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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, 2004
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 3,875,521 shares of the issuer's common stock, par value $.01,
outstanding as of May 5, 2004.
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CHESTERFIELD FINANCIAL CORP.
FORM 10-Q
Index
Part I. Financial Information Page
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Item 1. Financial Statements
Consolidated Condensed Balance Sheets as of
March 31, 2004 and June 30, 2003 (unaudited) 3
Consolidated Condensed Statements of Income for the three
and nine months ended March 31, 2004 and 2003 (unaudited) 4
Consolidated Condensed Statements of Stockholders' Equity
for the nine months ended March 31, 2004 and 2003 (unaudited) 5
Consolidated Condensed Statements of Cash Flows for the nine
months ended March 31, 2004 and 2003 (unaudited) 6
Notes to Consolidated Condensed Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
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
Exhibits 19
2
CHESTERFIELD FINANCIAL CORP.
CONSOLIDATED CONDENSED BALANCE SHEETS (unaudited)
Dollars in thousands
March 31, June 30,
Assets 2004 2003
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Cash and due from financial institutions $ 11,734 $ 8,843
Interest-bearing deposits 109,228 127,994
Federal funds sold 5,900 4,800
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Cash and cash equivalents 126,862 141,637
Securities available-for-sale 38,362 26,822
Securities held to maturity, at amortized cost (approximate fair value of
$26,351 at March 31, 2004 and $26,864 at June 30, 2003) 25,723 26,117
Loans receivable, net of allowance for loan losses of $1,303 at
March 31, 2004 and $1,304 at June 30, 2003 145,348 150,022
Federal Home Loan Bank stock 19,504 18,563
Premises and equipment 2,190 2,415
Goodwill 452 452
Accrued interest receivable and other assets 2,458 2,881
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Total assets $ 360,899 $ 368,909
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Liabilities and Stockholders' Equity
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Liabilities
Deposits $ 279,482 $ 282,175
Advance payments by borrowers for taxes and insurance 1,175 2,203
Accrued expenses and other liabilities 5,462 11,222
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Total liabilities 286,119 295,600
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; 3,875,521 and 3,879,558 shares outstanding
at March 31, 2004 and June 30, 2003 43 43
Additional paid in capital 42,692 42,399
Retained earnings 44,022 43,263
Unearned ESOP shares (2,668) (2,833)
Unearned RRP shares (1,522) (1,942)
Treasury stock, at cost (7,891) (7,797)
Accumulated other comprehensive income 104 176
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Total stockholders' equity 74,780 73,309
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Total liabilities and stockholders' equity $ 360,899 $ 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 Nine months ended
March 31, March 31,
-------------------------------------------------------
2004 2003 2004 2003
- -----------------------------------------------------------------------------------------------------------------
Interest income
Loans, including fees $ 2,232 $ 2,657 $ 6,910 $ 8,343
Securities 581 585 1,586 2,168
Interest-earning deposits 270 332 846 1,012
Federal Home Loan Bank stock dividends 312 224 941 714
Other interest income 13 20 37 68
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Total interest income 3,408 3,818 10,320 12,305
Interest expense 942 1,285 3,006 4,417
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Net interest income before provision for loan losses 2,466 2,533 7,314 7,888
Provision for loan losses -- (75) -- (275)
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Net interest income after provision for loan losses 2,466 2,608 7,314 8,163
Non-interest income
Insurance commissions 566 587 1,742 1,957
Service charges on deposit accounts 66 67 210 205
Other 21 (26) 118 45
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Total non-interest income 653 628 2,070 2,207
Non-interest expense
Salaries and employee benefits 1,482 1,451 4,497 4,418
Occupancy 201 199 595 594
Equipment 97 110 304 346
Data processing 99 118 292 286
Federal deposit insurance 33 33 97 99
Insurance agency bad debt expense 5 14 14 217
Other 303 301 1,024 939
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Total non-interest expense 2,220 2,226 6,823 6,899
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Income before income taxes 899 1,010 2,561 3,471
Income tax expense 342 384 970 1,288
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Net income $ 557 $ 626 $ 1,591 $ 2,183
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Basic earnings per share $ 0.16 $ 0.18 $ 0.45 $ 0.62
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Diluted earnings per share $ 0.15 $ 0.18 $ 0.44 $ 0.60
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Dividends per share $ 0.08 $ 0.06 $ 0.24 $ 0.11
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Comprehensive income $ 666 $ 558 $ 1,519 $ 2,233
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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, 2004 and 2003
Dollars in thousands
Additional Unearned
Common Paid-in Retained ESOP
Stock Capital Earnings Shares
--------------------------------------------
Balance at July 1, 2003 $ 43 $ 42,399 $ 43,263 $ (2,833)
Comprehensive income
