1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------------- ----------------------
Commission file number: 000-21167
------------------------------
Chester Bancorp, Inc.
(Exact name of registrant as specified in its charter)
------------------------------
Delaware 37-1359570
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1112 State Street, Chester, Illinois 62233
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (618) 826-5038
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of outstanding shares of the registrant's Common Stock, par value
$.01 per share, was 1,269,686 on August 10, 2001.
================================================================================
2
FORM 10-Q
Index
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets.......................................................... 4
Consolidated Statements of Income.................................................... 5
Consolidated Statement of Stockholders' Equity....................................... 7
Consolidated Statements of Cash Flows................................................ 8
Consolidated Statements of Comprehensive Income...................................... 9
Notes to Unaudited Consolidated Financial Statements................................. 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................................ 12
Item 3. Quantitative and Qualitative Disclosures About Market Risks........................... 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................... 22
Item 2. Changes in Securities................................................................ 22
Item 3. Defaults upon Senior Securities...................................................... 22
Item 4. Submission of Matters to a Vote
of Securities Holders................................................................ 22
Item 5. Other Information.................................................................... 22
Item 6. Exhibits and Reports on Form 8-K..................................................... 22
Signature........................................................................................ 23
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
3
4
CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2001 and December 31, 2000
(Unaudited)
June 30, December 31,
Assets 2001 2000
------ ---- ----
Cash $ 912,174 $ 1,220,381
Interest-bearing deposits 2,583,768 4,417,973
Federal funds sold 12,575,000 6,050,000
------------- ------------
Total cash and cash equivalents 16,070,942 11,688,354
Certificates of deposit - 1,000,000
Investment securities:
Available for sale, at fair value (cost of $3,346,486 and $1,750,000 at 3,359,996 1,754,036
June 30, 2001 and December 31, 2000, respectively)
Held to maturity, at cost (fair value of $37,704,259 and $34,733,050 at 37,047,748 34,728,445
June 30, 2001 and December 31, 2000, respectively)
Nonmarketable securities 4,354,200 2,322,500
Mortgage-backed securities:
Available for sale, at fair value (cost of $3,157,391 and $5,132,378 at 3,199,812 5,097,460
June 30, 2001 and December 31, 2000, respectively)
Held to maturity, at cost (fair value of $9,196,872 and $10,417,435 at 9,109,414 10,487,947
June 30, 2001 and December 31, 2000, respectively)
Loans receivable, net of allowance for loan loss ($592,160 at 45,450,584 47,340,779
June 30, 2001 and $597,580 at December 31, 2000, respectively)
Accrued interest receivable 940,951 1,108,650
Office property and equipment, net 1,449,108 1,423,951
Other assets 492,471 627,423
------------- ------------
$ 121,475,226 $117,579,545
============= ============
Liabilities and Stockholders' Equity
------------------------------------
Deposits
Non-interest bearing $ 3,647,928 $ 4,957,853
Interest bearing 92,129,199 92,033,633
Borrowed money 5,000,000 -
Accrued interest payable 116,784 187,733
Advance payments by borrowers for taxes and insurance 555,669 394,401
Accrued expenses and other liabilities 199,589 126,165
------------- ------------
Total liabilities 101,649,169 97,699,785
------------- ------------
Stockholders' equity:
Common stock, $.01 par value, 3,000,000 shares authorized, 2,182,125 shares
issued at June 30, 2001 and December 31, 2000 21,821 21,821
Additional paid-in capital 21,245,638 21,393,214
Retained earnings, substantially restricted 15,483,056 15,252,238
Accumulated other comprehensive income (loss) 34,677 (19,147)
Unearned ESOP shares (1,455,600) (1,483,080)
Unearned restricted stock awards (144,188) (227,286)
Treasury stock, at cost: 912,439 and 895,979 shares at
June 30, 2001 and December 31, 2000, respectively (15,359,347) (15,058,000)
------------- ------------
Total stockholders' equity 19,826,057 19,879,760
------------- ------------
$ 121,475,226 $ 117,579,545
============= =============
See accompanying notes to unaudited consolidated financial statements
4
5
CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Three Months Ended June 30, 2001 and 2000
(Unaudited)
Three Months Ended
------------------
June 30,
--------
2001 2000
---- ----
Interest income:
Loans receivable $ 933,728 $999,955
Mortgage-backed securities 212,452 293,826
Investments 587,763 615,131
Interest-bearing deposits and federal funds sold 211,195 17,421
--------- --------
Total interest income 1,945,138 1,926,333
--------- --------
Interest expense:
Savings deposits 1,019,745 960,919
Borrowed money 60,667 37,723
--------- --------
Total interest expense 1,080,412 998,642
--------- --------
Net interest income 864,726 927,691
Provision for loan losses - -
--------- --------
Net interest income after provision for loan losses 864,726 927,691
--------- --------
Noninterest income:
Late charges and other fees 47,269 30,083
Gain on sale of mortgage-backed securities, net 8,618 -
Other 42,296 13,612
--------- --------
Total noninterest income 98,183 43,695
--------- --------
Noninterest expense:
Compensation and employee benefits 317,718 325,422
Occupancy 71,320 65,601
Data processing 35,494 36,793
Professional fees 54,102 61,793
Advertising 12,772 10,974
Federal deposit insurance premiums 4,596 4,702
Other 81,017 77,041
--------- --------
Total noninterest expense 577,019 582,326
--------- --------
Income before income tax expense 385,890 389,060
Income tax expense 106,060 105,168
--------- --------
Net income $ 279,830 $ 283,892
========= =========
Earnings per common share - basic $ .25 $ .24
========= =========
Earnings per common share - diluted $ .24 $ .23
========= =========
See accompanying notes to unaudited consolidated financial statements.
