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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 December 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 |_|
The number of shares outstanding of the issuer's common stock was
3,875,521 shares of common stock, par value $.01, outstanding as of January 31,
2004.
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CHESTERFIELD FINANCIAL CORP.
FORM 10-Q
Index
Part I. Financial Information Page (s)
--------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets as of
December 31, 2003 (unaudited) and June 30, 2003 3
Consolidated Condensed Statements of Income for the three
and six months ended December 31, 2003 and 2002 (unaudited) 4
Consolidated Condensed Statements of Shareholders' Equity
for the six months ended December 31, 2003 and 2002 (unaudited) 5
Consolidated Condensed Statements of Cash Flows for the six
months ended December 31, 2003 and 2002 (unaudited) 6
Notes to Consolidated Condensed Financial Statements (unaudited) 7-9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10-13
Item 3. Quantitative and Qualitative Disclosures about Market Risks 14
Item 4. Controls and Procedures 15
Part II. Other Information
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signature Page 17
Certifications 18-20
CHESTERFIELD FINANCIAL CORP.
CONSOLIDATED CONDENSED BALANCE SHEETS (unaudited)
Dollars in thousands
December 31, June 30,
Assets 2003 2003
- -------------------------------------------------------------------------------------------------------------------
Cash and due from financial institutions $ 10,970 $ 8,843
Interest-bearing deposits 104,613 127,994
Federal funds sold 4,000 4,800
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 119,583 141,637
Securities available-for-sale 29,097 26,822
Securities held to maturity, at amortized cost (approximate fair value of
$41,235 at December 31, 2003 and $26,864 at June 30, 2003) 40,810 26,117
Loans receivable, net of allowance for loan losses of $1,303 at
December 31, 2003 and $1,304 at June 30, 2003 148,517 150,022
Federal Home Loan Bank stock 19,192 18,563
Premises and equipment 2,268 2,415
Goodwill 452 452
Accrued interest receivable and other assets 2,469 2,881
- -------------------------------------------------------------------------------------------------------------------
Total assets $ 362,388 $ 368,909
===================================================================================================================
Liabilities and Shareholders' Equity
- -------------------------------------------------------------------------------------------------------------------
Liabilities
Deposits $ 281,196 $ 282,175
Advance payments by borrowers for taxes and insurance 1,800 2,203
Accrued expenses and other liabilities 5,273 11,222
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 288,269 295,600
Shareholders' 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; 3,875,521 and 3,879,558 outstanding at December 31, 2003 and
at June 30, 2003 43 43
Additional paid in capital 42,613 42,399
Retained earnings 43,744 43,263
Unearned ESOP shares (2,725) (2,833)
Unearned RRP shares (1,662) (1,942)
Treasury stock, at cost, 429,217 shares at December 31, 2003
and 425,180 shares at June 30, 2003 (7,890) (7,797)
Accumulated other comprehensive income (4) 176
- -------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 74,119 73,309
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 362,388 $ 368,909
===================================================================================================================
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 Six months ended
December 31, December 31,
---------------------------------------------------
2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------
Interest and dividend income
Loans, including fees $2,282 $ 2,811 $4,678 $ 5,686
Securities 545 708 1,005 1,583
Interest-bearing deposits 278 333 576 680
Federal Home Loan Bank stock dividends 331 269 629 490
Other interest income 6 24 23 48
- --------------------------------------------------------------------------------------------------------------
Total interest and dividend income 3,442 4,145 6,911 8,487
Interest expense on deposits 1,003 1,467 2,063 3,132
- --------------------------------------------------------------------------------------------------------------
Net interest income 2,439 2,678 4,848 5,355
Provision for loan losses -- (200) -- (200)
- --------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 2,439 2,878 4,848 5,555
Non-interest income
Insurance commissions 560 786 1,177 1,370
Service charges on deposit accounts 70 68 144 138
Other 51 28 97 71
- --------------------------------------------------------------------------------------------------------------
Total non-interest income 681 882 1,418 1,579
Non-interest expense
Salaries and employee benefits 1,537 1,509 3,016 2,968
Occupancy 195 201 393 395
Equipment 103 121 207 236
Data processing 97 85 193 168
Federal deposit insurance 32 33 65 66
Insurance agency bad debt expense 4 199 9 203
Other 364 361 721 637
- --------------------------------------------------------------------------------------------------------------
Total non-interest expense 2,332 2,509 4,604 4,673
- --------------------------------------------------------------------------------------------------------------
Income before income taxes 788 1,251 1,662 2,461
Income tax expense 296 463 629 904
- --------------------------------------------------------------------------------------------------------------
Net income $ 492 $ 788 $1,033 $ 1,557
- --------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.14 $ 0.23 $ 0.30 $ 0.44
- --------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 0.14 $ 0.22 $ 0.29 $ 0.43
- --------------------------------------------------------------------------------------------------------------
Dividends per share $ 0.08 $ 0.05 $ 0.16 $ 0.05
- --------------------------------------------------------------------------------------------------------------
Comprehensive income $ 505 $ 764 $ 853 $ 1,675
- --------------------------------------------------------------------------------------------------------------
See accompanying notes to unaudited consolidated condensed financial statements.
