SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transaction period from ___________ to ___________
Commission File Number: 0-32589
CHESTERFIELD FINANCIAL CORP.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 36-4441126
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(State or Other Jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) Number)
10801 South Western Avenue, Chicago, Illinois 60643
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(Address of Principal Executive Office) (Zip Code)
(773) 239-6000
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(Registrant's Telephone Number including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
None
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Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file reports) and (2) has been subject to such
requirements for the past 90 days. YES [X] NO [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ ]
As of August 31, 2002, there were issued and outstanding 3,928,295 shares
of the Registrant's Common Stock. The aggregate value of the voting stock held
by non-affiliates of the Registrant, computed by reference to the closing price
of the Common Stock as of August 31, 2002 was $71.3 million.
DOCUMENTS INCORPORATED BY REFERENCE
1. Proxy Statement for the 2002 Annual Meeting of Stockholders (Part III)
PART I
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ITEM 1. Business
- ----------------
Chesterfield Financial Corp.
Chesterfield Financial Corp. was organized at the direction of the
Board of Directors of Chesterfield Federal Savings and Loan Association of
Chicago ("Chesterfield Federal") for the purpose of acting as the stock holding
company of Chesterfield Federal. Chesterfield Financial's assets consist
primarily of the outstanding capital stock of Chesterfield Federal and cash and
investments of $14.3 million, representing a portion of the net proceeds from
Chesterfield Financial's stock offering completed May 2, 2001. At June 30, 2002,
4,088,495 shares of Chesterfield Financial's common stock, par value $0.01 per
share, were held by the public. Chesterfield Financial's principal business is
overseeing and directing the business of Chesterfield Federal and investing the
net stock offering proceeds retained by it. At June 30, 2002, Chesterfield
Financial had total consolidated assets of $363.3 million, total deposits of
$278.1 million and shareholders' equity of $76.7 million.
Chesterfield Financial's office is located at 10801 South Western
Avenue, Chicago, Illinois 60643. Its telephone number is (773) 239-6000.
Chesterfield Federal Savings and Loan Association of Chicago
Founded in 1924, Chesterfield Federal is a customer-oriented,
federally chartered savings association, which operates from its main office in
Chicago, Illinois, and three branch offices. Chesterfield Federal also offers
property and casualty insurance through its wholly owned subsidiary,
Chesterfield Insurance Services, L.L.C. Chesterfield Federal's deposits are
insured by the Savings Association Insurance Fund, as administered by the
Federal Deposit Insurance Corporation, up to the maximum amount permitted by
law.
Chesterfield Federal's executive office is located at 10801 South
Western Avenue, Chicago, Illinois 60643. Its telephone number is (773) 239-6000.
Market Area
Chesterfield Federal has been, and continues to be, a
community-oriented savings institution offering a variety of financial products
to meet the needs of the communities it serves. Chesterfield Federal's lending
and deposit-gathering area is concentrated in the neighborhoods surrounding its
four offices; its main office and one branch office in the City of Chicago, one
branch office in Palos Hills, which is located in Cook County, and one branch
office in Frankfort, which is located in Will County. While the City of Chicago
experienced a population decrease of 4.6% between 1990 and 1998, the population
of Palos Hills and Frankfort increased 6.3% and 49.5%, respectively, over the
same period. The City of Chicago government is the largest employer in the City
of Chicago, and general building companies and healthcare providers comprise the
two largest types of businesses in each of Chicago, Palos Hills and Frankfort.
However, the economy in Chesterfield Federal's market area is not dependent on
any single employer or type of business.
Competition
We face significant competition in both originating loans and
attracting deposits. The Chicago metropolitan area has a high concentration of
financial institutions, most of which are significantly larger institutions that
have greater financial resources than we do, and all of which are our
competitors to varying degrees. Our competition for loans comes principally from
commercial banks, savings banks, and mortgage banking companies, credit unions,
insurance companies and other financial service companies. Our most direct
competition for deposits has historically come from commercial banks, savings
banks and credit unions. We face additional competition for deposits from
non-depository competitors such as mutual funds, securities and brokerage firms
and insurance companies. The Gramm-Leach-Bliley Act, which permits affiliation
among banks, securities firms and insurance companies, has increased the
competitive environment in which we conduct business.
1
Lending Activities
General. Our loan portfolio is comprised mainly of one-to
four-family residential real estate loans. The vast majority of these loans have
fixed rates of interest. In addition to one-to four-family residential real
estate loans, our loan portfolio consists primarily of home equity lines of
credit, multifamily residential loans and consumer loans. At June 30, 2002, our
loans totaled $173.2 million, of which $153.8 million, or 88.8% were secured by
one-to four-family residential real estate, $5.2 million, or 3.0% were secured
by multi-family residential real estate, $11.6 million, or 6.7% were home equity
lines of credit and $2.6 million, or 1.5% were consumer loans.
Loan Portfolio Composition. The following table shows the
composition of our loan portfolio in dollar amounts and in percentages (before
deductions for loans in process, deferred fees and allowances for losses) as of
the dates indicated.
At June 30,
---------------------------------------------------------------------------------
2002 2001 2000 1999
----------------- ----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Real Estate Loans:
One- to four-family......................... $ 153,843 88.8% $ 147,865 88.8% $ 140,120 87.7% $ 140,351 87.5%
Home equity................................. 11,559 6.7 10,521 6.3 11,002 6.9 11,413 7.1
Multi-family and other...................... 5,175 3.0 5,073 3.0 5,693 3.5 6,058 3.8
--------- ---- --------- ---- --------- ---- --------- ----
Total real estate loans................ 170,577 98.5 163,459 98.1 156,815 98.1 157,822 98.4
--------- ---- --------- ---- --------- ---- --------- ----
Other Loans:
Consumer loans:
Loans on deposits......................... 1,016 0.6 1,180 0.7 1,161 0.7 1,038 0.6
Automobile, stock secured,
second mortgages and other.............. 1,605 0.9 1,975 1.2 1,842 1.2 1,574 1.0
--------- ---- --------- ---- --------- ---- --------- ----
Total consumer loans.................. 2,621 1.5 3,155 1.9 3,003 1.9 2,612 1.6
--------- ---- --------- ---- --------- ---- --------- ----
Total loans............................ 173,198 100.0% 166,614 100.0% 159,818 100.0% 160,434 100.0%
===== ===== ===== =====
Less:
Undisbursed portion of loans in
process.................................. 1,242 3,364 480 1,422
Unearned discounts and deferred loan fees.. 499 474 554 663
Allowance for loan losses.................. 1,576 1,573 1,508 1,432
--------- --------- --------- ---------
Total loans receivable, net................ $ 169,881 $ 161,203 $ 157,276 $ 156,917
========= ========= ========= =========
At June 30,
-----------------
1998
-----------------
Amount Percent
------ -------
Real Estate Loans:
One- to four-family......................... $127,428 84.4%
Home equity................................. 14,114 9.4
Multi-family and other...................... 6,362 4.2
-------- ----
Total real estate loans................ 147,904 98.0
-------- ----
Other Loans:
Consumer loans:
Loans on deposits......................... 1,146 0.8
Automobile, stock secured,
second mortgages and other.............. 1,839 1.2
-------- ----
Total consumer loans.................. 2,985 2.0
-------- ----
Total loans............................ 150,889 100.0%
Less:
Undisbursed portion of loans in
process.................................. 1,911
Unearned discounts and deferred loan fees.. 754
Allowance for loan losses.................. 1,283
--------
Total loans receivable, net................ $146,941
========
2
Loan Contractual Terms to Maturity. The following table sets forth
certain information as of June 30, 2002, regarding the dollar amount of loans
maturing in our portfolio based on their contractual terms to maturity.
Adjustable and floating rate loans are included in the period in which interest
rates are next scheduled to adjust rather than in which they contractually
mature. The amounts shown represent outstanding principal balances and are not
adjusted for premiums, discounts, reserves, and unearned fees. Demand loans,
loans having no stated schedule of repayments and no stated maturity, and
overdrafts are reported as due in one year or less.
Over 1 Over 3 Over 5 Over 10 Beyond
Within Year to 3 Years to 5 Years to 10 Years to 20 20
1 Year Years Years Years Years Years Total
------ ----- ----- ----- ----- ----- -----
(In Thousands)
Real estate loans:
One- to four-family $11,044 $20,263 $20,253 $39,039 $34,854 $28,390 $153,843
Home equity, multi-family and other 3,398 3,983 3,450 4,751 1,152 -- 16,734
Consumer loans 911 873 279 375 183 -- 2,621
------- ------- ------- ------- ------- ------- --------
Total loans receivable $15,353 $25,119 $23,982 $44,165 $36,189 $28,390 $173,198
------- ------- ------- ------- ------- ------- --------
The following table sets forth at June 30, 2002, the dollar amount of
all fixed rate and adjustable rate loans and mortgage-backed securities due or
repricing after June 30, 2003.
Fixed Adjustable Total
-------- ---------- ---------
(In Thousands)
Real estate loans:
One- to four-family .................. $141,576 $1,223 $142,799
Home equity, multi-family and other... 4,619 8,717 13,336
Consumer loans ........................... 1,710 -- 1,710
-------- ------ ---------
Total ............................ $147,905 $9,940 $157,845
======== ====== ========
One-to Four-Family Residential Real Estate Loans. We emphasize the
origination of loans secured by first mortgage liens on one-to four-family
residential property. As of June 30, 2002, these loans totaled $153.8 million,
or 88.8% of our total loan portfolio. We originate loans for retention in our
portfolio, and we intend to continue to do so, as our residential mortgage loan
documents contain provisions that are more favorable to borrowers than set forth
in the seller/servicer guidelines of entities like Fannie Mae or Freddie Mac.
We offer one-to four-family residential mortgage loans with terms of
seven, 10, 15 and 30 years. Of these loans, $152.5 million, or 99.2% had fixed
rates of interest and the remaining $1.3 million, or 0.8% had adjustable rates
of interest. All of our fixed-rate mortgage loans are fully amortized over the
term of the loan. In an effort to increase our originations of shorter-term
loans, we more aggressively price the interest rates on loans with terms of
seven, 10 and 15 years than on 30-year loans.
Adjustable-rate mortgages are offered with initial rates that are fixed
for one year and adjust annually thereafter. Our adjustable rate loans have a 2%
cap on the annual rate adjustment, with a 6% rate adjustment cap over the life
of the loan. A rate floor is established at the initial loan rate. We price our
adjustable rate mortgage loans using the National Monthly Median Cost of Funds
for Savings Association Insurance Fund Insured Institutions as the index rate,
plus a margin we adjust from time to time.
Home Equity Lines of Credit. We offer home equity lines of credit, the
total of which amounted to $11.6 million, or 6.7% of our total loan portfolio as
of June 30, 2002. Home equity lines of credit are generally made for
owner-occupied homes, and are secured by first or second mortgages on
residences. We generally offer these loans with a maximum loan to appraised
value ratio of 80% (including senior liens on the subject property). We
currently offer these loans for periods of seven and 10 years, and at rates that
are tied to the prime rate plus a margin we adjust from time to time.
3
Multi-Family Loans. At June 30, 2002, $5.2 million, or 3.0% of our
total loan portfolio consisted of loans secured by multi-family real estate. As
of that date, the average principal amount outstanding per multi-family loan was
$159,548. We originate fixed-rate multi-family real estate loans with
amortization schedules of up to 20 years. We generally lend up to 70% of the
property's appraised value. Appraised values are determined by our own in-house
appraiser or independent appraisers that we designate. If deemed necessary, we
obtain an environmental assessment from an independent engineering firm of any
environmental risks that may be associated with a particular building or the
site. In deciding to originate a multi-family loan, we review the
creditworthiness of the borrower, the expected cash flows from the property
securing the loan, the cash flow requirements of the borrower, the value of the
property and the quality of the management involved with the property. We
generally obtain the personal guarantee of the principals when originating
multi-family real estate loans.
Multi-family real estate lending is generally considered to involve a
higher degree of credit risk than one- to four-family residential lending. Such
lending may involve large loan balances concentrated on a single borrower or
group of related borrowers. In addition, the payment experience on loans secured
by income producing properties is typically dependent on the successful
operation of the related real estate project. Consequently the repayment of the
loan may be subject to adverse conditions in the real estate market or the
economy generally.
Consumer Loans. We are authorized to make loans for a wide variety of
personal and consumer purposes. As of June 30, 2002, consumer loans totaled $2.6
million, or 1.5% of our total loan portfolio. Our consumer loans consist
primarily of home improvement loans and loans secured by deposit accounts, but
we also offer automobile, stock secured and unsecured personal loans. Our
procedure for underwriting consumer loans includes an assessment of the
applicant's credit history and ability to meet existing obligations and payments
of the proposed loan, as well as an evaluation of the value of the collateral
security, if any. Consumer loans generally entail greater risk than residential
mortgage loans, particularly in the case of loans that are unsecured or are
secured by assets that tend to depreciate in value, such as automobiles. In
these cases, repossessed collateral for a defaulted consumer loan may not
provide an adequate source of repayment for the outstanding loan and the
remaining value often does not warrant further substantial collection efforts
against the borrower.
Loan Originations, Purchases, Sales and Servicing. Although we
originate both fixed-rate and adjustable-rate loans, our ability to generate
each type of loan depends upon borrower demand, market interest rates, borrower
preference for fixed-versus adjustable-rate loans, and the interest rates
offered on each type of loan by other lenders in our market area. This includes
competing banks, savings institutions, credit unions, and mortgage banking
companies, as well as life insurance companies, and Wall Street conduits that
also actively compete for local real estate loans. Loan originations are derived
from a number of sources, including existing or prior customers and walk-in
customers. We have very few referrals from real estate brokers.
A rising interest rate environment that typically results in decreased
loan demand may adversely affect our loan origination activity. Accordingly, the
volume of loan originations and the profitability of this activity can vary from
period to period. We have not originated any loans for sale in the secondary
market, and are restricted from selling loans to some potential purchasers
because our residential mortgage loan documents contain provisions that are more
favorable to borrowers than permitted by the seller/servicer guidelines of
entities like Fannie Mae or Freddie Mac. We currently do not service any loans
for others.
4
The following table shows our loan origination and repayment activities
for the periods indicated. We did not purchase or sell any loans during the
periods indicated.
For the Years Ended June 30,
---------------------------------
2002 2001 2000
------- -------- -------
(In Thousands)
Originations by Type:
- ---------------------
Adjustable rate:
Real estate -
- one-to four-family .... $ -- $ 357 $ 568
- home equity ........... 7,418 6,472 6,014
------- -------- -------
Total adjustable-rate ......... 7,418 6,829 6,582
------- -------- -------
Fixed rate:
Real estate -
- one-to four-family .... 30,738 31,503 21,215
- multi-family and other 1,527 584 370
Non-real estate - consumer ............ 1,855 1,993 2,740
------- -------- -------
Total fixed-rate .............. 34,120 34,080 24,325
------- -------- -------
Total loans originated ........ 41,538 40,909 30,907
------- -------- -------
Repayments:
- -----------
Principal repayments ................ 34,954 34,113 31,523
------- -------- -------
Increase (decrease) in other items, net 2,094 (2,869) 975
------- -------- -------
Net increase .................. $ 8,678 $ 3,927 $ 359
======= ======== =======
Loan Approval Procedures and Authority. Our lending activities are
subject to written, non-discriminatory underwriting standards and the loan
origination procedures adopted by management and the Board of Directors. A loan
officer initially reviews all loans, regardless of size or type. Due to their
experience and length of employment with Chesterfield Federal, all of
Chesterfield Federal's loan officers have the authority to approve residential
mortgage loans in amounts up to $500,000. All of these approvals must be
ratified by at least two members of the Executive Loan Committee, which consists
of President and Chief Executive Officer Michael E. DeHaan, Vice President and
Secretary Richard E. Urchell, Vice President Peter I. Hahto, Director Robert T.
Mangan and Vice President Robert J. Cusack. Any loan application for which a
loan officer recommends denial is re-reviewed by at least two members of our
Second Review Committee, which consists of President and Chief Executive Officer
Michael E. DeHaan, Vice President and Secretary Richard E. Urchell, Vice
President and Compliance Officer Raymond M. Janacek and Vice President Robert J.
Cusack. Any two members of this committee have the authority to approve an
application that was denied previously. The entire Board of Directors must
approve loans in excess of $500,000.
Insurance Activities
Chesterfield Insurance Services, L.L.C., is a wholly owned service
corporation subsidiary of Chesterfield Federal. Chesterfield Insurance offers
property and casualty insurance on an agency basis for third-party providers.
During the fiscal years ended June 30, 2002 and 2001, Chesterfield Insurance
generated $2.1 and $1.9 million, respectively, in insurance commissions, and
incurred operating expenses of $2.1 million and $1.9 million, respectively.
Chesterfield Insurance reported net income of $10,200 for the year ended June
30, 2002, and net losses of $5,500 and $44,000 for the years ended June 30, 2001
and 2000, respectively. As of June 30, 2002, Chesterfield Insurance had 19
employees.
5
Asset Quality
Delinquent Loans. The following table sets forth Chesterfield Federal's
loan delinquencies by type, by amount and by percentage of type at June 30,
2002. Loans delinquent for 90 days and over are considered non-accruing loans.
Loans Delinquent For
--------------------------------------------------------
60-89 Days 90 Days and Over Total Delinquent Loans
-------------------------- -------------------------- -----------------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------------- -------- ------ ------ --------
(Dollars in Thousands)
Real Estate:
One- to four-family .. 5 $200 0.13% 6 $199 0.13% 11 $399 0.26%
Home equity .......... -- -- -- -- -- -- -- -- --
Multi-family and other 1 56 1.08 1 23 0.44 2 79 1.53
Consumer ............... 1 16 0.61 - -- -- 1 16 0.61
---- ---- ---- ---- ---- ---- ---- ---- ----
Total ............. 7 $272 0.16% 7 $222 0.13% 14 $494 0.29%
==== ==== ==== ==== ==== ==== ==== ==== ====
Loan Delinquencies and Collection Procedures. When a borrower fails to
make required payments on a loan, we take a number of steps to induce the
borrower to cure the delinquency and restore the loan to a current status. In
the case of mortgage loans, a reminder notice is sent 15 days after an account
becomes delinquent. Should the borrower not remit the entire payment due by the
end of the month, then a letter that includes information regarding
home-ownership counseling organizations is sent to the borrower. During the
first 15 days of the following month, a second letter is sent, and we will also
attempt to establish telephone contact with the borrower. At this time, and
after reviewing the cause of the delinquency and the borrower's previous loan
payment history, we may agree to accept repayment over a period of time that
will generally not exceed 60 days. However, should a loan become delinquent two
or more payments, and the borrower is either unwilling or unable to repay the
delinquency over a period of time acceptable to us, we will send a notice of
default by both regular and certified mail. This notice will provide the
borrower with the terms that must be met to cure the default, and will again
include information regarding home-ownership counseling.
In the event the borrower does not cure the default within 30 days of
the postmark of the notice of default, we may instruct our attorneys to
institute foreclosure proceedings depending on the loan-to-value ratio or our
relationship with the borrower. We hold property foreclosed upon as other real
estate owned. We carry foreclosed real estate at its fair market value less
estimated selling costs. If a foreclosure action is commenced and the loan is
not brought current or paid in full before the foreclosure sale, we will either
sell the real property securing the loan at the foreclosure sale or sell the
property as soon thereafter as practical.
In the case of consumer loans, customers are mailed reminder notices
when the loan is three days past due. Late notices are mailed when the loan is
ten days past due and we also attempt to establish telephone contact with the
borrower. If collection efforts are unsuccessful, accounts are written off when
the delinquency exceeds 90 days, and we may instruct our attorneys to take
further action.
Our policies require that management continuously monitor the status of
the loan portfolio and report to the Board of Directors on a monthly basis.
These reports include information on delinquent loans and foreclosed real estate
and our actions and plans to cure the delinquent status of the loans and to
dispose of any real estate acquired through foreclosure.
Non-Performing Loans. All loans are reviewed on a regular basis and are
placed on a non-accrual status when, in the opinion of management, there is
reasonable probability of loss of principal or the collection of additional
interest is deemed insufficient to warrant further accrual. Generally, we place
all loans 90 days or more past due on non-accrual status. In addition, we place
any loan on non-accrual if any part of it is classified as loss or if any part
has been charged-off. When a loan is placed on non-accruing status, total
interest accrued and unpaid to date is reversed. Subsequent payments are either
applied to the outstanding principal balance or recorded as interest
6
income, depending on the assessment of the ultimate collectibility of the loan.
