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.
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.
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.
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.
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.
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.
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.
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.
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.
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).
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.
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.
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.
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
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.
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.
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.
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.
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.
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.
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.
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
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
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,
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.
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.
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
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.
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.
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.
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.
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.
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.
PART II
ITEM 5.
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.
ITEM 6.
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.
- ---------- (1) Ratio of net income to average total assets.
(2) Ratio of net income to average equity.
(3) The difference between the weighted average yield on interest-earning assets and the weighted average cost of average interest-bearing liabilities.
(4) Net interest income divided by average interest-earning assets.
(5) Noninterest expense divided by the sum of net interest income and noninterest income.
(6) Chesterfield Financial's common stock first traded on May 2, 2001 and did not pay dividends until fiscal 2003.
ITEM 7.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This document contains certain "forward-looking statements," which may be identified by the use of words such as "believe," "expect," "anticipate," "should," "planned," "estimated," and "potential." Examples of forward-looking statements include, but are not limited to, estimates with respect to our financial condition, results of operations and business that are subject to various factors that could cause actual results to differ materially from these estimates, and most other statements that are not historical in nature. These factors include, but are not limited to, general and local economic conditions, changes in interest rates, deposit flows, demand for mortgage and other loans, real estate values, and competition; changes in accounting principles, policies, or guidelines; changes in legislation or regulation; and other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing products, and services.
Summary of Critical Accounting Policies
The Corporation's Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principles and prevailing practices of the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as the information changes, the financial statements could reflect different estimates, assumptions and judgments. Certain policies and accounting principles inherently have a greater reliance on the use of estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources when available. When third-party information is not available, valuation adjustments are estimated in good faith by management primarily through the use of internal cash flow modeling techniques.
A summary of the Corporation's significant accounting policies is presented in Note 2 to the Consolidated Financial Statements. These policies, along with the disclosures presented in the other financial statement notes and in this Management's Discussion and Analysis section, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Management has identified the determination of the allowance for loan losses and the determination of the fair value of financial instruments as the accounting areas that require the most subjective and complex judgments, and as such could be the most subject to revision as new information becomes available.
The allowance for loan losses is a valuation allowance for probable incurred credit losses. Management estimates the allowance balance on a quarterly basis based on past loan loss experience, the nature and volume of the portfolio, peer group information, adverse situations that may effect the borrower's ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision, as more information becomes available or as future events change.
The fair values of financial instruments are estimated using relevant market information and other assumptions. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. There is no ready market for a significant portion of the Corporation's financial instruments. Accordingly, fair values are based on various factors relative to expected loss experience, current economic conditions, risk characteristics, and other factors. The assumptions and estimates used in the fair value determination process are subjective in nature and involve uncertainties and significant judgment and, therefore, fair values cannot be determined with precision. Changes in assumptions or in market conditions could significantly affect the estimates.
General
Chesterfield Financial's results of operations depend primarily on net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets, consisting primarily of loans, securities, and interest-bearing deposits with other financial institutions, and the interest we pay on our interest-bearing liabilities, primarily savings accounts and time deposits. Our provisions for loan losses, other income, and other expense also affect our results of operations. Other income consists primarily of insurance commissions and service charges on deposit accounts. Other expense consists primarily of noninterest expenses, including salaries and employee benefits, occupancy, equipment, data processing, and deposit insurance premiums. Our results of operations may also be affected significantly by general and local economic and competitive conditions, particularly those with respect to changes in market interest rates, governmental policies, and actions of regulatory authorities.
Business Strategy
Our current business strategy is to operate as a well-capitalized, profitable, community-oriented savings and loan association dedicated to providing quality customer service. Generally, we have sought to implement this strategy by emphasizing deposits as the primary source of funds and maintaining a substantial portion of the assets in local residential first mortgage loans. Specifically, the business strategy incorporates the following elements: (1) emphasizing one-to-four-family residential real estate lending; (2) managing interest rate risk by emphasizing shorter-term mortgage loans and maintaining high levels of liquidity; (3) conducting our business as a community-oriented institution; and (4) maintaining asset quality and capital strength.
Highlights of the business strategy are as follows:
o Emphasizing One-to-four-Family Residential Real Estate Lending. Historically, we have emphasized one-to-four-family residential lending within our market area. As of June 30, 2004, $129.8 million, or 87.3% of our total loan portfolio, consisted of one-to-four-family residential real estate loans. During the year ended June 30, 2004, we originated $38.5 million of one-to-four-family residential real estate loans. Although the yields on residential mortgage loans are often less than the yields on other types of loans, we intend to continue to emphasize one-to-four-family lending because of our expertise with this type of lending and the relatively low delinquency rates on these loans compared to other loans.
o Managing Interest Rate Risk by Emphasizing Shorter-Term Loans and Maintaining High Levels of Liquidity. In recent years, we have emphasized the origination of shorter-term (7-, 10- or 15-year) residential mortgage loans and have maintained high levels of liquidity. In addition, when a borrower refinances a loan during periods of decreasing interest rates, we actively seek to reduce the term of the refinanced loan. While short-term loans generally offer lower interest rates than long-term loans, short-term loans increase monthly cash flows and reprice more quickly, allowing us greater flexibility in periods of rising interest rates.
o Conducting Our Business as a Community-Oriented Institution. We are committed to meeting the financial needs of the communities in which we operate. We are large enough to provide a range of personal and business financial services, and yet are still small enough to provide these services on a personalized and efficient basis. We believe that we can be more effective in servicing our customers than many of our non-local competitors because of our ability to quickly and effectively provide senior management responses to customer needs and inquiries. Our ability to provide these services is enhanced by the stability of our senior management, which has an average tenure with us of over 34 years.
o Maintaining Asset Quality and Capital Strength. Through our commitment to conservative loan underwriting guidelines and the emphasis on traditional residential mortgage loans, we have consistently experienced low levels of late payments and losses on loans. As of June 30, 2004, we had $360,000 of nonperforming assets, which represented 0.10% of total assets. In addition, we maintain our financial strength by maintaining high capital levels. At June 30, 2004, our ratio of shareholders' equity to assets was 20.6%.
Average Balance Sheet
The following table presents for the years indicated the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. No tax equivalent adjustments were made. Average balances are calculated daily. Non-accruing loans have been included in the table as loans carrying a zero yield.
- ---------- (1) Balance calculated net of deferred loan fees, loan discounts, loans in process, and the allowance for loan losses.
Rate/Volume Analysis
The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between the changes related to outstanding balances and those due to the changes in interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.