4
CHESTERFIELD FINANCIAL CORP.
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY (unaudited)
Six months ended December 31, 2003 and 2002
Dollars in thousands Accumu-
lated
Other
Compre-
Additional Unearned Unearned hensive Total
Common Paid-in Retained ESOP RRP Treasury Income Shareholders'
Stock Capital Earnings Shares Shares Stock (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 1,033 1,033
Unrealized loss on securities
available-for-sale, net (180) (180)
--------
Total comprehensive income 853
Dividends paid 5 (552) 4 (543)
Purchases of treasury stock (93) (93)
Amortization of vested RRP shares 280 280
Income tax benefit of RRP vesting 84 84
ESOP shares committed to be released 125 104 229
------------------------------------------------------------------------------------------
Balance at December 31, 2003 $ 43 $ 42,613 $ 43,744 $ (2,725) $ (1,662) $ (7,890) $ (4) $ 74,119
==========================================================================================
Balance at July 1, 2002 $ 43 $ 42,153 $ 41,085 $ (3,056) $ (2,496) $ (1,167) $ 179 $ 76,741
Comprehensive income
Net income 1,557 1,557
Unrealized gain on securities
available-for-sale, net 118 118
--------
Total comprehensive income 1,675
Dividends paid 1 (174) 2 (171)
Purchases of treasury stock (6,277) (6,277)
Amortization of vested RRP shares 287 287
Income tax benefit of RRP vesting 34 34
ESOP shares committed to be released 94 109 203
------------------------------------------------------------------------------------------
Balance at December 31, 2002 $ 43 $ 42,282 $ 42,468 $ (2,945) $ (2,209) $ (7,444) $ 297 $ 72,492
==========================================================================================
See accompanying notes to unaudited consolidated condensed financial statements.
5
CHESTERFIELD FINANCIAL CORP.
Consolidated Condensed Statements of Cash Flows (unaudited)
Dollars in thousands
Six months ended
December 31,
- ------------------------------------------------------------------------------------------------------------
2003 2002
- ------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 1,033 $ 1,557
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan losses -- (200)
Depreciation 186 197
Net amortization of securities 155 (28)
ESOP compensation expense 229 203
RRP compensation expense 280 287
Federal Home Loan Bank stock dividends (629) (437)
Net change in:
Deferred loan origination fees (40) 21
Accrued interest receivable and other assets 412 (647)
Accrued expenses and other liabilities (5,773) 708
- ------------------------------------------------------------------------------------------------------------
Net cash from operating activities (4,147) 1,661
- ------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Activity in held-to-maturity securities:
Maturities, calls and payments 307 21,083
Purchases (15,000) (19,934)
Activity in available-for-sale securities:
Maturities, calls and payments 7,651 2,280
Purchases (10,353) (5,000)
Loan originations and payments, net 1,545 11,348
Additions to premises and equipment (39) (155)
- ------------------------------------------------------------------------------------------------------------
Net cash from investing activities (15,889) 9,622
- ------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net change in deposits (979) 580
Net change in advance payments by borrowers for taxes and insurance (403) (335)
Dividends paid (543) (171)
Purchase of treasury stock (93) (6,277)
- ------------------------------------------------------------------------------------------------------------
Net cash from financing activities (2,018) (6,203)
- ------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (22,054) 5,080
Cash and cash equivalents at beginning of period 141,637 94,726
- ------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 119,583 $ 99,806
============================================================================================================
See accompanying notes to unaudited consolidated condensed financial statements.