5
6
CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Statement of Income
Six Months Ended June 30, 2001 and 2000
(Unaudited)
Six Months Ended
----------------
June 30,
--------
2001 2000
---- ----
Interest income:
Loans receivable $ 1,922,117 $ 2,003,310
Mortgage-backed securities 459,234 614,885
Investments 1,161,725 1,214,030
Interest-bearing deposits and federal funds sold 423,214 46,949
----------- -----------
Total interest income 3,966,290 3,879,174
----------- -----------
Interest expense:
Savings deposits 2,129,047 1,920,688
Borrowed money 110,667 98,568
----------- -----------
Total interest expense 2,239,714 2,019,256
----------- -----------
Net interest income 1,726,576 1,859,918
Provision for loan losses - -
----------- -----------
Net interest income after provision for loan losses 1,726,576 1,859,918
----------- -----------
Noninterest income:
Late charges and other fees 88,639 60,334
Gain (loss) on sale of investment securities, net 10,652 (22,969)
Gain on sale of mortgage-backed securities, net 8,618 1,139
Other 51,759 18,287
----------- -----------
Total noninterest income 159,668 56,791
----------- -----------
Noninterest expense:
Compensation and employee benefits 636,934 656,387
Occupancy 145,383 131,571
Data processing 73,832 79,766
Professional fees 101,943 123,729
Advertising 25,544 20,748
Federal deposit insurance premiums 9,615 10,111
Other 160,859 152,999
----------- -----------
Total noninterest expense 1,154,110 1,175,311
----------- -----------
Income before income tax expense 732,134 741,398
Income tax expense 205,541 205,184
----------- -----------
Net income $ 526,593 $ 536,214
=========== ===========
Earnings per common share - basic $ .46 $ .44
=========== ===========
Earnings per common share - diluted $ .45 $ .43
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
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7
CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Six Months Ended June 30, 2001
(Unaudited)
Retained Accumulated
Common stock Additional earnings, other
------------ paid-in substantially comprehensive
Shares Amount capital restricted income
------ ------ ------- ---------- ------
Balance, December 31, 2000 2,182,125 $ 21,821 $ 21,393,214 $ 15,252,238 $(19,147)
Net income -- -- -- 526,593 --
Purchase of treasury stock -- -- -- -- --
Treasury stock issued for MRP -- -- (166,110) (10,382) --
Stock options exercised -- (764) -- -- --
Amortization of restricted stock awards -- -- -- -- --
Amortization of ESOP awards -- -- 18,534 -- --
Dividends on common stock
at $.25 per share -- -- -- (284,629) --
Change in accumulated other
comprehensive income -- -- -- -- 53,824
---------- -------- ------------ ------------ --------
Balance, June 30, 2001 2,182,125 $ 21,821 $ 21,245,638 $ 15,483,056 $ 34,677
========== ======== ============ ============ ========
Unearned Unamortized Treasury Stock Total
ESOP restricted -------------- Stockholders'
shares stock awards Shares Amount equity
------ ------------ ------ ------ ------
Balance, December 31, 2000 $(1,483,080) $(227,286) 895,979 $(15,058,000) $ 19,879,760
Net income -- -- -- -- 526,593
Purchase of treasury stock -- -- 29,198 (490,825) (490,825)
Treasury stock issued for MRP -- -- (11,865) 176,492 176,492
Stock options exercised -- -- (873) 12,986 12,222
Amortization of restricted stock awards -- 83,098 -- -- 83,098
Amortization of ESOP awards 27,480 -- -- -- 46,014
Dividends on common stock
at $.25 per share -- -- -- -- (284,629)
Change in accumulated other
comprehensive income -- -- -- -- 53,824
----------- --------- -------- ------------ ------------
Balance, June 30, 2001 $(1,455,600) $(144,188) 912,439 $(15,359,347) $ 19,826,057
=========== ========= ======== ============ ============
See accompanying notes to unaudited consolidated financial statements.
