10-Q 1 form10q-55541_chesterfield.txt -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2003 Commission file number 0-32589 Chesterfield Financial Corp. (Exact name of registrant as specified in its charter) Delaware 36-4441126 (State of Incorporation) (I.R.S. Employer Identification No.) 10801 S. Western Avenue, Chicago, Illinois, 60643 (Address of principal executive offices) (773) 239-6000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all the reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report), and (2) has been subject to such filing requirements for the past 90 days. (1) Yes [X] No [_] (2) Yes [X] No [_] The number of shares outstanding of each of the issuer's classes of common stock was 3,879,558 shares of common stock, par value $.01, outstanding as of November 7, 2003. -------------------------------------------------------------------------------- CHESTERFIELD FINANCIAL CORP. FORM 10-Q Index -----

CHESTERFIELD FINANCIAL CORP. CONSOLIDATED BALANCE SHEETS (unaudited) Dollars in thousands

See accompanying notes to unaudited consolidated financial statements. 1 CHESTERFIELD FINANCIAL CORP. CONSOLIDATED STATEMENTS OF INCOME (unaudited) Dollars in thousands, except per share data

See accompanying notes to unaudited consolidated financial statement. 2 CHESTERFIELD FINANCIAL CORP. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (unaudited) Three months ended September 30, 2003 and 2002 Dollars in thousands

See accompanying notes to unaudited consolidated financial statements. 3 CHESTERFIELD FINANCIAL CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Dollars in thousands

See accompanying notes to unaudited consolidated financial statements. 4 Notes to Consolidated Financial Statements (unaudited) -------------------------------------------------------------------------------- Note 1 - Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring accruals) necessary for a fair presentation have been included. The results of operations and other data for the three months ended September 30, 2003 are not necessarily indicative of results that may be expected for the entire fiscal year ending June 30, 2004. Chesterfield Financial Corp. (the "Company") is a Delaware corporation that was organized in January 2001 at the direction of the Board of Directors of Chesterfield Federal Savings and Loan Association (the "Bank") for the purpose of owning all of the outstanding capital stock of the Bank following the completion of the Bank's mutual-to-stock conversion. The Company sold 4,304,738 shares of its common stock in a public offering to eligible depositors and members of the general public (the "Offering"), which was completed on May 2, 2001. Prior to that date, the Company had no assets or liabilities. The accompanying unaudited consolidated financial statements for the three months ended September 30, 2003 and 2002 represent the accounts of the Company, the Bank and its wholly owned subsidiary, Chesterfield Insurance Services, LLC. All intercompany accounts and transactions have been eliminated in consolidation. The Company uses the intrinsic method of accounting for the compensation effect of stock options described in APBO No. 25. No stock-based compensation cost is reflected in net income, as all options granted had an exercise price equal to the market price of the underlying common stock at date of grant. The following table illustrates the effect on net income and earnings per share if compensation expense was measured using the fair value recognition provisions of SFAS No. 123 in the interim financial statements for the three-month periods ended September 30, 2003 and 2002: Three months ended September 30, -------------------------------- 2003 2002 --------------- ---------------- Net income as reported $ 541 $ 769 Pro forma net income 434 658 Basic earnings per share as reported $ 0.16 $ 0.21 Pro forma basic earnings per share 0.12 0.18 Diluted earnings per share as reported $ 0.15 $ 0.21 Pro forma diluted earnings per share 0.12 0.18 The pro forma effects are computed using option pricing models, using the following weighted-average assumptions as of the date of grant in 2003 and 2002: fair value of options granted of $2.65 and $5.11; risk free rate of return of 2.50% and 4.78%; expected option life of seven years for both periods; expected stock price volatility of 10.59% and 14.21%; and dividend yield of 1.55% and 0%. Note 2 - Capital Resources The Bank is subject to regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a material impact on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the entity's assets, liabilities, and certain off-balance sheet items as calculated for 5 Notes to Consolidated Financial Statements (unaudited) -------------------------------------------------------------------------------- regulatory accounting purposes. