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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, 2004
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 (I.R.S. Employer Identification Number)
of Incorporation or Organization)
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, 2003 was
approximately $75.9 million.
As of August 31, 2004, there were issued and outstanding 3,875,521 shares
of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Proxy Statement for the 2004 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 $7.0 million as of June 30, 2004, representing a portion of the
net proceeds from Chesterfield Financial's stock offering completed May 2, 2001.
At June 30, 2004, 3,875,521 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, 2004,
Chesterfield Financial had total consolidated assets of $362.2 million, total
deposits of $280.1 million and shareholders' equity of $74.8 million.
Chesterfield Financial's executive office is located at 10801 South
Western Avenue, Chicago, Illinois 60643. Its telephone number is (773) 239-6000.
Chesterfield's website (www.chesterfieldfed.com) contains a direct link to
Chesterfield Financial's filings with the Securities and Exchange Commission,
including copies of annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to these filings. Copies may also be
obtained, without charge, by written request to Richard E. Urchell, Vice
President and Secretary, Chesterfield Financial Corp., 10801 South Western
Avenue, Chicago, Illinois 60643.
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.
Recent Developments
On June 5, 2004, the Corporation announced that it has entered into an
Agreement and Plan of Merger (the "Agreement") with MAF Bancorp, Inc. ("MAF").
Under the terms of the Agreement, the Corporation will be acquired by MAF in a
stock and cash transaction valued at approximately $128.5 million. Pursuant to
the Agreement, MAF will purchase each share of common stock of the Company for a
fixed price of $31.50, payable 65% in cash and 35% in shares of MAF common
stock. MAF has the option, subject to the consent of the Corporation, to
substitute additional cash consideration in lieu of shares of MAF common stock.
The merger is subject to customary conditions, including, among others, approval
by the Corporation's stockholders and applicable regulatory authorities. For
additional information about the merger, please refer to Amendment No. 1 to the
Form S-4 Registration Statement of MAF, as filed with the SEC on August 23,
2004.
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.
2
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, 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.
3
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, 2004, our loans
totaled $148.7 million, of which $129.8 million, or 87.3%, were secured by
one-to-four-family residential real estate; $5.2 million, or 3.5%, were secured
by multi-family residential real estate; $11.9 million, or 8.0%, were home
equity lines of credit; and $1.8 million, or 1.2%, 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,
------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
---------------- ---------------- ---------------- --------------- ---------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Real Estate Loans:
One-to-four-family ............. $129,762 87.3% $134,371 87.7% $153,843 88.8% $147,865 88.8% $140,120 87.7%
Home equity .................... 11,944 8.0 12,415 8.1 11,559 6.7 10,521 6.3 11,002 6.9
Multi-family and other ......... 5,226 3.5 4,318 2.8 5,175 3.0 5,073 3.0 5,693 3.5
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans ... 146,932 98.8 151,104 98.6 170,577 98.5 163,459 98.1 156,815 98.1
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Other Loans:
Consumer loans:
Loans on deposits ............ 714 0.5 896 0.6 1,016 0.6 1,180 0.7 1,161 0.7
Automobile, stock secured,
second mortgages and other . 1,070 0.7 1,263 0.8 1,605 0.9 1,975 1.2 1,842 1.2
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total consumer loans ..... 1,784 1.2 2,159 1.4 2,621 1.5 3,155 1.9 3,003 1.9
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans ............... 148,716 100.0% 153,263 100.0% 173,198 100.0% 166,614 100.0% 159,818 100.0%
====== ====== ====== ====== ======
Less:
Undisbursed portion of loans
in process................... 1,576 1,357 1,242 3,364 480
Unearned discounts and
deferred loan fees........... 480 580 499 474 554
Allowance for loan losses...... 1,303 1,304 1,576 1,573 1,508
-------- -------- -------- -------- --------
Total loans receivable, net.... $145,357 $150,022 $169,881 $161,203 $157,276
======== ======== ======== ======== ========
4
Loan Contractual Terms to Maturity. The following table sets forth certain
information as of June 30, 2004, 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 5 Beyond
Within Year to 5 Years to 10 10
1 Year Years Years Years Total
------- --------- ----------- ------- --------
(In Thousands)
Real estate loans:
One-to-four-family ................ $ 8,483 $34,719 $31,851 $54,710 $129,762
Home equity, multi-family and other 2,578 8,151 4,831 1,609 17,170
Consumer loans .................... 652 701 302 129 1,784
------- ------- ------- ------- --------
Total loans receivable .............. $11,713 $43,571 $36,984 $56,448 $148,716
======= ======= ======= ======= ========
The following table sets forth at June 30, 2004, the dollar amount of all
fixed rate and adjustable rate loans due or repricing after June 30, 2005.
Fixed Adjustable Total
-------- ---------- --------
(In Thousands)
Real estate loans:
One-to-four-family ........................ $120,845 $ 434 $121,279
Home equity, multi-family and other ....... 4,869 9,723 14,592
Consumer loans ........................... 1,132 -- 1,132
-------- ------- --------
Total .................................. $126,846 $10,157 $137,003
======== ======= ========
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, 2004, these loans totaled $129.8 million,
or 87.3% 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 7,
10, 15, and 30 years. Of these loans, $129.3 million, or 99.6%, had fixed rates
of interest and the remaining $473,000, or 0.4%, 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 $11.9 million, or 8.0% of our total loan portfolio as
of June 30, 2004. 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.
5
Multi-Family Loans. At June 30, 2004, $5.2 million, or 3.5% 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
$209,000. 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, 2004, consumer loans totaled $1.8
million, or 1.2% 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.
6
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,
--------------------------------------
2004 2003 2002
-------- -------- -------
(In Thousands)
Originations by Type:
Adjustable rate:
Real estate -
- home equity ........................ $ 8,921 $ 8,571 $ 7,418
-------- -------- -------
Total adjustable-rate ....................... 8,921 8,571 7,418
-------- -------- -------
Fixed rate:
Real estate -
- one-to-four-family ................. 38,485 32,674 30,738
- multi-family and other ............. 1,853 706 1,527
Non-real estate - consumer ........................ 963 1,649 1,855
-------- -------- -------
Total fixed-rate ............................ 41,301 35,029 34,120
-------- -------- -------
Total loans originated ...................... 50,222 43,600 41,538
-------- -------- -------
Repayments:
Principal repayments ............................. 54,769 63,535 34,954
-------- -------- -------
Increase (decrease) in other items, net ........... (118) 76 2,094
-------- -------- -------
Net (decrease) increase ..................... $ (4,665) $(19,859) $ 8,678
======== ======== =======
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,
2004. 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 ......... 2 $136 0.10% 6 $357 0.28% 8 $493 0.38%
Home equity ................ -- -- -- -- -- -- -- -- --
Multi-family and other ..... -- -- -- -- -- -- -- --
----
Consumer ..................... -- -- -- 1 3 0.17% 1 3 0.17%
---- ---- ---- ---- ---- ---- ---- ---- ----
Total ................... 2 $136 0.09% 7 $360 0.24% 9 $496 0.33%
==== ==== ==== ==== ==== ==== ==== ==== ====
7
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 non-accrual status when, in the opinion of management, there is
reasonable probability of loss of principal or the collection of additional
interest is deemed insufficient to warrant further accrual. Generally, we place
all loans 90 days or more past due on non-accrual status. In addition, we place
any loan on non-accrual if any part of it is classified as loss or if any part
has been charged off. When a loan is placed on non-accruing status, total
interest accrued and unpaid to date is reversed. Subsequent payments are either
applied to the outstanding principal balance or recorded as interest 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,
---------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ----- -----
(Dollars in Thousands)
Non-accruing loans:
One-to-four family .............................. $357 $258 $199 $ 3 $ 12
Home equity ..................................... -- -- -- -- --
Multi-family and other .......................... -- -- 23 -- --
Consumer ........................................ 3 -- -- -- 1
---- ---- ---- ----- -----
Total ......................................... 360 258 222 3 13
---- ---- ---- ----- -----
Accruing loans delinquent more than 90 days ....... -- -- -- -- --
---- ---- ---- ----- -----
Foreclosed assets ................................. -- -- -- -- --
---- ---- ---- ----- -----
Total nonperforming assets ........................ $360 $258 $222 $ 3 $ 13
==== ==== ==== ===== =====
Total as a percentage of total assets ............. 0.10% 0.07% 0.06% --% --%
==== ==== ==== ===== =====
8
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 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. The remaining loans, with principal balances of $196,000
at June 30, 2004, remain non-accrual loans.
For the year ended June 30, 2004, 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, 2004 and June 30, 2003.
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, 2004 and June 30, 2003.
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,
2004, we had classified $428,000 of our assets as substandard and none of our
assets as special mention, doubtful or loss.
Loan Concentrations. Chesterfield Federal has originated over 13 loans to
a single customer that have an aggregate principal balance of $1.6 million as of
June 30, 2004. 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.
9
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 2000
------ ------- ------- ------ ------
(Dollars in Thousands)
Balance at beginning of period ................................ $1,304 $ 1,576 $ 1,573 $1,508 1,432
Charge-offs:
One-to-four family .......................................... -- -- -- -- --
Home equity ................................................. -- -- -- -- --
Multi-family and other ...................................... -- -- -- -- --
Consumer .................................................... 2 -- -- 8 7
------ ------- ------- ------ ------
2 -- -- 8 7
------ ------- ------- ------ ------
Recoveries ................................................... 1 3 3 1 --
------ ------- ------- ------ ------
Net charge-offs (recoveries) ................................. 1 (3) (3) 7 7
Additions charged to operations .............................. -- (275) -- 72 83
------ ------- ------- ------ ------
Balance at end of period ..................................... $1,303 $ 1,304 $ 1,576 $1,573 $1,508
====== ======= ======= ====== ======
Allowance for loan losses to loans receivable, net, at end
of period .................................................... 0.90% 0.87% 0.93% 0.98% 0.96%
====== ======= ======= ====== ======
Ratio of net charge-offs during the period to average
nonperforming loans .......................................... --% --% --% 46.67% 9.72%
====== ======= ======= ====== ======
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.
