[CHESTER BANCORP. INC. LOGO]
2001 Annual Report
TABLE OF CONTENTS
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<Table>
<Caption>
Page
----
Message to Our Stockholders 1
Common Stock and Related Matters 2
Selected Consolidated Financial Information 3
Management's Discussion and Analysis 5
Independent Auditors' Report 12
Consolidated Balance Sheets 13
Consolidated Statements of Income 14
Consolidated Statements of Stockholders' Equity 15
Consolidated Statements of Comprehensive Income 16
Consolidated Statements of Cash Flows 17
Notes to Consolidated Financial Statements 18
Stockholder Information Inside Back Cover
</Table>
MESSAGE TO OUR STOCKHOLDERS
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To Our Stockholders:
Chester Bancorp, Inc. has completed another profitable year. We earned
$1,016,605 of net income during the year 2001 and ended the year with assets of
$111,761,298. Our basic earnings per share of common stock were $1.00, based on
the average shares outstanding.
The price of the Company's common stock increased during 2001, and we have
continued to increase dividends. During 2001 we paid cash dividends of 53 cents
per share, which amounts to an approximate annual cash return on your investment
of over three percent. This is excellent in today's volatile market.
Since October 4, 1996, the date that the Company initially offered
2,182,125 shares of common stock to the public, the Company has continually and
gradually reduced the number of outstanding shares of its common stock through
various repurchases. As part of this effort, the Company conducted an issuer
tender offer between July 10, 2001, and August 15, 2001, which resulted in the
repurchase of 273,216 shares of common stock at a purchase price of $17.75 per
share. As of December 31, 2001, the Company had 977,970 shares of common stock
outstanding.
We intend to continue to repurchase shares from time to time, to the extent
that such repurchases are then determined to be advisable by the Board of
Directors, authorized by the appropriate regulatory authorities and comply with
applicable legal requirements. This practice is considered by the Board of
Directors as a method of increasing value to the Company's stockholders. Such
repurchases have helped the Company maintain growth in earnings per share.
Since the initial public offering in 1996, the Company's common stock had
been listed on the Nasdaq National Market; however, in April of 2001, because of
our size, we changed to listing our common stock on the Nasdaq SmallCap Market.
Price quotes on the Company's common stock can still be found under the symbol
"CNBA" for the Nasdaq SmallCap Market.
On behalf of the Board of Directors of Chester Bancorp, Inc. and the
management and employees of Chester National Bank and Chester National Bank of
Missouri, I extend our sincere appreciation to our stockholders and customers
for your support during 2001. As in years past, we look forward to an exciting
and profitable future.
Sincerely,
/s/ Michael W. Welge
Michael W. Welge
Chairman of the Board,
President and Chief
Financial Officer
1
COMMON STOCK AND RELATED MATTERS
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The common stock of Chester Bancorp, Inc. is traded in the over-the-counter
market and is listed for quotation in the Nasdaq SmallCap Market under the
symbol "CNBA." The stock was issued on October 4, 1996 at $10.00 per share. As
of December 31, 2001, there were 977,970 shares of common stock issued and
outstanding.
The following table sets forth the high and low closing prices as reported
by Nasdaq SmallCap Market and dividends paid per share of common stock for the
period indicated.
<Table>
<Caption>
Dividends
Quarter ended High Low paid
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December 31, 1996 $13.750 $12.625 $ .05
March 31, 1997 $15.500 $13.125 $ .06
June 30, 1997 $15.500 $14.000 $ .06
September 30, 1997 $18.750 $14.750 $ .06
December 31, 1997 $20.500 $15.375 $ .07
March 31, 1998 $18.750 $17.125 $ .07
June 30, 1998 $18.000 $16.750 $ .07
September 30, 1998 $18.000 $17.000 $ .07
December 31, 1998 $17.250 $16.750 $ .07
March 31, 1999 $16.937 $16.750 $ .07
June 30, 1999 $16.812 $16.687 $ .08
September 30, 1999 $17.125 $16.687 $ .09
December 31, 1999 $16.750 $16.250 $ .09
March 31, 2000 $17.187 $16.625 $ .10
June 30, 2000 $17.500 $16.625 $ .10
September 30, 2000 $17.000 $16.625 $ .11
December 31, 2000 $17.250 $16.625 $ .12
March 31, 2001 $17.500 $16.620 $ .12
June 30, 2001 $17.500 $16.500 $ .13
September 30, 2001 $22.000 $16.500 $ .14
December 31, 2001 $20.000 $17.250 $ .14
</Table>
Payment of dividends on the 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, Chester Bancorp'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 will continue.
2
SELECTED CONSOLIDATED FINANCIAL INFORMATION
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<Table>
<Caption>
At December 31
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(Dollars in thousands) 2001 2000 1999 1998 1997
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SELECTED FINANCIAL CONDITION DATA:
Total assets $111,761 $117,580 $120,392 $142,796 $133,777
Loans receivable, net 41,097 47,341 48,277 48,209 60,468
Mortgage-backed securities, net(1) 7,110 15,585 21,734 21,870 13,758
Investments, net(2) 59,918 50,273 45,747 68,218 54,689
Savings deposits 91,414 96,991 90,753 99,435 95,362
Securities sold under agreements to
repurchase -- -- -- 10,880 8,380
Federal funds purchased -- -- 2,807 -- --
Federal Home Loan Bank advances 5,000 -- 5,000 10,000 --
Stockholders' equity 14,948 19,880 20,873 21,705 28,988
</Table>
<Table>
<Caption>
Year Ended December 31,
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(Dollars in thousands) 2001 2000 1999 1998 1997
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SELECTED OPERATING DATA:
Interest income $ 7,342 $ 7,757 $ 8,266 $ 9,077 $ 9,182
Interest expense 4,014 4,139 4,640 5,122 4,647
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Net interest income 3,328 3,618 3,626 3,955 4,535
Provision for loan losses -- -- 200 17 98
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Net interest income after provision
for loan losses 3,328 3,618 3,426 3,938 4,437
Gain on sale of investment securities
and mortgage-backed securities 128 43 -- 33 16
Other non-interest income 258 192 1,069 207 203
Non-interest expense 2,305 2,323 2,532 2,514 2,835
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Income before income taxes 1,409 1,530 1,963 1,664 1,821
Income taxes 392 439 654 514 511
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Net income 1,017 1,091 1,309 1,150 1,310
===================================================================================================================
Earnings per share -- basic $ 1.00 $ 0.93 $ 1.03 $ 0.75 $ 0.68
===================================================================================================================
Earnings per share -- diluted $ 0.97 $ 0.91 $ 1.01 $ 0.73 $ 0.67
===================================================================================================================
Dividends declared per common share $ 0.53 $ 0.43 $ 0.33 $ 0.28 $ 0.25
===================================================================================================================
</Table>
3
SELECTED CONSOLIDATED FINANCIAL INFORMATION (CONTINUED)
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<Table>
<Caption>
At or for the year ended December 31,
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2001 2000 1999 1998 1997
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KEY OPERATING RATIOS(3):
Performance Ratios:
Return on average assets (net income divided by
average assets) 0.85% 0.94% 1.00% 0.82% 0.96%
Return on average equity (net income divided by
average equity) 5.70 5.35 6.38 4.63 4.28
Interest rate spread (difference between average
yield on interest-earning assets and average
cost of interest-bearing liabilities)(3) 2.52 2.74 2.39 2.31 2.69
Net interest margin (net interest income as a
percentage of average interest-earning
assets)(3) 3.03 3.42 2.97 3.03 3.60
Non-interest expense to average assets 1.92 1.99 1.93 1.79 2.07
Average interest-earning assets to average
interest-bearing liabilities 114.46 118.24 115.71 118.91 125.71
Asset Quality:
Allowance for loan losses to total loans at end
of period 1.42 1.25 1.24 0.92 0.72
Ratio of allowance for loan losses to
non-performing loans 458.69 460.17 698.60 287.41 1,159.97
Net charge-offs to average outstanding loans
during the period -0.02 0.02 0.09 0.01 0.08
Ratio of non-performing assets to total
assets(4) 0.13 0.23 0.23 0.20 0.06
Capital Ratios:
Average equity to average assets 14.90 17.52 15.62 17.74 22.39
Equity to assets at end of period 13.37 16.91 17.34 15.20 21.67
</Table>
<Table>
<Caption>
At December 31,
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2001 2000 1999 1998 1997
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OTHER DATA:
Number of:
Real estate loans outstanding 880 1,023 1,050 1,127 1,317
Deposit accounts 7,301 7,888 8,216 9,970 10,391
Full-service offices 4 4 4 5 5
</Table>
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(1) Includes mortgage backed securities available for sale of $512,000, $5.1
million, $7.0 million, $11.3 million and $1.6 million, at December 31, 2001,
2000, 1999, 1998 and 1997 respectively.
(2) Includes investment securities, marketable securities, nonmarketable equity
securities, interest-bearing deposits, federal funds sold, and certificates
of deposits. Includes securities available for sale of $5.2 million, $4.1
million, $5.0 million, $12.5 million and $19.7 million at December 31, 2001,
2000, 1999, 1998 and 1997 respectively.
