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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 ne