10
At June 30,
---------------------------------------------------------------------------------
2004 2003
-------------------------------------- --------------------------------------
Percent Percent
of Loans of Loans
Amount Loan in Each Amount Loan in Each
of Loan Amounts Category of Loan Amounts Category
Loss By To Total Loss By To Total
Allowance Category Loans Allowance Category Loans
--------- -------- -------- --------- -------- --------
(Dollars in Thousands)
Real Estate Loans:
One-to-four family ... $ 341 $129,762 87.3% $ 340 $134,371 87.7%
Home equity .......... 25 11,944 8.0 26 12,415 8.1
Multi-family and other 4 5,226 3.5 4 4,318 2.8
Consumer ............. 7 1,784 1.2 8 2,159 1.4
Unallocated .......... 926 -- -- 926 -- --
-------- -------- ------ -------- -------- ------
Total ................ $ 1,303 $148,716 100.0% $ 1,304 $153,263 100.0%
======== ======== ====== ======== ======== ======
At June 30,
--------------------------------------------------------------------------------------------------------
2002 2001 2000
----------------------------------- -------------------------------- -------------------------------
Percent Percent Percent
of Loans of Loans of Loans
Amount Loan in Each Amount Loan in Each Amount Loan in Each
of Loan Amounts Category of Loan Amounts Category of Loan Amounts Category
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 ...... $ 611 $153,843 88.8% $ 581 $147,865 88.8% $ 575 $140,120 87.7%
Home equity ............. 24 11,559 6.7 22 10,521 6.3 23 11,002 6.9
Multi-family and other .. 4 5,175 3.0 4 5,073 3.0 5 5,693 3.5
Consumer ................ 11 2,621 1.5 15 3,155 1.9 14 3,003 1.9
Unallocated ............. 926 -- -- 951 -- -- 891 -- --
------- -------- ------ -------- -------- ------ -------- -------- ------
Total ................. 1,576 $173,198 100.0% $ 1,573 $166,614 100.0% $ 1,508 $159,818 100.0%
======= ======== ====== ======== ======== ====== ======== ======== ======
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
11
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, 2004,
the Corporation had an investment in a mutual fund, the AMF Adjustable-Rate
Mortgage Fund, in the amount of $15.6 million, which represents approximately
22% of the Corporation's equity at June 30, 2004. 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,
--------------------------------------------------------------------------------
2004 2003 2002
---------------------- ---------------------- ----------------------
Carrying % of Carrying % of Book % of
Value Total Value Total Value Total
-------- -------- -------- -------- -------- --------
(Dollars in Thousands)
Securities available-for-sale:
Mortgage-backed securities - FNMA, FHLMC, GNMA $ 20,290 28.7% $ 11,525 16.1% $ 12,347 13.4%
ARM Mutual fund 15,443 21.8 15,298 21.4 5,027 5.5
Securities held to maturity
Federal agency obligations - FHLB 15,000 21.0 25,000 35.0 55,000 59.6
Mortgage-backed securities - Freddie Mac 208 0.3 695 0.9 2,035 2.2
Tax increment allocation note 392 0.6 421 0.6 448 0.5
FHLB stock 19,792 27.6 18,563 26.0 17,342 18.8
-------- -------- -------- -------- -------- --------
Total securities and FHLB stock $ 71,125 100.0% $ 71,502 100.0% $ 92,199 100.0%
======== ======== ======== ======== ======== ========
Average remaining life of securities 2.6 years 2.8 years 3.2 years
Other interest-earning assets:
Interest-bearing deposits with banks $121,518 99.4% $127,994 96.4% $ 83,367 95.6%
Federal funds sold 800 0.6 4,800 3.6 3,800 4.4
-------- -------- -------- -------- -------- --------
Total $122,318 100.0% $132,794 100.0% $ 87,167 100.0%
======== ======== ======== ======== ======== ========
12
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, 2004. 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, 2004
-----------------------------------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over
1 Year Years Years 10 Years Total Securities
-------------- -------------- -------------- -------------- -----------------------------
Carrying Value Carrying Value Carrying Value Carrying Value Carrying Value Market Value
-------------- -------------- -------------- -------------- -------------- ------------
(Dollars in Thousands)
Federal agency obligations - FHLB ... $ 5,000 $ 10,000 $ -- $ -- $ 15,000 $ 15,099
Tax increment allocation note ....... 30 152 210 -- 392 392
Mortgage-backed securities .......... -- -- -- -- 20,498 20,500
FHLB stock .......................... -- -- -- -- 19,792 19,792
Mutual fund ......................... -- -- -- -- 15,443 15,443
--------- --------- --------- --------- ---------- ---------
Total securities .................... $ 5,030 $ 10,152 $ 210 $ -- $ 71,125 $ 71,226
========= ========= ========= ========= ========== =========
Weighted average yield............... 5.38% 3.82% 8.50% --% 3.40%
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,
-------------------------------------------
2004 2003 2002
--------- --------- ---------
(Dollars in Thousands)
Opening balance ..................... $ 282,175 $ 278,125 $ 260,658
Deposits ............................ 324,549 325,373 326,470
Withdrawals ......................... (330,300) (326,642) (316,893)
Interest credited ................... 3,671 5,319 7,890
--------- --------- ---------
Ending balance ...................... $ 280,095 $ 282,175 $ 278,125
========= ========= =========
Net increase (decrease) ............. $ (2,080) $ 4,050 $ 17,467
========= ========= =========
Percent increase (decrease) ......... (0.7)% 1.5% 6.7%
========= ========= =========
13
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,
----------------------------------------------------------------------------------
2004 2003 2002
----------------------- ----------------------- ----------------------
Amount Percent Amount Percent Amount Percent
---------- ------- ---------- ------- ---------- -------
(Dollars in Thousands)
Transactions and Savings Deposits:
Passbook Savings 0.75% ........... $ 64,754 23.2% $ 61,402 21.8% $ 58,968 21.2%
NOW Accounts 0.50% ............... 32,783 11.7 30,016 10.6 28,258 10.2
Money Market Accounts
0.50% - 0.75% .................. 9,914 3.5 10,702 3.8 9,806 3.5
---------- ------- ---------- ------- ---------- -------
Total non-certificates ........... 107,451 38.4 102,120 36.2 97,032 34.9
---------- ------- ---------- ------- ---------- -------
Time Deposits:
0.00% - 1.99% ................... 141,311 50.5 128,246 45.5 1,080 0.4
2.00% - 3.99% ................... 19,420 6.9 35,079 12.4 142,893 51.3
4.00% - 5.99% ................... 8,945 3.2 13,837 4.9 31,928 11.5
6.00% - 7.99% ................... 2,578 0.9 2,533 0.9 4,799 1.7
8.00% - 9.99% ................... 390 0.1 360 0.1 393 0.1
---------- ------- ---------- ------- ---------- -------
Total time deposits .............. 172,644 61.6 180,055 63.8 181,093 65.0
---------- ------- ---------- ------- ---------- -------
Accrued interest ................. 95 -- 113 -- 171 0.1
---------- ------- ---------- ------- ---------- -------
Total deposits, including
accrued interest ............... $ 280,190 100.0% $ 282,288 100.0% $ 278,296 100.0%
========== ======= ========== ======= ========== =======
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, 2004.
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%..... $ 133,543 $ 7,768 $ -- $ -- $ 141,311
2.00% - 3.99%..... 9,342 3,220 1,274 5,584 19,420
4.00% - 5.99%..... 1,439 1,254 1,220 5,032 8,945
6.00% - 7.99%..... 1,152 1,224 65 137 2,578
8.00% - 9.99%..... -- -- -- 390 390
----------- ----------- ----------- ----------- -----------
Total............. $ 145,476 $ 13,466 $ 2,559 $ 11,143 $ 172,644
=========== =========== =========== =========== ===========
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, 2004.
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.... $ 74,608 $ 11,023 $ 13,616 $ 20,542 $ 119,789
Time deposits of $100,000 or more... 41,996 1,922 2,311 6,626 52,855
----------- ----------- ----------- ----------- ----------
Total time deposits................. $ 116,604 $ 12,945 $ 15,927 $ 27,168 $ 172,644
=========== =========== =========== =========== ==========
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.
14
Chesterfield Federal did not borrow any funds, including Federal Home Loan
Bank advances, during the fiscal years ended June 30, 2004, 2003, and 2002.
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, 2004, 2003 and
2002, Chesterfield Insurance generated $2.2 million, $2.5 million, and $2.1
million, respectively, in insurance commissions and incurred operating expenses
of $2.3 million, $2.4 million, and $2.1 million respectively. Chesterfield
Insurance reported a loss of $71,600 (before income tax provisions) for the year
ended June 30, 2004, and income of $23,100 and $10,200 for the years ended June
30, 2003 and 2002, respectively.
Employees
At June 30, 2004, Chesterfield Federal had a total of 90 full-time and 16
part-time employees, including 21 employed full-time 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 in interest
and other expenses. The majority of our loan portfolio primarily consists of
loans that mature in more than five years. At June 30, 2004, our deposit
accounts consisted of time deposit accounts and demand deposits such as NOW
accounts. Of our time deposits, $145.5 million, or 84.3% 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, 2004, $129.8 million, or 87.3%, 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 competitors have
15
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, 2004, 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, 2004, Chesterfield Federal maintained 69.84% 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
16
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, 2004, 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,
17
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,
2004 and 2003, Chesterfield Federal met each of its capital requirements.
18
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, 2004, 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,
2004, 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.
19
The USA PATRIOT Act
The USA PATRIOT Act gives the federal government powers to address
terrorist threats through enhanced domestic security measures, expanded
surveillance powers, increased information sharing and broadened anti-money
laundering requirements. Certain provisions of the act impose affirmative
obligations on a broad range of financial institutions, including savings
associations like Chesterfield Federal. These obligations include enhanced
anti-money laundering programs, customer identification programs and regulations
relating to 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).
The federal banking agencies have begun to propose and implement
regulations pursuant to the USA PATRIOT Act. These proposed and interim
regulations would require financial institutions to adopt the policies and
procedures contemplated by the USA PATRIOT Act.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley") provides for corporate
governance, disclosure and accounting reforms intended to address corporate and
accounting fraud. Sarbanes-Oxley established an accounting oversight board that
enforces auditing, quality control and independence standards, and is funded by
fees from all publicly-traded companies. Sarbanes-Oxley also places certain
restrictions on the scope of services that may be provided by accounting firms
to their public company audit clients. Any non-audit services being provided to
a public company audit client will require preapproval by the company's audit
committee. In addition, Sarbanes-Oxley makes certain changes to the requirements
for audit partner rotation after a period of time. Sarbanes-Oxley also requires
chief executive officers and chief financial officers, or their equivalent, to
certify to the accuracy of periodic reports filed with the Securities and
Exchange Commission, subject to civil and criminal penalties if they knowingly
or willingly violate this certification requirement. In addition, under
Sarbanes-Oxley, counsel will be required to report to the chief executive
officer or chief legal officer of the company, evidence of a material violation
of the securities laws or a breach of fiduciary duty by a company and, if such
officer does not appropriately respond, to report such evidence to the audit
committee or other similar committee of the board of directors or the board
itself.