(3) Information is presented on a tax equivalent basis assuming a tax rate of
34%.
(4) Non-performing assets include loans which are contractually past due 90 days
or more, loans accounted for on nonaccrual basis and real estate acquired
through foreclosure.
4
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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GENERAL
The principal business of Chester Bancorp, Inc. and its subsidiaries
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 investments and mortgage-backed 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, securities sold under agreements to repurchase, federal funds
purchased and advances from the Federal Home Loan Bank. Net interest income is
affected by the relative amounts of interest-earning assets and interest-bearing
liabilities and the interest rates earned or paid on these balances. When
interest-earning assets approximate or exceed interest-bearing liabilities, any
positive interest rate spread will generate net interest income.
The Company's profitability is also affected by the level of provisions for
loan losses, noninterest income and noninterest expense. Noninterest income
consists primarily of gains and losses on the sale of investment securities,
late charges on loans, and deposit account fees. Noninterest expense consists of
salaries and benefits, occupancy related expenses, data processing expenses,
deposit insurance premiums paid to the Savings Association Insurance Fund and
other operating expenses.
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.
On October 4, 1996, the Company, completed its conversion from a federal
mutual savings bank to a federal capital stock savings bank and simultaneously
formed Chester Bancorp, Inc., a Delaware corporation, to act as the holding
company of the converted savings bank. Pursuant to the plan of conversion, the
Bank converted to a national bank known as Chester National Bank, and a newly
chartered bank subsidiary was formed by the Company known as Chester National
Bank of Missouri. The stock conversion resulted in the sale and issuance of
2,181,125 shares of $ .01 par value common stock at a price of $10.00 per share.
In conjunction with the conversion, the Company loaned $1,745,700 to the
Company's employee stock ownership plan for the purchase of 174,570 shares of
common stock in connection with the stock conversion. After reducing gross
proceeds for conversion costs of $939,363 and $1,745,700 related to the sale of
shares to the Company's employee stock ownership plan, net proceeds totaled
$19,136,187.
When used in this Annual Report the words or phrases "will likely result,"
"are expected to," "will continue," "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 result 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.
BUSINESS STRATEGY
The Company's current business strategy is to operate as a well
capitalized, profitable and independent community bank dedicated to financing
home ownership and consumer needs in its market area and to providing quality
service to its customers. The Company has implemented this strategy by: (1)
closely monitoring the needs of customers and providing quality service; (2)
emphasizing consumer banking by originating residential mortgage loans and
consumer loans, and by offering checking accounts and other financial services
and products; (3) maintaining asset quality; (4) maintaining
5
significant investments in investment and mortgage-backed securities; (5)
maintaining capital in excess of regulatory requirements; (6) increasing
earnings; and, (7) managing interest rate risk by attempting to match asset and
liability maturities and rates.
FINANCIAL CONDITION
Assets.
The Company's total assets decreased by $5.8 million, or 4.9%, to $111.8
million at December 31, 2001 from $117.6 million at December 31, 2000. The
decrease in the Company's asset size was attributable to a $4.9 million, or
24.8% decrease in stockholders' equity. This decrease was the result of a
continued effort to repurchase shares. In addition to shares being purchased
through the repurchase plan, the Company purchased 273,216 shares through an
Offer to Purchase dated July 19, 2001. These shares were purchased at $17.75,
plus cost associated with the offer totaling $41,049, which resulted in the
total purchase amount of $4,890,633.
Loans receivable decreased $6.2 million or 13.2%, to $41.1 million at
December 31, 2001 from $47.3 million at December 31, 2000. The average balance
on loans receivable decreased $3.2 million, or 6.6%, for the twelve months ended
December 31, 2001. Repayments on loans receivable were $13.4 million for 2001
compared to $9.7 for 2000. New loan originations decreased to $7.4 million in
2001 from $8.8 million in 2000. Refinancing volume was high due to the low level
of interest rates throughout 2001.
Mortgage-backed securities at December 31, 2001 were $7.1 million compared
to $15.6 million at December 31, 2000. Investment securities, marketable
securities and nonmarketable equity securities increased $947,000, or 2.4%, to
$39.8 million at December 31, 2001. The funds received from the decline in
mortgage-backed securities were used to purchase additional shares of treasury
stock.
On a combined basis cash, interest-bearing deposits, federal funds sold and
certificates of deposit, increased $8.3 million, or 65.6%, to $21.0 million at
December 31, 2001 from $12.7 million at December 31, 2000. Management invested
the funds received from maturing investment securities, calls and sales, and the
principal repayment on mortgage-backed securities into short-term
interest-bearing deposits.
Liabilities.
Savings deposits decreased $5.6 million, or 5.8%, to $91.4 million at
December 31, 2001 from $97.0 million at December 31, 2000. The decrease in
savings deposits reflects management's decision to compete less aggressively on
savings rates during a low interest rate environment.
Advances from the Federal Home Loan Bank (FHLB) were $5.0 million at
December 31, 2001, whereas the Company had no FHLB advances at December 31,
2000. The advance has a ten year term at a fixed rate of interest. Management
invested the funds from the advances into U.S. government agency securities with
a five year maturity. The average balance and the average cost of borrowed money
for 2001 was $4.9 million and 4.86%, respectively, compared to $1.6 million and
6.05% for 2000, respectively.
Over the last several years, the Company has maintained a deposit
relationship with Gilster-Mary Lee, which at times has had as much as $25
million in funds on deposit, typically with short terms. At December 31, 2001
and 2000, the balance of funds on deposit with the Company was $21.7 million and
$24.1 million, respectively.
A significant loss of funds from Gilster-Mary Lee could impair future
earnings as there is no intent to replace the Gilster-Mary Lee savings deposits
with other wholesale funds. At December 31, 2001, the Company maintained an
adequate liquidity level to cover the withdrawal of such deposits and/or
additional reduction of such borrowings.
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 losses on loans, 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.
6
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS/COST
The following table sets forth certain information for the periods
indicated regarding average balances of assets and liabilities as well as the
total dollar amounts of interest income from average interest-earning assets and
interest expense on average interest-bearing liabilities and average yields and
costs. Yields and costs are derived by dividing income or expense by the average
monthly balance of assets or liabilities, respectively, for the periods
presented. Average balances are derived from month-end balances instead of daily
balances, which management believes has not caused any material difference in
the information presented.
<Table>
<Caption>
2001 2000
------------------------------- -------------------------------
Average Average
Average yield/ Average yield/
(Dollars in thousands) balance Interest cost balance Interest cost
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INTEREST-EARNING ASSETS:
Loans receivable, net(1) $ 44,910 $3,663 8.16% $ 48,061 $4,032 8.39%
Investments, net(2)(3) 37,254 2,389 6.41 40,259 2,569 6.38
Mortgage-backed securities,
net 12,435 751 6.04 18,475 1,131 6.12
Interest-bearing deposits(4) 20,398 698 3.42 3,863 192 4.97
------------------------------------------------------------------
Total interest-earning
assets 114,997 7,501 6.52 110,658 7,924 7.16
------ ------ ------ ------
Noninterest-earning assets 4,747 5,859
-------- --------
Total assets $119,744 $116,517
======== ========
INTEREST-BEARING LIABILITIES:
Deposits $ 95,678 3,781 3.95 $ 91,962 4,041 4.39%
Securities sold under
agreements to repurchase -- -- -- -- -- --
Federal funds purchased -- -- -- 884 56 6.33
Other short-term borrowed
money -- -- -- 142 11 8.40
FHLB Advances 4,794 233 4.86 601 31 5.16
------------------------------------------------------------------
Total interest-bearing
liabilities 100,472 4,014 4.00 93,589 4,139 4.42
------ ------ ------ ------
Noninterest-bearing
liabilities 1,434 2,510
-------- --------
Total liabilities 101,906 96,099
Stockholders' equity 17,838 20,418
-------- --------
Total liabilities and
stockholders' equity $119,744 $116,517
======== ========
Net interest income $3,487 $3,785
====== ======
Interest rate spread (5) 2.52% 2.74%
====== ======
Net interest margin (6) 3.03% 3.42%
====== ======
Ratio of average
interest-earning assets to
average interest-bearing
liabilities 114.46% 118.24%
====== ======
<Caption>
1999
-------------------------------
Average
Average yield/
(Dollars in thousands) balance Interest cost
- ------------------------------
INTEREST-EARNING ASSETS:
Loans receivable, net(1) $ 47,580 $3,931 8.26%
Investments, net(2)(3) 44,546 2,599 5.83
Mortgage-backed securities,
net 24,867 1,459 5.87
Interest-bearing deposits(4) 8,831 392 4.44
-------------------------------
Total interest-earning
assets 125,824 8,381 6.66
------ ------
Noninterest-earning assets 5,435
--------
Total assets $131,259
========
INTEREST-BEARING LIABILITIES:
Deposits $ 96,389 4,048 4.20
Securities sold under
agreements to repurchase 2,588 113 4.37
Federal funds purchased 381 22 5.77
Other short-term borrowed
money -- -- --
FHLB Advances 9,384 457 4.87
-------------------------------
Total interest-bearing
liabilities 108,742 4,640 4.27
------ ------
Noninterest-bearing
liabilities 2,008
--------
Total liabilities 110,750
Stockholders' equity 20,509
--------
Total liabilities and
stockholders' equity $131,259
========
Net interest income $3,741
======
Interest rate spread (5) 2.39%
======
Net interest margin (6) 2.97%
======
Ratio of average
interest-earning assets to
average interest-bearing
liabilities 115.71%
======
</Table>
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(1) Average balance includes nonaccrual loans.