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets and of tangible capital to average assets. As of September 30, 2003, the Bank met the capital adequacy requirements to which it is subject. The Bank's tangible equity ratio at September 30, 2003 was 16.91%. The Tier 1 capital ratio was 16.91%, the Tier 1 risk-based capital ratio was 46.20%, and the total risk-based capital ratio was 45.27%. The most recent notification from the federal banking agencies categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios. There are no conditions or events since that notification that have changed the Bank's category. Note 3 - Commitments and Contingencies At September 30, 2003, the Company had outstanding commitments to make loans of $8.8 million and unused lines of credit outstanding of $20.5 million. At June 30, 2003, the Bank had outstanding commitments to make loans of $7.2 million and unused lines of credit outstanding of $19.8 million. Note 4 - Earnings Per Share Basic earnings per share for the three months ended September 30, 2003 and 2002 are computed by dividing net income by the weighted average number of shares of common stock outstanding for the period, which were 3,485,457 and 3,651,642, respectively. Unearned Employee Stock Ownership Plan ("ESOP") shares and unearned Recognition and Retention Plan ("RRP") shares are not considered outstanding for the calculation. Diluted earnings per share for the three months ended September 30, 2003 and 2002 are computed by dividing net income by the weighted average number of shares of common stock outstanding and additional shares issuable under stock option and stock grant plans for the period, which were 3,595,897 and 3,700,911, respectively. Note 5 - Segment Reporting The Company's operations are managed along two major operating segments: Banking and Insurance. Loans, investments and deposits provide the revenues in the banking segment. Insurance commissions provide the revenue in the insurance segment. Holding company services have been included in other. All inter-segment services provided are charged at the same rates as those charged to unaffiliated customers. Such services are included in the revenues and net income of the respective segments and are eliminated to arrive at consolidated totals. The accounting policies are the same as those described in the summary of significant accounting policies. Information reported for internal performance assessment is summarized below: Three months ended September 30, 2003 ---------------------------------------------------------- Banking Insurance Segment Segment Other Consolidated --------------- ------------- ---------- ------------- Net interest income $ 2,377 $ 1 $ 31 $ 2,409 Other revenue 183 632 (78) 737 Other expense (1,675) (581) (2,272) (16) Income taxes (337) (333) (20) 24 --------------- ------------- ---------- ------------- Segment profit $ 548 $ 32 $ (39) $ 541 =============== ============= ========== ============= Depreciation $ 81 $ 15 $ - $ 96 Segment assets $ 368,110 $ 2,710 $ (2,053) $ 368,767 6 Notes to Consolidated Financial Statements (unaudited) -------------------------------------------------------------------------------- Note 5 - Segment Reporting (continued) Three months ended September 30, 2002 ----------------------------------------------------------- Banking Insurance Segment Segment Other Consolidated ----------------------------------------------------------- Net interest income $ 2,599 $ 2 $ 76 $ 2,677 Other revenue 159 601 (63) 697 Other expense (1,607) (565) 8 (2,164) Income taxes (418) (14) (9) (441) ----------------------------------------------------------- Segment profit $ 733 $ 24 $ 12 $ 769 =========================================================== Depreciation $ 77 $ 15 $ - $ 92 Segment assets $ 358,935 $ 2,507 $ (1,444) $ 359,998 Note 6 - New Accounting Pronouncements In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity, which affects the accounting for certain freestanding financial instruments depending on the type of financial instrument. SFAS No. 150 affects the following types of freestanding financial instruments: (1) mandatorily redeemable shares for which the issuer is obligated to purchase those shares; (2) obligations to repurchase the issuer's equity shares; and (3) certain obligations to issue a variable number of shares. SFAS No. 150 is effective for affected financial instruments issued or modified after May 31, 2003. For those issued prior to May 31, 2002, SFAS No. 150 is required to be applied for periods beginning after December 15, 2003. Management determined that the adoption of SFAS No. 150 will not have a material effect on the Corporation's consolidated financial statements. In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest Entities. FIN 46 clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain variable interest entities ("VIE") in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The recognition and measurement provisions of FIN 46 are effective immediately for VIEs created after January 31, 2003. For VIEs created prior to February 1, 2003, FIN 46 will apply in the first interim period or fiscal year beginning after September 15, 2003. Management determined that adoption of FIN 46 will not have a material effect on the Corporation's consolidated financial statements. 