Under Sarbanes-Oxley, longer prison terms will apply to corporate
executives who violate federal securities laws; the period during which certain
types of suits can be brought against a company or its officers is extended; and
bonuses issued to top executives prior to restating a company's financial
statements are now subject to disgorgement if such restatement was due to
corporate misconduct. Executives are also prohibited from insider trading during
retirement plan "blackout" periods, and loans to company executives (other than
loans by financial institutions permitted by federal rules and regulations) are
restricted. The Federal Accounts for Investor Restitution provision also
requires the Securities and Exchange Commission to develop methods of improving
collection rates. The legislation accelerates the time frame for disclosures by
public companies, as they must immediately disclose any material changes in
their financial condition or operations. Directors and executive officers must
also provide information for most changes in beneficial ownership in a company's
securities within two business days of the change.
Sarbanes-Oxley also increases the oversight of, and codifies certain
requirements relating to, audit committees of public companies and how they
interact with the company's "registered public accounting firm." Audit committee
members must be independent and are absolutely barred from accepting consulting,
advisory or other compensatory fees from the public company. In addition,
companies must disclose whether at least one member of the committee is an
"audit committee financial expert" (as defined by Securities and Exchange
Commission regulations) and if not, why the company does not have one. Under
Sarbanes-Oxley, a company's registered public accounting firm will be prohibited
from performing statutorily mandated audit services for a company if such
company's chief executive officer, chief financial officer, comptroller, chief
accounting officer or any person serving in equivalent positions had been
employed by such firm and participated in the audit of such company during the
one-year period preceding the audit initiation date. Sarbanes-Oxley prohibits
any officer or director of a company or any other person acting under their
direction from taking any action to fraudulently influence, coerce, manipulate
or mislead any independent accountant engaged in the audit of the company's
financial statements for the purpose of rendering the financial statements
materially misleading. Sarbanes-Oxley
20
also requires the Securities and Exchange Commission to prescribe rules
requiring inclusion of any internal control report and assessment by management
in the annual report to shareholders. Sarbanes-Oxley requires the company's
registered public accounting firm that issues the audit report to attest to and
report on management's assessment of the company's internal controls.
Although we have incurred additional expense in complying with the provisions of
Sarbanes-Oxley and the resulting regulations, we do 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.
21
TAXATION
Federal Taxation
For federal income tax purposes, Chesterfield Financial and Chesterfield
Federal file consolidated federal income tax returns on a calendar year basis
using the accrual method of accounting.
As a result of the enactment of the Small Business Job Protection Act of
1996, all savings banks and savings associations may convert to a commercial
bank charter, diversify their lending, or be merged into a commercial bank
without having to recapture any of their pre-1988 tax bad debt reserve
accumulations. However, transactions that would require recapture of the
pre-1988 tax bad debt reserve include redemption of Chesterfield Federal's
stock, payment of dividends or distributions in excess of earnings and profits,
or failure by the institution to qualify as a bank for federal income tax
purposes. At June 30, 2004, 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.
Chesterfield Financial is required to file an annual report with and pay an
annual franchise tax to the State of Illinois.
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, 2004, 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, 2004.
22
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, 2004, 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.
23
PART II
ITEM 5. Market for Registrant's Common Equity, and Related Stockholder 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 1,032 stockholders of record as of September 1, 2004, (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, 2004 and 2003.
Fiscal Year Ended Cash Dividends
June 30, 2004 High Low Declared
- ----------------------------------------------------------------------------
Fourth quarter $ 31.25 $ 26.27 $ 0.08
Third quarter $ 26.96 $ 23.71 $ 0.08
Second quarter $ 25.40 $ 22.38 $ 0.08
First quarter $ 23.15 $ 21.01 $ 0.08
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 $ --
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, 2004, 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. There were no repurchases of Chesterfield
Financial's common stock, under a plan to repurchase equity securities, during
the year ended June 30, 2004.
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.
24
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,
------------------------------------------------------------------
2004 2003 2002 2001 2000
-------- --------- -------- -------- --------
(In Thousands)
Selected Financial Condition Data:
Total assets ..................... $362,241 $ 368,909 $363,340 $344,310 $305,480
Loans receivable, net ............ 145,357 150,022 169,881 161,203 157,276
Interest-bearing deposits ........ 121,518 127,994 83,367 60,816 59,933
Securities available-for-sale .... 35,733 26,822 17,374 13,405 --
Securities held-to-maturity ...... 15,600 26,117 57,483 94,846 73,687
Deposits ......................... 280,095 282,175 278,125 260,658 263,350
Shareholders' equity ............. 74,775 73,309 76,741 76,553 35,155
For the Years Ended June 30,
------------------------------------------------------------------
2004 2003 2002 2001 2000
-------- --------- -------- -------- --------
(In Thousands)
Selected Operations Data:
Total interest income ............ $ 13,596 $ 16,027 $ 19,047 $ 20,418 $ 19,563
Total interest expense ........... 3,946 5,620 8,102 11,005 10,746
-------- --------- -------- -------- --------
Net interest income .............. 9,650 10,407 10,945 9,413 8,817
Provision for loan losses ........ -- (275) -- 72 83
-------- --------- -------- -------- --------
Net interest income after
provision for loan losses ..... 9,650 10,682 10,945 9,341 8,734
Total noninterest income ......... 2,614 2,841 2,475 2,278 2,140
Total noninterest expense ........ 9,064 9,111 8,396 7,529 7,220
-------- --------- -------- -------- --------
Income before taxes .............. 3,200 4,412 5,024 4,090 3,654
Income tax provision ............. 1,211 1,646 1,766 1,418 1,321
-------- --------- -------- -------- --------
Net income ....................... $ 1,989 $ 2,766 $ 3,258 $ 2,672 $ 2,333
======== ========= ======== ======== ========
25
At or For the Years Ended June 30,
---------------------------------------------------------------
2004 2003 2002 2001 2000
------- ------- ------- ------- -------
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on average assets (1) ................ 0.55% 0.77% 0.91% 0.81% 0.77%
Return on average equity (2) ................ 2.70 3.82 4.26 5.76 6.86
Interest rate spread (3) .................... 2.54 2.61 2.52 2.39 2.56
Net interest margin (4) ..................... 2.80 3.00 3.16 2.95 3.01
Ratio of noninterest expense to
average total assets ...................... 2.49 2.52 2.35 2.29 2.38
Ratio of average interest-earning assets
to average interest-bearing liabilities ... 122.4 123.8 127.3 116.6 112.3
Efficiency ratio (5) ........................ 73.9 68.8 62.6 64.4 65.9
Asset Quality Ratios:
Nonperforming loans to total loans at
end of period ............................. 0.25 0.17 0.13 -- 0.01
Nonperforming assets to total assets at
end of period ............................. 0.10 0.07 0.06 -- --
Allowance for loan losses to
nonperforming loans ....................... 3.62x 5.05x 7.10x 524.33x 116.00x
Allowance for loan losses to
loans receivable, net ................... 0.90% 0.87% 0.93% 0.98% 0.96%
Capital Ratios:
Equity to total assets at end of period ..... 20.64 19.87 21.12 22.23 11.51
Average equity to average assets ............ 20.22 20.03 21.38 13.06 11.21
Dividend payout ratio (6) ................... 56.14 21.80 -- -- n/a
Per Share Data:
Basic earnings per share (6) .................. 0.57 0.78 0.84 0.10 n/a
Diluted earnings per share (6) ................ 0.55 0.77 0.83 0.10 n/a
Cash dividends per share (6) .................. 0.32 0.17 -- -- 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.
26
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 Corporation's Consolidated Financial Statements are prepared in
accordance with U.S. generally accepted accounting principles 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 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 Corporation'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 Corporation'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.
27
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, 2004, $129.8 million,
or 87.3% of our total loan portfolio, consisted of
one-to-four-family residential real estate loans. During the year
ended June 30, 2004, we originated $38.5 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 34 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, 2004, we had $360,000 of nonperforming assets,
which represented 0.10% of total assets. In addition, we maintain
our financial strength by maintaining high capital levels. At June
30, 2004, our ratio of shareholders' equity to assets was 20.6%.
28
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. Non-accruing loans have been included in
the table as loans carrying a zero yield.
For the Years Ended June 30,
-----------------------------------------------------------------------------------------------------
2004 2003 2002
--------------------------------- --------------------------------- -------------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Outstanding Earned/ Outstanding Earned/
Balance Paid Yield/Rate Balance Paid Yield/Rate Balance Paid Yield/Rate
----------- -------- ---------- ----------- -------- ---------- ----------- -------- ----------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable (1) ........ $146,351 $ 9,088 6.21% $160,125 $ 10,894 6.80% $164,146 $ 11,794 7.19%
Securities .................. 63,702 2,078 3.26 59,380 2,677 4.51 87,618 4,721 5.39
Interest-bearing deposits ... 111,952 1,161 1.04 103,514 1,364 1.32 75,455 1,628 2.16
Other ....................... 22,756 1,269 5.58 23,704 1,092 4.61 19,157 904 4.72
-------- -------- ------- -------- -------- ------ -------- -------- ------
Total interest-earning
assets (1) ............... 344,761 13,596 3.94 346,723 16,027 4.62 346,376 19,047 5.50
-------- -------- ------- -------- -------- ------ -------- -------- ------
Interest-bearing liabilities:
Passbook savings ............ 62,828 476 0.76 59,435 720 1.21 54,370 1,045 1.92
NOW accounts ................ 32,297 266 0.82 28,695 296 1.03 25,611 338 1.32
Money market accounts ....... 10,451 79 0.76 10,704 131 1.22 9,500 174 1.83
Time deposits ............... 176,188 3,125 1.77 181,278 4,473 2.47 182,551 6,545 3.59
-------- -------- ------- -------- -------- ------ -------- -------- ------
Total interest-bearing
liabilities ............. 281,764 3,946 1.40 280,112 5,620 2.01 272,032 8,102 2.98
-------- -------- ------- -------- -------- ------ -------- -------- ------
Net interest income........... $ 9,650 $ 10,407 $ 10,945
======== ======== ========
Net interest rate spread...... 2.54% 2.61% 2.52%
======= ====== ======
Net earning assets............ $ 62,997 $ 66,611 $ 74,344
======== ======== ========
Net yield on average
interest-earning assets.... 2.80% 3.00% 3.16%
Average interest-earning
assets to average interest-
bearing liabilities.......... 122.4% 123.8% 127.3%
- ----------
(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.