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8
BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six months ended June 30, 2001 and 2000
(Unaudited)
June 30, June 30,
2001 2000
---- ----
Cash flows from operating activities:
Net income $ 526,593 $ 536,214
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization:
Office properties and equipment 80,774 74,906
Deferred fees, discounts, and premiums (77,263) (1,160)
Stock plans 141,334 220,736
Increase in accrued interest receivable 167,699 78,724
Decrease in accrued interest payable (70,949) (45,006)
Increase (decrease) in income taxes, net 12,093 (438,225)
(Gain) loss on sale of investment securities, net (10,652) 22,969
(Gain) on sale of mortgage-backed securities, net (8,618) (1,139)
(Gain) loss on sale of real estate owned, net (701) 5,166
Dividend on FHLB Stock (31,700) (13,900)
Net change in other assets and other liabilities 64,421 (17,793)
------------ -----------
Net cash provided by operating activities 793,031 421,492
------------ -----------
Cash flows from investing activities:
Principal repayments on:
Loans receivable 7,021,828 5,694,121
Mortgage-backed securities 2,964,174 2,814,268
Proceeds from the maturity of certificates of deposits 1,000,000 --
Proceeds from the maturity of investment securities available for sale 1,000,000 500,000
Proceeds from the maturity of investment securities held to maturity 17,778,430 3,565,000
Proceeds from the sale of investment securities available for sale 1,510,652 1,202,031
Proceeds from the sale of mortgage-backed securities available for sale 1,410,369 538,389
Cash invested in:
Loans receivable (5,032,262) (5,485,231)
Mortgage-backed securities held to maturity (997,672) --
Investment securities held to maturity (20,035,000) (2,700,000)
Investment securities available for sale (4,096,486) (1,489,262)
FHLB stock (2,000,000) --
Purchase of office properties and equipment (105,931) (25,819)
------------ -----------
Net cash provided by investing activities 418,102 4,613,497
------------ -----------
Cash flows from financing activities:
Increase (decrease) in savings deposits (1,214,359) 1,358,918
Proceeds from (payments on) FHLB advances 5,000,000 (5,000,000)
Repayments of federal funds purchased -- (2,807,000)
Increase in advance payments by borrowers for taxes and insurance 161,268 321,904
Purchase of treasury stock (490,825) (1,246,971)
Dividends paid (284,629) (241,096)
------------ -----------
Net cash provided by (used in) financing activities 3,171,455 (7,614,245)
------------ -----------
Net increase (decrease) in cash and cash equivalents 4,382,588 (2,574,978)
Cash and cash equivalents, beginning of period 11,688,354 5,837,300
------------ -----------
Cash and cash equivalents, end of period $ 16,070,942 $ 3,262,322
============ ===========
Supplemental information:
Interest paid $ 2,310,662 $ 2,064,262
Income taxes paid $ 184,051 $ 656,024
Noncash investing and financing activities:
Loans transferred to real estate acquired by foreclosure $ -- $ 45,776
Interest credited to savings deposits $ 1,414,156 $ 1,309,492
See accompanying notes to unaudited consolidated financial statements.
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9
CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2001 2000 2001 2000
---- ---- ---- ----
Net income $ 279,830 $ 283,892 $526,593 $ 536,214
Other comprehensive income, net of tax
Unrealized holding gain (loss) on
securities available for sale $ (21,416) $ (4,971) $ 41,877 $ (13,321)
Less adjustment for realized gains
(losses) included in net income $ 5,343 $ -- $ 11,947 $ (13,535)
--------- --------- -------- ---------
Total other comprehensive income (loss) $ (16,073) $ (4,971) $ 53,824 $ (26,856)
--------- --------- -------- ---------
Comprehensive income $ 263,757 $ 278,921 $580,417 $ 509,358
========= ========= ======== =========
See accompanying notes to unaudited consolidated financial statements.
9
10
CHESTER BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
Six Months Ended June 30, 2001 and 2000
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements were
prepared in accordance with instructions for Form 10-Q and, therefore, do not
include all information and notes necessary for a complete presentation of
financial position, results of operations, changes in stockholders' equity, and
cash flows in conformity with generally accepted accounting principles. However,
all adjustments (consisting only of normal recurring accruals) which, in the
opinion of management are necessary for a fair presentation of the unaudited
consolidated financial statements, have been included in the consolidated
financial statements as of June 30, 2001 and for the six months ended June 30,
2001.
Operating results for the six months ended June 30, 2001 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2001.
The Company has not included disclosures regarding specific segments
since management makes operating decisions and assesses performance based on the
Company as a whole.
(2) Earnings Per Share (EPS)
Basic EPS is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the Company.
The computation of EPS for the three and six months ended June 30, 2001
and 2000 follows:
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2001 2000 2001 2000
---- ---- ---- ----
Basic EPS:
Net income $ 279,830 $ 283,892 $ 526,593 $ 536,214
========== ========== ========== ==========
Average common shares outstanding 1,123,217 1,192,742 1,133,513 1,219,687
========== ========== ========== ==========
Basic EPS $ 0.25 $ 0.24 $ .46 $ .44
========== ========== ========== ==========
Diluted EPS:
Net income $ 279,830 $ 283,892 $ 526,593 $ 536,214
========== ========== ========== ==========
Average common shares outstanding 1,123,217 1,192,742 1,133,513 1,219,687
Dilutive potential due to stock options 32,660 33,297 30,991 33,189
---------- ---------- ---------- ----------
Average number of common shares
and dilutive potential common
shares outstanding 1,155,877 1,226,039 1,164,504 1,252,876
========== ========== ========== ==========
Diluted EPS $ 0.24 $ .23 $ .45 $ .43
========== ========== ========== ==========
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(3) Employee Stock Ownership Plan (ESOP)
During 1996, the Company established a tax-qualified ESOP. The plan
covers substantially all employees who have attained the age of 21 and completed
one year of service. In connection with the conversion to a stock corporation,
the ESOP purchased 174,570 shares of the Company's common stock at a
subscription price of $10.00 per share using funds loaned by the Company. All
shares are held in a suspense account for allocation among the participants as
the loan is repaid with level principal payments over 30 years. Shares released
from the suspense account are allocated among the participants based upon their
pro rata annual compensation. The purchases of the shares by the ESOP were
recorded by the Company as unearned ESOP shares in a contra equity account. As
ESOP shares are committed to be released to compensate employees, the contra
equity account is reduced and the Company recognizes compensation expense equal
to the fair value of the shares committed to be released. Dividends on allocated
ESOP shares are recorded as a reduction of retained earnings; dividends on
unallocated ESOP shares are recorded as a reduction of debt. Compensation
expense related to the ESOP was $46,014 and $45,996 for the six months ended
June 30, 2001 and 2000, respectively.
