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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, 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 [_]
The number of shares outstanding of each of the issuer's classes of common
stock was 3,879,558 shares of common stock, par value $.01, outstanding as of
November 7, 2003.
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CHESTERFIELD FINANCIAL CORP.
FORM 10-Q
Index
-----
Part I. Financial Information Page (s)
- ------- --------------------- --------
Item 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 2003 and June 30, 2003 (unaudited) 1
Consolidated Statements of Income for the three
months ended September 30, 2003 and 2002 (unaudited) 2
Consolidated Statements of Stockholders' Equity
for the three months ended September 30, 2003 and 2002 (unaudited) 3
Consolidated Statements of Cash Flows for the three
months ended September 30, 2003 and 2002 (unaudited) 4
Notes to Consolidated Financial Statements (unaudited) 5-7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8-10
Item 3. Quantitative and Qualitative Disclosures about Market Risks 11
Item 4. Controls and Procedures 12
Part II. Other Information
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Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Defaults upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signature Page 14
Exhibits 15-17
CHESTERFIELD FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS (unaudited)
Dollars in thousands
September 30, June 30,
Assets 2003 2003
-------------------------
Cash and due from financial institutions $ 11,394 $ 8,843
Interest-earning deposits 119,749 127,994
Federal funds sold 1,200 4,800
-------------------------
Cash and cash equivalents 132,343 141,637
Securities available-for-sale 30,029 26,822
Securities held-to-maturity, at amortized cost (approximate fair value of
$36,585 at September 30, 2003 and $26,864 at June 30, 2003) 36,005 26,117
Loans receivable, net of allowance for loan losses of $1,303 at
September 30, 2003 and $1,304 at June 30, 2003 145,629 150,022
Federal Home Loan Bank stock 18,862 18,563
Premises and equipment 2,330 2,415
Goodwill 452 452
Accrued interest receivable and other assets 3,117 2,881
-------------------------
Total assets $ 368,767 $ 368,909
=========================
Liabilities and Stockholders' Equity
Liabilities
Deposits $ 283,248 $ 282,175
Advance payments by borrowers for taxes and insurance 511 2,203
Accrued expenses and other liabilities 11,368 11,222
-------------------------
Total liabilities 295,127 295,600
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; 3,879,558 outstanding at
September 30, 2003 and June 30, 2003 43 43
Additional paid in capital 42,463 42,399
Retained earnings 43,528 43,263
Unearned Employee Stock Ownership Plan shares (2,779) (2,833)
Unearned Recognition and Retention Plan shares (1,801) (1,942)
Treasury stock, at cost, 425,180 shares (7,797) (7,797)
Accumulated other comprehensive income (17) 176
-------------------------
Total stockholders' equity 73,640 73,309
-------------------------
Total liabilities and stockholders' equity $ 368,767 $ 368,909
=========================
See accompanying notes to unaudited consolidated financial statements.
1
CHESTERFIELD FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Dollars in thousands, except per share data
For the three months ended
September 30,
--------------------------
2003 2002
--------------------------
Loans, including fees $2,396 $2,875
Securities 460 875
Interest-earning deposits 298 347
Federal Home Loan Bank stock dividends 298 221
Other interest income 17 24
--------------------------
Total interest and dividend income 3,469 4,342
Interest expense on deposits 1,060 1,665
--------------------------
Net interest income before provision for loan losses 2,409 2,677
Provision for loan losses -- --
--------------------------
Net interest income after provision for loan losses 2,409 2,677
Non-interest income
Insurance commissions 617 584
Service charges on deposit accounts 74 70
Other 46 43
--------------------------
Total non-interest income 737 697
Non-interest expense
Salaries and employee benefits 1,369 1,346
Occupancy 198 194
Equipment 104 115
Data processing 96 83
Federal deposit insurance 33 33
Other 472 393
--------------------------
Total non-interest expense 2,272 2,164
--------------------------
Income before income taxes 874 1,210
Income tax expense 333 441
--------------------------
Net income $ 541 $ 769
==========================
Basic earnings per share $ 0.16 $ 0.21
Diluted earnings per share $ 0.15 $ 0.21
Dividends per share $ 0.08 $ --
See accompanying notes to unaudited consolidated financial statement.