Generally, consumer loans are charged-off before they become 120 days
delinquent.
The table below sets forth the amounts and categories of non-performing
assets in our loan portfolio. For all years presented, we had no troubled debt
restructurings (which involve forgiving a portion of interest or principal on
loans or making loans at a rate materially less than that of market rates).
At June 30,
--------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(Dollars in Thousands)
Non-accruing loans:
One- to four-family ..................... $199 $3 $12 $ 9 $ 69
Home equity ............................. -- -- -- 81 174
Multi-family and other .................. 23 -- -- -- --
Consumer ................................ -- -- 1 -- 22
---- ---- ---- ---- ----
Total ................................ 222 3 13 90 265
---- ---- ---- ---- ----
Accruing loans delinquent more than 90 days -- -- -- -- --
---- ---- ---- ---- ----
Foreclosed assets ......................... -- -- -- -- --
---- ---- ---- ---- ----
Total non-performing assets ............... $222 $3 $13 $90 $265
==== ==== ==== ==== ====
Total as a percentage of total assets ..... .06% --% --% .03% .09%
==== ==== ==== ==== ====
From August 1997 through December 1999, Chesterfield Federal originated
$509,000 of community development loans to a real estate development company to
acquire vacant lots and deteriorated buildings in an area located 1.5 miles from
Chesterfield Federal's main office. The borrower is attempting to find
developers to upgrade the acquired parcels with commercial development.
Chesterfield Insurance has a limited partnership interest in the borrower.
Chesterfield Federal has placed four of the loans, with principal balances
totaling $155,000 as of June 30, 2002, on non-accrual status, as the loans are
not currently performing in accordance with the terms of the agreements.
Due to the deteriorating value of the property securing the loans and
due to the possibility that these loans will not be paid in full, Chesterfield
Federal has classified all of the loans as "substandard" for regulatory
purposes, as discussed below in "--Classification of Assets." Management has
closely monitored these loans and recorded provisions for loan losses related to
the credit quality concerns associated with these loans in the fiscal years
1998, 1999, 2000, and 2001. Provisions for loan losses associated with these
community development loans are more fully described in "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Comparison of
Operating Results for the Years Ended June 30, 2002 and 2001--Provision for Loan
Losses," and "Comparison of Operating Results for the Years Ended June 30, 2001
and 2000--Provision for Loan Losses."
For the year ended June 30, 2002, the amount of additional gross
interest income that would have been recorded had non-accruing loans been
current in accordance with their original terms was immaterial.
Troubled Debt Restructurings. A troubled debt restructuring occurs when
we, for economic or legal reasons related to a borrower's financial
difficulties, grant a concession to the borrower, either as a deferment or
reduction of interest or principal, that we would not otherwise consider. We had
no troubled debt restructurings as of June 30, 2002 and June 30, 2001.
Real Estate Owned. Real estate owned consists of property acquired
through formal foreclosure or by deed in lieu of foreclosure and is recorded at
the lower of recorded investment or fair value. Write-downs from recorded
investment to fair value that are required at the time of foreclosure are
charged to the allowance for loan losses. After transfer, the property is
carried at the lower of recorded investment or fair value, less estimated
selling expenses. Adjustments to the carrying value of the properties that
result from subsequent declines in value are charged to operations in the period
in which the declines occur. We held no property that was classified as real
estate owned as of June 30, 2002 and June 30, 2001.
7
Classification of Assets. Our policies, consistent with regulatory
guidelines, provide for the classification of loans and other assets such as
securities that are considered to be of lesser quality as substandard, doubtful,
or loss assets. An asset is considered substandard if it is inadequately
protected by the current net worth and paying capacity of the obligor or by the
fair value of the collateral pledged, if any. Substandard assets include those
characterized by the distinct possibility that the savings institution will
sustain some loss if the deficiencies are not corrected. Assets classified as
doubtful have all of the weaknesses inherent in those classified substandard
with the added characteristic that the weaknesses present make collection or
liquidation in full, on the basis of currently existing facts, conditions, and
values, highly questionable and improbable. Assets classified as loss are those
considered uncollectible and of such little value that continuance as assets is
not warranted. Assets that do not expose us to risk sufficient to warrant
classification in one of the aforementioned categories, but which possess some
weaknesses, are required to be designated as special mention by management.
When we classify assets as either substandard or doubtful, we allocate
for analytical purposes a portion of our general valuation allowances or loss
reserves to these assets as deemed prudent by management. General allowances
represent loss allowances that have been established to recognize the risk
associated with lending activities, but which have not been allocated to
particular problem assets. When we classify problem assets as loss, we are
required either to establish a specific allowance for losses equal to 100% of
the amount of the assets so classified, or to charge-off the amount. Our
determination as to the classification of assets and the amount of valuation
allowances are subject to review by regulatory agencies, which can order the
establishment of additional loss allowances. Management regularly reviews our
asset portfolio to determine whether any assets require classification in
accordance with applicable regulations.
On the basis of management's review of our asset portfolio at June 30,
2002, we had classified $593,000 of our assets as substandard, and none of our
assets as special mention, doubtful or loss.
Loan Concentrations. Chesterfield Federal has originated over 30 loans
to a single customer that have an aggregate principal balance of $2.3 million as
of June 30, 2002. These loans are collateralized by one-to four-family
residential properties, and repayment of the loans is highly dependant on the
rental cash flow from these properties. These loans are currently performing in
accordance with the terms of the loan agreements and have not been classified by
management for regulatory purposes.
Allowance for Loan Losses. The following table sets forth information
regarding our allowance for loan losses and other ratios at or for the dates
indicated.
At or For the Years Ended June 30,
----------------------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
(Dollars in Thousands)
Balance at beginning of period ............... $1,573 $1,508 $1,432 $1,283 1,087
Charge-offs:
One- to four-family ........................ -- -- -- -- --
Home equity ................................ -- -- -- -- 6
Multi-family and other ..................... -- -- -- -- --
Consumer ................................... -- 8 7 1 --
------ ------ ------ ------ ------
-- 8 7 1 6
------ ------ ------ ------ ------
Recoveries ................................... 3 1 -- -- --
------ ------ ------ ------ ------
Net charge-offs (recoveries) ................. (3) 7 7 1 6
Additions charged to operations .............. -- 72 83 150 202
------ ------ ------ ------ ------
Balance at end of period ..................... $1,576 $1,573 $1,508 $1,432 $1,283
====== ====== ====== ====== ======
Allowance for loan losses to loans receivable,
net, at end of period 0.93% 0.98% 0.96% 0.91% 0.87%
====== ====== ====== ====== ======
Ratio of net charge-offs during the period to
average non-performing loans --% 46.67% 9.72% 0.98% 6.12%
====== ====== ====== ====== ======
The allowance for loan losses is a valuation account that reflects our
evaluation of the probable losses in our loan portfolio. We maintain the
allowance through provisions for loan losses that we charge to income. We charge
losses on loans against the allowance for loan losses when we believe the
collection of loan principal is unlikely.
8
Our evaluation of risk in maintaining the allowance for loan losses
includes the review of all loans on which the collectibility of principal may
not be reasonably assured. We consider the following factors as part of this
evaluation: our historical loan loss experience, known and inherent risks in the
loan portfolio, the estimated value of the underlying collateral, peer group
information and current economic and market trends. There may be other factors
that may warrant our consideration in maintaining an allowance at a level
sufficient to provide for probable losses. This evaluation is inherently
subjective as it requires estimates that are susceptible to significant
revisions as more information becomes available or as future events change.
Although we believe that we have established and maintained the allowance for
loan losses at adequate levels, future additions may be necessary if economic
and other conditions in the future differ substantially from the current
operating environment.
In addition, the Office of Thrift Supervision, as an integral part of
its examination process, periodically reviews our loan and foreclosed real
estate portfolios and the related allowance for loan losses and valuation
allowance for foreclosed real estate. The Office of Thrift Supervision may
require us to increase the allowance for loan losses or the valuation allowance
for foreclosed real estate based on their judgments of information available to
them at the time of their examination, thereby adversely affecting our results
of operations.
Allocation of the Allowance for Loan Losses. The following table
presents our allocation of the allowance for loan losses by loan category and
the percentage of loans in each category to total loans at the periods
indicated.
Years Ended June 30,
--------------------------------------------------------------------------
2002 2001
---------------------------------- --------------------------------------
Percent Percent
of Loans of Loans
Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category
Loan Loss By To Total Loan Loss By To Total
Allowance Category Loans Allowance Category Loans
--------- -------- -------- --------- -------- -----
(Dollars in Thousands)
Real Estate Loans:
One- to four-family .. $ 611 $153,843 88.8% $ 581 $ 147,865 88.8%
Home equity .......... 24 11,559 6.7 22 10,521 6.3
Multi-family and other 4 5,175 3.0 4 5,073 3.0
Consumer ................. 11 2,621 1.5 15 3,155 1.9
Unallocated .............. 926 -- -- 951 --
Total ................ $1,576 $173,198 100.0% $ 1,573 $ 166,614 100.0%
At June 30,
------------------------------------------------------------------------------------------------
2000 1999 1998
------------------------------- ------------------------------ -------------------------------
Percent Percent Percent
of Loans of Loans of Loans
Loan in Each Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category Amount of Amounts Category
Loan Loss By To Total Loan Loss By To Total Loan Loss By To Total
Allowance Category Loans Allowance Category Loans Allowance Category Loans
--------- -------- -------- --------- -------- ----- --------- -------- -----
(Dollars in Thousands)
Real Estate Loans:
One- to four-family .. $ 575 $140,120 87.7% $ 491 $140,351 87.5% $ 385 $127,428 84.4%
Home equity .......... 23 11,002 6.9 25 11,413 7.1 30 14,114 9.4
Multi-family and other 5 5,693 3.5 5 6,058 3.8 5 6,362 4.2
Consumer ................. 14 3,003 1.9 13 2,612 1.6 14 2,985 2.0
Unallocated .............. 891 -- -- 898 -- -- 849 -- --
------ -------- ---- ------ -------- ---- ------ -------- ----
Total ................ 1,508 $159,818 100.0% 1,432 160,434 100.0% $1,283 150,889 100.0%
====== ======== ==== ====== ======== ==== ====== ======== ====
The unallocated portion of the allowance for loan losses is based on
management's evaluation of the aggregate level of the recorded allowance for
loan loss balance. Management evaluates the total balance of the allowance for
loan losses based on several factors that are not loan specific but are
reflective of the probable losses in the loan portfolio, including management's
periodic review of loan collectibility in light of historical experience, the
nature and volume of the loan portfolio, adverse situations that may affect the
borrower's ability to repay, estimated value of any underlying collateral,
prevailing economic conditions such as housing trends, inflation rates
9
and unemployment rates, geographic concentrations of loans within Chesterfield
Federal's immediate market area, and both peer financial institution historic
loan loss experience and levels of allowance for loan losses.
Investment Activities
Chesterfield Federal is permitted under federal law to invest in
various types of liquid assets, including U.S. Government obligations,
securities of various federal agencies and of state and municipal governments,
deposits at the Federal Home Loan Bank of Chicago, certificates of deposit of
federally insured institutions, certain bankers' acceptances and federal funds.
Within certain regulatory limits, Chesterfield Federal may also invest a portion
of its assets in commercial paper and corporate debt securities. We are also
required to maintain an investment in FHLB stock. Chesterfield Federal is
required under federal regulations to maintain a minimum amount of liquid
assets. See "Regulation" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
Statement of Financial Accounting Standard ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," requires
that securities be categorized as "held to maturity," "trading securities" or
"available for sale," based on management's intent as to the ultimate
disposition of each security. SFAS No. 115 allows debt securities to be
classified as "held to maturity" and reported in financial statements at
amortized cost only if the reporting entity has the positive intent and ability
to hold those securities to maturity. Securities that might be sold in response
to changes in market interest rates, changes in the security's prepayment risk,
increases in loan demand, or other similar factors cannot be classified as "held
to maturity."
Debt and equity securities held for current resale are classified as
"trading securities." These securities are reported at fair value, and
unrealized gains and losses on the securities would be included in earnings.
Chesterfield Federal does not currently use or maintain a trading account. Debt
and equity securities not classified as either "held to maturity" or "trading
securities" are classified as "available for sale." These securities are
reported at fair value, and unrealized gains and losses on the securities are
excluded from earnings and reported, net of deferred taxes, as a separate
component of equity.
All of our securities carry market risk insofar as increases in market
rates of interest may cause a decrease in their market value. Many also carry
prepayment risk insofar as they may be called prior to maturity in times of low
market interest rates, so that we may have to invest the funds at a lower
interest rate. Investments in securities are made based on certain
considerations, which include the interest rate, tax considerations, yield,
settlement date and maturity of the security, our liquidity position, and
anticipated cash needs and sources. The effect that the proposed security would
have on our credit and interest rate risk and risk-based capital is also
considered. We purchase securities to provide necessary liquidity for day-to-day
operations, and when investable funds exceed loan demand.
Generally, the investment policy of Chesterfield Federal, as
established by the Board of Directors, is to invest funds among various
categories of investments and maturities based upon our liquidity needs,
asset/liability management policies, investment quality, marketability and
performance objectives.
Our investment policy does not permit engaging directly in hedging
activities or purchasing high risk mortgage derivative products.
Our securities are mainly composed of securities issued by the U.S.
Government and government agencies, although from time to time we make other
investments as permitted by applicable laws and regulations.
10
The following table sets forth the composition of our securities, net
of premiums and discounts, at the dates indicated.
At June 30,
--------------------------------------------------------------------
2002 2001 2000
------------------- ------------------ ------------------
Book % of Book % of Book % of
Value Total Value Total Value Total
----- ----- ----- ----- ----- -----
(Dollars in Thousands)
Securities available-for-sale:
Mortgage-backed securities - FNMA and Freddie Mac $12,347 13.4% $ 13,405 12.2% $ -- --%
Mutual funds .................................... 5,027 5.5 -- -- -- --
Securities held to maturity:
Federal agency obligations - FHLB ................. 55,000 59.6 90,025 81.8 70,000 93.0
Mortgage-backed securities - Freddie Mac ....... 2,035 2.2 4,348 4.0 3,196 4.2
Tax increment allocation note .................. 448 0.5 473 0.4 490 0.7
FHLB stock ..................................... 17,342 18.8 1,733 1.6 1,610 2.1
------- ----- -------- ----- ------- -----
Total securities and FHLB stock ............. $92,199 100.0% $109,984 100.0% $75,297 100.0%
======= ===== ======== ===== ======= =====
Average remaining life of securities .............. 3.2 years 1.6 years 1.6 years
Other interest-earning assets:
Interest-bearing deposits with banks ........... $83,367 95.6% $ 60,816 97.6% $59,932 95.7%
Federal funds sold ............................. 3,800 4.4 1,500 2.4 2,700 4.3
------- ----- -------- ----- ------- -----
Total ....................................... $87,167 100.0% $ 62,316 100.0% $62,632 100.0%
======= ===== ======== ===== ======= =====
Carrying Values, Yields and Maturities. The following table sets forth
the scheduled maturities, carrying values, market value and weighted average
yields for our securities at June 30, 2002. Mortgage-backed securities and
mutual funds are included in the total columns since the securities are not due
at a single maturity date.
At June 30, 2002
---------------------------------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over
1 Year Years Years 10 Years Total Securities
-------------- -------------- -------------- -------------- -------------- ------------
Carrying Value Carrying Value Carrying Value Carrying Value Carrying Value Market Value
-------------- -------------- -------------- -------------- -------------- ------------
(Dollars in Thousands)
Federal agency obligations - FHLB $5,000 $45,000 $5,000 $ -- $55,000 $55,758
Tax increment allocation note ... 27 130 232 59 448 448
Mortgage-backed securities ...... -- -- -- -- 14,382 14,439
FHLB stock ...................... -- -- -- -- 17,342 17,342
Mutual funds .................... -- -- -- -- 5,027 5,027
------ ------- ------ ------ ------- -------
Total securities ................ $5,027 $45,130 $5,232 $ 59 $92,199 $93,014
====== ======= ====== ====== ======= =======
Weighted average yield .......... 6.51% 4.45% 4.20% 8.50% 4.81%
Sources of Funds
General. Deposits have been our primary source of funds for lending and
other investment purposes. In addition to deposits, we derive funds primarily
from principal and interest payments on loans. These loan repayments are a
relatively stable source of funds, while deposit inflows and outflows are
significantly influenced by general interest rates and money market conditions.
Borrowings could be used on a short-term basis to compensate for reductions in
the availability of funds from other sources and may be used on a longer-term
basis for general business purposes.
Deposits. Our deposits are attracted principally from residents within
our primary market area. Deposit account terms vary, with the principal
differences being the minimum balance required, the time periods the funds must
remain on deposit and the interest rate. We are not currently using, nor have we
used in the past, brokers to obtain deposits. Our deposit products include
demand and NOW, money market, savings, and term certificate accounts. Interest
rates paid, maturity terms, service fees and withdrawal penalties are
established by Chesterfield Federal on a periodic basis. Management determines
the rates and terms based on rates paid by competitors, our needs for funds or
liquidity, growth goals and federal and state regulations.
11
Deposit Activity. The following table sets forth Chesterfield Federal's
deposit flows during the periods indicated.
For the Years Ended June 30,
--------------------------------------------
2002 2001 2000
(Dollars in Thousands)
Opening balance ................. $ 260,658 $ 263,350 $ 259,131
Deposits ........................ 326,470 326,812 306,464
Withdrawals ..................... (316,893) (339,625) (313,002)
Interest credited ............... 7,890 10,121 10,757
--------- --------- ---------
Ending balance .................. $ 278,125 $ 260,658 $ 263,350
========= ========= =========
Net increase (decrease) ......... $ 17,467 $ (2,692) $ 4,219
========= ========= =========
Percent increase (decrease)...... 6.7% (1.0)% 1.6%
========= ========= =========
Deposit Accounts. The following table sets forth the dollar amount of
savings deposits in the various types of deposit programs we offered as of the
dates indicated.
At June 30,
-----------------------------------------------------------------
2002 2001 2000
----------------- -------------------- -------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Transactions and Savings Deposits:
Passbook Savings 1.50% ........... $ 58,968 21.2% $ 53,553 20.5% $ 56,760 21.5%
NOW Accounts 1.00% - 1.25% ....... 28,258 10.2 24,049 9.2 23,263 8.8
Money Market Accounts
1.00% - 1.60% ............ 9,806 3.5 8,827 3.4 10,185 3.9
-------- ----- -------- ----- -------- -----
Total Non-Certificates ........... 97,032 34.9 86,429 33.1 90,208 34.2
-------- ----- -------- ----- -------- -----
Time Deposits:
0.00% - 1.99% ................... 1,080 0.4 -- -- -- --
2.00% - 3.99% ................... 142,893 51.3 980 0.4 281 0.1
4.00% - 5.99% ................... 31,928 11.5 170,539 65.4 165,555 62.8
6.00% - 7.99% ................... 4,799 1.7 2,079 0.8 6,970 2.7
8.00% - 9.99% ................... 393 0.1 631 0.2 336 0.1
-------- ----- -------- ----- -------- -----
Total Time Deposits .............. 181,093 65.0 174,229 66.8 173,142 65.7
-------- ----- -------- ----- -------- -----
Accrued Interest ................. 171 0.1 319 0.1 371 0.1
-------- ----- -------- ----- -------- -----
Total Deposits, including
accrued interest ............... $278,296 100.0% $260,977 100.0% $263,721 100.0%
======== ===== ======== ===== ======== =====
Time Deposit Maturity Schedule. The following table presents, by rate
category, the remaining period to maturity of time deposit accounts outstanding
as of June 30, 2002.
Maturity Date
--------------------------------------------------------------------------------------
Interest Rate 1 Year or Less Over 1 to 2 Years Over 2 to 3 Years Over 3 Years Total
- ------------- -------------- ----------------- ----------------- ------------ -----
(In Thousands)
0.00% - 1.99% $ 1,080 $ -- $ -- $ -- $ 1,080
2.00% - 3.99% 136,361 6,460 1,065 7 142,893
4.00% - 5.99% 23,081 4,993 1,459 2,395 31,928
6.00% - 7.99% 2,429 45 1,060 1,265 4,799
8.00% - 9.99% 393 -- -- -- 393
-------- -------- ------ ------ --------
Total ....... $162,344 $ 11,498 $3,584 $3,667 $181,093
======== ======== ====== ====== ========
12
Large Certificates. The following table indicates the amount of our
certificates of deposit and other deposits by time remaining until maturity as
of June 30, 2002.