The ESOP shares as of June 30, 2001 are as follows:
Allocated shares 26,262
Committed to be released shares 2,748
Unreleased shares 145,560
----------
Total ESOP shares 174,570
==========
Fair value of unreleased shares $2,474,520
==========
(4) Restricted Stock Awards
On April 4, 1997, the Company adopted the 1997 Management Recognition
and Development Plan. The plan provides that 82,921 common shares can be issued
to directors and employees in key management positions to encourage such
directors and key employees to remain with the Company. Interest in the plan for
each participant vests in five equal installments beginning April 4, 1998. The
adoption of the plan has been recorded in the consolidated financial statements
through a $1,160,894 credit to additional paid-in capital with a corresponding
charge to a contra equity account for restricted shares. The contra equity
account is amortized to compensation expense over the vesting period.
Compensation expense was $83,098 for both the six months ended June 30, 2001 and
2000.
(5) Pending Adoptions
In June 2001, the Financial Accounting Standards Board issued Statement
No. 141, "Business Combinations" (SFAS No. 141). SFAS No. 141 addresses
financial accounting and reporting for business combinations and supersedes APB
Opinion No. 16, "Business Combinations" and SFAS No. 38, "Accounting for
Preacquisition Contingencies of Purchased Enterprises". SFAS No. 141 requires
all business combinations in the scope of this SFAS to be accounted for using
the purchase method. SFAS No. 141 is effective for business combinations
initiated after June 30, 2001 and all business combinations accounted for using
the purchase method for which the acquisition date is July 1, 2001 or later.
Management does not believe the adoption of SFAS No. 141 will have a significant
impact on its financial statements.
Statement of Financial Accounting Standard No. 142, "Goodwill and Other
Intangible Assets" (SFAS No. 142), was issued in June 2001 by the Financial
Accounting Standards Board. The standard addresses financial accounting and
reporting for acquired goodwill and other intangible assets and supersedes APB
Opinion No. 17, "Intangible Assets". It addresses how intangible assets should
be accounted for at acquisition and in subsequent periods. Most significantly,
goodwill and intangible assets that have indefinite useful lives will not be
amortized but rather will be tested at least annually for impairment. Intangible
assets that have finite useful lives will continue to be amortized over their
useful lives. The standard also provides specific guidance for testing goodwill
for impairment and requires additional disclosures about goodwill and intangible
assets.
The Standard is effective for fiscal years beginning after December 15,
2001. The Standard is required to be applied to the beginning of any entity's
fiscal year and to be applied to all goodwill and other intangible assets
recognized in its financial statements at that date. Impairment losses for
goodwill and indefinite-lived intangible assets that arise due to the initial
application of this Standard are to be reported as resulting from a change in
accounting principle. Since the Company does not have any goodwill the adoption
of the Standard will have no impact on the consolidated financial statements.
11
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The principal business of Chester Bancorp, Inc. and its
subsidiaries (the Company) consists of attracting deposits from the general
public and using these funds to originate mortgage loans secured by one-to
four-family residences and to invest in securities of the U. S. government,
mortgage-backed securities, and other securities. To a lesser extent, the
Company engages in various forms of consumer lending. The Company's
profitability depends primarily on its net interest income, which is the
difference between the interest income it earns on its loans, mortgage-backed
securities and investment portfolio and its cost of funds, which consists mainly
of interest paid on deposits, federal funds purchased and FHLB advances.
The operations of the Company are significantly influenced by
general economic conditions and related monetary and fiscal policies of
financial institutions regulatory agencies. Deposit flows and the cost of funds
are influenced by interest rates on competing investments and general market
rates of interest. Lending activities are affected by the demand for financing
real estate and other types of loans, which in turn is affected by the interest
rates at which such financing may be offered and other factors affecting loan
demand and the availability of funds.
When used in this report the words or phrases "will likely
result," "are expected to," "is anticipated," "estimate," "project," or similar
expressions are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such statements
are subject to certain risks and uncertainties, including, among other things,
changes in economic conditions in the Company's market area, changes in policies
by regulatory agencies, fluctuations in interest rates, demand for loans in the
Company's market area and competition, that could cause actual results to differ
materially from the historical earnings and those presently anticipated or
projected. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made. The
Company wishes to advise readers that the factors listed above could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.
The Company does not undertake, and specifically declines any
obligation, to publicly release the results of any revisions which may be made
to any forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
FINANCIAL CONDITION
ASSETS. The Company's total assets increased by $3.9 million,
or 3.3%, to $121.5 million at June 30, 2001 from $117.6 million at December 31,
2000. The increase in the Company's asset size was attributable to an increase
in federal funds sold which was primarily funded by the $5.0 million of FHLB
advances received during the first quarter 2001.
Loans receivable deceased $1.9 million, or 4.0%, to $45.5
million at June 30, 2001 from $47.3 million at December 31, 2000. The decrease
in loans receivable resulted from a combined impact of decreased loan
origination volume, and an increase in principal repayments on loans receivable.