6
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 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 six months
ended December 31, 2003 are not necessarily indicative of results that may be
expected for the entire fiscal year ending June 30, 2004. Some items in the
prior year financial statements were reclassified to conform to the current
presentation.
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 six months ended December 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.
The Company uses the intrinsic method of accounting for the compensation effect
of stock options described in Accounting Principles Board Opinion ("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 Statement of Financial Accounting Standard ("SFAS")
No. 123 in the interim financial statements for the three and six-month periods
ended December 31, 2003 and 2002:
Three months ended Six months ended
December 31, December 31,
----------------------------------------------------------
2003 2002 2003 2002
----------------------------------------------------------
Net income as reported $ 492 $ 788 $ 1,033 $ 1,557
Pro forma net income 385 677 818 1,335
Basic earnings per share as reported $ 0.14 $ 0.23 $ 0.30 $ 0.44
Pro forma basic earnings per share 0.11 0.19 0.23 0.37
Diluted earnings per share as reported $ 0.14 $ 0.22 $ 0.29 $ 0.43
Pro forma diluted earnings per share 0.11 0.19 0.23 0.37
The pro forma effects are computed using option pricing models, using the
following weighted-average assumptions as of the date of grants in fiscal 2004
and 2003: fair values of options granted of $3.93 and $2.65; risk free rates of
return of 3.66% and 2.50%; expected option lives of seven years for all periods;
expected stock price volatilities of 9.99% and 10.59%; and dividend yields of
1.39% and 1.55%, respectively.
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
7
Notes to Consolidated Condensed Financial Statements (unaudited)
Note 2 - Capital Resources (continued)
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 December 31, 2003, the Bank met the
capital adequacy requirements to which it is subject. The Bank's tangible equity
ratio at December 31, 2003 was 17.41%. The Tier 1 capital ratio was17.41%, the
Tier 1 risk-based ratio was 46.55%, and the total risk-based capital ratio was
47.50%.
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 December 31, 2003, the Company had outstanding commitments to make loans of
$1.5 million and unused lines of credit outstanding of $19.9 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 December 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 3,499,126 and 3,492,676,
respectively. Basic earnings per share for the six months ended December 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 3,492,291 and
3,572,159, 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 December 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 3,628,507 and 3,562,902, respectively. Diluted earnings per share for the
six months ended December 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 3,612,415 and 3,632,009, 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:
8
Notes to Consolidated Condensed Financial Statements (unaudited)
Note 5 - Segment Reporting (continued)
Dollars in thousands Six months ended December 31, 2003
-----------------------------------------------------------
Banking Insurance
Segment Segment Other Consolidated
-----------------------------------------------------------
Net interest income $ 4,785 $ 3 $ 60 $ 4,848
Provision for loan losses -- -- -- --
Other revenue 295 1,215 (92) 1,418
Other expense 3,396 1,176 32 4,604
Income tax expense 621 16 (8) 629
-----------------------------------------------------------
Segment profit $ 1,063 $ 26 $ (56) $ 1,033
===========================================================
Depreciation $ 147 $ 39 $ -- $ 186
Segment assets 362,045 1,926 (1,583) 362,388
Six months ended December 31, 2002
-----------------------------------------------------------
Banking Insurance
Segment Segment Other Consolidated
-----------------------------------------------------------
Net interest income $ 5,236 $ 4 $ 115 $ 5,355
Provision for loan losses (200) -- -- (200)
Other revenue 470 1,388 (279) 1,579
Other expense 3,303 1,349 21 4,673
Income tax expense 867 17 20 904
-----------------------------------------------------------
Segment profit $ 1,736 $ 26 $ (205) $ 1,557
===========================================================
Depreciation $ 159 $ 38 $ -- $ 197
Segment assets $ 358,376 $ 3,273 $(1,577) $ 360,072
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, 2003,
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 an
effect on the Company'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 an effect on the Company's consolidated
financial statements.