Maturity
------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 Months Total
-------- ------- ------- ------- --------
(In Thousands)
Time deposits less than $100,000 $ 77,852 $15,949 $19,767 $16,147 $129,715
Time deposits of $100,000 or more 40,584 6,214 1,978 2,602 51,378
-------- ------- ------- ------- --------
Total time deposits ............. $118,436 $22,163 $21,745 $18,749 $181,093
======== ======= ======= ======= ========
Borrowings. Chesterfield Federal may obtain advances from the Federal
Home Loan Bank of Chicago upon the security of the common stock it owns in that
bank and certain of its residential mortgage loans and mortgage-backed
securities, provided certain standards related to creditworthiness have been
met. These advances are made pursuant to several credit programs, each of which
has its own interest rate and range of maturities. Federal Home Loan Bank
advances are generally available to meet seasonal and other withdrawals of
deposit accounts and to permit increased lending.
Chesterfield Federal did not borrow any funds, including Federal Home
Loan Bank advances, during the fiscal years ended June 30, 2002, 2001 and 2000.
Employees
At June 30, 2002, Chesterfield Federal had a total of 95 full-time and
15 part-time employees, including 19 employed by Chesterfield Insurance,
Chesterfield Federal's wholly owned subsidiary. Chesterfield Federal's employees
are not represented by any collective bargaining group. Management considers its
employee relations to be good.
Risk Factors
In addition to factors discussed in the description of the business of
Chesterfield Financial and Chesterfield Federal and elsewhere in this report,
the following are factors that could adversely affect our future results of
operations and our financial condition.
Changes in Interest Rates Could Hurt Our Profitability. To be
profitable, we have to earn more money in interest and other income than we pay
as interest and other expenses. The majority of our loan portfolio primarily
consists of loans that mature in more than five years. At June 30, 2002, our
deposit accounts consisted of time deposit accounts and demand deposits such as
NOW accounts. Of our time deposits, $162.3 million, or 89.6% have remaining
terms to maturity of one year or less. If interest rates rise, the amount of
interest we pay on deposits is likely to increase more quickly than the amount
of interest we receive on our loans and securities. This could cause our profits
to decrease or could result in losses. If interest rates fall, many borrowers
may refinance more quickly, while competitive factors may inhibit our ability to
further lower interest rates on our deposit products. This could also cause our
profits to decrease or could result in losses. For additional information on our
exposure to interest rates, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Management of Market Risk."
Our Emphasis on Residential Real Estate Lending May Limit Our Growth
and Profitability. Historically, we have emphasized one- to four-family
residential lending instead of commercial or consumer lending, and more
recently, we have specifically emphasized the origination of shorter-term
residential mortgage (seven, 10 and 15-year) loans. As of June 30, 2002, $153.8
million, or 88.8% of our total loan portfolio consisted of one- to four-family
residential real estate loans. The yields on residential mortgage loans are
often less than the yields on other types of loans, and the yields on
shorter-term mortgage loans are often less than the yields on 30-year mortgage
loans. We intend to continue to emphasize shorter-term, residential lending.
Because of this emphasis, any asset growth we may experience may not be as fast
as that of other financial institutions that focus on a broader range of loan
products, and our income may not grow as fast as other financial institutions
that earn higher interest rates on longer-term or non-residential loans.
13
Strong Competition Both Within Our Market Area and from Internet Banks
May Limit Our Growth and Profitability. We conduct most of our business in Cook
and Will Counties, Illinois. Competition in the banking and financial services
industry in our market area is intense. Our profitability depends in large part
on our continued ability to compete successfully. We compete with commercial
banks, savings institutions, credit unions, finance companies, mutual funds,
insurance companies, and brokerage and investment banking firms. In addition, we
compete with internet banks, many of which are not located in our market area.
Many of these competitors have substantially greater resources and lending
limits than we do and offer certain services that we do not or cannot provide.
This strong competition may limit our ability to grow in the future.
Loss of Key Officers Could Hurt Our Operations. We rely heavily on our
executive officers, Michael E. DeHaan, President and Chief Executive Officer,
and Richard E. Urchell, Vice President and Secretary. The loss of either Mr.
DeHaan or Mr. Urchell could have an adverse effect on us because, as a small
company, our executive officers are responsible for more aspects of our business
than they might be at a larger company with more employees. Moreover, as a small
company, we have fewer management level employees who are in a position to
succeed these individuals. We do not maintain, nor do we intend to obtain, a
key-man life insurance policy on either Mr. DeHaan or Mr. Urchell.
REGULATION
Chesterfield Federal is examined and supervised extensively by the
Office of Thrift Supervision and the Federal Deposit Insurance Corporation.
Chesterfield Federal is a member of and owns stock in the Federal Home Loan Bank
of Chicago, which is one of the twelve regional banks in the Federal Home Loan
Bank System. This regulation and supervision establishes a comprehensive
framework of activities in which an institution can engage and is intended
primarily for the protection of the insurance fund and depositors. Chesterfield
Federal also is regulated by the Board of Governors of the Federal Reserve
System, governing reserves to be maintained against deposits and other matters.
The Office of Thrift Supervision examines Chesterfield Federal and prepares
reports for the consideration of Chesterfield Federal's Board of Directors on
any deficiencies that they may find in Chesterfield Federal's operations.
Chesterfield Federal's relationship with its depositors and borrowers also is
regulated to a great extent by both federal and state laws, especially in
matters concerning the ownership of savings accounts and the form and content of
Chesterfield Federal's mortgage documents. Any change in this regulation,
whether by the Federal Deposit Insurance Corporation, Office of Thrift
Supervision, or Congress, could have a material adverse impact on Chesterfield
Financial and Chesterfield Federal and their operations.
Federal Regulation of Savings Institutions
Business Activities. The activities of federal savings associations are
subject to extensive regulation including restrictions or requirements with
respect to loans to one borrower, the percentage of non-mortgage loans or
investments to total assets, capital distributions, permissible investments and
lending activities, liquidity, transactions with affiliates and community
reinvestment. The description of statutory provisions and regulations applicable
to savings associations set forth in this annual report does not purport to be a
complete description of these statutes and regulations and their effect on
Chesterfield Federal.
Loans to One Borrower. Federal savings associations generally may not
make a loan or extend credit to a single or related group of borrowers in excess
of 15% of unimpaired capital and surplus on an unsecured basis. An additional
amount may be lent, equal to 10% of unimpaired capital and surplus, if the loan
is secured by readily marketable collateral, which is defined to include certain
securities and bullion, but generally does not include real estate. As of June
30, 2002 Chesterfield Federal was in compliance with its loans-to-one-borrower
limitations.
Qualified Thrift Lender Test. As a federal savings association,
Chesterfield Federal is required to satisfy a qualified thrift lender test
whereby it must maintain at least 65% of its "portfolio assets" in "qualified
thrift investments" consisting primarily of residential mortgages and related
investments, including mortgage-backed and related securities. "Portfolio
assets" generally means total assets less specified liquid assets up to 20% of
total assets, goodwill and other intangible assets, and the value of property
used to conduct business. A savings association that fails the qualified thrift
lender test must either convert to a bank charter or operate under specified
14
restrictions. As of June 30, 2002, Chesterfield Federal maintained 71.82% of its
portfolio assets in qualified thrift investments and, therefore, met the
qualified thrift lender test.
Capital Distributions. Office of Thrift Supervision regulations govern
capital distributions by savings institutions, which include cash dividends,
stock repurchases and other transactions charged to the capital account of a
savings institution to make capital distributions. A savings institution must
file an application for Office of Thrift Supervision approval of the capital
distribution if either (1) the total capital distributions for the applicable
calendar year exceed the sum of the institution's net income for that year to
date plus the institution's retained net income for the preceding two years, (2)
the institution would not be at least adequately capitalized following the
distribution, (3) the distribution would violate any applicable statute,
regulation, agreement or Office of Thrift Supervision-imposed condition, or (4)
the institution is not eligible for expedited treatment of its filings. If an
application is not required to be filed, savings institutions which are a
subsidiary of a holding company, as well as certain other institutions, must
still file a notice with the Office of Thrift Supervision at least 30 days
before the board of directors declares a dividend or approves a capital
distribution.
Any additional capital distributions would require prior regulatory
approval. In the event Chesterfield Federal's capital fell below its fully
phased-in requirement or the Office of Thrift Supervision notified it that it
was in need of more than normal supervision, Chesterfield Federal's ability to
make capital distributions could be restricted. In addition, the Office of
Thrift Supervision could prohibit a proposed capital distribution by any
institution, which would otherwise be permitted by the regulation, if the Office
of Thrift Supervision determines that the distribution would constitute an
unsafe or unsound practice.
Community Reinvestment Act and Fair Lending Laws. Savings associations
have a responsibility under the Community Reinvestment Act and related
regulations of the Office of Thrift Supervision to help meet the credit needs of
their communities, including low- and moderate-income neighborhoods. In
addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit
lenders from discriminating in their lending practices on the basis of
characteristics specified in those statutes. An institution's failure to comply
with the provisions of the Community Reinvestment Act could, at a minimum,
result in regulatory restrictions on its activities, and failure to comply with
the Equal Credit Opportunity Act and the Fair Housing Act could result in
enforcement actions by the Office of Thrift Supervision, as well as other
federal regulatory agencies and the Department of Justice. Chesterfield Federal
received a satisfactory Community Reinvestment Act rating under the current
Community Reinvestment Act regulations in its most recent federal examination by
the Office of Thrift Supervision.
Transactions with Related Parties. Chesterfield Federal's authority to
engage in transactions with related parties or "affiliates" or to make loans to
specified insiders, is limited by Sections 23A and 23B of the Federal Reserve
Act. The term "affiliates" for these purposes generally means any company that
controls or is under common control with an institution, including Chesterfield
Financial and its non-savings institution subsidiaries. Section 23A limits the
aggregate amount of certain "covered" transactions with any individual affiliate
to 10% of the capital and surplus of the savings institution and also limits the
aggregate amount of covered transactions with all affiliates to 20% of the
savings institution's capital and surplus. Covered transactions with affiliates
are required to be secured by collateral in an amount and of a type described in
Section 23A and the purchase of low quality assets from affiliates is generally
prohibited. Section 23B provides that covered transactions with affiliates,
including loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the institution as those prevailing at the time for comparable
transactions with non-affiliated companies. In addition, savings institutions
are prohibited from lending to any affiliate that is engaged in activities that
are not permissible for bank holding companies and no savings institution may
purchase the securities of any affiliate other than a subsidiary.
Chesterfield Federal's authority to extend credit to executive
officers, directors and 10% stockholders, as well as entities controlled by
these persons, is currently governed by Sections 22(g) and 22(h) of the Federal
Reserve Act, and also by Regulation O. Among other things, these regulations
generally require these loans to be made on terms substantially the same as
those offered to unaffiliated individuals and do not involve more than the
normal risk of repayment. However, recent regulations now permit executive
officers and directors to receive the same terms through benefit or compensation
plans that are widely available to other employees, as long as the director or
executive officer is not given preferential treatment compared to other
participating employees. Regulation O also places individual and aggregate
limits on the amount of loans Chesterfield Federal may make to these persons
based,
15
in part, on Chesterfield Federal's capital position, and requires
approval procedures to be followed. At June 30, 2002, Chesterfield Federal was
in compliance with these regulations.
Enforcement. The Office of Thrift Supervision has primary enforcement
responsibility over savings institutions and has the authority to bring
enforcement action against all "institution-related parties," including
stockholders, and attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors of the institutions, receivership, conservatorship or the termination
of deposit insurance. Civil penalties cover a wide range of violations and
actions, and range up to $25,000 per day, unless a finding of reckless disregard
is made, in which case penalties may be as high as $1 million per day. The
Federal Deposit Insurance Corporation also has the authority to recommend to the
Director of the Office of Thrift Supervision that enforcement action be taken
with respect to a particular savings institution. If action is not taken by the
Director, the Federal Deposit Insurance Corporation has authority to take action
under specified circumstances.
Standards for Safety and Soundness. Federal law requires each federal
banking agency to prescribe for all insured depository institutions standards
relating to, among other things, internal controls, information systems and
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, compensation, and other operational and managerial
standards as the agency deems appropriate. The federal banking agencies adopted
Interagency Guidelines Prescribing Standards for Safety and Soundness to
implement the safety and soundness standards required under the Federal law. The
guidelines set forth the safety and soundness standards that the federal banking
agencies use to identify and address problems at insured depository institutions
before capital becomes impaired. The guidelines address internal controls and
information systems; internal audit systems; credit underwriting; loan
documentation; interest rate risk exposure; asset growth; and compensation, fees
and benefits. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard. If an institution fails to meet these
standards, the appropriate federal banking agency may require the institution to
submit a compliance plan.
Capital Requirements.
Office of Thrift Supervision capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 4% leverage ratio (3% for institutions receiving the highest rating on
the CAMELS rating system) and an 8% risk-based capital ratio. In addition, the
prompt corrective action standards discussed below also establish, in effect, a
minimum 2% tangible capital standard, a 4% leverage ratio (3% for institutions
receiving the highest rating on the CAMELS financial institution rating system),
and, together with the risk-based capital standard itself, a 4% Tier 1
risk-based capital standard. Office of Thrift Supervision regulations also
require that, in meeting the tangible, leverage and risk-based capital
standards, institutions must generally deduct investments in and loans to
subsidiaries engaged in activities as principal that are not permissible for a
national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the Office of Thrift Supervision capital
regulation based on the risks believed inherent in the type of asset. Core (Tier
1) capital is defined as common stockholders' equity (including retained
earnings), certain noncumulative perpetual preferred stock and related surplus
and minority interests in equity accounts of consolidated subsidiaries less
intangibles other than certain mortgage servicing rights and credit card
relationships. The components of supplementary capital currently include
cumulative preferred stock, long-term perpetual preferred stock, mandatory
convertible securities, subordinated debt and intermediate preferred stock, the
allowance for loan and lease losses limited to a maximum of 1.25% of
risk-weighted assets and up to 45% of unrealized gains on available-for-sale
equity securities with readily determinable fair market values. Overall, the
amount of supplementary capital included as part of total capital cannot exceed
100% of core capital.
16
The capital regulations also incorporate an interest rate risk
component. Savings institutions with "above normal" interest rate risk exposure
are subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. For the present time, the Office of Thrift
Supervision has deferred implementation of the interest rate risk capital
charge. At June 30, 2002, Chesterfield Federal met each of its capital
requirements.
Prompt Corrective Regulatory Action
Under the Office of Thrift Supervision Prompt Corrective Action
regulations, the Office of Thrift Supervision is required to take supervisory
actions against undercapitalized institutions, the severity of which depends
upon the institution's level of capital. Generally, a savings institution that
has total risk-based capital of less than 8.0% or a leverage ratio or a Tier 1
core capital ratio that is less than 4.0% is considered to be undercapitalized.
A savings institution that has total risk-based capital less than 6.0%, a Tier 1
core risk-based capital ratio of less than 3.0% or a leverage ratio that is less
than 3.0% is considered to be "significantly undercapitalized" and a savings
institution that has a tangible capital to assets ratio equal to or less than
2.0% is deemed to be "critically undercapitalized." Generally, the banking
regulator is required to appoint a receiver or conservator for an institution
that is "critically undercapitalized." The regulation also provides that a
capital restoration plan must be filed with the Office of Thrift Supervision
within 45 days of the date an institution receives notice that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." In addition, numerous mandatory supervisory actions become
immediately applicable to the institution, including, but not limited to,
restrictions on growth, investment activities, capital distributions, and
affiliate transactions. The Office of Thrift Supervision could also take any one
of a number of discretionary supervisory actions against undercapitalized
institutions, including the issuance of a capital directive and the replacement
of senior executive officers and directors.
Insurance of Deposit Accounts
The Federal Deposit Insurance Corporation has adopted a risk-based
deposit insurance assessment system. The Federal Deposit Insurance Corporation
assigns an institution to one of three capital categories based on the
institution's financial information, as of the reporting period ending seven
months before the assessment period, and one of three supervisory subcategories
within each capital group. The three capital categories are well capitalized,
adequately capitalized and undercapitalized. The supervisory subgroup to which
an institution is assigned is based on a supervisory evaluation provided to the
Federal Deposit Insurance Corporation by the institution's primary federal
regulator and information which the Federal Deposit Insurance Corporation
determines to be relevant to the institution's financial condition and the risk
posed to the deposit insurance funds. An institution's assessment rate depends
on the capital category and supervisory category to which it is assigned. The
Federal Deposit Insurance Corporation is authorized to raise the assessment
rates. The Federal Deposit Insurance Corporation has exercised this authority
several times in the past and may raise insurance premiums in the future. If the
Federal Deposit Insurance Corporation takes this type of action, it could have
an adverse effect on the earnings of Chesterfield Federal.
Federal Home Loan Bank System
Chesterfield Federal is a member of the Federal Home Loan Bank System,
which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan
Bank System provides a central credit facility primarily for member
institutions. Chesterfield Federal, as a member of the Federal Home Loan Bank of
Chicago, is required to acquire and hold shares of capital stock in that Federal
Home Loan Bank in an amount at least equal to 1% of the aggregate principal
amount of its unpaid residential mortgage loans and similar obligations at the
beginning of each year, or 1/20 of its borrowings from the Federal Home Loan
Bank, whichever is greater. As of June 30, 2002, Chesterfield Federal was in
compliance with this requirement. The Federal Home Loan Banks are required to
provide funds for the resolution of insolvent thrifts and to contribute funds
for affordable housing programs. These requirements could reduce the amount of
dividends that the Federal Home Loan Banks pay to their members and could also
result in the Federal Home Loan Banks imposing a higher rate of interest on
advances to their members.
17
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain noninterest-earning reserves against their transaction accounts, such
as negotiable order of withdrawal and regular checking accounts. At June 30,
2002, Chesterfield Federal was in compliance with these reserve requirements.
The balances maintained to meet the reserve requirements imposed by the Federal
Reserve Board may be used to satisfy liquidity requirements imposed by the
Office of Thrift Supervision.
The USA PATRIOT Act
In response to the events of September 11th, the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001, or the USA PATRIOT Act, was signed into law on
October 26, 2001. The USA PATRIOT Act gives the federal government new powers to
address terrorist threats through enhanced domestic security measures, expanded
surveillance powers, increased information sharing, and broadened anti-money
laundering requirements. By way of amendments to the Bank Secrecy Act, Title III
of the USA PATRIOT Act takes measures intended to encourage information sharing
among bank regulatory agencies and law enforcement bodies. Further, certain
provisions of Title III impose affirmative obligations on a broad range of
financial institutions, including banks, thrifts, brokers, dealers, credit
unions, money transfer agents and parties registered under the Commodity
Exchange Act.
Among other requirements, Title III of the USA PATRIOT Act imposes the
following requirements with respect to financial institutions:
o Pursuant to Section 352, all financial institutions must establish
anti-money laundering programs that include, at minimum: (i) internal
policies, procedures, and controls; (ii) specific designation of an
anti-money laundering compliance officer; (iii) ongoing employee
training programs; and (iv) an independent audit function to test the
anti-money laundering program.
o Section 326 of the Act authorizes the Secretary of the Department of
Treasury, in conjunction with other bank regulators, to issue
regulations by October 26, 2002 that provide for minimum standards
with respect to customer identification at the time new accounts are
opened.
o Section 312 of the Act requires financial institutions that establish,
maintain, administer, or manage private banking accounts or
correspondence accounts in the United States for non-United States
persons or their representatives (including foreign individuals
visiting the United States) to establish appropriate, specific, and,
where necessary, enhanced due diligence policies, procedures, and
controls designed to detect and report money laundering.
o Effective December 25, 2001, financial institutions are prohibited
from establishing, maintaining, administering or managing
correspondent accounts for foreign shell banks (foreign banks that do
not have a physical presence in any country), and will be subject to
certain record keeping obligations with respect to correspondent
accounts of foreign banks.
o Bank regulators are directed to consider a holding company's
effectiveness in combating money laundering when ruling on Federal
Reserve Act and Bank Merger Act applications.
The federal banking agencies have begun to propose and implement
regulations pursuant to the USA PATRIOT Act. These proposed and interim
regulations would require financial institutions to adopt the policies and
procedures contemplated by the USA PATRIOT Act.