(2) Includes FHLB stock, FRB stock, marketable securities and investment
securities.
(3) Information is presented on a tax equivalent basis assuming a tax rate of
34%.
(4) Includes interest-bearing deposits, federal funds sold, bankers' acceptances
and certificates of deposit.
(5) Represents the difference between the average yield on interest-earning
assets and the average cost of interest-bearing liabilities.
(6) Represents net interest income as a percentage of average interest-earning
assets.
7
RATE/VOLUME ANALYSIS
The following table sets forth the effects of changing volumes and rates on
net interest income of the Company. Information is provided with respect to (i)
effects on interest income and expense attributable to changes in volume
(changes in volume when multiplied by prior rate); (ii) effects on interest
income and expense attributable to changes in rate (changes in rate multiplied
by prior volume); and (iii) changes in rate volume (change in rate multiplied by
change in volume). Information is presented on a tax equivalent basis assuming a
tax rate of 34% for all years presented.
<Table>
<Caption>
2001 COMPARED TO 2000 2000 Compared to 1999
------------------------------------ ------------------------------------
Total Total
Rate/ Increase Rate/ Increase
(Dollars in thousands) Volume Rate Volume (Decrease) Volume Rate Volume (Decrease)
- ---------------------------------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS:
Loans receivable, net(1) $(264) $(112) $ 7 $(369) $ 40 $ 61 $ 1 $ 102
Investments, net(2)(3) (192) 13 (1) (180) (250) 244 (23) (29)
Mortgage-backed securities, net (370) (15) 5 (380) (375) 62 (16) (329)
Interest-bearing deposits(4) 822 (60) (256) 506 (222) 46 (26) (202)
- ---------------------------------------------------------------------------------------------------------------------------------
Total net change in income on interest-earning
assets (4) (174) (245) (423) (807) 413 (64) (458)
- ---------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Deposits 163 (407) (16) (260) (186) 187 (9) (8)
Borrowings 191 (19) (37) 135 (515) 156 (135) (494)
- ---------------------------------------------------------------------------------------------------------------------------------
Total net change in expense on interest-bearing
liabilities 354 (426) (53) (125) (701) 343 (144) (502)
- ---------------------------------------------------------------------------------------------------------------------------------
Net change in net interest income $(358) $ 252 $(192) $(298) $(106) $ 70 $ 80 $ 44
=================================================================================================================================
</Table>
(1) Average balance includes nonaccrual loans.
(2) Includes FHLB stock, FRB stock, marketable securities and investment
securities.
(3) Information is presented on a tax equivalent basis assuming a tax rate of
34%.
(4) Includes interest-bearing deposits, federal funds sold, bankers' acceptances
and certificates of deposits.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
Net Income
The Company's net income for 2001 was $1.0 million compared to $1.1 million
for 2000. The lower net income level in 2001 reflects a $290,000 decline in net
interest income, positively offset by a $151,000 increase in noninterest income.
The decline in interest income resulted from a decrease in the Company's
interest spread.
Net Interest Income.
Net interest income decreased $290,000, or 8.0%, to $3.3 million for 2001
from $3.6 million for 2000. The decrease in net interest income was the result
of a $415,000 decrease in interest income, positively offset by a $125,000
decrease in interest expense. The decrease in net interest income was the result
of a decline in the ratio of average interest-earning assets to average
interest-bearing liabilities of 114.46% in 2001 from 118.24% in 2000.
Interest Income.
Interest income on loans receivable totaled $3.7 million for 2001 compared
to $4.0 million for 2000. The $369,000, or 9.2%, decrease in interest income on
loans receivable resulted from a $3.2 million, or 6.6%, decrease in the average
balance of loans receivable. The impact of decreased volume was further impacted
by a decline in the average yield on loans receivable of 8.16% in 2001 from
8.39% in 2000.
Interest income on mortgage-backed securities decreased $380,000, or 33.6%,
to $751,000 for 2001 from $1.1 million for 2000. The decrease in interest income
on mortgage-backed securities resulted from a $6.0 million, or 32.7%, decrease
in the average balance of mortgage-backed securities. The impact of a decreased
average balance was further impacted by a decrease in the average yield on
mortgage-backed securities of 6.04% in 2001 from 6.12% in 2000. Management used
funds received from the decline in mortgage-backed securities to purchase
additional shares of treasury stock.
Interest earned on investment securities totaled $2.2 million for 2001
compared to $2.4 million for 2000. The $172,000, or 7.2% decrease in interest
income on investment securities resulted from a $3.0 million, or 7.5%, decrease
in the average balance of investment securities. The average yield on investment
securities for 2001 and 2000 was 6.41% and 6.38%, respectively. Management used
funds received from the decline in investment securities to purchase additional
shares of treasury stock.
8
Interest income on interest-bearing deposits, federal fund sold and
certificates of deposit, totaled $698,000 for 2001 compared to $192,000 for
2000. The $506,000, or 263.5%, increase in interest income on interest-bearing
deposits resulted from a $16.5 million, or 428.0%, increase in the average
balance of interest-bearing deposits. The increase in interest income from
interest-bearing deposits was partially offset by a decrease in the average
yield on interest-bearing deposits of 3.42% in 2001 from 4.97% in 2000. 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 decreased $125,000, or 3.0%, during 2001. Interest expense
on savings deposits decreased $260,000, or 6.4%, to $3.8 million for 2001 from
$4.0 million for 2000. This decrease resulted primarily from the decrease in the
average cost of deposit to 3.95% in 2001 from 4.39% in 2000. The decrease in the
average cost of deposits was due to the lower interest rate environment.
Interest expense on FHLB advances increased $202,000, or 651.6%, for 2001
from $31,000 for 2000. The Company borrowed $5.0 million from the FHLB in
January 2001 and invested the funds in a U.S. government agency security with a
five year maturity. The average balance and the average cost on FHLB advances
for 2001 and 2000 was $4.8 million and 4.86%, and $601,000 and 5.16%,
respectively.
Interest expense on federal funds purchased decreased $56,000, or 100.0%,
for 2001. The Company had no federal funds purchased during 2001, whereas the
average balance and the average cost on federal funds purchased for 2000 was
$884,000 and 6.33%, respectively.
Provision for Loan Losses.
The allowance for loan losses is established through a provision for loan
losses 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.
The Company had no provisions for loan losses during 2001 and 2000 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 $591,000, or 1.42%, of loans
outstanding at December 31, 2001, compared to $598,000, or 1.25%, of loans
outstanding at December 31, 2000. The Company's level of net loans charged-off
(recovered) during the year ended December 31, 2001 was ($7,000), which
represented -.02% of average loans receivable outstanding. Based on current
levels in 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 December 31, 2001. At December 31, 2001,
loans 90 days or more delinquent totaled $129,000, or .31% of net loans
receivable, compared to $130,000, or .27% of net loans receivable at December
31, 2000.
The allowance for loan losses is maintained to absorb losses inherent in
the loan portfolio. The balance of the allowance is based on ongoing, quarterly
assessments of the probable estimated losses in the loan portfolio. The Bank's
methodology for assessing the appropriateness of the allowance consists of
applying several formula methods to identified problem loans and portfolio
segments. The allowance is calculated by applying loss factors to outstanding
loan balances, based on a internal risk grade of such loans or pools of loans.
Changes in risk grades of both performing and nonperforming loans affect the
amount of the allowance. Loss factors are based primarily on historical loss
experience over the past three to five years, and may be adjusted for other
significant conditions that, in management's judgement, affect the
collectibility of the loan portfolio.
Since the allowance for loan losses is based upon estimates of probable
losses, the amount actually observed can vary significantly from the estimated
amounts. The historical loss factors attempt to reduce this variance by taking
into account recent loss experience. Management evaluates several other
conditions in connection with the allowance, including general economic and
business conditions, credit quality trends, collateral values, loan volumes and
concentrations, seasoning of the portfolio, and regulatory examination results.
The formulas used in the analysis were changed in 2001 to reflect the changing
mix of the loan portfolio. Management believes the current balance of the
allowance for loan losses is adequate. Management will continue to monitor the
loan portfolio and assess the adequacy of the allowance at least quarterly.
9
The financial statements of the Company are prepared in accordance with
accounting principles generally accepted in the United States of America (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 $386,000 for 2001 compared to $235,000 for 2000. The
$151,000, or 64.3%, increase resulted primarily from the impact of the $128,000
net gain on the sale of investment securities, marketable securities and
mortgage-backed securities during 2001, combined with a $30,000 increase in late
charges and other fee income and a $36,000 increase in other noninterest income.