29
For the Years Ended June 30,
------------------------------------------------------------------------------
2004 vs. 2003 2003 vs. 2002
----------------------------------- -------------------------------------
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 ...................... $(978) $ (828) $(1,806) $ (294) $ (606) $ (900)
Securities ............................ 184 (783) (599) (1,686) (358) (2,044)
Interest-bearing deposits ............. 105 (308) (203) 490 (754) (264)
Other ................................. 36 141 177 203 (15) 188
----- ------- ------- ------- ------- -------
Total interest-earning assets ....... $(653) $(1,778) $(2,431) $(1,287) $(1,733) $(3,020)
===== ======= ======= ======= ======= =======
Interest-bearing liabilities:
Passbook savings ...................... $ 39 $ (283) $ (244) $ 90 $ (415) $ (325)
NOW accounts .......................... 34 (64) (30) 38 (80) (42)
Money market accounts ................. (3) (49) (52) 20 (63) (43)
Time deposits ......................... (129) (1,219) (1,348) (46) (2,026) (2,072)
----- ------- ------- ------- ------- -------
Total interest-bearing liabilities .. $ (59) $(1,615) (1,674) $ 102 $(2,584) (2,482)
===== ======= ======= ======= ======= =======
Net interest income..................... $ (757) $ (538)
======= =======
Comparison of Financial Condition at June 30, 2004 and 2003
At June 30, 2004, total assets were $362.2 million, a decrease of $6.7
million, or 1.8%, compared to $368.9 million at June 30, 2003. Loans receivable
at June 30, 2004 were $145.4 million, down $4.7 million, or 3.1%, compared to
$150.0 million at June 30, 2003, as principal repayments of $54.9 million
exceeded loan originations of $50.2 million during fiscal 2004. 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 2004. The Corporation's nonperforming loans were
$360,000, or 0.25% of loans receivable, as of June 30, 2004, compared to
$258,000, or 0.17% of loans receivable, as of June 30, 2003. The $1.3 million
allowance for losses on loans was 0.90% of loans receivable as of June 30, 2004,
compared to 0.87% as of June 30, 2003.
Total deposits at June 30, 2004, were $280.1 million, down $2.1 million,
or 0.7%, compared to $282.2 million at June 30, 2003. Passbook savings accounts
and NOW and money market accounts increased $5.3 million, or 5.2%, to $107.5
million at June 30, 2004, compared to $102.1 million at June 30, 2003. Time
deposits decreased $7.4 million, or 4.1%, to $172.6 million at June 30, 2004,
from $180.1 million at June 30, 2003. Accrued expenses and other liabilities
decreased $5.8 million in fiscal 2004, primarily due to settlement of a $5.1
million securities purchase pending on June 30, 2003.
Total shareholders' equity as of June 30, 2004 was $74.8 million, or 20.6%
of total assets, compared to $73.3 million, or 19.9% of total assets, at June
30, 2003. At June 30, 2004, there were 3,875,521 common shares outstanding with
a book value of $19.29 per share, compared to 3,879,558 shares with a book value
of $18.90 per share at June 30, 2003.
Comparison of Operating Results for the Years Ended June 30, 2004 and 2003
General. Net income for the year ended June 30, 2004 was $2.0 million, or
$0.55 diluted earnings per share, compared to net income of $2.8 million, or
$0.77 diluted earnings per share, for the year ended June 30, 2003. The
Corporation's return on average assets for the year ended June 30, 2004 was
0.55%, compared to 0.77% for the same period last year. Return on average equity
for the 2004 fiscal year was 2.70%, compared to 3.82% for the prior fiscal year.
Total Interest Income. Total interest income decreased by $2.4 million, or
15.2%, to $13.6 million for the year ended June 30, 2004, from $16.0 million for
the year ended June 30, 2003. A decrease in yield on interest-earning assets to
3.94% for the year ended June 30, 2004, from 4.62% for the prior fiscal year,
and a $13.8 million
30
decrease in the average balance of loans receivable contributed the decline in
interest income. The average balance of securities for the year ended June 30,
2004, increased $4.3 million from the average balance for the year ended June
30, 2003, while the average balance of interest-earning deposits and federal
funds sold increased $6.2 million.
Interest Expense. Interest expense on deposits decreased by $1.7 million,
or 29.8%, to $3.9 million for the year ended June 30, 2004, from $5.6 million
for the same period in 2003. The decrease was primarily attributable to
reductions in deposit rates paid, with the average cost of funds decreasing to
1.40% for the current year, from 2.01% for the prior year.
Net Interest Income. Net interest income decreased by $757,000, or 7.3%,
to $9.7 million for the year ended June 30, 2004, from $10.4 million for fiscal
2003. The net interest rate spread decreased 7 basis points, to 2.54% in 2004,
from 2.61% in 2003, while the net interest margin decreased 20 basis points, to
2.80% in 2004, from 3.00% in 2003. The ratio of average interest-earning assets
to average interest-bearing liabilities was 122.4% for the year ended June 30,
2004, compared to 123.8% for the same period last year.
Noninterest Income. Noninterest income decreased $227,000, or 8.0%, to
$2.6 million for the year ended June 30, 2004, from $2.8 million for the prior
fiscal year. Insurance commissions generated by the Association's insurance
subsidiary, Chesterfield Insurance, decreased $300,000, or 12.1%, to $2.2
million in 2004, compared to $2.5 million in 2003. The primary cause for this
decrease was the loss of renewal commissions due to renewed competition and
lower pricing in the commercial and condominium association insurance
underwriting business. Other noninterest income increased $69,000, or 78.4%, to
$157,000 for the year ended June 30, 2004, compared to $88,000 for the year
ended June 30, 2003. During 2004 other noninterest income was offset by a
$14,000 loss on the Company's equity investment in a community development
project. During 2003 this same project had a $105,000 loss offsetting other
noninterest income.
Noninterest Expense. Total noninterest expense decreased $47,000, or 0.5%,
to $9.1 million for the years ended June 30, 2004, and 2003. Salaries and
employee benefits increased $147,000, or 2.5%, and included an $82,000 increase
in ESOP expense due to the increased fair value of shares of Company stock
released to participants.
Insurance agency bad debt expense decreased $184,000, to $18,000 in fiscal
2004, compared to $202,000 in fiscal 2003, primarily as the result of a $194,000
provision for loss on an insurance premium receivable from a long term
commercial client made in 2003.
Other miscellaneous expenses increased $38,000, or 3.0%, to $1.3 million
for the years ended June 30, 2004 and 2003. The annualized ratio of noninterest
expense to average assets was 2.49% in 2004, compared to 2.52% in 2003, and the
Corporation's efficiency ratio was 73.9% for 2004, compared to 68.8% for 2003.
Provision for Income Taxes. The provision for income taxes of $1.2 million
for the year ended June 30, 2004 resulted in an effective tax rate of 37.9%,
compared to a provision of $1.6 million and a 37.3% effective tax rate for the
prior fiscal year.
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 prior fiscal year. Return on average equity for
the 2003 fiscal year was 3.82%, compared to 4.26% for the prior fiscal 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 prior fiscal 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
existing 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.
31
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 2003 fiscal year, from 2.98% for the prior fiscal 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 nine 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 prior fiscal 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 non-accrual 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 prior
fiscal year. 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
$697,000, or 13.5%, 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.
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 quarter ended June 30,
2003, Chesterfield Insurance recovered $20,000 of this provision. Chesterfield
Insurance continues to aggressively pursue collection of this receivable.
Other miscellaneous expenses decreased $74,000, or 5.5%, to $1.3 million
for the year ended June 30, 2003, compared to $1.4 million for the year ended
June 30, 2002. 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.
32
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.
At June 30, 2004, Chesterfield Federal had loan commitments of $1.9
million and unused lines of credit of $19.4 million. 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, 2004, approximately $145.5 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
During the fiscal 2004 year, the Corporation adopted FASB Statement 143,
Accounting for Asset Retirement Obligations; FASB Statement 145, Rescission of
FASB Statements 4, 44, and 64, Amendment of FASB Statement 13, and Technical
Corrections; FASB Statement 146, Accounting for Costs Associated With Exit or
Disposal Activities; FASB Statement 149, Amendment of FASB Statement 133 on
Derivative Instruments and Hedging Activities; FASB Statement 132 (revised
2003), Employers' Disclosures About Pensions and Other Postretirement Benefits;
FASB Interpretation 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees;, FASB Interpretation 46, Consolidation of Variable Interest
Entities; and EITF 03-01, Other-Than Temporary Impairment on Certain
Investments. Adoption of the new standards did not materially affect the
Corporation's operating results or financial condition. Beginning July 1, 2004,
the recognition and measurement guidance related to EITF 03-01,
Other-Than-Temporary Impairment on Certain Investments went into effect. This
guidance discusses how to determine if other-than-temporary impairment has
occurred. Management is currently evaluating the effect of this guidance on
their investment portfolio.
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.
33
Contractual Obligations and Commitments
Amount of Commitment Expiration per Period
--------------------------------------------------------------------
Within 1 After
Year 1-3 Years 4-5 Years 5 Years Total
----------- ----------- ----------- ----------- -----------
Home equity lines of credit $ 1,273 $ 1,350 $ 4,400 $ 12,382 $ 19,405
Loan commitments 1,929 -- -- -- 1,929
----------- ----------- ----------- ----------- -----------
Total commercial commitments $ 3,202 $ 1,350 $ 4,400 $ 12,382 $ 21,334
=========== =========== =========== =========== ===========
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 March 31, 2004, (the latest date
available) the estimated changes in Chesterfield Federal's NPV that would result
from the designated instantaneous changes in the U.S. Treasury yield curve.
Net Portfolio Value as a Percent
Net Portfolio Value of Present Value of Assets
--------------------------------------- --------------------------------
Change in
Interest Rates Estimated Amount of Percent
(basis points) NPV Change Percent NPV Ratio Change
-------------- --------- --------- ------- --------- -------
(Dollars in Thousands)
+300 $ 60,308 $ (16,815) -22% 16.99% -3.60%
+200 66,855 (10,267) -13 18.45 -2.14
+100 72,745 (4,378) -6 19.70 -0.89
0 77,123 -- -- 20.59 --
-100 77,612 489 1 20.64 0.05
34
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 REGISTERED PUBLIC ACCOUNTING FIRM
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, 2004 and 2003, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended June 30, 2004. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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, 2004 and 2003, and the results of its operations
and its cash flows for each of the three years in the period ended June 30, 2004
in conformity with U. S. generally accepted accounting principles.