18
Sarbanes-Oxley Act of 2002
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act
of 2002 (the "Sarbanes-Oxley Act"). The Sarbanes-Oxley Act represents a
comprehensive revision of laws affecting corporate governance, accounting
obligations and corporate reporting. The Sarbanes-Oxley Act is applicable to all
companies with equity or debt securities registered under the Securities
Exchange Act of 1934. In particular, the Sarbanes-Oxley Act establishes: (i) new
requirements for audit committees, including independence, expertise, and
responsibilities; (ii) additional responsibilities regarding financial
statements for the Chief Executive Officer and Chief Financial Officer of the
reporting company; (iii) new standards for auditors and regulation of audits;
(iv) increased disclosure and reporting obligations for the reporting company
and their directors and executive officers; and (v) new and increased civil and
criminal penalties for violation of the securities laws. Many of the provisions
became effective immediately while other provisions become effective over a
period of 30 to 270 days and are subject to rulemaking by the Securities and
Exchange Commission. Although we anticipate that we will incur additional
expense in complying with the provisions of the Sarbanes-Oxley Act and the
resulting regulations, management does not expect that such compliance will have
a material impact on our results of operations or financial condition.
Holding Company Regulation
Chesterfield Financial is a non-diversified unitary savings and loan
holding company within the meaning of federal law. Under prior law, a unitary
savings and loan holding company, such as Chesterfield Financial, was not
generally restricted as to the types of business activities in which it may
engage, provided that Chesterfield Federal continued to be a qualified thrift
lender. See "--Federal Regulation of Savings Institutions--Qualified Thrift
Lender Test." The Gramm-Leach-Bliley Act of 1999, however, restricts unitary
savings and loan holding companies not existing or applied for before May 4,
1999 to activities permissible for financial holding companies under the law or
for multiple savings and loan holding companies. Chesterfield Financial is
limited to the activities permissible for financial holding companies or
multiple savings and loan holding companies. A financial holding company may
engage in activities that are financial in nature, incidental to financial
activities or complementary to a financial activity. A multiple savings and loan
holding company is generally limited to activities permissible for bank holding
companies under Section 4(c)(8) of the Bank Holding Company Act, subject to the
prior approval of the Office of Thrift Supervision, and certain additional
activities authorized by Office of Thrift Supervision regulation.
A savings and loan holding company is prohibited from, directly or
indirectly, acquiring more than 5% of the voting stock of another savings
institution or savings and loan holding company without prior written approval
of the Office of Thrift Supervision and from acquiring or retaining control of a
depository institution that is not insured by the Federal Deposit Insurance
Corporation. In evaluating applications by holding companies to acquire savings
institutions, the Office of Thrift Supervision considers the financial and
managerial resources and future prospects of the holding company and institution
involved, the effect of the acquisition on the risk to the deposit insurance
funds, the convenience and needs of the community and competitive factors.
The Office of Thrift Supervision may not approve any acquisition that
would result in a multiple savings and loan holding company controlling savings
institutions in more than one state, subject to two exceptions: (1) the approval
of interstate supervisory acquisitions by savings and loan holding companies and
(2) the acquisition of a savings institution in another state if the laws of the
state of the target savings institution specifically permit the acquisitions.
The states vary in the extent to which they permit interstate savings and loan
holding company acquisitions.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, federal regulations do prescribe restrictions on
subsidiary savings institutions as described below. Chesterfield Federal must
notify the Office of Thrift Supervision 30 days before declaring any dividend to
Chesterfield Financial. In addition, the financial impact of a holding company
on its subsidiary institution is a matter that is evaluated by the Office of
Thrift Supervision and the agency has authority to order cessation of activities
or divestiture of subsidiaries deemed to pose a threat to the safety and
soundness of the institution.
The Office of Thrift Supervision has proposed new rules which would
require savings and loan holding companies to notify the Office of Thrift
Supervision prior to engaging in transactions which (i) when combined with
19
other debt transactions engaged in during a 12-month period, would increase the
holding company's consolidated debt by 5% or more; (ii) when combined with other
asset acquisitions engaged in during a 12-month period, would result in asset
acquisitions of greater than 15% of the holding company's consolidated assets;
or (iii) when combined with any other transactions engaged in during a 12-month
period, would reduce the holding company's consolidated tangible capital to
consolidated tangible assets by 10% or more. The Office of Thrift Supervision
has proposed to exempt from this rule holding companies whose consolidated
tangible capital exceeds 10% following the transactions.
The Office of Thrift Supervision has also proposed new rules which
would codify the manner in which the Office of Thrift Supervision reviews the
capital adequacy of savings and loan holding companies and determines when a
holding company must maintain additional capital. The Office of Thrift
Supervision is not currently proposing to establish uniform capital adequacy
guidelines for all savings and loan holding companies.
Chesterfield Financial and Chesterfield Federal are unable to predict
whether or when these proposed regulations will be adopted, and what effect, if
any, the adoption of these regulations would have on their business.
Federal Securities Laws
Chesterfield Financial's common stock is registered with the Securities
and Exchange Commission under the Securities Exchange Act of 1934. Chesterfield
Financial is subject to the information, proxy solicitation, insider trading
restrictions and other requirements under the Securities Exchange Act of 1934.
TAXATION
Federal Taxation
For federal income tax purposes, Chesterfield Financial and
Chesterfield Federal file a consolidated federal income tax return on a calendar
year basis using the accrual method of accounting.
As a result of the enactment of the Small Business Job Protection Act
of 1996, all savings banks and savings associations may convert to a commercial
bank charter, diversify their lending, or be merged into a commercial bank
without having to recapture any of their pre-1988 tax bad debt reserve
accumulations. However, transactions that would require recapture of the
pre-1988 tax bad debt reserve include redemption of Chesterfield Federal's
stock, payment of dividends or distributions in excess of earnings and profits,
or failure by the institution to qualify as a bank for federal income tax
purposes. At June 30, 2002, Chesterfield Federal had a balance of approximately
$3.5 million of pre-1988 bad debt reserves. A deferred tax liability has not
been provided on this amount as management does not intend to make
distributions, redeem stock or fail certain bank tests that would result in
recapture of the reserve.
Deferred income taxes arise from the recognition of items of income and
expense for tax purposes in years different from those in which they are
recognized in the consolidated financial statements. Chesterfield Financial will
account for deferred income taxes by the asset and liability method, applying
the enacted statutory rates in effect at the balance sheet date to differences
between the book basis and the tax basis of assets and liabilities. The
resulting deferred tax liabilities and assets will be adjusted to reflect
changes in the tax laws.
Chesterfield Financial is subject to the corporate alternative minimum
tax to the extent it exceeds Chesterfield Financial's regular income tax for the
year. The alternative minimum tax will be imposed at the rate of 20% of a
specially computed tax base. Included in this base are a number of preference
items, including interest on certain tax-exempt bonds issued after August 7,
1986, and an "adjusted current earnings" computation that is similar to a tax
earnings and profits computation. In addition, for purposes of the alternative
minimum tax, the amount of alternative minimum taxable income that may be offset
by net operating losses is limited to 90% of alternative minimum taxable income.
The Internal Revenue Service has audited Chesterfield Federal's income
tax returns through December 31, 1982.
20
State Taxation
Illinois State Taxation. Chesterfield Financial is required to file
Illinois income tax returns and pay tax at an effective tax rate of 7.18% of
Illinois taxable income. For these purposes, Illinois taxable income generally
means federal taxable income subject to certain modifications, the primary one
of which is the exclusion of interest income on United States obligations.
Delaware Taxation. As a Delaware holding company not earning income in
Delaware, Chesterfield Financial is exempt from Delaware corporate income tax
but is required to file an annual report with and pay an annual franchise tax to
the State of Delaware.
ITEM 2. Properties
- ----------------------
Properties
At June 30, 2002, Chesterfield Financial conducted its business from
our main office at 10801 South Western Avenue, Chicago, Illinois. The following
table sets forth certain information with respect to the offices of Chesterfield
Federal at June 30, 2002.
Original Year
Leased or Leased or Date of Lease
Location Owned Acquired Expiration
- -------- ----- -------- ----------
10801 South Western Avenue Owned 1965 N/A
Chicago, Illinois 60643
10701 South Western Avenue Owned 1981 N/A
Chicago, Illinois 60643
10135 S. Roberts Road Leased 1976 10/14/06
Palos Hills, Illinois 60465
22 West Lincoln Highway Owned 1974 N/A
Frankfort, Illinois 60423
ITEM 3. Legal Proceedings
- -----------------------------
Chesterfield Federal is involved, from time to time, as plaintiff or
defendant in various legal actions arising in the normal course of its business.
At June 30, 2002, Chesterfield Federal was not involved in any material legal
proceedings.
ITEM 4. Submission of Matters to a Vote of Security Holders
- ---------------------------------------------------------------
No matters were submitted to a vote of stockholders during the fourth
quarter of the year under report.
21
PART II
ITEM 5. Market for Company's Common Stock and Related Stock Holder Matters
- ------------------------------------------------------------------------------
Chesterfield Financial's common stock is quoted on the Nasdaq National
Market under the symbol "CFSL." As of September 19, 2002, Chesterfield Financial
had 12 registered market makers, 1,150 stockholders of record (excluding the
number of persons or entities holding stock in street name through various
brokerage firms), and 3,918,975 shares outstanding.
The following table sets forth market price and dividend information
for the common stock since the completion of Chesterfield Federal's
mutual-to-stock conversion on May 2, 2001.
Fiscal Year Ended Cash Dividends
June 30, 2002 High Low Declared
- --------------------------------------------------------------------------------
Fourth quarter $ 18.20 $ 17.26 $ --
Third quarter $ 17.80 $ 16.25 $ --
Second quarter $ 16.64 $ 14.80 $ --
First quarter $ 15.90 $ 13.55 $ --
Fiscal Year Ended Cash Dividends
June 30, 2002 High Low Declared
- --------------------------------------------------------------------------------
Fourth quarter $ 15.90 $ 13.62 $ --
Payment of dividends on Chesterfield Financial's common stock is
subject to determination and declaration by the Board of Directors and will
depend upon a number of factors, including capital requirements, regulatory
limitations on the payment of dividends, Chesterfield Financial's results of
operations and financial condition, tax considerations and general economic
conditions. No assurance can be given that dividends will be declared or, if
declared, what the amount of dividends will be, or whether such dividends, once
declared, will continue.
Office of Thrift Supervision regulations impose limitations upon all
"capital distributions" by savings institutions, including cash dividends,
payments by a savings institution to repurchase or otherwise acquire its stock,
payments to stockholders of another savings institution in a cash-out merger,
and other distributions charged against capital. The regulations establish a
three-tiered system of regulation, with the greatest flexibility being afforded
to well-capitalized or Tier 1 savings associations. As of June 30, 2002, the
most recent notification categorized Chesterfield Federal as "well-capitalized."
Accordingly, under the Office of Thrift Supervision capital distribution
regulations, Chesterfield Federal would be permitted to pay, upon notice to the
Office of Thrift Supervision, dividends during any calendar year up to 100
percent of its net income during that calendar year, plus its retained net
income for the preceding two years.
In addition to the foregoing, earnings of Chesterfield Federal
appropriated to bad debt reserves and deducted for federal income tax purposes
are not available for payment of cash dividends or other distributions to
stockholders without payment of taxes at the then-current tax rate by
Chesterfield Federal on the amount of earnings removed from the reserves for
such distributions. Chesterfield Financial intends to make full use of this
favorable tax treatment and does not contemplate any distribution by
Chesterfield Federal in a manner that would create federal tax liability.
22
ITEM 6. Selected Financial Data
- -----------------------------------
The following information is derived from the audited consolidated
financial statements of Chesterfield Financial or, prior to May 2, 2001,
Chesterfield Federal. For additional information about Chesterfield Financial
and Chesterfield Federal's conversion to stock form, reference is made to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of Chesterfield Financial
and related notes included elsewhere herein.
At June 30,
---------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(In Thousands)
Selected Financial Condition Data:
- ----------------------------------
Total assets ...................... $363,340 $344,310 $305,480 $304,107 $295,506
Loans receivable, net ............. 169,881 161,203 157,276 156,917 146,941
Interest-bearing deposits ......... 83,367 60,816 59,933 77,673 88,078
Securities available-for-sale...... 17,374 13,405 -- -- --
Securities held-to-maturity ....... 57,483 94,846 73,687 56,571 46,316
Intangible assets ................. 499 608 699 804 217
Deposits .......................... 278,125 260,658 263,350 259,131 257,686
Shareholders' equity .............. 76,741 76,553 35,155 32,822 31,164
For the Years Ended June 30,
---------------------------------------------------
2002 2001 2000 1999 1998
------- ------- ------- ------- -------
(In Thousands)
Selected Operations Data:
- -------------------------
Total interest income ............ $19,047 $20,418 $19,563 $18,848 $19,645
Total interest expense ........... 8,102 11,005 10,746 10,646 11,290
------- ------- ------- ------- -------
Net interest income .............. 10,945 9,413 8,817 8,202 8,355
Provision for loan losses ........ -- 72 83 150 202
------- ------- ------- ------- -------
Net interest income after
provision for loan losses...... 10,945 9,341 8,734 8,052 8,153
Total non-interest income ........ 2,475 2,278 2,140 1,531 1,064
Total non-interest expense ....... 8,396 7,529 7,220 7,006 6,115
------- ------- ------- ------- -------
Income before taxes .............. 5,024 4,090 3,654 2,577 3,102
Income tax provision ............. 1,766 1,418 1,321 919 1,111
------- ------- ------- ------- -------
Net income ....................... $ 3,258 $ 2,672 $ 2,333 $ 1,658 $ 1,991
======= ======= ======= ======= =======
23
At or For the Years Ended June 30,
---------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Selected Financial Ratios and Other Data:
- -----------------------------------------
Performance Ratios:
Return on average assets (1) ............ 0.91% 0.81% 0.77% 0.56% 0.68%
Return on average equity (2) ............ 4.26 5.76 6.86 5.17 6.57
Interest rate spread (3) ................ 2.52 2.39 2.56 2.41 2.50
Net interest margin (4) ................. 3.16 2.95 3.01 2.85 2.95
Ratio of non-interest expense to
average total assets .................. 2.35 2.29 2.38 2.36 2.10
Ratio of average interest-earning assets
to average interest-bearing liabilities 127.3 116.6 112.3 111.8 111.3
Efficiency ratio (5) .................... 62.6 64.4 65.9 72.0 64.9
Asset Quality Ratios:
Non-performing loans to total loans at
end of period ......................... 0.13 -- 0.01 0.06 0.18
Non-performing assets to total assets at
end of period ......................... 0.06 -- -- 0.03 0.09
Allowance for loan losses to
non-performing loans .................. 7.10x 524.33x 116.00x 15.91x 4.84x
Allowance for loan losses to
loans receivable, net ............... 0.93% 0.98% 0.96% 0.91% 0.87%
Capital Ratios:
Equity to total assets at end of period . 21.12 22.23 11.51 10.79 10.55
Average equity to average assets ........ 21.38 13.06 11.21 10.77 10.38
Dividend payout ratio (6) ............... -- -- n/a n/a n/a
Other Data:
Number of offices ....................... 4 4 4 4 4
- --------------------------
(1) Ratio of net income to average total assets.
(2) Ratio of net income to average equity.
(3) The difference between the weighted average yield on interest-earning
assets and the weighted average cost of average interest-bearing
liabilities.
(4) Net interest income divided by average interest-earning assets.
(5) Non-interest expense divided by the sum of net interest income and
non-interest income.
(6) Chesterfield Financial's common stock first traded on May 2, 2001, and has
paid no dividends.
24
ITEM 7. Management's Discussion and Analysis of Financial Condition and
- -----------------------------------------------------------------------------
Results of Operations
- ---------------------------------
Forward Looking Statements
This document contains certain "forward-looking statements" which may
be identified by the use of words such as "believe," "expect," "anticipate,"
"should," "planned," "estimated" and "potential." Examples of forward-looking
statements include, but are not limited to, estimates with respect to our
financial condition, results of operations and business that are subject to
various factors which could cause actual results to differ materially from these
estimates and most other statements that are not historical in nature. These
factors include, but are not limited to, general and local economic conditions,
changes in interest rates, deposit flows, demand for mortgage and other loans,
real estate values, and competition; changes in accounting principles, policies,
or guidelines; changes in legislation or regulation; and other economic,
competitive, governmental, regulatory, and technological factors affecting our
operations, pricing products and services.
General
Chesterfield Financial's results of operations depend primarily on 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-bearing deposits with other financial institutions, and
the interest we pay on our interest-bearing liabilities, primarily savings
accounts and time deposits. Our provisions for loan losses, other income and
other expense also affect our results of operations. Other income consists
primarily of insurance commissions and service charges on deposit accounts.
Other expense consists primarily of non-interest expenses, including 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.
Business Strategy
Our current business strategy is to operate as a well-capitalized,
profitable, community-oriented savings and loan association dedicated to
providing quality customer service. Generally, we have sought to implement this
strategy by emphasizing deposits as its primary source of funds and maintaining
a substantial portion of its assets in local residential first mortgage loans.
Specifically, the business strategy incorporates the following elements: (1)
Emphasizing one- to four-family residential real estate lending; (2) Managing
interest rate risk by emphasizing shorter-term mortgage loans and maintaining
high levels of liquidity; (3) Conducting our business as a community-oriented
institution; and (4) Maintaining asset quality and capital strength.
Highlights of the business strategy are as follows:
o Emphasizing One- to Four-Family Residential Real Estate Lending.
Historically, we have emphasized one- to four-family residential
lending within our market area. As of June 30, 2002, $153.8 million,
or 88.8% of our total loan portfolio consisted of one- to four-family
residential real estate loans. During the year ended June 30, 2002, we
originated $30.7 million of one- to four-family residential real
estate loans. Although the yields on residential mortgage loans are
often less than the yields on other types of loans, we intend to
continue to emphasize one- to four-family lending because of our
expertise with this type of lending, and the relatively low
delinquency rates on these loans compared to other loans.
o Managing Interest Rate Risk by Emphasizing Shorter-Term Loans and
Maintaining High Levels of Liquidity. In recent years, we have
emphasized the origination of shorter-term (seven-, 10- or 15-year)
residential mortgage loans and have maintained high levels of
liquidity. In addition, when a borrower refinances a loan during
periods of decreasing interest rates, we actively seek to reduce the
term of the refinanced loan. While short-term loans generally offer
lower interest rates than long-term loans, short-term loans increase
monthly cash flows and reprice more quickly, allowing us greater
flexibility in periods of rising interest rates.
25
o Conducting our Business as a Community-Oriented Institution. We are
committed to meeting the financial needs of the communities in which
we operate. We are large enough to provide a range of personal and
business financial services, and yet are still small enough to provide
these services on a personalized and efficient basis. We believe that
we can be more effective in servicing our customers than many of our
non-local competitors because of our ability to quickly and
effectively provide senior management responses to customer needs and
inquiries. Our ability to provide these services is enhanced by the
stability of our senior management, which has an average tenure with
us of over 32 years.
o Maintaining Asset Quality and Capital Strength. Through our commitment
to conservative loan underwriting guidelines and the emphasis on
traditional residential mortgage loans, we have consistently
experienced low levels of late payments and losses on loans. As of
June 30, 2002, we had $222,000 of non-performing assets, which
represented 0.06% of total assets. In addition, we maintain our
financial strength by maintaining high capital levels. At June 30,
2002, our ratio of shareholders' equity to assets was 21.12%.
Average Balance Sheet
The following table presents for the years indicated the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments were made.
Average balances are calculated daily for 2002 and monthly for 2001 and 2000.
Non-accruing loans have been included in the table as loans carrying a zero
yield.