Comparison of Financial Condition at June 30, 2004 and 2003
At June 30, 2004, total assets were $362.2 million, a decrease of $6.7 million, or 1.8%, compared to $368.9 million at June 30, 2003. Loans receivable at June 30, 2004 were $145.4 million, down $4.7 million, or 3.1%, compared to $150.0 million at June 30, 2003, as principal repayments of $54.9 million exceeded loan originations of $50.2 million during fiscal 2004. The Corporation was not aggressive in pricing mortgage loan products in this historically low interest-rate environment, which caused loan prepayments to exceed loan originations in fiscal 2004. The Corporation's nonperforming loans were $360,000, or 0.25% of loans receivable, as of June 30, 2004, compared to $258,000, or 0.17% of loans receivable, as of June 30, 2003. The $1.3 million allowance for losses on loans was 0.90% of loans receivable as of June 30, 2004, compared to 0.87% as of June 30, 2003.
Total deposits at June 30, 2004, were $280.1 million, down $2.1 million, or 0.7%, compared to $282.2 million at June 30, 2003. Passbook savings accounts and NOW and money market accounts increased $5.3 million, or 5.2%, to $107.5 million at June 30, 2004, compared to $102.1 million at June 30, 2003. Time deposits decreased $7.4 million, or 4.1%, to $172.6 million at June 30, 2004, from $180.1 million at June 30, 2003. Accrued expenses and other liabilities decreased $5.8 million in fiscal 2004, primarily due to settlement of a $5.1 million securities purchase pending on June 30, 2003.
Total shareholders' equity as of June 30, 2004 was $74.8 million, or 20.6% of total assets, compared to $73.3 million, or 19.9% of total assets, at June 30, 2003. At June 30, 2004, there were 3,875,521 common shares outstanding with a book value of $19.29 per share, compared to 3,879,558 shares with a book value of $18.90 per share at June 30, 2003.
Comparison of Operating Results for the Years Ended June 30, 2004 and 2003
General. Net income for the year ended June 30, 2004 was $2.0 million, or $0.55 diluted earnings per share, compared to net income of $2.8 million, or $0.77 diluted earnings per share, for the year ended June 30, 2003. The Corporation's return on average assets for the year ended June 30, 2004 was 0.55%, compared to 0.77% for the same period last year. Return on average equity for the 2004 fiscal year was 2.70%, compared to 3.82% for the prior fiscal year.
Total Interest Income. Total interest income decreased by $2.4 million, or 15.2%, to $13.6 million for the year ended June 30, 2004, from $16.0 million for the year ended June 30, 2003. A decrease in yield on interest-earning assets to 3.94% for the year ended June 30, 2004, from 4.62% for the prior fiscal year, and a $13.8 million
decrease in the average balance of loans receivable contributed the decline in interest income. The average balance of securities for the year ended June 30, 2004, increased $4.3 million from the average balance for the year ended June 30, 2003, while the average balance of interest-earning deposits and federal funds sold increased $6.2 million.
Interest Expense. Interest expense on deposits decreased by $1.7 million, or 29.8%, to $3.9 million for the year ended June 30, 2004, from $5.6 million for the same period in 2003. The decrease was primarily attributable to reductions in deposit rates paid, with the average cost of funds decreasing to 1.40% for the current year, from 2.01% for the prior year.
Net Interest Income. Net interest income decreased by $757,000, or 7.3%, to $9.7 million for the year ended June 30, 2004, from $10.4 million for fiscal 2003. The net interest rate spread decreased 7 basis points, to 2.54% in 2004, from 2.61% in 2003, while the net interest margin decreased 20 basis points, to 2.80% in 2004, from 3.00% in 2003. The ratio of average interest-earning assets to average interest-bearing liabilities was 122.4% for the year ended June 30, 2004, compared to 123.8% for the same period last year.
Noninterest Income. Noninterest income decreased $227,000, or 8.0%, to $2.6 million for the year ended June 30, 2004, from $2.8 million for the prior fiscal year. Insurance commissions generated by the Association's insurance subsidiary, Chesterfield Insurance, decreased $300,000, or 12.1%, to $2.2 million in 2004, compared to $2.5 million in 2003. The primary cause for this decrease was the loss of renewal commissions due to renewed competition and lower pricing in the commercial and condominium association insurance underwriting business. Other noninterest income increased $69,000, or 78.4%, to $157,000 for the year ended June 30, 2004, compared to $88,000 for the year ended June 30, 2003. During 2004 other noninterest income was offset by a $14,000 loss on the Company's equity investment in a community development project. During 2003 this same project had a $105,000 loss offsetting other noninterest income.
Noninterest Expense. Total noninterest expense decreased $47,000, or 0.5%, to $9.1 million for the years ended June 30, 2004, and 2003. Salaries and employee benefits increased $147,000, or 2.5%, and included an $82,000 increase in ESOP expense due to the increased fair value of shares of Company stock released to participants.
Insurance agency bad debt expense decreased $184,000, to $18,000 in fiscal 2004, compared to $202,000 in fiscal 2003, primarily as the result of a $194,000 provision for loss on an insurance premium receivable from a long term commercial client made in 2003.
Other miscellaneous expenses increased $38,000, or 3.0%, to $1.3 million for the years ended June 30, 2004 and 2003. The annualized ratio of noninterest expense to average assets was 2.49% in 2004, compared to 2.52% in 2003, and the Corporation's efficiency ratio was 73.9% for 2004, compared to 68.8% for 2003.
Provision for Income Taxes. The provision for income taxes of $1.2 million for the year ended June 30, 2004 resulted in an effective tax rate of 37.9%, compared to a provision of $1.6 million and a 37.3% effective tax rate for the prior fiscal year.
Comparison of Operating Results for the Years Ended June 30, 2003 and 2002
General. Net income for the year ended June 30, 2003 was $2.8 million, or $0.77 diluted earnings per share, compared to net income of $3.3 million, or $0.83 diluted earnings per share, for the year ended June 30, 2002. The Corporation's return on average assets for the year ended June 30, 2003 was 0.77%, compared to 0.91% for the prior fiscal year. Return on average equity for the 2003 fiscal year was 3.82%, compared to 4.26% for the prior fiscal year.
Total Interest Income. Total interest income decreased by $3.0 million, or 15.9%, to $16.0 million for the year ended June 30, 2003, from $19.0 million for the year ended June 30, 2002. A decrease in yield on interest-earning assets to 4.62% for the year ended June 30, 2003, from 5.50% for the prior fiscal year, and a change in the mix of interest-earning assets favoring shorter term, lower yielding interest-earning deposits, caused the decline in interest income. Management chose not to commit funds to intermediate-term investments, given the existing low level of interest rates. The average balance of securities for the year ended June 30, 2003 decreased $28.2 million from the average balance for the year ended June 30, 2002, while the average balance of interest-earning deposits and federal funds sold increased $29.5 million.
Interest Expense. Interest expense on deposits decreased by $2.5 million, or 30.6%, to $5.6 million for the year ended June 30, 2003, from $8.1 million for the same period in 2002. The decrease was primarily attributable to reductions in deposit rates paid, with the average cost of funds decreasing to 2.01% for the 2003 fiscal year, from 2.98% for the prior fiscal year, offset to some extent by a $8.1 million increase in the average balances of deposit accounts.
