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, 2003
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.
(Exact Name of Registrant as Specified in its Charter)
Delaware 36-4441126
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
10801 South Western Avenue, Chicago, Illinois 60643
(Address of Principal Executive Office) (Zip Code)
(773) 239-6000
(Registrant's Telephone Number including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
None
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. |_|
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, computed by reference to the closing price of the Registrant's
Common Stock on the Nasdaq National Market on December 31, 2002 was
approximately $66.1million.
As of August 31, 2003, there were issued and outstanding 3,879,558 shares of the
Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Proxy Statement for the 2003 Annual Meeting of Shareholders (Part III)
PART I
ITEM 1. Business
Chesterfield Financial Corp.
Chesterfield Financial Corp. ("Chesterfield Financial" or "the
Corporation") was organized at the direction of the Board of Directors of
Chesterfield Federal Savings and Loan Association of Chicago ("Chesterfield
Federal" or "the Association") 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 $7.8 million, representing a portion of the net proceeds from
Chesterfield Financial's stock offering completed May 2, 2001. At June 30, 2003,
3,879,558 shares of Chesterfield Financial's common stock, par value $0.01 per
share, were outstanding. 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, 2003, Chesterfield
Financial had total consolidated assets of $368.9 million, total deposits of
$282.2 million and shareholders' equity of $73.3 million.
Chesterfield Financial's executive 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.
2
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,
multi-family residential loans, and consumer loans. At June 30, 2003, our loans
totaled $153.3 million, of which $134.4 million, or 87.7%, were secured by one-
to four-family residential real estate; $4.3 million, or 2.8%, were secured by
multi-family residential real estate; $12.4 million, or 8.1%, were home equity
lines of credit; and $2.2 million, or 1.4%, 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,
-------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
---------------- ---------------- ---------------- --------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Real Estate Loans:
One- to four-family ................. $134,371 87.7% $153,843 88.8% $147,865 88.8% $140,120 87.7% $140,351 87.5%
Home equity ......................... 12,415 8.1 11,559 6.7 10,521 6.3 11,002 6.9 11,413 7.1
Multi-family and other .............. 4,318 2.8 5,175 3.0 5,073 3.0 5,693 3.5 6,058 3.8
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total real estate loans ........ 151,104 98.6 170,577 98.5 163,459 98.1 156,815 98.1 157,822 98.4
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Other Loans:
Consumer loans:
Loans on deposits ................. 896 0.6 1,016 0.6 1,180 0.7 1,161 0.7 1,038 0.6
Automobile, stock secured,
second mortgages and other ...... 1,263 0.8 1,605 0.9 1,975 1.2 1,842 1.2 1,574 1.0
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total consumer loans .......... 2,159 1.4 2,621 1.5 3,155 1.9 3,003 1.9 2,612 1.6
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans .................... 153,263 100.0% 173,198 100.0% 166,614 100.0% 159,818 100.0% 160,434 100.0%
===== ===== ===== ===== =====
Less:
Undisbursed portion of loans in
process .......................... 1,357 1,242 3,364 480 1,422
Unearned discounts and deferred
loan fees ........................ 580 499 474 554 663
Allowance for loan losses .......... 1,304 1,576 1,573 1,508 1,432
-------- -------- -------- -------- --------
Total loans receivable, net ........ $150,022 $169,881 $161,203 $157,276 $156,917
======== ======== ======== ======== ========
3
Loan Contractual Terms to Maturity. The following table sets forth certain
information as of June 30, 2003, regarding the dollar amount of loans maturing
in our portfolio based on their contractual terms to maturity. 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 .................... $ 9,379 $18,456 $17,578 $36,377 $30,541 $22,040 $134,371
Home equity, multi-family and other .... 2,897 4,152 4,307 4,508 869 -- 16,733
Consumer loans ......................... 802 507 291 375 184 -- 2,159
------- ------- ------- ------- ------- ------- --------
Total loans receivable ................... $13,078 $23,115 $22,176 $41,260 $31,594 $22,040 $153,263
======= ======= ======= ======= ======= ======= ========
The following table sets forth at June 30, 2003, the dollar amount of all
fixed rate and adjustable rate loans due or repricing after June 30, 2004.
Fixed Adjustable Total
-------- ---------- --------
(In Thousands)
Real estate loans:
One- to four-family .............................. $124,543 $ 449 $124,992
Home equity, multi-family and other .............. 3,975 9,861 13,836
Consumer loans .................................. 1,357 -- 1,357
-------- ------- --------
Total ......................................... $129,875 $10,310 $140,185
======== ======= ========
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, 2003, these loans totaled $134.4 million,
or 87.7% 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, $134.1 million, or 99.8%, had fixed
rates of interest and the remaining $269,000, or 0.2%, 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 7, 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 $12.4 million, or 8.1% of our total loan portfolio as
of June 30, 2003. 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 ten years and at rates that are tied to the prime
rate plus a margin we adjust from time to time.
4
Multi-Family Loans. At June 30, 2003, $4.3 million, or 2.8% 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
$159,926. 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, 2003, consumer loans totaled $2.2
million, or 1.4% 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 and 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.
5
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,
--------------------------------------
2003 2002 2001
-------- ------- --------
(In Thousands)
Originations by Type:
Adjustable rate:
Real estate -
- one- to four-family .................. $ -- $ -- $ 357
- home equity .......................... 8,571 7,418 6,472
-------- ------- --------
Total adjustable-rate ...................... 8,571 7,418 6,829
-------- ------- --------
Fixed rate:
Real estate -
- one- to four-family .................. 32,674 30,738 31,503
- multi-family and other ............... 706 1,527 584
Non-real estate - consumer ....................... 1,649 1,855 1,993
-------- ------- --------
Total fixed-rate ........................... 35,029 34,120 34,080
-------- ------- --------
Total loans originated ..................... 43,600 41,538 40,909
-------- ------- --------
Repayments:
Principal repayments ............................ 63,535 34,954 34,113
-------- ------- --------
Increase (decrease) in other items, net .......... 76 2,094 (2,869)
-------- ------- --------
Net (decrease) increase .................... $(19,859) $ 8,678 $ 3,927
======== ======= ========
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 Randy Trater. 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 Randy Trater. 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.
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,
2003. 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 ........... 1 $ 25 0.02% 7 $ 258 0.19% 8 $ 283 0.21%
Home equity ................... -- -- -- -- -- -- -- -- --
Multi-family and other ........ -- -- -- -- -- -- --
Consumer ........................ -- -- -- -- -- -- -- -- --
----- ----- ---- ---- ------ ---- ---- ------ ----
Total ...................... 1 $ 25 0.02% 7 $ 258 0.17% 8 $ 283 0.18%
===== ===== ==== ==== ====== ==== ==== ====== ====
6
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.
Nonperforming Loans. All loans are reviewed on a regular basis and are
placed on a nonaccrual 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 nonaccrual status. In addition, we place
any loan on nonaccrual 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 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 nonperforming
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,
----------------------------------------------------------------
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
(Dollars in Thousands)
Non-accruing loans:
One- to four family ......................... $ 258 $ 199 $ 3 $ 12 $ 9
Home equity ................................. -- -- -- -- 81
Multi-family and other ...................... -- 23 -- -- --
Consumer .................................... -- -- -- 1 --
------ ------ ------ ------ ------
Total ..................................... 258 222 3 13 90
------ ------ ------ ------ ------
Accruing loans delinquent more than 90 days ... -- -- -- -- --
------ ------ ------ ------ ------
Foreclosed assets ............................. -- -- -- -- --
------ ------ ------ ------ ------
Total nonperforming assets .................... $ 258 $ 222 $ 3 $ 13 $ 90
====== ====== ====== ====== ======
Total as a percentage of total assets ......... .07% .06% --% --% .03%
====== ====== ====== ====== ======
7
From August 1997 through December 1999, the Corporation originated
$509,000 of community development loans (thirteen loans) to a real estate
development company to acquire vacant lots and deteriorated buildings for future
development. The Corporation has closely monitored these loans since origination
and established a specific valuation reserves on these loans through provisions
for loan losses recorded in 1998, 1999, 2000, and 2001. During October 2002,
nine of these parcels were sold and the entire principal balances of the related
loans were recovered. These loans, with principal balances of $196,000 at June
30, 2003, remain on nonaccrual loans.
For the year ended June 30, 2003, 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, 2003 and June 30, 2002.
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, 2003 and June 30, 2002.
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 is 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,
2003, we had classified $273,000 of our assets as substandard and none of our
assets as special mention, doubtful or loss.
Loan Concentrations. Chesterfield Federal has originated over 14 loans to
a single customer that have an aggregate principal balance of $1.7 million as of
June 30, 2003. 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.
8
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,
-------------------------------------------------------------
2003 2002 2001 2000 1999
------- ------- ------- ------- -------
(Dollars in Thousands)
Balance at beginning of period .................................. $ 1,576 $ 1,573 $ 1,508 $ 1,432 1,283
Charge-offs:
One- to four family ........................................... -- -- -- -- --
Home equity ................................................... -- -- -- -- --
Multi-family and other ........................................ -- -- -- -- --
Consumer ...................................................... -- -- 8 7 1
------- ------- ------- ------- -------
-- -- 8 7 1
------- ------- ------- ------- -------
Recoveries ..................................................... 3 3 1 -- --
------- ------- ------- ------- -------
Net charge-offs (recoveries) ................................... (3) (3) 7 7 1
Additions charged to operations ................................ (275) -- 72 83 150
------- ------- ------- ------- -------
Balance at end of period ....................................... $ 1,304 $ 1,576 $ 1,573 $ 1,508 $ 1,432
======= ======= ======= ======= =======
Allowance for loan losses to loans receivable, net, at
end of period .................................................. 0.87% 0.93% 0.98% 0.96% 0.91%
======= ======= ======= ======= =======
Ratio of net charge-offs during the period to average
nonperforming loans ............................................ --% --% 46.67% 9.72% 0.98%
======= ======= ======= ======= =======
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.
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.