/s/ Crowe Chizek and Company LLC
--------------------------------
Crowe Chizek and Company LLC
Oak Brook, Illinois
August 20, 2004
36
CHESTERFIELD FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
June 30, 2004 and 2003
- --------------------------------------------------------------------------------
2004 2003
------------- -------------
ASSETS
Cash and due from financial institutions $ 18,121,592 $ 8,842,509
Interest-bearing deposits 121,517,545 127,994,123
Federal funds sold 800,000 4,800,000
------------- -------------
Cash and cash equivalents 140,439,137 141,636,632
Securities available-for-sale 35,733,292 26,822,431
Securities held-to-maturity (fair value:
2004 - $15,701,535; 2003 - $26,863,762) 15,600,437 26,116,586
Loans, net 145,357,467 150,022,280
Federal Home Loan Bank stock 19,792,400 18,563,200
Premises and equipment, net 2,112,637 2,414,856
Goodwill 451,582 451,582
Accrued interest receivable and other assets 2,754,414 2,881,746
------------- -------------
Total assets $ 362,241,366 $ 368,909,313
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 280,094,817 $ 282,174,642
Advance payments by borrowers for
taxes and insurance 1,990,950 2,203,499
Accrued expenses and other liabilities 5,380,256 11,221,750
------------- -------------
Total liabilities 287,466,023 295,599,891
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; 2004 - 3,875,521 shares outstanding,
2003 - 3,879,558 shares outstanding 43,047 43,047
Additional paid-in capital 42,790,728 42,398,689
Retained earnings 44,160,306 43,263,633
Unearned ESOP shares (2,624,783) (2,833,030)
Unearned RRP shares (1,388,357) (1,940,971)
Treasury stock, at cost; 2004 - 429,217 shares,
2003 - 425,180 shares (7,890,672) (7,797,619)
Accumulated other comprehensive income (loss) (314,926) 175,673
------------- -------------
Total shareholders' equity 74,775,343 73,309,422
------------- -------------
Total liabilities and shareholders' equity $ 362,241,366 $ 368,909,313
============= =============
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
37
CHESTERFIELD FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
Years ended June 30, 2004, 2003, and 2002
- --------------------------------------------------------------------------------
2004 2003 2002
---- ---- ----
Interest and dividend income
Loans, including fees $ 9,088,181 $ 10,893,710 $11,793,855
Securities 2,077,831 2,676,702 4,720,656
Interest-bearing deposits 1,160,577 1,363,843 1,627,850
Other 1,269,042 1,092,892 904,682
----------- ------------ -----------
Total interest income 13,595,631 16,027,147 19,047,043
Interest expense on deposits 3,945,625 5,620,102 8,102,099
----------- ------------ -----------
Net interest income 9,650,006 10,407,045 10,944,944
Provision for loan losses -- (275,000) --
----------- ------------ -----------
Net interest income after provision
for loan losses 9,650,006 10,682,045 10,944,944
Noninterest income
Insurance commissions 2,182,382 2,481,451 2,049,264
Service charges on deposit accounts 275,475 271,023 288,140
Other 156,834 88,326 138,078
----------- ------------ -----------
2,614,691 2,840,800 2,475,482
Noninterest expense
Salaries and employee benefits 6,007,532 5,860,851 5,163,514
Occupancy 789,016 793,629 775,381
Equipment 404,198 457,800 621,071
Data processing 396,545 383,980 336,215
Federal deposit insurance 130,188 131,801 127,699
Insurance agency bad debt expense 18,459 201,915 18,000
Other 1,318,283 1,280,424 1,354,514
----------- ------------ -----------
9,064,221 9,110,400 8,396,394
----------- ------------ -----------
Income before income taxes 3,200,476 4,412,445 5,024,032
Income tax expense 1,211,381 1,646,082 1,766,235
----------- ------------ -----------
Net income $ 1,989,095 $ 2,766,363 $ 3,257,797
=========== ============ ===========
Earnings per share
Basic $ 0.57 $ 0.78 $ 0.84
Diluted 0.55 0.77 0.83
Dividends per share $ 0.32 $ 0.17 $ --
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
38
CHESTERFIELD FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended June 30, 2004, 2003, and 2002
- --------------------------------------------------------------------------------
Accumulated
Other
Compre-
Additional Unearned Unearned hensive
Common Paid-In Retained ESOP RRP Treasury Income
Stock Capital Earnings Shares Shares Stock (Loss) Total
----- ------- -------- ------ ------ ----- ------ -----
Balance at July 1, 2001 $43,047 $ 41,999,352 $ 37,826,611 $(3,292,878) $ -- $ -- $ (23,572) $76,552,560
Purchases of treasury stock -- -- -- -- -- (4,008,314) -- (4,008,314)
ESOP shares earned -- 153,948 -- 237,317 -- -- -- 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 -- -- -- -- 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 43,047 42,153,300 41,084,408 (3,055,561) (2,496,015) (1,166,625) 178,579 76,741,133
Purchases of treasury stock -- -- -- -- -- (6,694,157) -- (6,694,157)
ESOP shares earned -- 215,247 -- 219,261 -- -- -- 434,508
RRP shares vested -- -- -- -- 555,044 -- -- 555,044
Income tax benefit of RRP
vesting -- 34,380 -- -- -- -- -- 34,380
Options exercised -- (7,542) -- -- -- 63,163 -- 55,621
Dividends paid -- 3,304 (587,138) 3,270 -- -- -- (580,564)
Comprehensive income
Net income -- -- 2,766,363 -- -- -- -- 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 $43,047 $ 42,398,689 $ 43,263,633 $(2,833,030) $(1,940,971) $(7,797,619) $ 175,673 $73,309,422
======= ============ ============ =========== =========== =========== ========= ===========
- --------------------------------------------------------------------------------
(Continued)
39
CHESTERFIELD FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended June 30, 2004, 2003, and 2002
- --------------------------------------------------------------------------------
Accumulated
Other
Compre-
Additional Unearned Unearned hensive
Common Paid-In Retained ESOP RRP Treasury Income
Stock Capital Earnings Shares Shares Stock (Loss) Total
----- ------- -------- ------ ------ ----- ------ -----
Balance at June 30, 2003 $43,047 $42,398,689 $ 43,263,633 $(2,833,030) $(1,940,971) $(7,797,619) $ 175,673 $73,309,422
Purchases of treasury stock -- -- -- -- -- (93,053) -- (93,053)
ESOP shares earned -- 308,185 -- 208,247 -- -- -- 516,432
RRP shares vested -- -- -- -- 552,614 -- -- 552,614
Income tax benefit of RRP
vesting -- 83,854 -- -- -- -- -- 83,854
Dividends paid -- -- (1,092,422) -- -- -- -- (1,092,422)
Comprehensive income
Net income -- -- 1,989,095 -- -- -- -- 1,989,095
Unrealized loss on
securities available-
for-sale, net of
reclassification
and tax effects -- -- -- -- -- -- (490,599) (490,599)
-----------
Total comprehensive
income 1,498,496
------- ----------- ------------ ----------- ----------- ----------- --------- -----------
Balance at June 30, 2004 $43,047 $42,790,728 $ 44,160,306 $(2,624,783) $(1,388,357) $(7,890,672) $(314,926) $74,775,343
======= =========== ============ =========== =========== =========== ========= ===========
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
40
CHESTERFIELD FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, 2004, 2003, and 2002
- --------------------------------------------------------------------------------
2004 2003 2002
---- ---- ----
Cash flows from operating activities
Net income $ 1,989,095 $ 2,766,363 $ 3,257,797
Adjustments to reconcile net income to net
cash provided by operating activities
Provision for loan losses -- (275,000) --
Bad debt expense 18,459 201,915 18,000
Depreciation and amortization 354,500 389,379 531,345
Deferred income tax benefit 158,150 (247,085) (260,529)
FHLB stock dividend (1,229,200) (1,221,100) (609,200)
ESOP compensation expense 516,432 434,508 391,265
RRP compensation expense 552,614 555,044 345,674
Net amortization of securities 62,821 (127,807) (3,865)
Net change in:
Deferred loan origination fees (100,108) (81,218) 24,430
Accrued interest receivable and other assets (49,277) 919,904 (439,215)
Accrued expenses and other liabilities (367,407) 66,047 1,487,785
------------- ------------- ------------
Net cash provided by operating activities 1,906,079 3,380,950 4,743,487
Cash flows from investing activities
Activity in securities held-to-maturity:
Maturities, calls, and prepayments 25,516,302 76,366,702 82,365,155
Purchases (15,000,000) (44,879,411) (45,000,000)
Activity in securities available-for-sale:
Maturities, calls, and prepayments 5,704,098 5,691,027 1,361,387
Purchases (20,558,765) (10,000,000) (5,021,383)
Purchase of Federal Home Loan Bank stock -- -- (15,000,000)
Loan originations and payments, net 4,764,921 20,215,411 (8,702,758)
Additions to premises and equipment (52,281) (274,991) (244,793)
------------- ------------- ------------
Net cash provided by investing activities 374,275 47,118,738 9,757,608
Cash flows from financing activities
Net change in deposits (2,079,825) 4,049,235 17,467,445
Net change in advance payments by borrowers
for taxes and insurance (212,549) (418,836) (155,970)
Net proceeds from stock option exercise -- 55,621 --
Dividends paid (1,092,422) (580,564) --
Purchase of treasury stock, at cost (93,053) (6,694,157) (4,008,314)
------------- ------------- ------------
Net cash provided by (used in) financing activities (3,477,849) (3,588,701) 13,303,161
------------- ------------- ------------
Net change in cash and cash equivalents (1,197,495) 46,910,987 27,804,256
Beginning cash and cash equivalents 141,636,632 94,725,645 66,921,389
------------- ------------- ------------
Ending cash and cash equivalents $ 140,439,137 $ 141,636,632 $ 94,725,645
============= ============= ============
Supplemental cash flow information:
Interest paid $ 3,964,250 $ 5,578,300 $ 8,249,446
Income taxes paid 1,290,000 1,467,000 1,668,000
Supplemental non-cash disclosures:
Due to/from broker for securities transactions $ -- $ 5,137,500 $ --
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
41
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004 and 2003
- --------------------------------------------------------------------------------
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 four 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 and Federal Home Loan Bank stock. The primary business of
Chesterfield Insurance is the sale of commercial and personal lines of
insurance, including mortgage, life, and disability insurance.
Use of Estimates: In preparing the consolidated financial statements in
conformity with U.S. generally accepted accounting principles, 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, fair values of financial instruments, and the valuation of
securities for other-than-temporary impairment 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.
- --------------------------------------------------------------------------------
42
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004 and 2003
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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, net of tax 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.
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,
2004 and 2003.