Net Interest Income. Net interest income decreased by $538,000, or 4.9%, to $10.4 million for the year ended June 30, 2003, from $10.9 million for fiscal 2002. The net interest rate spread increased nine basis points, to 2.61% in 2003, from 2.52% in 2002, while the net interest margin decreased 16 basis points, to 3.00% in 2003, from 3.16% in 2002. The ratio of average interest-earning assets to average interest-bearing liabilities was 123.8% for the year ended June 30, 2003, compared to 127.3% for the prior fiscal year.
Provision for Loan Losses. From August 1997 through December 1999, the Corporation originated $509,000 of community development loans (thirteen loans) to a real estate development company to acquire vacant lots and deteriorated buildings for future development. The Corporation has closely monitored these loans since origination and established $300,000 in specific valuation reserves on these loans through provisions for loan losses recorded in 1998, 1999, 2000, and 2001. During October 2002, nine of these parcels were sold and the entire principal balances of the related loans were recovered. Subsequent to the sale, $200,000 of the $300,000 specific valuation reserve was recovered during the quarter ended December 31, 2002, as a negative loan loss provision. A further review by management of the four remaining loans during the quarter ended March 31, 2003, indicated that an additional $75,000 of the specific valuation reserve could be recovered as a negative loan loss provision. These loans, with principal balances of $196,000 at June 30, 2003, remain non-accrual loans.
Noninterest Income. Noninterest income increased $366,000, or 14.8%, to $2.8 million for the year ended June 30, 2003, from $2.5 million for the prior fiscal year. Insurance commissions generated by the Association's insurance subsidiary, Chesterfield Insurance, increased $432,000, or 21.1%, to $2.5 million in 2003, compared to $2.0 million in 2002. Other noninterest income decreased $50,000, or 36.2%, to $88,000 for the year ended June 30, 2003, compared to $138,000 for the year ended June 30, 2002, primarily due to a $105,000 loss on the Corporation's equity investment in a community development company, partially offset by a $51,000 increase in agency fees and other service charges by Chesterfield Insurance.
Noninterest Expense. Total noninterest expense increased $714,000, or 8.5%, to $9.1 million for the year ended June 30, 2003, from $8.4 million for the year ended June 30, 2002. The primary causes for the increase included a $697,000, or 13.5%, increase in salaries and employee benefits, which included a $209,000 increase in expense from the amortization of shares granted in November 2001 under the Corporation's 2001 Recognition and Retention Plan, a $43,000 increase in employee stock ownership plan expense due to the increased fair value of shares released to participants, and a $28,000 increase in health insurance premiums.
Data processing expenses increased $48,000, or 14.3%, to $384,000 for 2003, compared to $336,000 in 2002, primarily due to additional software costs associated with upgrading internal systems. Equipment expense decreased $163,000, or 26.3%, to $458,000 in 2003, compared to $621,000 in 2002, primarily due to a $90,000 acceleration of depreciation expense recorded in 2002, and the subsequent replacement of computer equipment with newer, more cost effective systems, resulting in a $53,000 reduction in depreciation expense for fiscal 2003.
Insurance agency bad debt expense increased $184,000, to $202,000 in fiscal 2003 compared to $18,000 in fiscal 2002, primarily the result of a $194,000 provision for an insurance premium receivable from a long-term commercial client of Chesterfield Insurance. During the quarter ended June 30, 2003, Chesterfield Insurance recovered $20,000 of this provision. Chesterfield Insurance continues to aggressively pursue collection of this receivable.
Other miscellaneous expenses decreased $74,000, or 5.5%, to $1.3 million for the year ended June 30, 2003, compared to $1.4 million for the year ended June 30, 2002. The annualized ratio of noninterest expense to average assets was 2.52% in 2003, compared to 2.35% in 2002, and the Corporation's efficiency ratio was 68.8% for 2003, compared to 62.6% for 2002.
Liquidity and Capital Resources
Chesterfield Federal's liquidity management objective is to ensure the availability of sufficient cash flows to meet all financial commitments and to capitalize on opportunities for expansion. Liquidity management addresses the ability to meet deposit withdrawals on demand or at contractual maturity and to fund new loans and investments as opportunities arise. Chesterfield Federal's primary sources of internally generated funds are principal and interest payments on loans receivable, cash flows generated from operations, and cash flows generated by investments. External sources of funds primarily consist of increases in deposits.
At June 30, 2004, Chesterfield Federal had loan commitments of $1.9 million and unused lines of credit of $19.4 million. Chesterfield Federal believes that it has adequate resources to fund loan commitments as they arise. If Chesterfield Federal requires funds beyond its internal funding capabilities, advances from the Federal Home Loan Bank of Chicago could be made available. At June 30, 2004, approximately $145.5 million of time deposits were scheduled to mature within one year, and we expect that a portion of these time deposits will not be renewed upon maturity, which would reduce our liquidity. If additional liquidity is needed, Chesterfield Federal is permitted to sell its existing loans in the secondary market. However, Chesterfield Federal has not originated any loans for sale in the secondary market and is restricted from selling loans to some potential purchasers because Chesterfield Federal's loan documents contain provisions that are more favorable to borrowers than permitted by the seller/servicer guidelines of entities like Fannie Mae or Freddie Mac.
Chesterfield Financial does not engage in any significant business activity other than owning the common stock of Chesterfield Federal. Chesterfield Financial's primary source of funds is income from its investments and principal and interest payments received with respect to the employee stock ownership plan loan. Future dividends from Chesterfield Federal will also be a source of funds for Chesterfield Financial; however, as a stock savings and loan association, Chesterfield Federal is subject to regulatory limitations on its ability to pay cash dividends.
Recent Accounting Pronouncements
During the fiscal 2004 year, the Corporation adopted FASB Statement 143, Accounting for Asset Retirement Obligations; FASB Statement 145, Rescission of FASB Statements 4, 44, and 64, Amendment of FASB Statement 13, and Technical Corrections; FASB Statement 146, Accounting for Costs Associated With Exit or Disposal Activities; FASB Statement 149, Amendment of FASB Statement 133 on Derivative Instruments and Hedging Activities; FASB Statement 132 (revised 2003), Employers' Disclosures About Pensions and Other Postretirement Benefits; FASB Interpretation 45, Guarantor's Accounting and Disclosure Requirements for Guarantees;, FASB Interpretation 46, Consolidation of Variable Interest Entities; and EITF 03-01, Other-Than Temporary Impairment on Certain Investments. Adoption of the new standards did not materially affect the Corporation's operating results or financial condition. Beginning July 1, 2004, the recognition and measurement guidance related to EITF 03-01, Other-Than-Temporary Impairment on Certain Investments went into effect. This guidance discusses how to determine if other-than-temporary impairment has occurred. Management is currently evaluating the effect of this guidance on their investment portfolio.
Impact of Inflation and Changing Prices
The consolidated financial statements and related notes of Chesterfield Financial have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). GAAP generally requires the measurement of financial position and operating results in terms of historical dollars without consideration for changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation.