Mortgage-backed securities at June 30, 2001 were $12.3 million
compared to $15.6 million at December 31, 2000. Investment securities, including
nonmarketable equity securities, increased $6.0 million, or 15.4%, to $44.8
million at June 30, 2001, from $38.8 million at December 31, 2000. The proceeds
of maturing investment securities, calls and sales, and the principal repayment
on mortgage-backed securities were invested into short-term, interest-bearing
deposits and callable government agencies.
12
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Cash, interest-bearing deposits and federal funds sold, on a
combined basis, increased $4.4 million, or 37.5%, to $16.1 million at June 30,
2001 from $11.7 million at December 31, 2000. The proceeds of maturing
investment securities, calls and sales, and the principal repayment on
mortgage-backed securities were invested into short-term, interest-bearing
deposits.
LIABILITIES. Deposits decreased $1.2 million, or 1.3% during
the six months ended June 30, 2001. Borrowed money increased $5.0 million as a
result of new borrowings from the FHLB during the quarter ended March 31, 2001.
Over the last several years, the Company has maintained a
deposit relationship with Gilster-Mary Lee Corporation, (Gilster-Mary Lee), a
food manufacturing and packaging company headquartered in Chester, Illinois. The
Chairman of the Board of the Company is also the Executive Vice President,
Treasurer and Secretary of Gilster-Mary Lee. That relationship has provided as
much as $25 million in funds on deposit, typically with short terms. At June 30,
2001 and December 31, 2000, the balance of funds on deposit with the Company was
$22.0 million, and $24.1 million, respectively.
RESULTS OF OPERATIONS
The Company's operating results depend primarily on its level
of net interest income, which is the difference between the interest income
earned on its interest-earning assets (loans, mortgage-backed securities,
investment securities, and interest-bearing deposits) and the interest expense
paid on its interest-bearing liabilities (deposits and borrowings). Operating
results are also significantly affected by provisions for loan losses,
noninterest income, and noninterest expense. Each of these factors is
significantly affected not only by the Company's policies, but, to varying
degrees, by general economic and competitive conditions and by policies of
federal regulatory authorities.
NET INCOME. The Company's net income for the three and six
months ended June 30, 2001 was $279,830 and $526,593, respectively, compared to
$283,892 and $536,214 for the three and six months ended June 30, 2000,
respectively. The $4,100 and $10,000 decrease in net income for the three and
six months ended June 30, 2001, respectively, was the result of a decline in net
interest income, positively offset by an increase in noninterest income combined
with a decline in noninterest expense.
NET INTEREST INCOME. Net interest income totaled $865,000 for
the three months ended June 30, 2001 compared to $928,000 for the three months
ended June 30, 2000. The $63,000, or 6.8%, decrease in net interest income was
the result of a decrease in the ratio of average interest-earning assets to
average interest-bearing liabilities of 116.5% for the three months ended June
30, 2001 compared to 118.4% for the three months ended June 30, 2000. The
decrease was further impacted by a decline in the Company's interest rate spread
to 2.45% for the three months ended June 30, 2001 from 2.88% for the three
months ended June 30, 2000.
Net interest income totaled $1.7 million for the six months
ended June 30, 2001 compared to $1.9 million for the six months ended June 30,
2000. The $133,000, or 7.2%, decrease in net interest income was the result of a
decrease in the ratio of average interest-earning assets to average
interest-bearing liabilities of 116.3% for the six months ended June 30, 2001
compared to 118.6% for the six months ended June 30, 2000.
INTEREST INCOME. Interest income on loans receivable decreased
$66,000, or 6.6%, for the three months ended June 30, 2001. The decrease in
interest income on loans receivable was the result of a $2.2 million, or 4.5%,
decrease in the average balance of loans receivable, coupled with a decline in
the average yield on loans receivable to 8.15% for the three months ended June
30, 2001 from 8.34% for the three months ended June 30, 2000.
Interest income on loans receivable decreased $81,000, or
4.1%, for the six months ended June 30, 2001. The decrease in interest income on
loans receivable was the result of a $1.8 million, or 3.7%,
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decrease in the average balance of loans receivable for the six months ended
June 30, 2001. The average yield on loans receivable was 8.28% and 8.31% for the
six months ended June 30, 2001 and June 30, 2000, respectively.
Interest income on mortgage-backed securities decreased
$81,000, or 27.7%, for the quarter and decreased $156,000, or 25.3%, for the six
months ended June 30, 2001. The decrease in interest income on mortgage-backed
securities for the three months ended June 30, 2001 was the result of a $5.3
million, or 27.6%, decrease in the average balance of mortgage-backed
securities, with a consistent yield of 6.12%. The decrease in interest income on
mortgage-backed securities for the six months ended June 30, 2001 was the result
of a $5.2 million, or 25.9%, decrease in the average balance of mortgage-backed
securities, positively offset by an increase in the average yield to 6.16% for
the six months ended June 30, 2001 from 6.12% for the six months ended June 30,
2000. Management invested the funds received from the repayments of
mortgage-backed securities into short-term, interest-bearing deposits.