9
At June 30,
------------------------------------------------------------------------------------
2003 2002
-------------------------------------- ---------------------------------------
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 .. $ 340 $134,371 87.7% $ 611 $153,843 88.8%
Home equity .......... 26 12,415 8.1 24 11,559 6.7
Multi-family and other 4 4,318 2.8 4 5,175 3.0
Consumer ............. 8 2,159 1.4 11 2,621 1.5
Unallocated .......... 926 -- -- 926 -- --
-------- -------- ----- -------- -------- -----
Total ................ $ 1,304 $153,263 100.0% $ 1,576 $173,198 100.0%
======== ======== ===== ======== ======== =====
At June 30,
-------------------------------------------------------------------------------------------------------
2001 2000 1999
------------------------------- -------------------------------- ----------------------------------
Percent Percent Percent
of Loans of Loans of Loans
Loan in Each Amount Loan in Each Amount Loan in Each
Amount of Amounts Category of Loan Amounts Category of Loan Amounts Category
Loan Loss By To Total Loss By To Total Loss By To Total
Allowance Category Loans Allowance Category Loans Allowance Category Loans
--------- -------- --------- --------- -------- --------- --------- -------- --------
Real Estate Loans:
One- to four-family .. $ 581 $147,865 88.8% $ 575 $140,120 87.7% $ 491 $140,351 87.5%
Home equity .......... 22 10,521 6.3 23 11,002 6.9 25 11,413 7.1
Multi-family and other 4 5,073 3.0 5 5,693 3.5 5 6,058 3.8
Consumer ............. 15 3,155 1.9 14 3,003 1.9 13 2,612 1.6
Unallocated .......... 951 -- -- 891 -- -- 898 -- --
-------- -------- ----- -------- -------- ----- -------- -------- -----
Total .............. 1,573 $166,614 100.0% $ 1,508 $159,818 100.0% $ 1,432 $160,434 100.0%
======== ======== ===== ======== ======== ===== ======== ======== =====
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, 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
10
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. At June 30, 2003,
the Corporation has an investment in a mutual fund, AMF Adjustable-Rate Mortgage
Fund, in the amount of $15,298, which represents approximately 21% of
shareholders' equity at June 30, 2003. Virtually all of the interest-bearing
deposits with banks are on deposit with the Federal Home Loan Bank of Chicago in
a 10-day notice and overnight account.
The following table sets forth the composition of our securities, net of
premiums and discounts, at the dates indicated.
At June 30,
---------------------------------------------------------------------
2003 2002 2001
------------------- ------------------- -------------------
Book % of Book % of Book % of
Value Total Value Total Value Total
--------- ----- --------- ----- --------- -----
(Dollars in Thousands)
Securities available-for-sale:
Mortgage-backed securities - Fannie Mae and Freddie Mac $ 11,525 16.1% $ 12,347 13.4% $ 13,405 12.2%
Mutual fund 15,298 21.4 5,027 5.5 -- --
Securities held to maturity
Federal agency obligations - FHLB 25,000 35.0 55,000 59.6 90,025 81.8
Mortgage-backed securities - Freddie Mac 695 0.9 2,035 2.2 4,348 4.0
Tax increment allocation note 421 0.6 448 0.5 473 0.4
FHLB stock 18,563 26.0 17,342 18.8 1,733 1.6
--------- ----- --------- ----- --------- -----
Total securities and FHLB stock $ 71,502 100.0% $ 92,199 100.0% $ 109,984 100.0%
========= ===== ========= ===== ========= =====
Average remaining life of securities 2.8 years 3.2 years 1.6 years
Other interest-earning assets:
Interest-bearing deposits with banks $ 127,994 96.4% $ 83,367 95.6% $ 60,816 97.6%
Federal funds sold 4,800 3.6 3,800 4.4 1,500 2.4
--------- ----- --------- ----- --------- -----
Total $ 132,794 100.0% $ 87,167 100.0% $ 62,316 100.0%
========= ===== ========= ===== ========= =====
11
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, 2003. Mortgage-backed securities, FHLB
stock, and the mutual fund are only included in the total columns since these
securities are not due at a single maturity date.
At June 30, 2003
---------------------------------------------------------------------------------------------
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 .. $ -- $25,000 $ -- $ -- $25,000 $25,729
Tax increment allocation note ...... 27 130 232 32 421 421
Mortgage-backed securities ......... -- -- -- -- 12,220 12,239
FHLB stock ......................... -- -- -- -- 18,563 18,563
Mutual fund ........................ -- -- -- -- 15,298 15,298
------- ------- ------- ------- ------- -------
Total securities ................... $ 27 $25,130 $ 232 $ 32 $71,502 $72,250
======= ======= ======= ======= ======= =======
Weighted average yield ............. 8.50% 4.02% 8.50% 8.50% 3.66%
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.
Deposit Activity. The following table sets forth Chesterfield Federal's
deposit flows during the periods indicated.
For the Years Ended June 30,
------------------------------------------
2003 2002 2001
--------- --------- ---------
(Dollars in Thousands)
Opening balance .................... $ 278,125 $ 260,658 $ 263,350
Deposits ........................... 325,373 326,470 326,812
Withdrawals ........................ (326,642) (316,893) (339,625)
Interest credited .................. 5,319 7,890 10,121
--------- --------- ---------
Ending balance ..................... $ 282,175 $ 278,125 $ 260,658
========= ========= =========
Net increase (decrease) ............ $ 4,050 $ 17,467 $ (2,692)
========= ========= =========
Percent increase (decrease) ........ 1.5% 6.7% (1.0)%
========= ========= =========
12
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,
-----------------------------------------------------------------------------
2003 2002 2001
--------------------- --------------------- ---------------------
Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- -------
(Dollars in Thousands)
Transactions and Savings Deposits:
Passbook Savings 1.00% ......................... $ 61,402 21.8% $ 58,968 21.2% $ 53,553 20.5%
NOW Accounts 0.75% - 1.00% ..................... 30,016 10.6 28,258 10.2 24,049 9.2
Money Market Accounts
0.75% - 1.00% ................................ 10,702 3.8 9,806 3.5 8,827 3.4
-------- ----- -------- ----- -------- -----
Total non-certificates ......................... 102,120 36.2 97,032 34.9 86,429 33.1
-------- ----- -------- ----- -------- -----
Time Deposits:
0.00% - 1.99% ................................. 128,246 45.5 1,080 0.4 -- --
2.00% - 3.99% ................................. 35,079 12.4 142,893 51.3 980 0.4
4.00% - 5.99% ................................. 13,837 4.9 31,928 11.5 170,539 65.4
6.00% - 7.99% ................................. 2,533 0.9 4,799 1.7 2,079 0.8
8.00% - 9.99% ................................. 360 0.1 393 0.1 631 0.2
-------- ----- -------- ----- -------- -----
Total time deposits ............................ 180,055 63.8 181,093 65.0 174,229 66.8
-------- ----- -------- ----- -------- -----
Accrued interest ............................... 113 0.0 171 0.1 319 0.1
-------- ----- -------- ----- -------- -----
Total deposits, including
accrued interest ............................. $282,288 100.0% $278,296 100.0% $260,977 100.0%
======== ===== ======== ===== ======== =====
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, 2003.
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% .................. $126,324 $ 1,922 $ -- $ -- $128,246
2.00% - 3.99% .................. 20,685 9,702 2,304 2,388 35,079
4.00% - 5.99% .................. 4,960 1,427 1,226 6,224 13,837
6.00% - 7.99% .................. 100 1,033 1,213 187 2,533
8.00% - 9.99% .................. -- -- -- 360 360
-------- -------- -------- -------- --------
Total .......................... $152,069 $ 14,084 $ 4,743 $ 9,159 $180,055
======== ======== ======== ======== ========
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, 2003.
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 .............. $ 75,980 $ 11,874 $ 13,793 $ 22,083 $123,730
Time deposits of $100,000 or more ............. 44,417 2,268 3,737 5,903 56,325
-------- -------- -------- -------- --------
Total time deposits ........................... $120,397 $ 14,142 $ 17,530 $ 27,986 $180,055
======== ======== ======== ======== ========
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
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.
13
Chesterfield Federal did not borrow any funds, including Federal Home Loan
Bank advances, during the fiscal years ended June 30, 2003, 2002, and 2001.
Insurance Activities
Chesterfield Insurance Services, L.L.C. ("Chesterfield Insurance") 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, 2003 and 2002,
Chesterfield Insurance generated $2.5 and $2.0 million, respectively, in
insurance commissions and incurred operating expenses of $2.4 million and $2.1
million, respectively. Chesterfield Insurance reported income (before income tax
provisions) of $23,100 and $10,200 for the years ended June 30, 2003 and 2002,
respectively, and a loss of $5,500 for the year ended June 30, 2001. As of June
30, 2003, Chesterfield Insurance had 20 employees.
Employees
At June 30, 2003, Chesterfield Federal had a total of 91 full-time and 20
part-time employees, including 20 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, 2003, our deposit
accounts consisted of time deposit accounts and demand deposits such as NOW
accounts. Of our time deposits, $152.1 million, or 84.5%, 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
(7-, 10-, and 15-year) loans. As of June 30, 2003, $134.4 million, or 87.7%, 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.
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
14
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, 2003, 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
restrictions. As of June 30, 2003, Chesterfield Federal maintained 66.49% 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
15
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 that 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% shareholders, 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, in part,
on Chesterfield Federal's capital position, and requires approval procedures to
be followed. At June 30, 2003, 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
shareholders 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 a cease and desist order for removal of officers and/or
directors of the institution,
16
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 the Director does not take action, 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 shareholders' 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.
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,
2003 and 2002, Chesterfield Federal met each of its capital requirements.
17
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, 2003, 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.
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,
2003, 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.
18
The USA PATRIOT Act
In response to the events of September 11, 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. On July 23, 2002, the Office of Thrift Supervision and the
other federal bank regulators jointly issued proposed rules to
implement Section 326. The proposed rules require financial
institutions to establish a program specifying procedures for
obtaining identifying information from customers seeking to open new
accounts. This identifying information would be essentially the same
information currently obtained by most financial institutions for
individual customers.
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.
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
19
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.
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.
20
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, 2003, 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 in excess of earnings and profits, 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.
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, 2003, 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, 2003.
21
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 the plaintiff or
defendant in various legal actions arising in the normal course of its business.
At June 30, 2003, 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 the shareholders during the fourth
quarter of the year under report.
22
PART II
ITEM 5. Market for Corporation's Common Stock and Related Shareholder Matters
Chesterfield Financial's common stock is quoted on the Nasdaq National
Market under the symbol "CFSL." The Corporation's common stock was held by
approximately 1,128 stockholders of record (excluding the number of persons or
entities holding stock in street name through various brokerage firms), and is
traded on the Nasdaq Stock Market under the symbol "CFSL".
The following table sets forth market price and dividend information for
the common stock for the fiscal years ended June 30, 2003 and 2002.
Fiscal Year Ended Cash Dividends
June 30, 2003 High Low Declared
- -------------------------------------------------------------------------------
Fourth quarter $21.70 $20.10 $ 0.06
Third quarter $20.95 $19.80 $ 0.06
Second quarter $20.88 $18.15 $ 0.05
First quarter $18.43 $17.70 $ --
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 $ --
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 shareholders 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, 2003, 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
shareholders 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.