Contractual Obligations and Commitments
ITEM 7A.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
General. As with other financial institutions, our most significant form of market risk is interest rate risk. Our assets, consisting primarily of mortgage loans, have longer maturities than our liabilities, consisting primarily of deposits. As a result, a principal part of our business strategy is to manage interest rate risk and reduce the exposure of our net interest income to changes in market interest rates. Accordingly, Chesterfield Federal's Board of Directors has established an Asset/Liability Management Committee, which is responsible for evaluating the interest rate risk inherent in Chesterfield Federal's assets and liabilities; determining the level of risk that is appropriate given its business strategy, operating environment, capital, liquidity, and performance objectives; and managing this risk consistent with the guidelines approved by the Board of Directors. The Asset/Liability Management Committee consists of senior management operating under a policy adopted by the Board of Directors and meets at least quarterly to review Chesterfield Federal's asset/liability policies and interest rate risk position.
In recent years, management has sought to reduce interest rate risk by maintaining high levels of liquidity, and emphasizing the origination of shorter-term (7-, 10-, or 15-year) residential mortgage loans. In addition, when a borrower refinances a loan during a period of decreasing interest rates, management actively seeks to reduce the term of the refinanced loan.
Net Portfolio Value. The Office of Thrift Supervision requires the computation of amounts by which the net present value of an institution's cash flow from assets, liabilities, and off-balance-sheet items (the institution's net portfolio value or "NPV") would change in the event of a range of assumed changes in market interest rates. The Office of Thrift Supervision provides all institutions that file a Consolidated Maturity/Rate Schedule as a part of their quarterly Thrift Financial Report with an interest rate sensitivity report of NPV. The Office of Thrift Supervision simulation model uses a discounted cash flow analysis and an option-based pricing approach to measure the interest rate sensitivity of NPV. The Office of Thrift Supervision model estimates the economic value of each type of asset, liability and off-balance-sheet contract under the assumption that the U.S. Treasury yield curve shifts instantaneously and parallel up and down 100 to 300 basis points in 100 basis point increments. A basis point equals one-hundredth of one percentage point, and 100 basis points equals one percentage point. A change in interest rates to 8% from 7% would mean, for example, a 100 basis point increase in the "Change in Interest Rates" column below. The Office of Thrift Supervision provides Chesterfield Federal the results of the interest rate sensitivity model, which is based on information provided by Chesterfield Federal, to estimate the sensitivity of NPV.
The table below sets forth, as of March 31, 2004, (the latest date available) the estimated changes in Chesterfield Federal's NPV that would result from the designated instantaneous changes in the U.S. Treasury yield curve.
Due to the abnormally low prevailing interest rate environment, the OTS report did not provide NPV estimates for -200 and -300 basis points.
Certain shortcomings are inherent in the methodology used in the above interest rate risk measurement. Modeling changes in NPV requires making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the NPV table presented assumes that the composition of Chesterfield Federal's interest sensitive assets and liabilities existing at the beginning of a period remain constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the NPV table provides an indication of Chesterfield Federal's interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on its net interest income and will differ from actual results.
ITEM 8.
ITEM 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors Chesterfield Financial Corp. Chicago, Illinois
We have audited the consolidated balance sheets of Chesterfield Financial Corp. ("the Corporation") as of June 30, 2004 and 2003, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended June 30, 2004. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Chesterfield Financial Corp. as of June 30, 2004 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2004 in conformity with U. S. generally accepted accounting principles.
/s/ Crowe Chizek and Company LLC -------------------------------- Crowe Chizek and Company LLC
Oak Brook, Illinois August 20, 2004
CHESTERFIELD FINANCIAL CORP. CONSOLIDATED BALANCE SHEETS June 30, 2004 and 2003
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
CHESTERFIELD FINANCIAL CORP. CONSOLIDATED STATEMENTS OF INCOME Years ended June 30, 2004, 2003, and 2002
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
CHESTERFIELD FINANCIAL CORP. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Years ended June 30, 2004, 2003, and 2002
- --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- (Continued)
CHESTERFIELD FINANCIAL CORP. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Years ended June 30, 2004, 2003, and 2002
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
CHESTERFIELD FINANCIAL CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended June 30, 2004, 2003, and 2002
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
CHESTERFIELD FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004 and 2003
- --------------------------------------------------------------------------------
NOTE 1 - PLAN OF CONVERSION
On October 17, 2000, the Board of Directors of Chesterfield Federal Savings and Loan Association of Chicago ("the Association") adopted a Plan of Conversion to convert from a federal mutual savings bank to a federal stock savings bank with the concurrent formation of a holding company. On May 2, 2001, Chesterfield Financial Corp. ("the Corporation") sold 4,304,738 shares of common stock at $10 per share and received proceeds of $38,530,000, net of conversion expenses of $1,070,000 and ESOP shares. Approximately 50% of the net proceeds were used by the Corporation to acquire all of the capital stock of the Association.
At the time of conversion, the Association established a liquidation account in an amount equal to its total net worth as of the latest statement of financial condition appearing in the final prospectus. The liquidation account is maintained for the benefit of eligible depositors who continued to maintain their accounts at the Association after the conversion. The liquidation account is reduced annually to the extent that eligible depositors have reduced their qualifying deposits. Subsequent increases do not restore an eligible account holder's interest in the liquidation account. In the event of a complete liquidation, each eligible depositor will be entitled to receive a distribution from the liquidation account in an amount proportionate to the current adjusted qualifying balances for accounts then held. The liquidation account balance is not available for payment of dividends.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Principles of Consolidation: The consolidated financial statements include the Corporation and its wholly owned subsidiary, the Association. Included in the totals for the Association are the balances from its wholly owned subsidiary, Chesterfield Insurance. All significant inter-company transactions and balances are eliminated in consolidation.
The primary business of the Corporation is the ownership of the Association. The Association provides financial services through its four full-service offices located in the southwest side of Chicago, Palos Hills, and Frankfort, Illinois. The Association is principally engaged in the business of attracting savings deposits from the general public and investing these funds to originate one-to-four-family residential real estate loans. Other financial instruments that potentially represent concentrations of credit risk include deposit accounts in other financial institutions and the Corporation's investment in a mutual fund and Federal Home Loan Bank stock. The primary business of Chesterfield Insurance is the sale of commercial and personal lines of insurance, including mortgage, life, and disability insurance.
Use of Estimates: In preparing the consolidated financial statements in conformity with U.S. generally accepted accounting principles, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the consolidated financial statements and the disclosures provided, and future results could differ. The allowance for loan losses, fair values of financial instruments, and the valuation of securities for other-than-temporary impairment are particularly subject to change.
Cash Flows: Cash and cash equivalents include cash, deposits with other financial institutions under 90 days, and federal funds sold. Net cash flows are reported for loan and deposit transactions.