Interest earned on investment securities was $588,000 for the
three months ended June 30, 2001, compared to $615,000 for the three months
ended June 30, 2000. The $27,000, or 4.4% decrease in interest income on
investment securities was the result of a decrease in the average balance of
investment securities of $1.4 million, or 3.6%, combined with a slight decrease
in the average yield on investment securities to 6.48% for the three months
ended June 30, 2001 from 6.54% for the three months ended June 30, 2000. The
decrease in the average balance on investment securities was due to management's
decision to invest funds from maturities, call and sales into short-term,
interest-bearing deposits while longer term investment opportunities were
evaluated.
Interest earned on investment securities was $1.2 million for
both the six month period ended June 30, 2001, and 2000. Interest income on
investment securities remained constant due to a 12 basis point increase in the
average yield on investment securities, offset by a $2.5 million, or 6.2%,
decrease in the average balance of investment securities for the six months
ended June 30, 2001.
Interest income on interest-bearing deposits increased
$194,000, or 1,112.3%, and $376,000, or 801.4%, during the three and six months
ended June 30, 2001, respectively. The increase in both instances resulted from
an increase in the average balance of interest-bearing deposits. For the three
and six months ended June 30, 2001, the average balance of interest-bearing
deposits increased $18.5 million, or 1040.1%, and $16.3 million, or 680.2%,
respectively. The increase in the average balance on interest-bearing deposits
resulted primarily from management's decision to invest excess funds into
short-term, interest-bearing deposits while longer term investment opportunities
were evaluated.
INTEREST EXPENSE. Interest expense on savings deposits
increased $59,000, or 6.1%, to $1.0 million for the three months ended June 30,
2001 from $961,000 for the three months ended June 30, 2000. The increase in
interest expense was the result of a $6.9 million, or 7.7%, increase in the
average balance of deposits, which was positively offset by the decrease in the
average cost of deposits to 4.21% for the three months ended June 30, 2001 from
4.27% for the three months ended June 30, 2000.
Interest expense on savings deposits increased $208,000, or
10.8%, to $2.1 million for the six months ended June 30, 2001 from $1.9 million
for the six months ended June 30, 2000. The increase in interest expense on
savings deposits was the result of a $6.3 million, or 7.0%, increase in the
average balance of deposits. The average cost of deposits increased between the
two periods with an average rate of 4.39% for the six months ended June 30, 2001
compared to 4.24% for the six months ended June 30, 2000.
Interest expense on borrowed money increased $23,000, or
60.82%, to $61,000 for the three months ended June 30, 2001 from $38,000 for the
three months ended June 30, 2000. The increase in interest expense was the
result of a $2.8 million, or 131.3%, increase in the average balance of borrowed
money.
Interest expense on borrowed money increased $12,000, or
12.3%, to $111,000 for the six months ended June 30, 2001 from $99,000 for the
six months ended June 30, 2000. The increase in interest
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expense was the result of a $1.3 million, or 41.2%, increase in the average
balance of borrowed money.
PROVISION FOR LOAN LOSSES. The allowance for loan losses is
established through a provision for loan losses charged to expense based on
management's evaluation of the risk inherent in its loan portfolio and the
general economy. Such evaluation considers numerous factors including general
economic conditions, loan portfolio composition, prior loss experience, the
estimated fair value of the underlying collateral, and other factors that
warrant recognition in providing for an adequate loan loss allowance.
During the quarters ended June 30, 2001 and 2000, the
provision for loan losses was zero as no significant problem loans were
identified and the allowance for loan losses was deemed by management to be
adequate.
The Company's allowance for loan losses was $592,000, or 1.3%,
of loans outstanding at June 30, 2001 compared to $598,000, or 1.3%, of loans
outstanding at December 31, 2000. The Company's level of net loans charged-off
during the six months ended June 30, 2001 was $5,000, which represents a minimal
percentage of average loans outstanding. Based on current levels of the
allowance for loan losses in relation to loans receivable and delinquent loans,
management's continued effort to favorably resolve problem loan situations, and
the low level of charge-offs in recent years, management believes the allowance
is adequate at June 30, 2001. At June 30, 2001, loans 90 days or more delinquent
totaled $256,000, or .56% of net loans receivable, compared to $130,000, or .27%
of net loans receivable at December 31, 2000, and $32,000, or .07% of net loans
receivable at June 30, 2000.
The breakdown of general loss allowances and specific loss
allowances is made for regulatory accounting purposes only. General loan loss
allowances are added back to capital to the extent permitted in computing
risk-based capital. Both general and specific loss allowances are charged to
expense. The financial statements of the Company are prepared in accordance with
generally accepted accounting principles (GAAP) and, accordingly, provisions for
loan losses are based on management's assessment of the factors set forth above.
The Company regularly reviews its loan portfolio, including problem loans, to
determine whether any loans are impaired, require classification and/or the
establishment of appropriate reserves. Management believes it has established
its existing allowance for loan losses in accordance with GAAP, however, future
additions may be necessary if economic conditions or other circumstances differ
substantially from the assumptions used in making the initial determination.
NONINTEREST INCOME. Noninterest income was $98,000 and
$160,000 for the three and six months ended June 30, 2001, respectively,
compared to $44,000 and $57,000 for the three and six months ended June 30,
2000. The increase in noninterest income for the three months ended June 30,
2001 was mainly attributable to a $9,000 net gain realized on the sale of
available for sale mortgage-backed securities, combined with a $17,000 increase
in fee income and a $29,000 increase in other income. The increase in
noninterest income for the six months ended June 30, 2001 was mainly
attributable to a $19,000 net gain realized on the sale of available for sale
investment securities and mortgage-backed securities compared to a $22,000 net
loss realized on the sale of available for sale investment securities and
mortgage-backed securities during the comparable six month period ended June 30,
2000. The increase was positively impacted by a $28,000 increase in fee income
and a $33,000 increase in other income.