9
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, 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 December 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 used by operating activities, $4.1 million,
consisting primarily of interest and dividends received less interest paid on
deposits, and a $5.9 reduction in accrued expenses and other liabilities, for
the six months ended December 31, 2003. The Company used $15.9 million in
investing activities for the six months ended December 31, 2003. Loan principal
repayments exceeded originations by $1.5 million. Maturities, calls and payments
on securities totaled $8.0 million, while purchases of new securities amounted
to $25.4 million. Net cash used in financing activities amounted to $2.0 million
for the six months ended December 31, 2003.
10
Management's Discussion and Analysis of Financial Condition and Results of
Operations
At December 31, 2003, the Bank had outstanding commitments to make loans of $1.5
million and unused lines of credit outstanding of $19.9 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 December 31, 2003 totaled $129.5 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 December 31, 2003, total assets were $362.4 million, down $6.5 million, or
1.8%, from $368.9 million at June 30, 2003. Cash and cash equivalents decreased
$22.1 million, or 15.6%, to $119.6 million at December 31, 2003, compared to
$141.6 million at June 30, 2003. Loans receivable at December 31, 2003, were
$148.5 million, down $1.5 million, or 1.0%, from $150.0 million at June 30,
2003. Total deposits at December 31, 2003 were $281.2 million, down $979,000, or
0.4%, from $282.2 million at June 30, 2003.
Total shareholders' equity as of December 31, 2003 was $74.1 million, or 20.5%
of total assets, compared to $73.3 million, or 19.9% of total assets at June 30,
2003. At December 31, 2003, there were 3,875,521 common shares outstanding with
a book value of $19.12 per share, compared to 3,879,558 shares with a book value
of $18.90 at June 30, 2003. On January 20, 2004, the Board of Directors of the
Company declared a second quarter dividend of $0.08 per share, to be paid on
March 1, 2004, to shareholders of record as of February 13, 2004.
Asset Quality
The Company's non-performing loans were $221,000, or 0.15% of loans receivable
as of December 31, 2003, compared to $258,000, or 0.17% of loans receivable as
of June 30, 2003. The $1.3 million allowance for losses on loans to loans
receivable was 0.88% as of December 31, 2003, compared to 0.87% as of June 30,
2003.
Comparison of Operating Results for the Quarters Ended December 31, 2003 and
2002
General. Net income for the quarter ended December 31, 2003 was $492,000, or
$0.14 diluted earnings per share, compared to net income of $788,000, or $0.22
diluted earnings per share for the quarter ended December 31, 2002. The
Company's return on average assets for the quarter ended December 31, 2003, was
0.54%, compared to 0.88% for the quarter ended December 31, 2002. Return on
average equity for the current quarter was 2.68%, compared to 4.39% for the same
quarter last year.
Total Interest Income. Total interest income decreased by $703,000, or 17.0%, to
$3.4 million for the quarter ended December 31, 2003, from $4.1 million for the
quarter ended December 31, 2002. An increase in average interest-earning assets
of $1.6 million between periods, offset by a decrease in yield on
interest-earning assets to 3.99%, from 4.83% for the same quarter last year, and
a change in the mix of interest-earning assets favoring shorter-term, lower
yielding interest-bearing deposits, caused the decline in interest income. The
average balance of loans for the quarter ended December 31, 2003, decreased
$14.8 million from the average balance for the quarter ended December 31, 2002,
while the average balance of securities, interest-earning deposits and federal
funds sold increased $15.1 million.
Interest Expense. Interest expense on deposits decreased by $464,000, or 31.6%,
to $1.0 million for the quarter ended December 31, 2003, from $1.5 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 1.43% for
the current period, from 2.11% for the same period last year, offset to some
extent by a $3.8 million increase in the average balances of deposit accounts.
The average balance of time deposits, which generally are paid a higher rate
than other deposits, decreased $3.5 million between these two periods.