23
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,
-------------------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
(In Thousands)
Selected Financial Condition Data:
Total assets ............................ $ 368,909 $ 363,340 $ 344,310 $ 305,480 $ 304,107
Loans receivable, net ................... 150,022 169,881 161,203 157,276 156,917
Interest-bearing deposits ............... 127,994 83,367 60,816 59,933 77,673
Securities available-for-sale ........... 26,822 17,374 13,405 -- --
Securities held-to-maturity ............. 26,117 57,483 94,846 73,687 56,571
Deposits ................................ 282,175 278,125 260,658 263,350 259,131
Shareholders' equity .................... 73,309 76,741 76,553 35,155 32,822
For the Years Ended June 30,
-------------------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
(In Thousands)
Selected Operations Data:
Total interest income ................... $ 16,027 $ 19,047 $ 20,418 $ 19,563 $ 18,848
Total interest expense .................. 5,620 8,102 11,005 10,746 10,646
--------- --------- --------- --------- ---------
Net interest income ..................... 10,407 10,945 9,413 8,817 8,202
Provision for loan losses ............... (275) -- 72 83 150
--------- --------- --------- --------- ---------
Net interest income after
provision for loan losses ............ 10,682 10,945 9,341 8,734 8,052
Total noninterest income ................ 2,841 2,475 2,278 2,140 1,531
Total noninterest expense ............... 9,111 8,396 7,529 7,220 7,006
--------- --------- --------- --------- ---------
Income before taxes ..................... 4,412 5,024 4,090 3,654 2,577
Income tax provision .................... 1,646 1,766 1,418 1,321 919
--------- --------- --------- --------- ---------
Net income .............................. $ 2,766 $ 3,258 $ 2,672 $ 2,333 $ 1,658
========= ========= ========= ========= =========
24
At or For the Years Ended June 30,
----------------------------------------------------------
2003 2002 2001 2000 1999
----- ----- ----- ----- -----
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on average assets (1) .................................... 0.77% 0.91% 0.81% 0.77% 0.56%
Return on average equity (2) .................................... 3.82 4.26 5.76 6.86 5.17
Interest rate spread (3) ........................................ 2.61 2.52 2.39 2.56 2.41
Net interest margin (4) ......................................... 3.00 3.16 2.95 3.01 2.85
Ratio of noninterest expense to
average total assets .......................................... 2.52 2.35 2.29 2.38 2.36
Ratio of average interest-earning assets
to average interest-bearing liabilities ....................... 123.8 127.3 116.6 112.3 111.8
Efficiency ratio (5) ............................................ 68.8 62.6 64.4 65.9 72.0
Asset Quality Ratios:
Nonperforming loans to total loans at
end of period ................................................. 0.17 0.13 -- 0.01 0.06
Nonperforming assets to total assets at
end of period ................................................. 0.07 0.06 -- -- 0.03
Allowance for loan losses to
nonperforming loans ........................................... 5.05x 7.10x 524.33x 116.00x 15.91x
Allowance for loan losses to
loans receivable, net ....................................... 0.87% 0.93% 0.98% 0.96% 0.91%
Capital Ratios:
Equity to total assets at end of period ......................... 19.87 21.12 22.23 11.51 10.79
Average equity to average assets ................................ 20.03 21.38 13.06 11.21 10.77
Dividend payout ratio (6) ....................................... 21.8% -- -- n/a n/a
Per Share Data:
Basic Earnings per share (6) ...................................... 0.78 0.84 0.10 n/a n/a
Diluted Earnings per share (6) .................................... 0.77 0.83 0.10 n/a n/a
Cash dividends per share (6) ...................................... 0.17 -- -- 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) Noninterest expense divided by the sum of net interest income and
noninterest income.
(6) Chesterfield Financial's common stock first traded on May 2, 2001 and did
not pay dividends until fiscal 2003.
25
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 that 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.
Summary of Critical Accounting Policies
The Company's Consolidated Financial Statements are prepared in accordance
with accounting principles generally accepted in the United States of America
and prevailing practices of the banking industry. Application of these
principles requires management to make estimates, assumptions, and judgments
that affect the amounts reported in the financial statements and accompanying
notes. These estimates, assumptions and judgments are based on information
available as of the date of the financial statements; accordingly, as the
information changes, the financial statements could reflect different estimates,
assumptions and judgments. Certain policies and accounting principles inherently
have a greater reliance on the use of estimates, assumptions and judgments and
as such have a greater possibility of producing results that could be materially
different than originally reported. Estimates, assumptions and judgments are
necessary when assets and liabilities are required to be recorded at fair value,
when a decline in the value of an asset not carried on the financial statements
at fair value warrants an impairment write-down or valuation reserve to be
established, or when an asset or liability needs to be recorded contingent upon
a future event. Carrying assets and liabilities at fair value inherently results
in more financial statement volatility. The fair values and the information used
to record valuation adjustments for certain assets and liabilities are based
either on quoted market prices or are provided by other provided by other
third-party sources when available. When third-party information is not
available, valuation adjustments are estimated in good faith by management
primarily through the use of internal cash flow modeling techniques.
A summary of the Company's significant accounting policies is presented in
Note 2 to the Consolidated Financial Statements. These policies, along with the
disclosures presented in the other financial statement notes and in this
Management's Discussion and Analysis section, provide information on how
significant assets and liabilities are valued in the financial statements and
how those values are determined. Management has identified the determination of
the allowance for loan losses and the determination of the fair value of
financial instruments as the accounting areas that require the most subjective
and complex judgments, and as such could be the most subject to revision as new
information becomes available.
The allowance for loan losses is a valuation allowance for probable
incurred credit losses. Management estimates the allowance balance on a
quarterly basis based on past loan loss experience, the nature and volume of the
portfolio, peer group information, adverse situations that may effect 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.
The fair values of financial instruments are estimated using relevant
market information and other assumptions. 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. There is no ready market for a significant portion
of the Company's financial instruments. Accordingly, fair values are based on
various factors relative to expected loss experience, current economic
conditions, risk characteristics, and other factors. The assumptions and
estimates used in the fair value determination process are subjective in nature
and involve uncertainties and significant judgment and, therefore, fair values
cannot be determined with precision. Changes in assumptions or in market
conditions could significantly affect the estimates.
26
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 noninterest 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 the primary source of funds and maintaining
a substantial portion of the 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, 2003, $134.4 million,
or 87.7% of our total loan portfolio, consisted of one- to
four-family residential real estate loans. During the year ended
June 30, 2003, we originated $32.7 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 (7-, 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.
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 33 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, 2003, we had $258,000 of nonperforming assets,
which represented 0.07% of total assets. In addition, we maintain
our financial strength by maintaining high capital levels. At June
30, 2003, our ratio of shareholders' equity to assets was 19.87%.
27
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 2003 and 2002 and monthly for 2001.
Non-accruing loans have been included in the table as loans carrying a zero
yield.
For the Years Ended June 30,
----------------------------------------------------------------------------------------------------
2003 2002 2001
--------------------------------- ------------------------------- -------------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
------- ---- ---- ------- ---- ---- ------- ---- ----
(Dollars in Thousands)
Interest-earning assets:
Loans receivable (1) ......... $160,125 $ 10,894 6.80% $164,146 $ 11,794 7.19% $156,811 $ 11,842 7.55%
Securities ................... 59,380 2,677 4.51 87,618 4,721 5.39 86,854 4,963 5.71
Interest-bearing deposits .... 103,514 1,364 1.32 75,455 1,628 2.16 70,075 3,286 4.69
Other ........................ 23,704 1,092 4.61 19,157 904 4.72 4,960 327 6.59
-------- -------- ---- -------- -------- ---- -------- -------- ----
Total interest-earning
assets (1) ................ 346,723 16,027 4.62 346,376 19,047 5.50 318,700 20,418 6.41
-------- -------- ---- -------- -------- ---- -------- -------- ----
Interest-bearing liabilities:
Passbook savings ............. 59,435 720 1.21 54,370 1,045 1.92 66,441 1,410 2.12
NOW accounts ................. 28,695 296 1.03 25,611 338 1.32 23,137 434 1.88
Money market accounts ........ 10,704 131 1.22 9,500 174 1.83 11,502 273 2.37
Time deposits ................ 181,278 4,473 2.47 182,551 6,545 3.59 172,339 8,888 5.16
-------- -------- ---- -------- -------- ---- -------- -------- ----
Total interest-bearing
liabilities .............. 280,112 5,620 2.01 272,032 8,102 2.98 273,419 11,005 4.02
-------- -------- ---- -------- -------- ---- -------- -------- ----
Net interest income ........... $ 10,407 $ 10,945 $ 9,413
======== ======== ========
Net interest rate spread ...... 2.61% 2.52% 2.39%
==== ==== ====
Net earning assets ............ $ 66,611 $ 74,344 $ 45,281
======== ======== ========
Net yield on average
interest-earning assets .... 3.00% 3.16% 2.95%
Average interest-earning assets
to average interest-bearing
liabilities .................. 123.8% 127.3% 116.6%
- ----------
(1) Balance calculated net of deferred loan fees, loan discounts, loans in
process, and the allowance for loan losses.
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.
28
For the Years Ended June 30,
-------------------------------------------------------------------------
2003 vs. 2002 2002 vs. 2001
--------------------------------- ----------------------------------
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 ................... $ (294) $ (606) $ (900) $ 541 $ (589) $ (48)
Securities ......................... (1,686) (358) (2,044) 43 (285) (242)
Interest-bearing deposits .......... 490 (754) (264) 235 (1,893) (1,658)
Other .............................. 203 (15) 188 767 (190) 577
------- ------- ------- ------- ------- -------
Total interest-earning assets .... $(1,287) $(1,733) $(3,020) $ 1,586 $(2,957) $(1,371)
======= ======= ======= ======= ======= =======
Interest-bearing liabilities:
Passbook savings ................... $ 90 $ (415) $ (325) $ (272) $ (93) $ (365)
NOW accounts ....................... 38 (80) (42) 43 (139) (96)
Money market accounts .............. 20 (63) (43) (52) (47) (99)
Time deposits ...................... (46) (2,026) (2,072) 501 (2,844) (2,343)
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities $ 102 $(2,584) (2,482) $ 220 $(3,123) (2,903)
======= ======= ------- ======= ======= -------
Net interest income ................. $ (538) $ 1,532
======= =======
Comparison of Financial Condition at June 30, 2003 and 2002
At June 30, 2003, total assets were $368.9 million, an increase of $5.6
million, or 1.5%, compared to $363.3 million at June 30, 2002. Cash and cash
equivalents increased $46.9 million, or 49.5%, to $141.6 million at June 30,
2003, compared to $94.7 million at June 30, 2002. Securities decreased $22.0
million, or 29.3%, to $52.9 million at June 30, 2003, compared to $74.9 million
at June 30, 2002, primarily because management chose not to commit funds to
intermediate-term investments, given the current low level of interest rates.
Loans receivable at June 30, 2003 were $150.0 million, down $19.9 million,
or 11.7%, compared to $169.9 million at June 30, 2002 as principal repayments of
$63.5 million exceeded loan originations of $43.6 million during fiscal 2003, as
a result of the interest rate environment. The Corporation was not aggressive in
pricing mortgage loan products in this historically low interest-rate
environment, which caused loan prepayments to exceed loan originations in fiscal
2003. The Corporation's nonperforming loans were $258,000, or 0.17% of loans
receivable, as of June 30, 2003, compared to $222,000, or 0.13% of loans
receivable, as of June 30, 2002. The $1.3 million allowance for losses on loans
was 0.87% of loans receivable as of June 30, 2003, compared to 0.93% as of June
30, 2002.