7 Management's Discussion and Analysis of Financial Condition and Results of Operations -------------------------------------------------------------------------------- General The Company's results of operations depend primarily on its net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets, consisting primarily of loans, securities and interest-earning deposits with other financial institutions, and the interest we pay on our interest-bearing liabilities, primarily savings accounts and time deposits. Provisions for loan losses, non-interest income, and non-interest expense also affect our results of operations. Non-interest income consists primarily of insurance commissions and service charges on deposit accounts. Non-interest expense consists primarily of salaries and employee benefits, occupancy, equipment, data processing and deposit insurance premiums. Our results of operations may also be affected significantly by general and local economic and competitive conditions, particularly those with respect to changes in market interest rates, governmental policies and actions of regulatory authorities. Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 This report contains certain forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995, and is including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company and the Bank, are generally identifiable by use of the words such as "believe," "expect," "intend," "anticipate," "estimate," "project" or similar expressions. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse affect on the operations and future prospects of the Company and the subsidiaries include, but are not limited to, changes in: interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company's market area, our implementation of new technologies, our ability to develop and maintain secure and reliable electronic systems and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning the Company and its business, including additional factors that could materially affect the Company's financial results, is included in the Company's filings with the Securities and Exchange Commission. Liquidity The Company and Bank's liquidity management objective is to ensure the availability of sufficient cash flows to meet all financial commitments and to capitalize on opportunities for expansion. Liquidity management addresses the ability to meet deposit withdrawals on demand or at contractual maturity, and to fund new loans and investments as opportunities arise. The Bank's primary sources of internally generated funds are principal and interest payments on loans receivable, cash flows generated from operations, and cash flows generated by investments. External sources of funds primarily consist of increases in deposits. Federal regulations require the Bank to maintain sufficient liquidity to ensure its safe and sound operation. The Bank believes it was in compliance with Office of Thrift Supervision ("OTS") liquidity requirements at September 30, 2003. The Company's cash flows are comprised of three classifications: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities. Cash flows provided by operating activities, consisting primarily of interest and dividends received less interest paid on deposits, was $612,000 for the three months ended September 30, 2003. Net cash used in investing activities was $9.0 million for the three months ended September 30, 2003. Loan principal payments exceeded originations received by $4.4 million. Maturities, calls and payments on securities totaled $1.7 million, while purchases of new securities amounted to $15.1 million. Net cash used in financing 8 Management's Discussion and Analysis of Financial Condition and Results of Operations -------------------------------------------------------------------------------- activities amounted to $890,000 for the three months ended September 30, 2003. The Bank's deposits increased by $1.1 million during the three months ended September 30, 2003. The Company paid $272,000 in dividends during the three months ended September 30, 2003. The Company began paying dividends during the second quarter of fiscal 2003. At September 30, 2003, the Bank had outstanding commitments to make loans of $8.8 million and unused lines of credit outstanding of $20.5 million. Management anticipates that it will have sufficient funds available to meet its current loan commitments. Certificates of deposit scheduled to mature in one year or less from September 30, 2003 totaled $153.1 million. Consistent with historical experience, management believes that a significant portion of such deposits will remain with the Bank, and that their maturity and repricing will not have a material adverse impact on the operating results of the Bank. Comparison of Financial Condition at September 30, 2003 and June 30, 2003 At September 30, 2003, total assets were $368.8 million, down $142,000 from $368.9 million at June 30, 2003. Cash and cash