11
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Net Interest Income. Net interest income decreased by $239,000, or 8.9%, to $2.4
million for the quarter ended December 31, 2003, from $2.7 million for the same
period in 2002. The net interest rate spread decreased 16 basis points, to 2.56%
in 2003, from 2.72% in 2002, while the net interest margin decreased 29 basis
points, to 2.83% in 2003, from 3.12% in 2002. The ratio of average
interest-earning assets to average interest-bearing liabilities was 122.7% in
2003, compared to 123.8% in 2002.
Non-interest Income. Non-interest income decreased $201,000, or 22.8%, to
$681,000 for the quarter ended December 31, 2003, from $882,000 for the same
period in 2002. Insurance commissions generated by the Company's insurance
agency subsidiary decreased $226,000, or 28.8%, to $560,000 in 2003, compared to
$786,000 in 2002. The primary cause of this decrease was the loss of renewal
commissions of more than $175,000 from a major client due to renewed competition
and lower pricing in the condominium association insurance underwriting
business. The agency believes that the loss of business was due solely to rate
sensitivity, and to regain that lost business the agency has been aggressively
seeking contracts with new insurance carriers who can underwrite the condominium
association insurance business at competitive rates.
Non-interest Expense. Non-interest expense decreased $177,000, or 7.1%, to $2.3
million for the quarter ended December 31, 2003, from $2.5 million for the
quarter ended December 31, 2002. The primary cause for the decrease was a
$195,000 decrease in insurance agency bad debt expense. The insurance agency bad
debt expense for the quarter ended December 31, 2002, was primarily the result
of a $194,000 loss provision for an insurance premium receivable from a
long-term commercial client. The agency has since recovered $20,000 of the
receivable and continues to aggressively pursue collection. The annualized ratio
of non-interest expense to average assets was 2.57% in 2003, compared to 2.80%
in 2002, and the Company's efficiency ratio was 74.7% for the current quarter,
compared to 70.5% for the same period last year.
Provision for Income Taxes. The provision for income taxes of $296,000 for the
quarter ended December 31, 2003, resulted in an effective tax rate of 37.6%,
compared to a provision of $463,000 and a 37.0% effective tax rate for the same
quarter last year.
Comparison of Operating Results for the Six Months Ended December 31, 2003 and
2002
General. Net income for the six months ended December 31, 2003 was $1.0 million,
or $0.29 diluted earnings per share, compared to net income of $1.6 million, or
$0.43 diluted earnings per share for the six months ended December 31, 2002. The
Company's return on average assets for the six months ended December 31, 2003,
was 0.57%, compared to 0.87% for the same period last year. Return on average
equity for the six months was 2.82%, compared to 4.28% for the same period last
year.
Total Interest Income. Total interest income decreased by $1.6 million, or
18.6%, to $6.9 million for the six months ended December 31, 2003, from $8.5
million for the six months ended December 31, 2002. An increase in average
interest-earning assets of $2.0 million between periods, offset by a decrease in
yield on interest-earning assets to 3.98% for the six months ended December 31,
2003, from 4.91% for the same period last year, and a change in the mix of
interest-bearing assets favoring shorter-term, lower yielding interest-earning
deposits, caused the decline in interest income. The average balance of loans
and securities for the six months ended December 31, 2003, decreased $24.8
million from the average balance for the six months ended December 31, 2002,
while the average balance of interest-earning deposits and federal funds sold
increased $25.6 million.
Interest Expense. Interest expense on deposits decreased by $1.1 million, or
34.1%, to $2.1 million for the six months ended December 31, 2003, from $3.1
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
1.46% for the current period, from 2.25% for the same period last year, offset
to some extent by a $4.4 million increase in the average balances of deposit
accounts.
Net Interest Income. Net interest income decreased by $507,000, or 9.5%, to $4.8
million for the six months ended December 31, 2003, from $5.4 million for the
same period in 2002. The net interest rate spread decreased 14 basis
12
Management's Discussion and Analysis of Financial Condition and Results of
Operations
points, to 2.52% in 2003, from 2.66% in 2002, while the net interest margin
decreased 31 basis points, to 2.79% in 2003, from 3.10% in 2002. The ratio of
average interest-earning assets to average interest-bearing liabilities was
123.0% for the six months ended December 31, 2003, compared to 124.3% for the
same period last year.