- --------------------------------------------------------------------------------
43
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004 and 2003
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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, 2004, 2003, and 2002 was as follows (in thousands):
Years ended June 30,
---------------------------------------
2004 2003 2002
--------- --------- ---------
Net income
Reported net income $ 1,989 $ 2,766 $ 3,258
Add back: goodwill amortization -- -- 67
--------- --------- ---------
Adjusted net income $ 1,989 $ 2,766 $ 3,325
========= ========= =========
Years ended June 30,
---------------------------------------
2004 2003 2002
--------- --------- ---------
Basic earnings per common share
Reported net income $ 0.57 $ 0.78 $ 0.84
Add back: goodwill amortization -- -- 0.01
--------- --------- ---------
Adjusted net income $ 0.57 $ 0.78 $ 0.85
========= ========= =========
Diluted earnings per common share
Reported net income $ 0.55 $ 0.77 $ 0.83
Add back: goodwill amortization -- -- 0.01
--------- --------- ---------
Adjusted net income $ 0.55 $ 0.77 $ 0.84
========= ========= =========
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.
- --------------------------------------------------------------------------------
44
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004 and 2003
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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,
-----------------------------------------
2004 2003 2002
--------- --------- ---------
Net income as reported $ 1,989 $ 2,766 $ 3,258
Deduct: Stock-based compensation expense
determined under fair value based method (359) (356) (268)
--------- --------- ---------
Pro forma net income $ 1,630 $ 2,410 $ 2,990
========= ========= =========
Basic earnings per share as reported $ 0.57 $ 0.78 $ 0.84
Pro forma basic earnings per share 0.47 0.68 0 .77
Diluted earnings per share as reported $ 0.55 $ 0.77 $ 0.83
Pro forma diluted earnings per share 0.45 0.67 0.76
The pro forma effects are computed using option-pricing models, using the
following weighted-average assumptions as of grant date:
Years ended June 30,
--------------------------------------
2004 2003 2002
-------- -------- --------
Option exercise price $ 23.06 $ 20.65 $ 16.15
Weighted-average fair value of options granted 3.93 2.65 5.11
Risk-free interest rate 3.66% 2.50% 4.78%
Expected option life 7 years 7 years 7 years
Expected stock price volatility 9.99% 10.59% 14.21%
Dividend yield 1.39% 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.
- --------------------------------------------------------------------------------
45
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004 and 2003
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Dividends on allocated ESOP shares reduce retained earnings; dividends on
unallocated ESOP shares reduce debt. Shares are considered outstanding in the
earnings per share calculations as they are committed-to-be-released;
unallocated shares are not considered outstanding.
Financial Instruments: Financial instruments include off-balance-sheet credit
instruments, such as commitments to make loans and unused lines of credit,
issued to meet customer-financing needs. The face amount for these items
represents the exposure to loss, before considering customer collateral or
ability to repay. Such financial instruments are recorded when they are funded.
Fair Value of Financial Instruments: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed in a separate note. Fair value estimates involve uncertainties and
matters of significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates.
Loss Contingencies: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there now are such matters that will have
a material effect on the consolidated financial statements.
Restrictions on Cash: The Corporation was required to have $332,000 and $494,000
of cash on hand to meet regulatory reserve requirements at June 30, 2004 and
2003.
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: 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.
- --------------------------------------------------------------------------------
46
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004 and 2003
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
New Accounting Pronouncements: During the fiscal 2004 year, the Corporation
adopted FASB Statement 143, Accounting for Asset Retirement Obligations; FASB
Statement 145, Rescission of FASB Statements 4, 44, and 64, Amendment of FASB
Statement 13, and Technical Corrections; FASB Statement 146, Accounting for
Costs Associated With Exit or Disposal Activities; FASB Statement 149, Amendment
of FASB Statement 133 on Derivative Instruments and Hedging Activities; FASB
Statement 132 (revised 2003), Employers' Disclosures About Pensions and Other
Postretirement Benefits; FASB Interpretation 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees;, FASB Interpretation 46, Consolidation
of Variable Interest Entities; and EITF 03-01, Other-Than-Temporary Impairment
on Certain Investments. Adoption of the new standards did not materially affect
the Corporation's operating results or financial condition.
Beginning July 1, 2004, the recognition and measurement guidance related to EITF
03-01, Other-Than-Temporary Impairment on Certain Investments went into effect.
This guidance discusses how to determine if other-than-temporary impairment has
occurred. Management is currently evaluating the effect of this guidance on
their investment portfolio.
Reclassifications: Certain items in the consolidated financial statements have
been reclassified, with no effect on net income, to conform with the current
year presentation.
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, 2004
FNMA mortgage-backed $10,667,366 $ 99,320 $(155,947)
FHLMC mortgage-backed 560,334 7,486 --
GNMA mortgage-backed 9,062,270 -- (241,918)
ARM Mutual fund 15,443,322 -- (186,103)
----------- -------- ---------
Total $35,733,292 $106,806 $(583,968)
=========== ======== =========
June 30, 2003
FNMA mortgage-backed $ 9,949,006 $210,027 $ --
FHLMC mortgage-backed 1,575,977 56,204 --
ARM Mutual fund 15,297,448 -- (59)
----------- -------- ---------
Total $26,822,431 $266,231 $ (59)
=========== ======== =========
- --------------------------------------------------------------------------------
47
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004 and 2003
- --------------------------------------------------------------------------------
NOTE 3 - SECURITIES (Continued)
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, 2004
U.S. federal agency - FHLB $15,000,000 $120,852 $(22,149) $15,098,703
FHLMC mortgage-backed 208,145 2,395 -- 210,540
Tax increment allocation note 392,292 -- -- 392,292
----------- -------- -------- -----------
Total $15,600,437 $123,247 $(22,149) $15,701,535
=========== ======== ======== ===========
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
=========== ======== ======== ===========
Securities with unrealized losses at year-end 2004 not recognized in income are
as follows:
Less than 12 months 12 months or more Total
------------------- ----------------- -----
Fair Unrealized Fair Unrealized Fair Unrealized
Value Loss Value Loss Value Loss
----- ---- ----- ---- ----- ----
U.S. federal
agency - FHLB $ 4,977,851 $ (22,149) $ -- $ -- $ 4,977,851 $ (22,149)
FNMA mortgage-
backed $ 8,246,688 $(155,947) $ -- $ -- $ 8,246,688 $(155,947)
GNMA mortgage-
backed 9,062,270 (241,918) -- -- 9,062,270 (241,918)
ARM Mutual
Fund -- -- 15,443,322 (186,103) 15,443,322 (186,103)
----------- --------- ----------- --------- ----------- ---------
Total temporarily
impaired $22,286,809 $(420,014) $15,443,322 $(186,103) $37,730,131 $(606,117)
=========== ========= =========== ========= =========== =========
The Corporation evaluates securities for other-than-temporary impairment at
least quarterly, and more frequently when economic or market concerns warrant
such evaluation. Consideration is given to the length of time and the extent to
which the fair value has been less than cost, the financial condition and
near-term prospects of the issuer, and the intent and ability of the Corporation
to retain its investment in the issuer for a period of time sufficient to allow
for any anticipated recovery in fair value.
Unrealized losses on the FNMA and GNMA mortgage-backed securities and U.S.
federal agency investments have not been recognized into income because the
issuers' bonds are of high credit quality, management has the intent and ability
to hold for the foreseeable future, and the decline in fair value is largely due
to increased market interest rates. The fair value is expected to recover as the
bonds approach maturity and/or market interest rates decline. The adjustable
rate mortgage (ARM) mutual fund is
- --------------------------------------------------------------------------------
48
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004 and 2003
- --------------------------------------------------------------------------------
NOTE 3 - SECURITIES (Continued)
comprised of adjustable rate mortgage-backed securities of high credit quality,
has declined in fair value less than 1.2% of its cost, and has shown
historically that its fair value can be expected to recover as the fund adjusts
to changes in market interest rates.
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, 2004 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 $ 5,030,769 $ 5,118,237
Due from one to five years 10,151,923 10,163,158
Due from five to ten years 209,600 209,600
Due after ten years -- --
Mortgage-backed 208,145 210,540
--------------- ---------------
Total $ 15,600,437 $ 15,701,535
=============== ===============
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, 2004 or 2003.
There were no security sales during the years ending June 30, 2004, 2003, and
2002.
At June 30, 2004, the Corporation has an investment in a mutual fund, the AMF
Adjustable-Rate Mortgage Fund, in the amount of $15,443,322, which represents
approximately 21% of shareholders' equity at June 30, 2004. At June 30, 2003,
this investment was $15,297,448, also representing approximately 21% of
shareholders' equity.
At June 30, 2004, the Corporation had an investment of $19,792,400 in Federal
Home Loan Bank common stock, which represented approximately 26% of
shareholders' equity. On July 1, 2004, the Corporation redeemed $10,000,000 at
its carrying value. At June 30, 2003 this investment was $18,563,200, which
represented approximately 25% of shareholders' equity.
There were no other 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.
- --------------------------------------------------------------------------------
49
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004 and 2003
- --------------------------------------------------------------------------------
NOTE 4 - LOANS
Loans were as follows:
June 30,
--------
2004 2003
------------ ------------
One-to-four-family mortgage loans $129,762,372 $134,371,392
Home equity loans 11,944,154 12,415,127
Multi-family and other real estate loans 5,225,939 4,318,002
Consumer 1,783,966 2,158,935
------------ ------------
Subtotal 148,716,431 153,263,456
Less: Allowance for loan losses 1,303,280 1,304,413
Net deferred loan fees 479,655 579,763
Undisbursed loan funds 1,576,029 1,357,000
------------ ------------
Loans, net $145,357,467 $150,022,280
============ ============
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 the Corporation generally
maintains 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,
--------------------
2004 2003 2002
---- ---- ----
Beginning balance $ 1,304,413 $ 1,576,427 $1,573,396
Provision for loan losses -- (275,000) --
Loans charged off (1,883) -- --
Recoveries 750 2,986 3,031
----------- ----------- ----------
Ending balance $ 1,303,280 $ 1,304,413 $1,576,427
=========== =========== ==========
Nonperforming loans were as follows:
June 30,
--------
2004 2003 2002
---- ---- ----
Loans past due over 90 days still on accrual $ -- $ -- $ --
Nonaccrual loans 359,771 258,494 222,207
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, 2004 and 2003 did not meet
or exceed 5% of shareholders' equity.
- --------------------------------------------------------------------------------
50
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004 and 2003
- --------------------------------------------------------------------------------
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment were as follows:
June 30,
--------
2004 2003
---- ----
Land $ 559,163 $ 559,163
Buildings 3,402,974 3,402,974
Parking lot improvements 45,642 33,283
Furniture, fixtures, and equipment 1,619,925 1,800,476
---------- ----------
5,627,704 5,795,896
Less accumulated depreciation 3,515,067 3,381,040
---------- ----------
$2,112,637 $2,414,856
========== ==========
Rent expense was $104,076 for the years ended June 30, 2004 and 2003, and
$100,536 for the year ended June 30, 2002. Rent commitments under a
noncancelable-operating lease of premises as of June 30, 2004, were as follows,
before considering renewal options that generally are present.