Total deposits at June 30, 2003, were $282.2 million, up $4.1 million, or
1.5%, compared to $278.1 million at June 30, 2002. Passbook savings accounts and
NOW and money market accounts increased $5.1 million, or 5.2%, to $102.1 million
at June 30, 2003, compared to $97 million at June 30, 2002. Time deposits
decreased $1 million, or .6%, to $180.1 million, from $181.1 million during this
same period. Accrued expenses and other liabilities increased $5.4 million in
fiscal 2003, primarily due to pending settlement of a $5.1 million securities
purchase on June 30, 2003.
On November 25, 2002, the Corporation announced its intent to repurchase
up to 188,000 shares of the Corporation's common stock. To date, 20,200 shares
have been repurchased under the November 25 program. During the year ended June
30, 2003, the Corporation repurchased 363,624 shares of its common stock at a
cost of $6.7 million, or an average cost of $18.41 per share.
Total shareholders' equity as of June 30, 2003 was $73.3 million, or 19.9%
of total assets, compared to $76.7 million, or 21.1% of total assets, at June
30, 2002. The decrease in shareholders' equity was primarily due to the stock
repurchase programs previously discussed. At June 30, 2003, there were 3,879,558
common shares outstanding with a book value of $18.90 per share, compared to
4,239,738 shares with a book value of $18.10 at June 30, 2002.
29
Comparison of Operating Results for the Years Ended June 30, 2003 and 2002
General. Net income for the year ended June 30, 2003 was $2.8 million, or
$0.77 diluted earnings per share, compared to net income of $3.3 million, or
$0.83 diluted earnings per share, for the year ended June 30, 2002. The
Corporation's return on average assets for the year ended June 30, 2003 was
0.77%, compared to 0.91% for the same period last year. Return on average equity
for the year was 3.82%, compared to 4.26% for the same period last year.
Total Interest Income. Total interest income decreased by $3.0 million, or
15.9%, to $16.0 million for the year ended June 30, 2003, from $19.0 million for
the year ended June 30, 2002. A decrease in yield on interest-earning assets to
4.62% for the year ended June 30, 2003, from 5.50% for the same period last
year, and a change in the mix of interest-earning assets favoring shorter term,
lower yielding interest-earning deposits, caused the decline in interest income.
Management chose not to commit funds to intermediate-term investments, given the
current low level of interest rates. The average balance of securities for the
year ended June 30, 2003 decreased $28.2 million from the average balance for
the year ended June 30, 2002, while the average balance of interest-earning
deposits and federal funds sold increased $29.5 million.
Interest Expense. Interest expense on deposits decreased by $2.5 million,
or 30.6%, to $5.6 million for the year ended June 30, 2003, from $8.1 million
for the same period in 2002. The decrease was primarily attributable to
reductions in deposit rates paid, with the average cost of funds decreasing to
2.01% for the current year, from 2.98% for the prior year, offset to some extent
by a $8.1 million increase in the average balances of deposit accounts.
Net Interest Income. Net interest income decreased by $538,000, or 4.9%,
to $10.4 million for the year ended June 30, 2003, from $10.9 million for fiscal
2002. The net interest rate spread increased 9 basis points, to 2.61% in 2003,
from 2.52% in 2002, while the net interest margin decreased 16 basis points, to
3.00% in 2003, from 3.16% in 2002. The ratio of average interest-earning assets
to average interest-bearing liabilities was 123.8% for the year ended June 30,
2003, compared to 127.3% for the same period last year.
Provision for Loan Losses. From August 1997 through December 1999, the
Corporation originated $509,000 of community development loans (thirteen loans)
to a real estate development company to acquire vacant lots and deteriorated
buildings for future development. The Corporation has closely monitored these
loans since origination and established $300,000 in specific valuation reserves
on these loans through provisions for loan losses recorded in 1998, 1999, 2000,
and 2001. During October 2002, nine of these parcels were sold and the entire
principal balances of the related loans were recovered. Subsequent to the sale,
$200,000 of the $300,000 specific valuation reserve was recovered during the
quarter ended December 31, 2002, as a negative loan loss provision. A further
review by management of the four remaining loans during the quarter ended March
31, 2003, indicated that an additional $75,000 of the specific valuation reserve
could be recovered as a negative loan loss provision. These loans, with
principal balances of $196,000 at June 30, 2003 remain on nonaccrual loans.
Noninterest Income. Noninterest income increased $366,000, or 14.8%, to
$2.8 million for the year ended June 30, 2003, from $2.5 million for the same
period in 2002. Insurance commissions generated by the Association's insurance
subsidiary, Chesterfield Insurance, increased $432,000, or 21.1%, to $2.5
million in 2003, compared to $2.0 million in 2002. Other noninterest income
decreased $50,000, or 36.2%, to $88,000 for the year ended June 30, 2003,
compared to $138,000 for the year ended June 30, 2002, primarily due to a
$105,000 loss on the Corporation's equity investment in a community development
company, partially offset by a $51,000 increase in agency fees and other service
charges by Chesterfield Insurance.
Noninterest Expense. Total noninterest expense increased $714,000, or
8.5%, to $9.1 million for the year ended June 30, 2003, from $8.4 million for
the year ended June 30, 2002. The primary causes for the increase included a
$562,000, or 11.5%, increase in salaries and employee benefits, which included a
$209,000 increase in expense from the amortization of shares granted in November
2001 under the Corporation's 2001 Recognition and Retention Plan, a $43,000
increase in employee stock ownership plan expense due to the increased fair
value of shares released to participants, and a $28,000 increase in health
insurance premiums.
30
Data processing expenses increased $48,000, or 14.3%, to $384,000 for
2003, compared to $336,000 in 2002, primarily due to additional software costs
associated with upgrading internal systems. Equipment expense decreased
$163,000, or 26.3%, to $458,000 in 2003, compared to $621,000 in 2002, primarily
due to a $90,000 acceleration of depreciation expense recorded in 2002, and the
subsequent replacement of computer equipment with newer, more cost effective
systems, resulting in a $53,000 reduction in depreciation expense for fiscal
2003.
Insurance agency bad debt expense increased $184,000, to $202,000 in
fiscal 2003 compared to $18,000 in fiscal 2002, primarily the result of a
$194,000 provision for an insurance premium receivable from a long-term
commercial client of Chesterfield Insurance. During the current quarter,
Chesterfield Insurance recovered $20,000 of this provision. Chesterfield
Insurance continues to aggressively pursue collection of this receivable.
Other miscellaneous expenses increased $61,000, or 3.7%, to $1.7 million
for the year ended June 30, 2003, compared to $1.6 million for the year ended
June 30, 2002, and included a $42,000 increase in insurance and surety bond
premiums for the current year. The annualized ratio of noninterest expense to
average assets was 2.52% in 2003, compared to 2.35% in 2002, and the
Corporation's efficiency ratio was 68.8% for 2003, compared to 62.6% for 2002.
Provision for Income Taxes. The provision for income taxes of $1.6 million
for the year ended June 30, 2003 resulted in an effective tax rate of 37.3%,
compared to a provision of $1.8 million and a 35.2% effective tax rate for the
same period last year. The increase in the effective income tax rate results
primarily from increased state income taxes due to reduced amounts of U.S.
government and agency interest income.
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 dropped 54
basis points, NOW accounts dropped 56 basis points, and time deposits dropped
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 was 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.
31
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 nonaccrual 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.
Noninterest Income. Noninterest 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.
Noninterest Expense. Total noninterest 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 $224,000, or 15.9%, 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
noninterest 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.
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 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.
32
At June 30, 2003, Chesterfield Federal had loan commitments of $7.2
million and unused lines of credit of $19.8 million. Chesterfield Federal has
also purchased a $5.1 million mortgage pool security that settles during July
2003. Chesterfield Federal believes that 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, 2003, approximately $152.2 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
The Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 45 ("FIN 45"), Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, an interpretation of FASB Statement Nos. 5, 57, and 107 and Rescission
of FASB Interpretation No. 34. This interpretation elaborates on the disclosures
to be made by a guarantor in its interim and annual financial statements about
its obligations under certain guarantees that it has issued. It also clarifies
that a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing certain
guarantees. The initial recognition and measurement provisions of the FIN 45 are
applicable on a prospective basis to guarantees issued or modified after
December 15, 2002. Management determined that the adoption of the provisions of
FIN 45 did not have a material impact on the Corporation's consolidated
financial statements as of June 30, 2003.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities. FIN 46 clarifies the application of Accounting Research
Bulletin No. 51, Consolidated Financial Statements, to certain variable interest
entities ("VIE") in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. The recognition and measurement provisions of FIN 46
are effective for newly created VIEs formed after January 31, 2003 and for
existing VIEs on the first interim or annual reporting period beginning after
June 15, 2003. The Corporation has no VIEs. Management determined that adoption
of FIN 46 did not have a material effect on the Corporation's consolidated
financial statements as of June 30, 2003.
In April 2003, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 149, Amendment of Statement 133 on Derivative Instruments and
Hedging Activities to amend and clarify financial accounting and reporting for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. In addition, SFAS No. 149
requires that contracts with comparable characteristics be accounted for
similarly. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003 (with certain exceptions) and for hedging relationships
designated after June 30, 2003. The Corporation does not have any derivative
instruments. Management determined that the adoption of SFAS No. 149 will not
have an impact on the Corporation's consolidated financial statements as of June
30, 2003.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity, which
affects the accounting for certain freestanding financial instruments depending
on the type of financial instrument. The following types of freestanding
financial instruments are affected by SFAS No. 150: (1) mandatorily redeemable
shares for which the issuer is obligated to purchase
33
those shares; (2) obligations to repurchase the issuer's equity shares; and (3)
certain obligations to issue a variable number of shares. SFAS No. 150 is
effective for affected financial instruments issued or modified after May 31,
2003. For those issued prior to May 31, 2002, SFAS No. 150 is required to be
applied for periods beginning after December 15, 2003. Management determined
that the adoption of SFAS No. 150 will not have a material effect on the
Corporation's consolidated financial statements as of June 30, 2003.
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 interest rate risk by
maintaining high levels of liquidity, and emphasizing the origination of
shorter-term (7-, 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 measure 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.
The table below sets forth, as of June 30, 2003, the estimated changes in
Chesterfield Federal's NPV that would result from the designated instantaneous
changes in the U.S. Treasury yield curve.
34
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 $ 65,620 $ (9,362) -12% 17.65% -1.92%
+200 69,471 (5,511) -7 18.46 -1.11
+100 73,023 (1,960) -3 19.19 -0.38
0 74,983 -- -- 19.57 --
-100 74,647 (335) -- 19.46 -0.12
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.
35
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, 2003 and 2002, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended June 30, 2003. 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, 2003 and 2002, and the results of its operations
and its cash flows for each of the three years in the period ended June 30, 2003
in conformity with accounting principles generally accepted in the United States
of America.