- --------------------------------------------------------------------------------
CHESTERFIELD FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004 and 2003
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Securities: Securities are classified as held-to-maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Accordingly, they are stated at cost, adjusted for amortization of premiums and accretion of discounts. Securities are classified as available-for-sale when the Corporation may decide to sell those securities in response to changes in market interest rates, liquidity needs, changes in yields or alternative investments, and for other reasons. Securities available-for-sale, net of tax are carried at fair value, with unrealized gains and losses reported in other comprehensive income. Other securities such as Federal Home Loan Bank stock are carried at cost.
Interest income includes amortization of purchase premium or discount. Gains and losses on sales are based on the amortized cost of the security sold. Securities are written down to fair value when a decline in fair value is not temporary.
Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs and an allowance for loan losses.
Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term. Interest income on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection. Consumer loans are typically charged off no later than 120 days past due. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.
Interest accrued but not collected is reversed against interest income. Interest received is recognized on the cash basis or cost recovery method until qualifying for return to accrual status. Accrual is resumed when all contractually due payments are brought current and future payments are reasonably assured.
Allowance for Loan Losses: The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes it cannot collect a loan balance. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated quarterly based on management's periodic review of loan collectibility in light of historical experience, the nature and volume of the loan portfolio, peer group information, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision, as more information becomes available or as future events change.
A loan is impaired when full payment under the loan terms is not expected. Impairment is evaluated in total for smaller-balance loans of similar nature such as residential mortgage and consumer loans and on an individual loan basis for other loans. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan's existing rate or at the fair value of collateral if repayment is expected solely from the collateral. The Corporation did not have any loans that were deemed impaired as of or during the years ended June 30, 2004 and 2003.
- --------------------------------------------------------------------------------
CHESTERFIELD FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004 and 2003
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed over the assets' useful lives, ranging from five to forty years, using the straight-line method.
Goodwill: Goodwill results from prior business acquisitions and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Upon adopting new accounting guidance on July 1, 2002, the Corporation ceased amortizing goodwill. Goodwill is assessed at least annually for impairment and any such impairment will be recognized in the period identified. The impact of this standard on the years ended June 30, 2004, 2003, and 2002 was as follows (in thousands):
Long-Term Assets: Premises and equipment and other long-term assets are reviewed for impairment when events indicate that their carrying amounts may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.
- --------------------------------------------------------------------------------
CHESTERFIELD FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004 and 2003
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock Compensation: Employee compensation expense under stock options is reported using the intrinsic value method. No stock-based compensation cost is reflected in net income, as all options granted had an exercise price equal to or greater than the market price of the underlying common stock at date of grant. The following table illustrates the effect on net income and earnings per share if expense was measured using the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation (in thousands):
The pro forma effects are computed using option-pricing models, using the following weighted-average assumptions as of grant date:
Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance reduces deferred tax assets to the amount management expects to realize, if necessary.
Employee Stock Ownership Plan: The cost of shares issued to the ESOP but not yet allocated to participants is presented in the consolidated balance sheet as a reduction of shareholders' equity. Compensation expense is recorded based on the market price of shares as they are committed to be released for allocation to participant accounts. The difference between the market price and the cost of the shares committed-to-be-released is recorded as an adjustment to paid-in capital.
- --------------------------------------------------------------------------------
CHESTERFIELD FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004 and 2003
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Dividends on allocated ESOP shares reduce retained earnings; dividends on unallocated ESOP shares reduce debt. Shares are considered outstanding in the earnings per share calculations as they are committed-to-be-released; unallocated shares are not considered outstanding.
Financial Instruments: Financial instruments include off-balance-sheet credit instruments, such as commitments to make loans and unused lines of credit, issued to meet customer-financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
Fair Value of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.
Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the consolidated financial statements.
Restrictions on Cash: The Corporation was required to have $332,000 and $494,000 of cash on hand to meet regulatory reserve requirements at June 30, 2004 and 2003.
Comprehensive Income: Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available-for-sale, net of tax, which is also recognized as a separate component of equity.
Operating Segments: Internal financial information is primarily reported and aggregated in two lines of business, banking and insurance.
Earnings Per Share: Basic earnings per share of common stock has been determined by dividing net income for each period by the weighted average number of shares of common stock outstanding. Diluted earnings per share has been determined by dividing net income for each period by the weighted average number of shares of common stock outstanding and additional shares issuable under the stock option and recognition and retention plans. Common stock issuable under stock options assumes the exercise of stock options and the use of proceeds to purchase treasury stock at the average market price for the period. Common stock issuable under the recognition and retention plan assumes the use of potential unrecognized compensation funding to purchase treasury stock at the average market price for the period. Shares of stock purchased by the ESOP are considered outstanding in the earnings per share calculations as they are committed-to-be-released; unallocated shares are not considered outstanding.
- --------------------------------------------------------------------------------
CHESTERFIELD FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004 and 2003
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
New Accounting Pronouncements: During the fiscal 2004 year, the Corporation adopted FASB Statement 143, Accounting for Asset Retirement Obligations; FASB Statement 145, Rescission of FASB Statements 4, 44, and 64, Amendment of FASB Statement 13, and Technical Corrections; FASB Statement 146, Accounting for Costs Associated With Exit or Disposal Activities; FASB Statement 149, Amendment of FASB Statement 133 on Derivative Instruments and Hedging Activities; FASB Statement 132 (revised 2003), Employers' Disclosures About Pensions and Other Postretirement Benefits; FASB Interpretation 45, Guarantor's Accounting and Disclosure Requirements for Guarantees;, FASB Interpretation 46, Consolidation of Variable Interest Entities; and EITF 03-01, Other-Than-Temporary Impairment on Certain Investments. Adoption of the new standards did not materially affect the Corporation's operating results or financial condition.
Beginning July 1, 2004, the recognition and measurement guidance related to EITF 03-01, Other-Than-Temporary Impairment on Certain Investments went into effect. This guidance discusses how to determine if other-than-temporary impairment has occurred. Management is currently evaluating the effect of this guidance on their investment portfolio.
Reclassifications: Certain items in the consolidated financial statements have been reclassified, with no effect on net income, to conform with the current year presentation.