The increase in other noninterest income was primarily due to a $31,000 state
income tax refund for a prior accounting period.
Noninterest Expense.
Noninterest expense decreased $18,000, or .8%, for 2001. The decrease in
noninterest expense resulted primarily from a $29,000 decrease in professional
fees, combined with a $7,000 decrease in data processing expense and a $5,000
decrease in advertising expense, partially offset by a $10,000 increase in
compensation and employee expense and a $13,000 increase in occupancy expense.
These fluctuations are the result of normal operating procedures.
Income Tax Expense.
Income tax expense for 2001 was $392,000 compared to $439,000 for 2000. The
Company's effective tax rate for 2001 and 2000 was 27.9% and 28.7%,
respectively. The effective tax rate for each year was below the statutory
federal rate of 34% due to the Company's investment in tax exempt securities.
ASSET/LIABILITY MANAGEMENT
The principal operating objective of the Company is the achievement of a
positive interest rate spread that can be sustained during fluctuations in
prevailing interest rates. Since the Company's principal interest-earning assets
have substantially longer terms to maturity than its primary source of funds,
i.e., deposit liabilities, increases in general interest rates will generally
result in an increase in the Company's cost of funds before the yield on its
asset portfolio adjusts upward. The Company has generally sought to reduce its
exposure to adverse changes in interest rates by attempting to achieve a closer
match between the periods in which their interest-bearing liabilities and
interest-earning assets can be expected to reprice through the origination of
adjustable-rate mortgages and investment in loans and securities with shorter
terms.
The term "interest rate sensitivity" refers to those assets and liabilities
which mature and reprice periodically in response to fluctuations in market
rates and yields. Many banks have historically operated in a mismatched position
with interest-sensitive liabilities greatly exceeding interest-sensitive assets
in the short-term time periods. As noted above, one of the principal goals of
the Company's asset/liability program is to more closely match the interest rate
sensitivity characteristics of the asset and liability portfolios.
In order to increase the interest rate sensitivity of its assets, the
Company has originated adjustable rate residential mortgage loans and maintained
a consistent level of short- and intermediate-term investment securities and
interest-bearing deposits. At December 31, 2001, the Company had $11.2 million
of adjustable rate mortgages, $21.1 million of investment securities,
mortgage-backed securities and interest-bearing deposits maturing within one
year, and $21.9 million of investment securities and mortgage-backed securities
maturing within one to five years. In addition, at December 31, 2001, the
Company had $2.7 million of consumer loans which typically have maturities of
five years or less.
In managing its future interest rate sensitivity, the Company intends to
continue to stress the origination of adjustable rate mortgages and loans with
shorter maturities, the maintenance of a consistent level of short- and
intermediate-term securities, and pricing strategies that will extend the term
of deposit liabilities.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds consist of deposits, securities sold
under agreements to repurchase, 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
10
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 anticipates that loan repayments and other sources of funds will be
adequate to meet and exceed the Company's liquidity needs for 2002.
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 December 31, 2001,
cash and cash equivalents totaled $21.0 million.
The primary investing activities of the Company include origination of
loans and purchase of mortgage-backed securities and investment securities.
During the year ended December 31, 2001, purchases of investment securities and
mortgage-backed securities totaled $40.6 million and $1.5 million, respectively,
while loan originations totaled $7.4 million. These investments were funded
primarily from loan and mortgage-backed security repayments of $19.8 million and
investment security sales and maturities of $43.6 million, and FHLB advances of
$5.00 million.
In April 1997, the Company announced its initial plan to repurchase 5% of
its then outstanding common stock. Since that time the Company has continued to
repurchase shares when it was determined to be advisable by the Board of
Directors and authorized by the appropriate regulatory authorities. As of
December 31, 2001, the Company had repurchased approximately 1,204,000, or
55.2%, of its common shares. Management expects to continue to repurchase common
shares when it is viewed as a method of increasing value to the Company's
stockholders.
As part of the Company's repurchase plan, the Company purchased 273,216
shares at the purchase price of $17.75 per share during an Offer to Purchase
dated July 9, 2001. After costs associated with this offer, the total purchase
amount was $4,890,633.
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 additional funds from the
Federal Home Loan Bank or through federal funds purchased. At December 31, 2001,
the Company had $5.0 million of long-term advances from the FHLB.
At December 31, 2001, the Company exceeded all of its regulatory capital
requirements.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related data presented herein
have been prepared in accordance with accounting principles generally accepted
in the United States of America, 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.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, Statement of Financial Accounting Standards No. 143
"Accounting for Asset Retirement Obligations" was issued to address financial
reporting and obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This Statement applies to all
entities and to legal obligations associated with the retirement of long-lived
assets that result from the acquisition, construction, development or normal
operations of a long-lived asset, except for certain obligations of lessees.
Statement No. 143 is effective for financial statements issued for fiscal years
beginning after June 15, 2002. Management does not believe the adoption of
Statement No. 143 will have a significant impact on its financial statements.
In August, 2001, Statement on Financial Accounting Standards No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets" was issued to
supersede Statement No. 121 "Accounting for the Impairment and for Long-Lived
Assets to Be Disposed Of", and the accounting and reporting provisions of APB
Opinion No. 30 "Reporting the Results of Operations -- Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions". Statement No. 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years, with early application encouraged.
Management does not believe the adoption of Statement No. 143 will have a
significant impact on its financial statements.
11
INDEPENDENT AUDITOR'S REPORT
- --------------------------------------------------------------------------------
To the Board of Directors
Chester Bancorp, Inc.
Chester, Illinois
We have audited the accompanying consolidated balance sheets of Chester
Bancorp, Inc. as of December 31, 2001 and 2000, and the related consolidated
statements of income, stockholders' equity, comprehensive income, and cash flows
for the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The financial statements of Chester
Bancorp, Inc. for the year ended December 31, 1999 were audited by other
auditors whose report, dated January 28, 2000, expressed an unqualified opinion
on those statements.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Chester
Bancorp, Inc. as of December 31, 2001 and 2000, and the results of its
operations and its cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America.
/s/ McGladrey & Pullen, LLP
Springfield, Illinois
January 25, 2002
12
CHESTER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<Table>
<Caption>
December 31, 2001 and 2000 2001 2000
- --------------------------------------------------------------------------------------------
ASSETS
Cash $ 851,602 $ 1,220,381
Interest-bearing deposits 3,406,480 4,417,973
Federal funds sold 16,760,000 6,050,000
- --------------------------------------------------------------------------------------------
Total cash and cash equivalents 21,018,082 11,688,354
Certificates of deposit -- 1,000,000
Investment securities:
Available for sale, at fair value (cost of $1,659,955 and
$1,750,000 at December 31, 2001 and 2000, respectively) 1,632,477 1,754,036
Held to maturity, at cost (fair value of $35,273,053 and
$34,733,050 at December 31, 2001 and 2000, respectively) 34,572,352 34,728,445
Nonmarketable equity securities 3,547,000 2,322,500
Mortgage-backed securities:
Available for sale, at fair value (cost of $500,338 and
$5,132,377 at December 31, 2001 and 2000, respectively) 511,578 5,097,460
Held to maturity, at cost (fair value of $6,689,342 and
$10,417,435 at December 31, 2001 and 2000, respectively) 6,598,411 10,487,947
Loans, net of the allowance for loan losses ($590,590 and
$597,580 at December 31, 2001 and 2000, respectively) 41,097,027 47,340,779
Accrued interest receivable 778,175 1,108,650
Office properties and equipment, net 1,527,507 1,423,951
Other assets 478,689 627,423
- --------------------------------------------------------------------------------------------
Total assets $111,761,298 $117,579,545
============================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Non-interest bearing $ 5,022,030 $ 4,957,853
Interest bearing 86,391,754 92,033,633
FHLB advances 5,000,000 --
Advance payments by borrowers for taxes and insurance 183,378 394,401
Accrued interest payable 61,826 187,733
Accrued expenses and other liabilities 154,510 126,165
- --------------------------------------------------------------------------------------------
Total liabilities 96,813,498 97,699,785
- --------------------------------------------------------------------------------------------
Commitments and Contingencies (Notes 11 and 12)
Stockholders' Equity
Common stock, $.01 par value, 3,000,000 shares authorized,
2,182,125 shares issued 21,821 21,821
Additional paid-in capital 21,268,104 21,393,214
Retained earnings, substantially restricted 15,737,450 15,252,238
Accumulated other comprehensive (loss) (10,068) (19,147)
Unearned ESOP shares (1,428,120) (1,483,080)
Unearned restricted stock awards (61,092) (227,286)
Treasury stock, at cost: 1,204,155 and 895,979 shares at
December 31, 2001 and 2000, respectively (20,580,295) (15,058,000)
- --------------------------------------------------------------------------------------------
Total stockholders' equity 14,947,800 19,879,760
- --------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $111,761,298 $117,579,545
============================================================================================
</Table>
See Notes to Consolidated Financial Statements.