Net income 1,591
Unrealized loss on securities
available-for-sale, net
Total comprehensive income
Dividends paid (818)
Purchases of treasury stock
Amortization of vested RRP shares
Income tax benefit of RRP vesting 84
ESOP shares committed to be released 201 159
--------------------------------------------
Balance at March 31, 2004 $ 43 $ 42,684 $ 44,022 $ (2,674)
============================================
Balance at July 1, 2002 $ 43 $ 42,153 $ 41,085 $ (3,056)
Comprehensive income
Net income 2,183
Unrealized gain on securities
available-for-sale, net
Total comprehensive income
Dividends paid 2 (381) 2
Purchases of treasury stock
Amortization of vested RRP shares
Income tax benefit of RRP vesting 34
ESOP shares committed to be released 150 164
--------------------------------------------
Balance at March 31, 2003 $ 43 $ 42,339 $ 42,887 $ (2,890)
============================================
Accumulated
Unearned Other Total
RRP Treasury Comprehensive Stockholders'
Shares Stock Income (Loss) Equity
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Balance at July 1, 2003 $ (1,942) $ (7,797) $ 176 $ 73,309
Comprehensive income
Net income 1,591
Unrealized loss on securities
available-for-sale, net (72) (72)
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Total comprehensive income 1,519
Dividends paid (818)
Purchases of treasury stock (94) (94)
Amortization of vested RRP shares 420 420
Income tax benefit of RRP vesting 84
ESOP shares committed to be released 360
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Balance at March 31, 2004 $ (1,522) $ (7,891) $ 104 $ 74,780
====================================================
Balance at July 1, 2002 $ (2,496) $ (1,167) $ 179 $ 76,741
Comprehensive income
Net income 2,183
Unrealized gain on securities
available-for-sale, net 50 50
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Total comprehensive income 2,233
Dividends paid (377)
Purchases of treasury stock (6,277) (6,277)
Amortization of vested RRP shares 427 427
Income tax benefit of RRP vesting 34
ESOP shares committed to be released 314
----------------------------------------------------
Balance at March 31, 2003 $ (2,069) $ (7,444) $ 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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2004 2003
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Cash flows from operating activities:
Net income $ 1,591 $ 2,183
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan losses -- (275)
Provision for insurance agency bad debts 14 217
Depreciation and amortization 270 311
Net amortization of securities 36 (88)
ESOP compensation expense 360 314
RRP compensation expense 420 427
Federal Home Loan Bank stock dividends (941) (714)
Net change in:
Deferred loan origination fees (65) 73
Accrued interest receivable and other assets 410 (133)
Accrued expenses and other liabilities (502) (99)
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Net cash from operating activities 1,593 2,216
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Cash flows from investing activities:
Activity in held-to-maturity securities:
Maturities, calls and payments 15,393 46,086
Purchases (20,138) (39,879)
Activity in available-for-sale securities:
Payments 3,651 4,229
Purchases (15,335) (5,199)
Loan originations and payments, net 4,739 14,968
Additions to premises and equipment (45) (237)
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Net cash from investing activities (11,735) 19,968
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Cash flows from financing activities:
Net change in deposits (2,693) 4,911
Net change in advance payments by borrowers for taxes and insurance (1,028) (1,194)
Dividends paid (818) (377)
Purchase of treasury stock (94) (6,277)
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Net cash from financing activities (4,633) (2,937)
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Net change in cash and cash equivalents (14,775) 19,247
Cash and cash equivalents at beginning of period 141,637 94,726
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Cash and cash equivalents at end of period $ 126,862 $ 113,973
=========================================================================================================
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, 2004 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 nine months ended March 31, 2004 and 2003
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 nine-month periods
ended March 31, 2004 and 2003:
Three months ended Nine months ended
March 31, March 31,
------------------------------------------------
2004 2003 2004 2003
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Net income as reported $ 557 $ 626 $ 1,591 $ 2,183
Pro forma net income 451 518 1,270 1,853
Basic earnings per share as reported $ 0.16 $ 0.18 $ 0.45 $ 0.62
Pro forma basic earnings per share 0.13 0.15 0.36 0.52
Diluted earnings per share as reported $ 0.15 $ 0.18 $ 0.44 $ 0.60
Pro forma diluted earnings per share 0.12 0.15 0.35 0.51
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
7
Notes to Consolidated Condensed Financial Statements (unaudited)
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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, 2004, the Bank met the
capital adequacy requirements to which it is subject. The Bank's tangible equity
ratio at March 31, 2004 was 17.70%. The Tier 1 capital ratio was 17.70%, the
Tier 1 risk-based ratio was 48.64%, and the total risk-based capital ratio was
49.61%.