NOTE 3 - SECURITIES
The fair value of securities available-for-sale and the related gross unrealized gains and losses recognized in accumulated comprehensive income (loss) were as follows:
Gross Gross Fair Unrealized Unrealized Value Gains Losses ----- ----- ------ June 30, 2004 FNMA mortgage-backed $10,667,366 $ 99,320 $(155,947) FHLMC mortgage-backed 560,334 7,486 -- GNMA mortgage-backed 9,062,270 -- (241,918) ARM Mutual fund 15,443,322 -- (186,103) ----------- -------- ---------
Total $35,733,292 $106,806 $(583,968) =========== ======== =========
June 30, 2003 FNMA mortgage-backed $ 9,949,006 $210,027 $ -- FHLMC mortgage-backed 1,575,977 56,204 -- ARM Mutual fund 15,297,448 -- (59) ----------- -------- ---------
Total $26,822,431 $266,231 $ (59) =========== ======== =========
- --------------------------------------------------------------------------------
CHESTERFIELD FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004 and 2003
- --------------------------------------------------------------------------------
NOTE 3 - SECURITIES (Continued)
The carrying amount, unrecognized gains and losses, and fair value of securities held-to-maturity were as follows:
Securities with unrealized losses at year-end 2004 not recognized in income are as follows:
The Corporation evaluates securities for other-than-temporary impairment at least quarterly, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
Unrealized losses on the FNMA and GNMA mortgage-backed securities and U.S. federal agency investments have not been recognized into income because the issuers' bonds are of high credit quality, management has the intent and ability to hold for the foreseeable future, and the decline in fair value is largely due to increased market interest rates. The fair value is expected to recover as the bonds approach maturity and/or market interest rates decline. The adjustable rate mortgage (ARM) mutual fund is
- --------------------------------------------------------------------------------
CHESTERFIELD FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004 and 2003
- --------------------------------------------------------------------------------
NOTE 3 - SECURITIES (Continued)
comprised of adjustable rate mortgage-backed securities of high credit quality, has declined in fair value less than 1.2% of its cost, and has shown historically that its fair value can be expected to recover as the fund adjusts to changes in market interest rates.
The tax increment allocation note was issued by the City of Chicago for a development project located at 95th Street and Western Avenue, which is near the Corporation's main office. The terms of the note include a fixed interest rate of 8.50%, payable semi-annually, and a maturity date of December 1, 2012. Principal payments are required on an annual basis.
Contractual maturities of debt securities held-to-maturity at June 30, 2004 were as follows. Securities not due at a single maturity date, primarily mortgage-backed securities are shown separately.
Amortized Cost Fair Value -------------- ----------
Due in one year or less $ 5,030,769 $ 5,118,237 Due from one to five years 10,151,923 10,163,158 Due from five to ten years 209,600 209,600 Due after ten years -- -- Mortgage-backed 208,145 210,540 --------------- ---------------
Total $ 15,600,437 $ 15,701,535 =============== ===============
All securities classified as available-for-sale are mortgage-backed securities or mutual fund investments not due at a single maturity date.
There were no pledged securities at June 30, 2004 or 2003.
There were no security sales during the years ending June 30, 2004, 2003, and 2002.
At June 30, 2004, the Corporation has an investment in a mutual fund, the AMF Adjustable-Rate Mortgage Fund, in the amount of $15,443,322, which represents approximately 21% of shareholders' equity at June 30, 2004. At June 30, 2003, this investment was $15,297,448, also representing approximately 21% of shareholders' equity.
At June 30, 2004, the Corporation had an investment of $19,792,400 in Federal Home Loan Bank common stock, which represented approximately 26% of shareholders' equity. On July 1, 2004, the Corporation redeemed $10,000,000 at its carrying value. At June 30, 2003 this investment was $18,563,200, which represented approximately 25% of shareholders' equity.
There were no other holdings of securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of shareholders' equity.
- --------------------------------------------------------------------------------
CHESTERFIELD FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004 and 2003
- --------------------------------------------------------------------------------
NOTE 4 - LOANS
Loans were as follows:
The Corporation's lending activities are concentrated primarily on the southwest side of Chicago and the southwest suburbs in the Corporation's immediate geographic area. The largest portion of the Corporation's loans are originated for the purpose of enabling borrowers to purchase residential real estate property secured by first liens on such property and the Corporation generally maintains loan-to-value ratios of less than 80%.
Activity in the allowance for loan losses for the year was as follows:
Nonperforming loans were as follows:
Nonperforming loans includes all smaller balance homogeneous loans, such as residential mortgage and consumer loans, that are collectively evaluated for impairment. Loans to related parties as of June 30, 2004 and 2003 did not meet or exceed 5% of shareholders' equity.
- --------------------------------------------------------------------------------
CHESTERFIELD FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004 and 2003
- --------------------------------------------------------------------------------
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment were as follows:
June 30, -------- 2004 2003 ---- ----
Land $ 559,163 $ 559,163 Buildings 3,402,974 3,402,974 Parking lot improvements 45,642 33,283 Furniture, fixtures, and equipment 1,619,925 1,800,476 ---------- ---------- 5,627,704 5,795,896 Less accumulated depreciation 3,515,067 3,381,040 ---------- ----------
$2,112,637 $2,414,856 ========== ==========
Rent expense was $104,076 for the years ended June 30, 2004 and 2003, and $100,536 for the year ended June 30, 2002. Rent commitments under a noncancelable-operating lease of premises as of June 30, 2004, were as follows, before considering renewal options that generally are present.
2005 104,076 2006 104,076 2007 34,692 ----------
$ 242,844 ==========
NOTE 6 - ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows.
June 30, -------- 2004 2003 ---- ----
Securities $166,106 $152,987 Loans receivable 61,009 71,946 -------- --------
$227,115 $224,933 ======== ========
- --------------------------------------------------------------------------------
CHESTERFIELD FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004 and 2003
- --------------------------------------------------------------------------------
NOTE 7 - DEPOSITS
Deposits were as follows:
June 30, -------- 2004 2003 ---- ----
Passbook savings $ 64,753,665 $ 61,401,534 NOW accounts 32,782,730 30,015,938 Money market accounts 9,914,461 10,701,856 Time deposits 172,643,961 180,055,314 ------------ ------------
$280,094,817 $282,174,642 ============ ============
Time deposits of $100,000 or more were $52,855,000 and $56,325,000 at June 30, 2004 and 2003. Deposit amounts in excess of $100,000 are not federally insured.
Scheduled maturities of time deposits at June 30, 2004 were as follows.
2005 $ 145,476,078 2006 13,466,517 2007 2,558,937 2008 7,601,212 2009 3,151,021 Thereafter 390,196 -------------
$ 172,643,961 =============
NOTE 8 - RETIREMENT PLAN AND OTHER BENEFIT PLANS
The Corporation has a self-administered Employee Retirement (Profit Sharing) Plan, which covers substantially all employees with one or more years of service. The Corporation's obligations under this plan are limited to annual contributions based upon each employee's compensation and a discretionary percentage rate of 0% to 15% as approved by the Board of Directors.
The Corporation has a Supplemental Benefit Plan for Inside Directors. The plan is unfunded and provides for fixed amounts plus interest to be credited to participants' accounts over five years, with amounts fully vested at the time they are credited. A participant is entitled to benefit payments upon their separation from service, as defined. Benefits accrued were $1,402,525 and $1,310,771 at June 30, 2004 and 2003.
The Corporation has a Retirement Benefit Plan for Outside Directors. The plan is unfunded and provides for fixed monthly payments over ten years. A participant is vested upon completion of four years of continuous service, and payments begin upon termination of service with the Board of Directors. Benefits accrued were $351,000 at both June 30, 2004 and 2003.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CHESTERFIELD FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004 and 2003
NOTE 8 - RETIREMENT PLAN AND OTHER BENEFIT PLANS (Continued)
As part of the conversion transaction, the Corporation established an employee stock ownership plan ("ESOP") for the benefit of substantially all employees. The ESOP borrowed $3,443,790 from the Corporation and used those funds to acquire 344,379 shares of the Corporation's stock at $10 per share.