13
CHESTER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
<Table>
<Caption>
Years Ended December 31, 2001, 2000 and 1999 2001 2000 1999
- ------------------------------------------------------------------------------------------------------
Interest income:
Loans $3,662,799 $4,032,225 $3,930,511
Investment securities 2,230,428 2,402,502 2,484,070
Mortgage-backed securities 751,323 1,130,549 1,459,347
Other 697,595 192,282 392,270
- ------------------------------------------------------------------------------------------------------
Total interest income 7,342,145 7,757,558 8,266,198
- ------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 3,780,633 4,040,678 4,047,612
Other borrowings 233,333 98,568 592,623
- ------------------------------------------------------------------------------------------------------
Total interest expense 4,013,966 4,139,246 4,640,235
- ------------------------------------------------------------------------------------------------------
Net interest income 3,328,179 3,618,312 3,625,963
Provision for loan losses -- -- 200,000
- ------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 3,328,179 3,618,312 3,425,963
- ------------------------------------------------------------------------------------------------------
Noninterest income:
Late charges, deposit account fees, and other fees 190,845 160,350 134,181
Gain on sale of investment securities, net 60,318 42,200 11
Gain on sale of mortgage-backed securities, net 67,430 1,139 --
Gain on sale of branch -- -- 915,534
Other 67,651 31,435 19,441
- ------------------------------------------------------------------------------------------------------
Total noninterest income 386,244 235,124 1,069,167
- ------------------------------------------------------------------------------------------------------
Noninterest expense:
Compensation and employee benefits 1,274,241 1,264,442 1,342,858
Occupancy 288,344 274,928 288,861
Data processing 146,072 153,602 160,961
Advertising 45,322 50,473 40,859
Federal deposit insurance premiums 18,188 19,112 57,641
Professional fees 210,622 239,428 256,678
Other 322,291 321,335 384,495
- ------------------------------------------------------------------------------------------------------
Total noninterest expense 2,305,080 2,323,320 2,532,353
- ------------------------------------------------------------------------------------------------------
Income before income taxes 1,409,343 1,530,116 1,962,777
Income taxes 392,738 438,734 654,091
- ------------------------------------------------------------------------------------------------------
Net income $1,016,605 $1,091,382 $1,308,686
======================================================================================================
Basic net income per share $ 1.00 $ 0.93 $ 1.03
======================================================================================================
Diluted net income per share $ 0.97 $ 0.91 $ 1.01
======================================================================================================
</Table>
See Notes to Consolidated Financial Statements
14
CHESTER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<Table>
<Caption>
Accumulated
Retained Other Unearned
Common Stock Additional Earnings, Comprehensive Unearned Restricted
Years Ended December 31, ------------------- Paid-In Substantially (Loss) ESOP Stock
2001, 2000 and 1999 Shares Amount Capital Restricted Income Shares Awards
- -------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 2,182,125 $21,821 $21,650,837 $13,803,400 $ 93,610 $(1,592,980) $(559,674)
Net income -- -- -- 1,308,686 -- -- --
Purchase of treasury stock -- -- -- -- -- -- --
Issuance of treasury stock
for restricted stock
awards -- -- (166,110) (9,874) -- -- --
Stock options exercised -- -- -- (1,526) -- -- --
Amortization of stock
awards -- -- -- -- -- -- 166,194
ESOP shares released -- -- 37,258 -- -- 54,940 --
Dividends on common stock
at $.33 per share -- -- -- (419,213) -- -- --
Change in unrealized
(loss) on securities
available for sale, net
of tax of $(138,283) -- -- -- -- (222,775) -- --
- -------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 2,182,125 21,821 21,521,985 14,681,473 (129,165) (1,538,040) (393,480)
Net income -- -- -- 1,091,382 -- -- --
Purchase of treasury stock -- -- -- -- -- -- --
Issuance of treasury stock
for restricted stock
awards -- -- (166,110) (10,382) -- -- --
Stock options exercised -- -- -- (5,728) -- -- --
Amortization of stock
awards -- -- -- -- -- -- 166,194
ESOP shares released -- -- 37,339 -- -- 54,960 --
Dividends on common stock
at $.43 per share -- -- -- (504,507) -- -- --
Change in unrealized gain
on securities available
for sale, net of tax of
$67,430 -- -- -- -- 110,018 -- --
- -------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 2,182,125 21,821 21,393,214 15,252,238 (19,147) (1,483,080) (227,286)
Net income -- -- -- 1,016,605 -- -- --
Purchase of treasury stock -- -- -- -- -- --
Issuance of treasury stock
for restricted stock
awards -- -- (166,110) (10,382) -- -- --
Stock options exercised -- -- -- (763) -- -- --
Amortization of stock
awards -- -- -- -- -- -- 166,194
ESOP shares released -- -- 41,000 -- -- 54,960 --
Dividends on common stock
at $.53 per share -- -- -- (520,248) -- -- --
Change in unrealized gain
on securities available
for sale, net of tax of
$5,564 -- -- -- -- 9,079 -- --
- -------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001 2,182,125 $21,821 $21,268,104 $15,737,450 $ (10,068) $(1,428,120) $ (61,092)
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
<Caption>
Treasury stock Total
Years Ended December 31, ---------------------- Stockholders'
2001, 2000 and 1999 Shares Amount Equity
- -------------------------- --------------------------------------
BALANCE, DECEMBER 31, 1998 700,137 $(11,711,926) $21,705,088
Net income 1,308,686
Purchase of treasury stock 106,044 (1,781,412) (1,781,412)
Issuance of treasury stock
for restricted stock
awards (11,865) 175,984 --
Stock options exercised (1,744) 25,942 24,416
Amortization of stock
awards -- -- 166,194
ESOP shares released -- -- 92,198
Dividends on common stock
at $.33 per share -- -- (419,213)
Change in unrealized
(loss) on securities
available for sale, net
of tax of $(138,283) -- -- (222,775)
- ---------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 792,572 (13,291,412) 20,873,182
Net income -- -- 1,091,382
Purchase of treasury stock 121,818 (2,040,452) (2,040,452)
Issuance of treasury stock
for restricted stock
awards (11,865) 176,492 --
Stock options exercised (6,546) 97,372 91,644
Amortization of stock
awards -- -- 166,194
ESOP shares released -- -- 92,299
Dividends on common stock
at $.43 per share -- -- (504,507)
Change in unrealized gain
on securities available
for sale, net of tax of
$67,430 -- -- 110,018
- ------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 895,979 (15,058,000) 19,879,760
Net income -- -- 1,016,605
Purchase of treasury stock 320,914 (5,711,772) (5,711,772)
Issuance of treasury stock
for restricted stock
awards (11,865) 176,492 --
Stock options exercised (873) 12,985 12,222
Amortization of stock
awards -- -- 166,194
ESOP shares released -- -- 95,960
Dividends on common stock
at $.53 per share -- -- (520,248)
Change in unrealized gain
on securities available
for sale, net of tax of
$5,564 -- -- 9,079
- ---------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001 1,204,155 $(20,580,295) $14,947,800
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
</Table>
See Notes to Consolidated Financial Statements.
15
CHESTER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
- --------------------------------------------------------------------------------
<Table>
<Caption>
Years Ended December 31, 2001, 2000 and 1999 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------
Net income $1,016,605 $1,091,382 $1,308,686
Other comprehensive income (loss), net of tax:
Unrealized holding gain (loss) on securities available for
sale (net of tax of $54,109, $83,899 and ($138,287) for
2001, 2000 and 1999, respectively) 88,282 136,888 (222,768)
Less adjustment for realized gains included in net income
(net of tax of $(48,545), $(16,469) and $(4) for 2001,
2000 and 1999, respectively) (79,203) (26,870) (7)
- ---------------------------------------------------------------------------------------------------------------
Total other comprehensive income (loss) 9,079 110,018 (222,775)
- ---------------------------------------------------------------------------------------------------------------
Comprehensive income $1,025,684 $1,201,400 $1,085,911
===============================================================================================================
</Table>
See Notes to Consolidated Financial Statements.