For the Years Ended June 30,
--------------------------------------------------------------------------
2002 2001
---------------------------------- -----------------------------------
Average Interest Average Interest
Outstanding Earned/ Outstanding Earned/
Balance Paid Yield/Rate Balance Paid Yield/Rate
------- ---- ---------- ------- ---- ----------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable (1)............... $ 164,146 $ 11,794 7.19% $ 156,811 $ 11,842 7.55%
Securities......................... 87,618 4,721 5.39 86,854 4,963 5.71
Interest-bearing deposits.......... 75,455 1,628 2.16 70,075 3,286 4.69
Other.............................. 19,157 904 4.72 4,960 327 6.59
--------- -------- ---- ---------- -------- ----
Total interest-earning
assets (1)...................... 346,376 19,047 5.50 318,700 20,418 6.41
--------- -------- ---- ---------- -------- ----
Interest-bearing liabilities:
Passbook savings................... 54,370 1,045 1.92 66,441 1,410 2.12
NOW accounts....................... 25,611 338 1.32 23,137 434 1.88
Money market accounts.............. 9,500 174 1.83 11,502 273 2.37
Time deposits...................... 182,551 6,545 3.59 172,339 8,888 5.16
--------- -------- ---- ---------- -------- ----
Total interest-bearing
liabilities.................... 272,032 8,102 2.98 273,419 11,005 4.02
--------- -------- ---- ---------- -------- ----
Net interest income................. $ 10,945 $ 9,413
======== ==========
Net interest rate spread............ 2.52% 2.39%
==== ====
Net earning assets.................. $ 74,344 $ 45,281
========= ==========
Net yield on average
interest-earning assets.......... 3.16% 2.95%
Average interest-earning assets
to average interest-bearing
liabilities........................ 127.3% 116.6%
For the Years Ended June 30,
--------------------------------------
2000
--------------------------------------
Average Interest
Outstanding Earned/
Balance Paid Yield/Rate
------- ---- ----------
Interest-earning assets:
Loans receivable (1)............... $ 158,522 $ 11,917 7.52%
Securities......................... 62,247 3,512 5.64
Interest-bearing deposits.......... 67,670 3,796 5.61
Other.............................. 4,918 338 6.87
----------- ---------- ----
Total interest-earning
assets (1)...................... 293,357 19,563 6.67
----------- ---------- ----
Interest-bearing liabilities:
Passbook savings................... 57,270 1,407 2.46
NOW accounts....................... 22,300 435 1.95
Money market accounts.............. 10,083 281 2.79
Time deposits...................... 171,545 8,623 5.03
----------- ---------- ----
Total interest-bearing
liabilities.................... 261,198 10,746 4.11
----------- ---------- ----
Net interest income................. $ 8,817
==========
Net interest rate spread............ 2.56%
====
Net earning assets.................. $ 32,159
==========
Net yield on average
interest-earning assets.......... 3.01%
Average interest-earning assets
to average interest-bearing
liabilities........................ 112.3%
(1) Balance calculated net of deferred loan fees, loan discounts, loans in
process and the allowance for loan losses.
26
Rate/Volume Analysis
The following table presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the changes related to
outstanding balances and those due to the changes in interest rates. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (i.e.,
changes in volume multiplied by old rate) and (ii) changes in rate (i.e.,
changes in rate multiplied by old volume). For purposes of this table, changes
attributable to both rate and volume, which cannot be segregated, have been
allocated proportionately to the change due to volume and the change due to
rate.
For the Years Ended June 30,
------------------------------------------------------------------------------
2002 vs. 2001 2001 vs. 2000
----------------------------------- -----------------------------------------
Increase/(Decrease) Increase/(Decrease)
Due to Total Due to Total
------------------- Increase ------------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ----------
(In Thousands)
Interest-earning assets:
Loans receivable .................... $ 541 $ (589) $ (48) $ 54 $ (129) $ (75)
Securities .......................... 43 (285) (242) 45 1,406 1,451
Interest-bearing deposits ........... 235 (1,893) (1,658) (641) 131 (510)
Other ............................... 767 (190) 577 (15) 4 (11)
------- ------- ------ ----- ------- -------
Total interest-earning assets ..... $ 1,586 $(2,957) $(1,371) $(557) $ 1,412 $ 855
======= ======= ======= ===== ======= =======
Interest-bearing liabilities:
Passbook savings .................... $ (272) $ (93) $ (365) $ 209 $ (206) $ 3
NOW accounts ........................ 43 (139) (96) 16 (17) (1)
Money market accounts ............... (52) (47) (99) 37 (45) (8)
Time deposits ....................... 501 (2,844) (2,343) 40 225 265
------- ------- ------ ----- ------- -------
Total interest-bearing liabilities $ 220 $(3,123) (2,903) $ 302 $ (43) 259
======= ======= ====== ===== ======= =======
Net interest income .................. $ 1,532 $ 596
======= =======
34
Comparison of Financial Condition at June 30, 2002 and 2001
At June 30, 2002, total assets were $363.3 million, up $19.0 million,
or 5.5%, from $344.3 million at June 30, 2001. Loans receivable at June 30,
2002, were $169.9 million, up $8.7 million, or 5.4%, from $161.2 million at June
30, 2001. Securities held-to-maturity decreased $37.4 million, or 39.4%, to
$57.5 million at June 30, 2002, from $94.8 million at June 30, 2001. The
decrease resulted primarily from securities that were called or matured, with
the proceeds deposited into interest-earning accounts. Investments in Federal
Home Loan Bank stock increased $15.6 million, to $17.3 million as of June 30,
2002, compared to $1.7 million as of June 30, 2001, due to reinvestment of
proceeds from called or matured securities. Total deposits at June 30, 2002,
were $278.1 million, up $17.5 million, or 6.7 %, from $260.7 million at June 30,
2001.
Asset quality remains strong. Our non-performing loans were $222,000,
or 0.13% of loans receivable as of June 30, 2002, compared to $3,100 as of June
30, 2001. The increase in non-performing loans was primarily due to community
development loans where the developer has experienced delays in completing the
project. (See Business - Asset Quality.) The allowance for loan losses to loans
receivable was 0.93% as of June 30, 2002 compared to 0.98% as of June 30, 2001.
During the year ended June 30, 2002, we recorded recoveries on previously
charged-off loans of $3,000, and recorded no charge-offs.
Total shareholders' equity as of June 30, 2002, was $76.7 million, or
21.1% of total assets, compared to $76.6 million, or 22.2% of total assets at
June 30, 2001. On May 13, 2002, Chesterfield Financial announced its intent to
repurchase up to 207,200 shares of its common stock. As of June 30, 2002,
Chesterfield Financial had repurchased 65,000 shares at an average cost of
$17.95 per share. During the year ended June 30, 2002, Chesterfield Financial
repurchased a total of 237,189 shares of its common stock at a cost of $4.0
million, an average price of $16.90 per share. We designated 172,189 shares of
treasury stock, with an average cost of $16.50 per share, for issuance under the
Recognition and Retention Plan. At June 30, 2002, there were 4,088,495 common
shares outstanding with a book value of $18.77 per share.
27
Comparison of Operating Results for the Years Ended June 30, 2002 and 2001
General. Net income for the year ended June 30, 2002 was $3.3 million,
or $0.83 diluted earnings per share, compared to net income of $2.7 million for
the year ended June 30, 2001. Return on average assets for 2002 was 0.91%,
compared to 0.81% for 2001. The improved return on assets in 2002 was primarily
due to investment of proceeds from the mutual-to-stock conversion, while the
related increase in average equity resulted in a decrease in return on equity to
4.26% for 2002, compared to 5.76% for last year.
Total Interest Income. Total interest income decreased by $1.4 million,
or 6.7%, to $19.0 million for the year ended June 30, 2002, from $20.4 million
for the year ended June 30, 2001. An increase in average interest earning assets
of $27.7 million resulted in a volume increase of $1.6 million in interest
income that was offset by a rate induced decrease of $3.0 million in interest
income, netting a decrease in yield on interest earning assets of 91 basis
points, to 5.50% for 2002, from 6.41% for the prior year. The decrease in
interest income was the result of the general decline in market interest rates
for investments and loans and management's decision to reinvest funds from
recently called or matured securities on a short-term basis.
Interest Expense. Interest expense on deposits decreased by $2.9
million, or 26.4%, to $8.1 million for the year ended June 30, 2002, from $11.0
million for 2001. The decrease was primarily attributable to the general decline
in market interest rates for insured deposits and to management's repricing
decisions, with the average cost of funds decreasing 1.04%, to 2.98% for the
current year, from 4.02% for last year. A $1.4 million net decrease in
interest-bearing deposits, and a change in the deposit mix favoring time
deposits, resulted in a $220,000 volume increase in interest expense, while
reduced rates accounted for a $3.1 million decrease in interest expense. The
average cost of passbook accounts dropped 20 basis points, money market accounts
54 basis points, NOW accounts 56 basis points, and time deposits 157 basis
points.
Net Interest Income. Net interest income increased by $1.5 million, or
16.3%, to $10.9 million for the year ended June 30, 2002 from $9.4 million for
the same period in 2001. The net interest rate spread and the net interest
margin increased during the period as the result of the drop in market interest
rates, and helped by the increase in interest-earning assets resulting from
investment of the proceeds from the mutual-to-stock conversion. The net interest
rate spread increased to 2.52% from 2.39% while the net interest margin
increased to 3.16% from 2.95%. The ratio of average interest-earning assets to
average interest-bearing liabilities improved to 127.3% for the year ended June
30, 2002, from 116.6% for the same period last year.
Provision for Loan Losses. Management made no additional provision for
loan losses for the year ended June 30, 2002, compared to a $72,000 provision
for the year ended June 30, 2001. The provision for 2001 was partially
attributable to credit quality concerns associated with certain community
development loans and charge-offs recorded during the year. (See Business -
Asset Quality.) The credit quality concerns associated with these loans related
to the borrower's ability to successfully redevelop certain parcels of land
located near Chesterfield Federal's main office.
Management estimates the probable collectibility of these loans on an
ongoing basis based on information made available by the borrower. A development
plan for certain parcels was terminated in 2001, and management recorded
provisions for the loans based on alternative uses of the land because of the
continued uncertainty associated with the borrower's ability to successfully
redevelop the parcels. During the current year, four of the community
development loans were put on non-accrual status due to failure to make timely
payments. All of the related community development loans are reported as
"substandard" for regulatory purposes. After a review of the present
collectibility of these loans, management determined that no additional
provision for loan loss was required.
The allowance for loan losses decreased to 0.93% of loans outstanding
at June 30, 2002 from 0.98% at June 30, 2001. The amount of the allowance is
based on estimates and the ultimate losses may vary from the estimates. The
allowance for loan losses as of June 30, 2002 is maintained at a level that
represents management's best estimate of probable losses in the loan portfolio.
Non-interest Income. Non-interest income increased $197,000, or 8.6%,
to $2.5 million for the year ended June 30, 2002, from $2.3 million for the same
period in 2001. The increase was primarily attributable to insurance commissions
at Chesterfield Insurance. Insurance commissions increased $192,000, or 10.3%,
to $2.1 million in 2002, compared to $1.9 million in 2001.
28
Non-interest Expense. Total non-interest expenses increased $867,000,
or 11.5%, to $8.4 million for the year ended June 30, 2002, from $7.5 million
for the year ended June 30, 2001. The primary causes for the increase were a
$515,000, or 11.8% increase in salaries and employee benefits, which included a
$346,000 expense for Chesterfield Federal's Recognition and Retention Plan, and
a $214,000, or 14.9% increase in other expenses, which included a $134,000
increase in administrative expenses attributable to the newly formed holding
company. Equipment expense increased $116,000, or 23.0%, to $621,000 in 2002,
compared to $505,000 in 2001, primarily because of a $90,000 change in estimate
of the useful life of computers. The computers are being replaced earlier than
expected because they will not support updated software being provided by
Chesterfield Federal's data processing service. Our annualized ratio of
non-interest expense to average assets increased to 2.35% in 2002, compared to
2.29% in 2001, while our efficiency ratio improved to 62.6% for the current
year, from 64.4% for the same period last year.
During the years ended June 30, 2002 and 2001, Chesterfield Insurance
incurred operating expenses of $2.1 million and $1.9 million, respectively. The
increase was primarily due to a $161,000, or 15.0% increase in salaries and
employee benefits, which included a $24,000 expense for the Recognition and
Retention Plan (both included in the consolidated numbers in the last
paragraph). Chesterfield Insurance reported (unconsolidated) net income of
$10,200 for the year ended June 30, 2002, and net losses of $5,500 and $44,000
for the years ended June 30, 2001 and 2000, respectively.
Provision for Income Taxes. The provision for income taxes of $1.8
million for the year ended June 30, 2002, resulted in an effective tax rate of
35.2%, compared to a provision of $1.4 million and a 34.7% effective tax rate
for the same period last year.
Comparison of Operating Results for the Years Ended June 30, 2001 and 2000
General. Net income increased $338,000, or 14.5%, to $2.7 million for
the fiscal year ended June 30, 2001 from $2.3 million for the fiscal year ended
June 30, 2000. The increase resulted from increases in net interest income,
partially offset by an increase in noninterest expenses.
Total Interest Income. Total interest income increased by $855,000, or
4.4%, to $20.4 million for the fiscal year ended June 30, 2001 from $19.6
million for the fiscal year ended June 30, 2000. The increase resulted primarily
from increases in interest on securities, partially offset by a decrease in
interest on interest-bearing deposits in other financial institutions.
Interest and fees on loans decreased $75,000, or 0.6%, to $11.8 million
for the fiscal year ended June 30, 2001 from $11.9 million for the fiscal year
ended June 30, 2000. The decrease resulted from a $1.7 million, or 1.1%,
decrease in the average balance of loans to $156.8 million from $158.5 million.
This decrease in volume was partially offset by a 3 basis point increase in the
average yield on the loan portfolio to 7.55% from 7.52%.
Interest on securities increased $1.5 million, or 41.3%, to $5.0
million for the fiscal year ended June 30, 2001 from $3.5 million for the fiscal
year ended June 30, 2000. The increase resulted from a $24.6 million, or 39.5%,
increase in the average balance of securities to $86.9 million from $62.2
million and an increase in the average yield on the securities portfolio to
5.71% from 5.64%. The volume increase was attributable to the investment of the
offering proceeds.
Interest on interest-bearing deposits decreased $509,000, or 13.4%, to
$3.3 million for the fiscal year ended June 30, 2001 from $3.8 million for the
fiscal year ended June 30, 2000. The decrease resulted from a 92 basis point
decline in the yield on interest-bearing deposits to 4.69% from 5.61%. The
decrease in yield resulted from a general decrease in shorter-term market rates
of interest. The rate decrease was partially offset by a $2.4 million, or 3.6%,
increase in the average balance of interest-bearing deposits to $70.1 million
from $67.7 million.
Interest Expense. Interest expense on deposits increased $259,000, or
2.4%, to $11.0 million for the fiscal year ended June 30, 2001 from $10.7
million for the fiscal year ended June 30, 2000. The overall increase in
interest expense was primarily attributable to time deposits. Interest expense
on time deposits increased $265,000, or 3.1%, to $8.9 million from $8.6 million
primarily as a result of the rates paid on time deposits increasing 13 basis
points to 5.16% from 5.03%. The average balance of time deposits remained
relatively constant during fiscal 2001, increasing $794,000, or 0.5%, to $172.3
million from $171.5 million.
29
Net Interest Income. Net interest income increased $596,000, or 6.8%,
to $9.4 million for the fiscal year ended June 30, 2001 from $8.8 million for
the fiscal year ended June 30, 2000. The net interest rate spread and the net
interest margin decreased during the period. The net interest spread decreased
17 basis points to 2.39% from 2.56% while the net interest margin decreased 6
basis points to 2.95% from 3.01%.
Provision for Loan Losses. Management made provisions of $72,000 and
$83,000 for the fiscal years ended June 30, 2001 and 2000, respectively. The
provision for both years was partially attributable to credit quality concerns
associated with certain community development loans and charge-offs recorded
during the year. The credit quality concerns associated with these loans relate
to the borrower's ability to successfully redevelop certain parcels of land
located near Chesterfield Federal's main office. Management estimates the
probable collectibility of these loans on an ongoing basis based on information
made available by the borrower. A development plan for certain parcels was
terminated and management recorded provisions for the loans based on alternative
uses of the land because of the continued uncertainty associated with the
borrower's ability to successfully redevelop the parcels.
The allowance for loan losses increased to 0.98% of loans outstanding
at June 30, 2001 from 0.96% at June 30, 2000. The amount of the allowance is
based on estimates and the ultimate losses may vary from the estimates. The
allowance for loan losses as of June 30, 2001 is maintained at a level that
represents management's best estimate of probable losses in the loan portfolio.
Noninterest Income. Total noninterest income increased $138,000, or
6.4%, to $2.3 million for the fiscal year ended June 30, 2001 from $2.1 million
for the fiscal year ended June 30, 2000. The increase was primarily attributable
to insurance commissions at Chesterfield Federal's insurance subsidiary.
Insurance commissions increased $152,000, or 8.9%, to $1.9 million for the
fiscal year ended June 30, 2001 from $1.7 million for the fiscal year ended June
30, 2000.
Noninterest Expense. Total noninterest expense increased $310,000, or
4.3%, to $7.5 million for the fiscal year ended June 30, 2001 from $7.2 million
for the fiscal year ended June 30, 2000.
Salaries and employee benefits represented 58.0% and 57.5% of total
noninterest expense for the fiscal years ended June 30, 2001 and 2000. Total
salaries and employee benefits increased $221,000, or 5.3%, to $4.4 million for
the fiscal year ended June 30, 2001 from $4.1 million for the fiscal ended June
30, 2000. The increase is primarily attributable to higher salary expenses
resulting from general pay increases and an increase in retirement and other
benefit expenses. Retirement and other benefit expenses increased $95,000;
representing approximately 43% of the $221,000 total salaries and benefit
increase for the fiscal year. The increase in retirement and other benefit
expenses was partially attributable to the Employee Stock Ownership Plan
established in conjunction with the conversion. During 2001, 15,091 shares of
common stock with an average fair value of $14.41 per share were committed to be
released, resulting in Employee Stock Ownership Plan compensation expense of
$217,464. As of June 30, 2001, the ESOP held 344,379 shares of common stock of
which 15,091 shares were allocated to participants.
Occupancy expense increased $56,000, or 7.8%, to $772,000 for the
fiscal year ended June 30, 2001 from $716,000 for the fiscal year ended June 30,
2000. The increase is primarily attributable to increased building and premises
maintenance expenses incurred throughout the fiscal year.
Federal deposit insurance expense decreased $50,000, or 29.1%, to
$121,000 for the fiscal year ended June 30, 2001 from $171,000 for the fiscal
year ended June 30, 2000. The reduction in federal deposit insurance premium
expense resulted primarily from decreases in insurance rates.
Provision for Income Taxes. The provision for income taxes increased to
$1.4 million, or 34.7% of income before income taxes for the fiscal year ended
June 30, 2001, from $1.3 million, or 36.1% for the fiscal year ended June 30,
2000.
Liquidity and Capital Resources
Chesterfield Federal'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
30
investments as opportunities arise. Chesterfield Federal'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.
At June 30, 2002, Chesterfield Federal had loan commitments of $3.4
million and unused lines of credit of $19.9 million. Chesterfield Federal
believes it has adequate resources to fund loan commitments as they arise. If
Chesterfield Federal requires funds beyond its internal funding capabilities,
advances from the Federal Home Loan Bank of Chicago could be made available. At
June 30, 2002, approximately $162.3 million of time deposits were scheduled to
mature within one year, and we expect that a portion of these time deposits will
not be renewed upon maturity, which would reduce our liquidity. If additional
liquidity is needed, Chesterfield Federal is permitted to sell its existing
loans in the secondary market. However, Chesterfield Federal has not originated
any loans for sale in the secondary market, and is restricted from selling loans
to some potential purchasers because Chesterfield Federal's loan documents
contain provisions that are more favorable to borrowers than permitted by the
seller/servicer guidelines of entities like Fannie Mae or Freddie Mac.
Chesterfield Financial does not engage in any significant business
activity other than owning the common stock of Chesterfield Federal.
Chesterfield Financial's primary source of funds is income from its investments
and principal and interest payments received with respect to the employee stock
ownership plan loan. Future dividends from Chesterfield Federal will also be a
source of funds for Chesterfield Financial; however, as a stock savings and loan
association, Chesterfield Federal is subject to regulatory limitations on its
ability to pay cash dividends.
Recent Accounting Pronouncements
In July 2000, the Financial Accounting Standards Board (FASB) issued
two new accounting standards, Statement of Financial Accounting Standards (SFAS)
No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 was issued to improve the transparency of the
accounting and reporting for business combinations by requiring that all
business combinations initiated after June 30, 2001 be accounted for under the
purchase method of accounting. Since this accounting standard applies to
business combinations initiated after June 30, 2001, it will have no effect on
the Corporation's financial statements unless the Corporation enters into a
business combination transaction.
SFAS No. 142 requires that goodwill no longer be amortized to earnings,
but instead be reviewed for impairment. This change provides investors with
greater transparency regarding the economic value of goodwill and its impact on
earnings. The amortization of goodwill ceases upon the adoption of SFAS No. 142,
which will be July 1, 2002 for the Corporation. The Corporation has
approximately $450,000 of unamortized goodwill that it will discontinue
amortizing. The adoption of this standard on July 1, 2002, is expected to result
in lower amortization expense of approximately $72,000. The Corporation
performed an analysis of goodwill for impairment as of June 30, 2002, and
determined that the goodwill was not impaired.