Shares issued to the ESOP are allocated to ESOP participants based on principal and interest repayments made by the ESOP on the loan from the Corporation. The loan is secured by shares purchased with the loan proceeds and will be repaid by the ESOP with funds from the Corporation's discretionary contributions to the ESOP and earnings on the ESOP's assets. Principal payments are scheduled to occur over a twenty-year period. However, in the event the Corporation's contributions exceed the minimum debt service requirements, additional principal payments will be made.
Contributions to the ESOP during 2004, 2003, and 2002 were $287,990, $307,750, and $343,945. ESOP expenses for 2004, 2003, and 2002 were $516,432, $434,508, and $391,265. Shares held by the ESOP were are as follows:
In November 2001, the Corporation adopted a Recognition and Retention Plan ("RRP") that provides for issuance of its common shares to directors, officers, and employees. There are 172,189 shares to be issued under the plan, and rights to receive 172,189 shares over a five-year vesting period were awarded in 2001. The Corporation purchased 172,189 shares of its common stock in open market transactions, at an average cost of $16.50 per share, with the intention of designating these shares for the RRP. Compensation expense is recognized over the vesting period of the shares at cost. Compensation expense for 2004, 2003, and 2002 was $552,614, $555,044 and $345,674. Unearned compensation is reported as a reduction of shareholders' equity until earned. The following schedule summarizes expenses recorded related to benefit plans:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CHESTERFIELD FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004 and 2003
NOTE 8 - RETIREMENT PLAN AND OTHER BENEFIT PLANS (Continued)
During 2002, the Corporation adopted a stock option plan under the terms of which 430,473 shares of the Corporation's common stock were reserved for issuance. The options become exercisable on a cumulative basis in equal installments over a five-year period from the date of grant and expire ten years from the date of grant.
A summary of the status of the option plans as of June 30, 2004, 2003 and 2002 and changes during the years ended on those dates is presented below.
Options outstanding at year-end 2004 were as follows:
Certain members of the Board of Directors have deferred some of their fees in consideration for future payments, including interest. Amounts deferred are included in accrued expenses and other liabilities and were approximately $2,162,000 and $2,038,000 as of June 30, 2004 and 2003.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CHESTERFIELD FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004 and 2003
NOTE 9 - INCOME TAXES
Income tax expense (benefit) was as follows.
Years ended June 30, -------------------- 2004 2003 2002 ---- ---- ----
Current $1,053,231 $ 1,893,167 $ 2,026,764 Deferred 158,150 (247,085) (260,529) ---------- ----------- -----------
Total $1,211,381 $ 1,646,082 $ 1,766,235 ========== =========== ===========
Effective tax rates differ from the federal statutory rate of 34% applied to financial statement income due to the following:
Year-end deferred tax assets and liabilities were due to the following:
- --------------------------------------------------------------------------------
CHESTERFIELD FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004 and 2003
- --------------------------------------------------------------------------------
NOTE 9 - INCOME TAXES (Continued)
No valuation allowance for deferred tax assets was necessary as of June 30, 2004 and 2003.
Federal income tax laws provided additional bad debt deductions through 1987, totaling $3,479,000. Accounting standards do not require a deferred tax liability to be recorded on this amount, which liability otherwise would total $1,348,000 at June 30, 2004 and 2003. If the Corporation were liquidated or otherwise ceased to be a corporation or if tax laws were to change, this amount would be charged to earnings.
NOTE 10 - REGULATORY MATTERS
The Association is subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required.
- --------------------------------------------------------------------------------
CHESTERFIELD FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004 and 2003
- --------------------------------------------------------------------------------
NOTE 10 - REGULATORY MATTERS (Continued)
Actual and required capital amounts (in thousands) and ratios are presented below:
As of June 30, 2004, the most recent notification from regulatory authorities categorized the Association as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution's category.
The following is a reconciliation of the Association's equity under accounting principles generally accepted in the United States of America to regulatory capital (in thousands):
June 30, -------- 2004 2003 ---- ----
GAAP equity $ 64,656 $ 62,425 Disallowed intangible assets (482) (486) Accumulated other comprehensive loss (gain) 315 (176) Non-qualifying equity instruments (176) (189) -------- -------- Tier I capital 64,313 61,574 General regulatory loan loss reserves 1,278 1,279 -------- --------
Total capital $ 65,591 $ 62,853 ======== ========
- --------------------------------------------------------------------------------
CHESTERFIELD FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004 and 2003
- --------------------------------------------------------------------------------
NOTE 11 - OFF-BALANCE-SHEET ACTIVITIES
Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance-sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.
The contractual amount of financial instruments with off-balance-sheet risk was as follows.
Commitments to make loans are generally made for periods of 60 days or less. As of June 30, 2004, fixed rate loan commitments had interest rates ranging from 5.00% to 6.25% and maturities ranging from 7 years to 30 years. As of June 30, 2003, fixed rate loan commitments had interest rates ranging from 4.50% to 6.25% and maturities ranging from 7 years to 30 years.
NOTE 12 - FAIR VALUES OF FINANCIAL INSTRUMENTS
Carrying amounts and estimated fair values of financial instruments (in thousands) were as follows:
- --------------------------------------------------------------------------------
CHESTERFIELD FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004 and 2003
- --------------------------------------------------------------------------------
NOTE 12 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
The methods and assumptions used to estimate fair value are described as follows:
Carrying amount is the estimated fair value for cash and cash equivalents, Federal Home Loan Bank stock, accrued interest receivable and payable, deposits with no maturities, and variable rate loans or deposits that reprice frequently and fully. Security fair values are based on market prices or dealer quotes and, if no such information is available, on the rate and term of the security and information about the issuer. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. The fair value of off-balance-sheet items is based on the current fees or cost that would be charged to enter into or terminate such arrangements and are not deemed material.
While these estimates of fair value are based on management's judgment of the most appropriate factors as of the balance sheet date, there is no assurance that the estimated fair values would have been realized if the assets were disposed of or the liabilities settled at that date, since market values may differ depending on various circumstances. The estimated fair values would also not apply to subsequent dates.
In addition, other assets and liabilities that are not financial instruments, such as premises and equipment, are not included in the above disclosures. Also, non-financial instruments typically not recognized on the balance sheet may have value but are not included in the above disclosures. These include, among other items, the estimated earnings power of core deposits, customer goodwill, and similar items.