2005 104,076
2006 104,076
2007 34,692
----------
$ 242,844
==========
NOTE 6 - ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows.
June 30,
--------
2004 2003
---- ----
Securities $166,106 $152,987
Loans receivable 61,009 71,946
-------- --------
$227,115 $224,933
======== ========
- --------------------------------------------------------------------------------
51
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004 and 2003
- --------------------------------------------------------------------------------
NOTE 7 - DEPOSITS
Deposits were as follows:
June 30,
--------
2004 2003
---- ----
Passbook savings $ 64,753,665 $ 61,401,534
NOW accounts 32,782,730 30,015,938
Money market accounts 9,914,461 10,701,856
Time deposits 172,643,961 180,055,314
------------ ------------
$280,094,817 $282,174,642
============ ============
Time deposits of $100,000 or more were $52,855,000 and $56,325,000 at June 30,
2004 and 2003. Deposit amounts in excess of $100,000 are not federally insured.
Scheduled maturities of time deposits at June 30, 2004 were as follows.
2005 $ 145,476,078
2006 13,466,517
2007 2,558,937
2008 7,601,212
2009 3,151,021
Thereafter 390,196
-------------
$ 172,643,961
=============
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 $1,402,525 and
$1,310,771 at June 30, 2004 and 2003.
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, 2004 and 2003.
- --------------------------------------------------------------------------------
52
- --------------------------------------------------------------------------------
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004 and 2003
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 2004, 2003, and 2002 were $287,990, $307,750,
and $343,945. ESOP expenses for 2004, 2003, and 2002 were $516,432, $434,508,
and $391,265. Shares held by the ESOP were are as follows:
June 30,
--------
2004 2003 2002
---- ---- ----
Allocated shares 78,508 60,568 38,823
Unallocated shares 262,478 283,303 305,556
---------- ---------- ----------
Total ESOP shares 340,986 343,871 344,379
========== ========== ==========
Fair value of unallocated shares $8,136,818 $5,991,858 $5,542,789
========== ========== ==========
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 2004, 2003,
and 2002 was $552,614, $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:
Years ended June 30,
--------------------
2004 2003 2002
---- ---- ----
Employee stock ownership plan $ 516,432 $ 434,508 $391,265
Recognition and retention plan 552,614 555,044 345,674
Supplemental Benefit Plan for Inside Directors 91,754 85,752 174,835
---------- ---------- --------
Total expense $1,160,800 $1,075,304 $911,774
========== ========== ========
- --------------------------------------------------------------------------------
53
- --------------------------------------------------------------------------------
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004 and 2003
NOTE 8 - RETIREMENT PLAN AND OTHER BENEFIT PLANS (Continued)
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, 2004, 2003 and 2002
and changes during the years ended on those dates is presented below.
2004 2003 2002
---- ---- ----
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding at beginning $
of year 416,254 $ 16.18 430,473 $ 16.15 -- --
Granted 2,000 23.06 3,000 20.65 430,473 16.15
Exercised -- -- (3,444) 16.15 -- --
Forfeited -- -- (13,775) 16.15 -- --
-------- -------- -------- -------- -------- --------
Outstanding at end of
year 418,254 16.22 416,254 16.18 430,473 16.15
-------- -------- -------- -------- -------- --------
Options exercisable at
year end 165,908 $ 16.17 95,370 $ 16.15 -- $ --
-------- -------- -------- -------- -------- --------
Weighted average fair
value of options granted
during the year $ 3.93 $ 2.65 $ 5.11
-------- -------- --------
Options outstanding at year-end 2004 were as follows:
Outstanding Exercisable
----------- -----------
Remaining
Contractual Exercise
Exercise Prices Number Life Number Price
--------------- ------ ---- ------ -----
$16.15 413,254 8 years 165,308 $ 16.15
20.65 3,000 9 years 600 20.65
23.06 2,000 10 years -- --
---------- ----------- ----------- ----------
418,254 8 years 165,908 $ 16.17
========== =========== =========== ==========
Certain members of the Board of Directors have deferred some of their fees in
consideration for future payments, including interest. Amounts deferred are
included in accrued expenses and other liabilities and were approximately
$2,162,000 and $2,038,000 as of June 30, 2004 and 2003.
- --------------------------------------------------------------------------------
54
- --------------------------------------------------------------------------------
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004 and 2003
NOTE 9 - INCOME TAXES
Income tax expense (benefit) was as follows.
Years ended June 30,
--------------------
2004 2003 2002
---- ---- ----
Current $1,053,231 $ 1,893,167 $ 2,026,764
Deferred 158,150 (247,085) (260,529)
---------- ----------- -----------
Total $1,211,381 $ 1,646,082 $ 1,766,235
========== =========== ===========
Effective tax rates differ from the federal statutory rate of 34% applied to
financial statement income due to the following:
Years ended June 30,
--------------------
2004 2003 2002
---- ---- ----
Federal statutory rate times income
before income taxes $1,088,162 $1,500,231 $ 1,708,171
Effect of:
Nondeductible life insurance premiums 4,760 4,760 1,020
State taxes, net of federal benefit 103,110 131,603 60,586
Other, net 15,349 9,488 (3,542)
---------- ---------- -----------
Total $1,211,381 $1,646,082 $ 1,766,235
========== ========== ===========
Effective tax rate 37.9% 37.3% 35.2%
Year-end deferred tax assets and liabilities were due to the following:
June 30,
--------
2004 2003
---- ----
Deferred tax assets:
Allowance for loan losses $ 507,428 $ 507,428
Deferred loan fees 185,818 222,253
Deferred director fees 822,378 768,781
Inside director nonqualified retirement plan 543,338 507,793
Outside director nonqualified retirement plan 135,938 135,938
RRP expense 141,181 137,547
ESOP expense 26,524 12,555
Goodwill, noncompete 58,786 61,127
Capital loss carryforward 23,244 23,244
Depreciation 16,242 --
Unrealized loss on securities available for sale 162,235 --
Other 178,085 38,109
---------- ----------
Total deferred tax assets 2,801,197 2,414,775
- --------------------------------------------------------------------------------
55
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004 and 2003
- --------------------------------------------------------------------------------
NOTE 9 - INCOME TAXES (Continued)
June 30,
--------
2004 2003
---- ----
Deferred tax liabilities:
Loan loss reserve recapture $ -- $ --
Depreciation -- (18,624)
FHLB stock dividend (1,263,714) (798,834)
Loan fees (93,645) (163,377)
Prepaid insurance (2,684) (6,556)
Prepaid service contracts (42,246) (32,561)
Unrealized gain on securities available-for-sale -- (90,500)
----------- -----------
Total deferred tax liabilities (1,402,289) (1,110,452)
----------- -----------
Net deferred income tax assets $ 1,398,908 $ 1,304,323
=========== ===========
No valuation allowance for deferred tax assets was necessary as of June 30, 2004
and 2003.
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, 2004 and 2003. 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.
- --------------------------------------------------------------------------------
56
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004 and 2003
- --------------------------------------------------------------------------------
NOTE 10 - REGULATORY MATTERS (Continued)
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, 2004
Total Capital to risk-
weighted assets $ 65,591 45.41% $ 11,556 8.0% $ 14,445 10.0%
Tier 1 Capital to risk-
weighted assets 64,313 44.52 5,778 4.0 8,667 6.0
Tier 1 Capital to
adjusted assets 64,313 17.76 14,482 4.0 18,103 5.0
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
As of June 30, 2004, 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,
--------
2004 2003
---- ----
GAAP equity $ 64,656 $ 62,425
Disallowed intangible assets (482) (486)
Accumulated other comprehensive loss (gain) 315 (176)
Non-qualifying equity instruments (176) (189)
-------- --------
Tier I capital 64,313 61,574
General regulatory loan loss reserves 1,278 1,279
-------- --------
Total capital $ 65,591 $ 62,853
======== ========
- --------------------------------------------------------------------------------
57
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004 and 2003
- --------------------------------------------------------------------------------
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, 2004 June 30, 2003
------------- -------------
Fixed Variable Fixed Variable
Rate Rate Rate Rate
---- ---- ---- ----
Commitments to make loans $ 1,929,000 $ -- $ 7,185,000 $ --
Unused lines of credit -- 19,405,000 -- 19,784,000
Commitments to make loans are generally made for periods of 60 days or less. As
of June 30, 2004, fixed rate loan commitments had interest rates ranging from
5.00% to 6.25% and maturities ranging from 7 years to 30 years. 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.
NOTE 12 - FAIR VALUES OF FINANCIAL INSTRUMENTS
Carrying amounts and estimated fair values of financial instruments (in
thousands) were as follows:
June 30, 2004 June 30, 2003
------------- -------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Financial assets
Cash and cash equivalents $140,439 $140,439 $141,637 $141,637
Securities available-for-sale 35,733 35,733 26,822 26,822
Securities held-to-maturity 15,600 15,702 26,117 26,864
Loans, net 145,357 145,147 150,022 157,104
Federal Home Loan Bank stock 19,792 19,792 18,563 18,563
Accrued interest receivable 227 227 225 225
Financial liabilities
Deposits 280,095 280,875 282,175 283,841
Accrued interest payable 95 95 113 113
Due to broker -- -- 5,138 5,138
- --------------------------------------------------------------------------------
58
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004 and 2003
- --------------------------------------------------------------------------------
NOTE 12 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
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.