In June 2001, the FASB issued SFAS No. 143, "Accounting For Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS No. 143 is effective for
financial statements issued for fiscal years beginning after June 15, 2002. This
pronouncement will not have a material effect on the Corporation.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which replaced SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." SFAS No. 144 established a single accounting model, based on
the framework established in SFAS No. 121, for long-lived assets to be disposed
of by sale. SFAS No. 144 also resolved significant implementation issues related
to SFAS No. 121. The provisions of SFAS No. 144 are effective for financial
statements issued for fiscal years beginning after December 15, 2001. This
pronouncement will not have a material effect on the Corporation.
The FASB recently issued SFAS No. 145 and No. 146. SFAS No. 145 applies
for years beginning after May 14, 2002 and may be adopted sooner. SFAS No. 145
covers extinguishments of debt and leases and includes some minor technical
corrections. Under previous accounting guidance, gains or losses from
extinguishments of debt were always treated as extraordinary items. Under SFAS
No. 145, they will no longer be considered extraordinary, except under very
limited conditions. Upon adoption of SFAS No. 145, any prior gains and losses
31
from extinguishments of debt must be reclassified as ordinary gains and losses.
Under SFAS No. 145, if a capital lease is modified to become an operating lease,
it will be accounted for as a sale-leaseback, by following the accounting
guidance of SFAS No. 98, instead of being accounted for as a sale-leaseback, by
following the accounting guidance of SFAS No. 98, instead of being accounted for
as a new lease.
SFAS No. 146 covers accounting for costs associated with exit or
long-lived asset disposal activities, such as restructurings, consolidation or
closing of facilities, lease termination costs, or employee relocation or
severance costs. SFAS No. 146 replaces Emerging Issues Task Force (EITF) 94-3,
and is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002 and may be adopted sooner. A company may not restate its
previously issued financial statements. SFAS No. 146 requires exit or long-lived
asset disposal costs to be recognized as an expense when the liability is
incurred and can be measured at fair value, rather than at the date of making a
commitment to an exit or disposal plan. Management does not expect the effects
of the future adoptions of SFAS No. 145 and SFAS No. 146 to be material to the
Corporation's consolidated financial statements.
Impact of Inflation and Changing Prices
The consolidated financial statements and related notes of Chesterfield
Financial have been prepared in accordance with accounting principles generally
accepted in the United States of America ("GAAP"). GAAP generally requires the
measurement of financial position and operating results in terms of historical
dollars without consideration for changes in the relative purchasing power of
money over time due to inflation. The impact of inflation is reflected in the
increased cost of our operations. Unlike industrial companies, our assets and
liabilities are primarily monetary in nature. As a result, changes in market
interest rates have a greater impact on performance than the effects of
inflation.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
- ----------------------------------------------------------------------
General. As with other financial institutions, our most significant
form of market risk is interest rate risk. Our assets, consisting primarily of
mortgage loans, have longer maturities than our liabilities, consisting
primarily of deposits. As a result, a principal part of our business strategy is
to manage interest rate risk and reduce the exposure of our net interest income
to changes in market interest rates. Accordingly, Chesterfield Federal's Board
of Directors has established an Asset/Liability Management Committee which is
responsible for evaluating the interest rate risk inherent in Chesterfield
Federal's assets and liabilities, determining the level of risk that is
appropriate given its business strategy, operating environment, capital,
liquidity and performance objectives, and managing this risk consistent with the
guidelines approved by the Board of Directors. The Asset/Liability Management
Committee consists of senior management operating under a policy adopted by the
Board of Directors and meets at least quarterly to review Chesterfield Federal's
asset/liability policies and interest rate risk position.
In recent years, management has sought to reduce our interest rate risk
by maintaining high levels of liquidity, and emphasizing the origination of
shorter-term (seven, 10 or 15 year) residential mortgage loans. In addition,
when a borrower refinances a loan during a period of decreasing interest rates,
management actively seeks to reduce the term of the refinanced loan.
Net Portfolio Value. The Office of Thrift Supervision requires the
computation of amounts by which the net present value of an institution's cash
flow from assets, liabilities and off balance sheet items (the institution's net
portfolio value or "NPV") would change in the event of a range of assumed
changes in market interest rates. The Office of Thrift Supervision 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
NPV. The Office of Thrift Supervision simulation model uses a discounted cash
flow analysis and an option-based pricing approach to measuring the interest
rate sensitivity of NPV. The Office of Thrift Supervision model estimates the
economic 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.
A basis point equals one-hundredth of one percentage point, and 100 basis points
equals one percentage point. A change in interest rates to 8% from 7% would
mean, for example, a 100 basis point increase in the "Change in Interest Rates"
column below. The Office of Thrift Supervision provides Chesterfield Federal the
results of the interest rate sensitivity model, which is based on information
provided by Chesterfield Federal, to estimate the sensitivity of NPV.
32
The table below sets forth, as of June 30, 2002, the estimated changes
in Chesterfield Federal's NPV that would result from the designated
instantaneous changes in the U.S. Treasury yield curve.
Net Portfolio Value as a Percent
Net Portfolio Value of Present Value of Assets
------------------------------------- --------------------------------
Change in
Interest Rates Estimated Amount of Percent
(basis points) NPV Change Percent NPV Ratio Change
-------------- --------- --------- ------- --------- ------
(Dollars in Thousands)
+300 $ 59,921 $ (15,796) -21% 16.48% -3.39%
+200 65,360 (10,357) -14 17.69 -2.18
+100 70,797 (4,920) -6 18.85 -1.02
0 75,717 -- -- 19.87 --
-100 77,915 2,198 +3 20.29 +0.42
Due to the abnormally low prevailing interest rate environment, the OTS
report did not provide NPV estimates for -200 and -300 basis points.
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurement. Modeling changes in NPV requires making certain
assumptions that may or may not reflect the manner in which actual yields and
costs respond to changes in market interest rates. In this regard, the NPV table
presented assumes that the composition of Chesterfield Federal's interest
sensitive assets and liabilities existing at the beginning of a period remain
constant over the period being measured and assumes that a particular change in
interest rates is reflected uniformly across the yield curve regardless of the
duration or repricing of specific assets and liabilities. Accordingly, although
the NPV table provides an indication of Chesterfield Federal's interest rate
risk exposure at a particular point in time, such measurements are not intended
to and do not provide a precise forecast of the effect of changes in market
interest rates on its net interest income, and will differ from actual results.
33
ITEM 8. Financial Statements and Supplementary Data
- -------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Chesterfield Financial Corp.
Chicago, Illinois
We have audited the consolidated balance sheets of Chesterfield
Financial Corp. (the Corporation) as of June 30, 2002 and 2001, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended June 30, 2002. These financial statements
are the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Chesterfield
Financial Corp. as of June 30, 2002 and 2001, and the results of its operations
and its cash flows for each of the three years in the period ended June 30, 2002
in conformity with accounting principles generally accepted in the United States
of America.
/s/ Crowe, Chizek and Company LLP
---------------------------------
Crowe, Chizek and Company LLP
Oak Brook, Illinois
August 9, 2002
34
CHESTERFIELD FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
June 30, 2002 and 2001
- -------------------------------------------------------------------------------
2002 2001
---- ----
ASSETS
Cash and due from financial institutions $ 7,558,382 $ 4,605,214
Interest-bearing deposits 83,367,263 60,816,175
Federal funds sold 3,800,000 1,500,000
------------- -------------
Cash and cash equivalents 94,725,645 66,921,389
Securities available-for-sale 17,373,760 13,405,076
Securities held-to-maturity (fair value:
2002 - $58,298,527; 2001 - $95,592,595) 57,482,670 94,846,359
Loans, net 169,881,473 161,203,145
Federal Home Loan Bank stock 17,342,100 1,732,900
Premises and equipment, net 2,529,244 2,815,796
Accrued interest receivable and other assets 4,005,204 3,385,542
------------- -------------
Total assets $ 363,340,096 $ 344,310,207
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 278,125,407 $ 260,657,962
Advance payments by borrowers for
taxes and insurance 2,622,335 2,778,305
Accrued expenses and other liabilities 5,851,221 4,321,380
------------- -------------
Total liabilities 286,598,963 267,757,647
Commitments and contingent liabilities -- --
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; 2002 - 4,088,495 shares outstanding,
2001 - 4,304,738 shares outstanding 43,047 43,047
Additional paid-in capital 42,153,300 41,999,352
Retained earnings 41,084,408 37,826,611
Unearned ESOP shares (3,055,561) (3,292,878)
Unearned RRP shares (2,496,015) --
Treasury stock, at cost, 65,000 shares (1,166,625) --
Accumulated other comprehensive income (loss) 178,579 (23,572)
------------- -------------
Total shareholders' equity 76,741,133 76,552,560
------------- -------------
Total liabilities and shareholders' equity $ 363,340,096 $ 344,310,207
============= =============
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
35
CONSOLIDATED STATEMENTS OF INCOME
Years ended June 30, 2002, 2001, and 2000
2002 2001 2000
---- ---- ----
Interest and dividend income
Loans, including fees $11,793,855 $11,842,137 $11,916,860
Securities 4,720,656 4,962,409 3,511,688
Interest-bearing deposits 1,627,850 3,286,374 3,795,864
Other 904,682 327,636 338,743
----------- ----------- -----------
Total interest income 19,047,043 20,418,556 19,563,155
Interest expense on deposits 8,102,099 11,005,252 10,746,121
----------- ----------- -----------
Net interest income 10,944,944 9,413,304 8,817,034
Provision for loan losses -- 72,000 83,000
----------- ----------- -----------
Net interest income after provision
for loan losses 10,944,944 9,341,304 8,734,034
Noninterest income
Insurance commissions 2,049,264 1,857,508 1,705,376
Service charges on deposit accounts 288,140 292,611 280,853
Other 138,078 127,736 153,814
----------- ----------- -----------
2,475,482 2,277,855 2,140,043
Noninterest expense
Salaries and employee benefits 4,885,614 4,370,506 4,149,079
Occupancy 775,381 772,274 716,088
Equipment 621,071 504,990 473,118
Data processing 336,215 324,245 310,433
Federal deposit insurance 127,699 120,946 170,613
Other 1,650,414 1,436,403 1,400,368
----------- ----------- -----------
8,396,394 7,529,364 7,219,699
----------- ----------- -----------
Income before income taxes 5,024,032 4,089,795 3,654,378
Income tax expense 1,766,235 1,418,205 1,320,901
----------- ----------- -----------
Net income $ 3,257,797 $ 2,671,590 $2,333,477
============ =========== ==========
Earnings per share
Basic $ 0.84 $ 0.10 NA
Diluted 0.83 0.10 NA
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
36
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended June 30, 2002, 2001, and 2000
- ---------------------------------------------------------------------------------------------------------------------------------
Additional Unearned Unearned
Common Paid-In Retained ESOP RRP Treasury
Stock Capital Earnings Shares Shares Stock
---------- ----------- ----------- ----------- ----------- -----------
Balance at June 30, 1999 $ -- $ -- $32,821,544 $ -- $ -- $ --
Net income -- -- 2,333,477 -- -- --
Balance at June 30, 2000 -- -- 35,155,021 -- -- --
Issuance of common stock,
net of expenses 43,047 41,932,800 -- (3,443,790) -- --
ESOP shares earned -- 66,552 -- 150,912 -- --
Comprehensive income
Net income -- -- 2,671,590 -- -- --
Unrealized loss on
securities available-for-sale,
net of reclassification
and tax effects -- -- -- -- -- --
Total comprehensive
income 2,648,018
---------- ----------- ----------- ----------- ----------- -----------
Balance at June 30, 2001 43,047 41,999,352 37,826,611 (3,292,878) -- --
Purchases of treasury stock -- -- -- -- -- (4,008,314)
ESOP shares earned -- 153,948 -- 237,317 -- --
Grant of RRP shares -- -- -- -- (2,841,689) 2,841,689
RRP shares vested -- -- -- -- 345,674 --
Comprehensive income
Net income -- -- 3,257,797 -- -- --
Unrealized gain on
securities available-for-sale,
net of reclassification
and tax effects -- -- -- -- -- --
Total comprehensive
income
---------- ----------- ----------- ----------- ----------- -----------
Balance at June 30, 2002 $ 43,047 $42,153,300 $41,084,408 $(3,055,561) $(2,496,015) $(1,166,625)
========== =========== =========== =========== =========== ===========
- -----------------------------------------------------------------------
Accumulated
Other
Comprehensive
Income (Loss) Total
------------- ------------
Balance at June 30, 1999 $ -- $ 32,821,544
Net income -- 2,333,477
Balance at June 30, 2000 -- 35,155,021
Issuance of common stock,
net of expenses -- 38,532,057
ESOP shares earned -- 217,464
Comprehensive income
Net income -- 2,671,590
Unrealized loss on
securities available-for-sale,
net of reclassification
and tax effects (23,572) (23,572)
Total comprehensive ------------
income
--------- ------------
Balance at June 30, 2001 (23,572) 76,552,560
Purchases of treasury stock -- (4,008,314)
ESOP shares earned -- 391,265
Grant of RRP shares -- --
RRP shares vested -- 345,674
Comprehensive income
Net income -- 3,257,797
Unrealized gain on
securities available-for-sale,
net of reclassification
and tax effects 202,151 202,151
Total comprehensive ------------
income 3,459,948
--------- ------------
Balance at June 30, 2002 $ 178,579 $ 76,741,133
========= ============
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
37
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, 2002, 2001, and 2000
- ---------------------------------------------------------------------------------------------------------------
2002 2001 2000
---- ---- ----
Cash flows from operating activities
Net income $ 3,257,797 $ 2,671,590 $ 2,333,477
Adjustments to reconcile net income to net
cash provided by operating activities
Provision for loan losses -- 72,000 83,000
Depreciation and amortization 531,345 425,093 451,325
Deferred income tax benefit (260,529) (133,714) (391,908)
FHLB stock dividend (609,200) (123,100) --
ESOP compensation expense 391,265 217,464 --
RRP compensation expense 345,674 -- --
Net amortization of securities (3,865) (2,636) (3,869)
Amortization of intangibles 80,082 77,473 104,548
Net change in:
Deferred loan origination fees 24,430 (80,149) (108,611)
Accrued interest receivable and other assets (439,215) (134,448) 35,976
Accrued expenses and other liabilities 1,425,703 181,674 (176,988)
------------ ------------ ------------
Net cash provided by operating activities 4,743,487 3,171,247 2,326,950
Cash flows from investing activities
Activity in held-to-maturity securities:
Maturities, calls, and prepayments 82,365,155 53,861,339 2,887,970
Purchases (45,000,000) (75,018,312) (25,000,000)
Activity in available-for-sale securities:
Maturities, calls, and prepayments 1,361,387 -- --
Purchases (5,021,383) (13,440,773) --
Purchase of Federal Home Loan Bank stock (15,000,000) -- (69,500)
Loan originations and payments, net (8,702,758) (3,918,740) (333,508)
Additions to premises and equipment (244,793) (471,150) (497,821)
------------ ------------ ------------
Net cash provided by (used in) investing activities 9,757,608 (38,987,636) (23,012,859)
Cash flows from financing activities
Net change in deposits 17,467,445 (2,692,026) 4,219,472
Net change in advance payments by borrowers
for taxes and insurance (155,970) (56,956) (3,375)
Net proceeds from stock issuance -- 38,532,057 --
Purchase of treasury stock, at cost (4,008,314) -- --
------------ ------------ ------------
Net cash provided by financing activities 13,303,161 35,783,075 4,216,097
------------ ------------ ------------
Net change in cash and cash equivalents 27,804,256 (33,314) (16,469,812)
Beginning cash and cash equivalents 66,921,389 66,954,703 83,424,515
------------ ------------ ------------
Ending cash and cash equivalents $ 94,725,645 $ 66,921,389 $ 66,954,703
============ ============ ============
Supplemental cash flow information:
Interest paid $ 8,249,446 $ 11,057,930 $ 10,683,738
Income taxes paid 1,668,000 1,453,000 1,740,000
Supplemental non-cash disclosures:
Due to/from broker for securities transactions $ -- $ -- $ (5,000,000)
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
38
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 1 - PLAN OF CONVERSION
On October 17, 2000, the Board of Directors of Chesterfield Federal Savings and
Loan Association of Chicago (the Association) adopted a Plan of Conversion to
convert from a federal mutual savings bank to a federal stock savings bank with
the concurrent formation of a holding company. On May 2, 2001, Chesterfield
Financial Corp. (the Corporation) sold 4,304,738 shares of common stock at $10
per share and received proceeds of $38,530,000, net of conversion expenses of
$1,070,000 and ESOP shares. Approximately 50% of the net proceeds were used by
the Corporation to acquire all of the capital stock of the Association.
At the time of conversion, the Association established a liquidation account in
an amount equal to its total net worth as of the latest statement of financial
condition appearing in the final prospectus. The liquidation account will be
maintained for the benefit of eligible depositors who continue to maintain their
accounts at the Association after the conversion. The liquidation account will
be reduced annually to the extent that eligible depositors have reduced their
qualifying deposits. Subsequent increases will not restore an eligible account
holder's interest in the liquidation account. In the event of a complete
liquidation, each eligible depositor will be entitled to receive a distribution
from the liquidation account in an amount proportionate to the current adjusted
qualifying balances for accounts then held. The liquidation account balance is
not available for payment of dividends.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Principles of Consolidation: The consolidated financial
- ----------------------------------------------------
statements include the Corporation and its wholly owned subsidiary, the
Association. Included in the totals for the Association are the balances from
its wholly owned subsidiary, Chesterfield Insurance Services, LLC (CIS). All
significant intercompany transactions and balances are eliminated in
consolidation.
The only business of the Corporation is the ownership of the Association. The
Association provides financial services through its three full-service offices
located on the southwest side of Chicago, Palos Hills, and Frankfort, Illinois.
The Association is principally engaged in the business of attracting savings
deposits from the general public and investing these funds to originate
one-to-four-family residential real estate loans. Other financial instruments
that potentially represent concentrations of credit risk include deposit
accounts in other financial institutions. CIS sells commercial and personal
lines of insurance, including mortgage, life, and disability insurance.
While the Corporation's principal decision-makers monitor the revenue streams of
the various products and services, operations are managed and financial
performances are evaluated on a
- --------------------------------------------------------------------------------
(Continued)
39
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
corporate wide basis. Accordingly, all of the Corporation's operations are
considered by management to be aggregated in one reportable operating segment.
Use of Estimates: In preparing the consolidated financial statements in
- -----------------
conformity with accounting principles generally accepted in the United States of
America, management makes estimates and assumptions based on available
information. These estimates and assumptions affect the amounts reported in the
consolidated financial statements and the disclosures provided. Actual results
could differ from the current estimates. The allowance for loan losses and fair
values of financial instruments are particularly subject to change.
Cash Flows: Cash and cash equivalents include cash, deposits with other
- -----------
financial institutions under 90 days, and federal funds sold. Net cash flows are
reported for loan and deposit transactions.
Securities: Securities are classified as held-to-maturity and carried at
- -----------
amortized cost when management has the positive intent and ability to hold them
to maturity. Accordingly, they are stated at cost, adjusted for amortization of
premiums and accretion of discounts. All other securities are classified as
available-for-sale since the Corporation may decide to sell those securities in
response to changes in market interest rates, liquidity needs, changes in yields
or alternative investments, and for other reasons. Securities available-for-sale
are carried at fair value, with unrealized gains and losses reported in other
comprehensive income. Realized gains and losses on disposition are based on the
net proceeds and the adjusted carrying amounts of the securities sold using the
specific identification method. Other securities such as Federal Home Loan Bank
stock are carried at cost.
Loans: Loans that management has the intent and ability to hold until maturity
- ------
or payoff are reported at the principal balance outstanding, net of deferred
loan fees and costs and an allowance for loan losses. Loan origination fees, net
of loan origination costs, are deferred and recognized as interest income over
the contractual life of the loan using the interest method.
Loans are placed on nonaccrual or charged off if collection of principal and
interest is doubtful. Interest accrued but not collected is reversed against
interest income. Interest received is recognized on the cash basis or cost
recovery method, until qualifying for return to accrual status. Accrual is
resumed when all contractually due payments are brought current and future
payments are reasonably assured.
Allowance for Loan Losses: The allowance for loan losses is established as
- --------------------------
losses are estimated to have occurred through a provision for loan losses
charged to earnings. Loan losses are charged against the allowance when
management believes the uncollectibility of a loan balance is confirmed.