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, 2004, the Company had outstanding commitments to make loans of
$801,000 and unused lines of credit outstanding of $19.0 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 March 31, 2004 and 2003 was
computed by dividing net income by the weighted average number of shares of
common stock outstanding for the period, which were 3,509,294 and 3,475,006,
respectively. Basic earnings per share for the nine months ended March 31, 2004
and 2003 was computed by dividing net income by the weighted average number of
shares of common stock outstanding for the period, which were 3,497,918 and
3,540,247, 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, 2004 and 2003 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 3,663,573 and 3,565,956, respectively. Diluted earnings per share for the
nine months ended March 31, 2004 and 2003 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 3,630,776 and 3,610,493, 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)
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Dollars in thousands Nine months ended March 31, 2004
----------------------------------------------------
Banking Insurance
Segment Segment Other Consolidated
----------------------------------------------------
Net interest income $ 7,220 $ 4 $ 90 $ 7,314
Provision for loan losses -- -- -- --
Other revenue 424 1,777 (131) 2,070
Other expense 5,046 1,728 (49) 6,823
Income tax expense 964 21 15 970
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Segment profit $ 1,634 $ 32 $ (75) $ 1,591
====================================================
Depreciation $ 213 $ 57 $ -- $ 270
Segment assets $ 360,801 $ 1,836 $ (1,738) $ 360,899
Nine months ended March 31, 2003
----------------------------------------------------
Banking Insurance
Segment Segment Other Consolidated
----------------------------------------------------
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 tax expense 1,266 3 19 1,288
----------------------------------------------------
Segment profit $ 2,155 $ 5 $ 23 $ 2,183
====================================================
Depreciation and amortization $ 239 $ 72 -- $ 311
Segment assets $ 362,541 $ 1,920 $ (1,157) $ 363,304
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) mandatory 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 would 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 would not have an effect on the Company's consolidated
financial statements.
In November 2003, the Emerging Issues Task Force ("EITF") issued consensus
requirements concerning Issue 03-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments relating to disclosures
for investment securities and that require additional numerical an narrative
disclosures for debt and marketable equity
9
Notes to Consolidated Condensed Financial Statements (unaudited)
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securities that have unrealized losses. The requirements applies to the
Corporation for June 30, 2004 year-end disclosures. In March 2004, Issue 03-01
was expanded to include guidance on recognition and measurement of impairment
losses. The additional guidance applies to reporting periods beginning after
June 15, 2004. Management is reviewing the additional guidance that was recently
issued, although they do not expect it to have a significant impact.
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.
The Company's 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, 2004, 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, $1.6 million
for the nine months ended March 31, 2004, consisted primarily of interest and
dividends received less interest paid on deposits. Loan principal repayments
exceeded originations by $4.7 million. Maturities, calls and repayments on
securities totaled $19.0 million, while purchases of new securities amounted to
$35.5 million. Net cash used by financing activities amounted to $4.6 million
for the nine months ended March 31, 2004, and included a $2.7 million net
decrease in deposits.
11
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
At March 31, 2004, the Bank had outstanding commitments to make loans of
$801,000 and unused lines of credit outstanding of $19.0 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, 2004 totaled $147.5 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 March 31, 2004, total assets were $360.9 million, down $8.0 million, or 2.2%,
from $368.9 million at June 30, 2003. Cash and cash equivalents decreased $14.8
million, or 10.4%, to $126.9 million at March 31, 2004, compared to $141.6
million at June 30, 2003. Loans receivable at March 31, 2004, were $145.3
million, down $4.7 million, or 3.1%, from $150.0 million at June 30, 2003. Total
deposits at March 31, 2004 were $279.5 million, down $2.7 million, or 1.0%, from
$282.2 million at June 30, 2003.