NOTE 13 - OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes were as follows:
2004 2003 2002
---- ---- ----
Unrealized holding gains (losses) on securities
available-for-sale $(743,334) $(4,401) $ 306,289
Tax effect 252,735 1,495 (104,138)
--------- ------- ---------
Other comprehensive income (loss) $(490,599) $(2,906) $ 202,151
========= ======= =========
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, 2004, 2003 and 2002 are as
follows:
2004 2003 2002
---- ---- ----
Basic earnings per share
Net income available to common
shareholders $1,989,095 $2,766,363 $3,257,797
========== ========== ==========
Weighted average common shares
outstanding 3,504,079 3,524,364 3,901,283
---------- ---------- ----------
Basic earnings per share $ 0.57 $ 0.78 $ 0.84
========== ========== ==========
- --------------------------------------------------------------------------------
59
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004 and 2003
- --------------------------------------------------------------------------------
NOTE 14 - EARNINGS PER COMMON SHARE (Continued)
2004 2003 2002
---- ---- ----
Earnings per share assuming dilution
Net income available to common
shareholders $1,989,095 $2,766,363 $3,257,797
========== ========== ==========
Weighted average common shares
outstanding for basic earnings per
common share 3,504,079 3,524,364 3,901,283
Add dilutive effect of assumed exercises:
Stock option exercises 123,652 63,425 14,562
RRP share recognition 22,034 14,636 4,084
---------- ---------- ----------
Average shares and dilutive potential
common shares 3,649,765 3,602,425 3,919,929
========== ========== ==========
Diluted earnings per share $ 0.55 $ 0.77 $ 0.83
========== ========== ==========
NOTE 15 - PARENT COMPANY ONLY FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
June 30, 2004 and 2003
2004 2003
----------- -----------
Assets
Cash and due from financial institutions $ 20,150 $ 20,498
Cash on deposit in subsidiary 6,990,780 7,782,033
----------- -----------
Cash and cash equivalents 7,010,930 7,802,531
ESOP loan 2,716,994 2,889,184
Investment in subsidiary 64,656,698 62,424,566
Accrued interest receivable and other assets 394,721 197,141
----------- -----------
$74,779,343 $73,313,422
=========== ===========
Liabilities and Shareholders' Equity
Accrued expenses and other liabilities $ 4,000 $ 4,000
Shareholders' equity 74,775,343 73,309,422
----------- -----------
$74,779,343 $73,313,422
=========== ===========
- --------------------------------------------------------------------------------
60
- --------------------------------------------------------------------------------
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004 and 2003
NOTE 15 - PARENT COMPANY ONLY FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF INCOME
For the years ended June 30, 2004, 2003, and 2002
2004 2003 2002
---- ---- ----
Interest income
ESOP loan $ 115,800 $ 83,616 $ 171,755
Deposits in subsidiary 55,569 121,239 323,228
----------- ---------- ----------
Total interest income 171,369 204,855 494,983
Operating expenses 210,121 183,900 181,987
----------- ---------- ----------
Income before income taxes and equity
in undistributed earnings of subsidiary (38,752) 20,955 312,996
Income taxes (14,997) 8,093 127,058
----------- ---------- ----------
Income before equity in undistributed
earnings of subsidiary (23,755) 12,862 185,938
Equity in undistributed earnings of
subsidiary 2,012,850 2,753,501 3,071,859
----------- ---------- ----------
Net income $ 1,989,095 $2,766,363 $3,257,797
=========== ========== ==========
- --------------------------------------------------------------------------------
61
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004 and 2003
- --------------------------------------------------------------------------------
NOTE 15 - PARENT COMPANY ONLY FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
For the years ended June 30, 2004, 2003 and 2002
2004 2003 2002
---- ---- ----
Operating activities
Net income $ 1,989,095 $ 2,766,363 $ 3,257,797
Adjustments to reconcile net
income to net cash provided by
operating activities
Equity in undistributed earnings
of subsidiary (2,012,850) (2,753,501) (3,071,859)
Change in other assets and
liabilities (307,175) 4,397 (42,739)
----------- ------------ ------------
Net cash provided by
(used in) operating activities (330,930) 17,259 143,199
Financing activities
Purchase of treasury stock (93,053) (6,694,157) (4,008,314)
Dividends paid (1,092,422) (587,138) --
Options exercised -- 55,621 --
Payment for RRP shares 552,614 555,044 345,674
Payment received on loan to ESOP 172,190 172,189 172,190
----------- ------------ ------------
Net cash used in
financing activities (460,671) (6,498,441) (3,490,450)
----------- ------------ ------------
Net change in cash and cash equivalents (791,601) (6,481,182) (3,347,251)
Cash and cash equivalents at
beginning of year 7,802,531 14,283,713 17,630,964
----------- ------------ ------------
Cash and cash equivalents at
end of year $ 7,010,930 $ 7,802,531 $ 14,283,713
=========== ============ ============
- --------------------------------------------------------------------------------
62
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, 2004
-------------------------------------------------------
Banking Insurance
Segment Segment Other Consolidated
------- ------- ----- ------------
Net interest income $ 9,526 $ 5 $ 119 $ 9,650
Other revenue 415 2,230 (31) 2,614
Other expense (6,702) (2,307) (55) (9,064)
Income taxes (1,254) 28 15 (1,211)
--------- ------- ------- ---------
Segment profit $ 1,985 $ (44) $ 48 $ 1,989
========= ======= ======= =========
Depreciation $ 278 $ 77 $ -- $ 355
Segment assets $ 361,869 $ 1,906 $(1,534) $ 362,241
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
- --------------------------------------------------------------------------------
63
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004 and 2003
- --------------------------------------------------------------------------------
NOTE 16 - SEGMENT REPORTING (Continued)
Year Ended June 30, 2002
-------------------------------------------------------
Banking Insurance
Segment Segment Other Consolidated
------- ------- ----- ------------
Net interest income $ 10,479 $ 8 $ 458 $ 10,945
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
NOTE 17 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
Year Ended June 30, 2004 Year Ended June 30, 2003
Three Months Ended Three Months Ended
---------------------------------------- ----------------------------------------
June 30 Mar 31 Dec. 31 Sep 30 June 30 Mar 31 Dec 31 Sep 30
------- ------- ------- ------- ------- ------- ------- -------
Total interest income $ 3,276 $ 3,408 $ 3,442 $ 3,469 $ 3,722 $ 3,818 $ 4,145 $ 4,342
Total interest expense (940) (942) (1,003) (1,060) (1,203) (1,285) (1,467) (1,665)
------- ------- ------- ------- ------- ------- ------- -------
Net interest income 2,336 2,466 2,439 2,409 2,519 2,533 2,678 2,677
Provision for loan losses -- -- -- -- -- (75) (200) --
Noninterest income 544 653 681 737 634 628 882 697
Noninterest expense 2,241 2,220 2,332 2,272 2,212 2,226 2,509 2,164
------- ------- ------- ------- ------- ------- ------- -------
Income before income
taxes 639 899 788 874 941 1,010 1,251 1,210
Income tax expense 241 342 296 333 358 384 463 441
------- ------- ------- ------- ------- ------- ------- -------
Net income $ 398 $ 557 $ 492 $ 541 $ 583 $ 626 $ 788 $ 769
======= ======= ======= ======= ======= ======= ======= =======
Basic earnings
per share $ 0.11 $ 0.16 $ 0.14 $ 0.16 $ 0.17 $ 0.18 $ 0.23 $ 0.21
======= ======= ======= ======= ======= ======= ======= =======
Diluted earnings
per share $ 0.11 $ 0.15 $ 0.14 $ 0.15 $ 0.16 $ 0.18 $ 0.22 $ 0.21
======= ======= ======= ======= ======= ======= ======= =======
Dividends per share $ 0.08 $ 0.08 $ 0.08 $ 0.08 $ 0.06 $ 0.06 $ 0.05 $ --
- --------------------------------------------------------------------------------
64
CHESTERFIELD FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004 and 2003
- --------------------------------------------------------------------------------
NOTE 18 - MERGER WITH MAF BANCORP, INC.
On June 5, 2004, the Corporation announced that it has entered into an
Agreement and Plan of Merger (the "Agreement") with MAF Bancorp, Inc. ("MAF").
Under the terms of the Agreement, the Corporation will be acquired by MAF in a
stock and cash transaction valued at approximately $128.5 million. Pursuant to
the Agreement, MAF will purchase each share of common stock of the Corporation
for a fixed price of $31.50, payable 65% in cash and 35% in shares of MAF common
stock. MAF has the option, subject to the consent of the Corporation, to
substitute additional cash consideration in lieu of shares of MAF common stock.
The merger is subject to customary conditions, including, among others, approval
by the Corporation's stockholders and applicable regulatory authorities.
- --------------------------------------------------------------------------------
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.
ITEM 9B. Other Information
None.
66
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 2004 Annual Meeting of
Shareholders ("the 2004 Proxy Statement") is incorporated herein by reference,
or the required information will be filed with the SEC by amendment to this Form
10-K.
ITEM 11. Executive Compensation
The "Proposal I--Election of Directors" section of the Corporation's 2004
Proxy Statement is incorporated herein by reference, or the required information
will be filed with the SEC by amendment to this Form 10-K.
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 2004
Proxy Statement is incorporated herein by reference, or the required information
will be filed with the SEC by amendment to this Form 10-K.
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, 2004 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 Number of securities
Equity compensation plans issued upon exercise of Weighted average remaining available for
approved by shareholders outstanding options and rights exercise price issuance under plan
- ----------------------------------------------------------------------------------------------------------------
Stock Option Plan 418,154 $ 16.22 None
- ----------------------------------------------------------------------------------------------------------------
Recognition and Retention
Plan (1) 101,173 Not Applicable None
- ----------------------------------------------------------------------------------------------------------------
Total (2) 519,327 $ 16.22
================================================================================================================
(1) Represents shares that have been granted but have not yet vested.
(2) Weighted average exercise price represents Stock Option Plan only, since
RRP shares have no exercise price.
ITEM 13. Certain Relationships and Related Transactions
The "Transactions with Certain Related Persons" section of the
Corporation's 2004 Proxy Statement is incorporated herein by reference, or the
required information will be filed with the SEC by amendment to this Form 10-K.
ITEM 14. Principal Accountant Fees and Services
The "Proposal II - Ratification of the Appointment of Independent
Registered Public Accounting Firm" section of the Corporation's 2004 Proxy
Statement is incorporated herein by reference, or the required information will
be filed with the SEC by amendment to this Form 10-K.
67
PART IV
ITEM 15. Exhibits and Financial Statement Schedules
(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 Registered Public Accounting Firm
(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) Exhibits
2 Agreement and Plan of Merger, by and among MAF Bancorp, Inc.,
Classic Acquisition Corp. and Chesterfield Financial Corp.,
dated as of June 5, 2004****
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.
*** Incorporated by reference to the Proxy Statement of Chesterfield Financial
Corp. for the 2003 Annual Meeting of Shareholders (File No. 0-32589),
filed with the Securities and Exchange Commission on October 17, 2003.
**** Incorporated by reference to Exhibit 99.2 to the Current Report on Form
8-K of MAF Bancorp, Inc. (Commission file No. 0-18121), as filed with the
Securities and Exchange Commission on June 7, 2004
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 9, 2004 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 9, 2004
- --------------------------- Officer and Director (Principal
Michael E. DeHaan Executive Officer)
/s/ Karen M. Wirth Treasurer September 9, 2004
- --------------------------- (Principal Financial and
Karen M. Wirth Accounting Officer)
/s/ C. C. DeHaan Director September 9, 2004
- ---------------------------
C. C. DeHaan
/s/ Robert T. Mangan Director September 9, 2004
- ---------------------------
Robert T. Mangan
/s/ David M. Steadman Director September 9, 2004
- ---------------------------
David M. Steadman
/s/ Richard E. Urchell Director September 9, 2004
- ---------------------------
Richard E. Urchell
/s/ Donald D. Walters Director September 9, 2004
- ---------------------------
Donald D. Walters
69