equivalents decreased $9.3 million, or 6.6%, to $132.3 million at September 30, 2003, compared to $141.6 million at June 30, 2003. Securities increased $13.1 million, or 24.7%, to $66.0 million at September 30, 2003, compared to $52.9 million at June 30, 2003, primarily because management invested in mortgage-backed securities to increase yield and to maintain adequate levels of qualifying mortgage loans for regulatory purposes. Loans receivable at September 30, 2003, were $145.6 million, down $4.4 million, or 2.9%, from $150.0 million at June 30, 2003. Total deposits at September 30, 2003, were $283.2 million, up $1.1 million, or 0.4%, from $282.2 million at June 30, 2003. Passbook saving accounts increased $385,000, offset by a $385,000 decrease in time deposits, and NOW accounts increased $1.1 million since June 30, 2003. Total stockholders' equity as of September 30, 2003, was $73.6 million, or 20.0% of total assets, compared to $73.3 million, or 19.9% of total assets at June 30, 2003. On November 25, 2002, the Company announced its intent to repurchase up to 188,000 shares of the Company's common stock. There were no repurchases during the quarter ended September 30, 2003. A total of 20,200 shares have been repurchased under this program. At September 30, 2003, there were 3,879,558 common shares outstanding with a book value of $18.98 per share. Asset Quality The Company's non-performing loans were $363,000, or 0.25% of loans receivable as of September 30, 2003, compared to $258,000, or 0.17% of loans receivable as of June 30, 2003. The $1.3 million allowance for loan losses was 0.89% of loans receivable as of September 30, 2003, compared to 0.87% as of June 30, 2003. Management has reviewed the allowance for loan losses as of September 30, 2003, and determined that neither additions to nor recoveries of the allowance are required. Comparison of Operating Results for the Quarters Ended September 30, 2003 and 2002 General. The Company reported net income of $541,000, or $0.15 earnings per diluted share for the quarter ended September 30, 2003. Net income for the quarter was $228,000 less than net income for the quarter ended September 30, 2002 of $769,000, or $0.21 earnings per diluted share. The primary reason for the decrease was a $268,000 decrease in the Company's net interest income. Other income increased $40,000, primarily due to a $33,000 increase in insurance commissions. Operating expenses increased $108,000, including a $29,000 increase in administrative expenses at the parent company. The Company's return on average assets for the quarter ended September 30, 2003, was 0.59%, compared to 0.85% for the quarter ended September 30, 2002. Return on equity was 2.95% for the quarter ended September 30, 2003, compared to 4.14% for the same period last year. 9 Management's Discussion and Analysis of Financial Condition and Results of Operations -------------------------------------------------------------------------------- Total Interest Income. Total interest income decreased by $873,000, or 20.1%, to $3.5 million for the quarter ended September 30, 2003, from $4.3 million for the quarter ended September 30, 2002. A decrease in yield on interest-earning assets to 3.96%, from 4.99% for the same quarter last year, and a change in the mix of interest-earning assets favoring shorter term, lower yielding interest-earning deposits, caused the decline in interest income. Interest Expense. Interest expense on deposits decreased by $605,000, or 36.3%, to $1.1 million for the quarter ended September 30, 2003, from $1.7 million for the same period in 2002. The decrease was primarily attributable to reductions in deposit rates paid, with the average cost of funds decreasing to 1.49% for the current period, from 2.39% for the same period last year, offset to some extent by a $5.0 million increase in the average balances of deposit accounts, primarily passbook savings and NOW accounts. Net Interest Income. Net interest income decreased by $268,000, or 10.0%, to $2.4 million for the quarter ended September 30, 2003, from $2.7 million for the same period in 2002. The net interest rate spread decreased 13 basis points, to 2.47% in 2003, from 2.60% in 2002, while the net interest margin decreased 32 basis points, to 2.75% in 2003, from 3.07% in 2002. The ratio of average interest-earning assets to average interest-bearing liabilities was 123.58% in 2003, compared to 124.98% in 2002. Non-interest Income. Total non-interest income increased $40,000, or 5.8%, to $737,000 for the quarter ended September 30, 2003, compared to $697,000 for the same period last year. Insurance commissions generated by the Company's insurance subsidiary increased $33,000, to $617,000 in 2003, compared to $584,000 in 2002. Non-interest Expense. Total non-interest expenses increased $108,000, or 5.0%, to $2.3 million for the quarter ended September 30, 2003, from $2.2 million for the quarter ended September 30, 2002, due primarily to a $23,000 (1.7%) increase in salaries and benefits and a $79,000 (20.1%) increase