Non-interest Income. Non-interest income decreased $161,000, or 10.2%, to $1.4
million for the six months ended December 31, 2003, from $1.6 million for the
same period in 2002. Insurance commissions generated by the Company's insurance
subsidiary decreased $193,000, or 14.1% to $1.2 million in 2003, compared to
$1.4 million in 2002, primarily for the reason previously discussed.
Non-interest Expense. Non-interest expense decreased $69,000, or 1.5%, to $4.6
million for the six months ended December 31, 2003, from $4.7 million for the
six months ended December 31, 2002. Salaries and employee benefits increased by
$48,000, or 1.6%, including $26,000 from the increased fair value of Company
stock released to the ESOP. Other expenses increased $84,000, or 13.2%,
including a $26,000 increase in loan underwriting expenses, a $10,000 increase
in advertising expense, a $9,000 increase in insurance expense, and a $28,000
increase in public company administrative expenses. These increases were offset
by the $194,000 decrease in insurance agency bad debt expense previously
discussed. The annualized ratio of non-interest expense to average assets was
2.52% in 2003, compared to 2.60% in 2002, and the Company's efficiency ratio was
73.5% for 2003, compared to 67.4% for 2002.
Provision for Income Taxes. The provision for income taxes of $629,000 for the
six months ended December 31, 2003 resulted in an effective tax rate of 37.9%,
compared to a provision of $904,000 and a 36.7% 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.
13
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 September 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 $ 62,983 $ (13,407) (18)% 17.06% (14)%
+200 67,600 (8,790) (12)% 18.06% (9)%
+100 72,294 (4,096) (5)% 19.06% (4)%
0 76,390 -- -- 19.91% --
- 100 77,042 652 1% 20.01% 1%
- 200 -- -- -- -- --
- 300 -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
For the September 30, 2003 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 December 31, 2003 data becomes available.
14
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.
15
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
The Annual Meeting of Stockholders of the Company was held at the main
office of Chesterfield Financial Corp., 10801 South Western Avenue,
Chicago, Illinois, on Tuesday, November 18, 2003 at 12:00 noon local time,
pursuant to due notice. According to the certified list of stockholders,
which was presented at the Annual Meeting, there were 3,879,558
outstanding votes that were entitled to be cast at the Annual Meeting, of
which 1,939,780 represented a majority. There were present at the Annual
Meeting in person or by proxy the holders of 3,457,479 votes, said votes
constituting a majority and more than a quorum of the outstanding votes
entitled to be cast.
Proposal No. 1 - Election of Directors
Proposal No. 1 was for the election of Michael E. DeHaan and David M.
Steadman, each to serve as directors for terms of three years and until
their successors have been elected and qualified. There were 3,438,244
votes cast for election of Michael E. DeHaan and 3,438,095 votes cast for
election of David M. Steadman. There are four directors continuing in
office: Robert T. Mangan, Donald D. Walters, C.C. DeHaan, and Richard E.
Urchell.
Proposal No. 2 - Ratification of Crowe Chizek and Company LLC as Auditors
Proposal No. 2 was for the appointment of Crowe Chizek and Company LLC to
serve as auditors for the Company for the fiscal year ending June 30,
2004. There were 3,401,625 votes cast for ratification of the appointment
of Crowe Chizek and Company LLC, 36,854 votes against, and 19,000 votes
abstained.
Accordingly, each nominee for director having received a favorable vote of
a plurality of the votes cast at the Annual Meeting and Proposal 2 having
received a favorable vote of at least a majority of the Company's
outstanding votes present in person or by proxy to be cast at the Annual
Meeting, each of the propositions described above was declared to be duly
approved by the stockholders of the Company.
16
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
The Company filed Form 8-K on October 30, 2003, when it issued
a press release regarding its earnings for the fiscal quarter
ended September 30, 2003.
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: February 6, 2004 /s/ Michael E. DeHaan
---------------------------
Michael E. DeHaan
President and Chief Executive Officer
(Principal Executive Officer)
Dated: February 6, 2004 /s/ Karen M. Wirth
--------------------
Karen M. Wirth
Treasurer
(Principal Financial and Accounting Officer)
17