Total stockholders' equity as of March 31, 2004 was $74.8 million, or 20.7% of
total assets, compared to $73.3 million, or 19.9% of total assets at June 30,
2003. At March 31, 2004, there were 3,875,521 shares outstanding with a book
value of $19.30 per share, compared to 3,879,558 shares with a book value of
$18.90 per share at June 30, 2003. On April 20, 2004, the Board of Directors of
the Company declared a dividend of $0.08 per share to be paid on June 1, 2004 to
stockholders of record on May 14, 2004.
Asset Quality
The Company's non-performing loans were $378,000, or 0.26% of loans receivable
as of March 31, 2004, 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 0.90% as of March 31, 2004, compared to 0.87% as of June 30, 2003
Comparison of Operating Results for the Quarters Ended March 31, 2004 and 2003
General. Net income for the quarter ended March 31, 2004 was $557,000, or $0.15
diluted earnings per share, compared to net income of $626,000, or $0.18 diluted
earnings per share for the quarter ended March 31, 2003. The Company's return on
average assets for the quarter ended March 31, 2004, was 0.61%, compared to
0.69% for the quarter ended March 31, 2003. Return on average equity for the
current quarter was 3.03%, compared to 3.48% for the same quarter last year.
Interest Income. Total interest income decreased by $410,000, or 10.7%, to $3.4
million for the quarter ended March 31, 2004, from $3.8 million for the quarter
ended March 31, 2003. A decrease in yield on interest-earning assets to 3.94%,
from 4.41% for the same quarter last year, and a change in the mix of
interest-earning assets caused the decline in interest income. The average
balance of securities for the quarter ended March 31, 2004, increased $19.5
million compared to the average balance for the quarter ended March 31, 2003,
while the average balances of loans and of interest-earning deposits decreased
$9.8 million and $11.4 million, respectively.
Interest Expense. Interest expense on deposits decreased by $343,000, or 26.7%,
to $942,000 for the quarter ended March 31, 2004, from $1.3 million for the same
period in 2003. The decrease was primarily attributable to reductions in deposit
rates paid, with the average cost of funds decreasing to 1.34% for the current
period, from 1.83% for the same period last year, and a shift of $6.4 million in
average balances from time deposits to regular savings and transaction accounts.
Net Interest Income. Net interest income decreased by $67,000, or 2.6%, to $2.47
million for the quarter ended March 31, 2004, from $2.53 million for the same
period in 2003. The net interest rate spread increased two basis points, to
2.60% in 2004, from 2.58% in 2003, while the net interest margin decreased seven
basis points, to 2.85% in 2004, from 2.92% in 2003. The ratio of average
interest-earning assets to average interest-bearing liabilities was 123.0% in
2004,
12
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
compared to 123.5% in 2003.
Non-interest Income. Non-interest income increased $25,000, or 4.0%, to $653,000
for the quarter ended March 31, 2004, from $628,000 for the same period in 2003.
Insurance commissions generated by the Company's insurance subsidiary decreased
$21,000, or 3.6%, to $566,000 in 2004, compared to $587,000 in 2003. Other
income of $21,000 for the quarter ended March 31, 2004, includes a $14,000 loss
on the Company's equity investment in a community development company. For the
quarter ended March 31, 2003 other non-interest income (which is reported as a
loss of $26,000 for the quarter) included a $78,000 loss on the same equity
investment.
Non-interest Expense. Total non-interest expense remained approximately the same
at $2.2 million for the quarters ended March 31, 2004 and 2003. The annualized
ratio of non-interest expense to average assets was 2.45% in 2004, compared to
2.47% in 2003, and the Company's efficiency ratio was 71.2% for the current
quarter, compared to 70.4% for the same period last year.
Provision for Income Taxes. The provision for income taxes of $342,000 for the
quarter ended March 31, 2004, resulted in an effective tax rate of 38.0%,
compared to a provision of $384,000 and a 38.0% effective tax rate for the same
quarter last year.
Comparison of Operating Results for the Nine Months Ended March 31, 2004 and
2003
General. Net income for the nine months ended March 31, 2004, was $1.6 million,
or $0.44 diluted earnings per share, compared to net income of $2.2 million, or
$0.60 diluted earnings per share for the nine months ended March 31, 2003. The
Company's return on average assets for the nine months ended March 31, 2004, was
0.58%, compared to 0.81% for the same period last year. Return on average equity
for the nine months was 2.89%, compared to 4.02% for the same period last year.