/s/ Crowe Chizek and Company LLC
--------------------------------
Crowe Chizek and Company LLC
Oak Brook, Illinois
August 15, 2003
36
CHESTERFIELD FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
June 30, 2003 and 2002
- --------------------------------------------------------------------------------
2003 2002
---- ----
ASSETS
Cash and due from financial institutions $ 8,842,509 $ 7,558,382
Interest-bearing deposits 127,994,123 83,367,263
Federal funds sold 4,800,000 3,800,000
------------- -------------
Cash and cash equivalents 141,636,632 94,725,645
Securities available-for-sale 26,822,431 17,373,760
Securities held-to-maturity (fair value:
2003 - $26,863,762; 2002 - $58,298,527) 26,116,586 57,482,670
Loans, net 150,022,280 169,881,473
Federal Home Loan Bank stock 18,563,200 17,342,100
Premises and equipment, net 2,414,856 2,529,244
Goodwill 451,582 451,582
Accrued interest receivable and other assets 2,881,746 3,553,622
------------- -------------
Total assets $ 368,909,313 $ 363,340,096
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 282,174,642 $ 278,125,407
Advance payments by borrowers for
taxes and insurance 2,203,499 2,622,335
Accrued expenses and other liabilities 11,221,750 5,851,221
------------- -------------
Total liabilities 295,599,891 286,598,963
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; 2003 - 3,879,558 shares outstanding,
2002 - 4,239,738 shares outstanding 43,047 43,047
Additional paid-in capital 42,398,689 42,153,300
Retained earnings 43,263,633 41,084,408
Unearned ESOP shares (2,833,030) (3,055,561)
Unearned RRP shares (1,940,971) (2,496,015)
Treasury stock, at cost; 2003 - 425,180 shares,
2002 - 65,000 shares (7,797,619) (1,166,625)
Accumulated other comprehensive income 175,673 178,579
------------- -------------
Total shareholders' equity 73,309,422 76,741,133
------------- -------------
Total liabilities and shareholders' equity $ 368,909,313 $ 363,340,096
============= =============
37
CHESTERFIELD FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
Years ended June 30, 2003, 2002, and 2001
- --------------------------------------------------------------------------------
2003 2002 2001
---- ---- ----
Interest and dividend income
Loans, including fees $ 10,893,710 $ 11,793,855 $ 11,842,137
Securities 2,676,702 4,720,656 4,962,409
Interest-bearing deposits 1,363,843 1,627,850 3,286,374
Other 1,092,892 904,682 327,636
------------ ------------ ------------
Total interest income 16,027,147 19,047,043 20,418,556
Interest expense on deposits 5,620,102 8,102,099 11,005,252
------------ ------------ ------------
Net interest income 10,407,045 10,944,944 9,413,304
Provision for loan losses (275,000) -- 72,000
------------ ------------ ------------
Net interest income after provision
for loan losses 10,682,045 10,944,944 9,341,304
Noninterest income
Insurance commissions 2,481,451 2,049,264 1,857,508
Service charges on deposit accounts 271,023 288,140 292,611
Other 88,326 138,078 127,736
------------ ------------ ------------
2,840,800 2,475,482 2,277,855
Noninterest expense
Salaries and employee benefits 5,448,071 4,885,614 4,370,506
Occupancy 793,629 775,381 772,274
Equipment 457,800 621,071 504,990
Data processing 383,980 336,215 324,245
Federal deposit insurance 131,801 127,699 120,946
Insurance agency bad debt expense 201,915 18,000 28,579
Other 1,693,204 1,632,414 1,407,824
------------ ------------ ------------
9,110,400 8,396,394 7,529,364
------------ ------------ ------------
Income before income taxes 4,412,445 5,024,032 4,089,795
Income tax expense 1,646,082 1,766,235 1,418,205
------------ ------------ ------------
Net income $ 2,766,363 $ 3,257,797 $ 2,671,590
============ ============ ============
Earnings per share
Basic $ 0.78 $ 0.84 $ 0.10
Diluted 0.77 0.83 0.10
- --------------------------------------------------------------------------------
38
CHESTERFIELD FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS'
EQUITY Years ended June 30, 2003, 2002, and 2001
- --------------------------------------------------------------------------------
Additional Unearned
Common Paid-In Retained ESOP
Stock Capital Earnings Shares
----- ------- -------- ------
Balance at July 1, 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
------------ ------------ ------------ ------------
Balance at June 30, 2001 43,047 41,999,352 37,826,611 (3,292,878)
Purchases of treasury stock -- -- -- --
ESOP shares earned -- 153,948 -- 237,317
Grant of RRP shares -- -- -- --
RRP shares vested -- -- -- --
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)
Accumulated
Unearned Other
RRP Treasury Comprehensive
Shares Stock Income (Loss) Total
------ ----- ------------- -----
Balance at July 1, 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 2,648,018
------------ ------------ ------------ ------------
Balance at June 30, 2001 -- -- (23,572) 76,552,560
Purchases of treasury stock -- (4,008,314) -- (4,008,314)
ESOP shares earned -- -- -- 391,265
Grant of RRP shares (2,841,689) 2,841,689 -- --
RRP shares vested 345,674 -- -- 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 (2,496,015) (1,166,625) 178,579 76,741,133
- --------------------------------------------------------------------------------
39
CHESTERFIELD FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS'
EQUITY Years ended June 30, 2003, 2002, and 2001
- --------------------------------------------------------------------------------
Additional Unearned
Common Paid-In Retained ESOP
Stock Capital Earnings Shares
----- ------- -------- ------
Purchases of treasury stock $ -- $ -- $ -- $ --
ESOP shares earned -- 215,247 -- 219,261
RRP shares vested -- -- -- --
Income tax benefit of RRP vesting -- 34,380 -- --
Options exercised -- (7,542) -- --
Dividends paid -- 3,304 (587,138) 3,270
Comprehensive income
Net income -- -- 2,766,363 --
Unrealized loss on
securities available-for-sale,
net of reclassification
and tax effects -- -- -- --
Total comprehensive
income
------------ ------------ ------------ ------------
Balance at June 30, 2003 $ 43,047 $ 42,398,689 $ 43,263,633 $ (2,833,030)
============ ============ ============ ============
Accumulated
Unearned Other
RRP Treasury Comprehensive
Shares Stock Income (Loss) Total
------ ----- ------------- -----
Purchases of treasury stock $ -- $ (6,694,157) $ -- $ (6,694,157)
ESOP shares earned -- -- -- 434,508
RRP shares vested 555,044 -- -- 555,044
Income tax benefit of RRP vesting -- -- -- 34,380
Options exercised -- 63,163 -- 55,621
Dividends paid -- -- -- (580,564)
Comprehensive income
Net income -- -- -- 2,766,363
Unrealized loss on
securities available-for-sale,
net of reclassification
and tax effects -- -- (2,906) (2,906)
------------
Total comprehensive
income 2,763,457
------------ ------------ ------------ ------------
Balance at June 30, 2003 $ (1,940,971) $ (7,797,619) $ 175,673 $ 73,309,422
============ ============ ============ ============
- --------------------------------------------------------------------------------
40
CHESTERFIELD FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, 2003, 2002, and 2001
- --------------------------------------------------------------------------------
2003 2002 2001
---- ---- ----
Cash flows from operating activities
Net income $ 2,766,363 $ 3,257,797 $ 2,671,590
Adjustments to reconcile net income to net
cash provided by operating activities
Provision for loan losses (275,000) -- 72,000
Bad debt expense 201,915 18,000 28,579
Depreciation and amortization 389,379 531,345 425,093
Deferred income tax benefit (247,085) (260,529) (133,714)
FHLB stock dividend (1,221,100) (609,200) (123,100)
ESOP compensation expense 434,508 391,265 217,464
RRP compensation expense 555,044 345,674 --
Net amortization of securities (127,807) (3,865) (2,636)
Net change in:
Deferred loan origination fees (81,218) 24,430 (80,149)
Accrued interest receivable and other assets 919,904 (439,215) (134,448)
Accrued expenses and other liabilities 66,047 1,487,785 230,568
------------- ------------- -------------
Net cash provided by operating activities 3,380,950 4,743,487 3,171,247
Cash flows from investing activities
Activity in securities held-to-maturity:
Maturities, calls, and prepayments 76,366,702 82,365,155 53,861,339
Purchases (44,879,411) (45,000,000) (75,018,312)
Activity in securities available-for-sale:
Maturities, calls, and prepayments 5,691,027 1,361,387 --
Purchases (10,000,000) (5,021,383) (13,440,773)
Purchase of Federal Home Loan Bank stock -- (15,000,000) --
Loan originations and payments, net 20,215,411 (8,702,758) (3,918,740)
Additions to premises and equipment (274,991) (244,793) (471,150)
------------- ------------- -------------
Net cash provided by (used in) investing activities 47,118,738 9,757,608 (38,987,636)
Cash flows from financing activities
Net change in deposits 4,049,235 17,467,445 (2,692,026)
Net change in advance payments by borrowers
for taxes and insurance (418,836) (155,970) (56,956)
Net proceeds from stock option exercise 55,621 -- --
Net proceeds from stock issuance -- -- 38,532,057
Dividends paid (580,564) -- --
Purchase of treasury stock, at cost (6,694,157) (4,008,314) --
------------- ------------- -------------
Net cash provided by (used in) financing activities (3,588,701) 13,303,161 35,783,075
------------- ------------- -------------
Net change in cash and cash equivalents 46,910,987 27,804,256 (33,314)
Beginning cash and cash equivalents 94,725,645 66,921,389 66,954,703
------------- ------------- -------------
Ending cash and cash equivalents $ 141,636,632 $ 94,725,645 $ 66,921,389
============= ============= =============
Supplemental cash flow information:
Interest paid $ 5,578,300 $ 8,249,446 $ 11,057,930
Income taxes paid 1,467,000 1,668,000 1,453,000
Supplemental non-cash disclosures:
Due to/from broker for securities transactions $ 5,137,500 $ -- $ --
- --------------------------------------------------------------------------------
41
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003 and 2002
- --------------------------------------------------------------------------------
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 is
maintained for the benefit of eligible depositors who continued to maintain
their accounts at the Association after the conversion. The liquidation account
is reduced annually to the extent that eligible depositors have reduced their
qualifying deposits. Subsequent increases do 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. All significant
inter-company transactions and balances are eliminated in consolidation.
The primary business of the Corporation is the ownership of the Association. The
Association provides financial services through its three full-service offices
located in 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 and the Corporation's investment in a mutual fund.
The primary business of Chesterfield Insurance is the sale of commercial and
personal lines of insurance, including mortgage, life, and disability insurance.
- --------------------------------------------------------------------------------
42
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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, and future
results could differ. 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. Securities are classified as
available-for-sale when 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. Other securities such as Federal Home Loan Bank stock are
carried at cost.