Subsequent recoveries, if any, are credited to the allowance. The allowance for
- --------------------------------------------------------------------------------
(Continued)
40
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
loan losses is evaluated quarterly based on management's periodic review of loan
collectibility in light of historical experience, the nature and volume of the
loan portfolio, peer group information, adverse situations that may affect the
borrower's ability to repay, estimated value of any underlying collateral, and
prevailing economic conditions. This evaluation is inherently subjective as it
requires estimates that are susceptible to significant revision, as more
information becomes available or as future events change.
A loan is impaired when full payment under the loan terms is not expected.
Impairment is evaluated in total for smaller-balance loans of similar nature
such as residential mortgage and consumer loans and on an individual loan basis
for other loans. If a loan is impaired, a portion of the allowance is allocated
so that the loan is reported, net, at the present value of estimated future cash
flows using the loan's existing rate or at the fair value of collateral if
repayment is expected solely from the collateral. The Corporation did not have
any loans that were deemed impaired as of or during the years ended June 30,
2002 and 2001.
Premises and Equipment: Land is carried at cost. Premises and equipment are
- -----------------------
stated at cost less accumulated depreciation. Depreciation is computed over the
assets' useful lives, ranging from five to forty years, using the straight-line
method. The cost of leasehold improvements is amortized using the straight-line
method over the term of the lease.
Intangibles: Purchased intangibles, primarily goodwill and a non-compete
- ------------
agreement related to CIS acquisitions, are recorded at cost and amortized over
the estimated life. Goodwill amortization is straight-line over ten years, and
the non-compete agreement is straight-line over seven years.
Long-Term Assets: Premises and equipment and other long-term assets are reviewed
- -----------------
for impairment when events indicate that their carrying amounts may not be
recoverable from future undiscounted cash flows. If impaired, the assets are
recorded at discounted amounts.
Income Taxes: Income tax expense is the total of the current year income tax due
- -------------
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax amounts for the temporary
differences between carrying amounts and tax bases of assets and liabilities,
computed using enacted tax rates. A valuation allowance, if needed, reduces
deferred tax assets to the amount expected to be realized.
Employee Stock Ownership Plan: The cost of shares issued to the ESOP but not yet
- ------------------------------
allocated to participants is presented in the consolidated balance sheet as a
reduction of shareholders' equity. Compensation expense is recorded based on the
market price of the shares as they are committed to be released for allocation
to participant accounts. The difference between the market price and the cost of
the shares committed to be released is recorded as an adjustment to paid-in
- --------------------------------------------------------------------------------
(Continued)
41
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
capital. Dividends on allocated ESOP shares reduce retained earnings; dividends
on unallocated ESOP shares reduce debt. Shares are considered outstanding in the
earnings per share calculations as they are committed to be released,
unallocated shares are not considered outstanding.
Financial Instruments: Financial instruments include off-balance-sheet credit
- ----------------------
instruments, such as commitments to make loans and unused lines of credit,
issued to meet customer-financing needs. The face amount for these items
represents the exposure to loss, before considering customer collateral or
ability to repay. Such financial instruments are recorded when they are funded.
Fair Value of Financial Instruments: Fair values of financial instruments are
- ------------------------------------
estimated using relevant market information and other assumptions, as more fully
disclosed in a separate note. Fair value estimates involve uncertainties and
matters of significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates.
Loss Contingencies: Loss contingencies, including claims and legal actions
- -------------------
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there now are such matters that will have
a material effect on the consolidated financial statements.
Restrictions on Cash: The Corporation was required to have $504,000 and $498,000
- ---------------------
of cash on hand to meet regulatory reserve requirements at June 30, 2002 and
2001.
Comprehensive Income: Comprehensive income consists of net income and other
- ---------------------
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available-for-sale, net of tax, which is also recognized as
a separate component of equity.
Earnings Per Share: The amount reported as earnings per common share for the
- -------------------
year ended June 30, 2001 reflects the earnings since May 2, 2001 available to
common shareholders divided by the weighted average number of common shares
outstanding since that date. Basic earnings per share of common stock has been
determined by dividing net income for each period by the weighted average number
of shares of common stock outstanding. Diluted earnings per share has been
determined by dividing net income for each period by the weighted average number
of shares of common stock outstanding and additional shares issuable under the
stock option and recognition and retention plans. Common stock issuable under
stock options assumes the exercise of stock options and the use of proceeds to
purchase treasury stock at the average market price for the period. Common stock
issuable under the recognition and retention plan assumes the use of potential
unrecognized compensation funding to purchase treasury stock at
- --------------------------------------------------------------------------------
(Continued)
42
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
the average market price for the period. Shares of stock purchased by the ESOP
are considered outstanding in the earnings per share calculations as they are
committed to be released, unallocated shares are not considered outstanding.
New Accounting Pronouncements: Two new accounting standards were issued in July
- ------------------------------
2000. Statement No. 141 relates to business combinations and Statement No. 142
relates to goodwill and other intangible assets.
Statement No. 141 was issued to improve the transparency of the accounting and
reporting for business combinations by requiring that all business combinations
initiated after June 30, 2001 be accounted for under the purchase method of
accounting. Since this accounting standard applies to business combinations
initiated after June 30, 2001, it will have no effect on the Corporation's
financial statements unless the Corporation enters into a business combination
transaction.
Statement No. 142 requires that goodwill no longer be amortized to earnings, but
instead be reviewed for impairment. This change provides investors with greater
transparency regarding the economic value of goodwill and its impact on
earnings. The amortization of goodwill ceases upon the adoption of Statement No.
142, which will be July 1, 2002 for the Corporation. The Corporation has
approximately $450,000 of unamortized goodwill that it will discontinue
amortizing. Adoption of this standard on July 1, 2002 is expected to result in
lower amortization expense of approximately $72,000. The Corporation performed
an analysis of goodwill for impairment as of June 30, 2002, and determined that
the goodwill was not impaired.
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
143, "Accounting For Asset Retirement Obligations" (SFAS No. 143). SFAS No. 143
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. SFAS No. 143 is effective for financial statements issued for fiscal
years beginning after June 15, 2002. This pronouncement will not have a material
effect on the Corporation.
In August 2001, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," which replaced SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 144
established a single accounting model, based on the framework established in
SFAS No. 121, for long-lived assets to be disposed of by sale. SFAS No. 144 also
resolved significant implementation issues related to SFAS No. 121. The
provisions of SFAS No. 144 are effective for financial statements issued for
fiscal years beginning after December 15, 2001. This pronouncement will not have
a material effect on the Corporation.
- --------------------------------------------------------------------------------
(Continued)
43
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The FASB recently issued SFAS No. 145 and No. 146. SFAS No. 145 applies for
years beginning after May 14, 2002 and may be adopted sooner. SFAS No. 145
covers extinguishments of debt and leases and includes some minor technical
corrections. Under previous accounting guidance, gains or losses from
extinguishments of debt were always treated as extraordinary items. Under SFAS
No. 145, they will no longer be considered extraordinary, except under very
limited conditions. Upon adoption of SFAS No. 145, any prior gains and losses
from extinguishments of debt must be reclassified as ordinary gains and losses.
Under SFAS No. 145, if a capital lease is modified to become an operating lease,
it will be accounted for as a sale-leaseback, by following the accounting
guidance of SFAS No. 98, instead of being accounted for as a sale-leaseback, by
following the accounting guidance of SFAS No. 98, instead of being accounted for
as a new lease. SFAS No. 146 covers accounting for costs associated with exit or
long-lived asset disposal activities, such as restructurings, consolidation or
closing of facilities, lease termination costs, or employee relocation or
severance costs. SFAS No. 146 replaces Emerging Issues Task Force (EITF) 94-3,
and is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002 and may be adopted sooner. A company may not restate its
previously issued financial statements. SFAS No. 146 requires exit or long-lived
asset disposal costs to be recognized as an expense when the liability is
incurred and can be measured at fair value, rather than at the date of making a
commitment to an exit or disposal plan. Management does not expect the effects
of the future adoptions of SFAS No. 145 and SFAS No. 146 to be material to the
Corporation's consolidated financial statements.
NOTE 3 - SECURITIES
The fair value of securities available-for-sale and the related gross unrealized
gains and losses recognized in accumulated comprehensive income (loss) were as
follows:
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
----- ----- ------
June 30, 2002
FNMA mortgage-backed $ 9,119,382 $213,513 $ --
FHLMC mortgage-backed 3,227,965 52,030 --
Mutual fund 5,026,413 5,030 --
----------- -------- --------
Total $17,373,760 $270,573 $ --
=========== ======== ========
- --------------------------------------------------------------------------------
(Continued)
44
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 3 - SECURITIES (Continued)
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
----- ----- ------
June 30, 2001
FNMA mortgage-backed $ 9,930,062 $ -- $(28,117)
FHLMC mortgage-backed 3,475,014 -- (7,599)
----------- ----- --------
Total $13,405,076 $ -- $(35,716)
=========== ===== ========
The carrying amount, unrecognized gains and losses, and fair value of securities
held-to-maturity were as follows:
Gross Gross
Carrying Unrealized Unrealized Fair
Amount Gains Losses Value
------ ----- ------ -----
June 30, 2002
U.S. federal agency - FHLB $55,000,000 $758,455 $ -- $55,758,455
FHLMC mortgage-backed 2,034,611 57,402 -- 2,092,013
Tax increment allocation note 448,059 -- -- 448,059
----------- -------- ------- -----------
Total $57,482,670 $815,857 $ -- $58,298,527
=========== ======== ======= ===========
June 30, 2001
U.S. federal agency - FHLB $90,025,000 $636,557 $ -- $90,661,557
FHLMC mortgage-backed 4,348,301 109,679 -- 4,457,980
Tax increment allocation note 473,058 -- -- 473,058
----------- -------- ------- -----------
Total $94,846,359 $746,236 $ -- $95,592,595
=========== ======== ======= ===========
The tax increment allocation note was issued by the City of Chicago for a
development project located at 95th Street and Western Avenue, which is near the
Corporation's main office. The terms of the note include a fixed interest rate
of 8.50%, payable semi-annually, and a maturity date of December 1, 2012.
Principal payments are required on an annual basis.
- --------------------------------------------------------------------------------
(Continued)
45
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 3 - SECURITIES (Continued)
Contractual maturities of debt securities classified as held-to-maturity were as
follows. Securities not due at a single maturity date, primarily mortgage-backed
securities, are shown separately:
------------June 30, 2002------------
Amortized Cost Fair Value
Due in one year or less $ 5,026,905 $ 5,213,359
Due from one to five years 45,129,808 45,672,056
Due from five to ten years 5,231,731 5,261,484
Due after ten years 59,615 59,615
Mortgage-backed 2,034,611 2,092,013
-------------- --------------
Total $ 57,482,670 $ 58,298,527
============== ==============
There were no pledged securities at June 30, 2002 or at June 30, 2001.
At June 30, 2002 and 2001, there were no holdings of securities of any one
issuer, other than the U.S. government and its agencies, in an amount greater
than 10% of shareholders' equity.
NOTE 4 - LOANS
Loans were as follows:
-----------June 30,-----------
2002 2001
One-to-four-family mortgage loans $153,843,368 $147,865,249
Home equity loans 11,558,957 10,521,490
Multi-family and other real estate loans 5,175,063 5,072,485
Consumer 2,621,134 3,155,032
------------ ------------
Subtotal 173,198,522 166,614,256
Less: Allowance for loan losses 1,576,427 1,573,396
Net deferred loan fees 498,545 474,115
Undisbursed loan funds 1,242,077 3,363,600
------------ ------------
Loans, net $169,881,473 $161,203,145
============ ============
The Corporation's lending activities are concentrated primarily on the southwest
side of Chicago and southwest suburbs in the Corporation's immediate geographic
area. The largest portion of the Corporation's loans are originated for the
purpose of enabling borrowers to purchase
- --------------------------------------------------------------------------------
(Continued)
46
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 4 - LOANS
residential real estate property secured by first liens on such property and
generally maintain loan-to-value ratios of less than 80%. Activity in the
allowance for loan losses for the year was as follows.
---------------Years Ended June 30,-------------
2002 2001 2000
---- ---- ----
Beginning balance $1,573,396 $ 1,508,020 $ 1,432,360
Provision for loan losses -- 72,000 83,000
Loans charged-off -- (7,525) (7,340)
Recoveries 3,031 901 --
---------- ----------- -----------
Ending balance $1,576,427 $ 1,573,396 $ 1,508,020
========== =========== ===========
Non-performing loans were as follows.
-------------June 30,------------
2002 2001 2000
---- ---- ----
Loans past due over 90 days still on accrual $ -- $ -- $ --
Nonaccrual loans 222,207 3,078 12,921
Nonperforming loans includes all smaller balance homogeneous loans, such as
residential mortgage and consumer loans, that are collectively evaluated for
impairment. Loans to related parties as of June 30, 2002 and 2001 did not meet
or exceed 5% of shareholders' equity.
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment were as follows.
----------June 30,---------
2002 2001
---- ----
Land $ 559,163 $ 559,163
Buildings 3,402,974 3,872,392
Leasehold improvements -- 296,354
Parking lot improvements 6,353 46,714
Furniture, fixtures, and equipment 1,552,414 2,460,610
---------- ----------
5,520,904 7,235,233
Less accumulated depreciation and amortization 2,991,660 4,419,437
---------- ----------
$2,529,244 $2,815,796
========== ==========
- ------------------------------------------------------------------------------
(Continued)
47
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 5 - PREMISES AND EQUIPMENT (Continued)
Rent commitments under a noncancelable-operating lease of premises as of June
30, 2002, were as follows, before considering renewal options that generally are
present.
2003 $ 104,076
2004 104,076
2005 104,076
2006 104,076
2007 34,692
----------
$ 450,996
==========
NOTE 6 - INTANGIBLE ASSETS
Chesterfield Insurance Services, LLC has acquired the customer lists,
expirations files, customer account records, goodwill, going-concern value, and
other intangible assets of various insurance agencies. These acquisitions were
all accounted for using the purchase method of accounting and resulted in
goodwill being recorded, which is being amortized on a straight-line basis over
ten years.
In addition to the goodwill recorded related to the purchase of one of the
insurance agencies, a $105,000 intangible asset was recorded relating to a
noncompete agreement with the owner, which is being amortized over seven years.
Goodwill of $719,000 is reported net of accumulated amortization of $269,000 and
$201,000 at June 30, 2002 and 2001. These intangible assets are included in
accrued interest receivable and other assets in the consolidated balance sheet.
NOTE 7 - ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows.
---------June 30,-----------
2002 2001
---- ----
Investment securities $ 549,816 $1,256,736
Loans receivable 139,848 135,656
Other 216,182 28,082
---------- ----------
$ 905,846 $1,420,474
========== ==========
- --------------------------------------------------------------------------------
(Continued)
48
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 8 - DEPOSITS
Deposits were as follows:
--------------June 30,------------
2002 2001
---- ----
Passbook savings $ 58,967,897 $ 53,553,198
NOW accounts 28,258,227 24,049,027
Money market accounts 9,806,087 8,826,744
Time deposits 181,093,196 174,228,993
------------ ------------
$278,125,407 $260,657,962
============ ============
Time deposits of $100,000 or more were $51,378,000 and $47,480,000 at June 30,
2002 and 2001. Deposit amounts in excess of $100,000 are not federally insured.
Scheduled maturities of time deposits at June 30, 2002 were as follows.
2003 $162,344,143
2004 11,497,569
2005 3,583,857
2006 2,352,399
2007 and thereafter 1,315,228
------------
$181,093,196
============
Deposits from principal officers, directors, and their affiliates as of June 30,
2002 and 2001 were approximately $1,567,000 and $945,000, respectively.
NOTE 9 - RETIREMENT PLAN AND OTHER BENEFIT PLANS
The Corporation has a self-administered Employee Retirement (Profit Sharing)
Plan, which covers substantially all employees with one or more years of
service. The Corporation's obligations under the Plan are limited to annual
contributions based upon each employee's compensation and a discretionary
percentage rate of 0% to 15% as approved by the Board of Directors.
The Corporation has a Supplemental Benefit Plan for Inside Directors. The Plan
is unfunded and provides for fixed amounts plus interest to be credited to
participants' accounts over five years, with amounts fully vested at the time
they are credited. A participant is entitled to benefit
- --------------------------------------------------------------------------------
(Continued)
49
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 9 - RETIREMENT PLAN AND OTHER BENEFIT PLANS (Continued)
payments upon their separation from service, as defined. Benefits accrued were
$1,225,000 and $1,050,000 at June 30, 2002 and 2001.
The Corporation has a Retirement Benefit Plan for Outside Directors. The Plan is
unfunded and provides for fixed monthly payments over ten years. A participant
is vested upon completion of four years of continuous service, and payments
begin upon termination of service with the Board of Directors. Benefits accrued
were $375,000 and $351,000 at June 30, 2002 and 2001.
As part of the conversion transaction, the Corporation established an employee
stock ownership plan (ESOP) for the benefit of substantially all employees. The
ESOP borrowed $3,443,790 from the Corporation and used those funds to acquire
344,379 shares of the Corporation's stock at $10 per share.
Shares issued to the ESOP are allocated to ESOP participants based on principal
and interest repayments made by the ESOP on the loan from the Corporation. The
loan is secured by shares purchased with the loan proceeds and will be repaid by
the ESOP with funds from the Corporation's discretionary contributions to the
ESOP and earnings on the ESOP's assets. Principal payments are scheduled to
occur over a twenty-year period. However, in the event the Corporation's
contributions exceed the minimum debt service requirements, additional principal
payments will be made.
Contributions to the ESOP during 2002 and 2001 were $343,945 and $247,166. ESOP
expenses for 2002 and 2001 were $391,265 and $217,464. Shares held by the ESOP
were are as follows:
2002 2001
---- ----
Allocated shares 38,823 15,091
Unallocated shares 305,556 329,288
----------- -----------
Total ESOP shares 344,379 344,379
=========== ===========
Fair value of unallocated shares $ 5,542,789 $ 4,903,098
=========== ===========
In November 2001, the Corporation adopted a Recognition and Retention Plan (RRP)
that provides for issuance of its common shares to directors, officers, and
employees. There are 172,189 shares to be issued under the plan, and rights to
receive 172,189 shares over a five-year vesting period were awarded in 2001. The
Corporation purchased 172,189 shares of its common stock in open market
transactions, at an average cost of $16.50 per share, with the intention of
designating these shares for the RRP. Compensation expense is recognized over
the vesting period of the shares at cost. Compensation expense for 2002 was
$345,674. Unearned compensation is reported as a reduction of shareholders'
equity until earned.
- -------------------------------------------------------------------------------
(Continued)
50
NOTE 9 - RETIREMENT PLAN AND OTHER BENEFIT PLANS (Continued)
The following schedule summarizes expenses recorded related to benefit plans:
----------Years Ended June 30,---------
2002 2001 2000
---- ---- ----
Employee retirement (profit sharing) plan $ -- $180,429 $326,286
Employee stock ownership plan 391,265 217,464 --
Recognition and retention plan 345,674 -- --
Supplemental Benefit Plan for Inside Directors 174,835 163,397 152,708
Retirement Benefit Plan for Outside Directors 24,563 104,942 92,713
-------- -------- --------
Total expense $936,337 $666,232 $571,707
======== ======== ========
During 2002, the Corporation adopted a stock option plan under the terms of
which 430,473 shares of the Corporation's common stock were reserved for
issuance. The options become exercisable on a cumulative basis in equal
installments over a five-year period from the date of grant and expire ten years
from the date of grant. The Corporation awarded 430,473 stock options at an
exercise price of $16.15 during the year, all of which were outstanding as of
June 30, 2002. None of the options were exercisable as of June 20, 2002. The
weighted-average fair value of options granted during 2002 was $5.11.
Had compensation cost for stock options been measured using FASB Statement No.
123, 2002 net income and earnings per share would have been the pro forma
amounts indicated below:
Net income as reported $ 3,257,797
Pro forma net income 2,990,216
Basic earnings per share as reported $ 0.84
Pro forma basic earnings per share 0.77
Diluted earnings per share as reported $ 0.83
Pro forma diluted earnings per share 0.76
The pro forma effects for 2002 are computed using option-pricing models, using
the following weighted average assumptions as of grant date:
Risk free interest rate 4.78%
Expected option life 7 years
Expected stock price volatility 14.21%
Dividend yield 0%
- --------------------------------------------------------------------------------
(Continued)
51
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 9 - RETIREMENT PLAN AND OTHER BENEFIT PLANS (Continued)
Certain members of the Board of Directors have deferred some of their fees in
consideration for future payments, including interest. Amounts deferred were
approximately $1,917,000 and $1,783,000 as of June 30, 2002 and 2001.