NONINTEREST EXPENSE. Noninterest expense decreased $5,000, or
.9%, for the three months ended June 30, 2001. The decrease in noninterest
expense for the three months ended June 30, 2001 resulted from a $8,000 decrease
in compensation expense and a $8,000 decrease in professional fees, partially
offset by a $6,000 increase in occupancy expense and a $4,000 increase in other
expense. Each of these fluctuations are the result of normal operating
procedures.
Noninterest expense decreased $21,000, or 1.8%, for the six
months ended June 30, 2001. The decrease in noninterest expense for the six
months ended June 30, 2001 resulted from a $19,000 decrease in compensation
expense, a $6,000 decrease in data processing expense and a $22,000 decrease in
professional fees, partially offset by a $14,000 increase in occupancy expense
and a $8,000 increase in other expense.
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These fluctuations are the result of normal operating procedures.
INCOME TAX EXPENSE. Income tax expense for the three and six
months ended June 30, 2001 was $106,000 and $206,000 compared to $105,000 and
$205,000 for the three and six months ended June 30, 2000. The Company's
effective tax rate for the three and six months ended June 30, 2001 was 27.5%
and 28.1% respectively, compared to 27.0% and 27.7% for the three and six months
ended June 30, 2000. The effective tax rate for each period was below the
statutory rate of 34% due to the Company's investment in tax exempt securities.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds consist of deposits,
securities sold under agreements to repurchase, federal funds purchased, FHLB
advances, repayments and prepayments of loans and mortgage-backed securities,
maturities of investments and interest-bearing deposits, and funds provided from
operations. While scheduled repayments of loans and mortgage-backed securities
and maturities of investment securities are predictable sources of funds,
deposit flows and loan prepayments are greatly influenced by general interest
rates, economic conditions and competition. The Company manages the pricing of
its deposits to maintain a steady deposit base. The Company uses its liquidity
resources principally to fund existing and future loan commitments, to fund
maturing certificates of deposit and deposit withdrawals, to invest in other
interest-bearing assets, to maintain liquidity, and to meet operating expenses.
Management believes that loan repayments and other sources of funds will be
adequate to meet the Company's liquidity needs for the remainder of 2001.
A major portion of the Company's liquidity consists of cash
and cash equivalents, which include investments in highly liquid, short-term
deposits. The level of these assets is dependent on the Company's operating,
investing, lending and financing activities during any given period. At June 30,
2001, cash and cash equivalents totaled $16.1 million.
The primary investing activities of the Company include
origination of loans and purchase of mortgage-backed securities and investment
securities. During the six months ended June 30, 2001, purchases of investment
securities and mortgaged-backed securities totaled $27.1 million while loan
originations totaled $5.0 million. These investments were funded primarily from
loan and mortgage-backed security repayments of $10.0 million and investment
securities and sales, calls and maturities of $21.7 million.
Liquidity management is both a daily and long-term function of
business management. If the Company requires funds beyond its ability to
generate them internally, the Company believes that it could borrow by
purchasing federal funds or borrow funds from the Federal Home Loan Bank (FHLB).
At June 30, 2001, the Company had $5.0 million in outstanding advances from the
FHLB.
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June 30, 2001, the Company exceeded all of its regulatory
capital requirements. The Company and the Company's subsidiary banks actual and
required capital amounts and ratios as of June 30, 2001 are as follows:
For capital
Actual adequacy purposes
----------------------------- ---------------------------
(Dollars in thousands) Amount Ratio Amount Ratio
- ------------------------------------------------------------ ------- ----- ------ ------
Total capital (to risk-weighted assets):
Company $20,288 42.8% 3,791 8.00%
Chester National Bank $15,785 38.5% 3,208 8.00%
Chester National Bank of Missouri $ 3,537 60.6% 467 8.00%
Tier 1 capital (to risk-weighted assets):
Company $19,740 41.7% 1,896 4.00%
Chester National Bank $15,311 37.3% 1,640 4.00%
Chester National Bank of Missouri $ 3,463 59.3% 234 4.00%
Tier 1 capital (to average assets):
Company $19,740 16.0% 3,694 3.00%
Chester National Bank $15,311 13.9% 3,300 3.00%
Chester National Bank of Missouri $ 3,463 29.0% 359 3.00%
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related data
presented herein have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
results of operations in terms of historical dollars without considering changes
in the relative purchasing power of money over time because of inflation. Unlike
most industrial companies, virtually all of the assets and liabilities of the
Company are monetary in nature. As a result, interest rates have a more
significant impact on the Company's performance than the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services.
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NONPERFORMING ASSETS
The following table sets forth information with respect to the Company's
nonperforming assets at the dates indicated.