NOTE 13 - OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes were as follows:
NOTE 14 - EARNINGS PER COMMON SHARE
A reconciliation of the numerator and denominator of the earnings per common share computation for the years ended June 30, 2004, 2003 and 2002 are as follows:
- --------------------------------------------------------------------------------
CHESTERFIELD FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004 and 2003
- --------------------------------------------------------------------------------
NOTE 14 - EARNINGS PER COMMON SHARE (Continued)
NOTE 15 - PARENT COMPANY ONLY FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS June 30, 2004 and 2003
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CHESTERFIELD FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004 and 2003
NOTE 15 - PARENT COMPANY ONLY FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF INCOME For the years ended June 30, 2004, 2003, and 2002
- --------------------------------------------------------------------------------
CHESTERFIELD FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004 and 2003
- --------------------------------------------------------------------------------
NOTE 15 - PARENT COMPANY ONLY FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF CASH FLOWS For the years ended June 30, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
CHESTERFIELD FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 16 - SEGMENT REPORTING
The Corporation's operations are managed along two major operating segments: banking and insurance. Loans, investments, and deposits provide the revenues in the banking segment. Insurance commissions provide the revenue in the insurance segment. Holding company services have been included in other. All inter-segment services provided are charged at the same rates as those charged to unaffiliated customers. Such services are included in the revenues and net income of the respective segments and are eliminated to arrive at consolidated totals. The accounting policies are the same as those described in the summary of significant accounting policies. Information reported for internal performance assessment is summarized below (in thousands):
- --------------------------------------------------------------------------------
CHESTERFIELD FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004 and 2003
- --------------------------------------------------------------------------------
NOTE 16 - SEGMENT REPORTING (Continued)
NOTE 17 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
- --------------------------------------------------------------------------------
CHESTERFIELD FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004 and 2003
- --------------------------------------------------------------------------------
NOTE 18 - MERGER WITH MAF BANCORP, INC.
On June 5, 2004, the Corporation announced that it has entered into an Agreement and Plan of Merger (the "Agreement") with MAF Bancorp, Inc. ("MAF"). Under the terms of the Agreement, the Corporation will be acquired by MAF in a stock and cash transaction valued at approximately $128.5 million. Pursuant to the Agreement, MAF will purchase each share of common stock of the Corporation for a fixed price of $31.50, payable 65% in cash and 35% in shares of MAF common stock. MAF has the option, subject to the consent of the Corporation, to substitute additional cash consideration in lieu of shares of MAF common stock. The merger is subject to customary conditions, including, among others, approval by the Corporation's stockholders and applicable regulatory authorities.
- --------------------------------------------------------------------------------
ITEM 9.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A.
ITEM 9A. Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this annual report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this annual report, our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.
There were no significant changes made in our internal controls during the period covered by this report or, to our knowledge, in other factors that could significantly affect these controls subsequent to the date of their evaluation.
ITEM 9B.
ITEM 9B. Other Information
None.
PART III
ITEM 10.
ITEM 10. Directors and Executive Officers of the Corporation
The "Proposal I--Election of Directors" section of the Corporation's definitive Proxy Statement for the Corporation's 2004 Annual Meeting of Shareholders ("the 2004 Proxy Statement") is incorporated herein by reference, or the required information will be filed with the SEC by amendment to this Form 10-K.
ITEM 11.
ITEM 11. Executive Compensation
The "Proposal I--Election of Directors" section of the Corporation's 2004 Proxy Statement is incorporated herein by reference, or the required information will be filed with the SEC by amendment to this Form 10-K.
ITEM 12.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
The "Proposal I--Election of Directors" section of the Corporation's 2004 Proxy Statement is incorporated herein by reference, or the required information will be filed with the SEC by amendment to this Form 10-K.
The Corporation does not have any equity compensation program that was not approved by shareholders, other than its employee stock ownership plan.
Set forth below is certain information as of June 30, 2004 regarding equity compensation plans under which equity securities of the Corporation are authorized for issuance that has been approved by the shareholders.
(1) Represents shares that have been granted but have not yet vested.
(2) Weighted average exercise price represents Stock Option Plan only, since RRP shares have no exercise price.
ITEM 13.
ITEM 13. Certain Relationships and Related Transactions
The "Transactions with Certain Related Persons" section of the Corporation's 2004 Proxy Statement is incorporated herein by reference, or the required information will be filed with the SEC by amendment to this Form 10-K.
ITEM 14.
ITEM 14. Principal Accountant Fees and Services
The "Proposal II - Ratification of the Appointment of Independent Registered Public Accounting Firm" section of the Corporation's 2004 Proxy Statement is incorporated herein by reference, or the required information will be filed with the SEC by amendment to this Form 10-K.
PART IV
ITEM 15.
ITEM 15. Exhibits and Financial Statement Schedules
(a)(1) Financial Statements
The exhibits and financial statement schedules filed as a part of this Form 10-K are as follows:
(A) Report of Independent Registered Public Accounting Firm
(B) Consolidated Balance Sheets
(C) Consolidated Statements of Income
(D) Consolidated Statements of Shareholders' Equity
(E) Consolidated Statements of Cash Flows
(F) Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
All financial statement schedules have been omitted as the required information is inapplicable or has been included in the Notes to Consolidated Financial Statements.
(b) Exhibits
2 Agreement and Plan of Merger, by and among MAF Bancorp, Inc., Classic Acquisition Corp. and Chesterfield Financial Corp., dated as of June 5, 2004****
3.1 Certificate of Incorporation of Chesterfield Financial Corp.*
3.2 Bylaws of Chesterfield Financial Corp.*
4 Form of Common Stock Certificate of Chesterfield Financial Corp.*
10.1 Form of Employment Agreement*
10.2 Form of Severance Plan*
10.3 Form of Supplemental Benefit Plan*
10.4 2001 Recognition and Retention Plan**
10.5 2001 Stock Option Plan**
10.6 Supplemental Executive Agreement***
21 Subsidiaries of the Corporation*
31.1 Certification of Michael E. DeHaan required by Rule 13a - 14(a)
31.2 Certification of Karen M. Wirth required by Rule 13a - 14(a)
32 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
- ---------- * Incorporated by reference to the Registration Statement on Form S-1 of Chesterfield Financial Corp. (Registration No. 333-53882) initially filed with the Securities and Exchange Commission on January 18, 2001.
** Incorporated by reference to the Proxy Statement of Chesterfield Financial Corp. for the 2001 Annual Meeting of Shareholders (File No. 0-32589), filed with the Securities and Exchange Commission on October 18, 2001.
*** Incorporated by reference to the Proxy Statement of Chesterfield Financial Corp. for the 2003 Annual Meeting of Shareholders (File No. 0-32589), filed with the Securities and Exchange Commission on October 17, 2003.
**** Incorporated by reference to Exhibit 99.2 to the Current Report on Form 8-K of MAF Bancorp, Inc. (Commission file No. 0-18121), as filed with the Securities and Exchange Commission on June 7, 2004
Signatures
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CHESTERFIELD FINANCIAL CORP.
Date: September 9, 2004 By: /s/ Michael E. DeHaan ---------------------- Michael E. DeHaan President and Chief Executive Officer (Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange of 1934, the following persons on behalf of the Registrant and in the capacities and on the dates indicated have signed this report below.