NOTE 10 - INCOME TAXES
Income tax expense (benefit) was as follows.
----------------Years Ended June 30,------------
2002 2001 2000
Current $ 2,026,764 $ 1,551,919 $ 1,712,809
Deferred (260,529) (133,714) (391,908)
----------- ----------- -----------
Total $ 1,766,235 $ 1,418,205 $ 1,320,901
=========== =========== ===========
Effective tax rates differ from the federal statutory rate of 34% applied to
financial statement income due to the following:
---------------Years Ended June 30,--------------
2002 2001 2000
---- ---- ----
Federal statutory rate times income
before income taxes $ 1,708,171 $1,390,530 $1,242,489
Effect of:
Nondeductible life insurance premiums 1,020 909 2,318
State taxes, net of federal benefit 60,586 19,800 22,930
Other, net (3,542) 6,966 53,164
----------- ---------- ----------
Total $ 1,766,235 $1,418,205 $1,320,901
=========== ========== ==========
Effective tax rate 35.2% 34.7% 36.1%
- --------------------------------------------------------------------------------
(Continued)
52
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 10 - INCOME TAXES (Continued)
Year-end deferred tax assets and liabilities were due to the following:
------------June 30,---------
2002 2001
Deferred tax assets:
Allowance for loan losses $ 609,173 $ 609,173
Deferred loan fees 176,596 159,859
Deferred director fees 699,405 649,437
Unrealized loss on securities available-for-sale -- 23,572
Inside director nonqualified retirement plan 489,948 406,841
Outside director nonqualified retirement plan 145,454 135,939
RRP expense 133,914 --
Other 8,318 --
----------- -----------
Total $ 2,262,808 $ 1,984,821
=========== ===========
Deferred tax liabilities:
Loan loss reserve recapture $ (64,185) $ (192,555)
Depreciation (53,490) (72,860)
FHLB stock dividend (480,778) (174,732)
Loan fees (393,880) (335,770)
Accrued FHLB dividends (83,749) (10,879)
Prepaid insurance (10,432) (12,730)
Prepaid service contracts (22,876) (36,619)
ESOP expense (5,680) (30,910)
Unrealized gain on securities available-for-sale (91,995) --
Other -- (49,699)
----------- -----------
Total $(1,207,065) $ (916,754)
=========== ===========
Net deferred income tax assets $ 1,055,743 $ 1,068,067
=========== ===========
No valuation allowance for deferred tax assets was necessary as of June 30, 2002
and 2001.
Federal income tax laws provided additional bad debt deductions through 1987,
totaling $3,479,000. Accounting standards do not require a deferred tax
liability to be recorded on this amount, which liability otherwise would total
$1,348,000 at June 30, 2002 and 2001. If the Corporation were liquidated or
otherwise ceased to be a corporation or if tax laws were to change, this amount
would be charged to earnings.
- --------------------------------------------------------------------------------
(Continued)
53
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 11 - REGULATORY MATTERS
The Association is subject to regulatory capital requirements administered by
federal banking agencies. Capital adequacy guidelines and prompt corrective
action regulations involve quantitative measures of assets, liabilities, and
certain off-balance-sheet items calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to qualitative
judgments by regulators. Failure to meet capital requirements can initiate
regulatory action.
Prompt corrective action regulations provide five classifications: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and capital restoration plans are required.
Actual and required capital amounts (in thousands) and ratios are presented
below:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
June 30, 2002
- --------------
Total Capital to risk-
weighted assets $59,506 41.55% $11,456 8.0% $14,320 10.0%
Tier 1 Capital to risk-
weighted assets 58,228 40.66 5,728 4.0 8,592 6.0
Tier 1 Capital to
adjusted assets 58,228 16.05 14,509 4.0 18,137 5.0
June 30, 2001
- -------------
Total Capital to risk-
weighted assets $56,234 41.72% $10,784 8.0% $13,480 10.0%
Tier 1 Capital to risk-
weighted assets 54,724 40.60 5,392 4.0 8,088 6.0
Tier 1 Capital to
adjusted assets 54,724 15.90 13,768 4.0 17,211 5.0
- --------------------------------------------------------------------------------
(Continued)
54
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 11 - REGULATORY MATTERS (Continued)
As of June 30, 2002, the most recent notification from regulatory authorities
categorized the Association as well capitalized under the regulatory framework
for prompt corrective action. There are no conditions or events since that
notification that management believes have changed the institution's category.
The following is a reconciliation of the Association's equity under accounting
principles generally accepted in the United States of America to regulatory
capital (in thousands):
--------June 30,---------
2002 2001
---- ----
GAAP equity $ 59,199 $ 55,533
Disallowed intangible assets (499) (595)
Accumulated other comprehensive (gain) loss (179) 23
Non-qualifying equity instruments (293) (237)
-------- --------
Tier I capital 58,228 54,724
Other equity instruments 2 237
General regulatory loan loss reserves 1,276 1,273
-------- --------
Total capital $ 59,506 $ 56,234
======== ========
NOTE 12 - OFF-BALANCE-SHEET ACTIVITIES
Some financial instruments, such as loan commitments, credit lines, letters of
credit, and overdraft protection, are issued to meet customer financing needs.
These are agreements to provide credit or to support the credit of others, as
long as conditions established in the contract are met, and usually have
expiration dates. Commitments may expire without being used. Off-balance-sheet
risk to credit loss exists up to the face amount of these instruments, although
material losses are not anticipated. The same credit policies are used to make
such commitments as are used for loans, including obtaining collateral at
exercise of the commitment.
The contractual amount of financial instruments with off-balance-sheet risk was
as follows.
June 30, 2002 June 30, 2001
------------- -------------
Fixed Variable Fixed Variable
Rate Rate Rate Rate
---- ---- ---- ----
Commitments to make loans $3,398,000 $ -- $ 5,259,900 $ --
Unused lines of credit -- 19,880,000 -- 16,154,000
- --------------------------------------------------------------------------------
(Continued)
55
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 12 - OFF-BALANCE-SHEET ACTIVITIES (Continued)
Commitments to make loans are generally made for periods of 60 days or less. As
of June 30, 2002, fixed rate loan commitments had interest rates ranging from
5.60% to 7.00% and maturities ranging from 7 years to 30 years. As of June 30,
2001, fixed rate loan commitments had interest rates ranging from 6.25% to 8.50%
and maturities ranging from 7 years to 30 years.
NOTE 13 - FAIR VALUES OF FINANCIAL INSTRUMENTS
Carrying amounts and estimated fair values of financial instruments (in
thousands) were as follows.
-------June 30, 2002------ -------June 30, 2001------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Financial assets
Cash and cash equivalents $ 94,726 $ 94,726 $ 66,921 $ 66,921
Securities available-for-sale 17,374 17,374 13,405 13,405
Securities held-to-maturity 57,483 58,299 94,846 95,593
Loans, net 169,881 170,754 161,203 162,449
Federal Home Loan Bank stock 17,342 17,342 1,733 1,733
Accrued interest receivable 906 906 1,420 1,420
Financial liabilities
Deposits 278,125 279,181 260,658 261,832
Accrued interest payable 171 171 319 319
The methods and assumptions used to estimate fair value are described as
follows:
Carrying amount is the estimated fair value for cash and cash equivalents,
Federal Home Loan Bank stock, accrued interest receivable and payable, deposits
with no maturities, and variable rate loans or deposits that reprice frequently
and fully. Security fair values are based on market prices or dealer quotes and,
if no such information is available, on the rate and term of the security and
information about the issuer. For fixed rate loans or deposits and for variable
rate loans or deposits with infrequent repricing or repricing limits, fair value
is based on discounted cash flows using current market rates applied to the
estimated life and credit risk. The fair value of off-balance-sheet items is
based on the current fees or cost that would be charged to enter into or
terminate such arrangements and are not deemed material.
While these estimates of fair value are based on management's judgment of the
most appropriate factors as of the balance sheet date, there is no assurance
that the estimated fair values would have been realized if the assets were
disposed of or the liabilities settled at that date, since market
- --------------------------------------------------------------------------------
(Continued)
56
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 13 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
values may differ depending on various circumstances. The estimated fair values
would also not apply to subsequent dates.
In addition, other assets and liabilities that are not financial instruments,
such as premises and equipment, are not included in the above disclosures. Also,
non-financial instruments typically not recognized on the balance sheet may have
value but are not included in the above disclosures. These include, among other
items, the estimated earnings power of core deposits, customer goodwill, and
similar items.
NOTE 14 - OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes were as follows:
2002 2001
---- ----
Unrealized holding gains (losses) on securities
available-for-sale $ 306,289 $(35,716)
Tax effect (104,138) 12,144
--------- --------
Other comprehensive income (loss) $ 202,151 $(23,572)
========= ========
- --------------------------------------------------------------------------------
(Continued)
57
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 15 - EARNINGS PER COMMON SHARE
A reconciliation of the numerator and denominator of the earnings per common
share computation for the year ended June 30, 2002 and for the two-month period
ended June 30, 2001 are as follows:
2002 2001
---- ----
Basic earnings per share
Earnings per common share
Net income $3,257,797 $2,671,590
Less net income of Association prior to conversion -- 2,231,550
---------- ----------
Net income available to common shareholders $3,257,797 $ 440,040
========== ==========
Weighted average common shares outstanding 3,901,283 4,297,193
Basic earnings per share $ 0.84 $ 0.10
========== ==========
Earnings per share assuming dilution
Net income available to common shareholders $3,257,797 $ 440,040
========== ==========
Weighted average common shares outstanding
for basic earnings per common share 3,901,283 4,297,193
Add dilutive effect of assumed exercises:
Stock option exercises 14,562 --
RRP share recognition 4,084 --
---------- ----------
3,919,929 4,297,193
========== ==========
Diluted earnings per share $ 0.83 $ 0.10
========== ==========
- --------------------------------------------------------------------------------
(Continued)
58
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 16 - PARENT COMPANY ONLY FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
June 30, 2002 and 2001
2002 2001
---- ----
ASSETS
Cash and due from financial institutions $ 19,788 $ --
Cash on deposit in subsidiary 14,263,925 17,630,964
----------- -----------
Cash and cash equivalents 14,283,713 17,630,964
ESOP loan 3,061,373 3,233,563
Investment in subsidiary 59,198,509 55,533,234
Accrued interest receivable and other assets 202,378 247,166
----------- -----------
$76,745,973 $76,644,927
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued expenses and other liabilities $ 4,840 $ 92,367
Shareholders' equity 76,741,133 76,552,560
----------- -----------
$76,745,973 $76,644,927
=========== ===========
CONDENSED STATEMENTS OF INCOME
For the year ended June 30, 2002,
and for the period May 2, 2001 through June 30, 2001
2002 2001
---- ----
Interest income
ESOP loan $ 171,755 $ 36,938
Deposits in subsidiary 323,228 29,176
---------- --------
Total interest income 494,983 66,114
Operating expenses 181,987 18,206
---------- --------
Income before income taxes and equity in undistributed
earnings of subsidiary 312,996 47,908
Income taxes 127,058 16,505
---------- --------
Income before equity in undistributed earnings of subsidiary 185,938 31,403
Equity in undistributed earnings of subsidiary 3,071,859 408,637
---------- --------
Net income $3,257,797 $440,040
========== ========
- --------------------------------------------------------------------------------
(Continued)
59
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 16 - PARENT COMPANY ONLY FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
For the year ended June 30, 2002,
and for the period May 2, 2001 through June 30, 2001
2002 2001
---- ----
Operating activities
Net income $ 3,257,797 $ 440,040
Adjustments to reconcile net income to net cash provided by
operating activities
Equity in undistributed earnings of subsidiary (3,071,859) (408,637)
Change in other assets and liabilities (42,739) (154,799)
------------ ------------
Net cash provided by (used in) operating activities 143,199 (123,396)
Investing activities
Purchase of subsidiary stock -- (20,987,924)
------------ ------------
Net cash used in investing activities -- (20,987,924)
Financing activities
Net proceeds from sale of common stock -- 38,532,057
Purchase of treasury stock (4,008,314) --
Payment for RRP shares 345,674 --
Payment received on loan to ESOP 172,190 210,227
------------ ------------
Net cash provided by (used in) financing activities (3,490,450) 38,742,284
------------ ------------
Net change in cash and cash equivalents (3,347,251) 17,630,964
Cash and cash equivalents at beginning of period 17,630,964 --
------------ ------------
Cash and cash equivalents at end of period $ 14,283,713 $ 17,630,964
============ ============
- --------------------------------------------------------------------------------
(Continued)
60
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002 and 2001
- --------------------------------------------------------------------------------
61.NOTE 17 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Year Ended June 30, 2002 Year Ended June 30, 2001
-------------Three Months Ended------------ -----------Three Months Ended--------------
June 30 March 31 Dec. 31 Sep. 30 June 30 March 31 Dec. 31 Sep. 30
------- -------- ------- ------- ------- -------- ------- -------
Total interest
and dividend
income $4,410 $4,519 $4,946 $5,172 $5,211 $4,961 $5,095 $5,151
Net interest
income 2,696 2,750 2,831 2,668 2,513 2,257 2,285 2,358
Provision for
loan losses -- -- -- -- 16 17 20 19
Income before
income taxes 1,164 1,110 1,349 1,401 1,022 926 1,002 1,140
------ ------ ------ ------ ------ ------ ------ ------
Net income $ 741 $ 718 $ 874 $ 925 $ 743 $ 651 $ 602 $ 676
====== ====== ====== ====== ====== ====== ====== ======
- --------------------------------------------------------------------------------
61
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
- ---------------------------------------------------------------------------
Financial Disclosure
- --------------------------------
None.
PART III
--------
ITEM 10. Directors and Executive Officers of the Company
- -----------------------------------------------------------
The "Proposal I--Election of Directors" section of the Company's definitive
Proxy Statement for the Company's 2002 Annual Meeting of Stockholders (the "2002
Proxy Statement") is incorporated herein by reference.
ITEM 11. Executive Compensation
- -----------------------------------
The "Proposal I--Election of Directors" section of the Company's 2002 Proxy
Statement is incorporated herein by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
- -------------------------------------------------------------------------
and Related Stockholder Matters
- -------------------------------------------
The "Proposal I--Election of Directors" section of the Company's 2002 Proxy
Statement is incorporated herein by reference.
The Company does not have any equity compensation program that was not
approved by stockholders, other than its employee stock ownership plan.
Set forth below is certain information as of June 30, 2002 regarding equity
compensation to directors and executive officers of the Company that has been
approved by stockholders.
===================================== ============================== ====================== =================================
Number of securities to be Number of securities remaining
Equity compensation plans approved by issued upon exercise of Weighted average available for issuance under
stockholders outstanding options and rights exercise price plan
- ------------------------------------- ------------------------------ ---------------------- ---------------------------------
Stock Option Plan............. 430,373 $ 16.15 None
- ------------------------------------- ------------------------------ ---------------------- ---------------------------------
Recognition and Retention
Plan (1)................... 172,189 Not Applicable None
- ------------------------------------- ------------------------------ ---------------------- ---------------------------------
Total (2).............. 602,562 $ 16.15
===================================== ============================== ====================== =================================
(1) Represents shares that have been granted but have not yet vested.
(2) Weighted average exercise price represents Stock Option Plan only,
since RRP shares have no exercise price.
ITEM 13. Certain Relationships and Related Transactions
- -----------------------------------------------------------
The "Transactions with Certain Related Persons" section of the Company's
2002 Proxy Statement is incorporated herein by reference.
62
PART IV
-------
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- ----------------------------------------------------------------------------
(a)(1) Financial Statements
--------------------
The exhibits and financial statement schedules filed as a part of
this Form 10-K are as follows:
(A) Report of Independent Auditors
(B) Consolidated Balance Sheets
(C) Consolidated Statements of Income
(D) Consolidated Statements of Shareholders' Equity
(E) Consolidated Statements of Cash Flows
(F) Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
-----------------------------
All financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Notes to
Consolidated Financial Statements.
(b) Reports on Form 8-K
-------------------
None.
(c) Exhibits
---------
3.1 Certificate of Incorporation of Chesterfield
Financial Corp.*
3.2 Bylaws of Chesterfield Financial Corp.*
4 Form of Common Stock Certificate of
Chesterfield Financial Corp.*
10.1 Form of Employment Agreement*
10.2 Form of Severance Plan*
10.3 Form of Supplemental Benefit Plan*
10.4 2001 Recognition and Retention Plan**
10.5 2001 Stock Option Plan**
21 Subsidiaries of the Company*
99 Certification of Chief Executive Officer and
Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
- -----------------------------
* Incorporated by reference to the Registration Statement on Form S-1 of
Chesterfield Financial Corp. (Registration No. 333-53882) initially filed
with the Securities and Exchange Commission on January 18, 2001.
** Incorporated by reference to the Proxy Statement of Chesterfield Financial
Corp. for the 2001 Annual Meeting of Stockholders (File No. 0-32589), filed
with the Securities and Exchange Commission on October 18, 2001. Signatures
63
Signatures
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Company has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
CHESTERFIELD FINANCIAL CORP.
Date: September 23, 2002 By: /s/ Michael E. DeHaan
-----------------------
Michael E. DeHaan
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange of 1934, the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated have signed this report below.
Signatures Title Date
- ---------- ----- ----
/s/ Michael E. DeHaan President, Chief Executive September 23, 2002
- ----------------------- Officer and Director (Principal
Michael E. DeHaan Executive Officer)
/s/ Karen M. Wirth Treasurer September 23, 2002
- ----------------------- (Principal Financial and
Karen M. Wirth Accounting Officer)
/s/ C. C. DeHaan Director September 23, 2002
- -----------------------
C. C. DeHaan
/s/ Robert T. Mangan Director September 23, 2002
- -----------------------
Robert T. Mangan
/s/ David M. Steadman Director September 23, 2002
- -----------------------
David M. Steadman
/s/ Richard E. Urchell Director September 23, 2002
- -----------------------
Richard E. Urchell
/s/ Donald D. Walters Director September 23, 2002
- -----------------------
Donald D. Walters
64
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Michael E. DeHaan, Chairman, President and Chief Executive Officer,
certify that:
1. I have reviewed this annual report on Form 10-K of Chesterfield
Financial Corp.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the period presented in
this annual report;
September 23, 2002 /s/ Michael E. DeHaan
------------------ ----------------------
Date Michael E. DeHaan
Chairman, President and
Chief Executive Officer
65
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Karen M. Wirth, Treasurer, certify that:
1. I have reviewed this annual report on Form 10-K of Chesterfield
Financial Corp.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the period presented in
this annual report;
September 23, 2002 /s/ Karen M. Wirth
------------------ ----------------------------------
Date Karen M. Wirth
Treasurer (Chief Financial Officer)
66
STOCKHOLDER INFORMATION
Special Legal Counsel Stock Transfer Agent
Luse Gorman Pomerenk & Schick Registrar and Transfer Company
5335 Wisconsin Ave. N.W., Suite 400 10 Commerce Drive
Washington, DC 20015 Cranford, New Jersey 07016
Independent Auditors Annual Meeting
Crowe, Chizek and Company LLP The annual meeting of stockholders
One Mid America Plaza, Suite 700 of Chesterfield Financial Corp. will
Oakbrook Terrace, Illinois 60181-4450 be held at 12:00 noon on November
19, 2002 at 10801 South Western
Office Locations Avenue, Chicago, Illinois.
Main Office Form 10-K
10801 South Western Avenue A copy of the Form 10-K as filed
Chicago, Illinois 60643 with the Securities and Exchange
Commission will be furnished without
Branch Offices charge to stockholders for the most
recent fiscal year upon written
10701 South Western Avenue request to Richard E. Urchell, Vice
Chicago, Illinois 60643 President and Secretary,
Chesterfield Financial Corp., 10801
10135 S. Roberts Road South Western Avenue, Chicago,
Palos Hills, Illinois 60465 Illinois 60643.
22 West Lincoln Highway
Frankfort, Illinois 60423 Directors and Executive Officers
Michael E. DeHaan, Chairman,
President and Chief Executive
Officer C. C. DeHaan, Director
Robert T. Mangan, Director David M.
Steadman, Director Richard E.
Urchell, Vice President, Secretary
and Director Donald D. Walters,
Director
67