------------------------------
(in thousands)
+300 bp $ 62,014 $ (13,918) -18% 17.19% -15%
+200 67,264 (8,668) -11% 18.35% -9%
+100 72,422 (3,510) -5% 19.45% -4%
0 75,932 -- -- 20.17% --
- 100 76,750 819 1% 20.30% 1%
- 200 -- -- -- -- --
- 300 -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------
For the December 31, 2002 reporting cycle the OTS suppressed all model outputs
associated with the -300 and -200 basis point scenarios because of the
abnormally low prevailing interest rate environment. The Company does not expect
a material change when March 31, 2003 data becomes available.
15
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.
16
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
10 Supplemental Executive Agreement to the Employment Agreement
between the Chief Executive Officer and Chesterfield Federal
Savings and Loan Association of Chicago, the wholly owned
subsidiary of the Company.
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
17
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: May 12, 2003 /s/ Michael E. DeHaan
--------------------------------------------
Michael E. DeHaan
President and Chief Executive Officer
(Principal Executive Officer)
Dated: May 12, 2003 /s/ Karen M. Wirth
--------------------------------------------
Karen M. Wirth
Treasurer
(Principal Financial and Accounting Officer)
18
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 officer 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 officer 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 officer 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.
Dated: May 12, 2003 /s/ Michael E. DeHaan
-----------------------
Michael E. DeHaan
Chairman, President and
Chief Executive Officer
19
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 officer 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 officer 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 officer 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.
Dated: May 12, 2003 /s/ Karen M. Wirth
-----------------------------------
Karen M. Wirth
Treasurer (Chief Financial Officer)
20