16
CHESTER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<Table>
<Caption>
Years Ended December 31, 2001, 2000 and 1999 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income $ 1,016,605 $ 1,091,382 $ 1,308,686
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization:
Office properties and equipment 153,309 150,528 147,765
Deferred fees, discounts, and premiums (87,399) 43,601 5,134
Stock plans 274,376 350,137 258,392
Provision for deferred taxes 9,397 (15,000) (104,404)
(Increase) decrease in accrued interest receivable 330,475 42,530 (241,227)
Increase (decrease) in accrued interest payable (125,907) 48,664 (76,351)
Gain on sale of investment securities, net (60,318) (42,200) (11)
Gain on sale of mortgage-backed securities, net (67,430) (1,139) --
Gain on sale of branch -- -- (915,534)
Provision for loan losses -- -- 200,000
FHLB stock dividend (97,000) (44,300) --
Net change in other assets and other liabilities 21,917 (333,383) 554,635
- -----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,368,025 1,290,820 1,137,085
- -----------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Investment securities:
Available-for-sale:
Purchases (5,756,442) (1,741,082) (400,000)
Proceeds from sales 4,883,555 2,258,282 400,000
Proceeds from calls and maturities 1,000,000 500,000 7,235,000
Held-to-maturity:
Purchases (32,665,000) (2,700,000) (94,215,397)
Proceeds from maturities and paydowns 32,896,145 4,149,000 98,104,167
Nonmarketable equity securities:
Purchases (2,150,000) -- --
Proceeds from sales 1,045,750 -- --
Proceeds from calls and maturities -- -- 229,437
Mortgage-backed securities:
Available-for-sale:
Proceeds from sales 3,794,185 538,389 --
Proceeds from maturities and paydowns 910,817 1,509,219 3,999,603
Held-to-maturity:
Purchases (1,497,672) -- (10,882,216)
Proceeds from maturities and paydowns 5,393,027 4,214,016 6,786,882
Principal repayments on loans 13,447,983 9,661,854 14,993,527
Origination of loans (7,367,780) (8,778,943) (15,620,100)
Purchase of certificates of deposit -- (1,000,000) --
Proceeds from the maturity of certificates of deposit 1,000,000 -- 95,000
Cash paid upon sale of branch -- -- (8,277,427)
Proceeds from sales of real estate acquired through
foreclosure 304,745 95,226 248,292
Purchase of office properties and equipment (256,865) (50,283) (72,046)
- -----------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 14,982,448 8,655,678 2,624,722
- -----------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Increase (decrease) in deposits (5,577,702) 6,238,545 595,789
Increase (decrease) in securities sold under agreements to
repurchase -- -- (10,880,389)
Proceeds from (payments on) FHLB advances 5,000,000 (5,000,000) (5,000,000)
Proceeds from (payments on) federal funds purchased -- (2,807,000) 2,807,000
Increase (decrease) in advance payments by borrowers for
taxes and insurance (211,023) 17,970 (43,121)
Purchase of treasury stock (5,711,772) (2,040,452) (1,781,412)
Dividends paid (520,248) (504,507) (419,213)
- -----------------------------------------------------------------------------------------------------------
Net cash (used in) financing activities (7,020,745) (4,095,444) (14,721,346)
- -----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 9,329,728 5,851,054 (10,959,539)
Cash and cash equivalents:
Beginning of year 11,688,354 5,837,300 16,796,839
- -----------------------------------------------------------------------------------------------------------
End of year $ 21,018,082 $11,688,354 $ 5,837,300
===========================================================================================================
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest paid $ 4,139,873 $ 4,090,582 $ 4,716,586
Income taxes paid 350,130 777,099 328,090
===========================================================================================================
Supplemental Schedule of Noncash Investing and Financing
Activities
Loans transferred to real estate acquired by foreclosure $ 164,544 $ 45,776 $ 408,299
===========================================================================================================
</Table>
See Notes to Consolidated Financial Statements.
17
CHESTER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS -- Chester Bancorp, Inc. and Subsidiaries (the
Company) provides a full range of financial services to individual and corporate
customers through its home office in Chester, Illinois, and its two banking
offices in neighboring cities in Southern Illinois and two banking offices in
Perryville, Missouri. The Company is subject to competition from other financial
institutions in the area, is subject to the regulations of certain federal
agencies, and undergoes periodic examinations by those regulatory authorities.
The Company has not included segment disclosures regarding specific
segments since management makes operating decisions and assesses performance
based on the Company as a whole.
The significant accounting and reporting policies of the Company and its
subsidiary follow:
BASIS OF CONSOLIDATION AND FINANCIAL STATEMENT PRESENTATION -- The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries, Chester National Bank and Chester National Bank of
Missouri. Significant intercompany accounts and transactions have been
eliminated in consolidation.
The consolidated financial statements of the Company have been prepared in
conformity with accounting principles generally accepted in the United States of
America and conform to predominate practice within the banking industry.
In preparing the consolidated financial statements, Company management is
required to make estimates and assumptions, which significantly affect the
amounts reported in the consolidated financial statements. Significant estimates
which are particularly susceptible to change in a short period of time include
the market value of investment and mortgage-backed securities, the determination
of the allowance for loan losses and valuation of real estate and other
properties acquired in connection with foreclosures or in satisfaction of
amounts due from borrowers on loans. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS -- For purposes of reporting cash flows, cash
equivalents include cash and amounts due from depository institutions,
interest-bearing deposits in other depository institutions, excluding
certificates of deposits, and federal funds sold.
SECURITIES HELD TO MATURITY -- Debt securities and mortgage backed
securities for which the Company has both the positive intent and ability to
hold to maturity are classified as held-to-maturity and reported at amortized
cost. Amortization of premiums and accretion of discounts, computed by the
interest method over their contractual lives, is included in interest income.
SECURITIES AVAILABLE FOR SALE -- Securities classified as available for
sale are those debt securities, mortgage backed securities, mutual fund shares
and marketable equity securities that the Company intends to hold for an
indefinite period of time, but not necessarily to maturity. Any decision to sell
a security classified as available for sale would be based on various factors,
including significant movements in interest rates, changes in the maturity mix
of the Company's assets and liabilities, liquidity needs, regulatory capital
considerations, and other similar factors.
Securities available for sale are reported at fair value with unrealized
gains or losses reported as a separate component of other comprehensive income,
net of the related deferred tax effect. The amortization of premiums and
accretion of discounts, computed by the interest method over their contractual
lives, are recognized in interest income.
Realized gains or losses, determined on the basis of the cost of specific
securities sold, are included in earnings.
Declines in the fair value of individual securities classified as either
held to maturity or available for sale below their amortized cost that are
determined to be other than temporary result in write-downs of the individual
securities to their fair value with the resulting write-downs included in
current earnings as realized losses.
NONMARKETABLE EQUITY SECURITIES -- Nonmarketable equity securities at
December 31, 2001 and 2000 include equity investments in local community
organizations and Federal Home Loan Bank and Federal Reserve Bank stock. These
securities are carried at cost, as they have no readily ascertainable market
value.
LOANS -- Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are stated at the unpaid
principal amounts less the allowance for loan losses and net deferred loan
origination fees.
18
CHESTER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Loan origination fees, net of certain direct loan origination costs are deferred
and amortized to interest income over the contractual lives of the loans using
the level yield method.
Interest on loans is accrued based upon the principal amounts outstanding.
The Company's policy is to discontinue the accrual of interest income on any
loan when, in the opinion of management, there is reasonable doubt as to the
timely collectibility of interest or principal or generally when a loan becomes
contractually past due ninety days or more with respect to principal or
interest. Accrued interest on nonaccrual loans is reversed and offset against
interest income in the period the loan is deemed uncollectible. Nonaccrual loans
are returned to accrual status when, in the opinion of management, the financial
position of the borrower indicates there is no longer any reasonable doubt as to
the timely collectibility of interest or principal.
ALLOWANCE FOR LOAN LOSSES -- The Company considers a loan to be impaired
when management believes it is probable that it will be unable to collect all
principal and interest due according to the contractual terms of the loan. If a
loan is impaired, the Company records a loss valuation equal to the excess of
the loan's carrying value over the present value of the estimated future cash
flows discounted at the loan's effective rate, based on the loan's observable
market price, or the fair value of the collateral if the loan is collateral
dependent. One-to-four family residential loans and consumer loans are
collectively evaluated for impairment. Loans on residential properties with
greater than four units and loans on construction and development and commercial
properties are evaluated for impairment on a loan-by-loan basis.
The allowance for loan losses is established through a provision for loan
losses charged to operating expenses. Loans are charged against the allowance
for loan losses when management believes that the collectibility of the
principal is unlikely. The allowance is an amount that management believes will
be adequate to absorb losses on existing loans that may become uncollectible,
based on evaluations of the collectibility of loans and prior loan loss
experience. The evaluations take into consideration such factors as changes in
the nature and volume of the loan portfolio, overall portfolio quality, review
of specific problem loans and current economic conditions that may affect the
borrowers' ability to pay. While management uses the best information available
to make its evaluation, future adjustments to the allowance may be necessary if
there are significant changes in economic conditions. In addition, various
regulatory agencies periodically review the allowance for loan losses. These
agencies may require the Banks to make additions to the allowance for loan
losses based on their judgments of collectibility based on information available
to them at the time of their examination.
OFFICE PROPERTIES AND EQUIPMENT -- Office properties and equipment are
stated at cost, less accumulated depreciation. Depreciation charged to
operations is primarily computed utilizing the straight-line method over the
estimated useful lives of the related assets. Estimated lives are 10 to 35 years
for buildings and improvements, and 3 to 15 years for furniture and equipment.
Management periodically reviews the carrying value of its long-lived assets to
determine if an impairment has occurred or whether changes in circumstances have
occurred that would require a revision to the remaining useful life. In making
such determination, management evaluates the performance, on an undiscounted
basis, of the underlying operations or assets, which give rise to such amount.
INCOME TAXES -- Deferred taxes are provided on a liability method which
recognizes deferred tax assets for deductible temporary differences and
operating loss and tax credit carryforwards and deferred tax liabilities for
taxable temporary differences. Temporary differences are the differences between
the reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
STOCK OPTION PLAN-- The Company accounts for its stock option grants in
accordance with the provisions of Accounting Principles Board (APB) Opinion No.