Interest income includes amortization of purchase premium or discount. Gains and
losses on sales are based on the amortized cost of the security sold. Securities
are written down to fair value when a decline in fair value is not temporary.
Loans: Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at the principal
balance outstanding, net of deferred loan fees and costs and an allowance for
loan losses.
Interest income is reported on the interest method and includes amortization of
net deferred loan fees and costs over the loan term. Interest income on mortgage
and commercial loans is discontinued at the time the loan is 90 days delinquent
unless the credit is well-secured and in process of collection. Consumer loans
are typically charged off no later than 120 days past due. In all cases, loans
are placed on nonaccrual or charged off at an earlier date if collection of
principal or interest is considered 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.
- --------------------------------------------------------------------------------
43
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 it cannot collect a loan balance. Subsequent recoveries, if
any, are credited to the allowance. The allowance for 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,
2003 and 2002.
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.
Goodwill : Goodwill results from prior business acquisitions and represents the
excess of the purchase price over the fair value of acquired tangible assets and
liabilities and identifiable intangible assets. Upon adopting new accounting
guidance on July 1, 2002, the Corporation ceased amortizing goodwill. Goodwill
is assessed at least annually for impairment and any such impairment will be
recognized in the period identified. The impact of this standard on the years
ended June 30, 2003, 2002, and 2001 was as follows (in thousands):
Years ended June 30,
----------------------------------
2003 2002 2001
------ ------ ------
Net income
Reported net income $2,766 $3,258 $2,672
Add back: goodwill amortization -- 67 115
------ ------ ------
Adjusted net income $2,766 $3,325 $2,787
====== ====== ======
- --------------------------------------------------------------------------------
44
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Years ended June 30,
---------------------------------------
2003 2002 2001
--------- --------- ---------
Basic earnings per common share
Reported net income $ 0.78 $ 0.84 $ 0.10
Add back: goodwill amortization -- 0.01 0.01
--------- --------- ---------
Adjusted net income $ 0.78 $ 0.85 $ 0.11
========= ========= =========
Diluted earnings per common share
Reported net income $ 0.77 $ 0.83 $ 0.10
Add back: goodwill amortization -- 0.01 0.01
--------- --------- ---------
Adjusted net income $ 0.77 $ 0.84 $ 0.11
========= ========= =========
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 fair value.
Stock Compensation: Employee compensation expense under stock options is
reported using the intrinsic value method. No stock-based compensation cost is
reflected in net income, as all options granted had an exercise price equal to
or greater than the market price of the underlying common stock at date of
grant. The following table illustrates the effect on net income and earnings per
share if expense was measured using the fair value recognition provisions of
FASB Statement No. 123, Accounting for Stock-Based Compensation (in thousands):
Years ended June 30,
---------------------------------------
2003 2002 2001
--------- --------- ---------
Net income as reported $ 2,766 $ 3,258 $ 2,672
Deduct: Stock-based compensation expense
determined under fair value based method (356) (268) --
--------- --------- ---------
Pro forma net income $ 2,410 $ 2,990 $ 2,672
========= ========= =========
Basic earnings per share as reported $ 0.78 $ 0.84 $ 0.10
Pro forma basic earnings per share 0.68 0.77 --
Diluted earnings per share as reported $ 0.77 $ 0.83 $ 0.10
Pro forma diluted earnings per share 0.67 0.76 --
- --------------------------------------------------------------------------------
45
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The pro forma effects are computed using option-pricing models, using the
following weighted-average assumptions as of grant date:
Years ended June 30,
--------------------
2003 2002
---- ----
Option exercise price $20.65 $16.15
Weighted-average fair value of options granted 2.65 5.11
Risk-free interest rate 2.50% 4.78%
Expected option life 7 years 7 years
Expected stock price volatility 10.59% 14.21%
Dividend yield 1.55% 0%
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 reduces deferred tax
assets to the amount management expects to realize, if necessary.
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 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
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.
- --------------------------------------------------------------------------------
46
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 $494,000 and $504,000
of cash on hand to meet regulatory reserve requirements at June 30, 2003 and
2002.
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.
Operating Segments: Internal financial information is primarily reported and
aggregated in two lines of business, banking and insurance.
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 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: The Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 45 ("FIN 45"), Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, an interpretation of FASB Statement Nos. 5, 57, and 107
and Rescission of FASB Interpretation No. 34. This interpretation elaborates on
the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing certain guarantees. The initial recognition and measurement provisions
of the FIN 45 are applicable on a prospective basis to guarantees issued or
modified after December 15, 2002. Management determined that the adoption of the
provisions of FIN 45 did not have a material impact on the Corporation's
consolidated financial statements as of June 30, 2003.
- --------------------------------------------------------------------------------
47
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities. FIN 46 clarifies the application of Accounting Research Bulletin No.
51, Consolidated Financial Statements, to certain variable interest entities
("VIE") in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. The recognition and measurement provisions of FIN 46
are effective for newly created VIEs formed after January 31, 2003 and for
existing VIEs on the first interim or annual reporting period beginning after
June 15, 2003. The Corporation has no VIEs. Management determined that adoption
of FIN 46 did not have a material effect on the Corporation's consolidated
financial statements as of June 30, 2003.
In April 2003, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 149, Amendment of Statement 133 on Derivative Instruments and
Hedging Activities to amend and clarify financial accounting and reporting for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. In addition, SFAS No. 149
requires that contracts with comparable characteristics be accounted for
similarly. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003 (with certain exceptions) and for hedging relationships
designated after June 30, 2003. The Corporation does not have any derivative
instruments. Management determined that the adoption of SFAS No. 149 will not
have an impact on the Corporation's consolidated financial statements as of June
30, 2003.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity, which affects
the accounting for certain freestanding financial instruments depending on the
type of financial instrument. The following types of freestanding financial
instruments are affected by SFAS No. 150: (1) mandatorily redeemable shares for
which the issuer is obligated to purchase those shares; (2) obligations to
repurchase the issuer's equity shares; and (3) certain obligations to issue a
variable number of shares. SFAS No. 150 is effective for affected financial
instruments issued or modified after May 31, 2003. For those issued prior to May
31, 2002, SFAS No. 150 is required to be applied for periods beginning after
December 15, 2003. Management determined that the adoption of SFAS No. 150 will
not have a material effect on the Corporation's consolidated financial
statements as of June 30, 2003.
Reclassifications: Certain items in the consolidated financial statements have
been reclassified, with no effect on net income, to conform with the current
year presentation.
- --------------------------------------------------------------------------------
48
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003 and 2002
- --------------------------------------------------------------------------------
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, 2003
FNMA mortgage-backed $ 9,949,006 $ 210,027 $ --
FHLMC mortgage-backed 1,575,977 56,204 --
Mutual fund 15,297,448 -- (59)
----------- ----------- -----------
Total $26,822,431 $ 266,231 $ (59)
=========== =========== ===========
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 $ --
=========== =========== ===========
The carrying amount, unrecognized gains and losses, and fair value of securities
held-to-maturity were as follows:
Gross Gross
Carrying Unrecognized Unrecognized Fair
Amount Gains Losses Value
----------- ------------ ------------ -----------
June 30, 2003
U.S. federal agency - FHLB $25,000,000 $ 728,548 $ -- $25,728,548
FHLMC mortgage-backed 695,449 18,628 -- 714,077
Tax increment allocation note 421,137 -- -- 421,137
----------- ----------- ----------- -----------
Total $26,116,586 $ 747,176 $ -- $26,863,762
=========== =========== =========== ===========
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
=========== =========== =========== ===========
- --------------------------------------------------------------------------------
49
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 3 - SECURITIES (Continued)
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.
Contractual maturities of debt securities held-to-maturity at June 30, 2003 were
as follows. Securities not due at a single maturity date, primarily
mortgage-backed securities are shown separately.
Amortized Cost Fair Value
-------------- ----------
Due in one year or less $ 26,906 $ 26,906
Due from one to five years 25,129,808 25,858,356
Due from five to ten years 231,731 231,731
Due after ten years 32,692 32,692
Mortgage-backed 695,449 714,077
----------- -----------
Total $26,116,586 $26,863,762
=========== ===========
All securities classified as available-for-sale are mortgage-backed securities
or mutual fund investments not due at a single maturity date.
There were no pledged securities at June 30, 2003 or 2002.
There were no security sales during the years ending June 30, 2003, 2002, and
2001.
At June 30, 2003, the Corporation has an investment in a mutual fund, AMF
Adjustable-Rate Mortgage Fund, in the amount of $15,297,448, which represents
approximately 21% of shareholders' equity at June 30, 2003. At June 30, 2002,
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.
- --------------------------------------------------------------------------------
50
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 4 - LOANS
Loans were as follows:
-----------June 30,----------
--------
2003 2002
---- ----
One- to four-family mortgage loans $134,371,392 $153,843,368
Home equity loans 12,415,127 11,558,957
Multi-family and other real estate loans 4,318,002 5,175,063
Consumer 2,158,935 2,621,134
------------ ------------
Subtotal 153,263,456 173,198,522
Less: Allowance for loan losses 1,304,413 1,576,427
Net deferred loan fees 579,763 498,545
Undisbursed loan funds 1,357,000 1,242,077
------------ ------------
Loans, net $150,022,280 $169,881,473
============ ============
The Corporation's lending activities are concentrated primarily on the southwest
side of Chicago and the 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 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,---------
--------------------
2003 2002 2001
---- ---- ----
Beginning balance $ 1,576,427 $ 1,573,396 $ 1,508,020
Provision for loan losses (275,000) -- 72,000
Loans charged off -- -- (7,525)
Recoveries 2,986 3,031 901
----------- ----------- -----------
Ending balance $ 1,304,413 $ 1,576,427 $ 1,573,396
=========== =========== ===========
Nonperforming loans were as follows:
-------------June 30,-------------
--------
2003 2002 2001
---- ---- ----
Loans past due over 90 days still on accrual $ -- $ -- $ --
Nonaccrual loans 258,494 222,207 3,078
- --------------------------------------------------------------------------------
51
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 4 - LOANS (Continued)
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, 2003 and 2002 did not meet
or exceed 5% of shareholders' equity.
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment were as follows:
---------June 30,--------
--------
2003 2002
---- ----
Land $ 559,163 $ 559,163
Buildings 3,402,974 3,402,974
Parking lot improvements 33,283 6,353
Furniture, fixtures, and equipment 1,800,476 1,552,414
---------- ----------
5,795,896 5,520,904
Less accumulated depreciation 3,381,040 2,991,660
---------- ----------
$2,414,856 $2,529,244
========== ==========
Rent commitments under a noncancelable-operating lease of premises as of June
30, 2003, were as follows, before considering renewal options that generally are
present.
2004 $ 104,076
2005 104,076
2006 104,076
2007 34,692
----------
$ 346,920
==========
NOTE 6 - ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows.