2
CHESTERFIELD FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (unaudited)
Three months ended September 30, 2003 and 2002
Dollars in thousands
Accumulated
Additional Unearned Unearned Other Total
Common Paid-in Retained ESOP RRP Treasury Comprehensive Stockholders'
Stock Capital Earnings Shares Shares Stock Income (Loss) Equity
=================================================================================================
Balance at July 1, 2003 $ 43 $ 42,399 $ 43,263 $ (2,833) $ (1,942) $ (7,797) $ 176 $ 73,309
Comprehensive income
Net income 541 541
Unrealized loss on securities
available-for-sale, net (193) (193)
----------------
Total comprehensive income 348
Dividends paid 2 (276) 2 (272)
Amortization of vested RRP shares 141 141
ESOP shares committed to release 62 52 114
-------------------------------------------------------------------------------------------------
Balance at September 30, 2003 $ 43 $ 42,463 $ 43,528 $ (2,779) $ (1,801) $ (7,797) $ (17) $ 73,640
=================================================================================================
Balance at July 1, 2002 $ 43 $ 42,153 $ 41,085 (3,056) $ (2,496) $ (1,167) $ 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 release 45 55 100
-------------------------------------------------------------------------------------------------
Balance at September 30, 2002 $ 43 $ 42,198 $ 41,854 $ (3,001) $ (2,353) $ (6,151) $ 321 $ 72,911
=================================================================================================
See accompanying notes to unaudited consolidated financial statements.
3
CHESTERFIELD FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Dollars in thousands
For the three months ended
September 30,
-----------------------------
2003 2002
-----------------------------
Cash flows from operating activities:
Net income $ 541 $ 769
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan losses -- --
Depreciation 96 92
Net amortization of securities 5 (2)
ESOP compensation expense 114 100
RRP compensation expense 141 143
Federal Home Loan Bank stock dividends (299) (221)
Net change in:
Deferred loan origination fees 4 35
Accrued interest receivable and other assets (236) (387)
Accrued expenses and other liabilities 247 (12)
-----------------------------
Net cash from operating activities
613 517
-----------------------------
Cash flows from investing activities:
Activity in held-to-maturity securities:
Maturities, calls and payments 111 10,452
Purchases (10,000) --
Activity in available-for-sale securities:
Payments 1,558 857
Purchases (5,063) (5,000)
Loan originations and payments, net 4,389 3,260
Additions to premises and equipment (11) (150)
-----------------------------
Net cash from investing activities (9,016) 9,419
-----------------------------
Cash flows from financing activities:
Net change in deposits 1,073 (450)
Net change in advance payments by borrowers for taxes and insurance (1,692) 877
Dividends paid (272) --
Purchase of treasury stock -- (4,984)
-----------------------------
Net cash from financing activities
(891) (4,557)
-----------------------------
Net change in cash and cash equivalents (9,294) 5,379
Cash and cash equivalents at beginning of period 141,637 94,726
-----------------------------
Cash and cash equivalents at end of period $ 132,343 $ 100,105
=============================
See accompanying notes to unaudited consolidated financial statements.
4
Notes to Consolidated Financial Statements (unaudited)
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Note 1 - Basis of Presentation
The accompanying unaudited consolidated 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 months ended September
30, 2003 are not necessarily indicative of results that may be expected for the
entire fiscal year ending June 30, 2004.
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 financial statements for the three months
ended September 30, 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.
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-month periods
ended September 30, 2003 and 2002:
Three months ended
September 30,
--------------------------------
2003 2002
--------------- ----------------
Net income as reported $ 541 $ 769
Pro forma net income 434 658
Basic earnings per share as reported $ 0.16 $ 0.21
Pro forma basic earnings per share 0.12 0.18
Diluted earnings per share as reported $ 0.15 $ 0.21
Pro forma diluted earnings per share 0.12 0.18
The pro forma effects are computed using option pricing models, using the
following weighted-average assumptions as of the date of grant in 2003 and 2002:
fair value of options granted of $2.65 and $5.11; risk free rate of return of
2.50% and 4.78%; expected option life of seven years for both periods; expected
stock price volatility of 10.59% and 14.21%; and dividend yield of 1.55% and 0%.
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
5
Notes to Consolidated Financial Statements (unaudited)
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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, 2003, the Bank met the
capital adequacy requirements to which it is subject. The Bank's tangible equity
ratio at September 30, 2003 was 16.91%. The Tier 1 capital ratio was 16.91%, the
Tier 1 risk-based capital ratio was 46.20%, and the total risk-based capital
ratio was 45.27%.
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, 2003, the Company had outstanding commitments to make loans of
$8.8 million and unused lines of credit outstanding of $20.5 million. At June
30, 2003, the Bank had outstanding commitments to make loans of $7.2 million and
unused lines of credit outstanding of $19.8 million.