25, Accounting for Stock Issued to Employees, accordingly no compensation
expense is recognized for the stock grants if the exercise price is equal to or
more than the fair value of the shares at the date of the grant. Proforma
information regarding net income and earnings per share as calculated under the
provisions of Statement 123, Accounting for Stock Based Compensation is provided
in Note 10.
NET INCOME PER SHARE -- Basic net income per share is determined by
dividing net income for the year by the weighted average number of common
shares.
19
CHESTER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Diluted net income per share considers the potential dilutive effects of
the exercise of the outstanding stock options under the Company's stock option
plan.
The following reflects net income per share calculations for basic and
diluted methods:
<Table>
<Caption>
2001 2000 1999
------------------------------------
Net income available to common shareholders $1,016,605 $1,091,382 $1,308,686
===============================================================================================
Basic average common shares outstanding $1,012,230 $1,170,331 $1,265,404
Dilutive potential due to stock options 39,483 31,818 32,836
- -----------------------------------------------------------------------------------------------
Average number of common shares and dilutive
potential common shares outstanding 1,051,713 1,202,149 1,298,240
- -----------------------------------------------------------------------------------------------
Basic net income per share $ 1.00 $ 0.93 $ 1.03
===============================================================================================
Diluted net income per share $ 0.97 $ 0.91 $ 1.01
===============================================================================================
</Table>
ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS -- In June 2001, Statement on
Financial Accounting Standards No. 143 "Accounting for Asset Retirement
Obligations" was issued to address financial reporting and obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. This Statement applies to all entities and to legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development or normal operations of a long-lived
asset, except for certain obligations of lessees. Statement No. 143 is effective
for financial statements issued for fiscal years beginning after June 15, 2002.
Management does not believe the adoption of statement No. 143 will have a
significant impact on the financial statements.
ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS -- In August
2001, Statement on Financial Accounting Standards No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" was issued to supersede Statement
No 121 "Accounting for the Impairment and for Long-Lived Assets to Be Disposed
Of", and the accounting and reporting provisions of APB Opinion No. 30
"Reporting the Results of Operations -- Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions". Statement No. 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years, with early application encouraged.
Management does not believe the adoption of statement No. 144 will have a
significant impact on the financial statements.
NOTE 2. INVESTMENT SECURITIES
The amortized cost and fair value of investment securities available for
sale follow:
<Table>
<Caption>
December 31, 2001
-------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
- -------------------------------------------------------------------------------------------------
Mutual fund shares $ 1,659,955 $ -- $ (27,478) $ 1,632,477
- -------------------------------------------------------------------------------------------------
Total $ 1,659,955 $ -- $ (27,478) $ 1,632,477
=================================================================================================
</Table>
<Table>
<Caption>
December 31, 2000
- -------------------------------------------------------------------------------------------------
Securities of U.S. government $ 250,000 $ 2,500 $ -- $ 252,500
Securities of U.S. government and
agencies 1,500,000 5,636 (4,100) 1,501,536
- -------------------------------------------------------------------------------------------------
Total $ 1,750,000 $ 8,136 $ (4,100) $ 1,754,036
=================================================================================================
</Table>
20
CHESTER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
NOTE 2. INVESTMENT SECURITIES (CONTINUED)
The amortized cost and fair value of investment securities classified as
held to maturity follow:
<Table>
<Caption>
December 31, 2001
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
- -------------------------------------------------------------------------------------------------
Securities of U.S. government and
agencies $25,900,566 $432,251 $ (7,810) $26,325,007
Mortgage-backed bonds 1,000,000 824 -- 1,000,824
Securities of states and municipalities 7,671,786 320,922 (45,486) 7,947,222
- -------------------------------------------------------------------------------------------------
Total $34,572,352 $753,997 $ (53,296) $35,273,053
=================================================================================================
</Table>
<Table>
<Caption>
December 31, 2000
- -------------------------------------------------------------------------------------------------
Securities of U.S. government and
agencies $25,740,140 $ 37,170 $(229,465) $25,547,845
Mortgage-backed bonds 3,000,000 -- (70,320) 2,929,680
Securities of states and municipalities 5,988,305 310,284 (43,064) 6,255,525
- -------------------------------------------------------------------------------------------------
Total $34,728,445 $347,454 $(342,849) $34,733,050
=================================================================================================
</Table>
The amortized cost and fair value at December 31, 2001, by contractual
maturity, are shown below:
<Table>
<Caption>
Available for Sale Held to Maturity
------------------------- ---------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- -------------------------------------------------------------------------------------------------
One year or less $ -- $ -- $ 906,224 $ 910,195
One year through five years -- -- 20,692,518 20,986,549
Five years through ten years -- -- 9,444,427 9,688,525
Over ten years -- -- 3,529,183 3,687,784
Mutual fund shares 1,659,955 1,632,477 -- --
- -------------------------------------------------------------------------------------------------
$ 1,659,955 $1,632,477 $ 34,572,352 $35,273,053
=================================================================================================
</Table>
Maturities may differ from contractual maturities in mortgage-backed
securities because the mortgages underlying the securities may be called or
repaid without any penalties and mutual funds do not have stated maturity dates.
Therefore, stated maturities are not disclosed.
Gross realized gains and (losses) from the sale of investment securities
classified as available for sale follow:
<Table>
<Caption>
For the year ended December 31,
----------------------------------------
2001 2000 1999
- -----------------------------------------------------------------------------------------------
Gross realized gains $ 60,318 $65,169 $ 11
Gross realized (losses) -- (22,969) --
- -----------------------------------------------------------------------------------------------
Net gains $ 60,318 $42,200 $ 11
===============================================================================================
</Table>
Investment securities and mortgage backed securities with a carrying value
of approximately $2,500,000 and $5,300,000 at December 31, 2001 and 2000,
respectively, were pledged to collateralize certain deposit accounts with
balances in excess of $100,000 and for other purposes as required or permitted
by law.
21
CHESTER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
NOTE 3. MORTGAGE-BACKED SECURITIES
The amortized cost and fair values of mortgage-backed securities classified
as available for sale follow:
<Table>
<Caption>
December 31, 2001
------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
- ----------------------------------------------------------------------------------------------------
GNMA $ 153,653 $ 5,383 $ -- $ 159,036
FNMA 346,685 5,857 -- 352,542
- ----------------------------------------------------------------------------------------------------
Total $ 500,338 $11,240 $ -- $ 511,578
====================================================================================================
</Table>
<Table>
<Caption>
December 31, 2000
- ----------------------------------------------------------------------------------------------------
GNMA $ 820,827 $ 3,259 $ (5,406) $ 818,680
FNMA 1,974,553 -- (19,181) 1,955,372
FHLMC 2,336,997 -- (13,589) 2,323,408
- ----------------------------------------------------------------------------------------------------
Total $ 5,132,377 $ 3,259 $ (38,176) $ 5,097,460
====================================================================================================
</Table>
The amortized cost and fair value of mortgage backed securities classified
as held to maturity follow:
<Table>
<Caption>
December 31, 2001
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
- --------------------------------------------------------------------------------------------------
GNMA $ 625,600 $ 9,758 $ -- $ 635,358
FNMA 1,716,276 28,380 -- 1,744,656
FHLMC 1,708,417 35,876 -- 1,744,293
Collateralized mortgage obligations 2,548,118 22,572 (5,655) 2,565,035
- --------------------------------------------------------------------------------------------------
Total $ 6,598,411 $96,586 $ (5,655) $ 6,689,342
==================================================================================================
</Table>
<Table>
<Caption>
December 31, 2000
- --------------------------------------------------------------------------------------------------
FNMA $ 2,604,225 $ 3,100 $ (23,215) $ 2,584,110
FHLMC 1,623,203 2,470 (3,901) 1,621,772
Collateralized mortgage obligations 6,260,519 8,662 (57,628) 6,211,553
- --------------------------------------------------------------------------------------------------
Total $10,487,947 $14,232 $ (84,744) $10,417,435
==================================================================================================
</Table>
Gross realized gains and (losses) on sales of mortgage-backed securities
classified as available for sale follow:
<Table>
<Caption>
Year Ended December 31,
----------------------------------
2001 2000 1999
- ----------------------------------------------------------------------------------------------
Gross realized gains $67,430 $1,197 $ --
Gross realized (losses) -- (58) --
- ----------------------------------------------------------------------------------------------
Net realized gains $67,430 $1,139 $ --
==============================================================================================
</Table>
Maturities may differ from contractual maturities in mortgage-backed
securities because the mortgages underlying the securities may be called or
repaid without any penalties and do not have stated maturity dates. Therefore,
stated maturities are not disclosed.