----------June 30,-------
--------
2003 2002
---- ----
Investment securities $152,987 $549,816
Loans receivable 71,946 139,848
Other -- 216,182
-------- --------
$224,933 $905,846
======== ========
- --------------------------------------------------------------------------------
52
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 7 - DEPOSITS
Deposits were as follows:
------------June 30,-----------
--------
2003 2002
---- ----
Passbook savings $ 61,401,534 $ 58,967,897
NOW accounts 30,015,938 28,258,227
Money market accounts 10,701,856 9,806,087
Time deposits 180,055,314 181,093,196
------------ ------------
$282,174,642 $278,125,407
============ ============
Time deposits of $100,000 or more were $56,325,000 and $51,378,000 at June 30,
2003 and 2002. Deposit amounts in excess of $100,000 are not federally insured.
Scheduled maturities of time deposits at June 30, 2003 were as follows.
2004 $152,068,964
2005 14,084,501
2006 4,742,895
2007 1,279,550
2008 7,464,002
Thereafter 415,402
------------
$180,055,314
============
NOTE 8 - 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 this 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 payments upon their
separation from service, as defined. Benefits accrued were $1,311,000 at both
June 30, 2003 and 2002.
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 $351,000 at both June 30, 2003 and 2002.
- --------------------------------------------------------------------------------
53
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 8 - RETIREMENT PLAN AND OTHER BENEFIT PLANS (Continued)
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 2003, 2002, and 2001 were $307,750, $343,945,
and $247,166. ESOP expenses for 2003, 2002, and 2001 were $434,508, $391,265,
and $217,464. Shares held by the ESOP were are as follows:
----------------June 30, ---------------
2003 2002 2001
---- ---- ----
Allocated shares 60,568 38,823 15,091
Unallocated shares 283,303 305,556 329,288
---------- ---------- ----------
Total ESOP shares 343,871 344,379 344,379
========== ========== ==========
Fair value of unallocated shares $5,991,858 $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 2003 and 2002
was $555,044 and $345,674. Unearned compensation is reported as a reduction of
shareholders' equity until earned. The following schedule summarizes expenses
recorded related to benefit plans:
- --------------------------------------------------------------------------------
54
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 8 - RETIREMENT PLAN AND OTHER BENEFIT PLANS (Continued)
-------------Years ended June 30,-------
-------------------
2003 2002 2001
---- ---- ----
Employee retirement (profit sharing) plan $ -- $ -- $ 180,429
Employee stock ownership plan 434,508 391,265 217,464
Recognition and retention plan 555,044 345,674 --
Supplemental Benefit Plan for Inside Directors 85,752 174,835 163,397
Retirement Benefit Plan for Outside Directors -- -- 104,942
---------- ---------- ----------
Total expense $1,075,304 $ 911,774 $ 666,232
========== ========== ==========
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.
A summary of the status of the option plans as of June 30, 2003 and 2002 and
changes during the years ended on those dates is presented below.
2003 2002
---------------------- --------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
Outstanding at beginning of year 430,373 $16.15 -- $ --
Granted 3,000 20.65 430,373 16.15
Exercised (3,444) 16.15 -- --
Forfeited (13,775) 16.15 -- --
-------- ------ -------- ------
Outstanding at end of year 416,154 16.18 430,373 16.15
======== ====== ======== ======
Options exercisable at year end 95,370 $16.15 -- $ --
======== ====== ======== ======
Weighted average fair value of
options granted during the year $ 2.65 $ 5.11
====== =======
- --------------------------------------------------------------------------------
55
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 8 - RETIREMENT PLAN AND OTHER BENEFIT PLANS (Continued)
Options outstanding at year-end 2003 were as follows:
Outstanding Exercisable
----------------------- ---------------------
Remaining
Contractual Exercise
Exercise Prices Number Life Number Price
--------------- ------ ----------- ------ --------
$16.15 413,154 9 years 95,370 $ 16.15
20.65 3,000 10 years -- --
------- -------- ------ ----------
416,154 9 years 95,370 $ 16.15
======= ======== ====== ==========
Certain members of the Board of Directors have deferred some of their fees in
consideration for future payments, including interest. Amounts deferred were
approximately $2,038,000 and $1,917,000 as of June 30, 2003 and 2002.
NOTE 9 - INCOME TAXES
Income tax expense (benefit) was as follows.
--------------Years ended June 30,-------------
-------------------
2003 2002 2001
---- ---- ----
Current $ 1,893,167 $ 2,026,764 $ 1,551,919
Deferred (247,085) (260,529) (133,714)
----------- ----------- -----------
Total $ 1,646,082 $ 1,766,235 $ 1,418,205
=========== =========== ===========
Effective tax rates differ from the federal statutory rate of 34% applied to
financial statement income due to the following:
-------------Years ended June 30,-------------
-------------------
2003 2002 2001
---- ---- ----
Federal statutory rate times income
before income taxes $ 1,500,231 $ 1,708,171 $ 1,390,530
Effect of:
Nondeductible life insurance premiums 4,760 1,020 909
State taxes, net of federal benefit 131,603 60,586 19,800
Other, net 9,488 (3,542) 6,966
----------- ----------- -----------
Total $ 1,646,082 $ 1,766,235 $ 1,418,205
=========== =========== ===========
Effective tax rate 37.3% 35.2% 34.7%
- --------------------------------------------------------------------------------
56
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 9 - INCOME TAXES (Continued)
Year-end deferred tax assets and liabilities were due to the following:
----------June 30,----------
--------
2003 2002
---- ----
Deferred tax assets:
Allowance for loan losses $ 507,428 $ 609,173
Deferred loan fees 222,253 176,596
Deferred director fees 768,781 699,405
Inside director nonqualified retirement plan 507,793 489,948
Outside director nonqualified retirement plan 135,938 145,454
RRP expense 137,547 133,914
ESOP expense 12,555 --
Goodwill, noncompete 61,127 --
Capital loss carryforward 23,244 --
Other 38,109 8,318
----------- -----------
Total deferred tax assets 2,414,775 2,262,808
Deferred tax liabilities:
Loan loss reserve recapture -- (64,185)
Depreciation (18,624) (53,490)
FHLB stock dividend (798,834) (480,778)
Loan fees (163,377) (393,880)
Accrued FHLB dividends -- (83,749)
Prepaid insurance (6,556) (10,432)
Prepaid service contracts (32,561) (22,876)
ESOP expense -- (5,680)
Unrealized gain on securities available-for-sale (90,500) (91,995)
----------- -----------
Total deferred tax liabilities (1,110,452) (1,207,065)
----------- -----------
Net deferred income tax assets $ 1,304,323 $ 1,055,743
=========== ===========
No valuation allowance for deferred tax assets was necessary as of June 30, 2003
and 2002.
- --------------------------------------------------------------------------------
57
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 9 - INCOME TAXES (Continued)
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, 2003 and 2002. 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.
NOTE 10 - 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, 2003
Total Capital to risk-
weighted assets $62,853 45.75% $10,991 8.0% $13,739 10.0%
Tier 1 Capital to risk-
weighted assets 61,574 44.82 5,495 4.0 8,243 6.0
Tier 1 Capital to
adjusted assets 61,574 16.73 14,723 4.0 18,404 5.0
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
- --------------------------------------------------------------------------------
58
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 10 - REGULATORY MATTERS (Continued)
As of June 30, 2003, 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,------
-------
2003 2002
---- ----
GAAP equity $ 62,425 $ 59,199
Disallowed intangible assets (486) (499)
Accumulated other comprehensive gain (176) (179)
Non-qualifying equity instruments (189) (293)
-------- --------
Tier I capital 61,574 58,228
Other equity instruments -- 2
General regulatory loan loss reserves 1,279 1,276
-------- --------
Total capital $ 62,853 $ 59,506
======== ========
NOTE 11 - 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, 2003 June 30, 2002
------------- -------------
Fixed Variable Fixed Variable
Rate Rate Rate Rate
---- ---- ---- ----
Commitments to make loans $ 7,185,000 $ -- $ 3,398,900 $ --
Unused lines of credit -- 19,784,000 -- 19,880,000
Commitments to make loans are generally made for periods of 60 days or less. As
of June 30, 2003, fixed rate loan commitments had interest rates ranging from
4.50% to 6.25% and maturities ranging from 7 years to 30 years. 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.
- --------------------------------------------------------------------------------
59
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 12 - FAIR VALUES OF FINANCIAL INSTRUMENTS
Carrying amounts and estimated fair values of financial instruments (in
thousands) were as follows:
----June 30, 2003---- ----June 30, 2002----
------------- -------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
Financial assets
Cash and cash equivalents $141,637 $141,637 $ 94,726 $ 94,726
Securities available-for-sale 26,822 26,822 17,374 17,374
Securities held-to-maturity 26,117 26,864 57,483 58,299
Loans, net 150,022 157,104 169,881 170,754
Federal Home Loan Bank stock 18,563 18,563 17,342 17,342
Accrued interest receivable 225 225 906 906
Financial liabilities
Deposits 282,175 283,841 278,125 279,181
Accrued interest payable 113 113 171 171
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 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.