Note 4 - Earnings Per Share
Basic earnings per share for the three months ended September 30, 2003 and 2002
are computed by dividing net income by the weighted average number of shares of
common stock outstanding for the period, which were 3,485,457 and 3,651,642,
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, 2003 and 2002 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 3,595,897 and 3,700,911, 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, 2003
----------------------------------------------------------
Banking Insurance
Segment Segment Other Consolidated
--------------- ------------- ---------- -------------
Net interest income $ 2,377 $ 1 $ 31 $ 2,409
Other revenue 183 632 (78) 737
Other expense (1,675) (581) (2,272)
(16)
Income taxes (337) (333)
(20) 24
--------------- ------------- ---------- -------------
Segment profit $ 548 $ 32 $ (39) $ 541
=============== ============= ========== =============
Depreciation $ 81 $ 15 $ - $ 96
Segment assets $ 368,110 $ 2,710 $ (2,053) $ 368,767
6
Notes to Consolidated Financial Statements (unaudited)
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Note 5 - Segment Reporting (continued)
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 (63) 697
Other expense (1,607) (565) 8 (2,164)
Income taxes (418) (14) (9) (441)
-----------------------------------------------------------
Segment profit $ 733 $ 24 $ 12 $ 769
===========================================================
Depreciation $ 77 $ 15 $ - $ 92
Segment assets $ 358,935 $ 2,507 $ (1,444) $ 359,998
Note 6 - New Accounting Pronouncements
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity, which affects
the accounting for certain freestanding financial instruments depending on the
type of financial instrument. SFAS No. 150 affects the following types of
freestanding financial instruments: (1) mandatorily redeemable shares for which
the issuer is obligated to purchase those shares; (2) obligations to repurchase
the issuer's equity shares; and (3) certain obligations to issue a variable
number of shares. SFAS No. 150 is effective for affected financial instruments
issued or modified after May 31, 2003. For those issued prior to May 31, 2002,
SFAS No. 150 is required to be applied for periods beginning after December 15,
2003. Management determined that the adoption of SFAS No. 150 will not have a
material effect on the Corporation's consolidated financial statements.
In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest
Entities. FIN 46 clarifies the application of Accounting Research Bulletin No.
51, Consolidated Financial Statements, to certain variable interest entities
("VIE") in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. The recognition and measurement provisions of FIN 46
are effective immediately for VIEs created after January 31, 2003. For VIEs
created prior to February 1, 2003, FIN 46 will apply in the first interim period
or fiscal year beginning after September 15, 2003. Management determined that
adoption of FIN 46 will not have a material effect on the Corporation's
consolidated financial statements.
7
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, 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, 2003.
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
$612,000 for the three months ended September 30, 2003. Net cash used in
investing activities was $9.0 million for the three months ended September 30,
2003. Loan principal payments exceeded originations received by $4.4 million.
Maturities, calls and payments on securities totaled $1.7 million, while
purchases of new securities amounted to $15.1 million. Net cash used in
financing
8
Management's Discussion and Analysis of Financial
Condition and Results of Operations
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activities amounted to $890,000 for the three months ended September 30, 2003.
The Bank's deposits increased by $1.1 million during the three months ended
September 30, 2003. The Company paid $272,000 in dividends during the three
months ended September 30, 2003. The Company began paying dividends during the
second quarter of fiscal 2003.
At September 30, 2003, the Bank had outstanding commitments to make loans of
$8.8 million and unused lines of credit outstanding of $20.5 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, 2003 totaled $153.1 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.
Comparison of Financial Condition at September 30, 2003 and June 30, 2003
At September 30, 2003, total assets were $368.8 million, down $142,000 from
$368.9 million at June 30, 2003. Cash and cash equivalents decreased $9.3
million, or 6.6%, to $132.3 million at September 30, 2003, compared to $141.6
million at June 30, 2003. Securities increased $13.1 million, or 24.7%, to $66.0
million at September 30, 2003, compared to $52.9 million at June 30, 2003,
primarily because management invested in mortgage-backed securities to increase
yield and to maintain adequate levels of qualifying mortgage loans for
regulatory purposes. Loans receivable at September 30, 2003, were $145.6
million, down $4.4 million, or 2.9%, from $150.0 million at June 30, 2003.
Total deposits at September 30, 2003, were $283.2 million, up $1.1 million, or
0.4%, from $282.2 million at June 30, 2003. Passbook saving accounts increased
$385,000, offset by a $385,000 decrease in time deposits, and NOW accounts
increased $1.1 million since June 30, 2003.
Total stockholders' equity as of September 30, 2003, was $73.6 million, or 20.0%
of total assets, compared to $73.3 million, or 19.9% of total assets at June 30,
2003. On November 25, 2002, the Company announced its intent to repurchase up to
188,000 shares of the Company's common stock. There were no repurchases during
the quarter ended September 30, 2003. A total of 20,200 shares have been
repurchased under this program. At September 30, 2003, there were 3,879,558
common shares outstanding with a book value of $18.98 per share.
Asset Quality
The Company's non-performing loans were $363,000, or 0.25% of loans receivable
as of September 30, 2003, compared to $258,000, or 0.17% of loans receivable as
of June 30, 2003. The $1.3 million allowance for loan losses was 0.89% of loans
receivable as of September 30, 2003, compared to 0.87% as of June 30, 2003.