At June 30, At December 31,
----------- ---------------
2001 2000
---- ----
(Dollars in Thousands)
-------------------------------------------------------
Non-performing loans:
Loans accounted for on a non-accrual basis:
Real estate
Residential real estate $241 $ 115
Commercial -- --
Consumer 15 15
------ ------
Total 256 130
------ ------
Accruing loans which are contractually past due 90 days or more:
Residential real estate -- --
Commercial -- --
Consumer -- --
----- -----
Total -- --
----- -----
Total non-performing loans 256 130
Real estate acquired by foreclosure, net 46 145
----- -----
Total non-performing assets $302 $275
===== =====
Total non-performing loans to net loans 0.56% 0.27%
============ ===========
Total allowance for loan losses to
non-performing loans 231.98% 460.17%
============ ===========
Total non-performing assets to total assets 0.25% 0.23%
============ ===========
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Chester Bancorp, Inc., and Subsidiaries
Three Months Ended June 30,
- --------------------------------------------------------------------------------
2001 2000
-------------------------------------- -----------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ------- ------- -------- -------
(Dollars in thousands)
Interest-earning assets:
Loans receivable, net $ 45,818 $ 934 8.15% $ 47,981 $1,000 8.34%
Investments, net (1) 38,696 627 6.48% 40,125 656 6.54%
Mortgage-backed securities, net 13,923 213 6.12% 19,219 294 6.12%
Interest-bearing deposits 20,248 211 4.17% 1,776 18 4.05%
-------- ------ ------ -------- ------ ------
Total interest-earning assets 118,685 1,985 6.69% 109,101 1,968 7.22%
------ ------ ------ ------
Noninterest-earning assets 4,447 5,506
-------- --------
Total assets $123,132 $114,607
======== ========
Interest-bearing liabilities:
Deposits $ 96,880 1,020 4.21% $ 89,979 961 4.27%
Federal funds purchased 0 0 0.00% 1,638 26 6.35%
Other borrowings 0 0 0.00% 524 12 9.16%
FHLB advances 5,000 61 4.88% 0 0 0.00%
-------- ------ ------ -------- ------ ------
Total interest-bearing liabilities 101,880 1,081 4.24% 92,141 999 4.34%
------ ------ ------ ------
Noninterest-bearing liabilities 1,477 1,951
-------- --------
Total liabilities 103,357 94,092
Retained earnings 19,775 20,515
-------- --------
Total liabilities and retained
earnings $123,132 $114,607
======== ========
Net interest income $ 904 $ 969
====== ======
Interest rate spread 2.45% 2.88%
====== ======
Net interest margin 3.05% 3.55%
====== ======
Ratio of average interest-earning
assets
to average interest-bearing liabilities 116.49% 118.41%
====== ======
(1) Tax exempt state and municipal securities are presented on a tax equivalent
basis.
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Chester Bancorp, Inc., and Subsidiaries
Six Months Ended June 30,
- --------------------------------------------------------------------------------
2001 2000
-------------------------------------- -----------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ------- ------- -------- -------
(Dollars in thousands)
Interest-earning assets:
Loans receivable, net $ 46,447 $1,922 8.28% $ 48,233 $2,003 8.31%
Investments, net (1) 38,057 1,241 6.52% 40,584 1,299 6.40%
Mortgage-backed securities, net 14,900 459 6.16% 20,104 615 6.12%
Interest-bearing deposits 18,724 424 4.53% 2,400 47 3.92%
-------- ------ ------ -------- ------ ------
Total interest-earning assets 118,128 4,046 6.85% 111,321 3,964 7.12%
------ ------ ------ ------
Noninterest-earning assets 4,711 6,712
-------- --------
Total assets $122,839 $118,033
======== ========
Interest-bearing liabilities:
Deposits $ 96,962 2,129 4.39% $ 90,656 1,921 4.24%
Federal funds purchased 0 0 0.00% 1,778 56 6.30%
Other borrowings 0 0 0.00% 262 12 9.16%
FHLB advances 4,586 111 4.84% 1,209 30 4.96%
-------- ------ ------ -------- ------ ------
Total interest-bearing liabilities 101,548 2,240 4.41% 93,905 2,019 4.30%
------ ------ ------ ------
Noninterest-bearing liabilities 1,460 3,063
-------- --------
Total liabilities 103,008 96,968
Retained earnings 19,831 21,065
-------- --------
Total liabilities and retained
Earnings $122,839 $118,003
======== ========
Net interest income $ 1,806 $1,945
======= ======
Interest rate spread 2.44% 2.82%
====== ======
Net interest margin 3.06% 3.49%
====== ======
Ratio of average interest-earning
assets
to average interest-bearing liabilities 116.33% 118.55%
====== ======
(1) Tax exempt state and municipal securities are presented on a tax equivalent
basis.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
There has been no material change to the market risk position of the
Company from the end of the last fiscal year on December 31, 2000.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Neither the Company nor the Banks are a party to any material legal
proceedings at this time. From time to time, the Banks are involved in
various claims and legal actions arising in the ordinary course of
business.
Item 2. Changes in Securities.
None
Item 3. Defaults upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
On March 9, 2001, the Company solicited proxies for the annual meeting
of stockholders of the Company held on April 6, 2001. The meeting involved the
election of two directors. The directors up for election were elected by the
vote of 1,125,593 shares for Allen Verseman and 1,125,797 shares for Carl Welge
out of 1,129,522 shares present at the meeting, either in person or by proxy.
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits
None
B. Reports on Form 8-K
None
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned, thereunto duly authorized.
Chester Bancorp, Inc.
By: /s/ Michael W. Welge
------------------------------------------
Michael W. Welge
Chairman of the Board, President and Chief
Financial Officer
(Duly Authorized Officer)
Dated: August 10, 2001
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