- --------------------------------------------------------------------------------
60
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 13 - OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes were as follows:
2003 2002 2001
---- ---- ----
Unrealized holding gains (losses) on securities
available-for-sale $ (4,401) $ 306,289 $ (35,716)
Tax effect 1,495 (104,138) 12,144
--------- --------- ---------
Other comprehensive income (loss) $ (2,906) $ 202,151 $ (23,572)
========= ========= =========
NOTE 14 - EARNINGS PER COMMON SHARE
A reconciliation of the numerator and denominator of the earnings per common
share computation for the years ended June 30, 2003 and 2002 and for the
two-month period ended June 30, 2001 are as follows:
2003 2002 2001
---- ---- ----
Basic earnings per share
Net income 2,766,363 3,257,797 2,671,590
Less net income of the Association
prior to conversion -- -- 2,231,550
---------- ---------- ----------
Net income available to common
shareholders $2,766,363 $3,257,797 $ 440,040
========== ========== ==========
Weighted average common shares
outstanding 3,524,364 3,901,283 4,297,193
---------- ---------- ----------
Basic earnings per share $ 0.78 $ 0.84 $ 0.10
========== ========== ==========
Earnings per share assuming dilution
Net income available to common
shareholders $2,766,363 $3,257,797 $ 440,040
========== ========== ==========
Weighted average common shares
outstanding for basic earnings per
common share 3,524,364 3,901,283 4,297,193
Add dilutive effect of assumed exercises:
Stock option exercises 63,425 14,562 --
RRP share recognition 14,636 4,084 --
---------- ---------- ----------
Average shares and dilutive potential
common shares 3,602,425 3,919,929 4,297,193
========== ========== ==========
Diluted earnings per share $ 0.77 $ 0.83 $ 0.10
========== ========== ==========
- --------------------------------------------------------------------------------
61
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 15 - PARENT COMPANY ONLY FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
June 30, 2003 and 2002
2003 2002
---- ----
Assets
Cash and due from financial institutions $ 20,498 $ 19,788
Cash on deposit in subsidiary 7,782,033 14,263,925
----------- -----------
Cash and cash equivalents 7,802,531 14,283,713
ESOP loan 2,889,184 3,061,373
Investment in subsidiary 62,424,566 59,198,509
Accrued interest receivable and other assets 197,141 202,378
----------- -----------
$73,313,422 $76,745,973
=========== ===========
Liabilities and Shareholders' Equity
Accrued expenses and other liabilities $ 4,000 $ 4,840
Shareholders' equity 73,309,422 76,741,133
----------- -----------
$73,313,422 $76,745,973
=========== ===========
CONDENSED STATEMENTS OF INCOME
For the years ended June 30, 2003 and 2002 and for the period
May 2, 2001 through June 30, 2001
2003 2002 2001
---- ---- ----
Interest income
ESOP loan $ 83,616 $ 171,755 $ 36,938
Deposits in subsidiary 121,239 323,228 29,176
---------- ---------- ----------
Total interest income 204,855 494,983 66,114
Operating expenses 183,900 181,987 18,206
---------- ---------- ----------
Income before income taxes and equity
in undistributed earnings of subsidiary 20,955 312,996 47,908
Income taxes 8,093 127,058 16,505
---------- ---------- ----------
Income before equity in undistributed
earnings of subsidiary 12,862 185,938 31,403
Equity in undistributed earnings of
subsidiary 2,753,501 3,071,859 408,637
---------- ---------- ----------
Net income $2,766,363 $3,257,797 $ 440,040
========== ========== ==========
- --------------------------------------------------------------------------------
62
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 15 - PARENT COMPANY ONLY FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
For the years ended June 30, 2003 and 2002 and for the period
May 2, 2001 through June 30, 2001
2003 2002 2001
---- ---- ----
Operating activities
Net income $ 2,766,363 $ 3,257,797 $ 440,040
Adjustments to reconcile net
income to net cash provided by
operating activities
Equity in undistributed earnings
of subsidiary (2,753,501) (3,071,859) (408,637)
Change in other assets and
liabilities 4,397 (42,739) (154,799)
------------ ------------ ------------
Net cash provided by
(used in) operating activities 17,259 143,199 (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 (6,694,157) (4,008,314) --
Dividends paid (587,138) -- --
Options exercised 55,621 -- --
Payment for RRP shares 555,044 345,674 --
Payment received on loan to ESOP 172,189 172,190 210,227
------------ ------------ ------------
Net cash provided by (used in)
financing activities (6,498,441) (3,490,450) 38,742,284
------------ ------------ ------------
Net change in cash and cash equivalents (6,481,182) (3,347,251) 17,630,964
Cash and cash equivalents at
beginning of period 14,283,713 17,630,964 --
------------ ------------ ------------
Cash and cash equivalents at
end of period $ 7,802,531 $ 14,283,713 $ 17,630,964
============ ============ ============
- --------------------------------------------------------------------------------
63
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 16 - SEGMENT REPORTING
The Corporation's operations are managed along two major operating segments:
banking and insurance. Loans, investments, and deposits provide the revenues in
the banking segment. Insurance commissions provide the revenue in the insurance
segment. Holding company services have been included in other. All inter-segment
services provided are charged at the same rates as those charged to unaffiliated
customers. Such services are included in the revenues and net income of the
respective segments and are eliminated to arrive at consolidated totals. The
accounting policies are the same as those described in the summary of
significant accounting policies. Information reported for internal performance
assessment is summarized below (in thousands):
Year Ended June 30, 2003
-------------------------------------------------------
Banking Insurance
Segment Segment Other Consolidated
--------- --------- --------- ------------
Net interest income $ 10,237 $ 5 $ 165 $ 10,407
Provision for loan losses (275) -- -- (275)
Other revenue 502 2,459 (120) 2,841
Other expense (6,623) (2,441) (47) (9,111)
Income taxes (1,629) (9) (8) (1,646)
Segment profit $ 2,762 $ 14 $ (10) $ 2,766
========= ========= ========= =========
Depreciation $ 321 $ 68 $ -- $ 389
Segment assets $ 368,072 $ 2,401 $ (1,564) $ 368,909
Year Ended June 30, 2002
-------------------------------------------------------
Banking Insurance
Segment Segment Other Consolidated
--------- --------- --------- ------------
Net interest income $ 10,479 $ 8 $ 458 $ 10,945
Provision for loan losses -- -- -- --
Other revenue 506 2,079 (110) 2,475
Other expense (6,273) (2,077) (46) (8,396)
Income taxes (1,635) (4) (127) (1,766)
Segment profit $ 3,077 $ 6 $ 175 $ 3,258
========= ========= ========= =========
Depreciation $ 465 $ 66 -- $ 531
Amortization of goodwill -- 67 -- 67
Segment assets $ 362,263 $ 2,252 $ (1,175) $ 363,340
- --------------------------------------------------------------------------------
64
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 16 - SEGMENT REPORTING (Continued)
Year Ended June 30, 2001
--------------------------------------------------------
Banking Insurance
Segment Segment Other Consolidated
--------- --------- --------- ------------
Net interest income $ 9,390 $ 14 $ 9 $ 9,413
Provision for loan losses 72 -- -- 72
Other revenue 450 1,874 (46) 2,278
Other expense (5,726) (1,893) 90 (7,529)
Income taxes (1,402) 2 (18) (1,418)
--------- --------- --------- ---------
Segment profit $ 2,640 $ (3) $ 35 $ 2,672
========= ========= ========= =========
Depreciation $ 374 $ 51 -- $ 425
Amortization of goodwill -- 115 -- 115
Segment assets $ 343,967 $ 1,735 $ (1,392) $ 344,310
NOTE 17 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Year Ended June 30, 2003 Year Ended June 30, 2002
Three Months Ended Three Months Ended
---------------------------------------------- ----------------------------------------------
June 30 March 31 Dec. 31 Sep. 30 June 30 March 31 Dec. 31 Sep. 30
------- -------- ------- ------- ------- -------- ------- -------
Total interest income $ 3,722 $ 3,818 $ 4,145 $ 4,342 $ 4,410 $ 4,519 $ 4,946 $ 5,172
Total interest expense (1,203) (1,285) (1,467) (1,665) (1,714) (1,769) (2,115) (2,504)
------- ------- ------- ------- ------- ------- ------- -------
Net interest income 2,519 2,533 2,678 2,677 2,696 2,750 2,831 2,668
Provision for loan losses -- (75) (200) -- -- -- -- --
Noninterest income 634 628 882 697 632 585 677 581
Noninterest expense 2,212 2,226 2,509 2,164 2,164 2,225 2,159 1,848
------- ------- ------- ------- ------- ------- ------- -------
Income before income
taxes 941 1,010 1,251 1,210 1,164 1,110 1,349 1,401
Income tax expense 358 384 463 441 423 392 475 476
------- ------- ------- ------- ------- ------- ------- -------
Net income $ 583 $ 626 $ 788 $ 769 $ 741 $ 718 $ 874 $ 925
======= ======= ======= ======= ======= ======= ======= =======
Basic earnings
per share $ 0.16 $ 0.18 $ 0.23 $ 0.21 $ 0.20 $ 0.19 $ 0.22 $ 0.23
======= ======= ======= ======= ======= ======= ======= =======
Diluted earnings
per share $ 0.16 $ 0.18 $ 0.22 $ 0.21 $ 0.19 $ 0.19 $ 0.22 $ 0.23
======= ======= ======= ======= ======= ======= ======= =======
- --------------------------------------------------------------------------------
65
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
ITEM 9A. Controls and Procedures
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act)
as of the end of the period covered by this annual report. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that, as of the end of the period covered by this annual report, our disclosure
controls and procedures were effective to ensure that information required to be
disclosed in the reports that the Company files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms.
There were no significant changes made in our internal controls during the
period covered by this report or, to our knowledge, in other factors that could
significantly affect these controls subsequent to the date of their evaluation.
PART III
ITEM 10. Directors and Executive Officers of the Corporation
The "Proposal I--Election of Directors" section of the Corporation's
definitive Proxy Statement for the Corporation's 2003 Annual Meeting of
Shareholders ("the 2003 Proxy Statement") is incorporated herein by reference.
ITEM 11. Executive Compensation
The "Proposal I--Election of Directors" section of the Corporation's 2003
Proxy Statement is incorporated herein by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
and Related Shareholder Matters
The "Proposal I--Election of Directors" section of the Corporation's 2003
Proxy Statement is incorporated herein by reference.
The Corporation does not have any equity compensation program that was not
approved by shareholders, other than its employee stock ownership plan.
Set forth below is certain information as of June 30, 2003 regarding
equity compensation plans under which equity securities of the Corporation are
authorized for issuance that has been approved by the shareholders.
================================================================================================================
Number of securities to be
issued upon exercise of Number of securities
Equity compensation plans outstanding options and Weighted average remaining available for
approved by shareholders rights exercise price issuance under plan
- ----------------------------------------------------------------------------------------------------------------
Stock Option Plan 416,154 $ 16.18 None
- ----------------------------------------------------------------------------------------------------------------
Recognition and Retention
Plan (1) 137,747 Not Applicable None
- ----------------------------------------------------------------------------------------------------------------
Total (2) 553,901 $ 16.18
================================================================================================================
(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.
66
ITEM 13. Certain Relationships and Related Transactions
The "Transactions with Certain Related Persons" section of the
Corporation's 2003 Proxy Statement is incorporated herein by reference.
67
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
On July 22, 2003, the Company filed Form 8-K with a press release
regarding its earnings for the fiscal quarter ended June 30, 2003.
On July 24, 2003, the Company filed Form 8-K with a press release
reporting revised earnings per share for the fiscal year ended June
30, 2003.
(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**
10.6 Supplemental Executive Agreement
21 Subsidiaries of the Corporation*
31.1 Certification of Michael E. DeHaan required by Rule 13a -
14(a).
31.2 Certification of Karen M. Wirth required by Rule 13a - 14(a).
32 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
- ----------
* 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 Shareholders (File No. 0-32589),
filed with the Securities and Exchange Commission on October 18, 2001.
68
Signatures
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Corporation has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
CHESTERFIELD FINANCIAL CORP.
Date: September 25, 2003 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 25, 2003
- --------------------------- Officer and Director (Principal
Michael E. DeHaan Executive Officer)
/s/ Karen M. Wirth Treasurer September 25, 2003
- --------------------------- (Principal Financial and
Karen M. Wirth Accounting Officer)
/s/ C. C. DeHaan Director September 25, 2003
- ---------------------------
C. C. DeHaan
/s/ Robert T. Mangan Director September 25, 2003
- ---------------------------
Robert T. Mangan
/s/ David M. Steadman Director September 25, 2003
- ---------------------------
David M. Steadman
/s/ Richard E. Urchell Director September 25, 2003
- ---------------------------
Richard E. Urchell
/s/ Donald D. Walters Director September 25, 2003
- ---------------------------
Donald D. Walters
69