Interest Income. Total interest income decreased by $2.0 million, or 16.1%, to
$10.3 million for the nine months ended March 31, 2004, from $12.3 million for
the nine months ended March 31, 2003. A decrease in yield on interest-earning
assets to 3.97% for the nine months ended March 31, 2004, from 4.74% for the
same period last year, and a change in the mix of interest-earning assets caused
the decline in interest income. The average balance of loans for the nine months
ended March 31, 2004, decreased $15.7 million from the average balance of loans
for the nine months ended March 31, 2003, while the average balance of
interest-earning deposits and securities increased $14.5 million and $2.4
million, respectively.
Interest Expense. Interest expense on deposits decreased by $1.4 million, or
31.9%, to $3.0 million for the nine months ended March 31, 2004, from $4.4
million for the same period in 2003. The decrease was primarily attributable to
reductions in deposit rates paid, with the average cost of funds decreasing to
1.42% for the current period, from 2.11% for the same period last year, offset
to some extent by a $3.1 million increase in the average balances of deposit
accounts.
Net Interest Income. Net interest income decreased by $574,000, or 7.3%, to $7.3
million for the nine months ended March 31, 2004, from $7.9 million for the same
period in 2003. The net interest rate spread decreased eight basis points, to
2.55% in 2004, from 2.63% in 2003, while the net interest margin decreased 23
basis points, to 2.81% in 2004, from 3.04% in 2003. The ratio of average
interest-earning assets to average interest-bearing liabilities was 123.0% for
the nine months ended March 31, 2004, compared to 124.0% for the same period
last year.
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
13
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
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 decreased $137,000, or 6.2%, to $2.1
million for the nine months ended March 31, 2004, from $2.2 million for the same
period in 2003. Insurance commissions generated by the Company's insurance
subsidiary decreased $215,000, or 11.0% to $1.7 million in 2004, compared to
$2.0 million in 2003. The primary cause for 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. Other non-interest income of $118,000 for the nine months
ended March 31, 2004, includes a $14,000 loss on the Company's equity investment
in a community development company. A loss of $105,000 from this same equity
investment was recognized for the nine months ended March 31, 2003.
Non-interest Expense. Total non-interest expense decreased $76,000, or 1.1%, to
$6.8 million for the nine months ended March 31, 2004, from $6.9 million for the
nine months ended March 31, 2003. Salaries and employee benefits increased
$79,000, or 1.8%, to $4.5 million for the nine months ended March 31, 2004,
compared to $4.4 million for 2003. The $79,000 increase in salaries and employee
benefits included a $46,000 increase in ESOP expense attributed to the increased
fair value of Company stock allocated to participants. The $203,000 decrease in
insurance agency bad debt expense was primarily 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. Parent company
administrative expenses increased by $46,000, or 54.1%, to $131,000 for the nine
months ended March 31, 2004, compared to $85,000 for the same period last year.
The annualized ratio of non-interest expense to average assets was 2.50% in
2004, compared to 2.55% in 2003, and the Company's efficiency ratio was 72.7%
for 2004, compared to 68.3% for 2003.
Provision for Income Taxes. The provision for income taxes of $970,000 for the
nine months ended March 31, 2004 resulted in an effective tax rate of 37.9%,
compared to a provision of $1.3 million and a 37.1% effective tax rate for the
same period last year.
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, 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 $ 64,046 $(13,167) -17% 17.72% -14%
+200 68,542 (8,671) -11% 18.69% -9%
+100 73,103 (4,110) -5% 19.65% -4%
0 77,213 -- -- 20.49% --
-100 78,314 1,101 1% 20.67% 1%
-200 -- -- -- -- --
-300 -- -- -- -- --
- -----------------------------------------------------------------------------------------------------
For the December 31, 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 March 31, 2004 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
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 January 26, 2004, when it
issued a press release regarding its earnings for the
fiscal quarter ended December 31, 2003.
17
s
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 7, 2004 /s/ Michael E. DeHaan
------------------ ------------------------
Michael E. DeHaan
President and Chief Executive Officer
(Principal Executive Officer)
Dated: May 7, 2004 /s/ Karen M. Wirth
------------------ -------------------
Karen M. Wirth
Treasurer
(Principal Financial and Accounting Officer)
18