Management has reviewed the allowance for loan losses as of September 30, 2003,
and determined that neither additions to nor recoveries of the allowance are
required.
Comparison of Operating Results for the
Quarters Ended September 30, 2003 and 2002
General. The Company reported net income of $541,000, or $0.15 earnings per
diluted share for the quarter ended September 30, 2003. Net income for the
quarter was $228,000 less than net income for the quarter ended September 30,
2002 of $769,000, or $0.21 earnings per diluted share. The primary reason for
the decrease was a $268,000 decrease in the Company's net interest income. Other
income increased $40,000, primarily due to a $33,000 increase in insurance
commissions. Operating expenses increased $108,000, including a $29,000 increase
in administrative expenses at the parent company. The Company's return on
average assets for the quarter ended September 30, 2003, was 0.59%, compared to
0.85% for the quarter ended September 30, 2002. Return on equity was 2.95% for
the quarter ended September 30, 2003, compared to 4.14% for the same period last
year.
9
Management's Discussion and Analysis of Financial
Condition and Results of Operations
- --------------------------------------------------------------------------------
Total Interest Income. Total interest income decreased by $873,000, or 20.1%, to
$3.5 million for the quarter ended September 30, 2003, from $4.3 million for the
quarter ended September 30, 2002. A decrease in yield on interest-earning assets
to 3.96%, from 4.99% for the same quarter 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.
Interest Expense. Interest expense on deposits decreased by $605,000, or 36.3%,
to $1.1 million for the quarter ended September 30, 2003, from $1.7 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 1.49% for
the current period, from 2.39% for the same period last year, offset to some
extent by a $5.0 million increase in the average balances of deposit accounts,
primarily passbook savings and NOW accounts.
Net Interest Income. Net interest income decreased by $268,000, or 10.0%, to
$2.4 million for the quarter ended September 30, 2003, from $2.7 million for the
same period in 2002. The net interest rate spread decreased 13 basis points, to
2.47% in 2003, from 2.60% in 2002, while the net interest margin decreased 32
basis points, to 2.75% in 2003, from 3.07% in 2002. The ratio of average
interest-earning assets to average interest-bearing liabilities was 123.58% in
2003, compared to 124.98% in 2002.
Non-interest Income. Total non-interest income increased $40,000, or 5.8%, to
$737,000 for the quarter ended September 30, 2003, compared to $697,000 for the
same period last year. Insurance commissions generated by the Company's
insurance subsidiary increased $33,000, to $617,000 in 2003, compared to
$584,000 in 2002.
Non-interest Expense. Total non-interest expenses increased $108,000, or 5.0%,
to $2.3 million for the quarter ended September 30, 2003, from $2.2 million for
the quarter ended September 30, 2002, due primarily to a $23,000 (1.7%) increase
in salaries and benefits and a $79,000 (20.1%) increase in miscellaneous
operating expenses that were primarily the result of increases in loan expenses,
legal and accounting expenses, and administrative expenses at the parent
company. The annualized ratio of non-interest expense to average assets
increased to 2.48% in 2003, compared to 2.39% in 2002, while the Company's
efficiency ratio was 72.22% for the current quarter, compared to 64.14% for the
same period last year.
Provision for Income Taxes. The provision for income taxes of $333,000 for the
quarter ended September 30, 2003, resulted in an effective tax rate of 38.09%,
compared to a provision of $441,000 and a 36.45% effective tax rate for the same
quarter last year. The increase in the effective income tax rate resulted
primarily from increased state income taxes due to reduced amounts of U.S.
Government and Agency interest income.
10
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, 2003 (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 $ 65,620 $ (9,362) -12% 17.65% -1.92%
+200 69,471 (5,511) -7 18.46 -1.11
+100 73,023 (1,960) -3 19.19 -0.38
0 74,983 - - 19.57 -
- 100 74,647 (335) - 19.46 -0.12
For the June 30, 2003 reporting cycle the OTS suppressed all model outputs
associated with the minus 200 basis points and minus 300 basis points scenarios
because of the abnormally low prevailing interest rate environment.
11
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.
12
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 present.
Item 2. Changes in Securities and Use of Proceeds
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
31.1 Certification of Chief Executive Officer required by
Rule 13a - 14(a).
31.2 Certification of Chief Financial Officer required by
Rule 13a - 14(a).
32 Certification of 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
13
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 10, 2003 /s/ Michael E. DeHaan
------------------------------------------
Michael E. DeHaan, Chairman, President and
Chief Executive Officer
Dated: November 10, 2003 /s/ Karen M. Wirth
------------------------------------------
Karen M. Wirth, Treasurer and
Chief Financial Officer
14