in miscellaneous operating expenses that were primarily the result of increases in loan expenses, legal and accounting expenses, and administrative expenses at the parent company. The annualized ratio of non-interest expense to average assets increased to 2.48% in 2003, compared to 2.39% in 2002, while the Company's efficiency ratio was 72.22% for the current quarter, compared to 64.14% for the same period last year. Provision for Income Taxes. The provision for income taxes of $333,000 for the quarter ended September 30, 2003, resulted in an effective tax rate of 38.09%, compared to a provision of $441,000 and a 36.45% effective tax rate for the same quarter last year. The increase in the effective income tax rate resulted primarily from increased state income taxes due to reduced amounts of U.S. Government and Agency interest income. 10 Quantitative and Qualitative Disclosures about Market Risks -------------------------------------------------------------------------------- Quantitative and Qualitative Disclosures about Market Risks The OTS provides all institutions that file a Consolidated Maturity/Rate schedule as a part of their quarterly Thrift Financial Report with an interest rate sensitivity report of Net Portfolio Value ("NPV"). The OTS simulation model uses a discounted cash flow analysis and an option-based pricing approach to measuring the interest rate sensitivity of NPV. The OTS model estimates the economics value of each type of asset, liability, and off-balance sheet contract under the assumption that the U.S. Treasury yield curve shifts instantaneously and parallel up and down 100 to 300 basis points in 100 basis point increments. The OTS provides thrifts the results of their interest rate sensitivity model, which is based on information provided by the Bank, to estimate the sensitivity of NPV. The OTS model utilizes an option-based pricing approach to estimate the sensitivity of mortgage loans. The most significant embedded option in these types of assets is the prepayment option of the borrowers. The OTS model uses various price indications and prepayment assumptions to estimate sensitivity of mortgage loans. In the OTS model, the value of deposit accounts appears on the asset and liability side of the NPV analysis. In estimating the value of certificate of deposit accounts ("CD"), the liability portion of the CD is represented by the implied value when comparing the difference between the CD face rate and available wholesale CD rates. On the asset side of the NPV calculation, the value of the "customer relationship" due to the rollover of retail CD deposits represents an intangible asset in the NPV calculation. Other deposit accounts such as transaction accounts, money market deposit accounts, passbook accounts, and non-interest bearing accounts also are included on the asset and liability side of the NPV calculation in the OTS model. The accounts are valued at 100% of the respective account balances on the liability side. On the assets side of the analysis, the value of the "customer relationship" of the various types of deposit accounts is reflected as a deposit intangible. The table below sets forth, as of June 30, 2003 (the most recent date available), the estimated changes in the Bank's NPV that would result from the designated instantaneous changes in the U.S. Treasury yield curve.

For the June 30, 2003 reporting cycle the OTS suppressed all model outputs associated with the minus 200 basis points and minus 300 basis points scenarios because of the abnormally low prevailing interest rate environment. 11 Controls and Procedures -------------------------------------------------------------------------------- Controls and Procedures The Company's Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation within 90 days prior to the filing date of this report, that the Company's disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-14(c) and 15d-14(c)) are effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of the foregoing evaluation. 12 Part II - Other Information Item 1. Legal Proceedings The Company and the Bank are not engaged in any legal proceedings of a material nature at present. Item 2. Changes in Securities and Use of Proceeds Not applicable. Item 3. Defaults Upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. Item 5. Other Information Not applicable Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 31.1 Certification of Chief Executive Officer required by Rule 13a - 14(a). 31.2 Certification of Chief Financial Officer required by Rule 13a - 14(a). 32 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K None 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Chesterfield Financial Corp. Dated: November 10, 2003 /s/ Michael E. DeHaan ------------------------------------------ Michael E. DeHaan, Chairman, President and Chief Executive Officer Dated: November 10, 2003 /s/ Karen M. Wirth ------------------------------------------ Karen M. Wirth, Treasurer and Chief Financial Officer 14

CHESTERFIELD FINANCIAL CORP 10-Q