22
CHESTER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
NOTE 4. LOANS
Loans consist of:
<Table>
<Caption>
December 31,
-----------------------------
2001 2000
- ---------------------------------------------------------------------------------------------
Loans secured by real estate:
Residential:
1-4 family $32,659,775 $36,987,918
Multifamily 377,190 423,171
- ---------------------------------------------------------------------------------------------
Total residential 33,036,965 37,411,089
Agricultural and land 367,487 208,418
Commercial 3,307,068 4,668,761
- ---------------------------------------------------------------------------------------------
Total loans secured by real estate 36,711,520 42,288,268
- ---------------------------------------------------------------------------------------------
Commercial loans 2,235,990 2,433,961
- ---------------------------------------------------------------------------------------------
Consumer loans:
Automobile loans 680,857 833,661
Home improvement 678,686 744,310
Credit cards 617,681 785,486
Loans secured by deposits 409,536 550,967
Other 356,499 310,643
- ---------------------------------------------------------------------------------------------
Total consumer loans 2,743,259 3,225,067
- ---------------------------------------------------------------------------------------------
Total loans 41,690,769 47,947,296
- ---------------------------------------------------------------------------------------------
Less:
Loans in process (2,425) 2,365
Deferred loan fees (costs), net 5,577 6,572
Allowance for loan losses 590,590 597,580
- ---------------------------------------------------------------------------------------------
593,742 606,517
- ---------------------------------------------------------------------------------------------
Loans, net $41,097,027 $47,340,779
=============================================================================================
</Table>
Activity in the allowance for loan losses follows:
<Table>
<Caption>
Year Ended December 31,
--------------------------------------
2001 2000 1999
- -----------------------------------------------------------------------------------------------
Balance, beginning of year $597,580 $605,347 $448,643
Provision -- -- 200,000
Charge-offs (16,250) (21,952) (50,608)
Recoveries 9,260 14,185 7,312
- -----------------------------------------------------------------------------------------------
Balance, end of year $590,590 $597,580 $605,347
===============================================================================================
</Table>
The Banks have granted loans to officers and directors and related
interests. In management's opinion, these loans and transactions were on the
same terms as those for comparable loans and transactions with nonrelated
parties. At
23
CHESTER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
NOTE 4. LOANS (CONTINUED)
December 31, 2001, all loans to officers and directors were current with respect
to principal and interest. Changes in loans to officers and directors for the
year ended December 31, 2001 are summarized as follows:
<Table>
Balance beginning of year $515,705
Additions 133,463
Repayments (220,308)
- ---------------------------------------------------------------------------
Balance, end of year $428,860
===========================================================================
</Table>
NOTE 5. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment consist of:
<Table>
<Caption>
December 31,
-----------------------------
2001 2000
- ----------------------------------------------------------------------------------------------
Land $ 163,227 $ 163,227
Office buildings and improvements 2,238,001 2,132,912
Furniture, fixtures and equipment 1,486,834 1,335,058
- ----------------------------------------------------------------------------------------------
3,888,062 3,631,197
Less accumulated depreciation 2,360,555 2,207,246
- ----------------------------------------------------------------------------------------------
Total $1,527,507 $1,423,951
==============================================================================================
</Table>
NOTE 6. DEPOSITS
Certificates of deposit of $100,000 or more totaled $10,315,536 and
$11,777,471 at December 31, 2001 and 2000, respectively.
At December 31, 2001, the scheduled maturities of certificates of deposit
were as follows:
<Table>
<Caption>
Amount
- ------------------------------------------------------------------------------
2002 $33,856,273
2003 15,050,347
2004 3,842,645
2005 574,608
- ------------------------------------------------------------------------------
Total $53,323,873
==============================================================================
</Table>
NOTE 7. FHLB ADVANCES
Advances from the Federal Home Loan Bank totaled $5,000,000 at December 31,
2001. The advance bears interest at 4.8% and matures on January 17, 2011.
Pursuant to collateral agreements with the FHLB, advances are collateralized by
all the institution's stock in the FHLB and qualifying first mortgage loans.
NOTE 8. INCOME TAXES
Under provisions of the Internal Revenue Code and similar sections of state
income tax laws that apply to tax years beginning before December 31, 1995,
qualifying thrifts were allowed to claim bad debt deductions based on the
greater of (1) a specified percentage of taxable income, as defined, or (2)
actual loss experience. If, in the future, any of the accumulated bad debt
deductions are used for any purpose other than to absorb bad debt losses, gross
taxable income may result and income taxes may be payable.
24
CHESTER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
NOTE 8. INCOME TAXES (CONTINUED)
The Small Business Job Protection Act became law on August 20, 1996. One of
the provisions in this law repealed the reserve method of accounting for bad
debts for thrift institutions so that the bad debt deduction described in the
preceding paragraph will no longer be effective for tax years beginning after
December 31, 1995. The change in the law requires that the tax bad debt reserves
accumulated after December 31, 1987 be recaptured into taxable income over a
six-year period. The start of the six-year period can be delayed for up to two
tax years if the Company meets certain residential lending thresholds. Deferred
taxes have been provided on the portion of the tax reserve for loan loss that
must be recaptured.
Retained earnings at December 31, 2001 and 2000 includes approximately
$2,066,000 of the tax reserve which accumulated prior to 1988, for which no
deferred income tax liability has been recognized. This amount represents an
allocation of income to bad debt deductions for tax purposes only. Reduction of
amounts so allocated for purposes other than tax bad debt losses or adjustments
arising from carryback of net operating losses would create income for tax
purposes only, which would be subject to the then-current corporate income tax
rate. The unrecorded deferred income tax liability on the above amounts was
approximately $800,000 as of December 31, 2001 and 2000.
Income taxes for the years ended December 31, 2001, 2000 and 1999 are
summarized as follows:
<Table>
<Caption>
Year Ended December 31,
---------------------------------
2001 2000 1999
- ---------------------------------------------------------------------------------------------
Current:
Federal $361,225 $442,704 $ 711,027
State 22,116 11,030 47,468
- ---------------------------------------------------------------------------------------------
Total current 383,341 453,734 758,495
Deferred 9,397 (15,000) (104,404)
- ---------------------------------------------------------------------------------------------
Total $392,738 $438,734 $ 654,091
=============================================================================================
</Table>
Income tax expense differs from that computed at the maximum Federal
statutory rate of 35% as follows:
<Table>
<Caption>
Year Ended December 31,
------------------------------------------------------------------
2001 2000 1999
------------------- -------------------- -------------------
Amount Percent Amount Percent Amount Percent
- ---------------------------------------------------------------------------------------------------
Computed "expected" income tax
expense $493,270 35.0% $ 535,541 35.0% $686,972 35.0%
Items affecting federal income
tax rate:
Amortization of ESOP awards (4,960) (0.4)% (2,009) (0.1)% 11,273 0.6%
State income taxes, net of
Federal benefit 14,375 1.0% 7,170 0.5% 32,250 1.6%
Tax-exempt interest (96,734) (6.9)% (121,848) (8.0)% (76,223) (3.9)%
Other (13,213) (0.8)% 19,880 1.3% (181) 0.0%
- ---------------------------------------------------------------------------------------------------
$392,738 27.9% $ 438,734 28.7% $654,091 33.3%
===================================================================================================
</Table>
25
CHESTER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
NOTE 8. INCOME TAXES (CONTINUED)
The components of the deferred tax assets and liabilities follow:
<Table>
<Caption>
December 31,
--------------------
2001 2000
- ------------------------------------------------------------------------------------
Deferred tax assets:
General loan loss allowance $228,069 $219,738
Restricted stock awards 48,418 48,385
Other 15,885 --
Available-for-sale securities market valuation 6,171 11,735
- ------------------------------------------------------------------------------------
Total deferred tax assets 298,543 279,858
- ------------------------------------------------------------------------------------
Deferred tax liabilities:
Excess of tax bad debt reserves over base year (37,513) (52,232)
Tax depreciation in excess of that recorded for book
purposes (31,223) (33,756)
FHLB stock dividends (98,685) (43,155)
Other -- (4,632)
- ------------------------------------------------------------------------------------
Total deferred tax liabilities (167,421) (133,775)
- ------------------------------------------------------------------------------------
Net deferred tax asset $131,122 $146,083
====================================================================================
</Table>
NOTE 9. REGULATORY CAPITAL REQUIREMENTS
The Company and the Banks are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory -- and possibly
additional discretionary -- actions by regulators that, if undertaken, could
have a direct material effect on the Company's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and Banks must meet specific capital guidelines that involve
quantitative measures of the Company and Banks' assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Company and Banks' capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and Banks to maintain minimum amounts and ratios (set forth
in the table below) of total and Tier I capital (as defined in the regulations)
to risk-weighted assets (as defined) and Tier I capital (as defined) to average
assets (as defined). Management believes, at December 31, 2001, that the Company
and Banks meet all capital adequacy requirements to which they are subject.
As of December 31, 2001, the most recent notification from the regulatory
agencies categorized the Banks as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
the Banks must maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the Banks'
category.
26
CHESTER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
NOTE 9. REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
The Company's and the Banks' actual capital amounts and ratios were as
follows:
<Table>
<Caption>
December 31, 2001
------------------------------------------------------
To Be Well
Capitalized
Under
Prompt
For Capital Corrective
Adequacy Action
Actual Purposes Provisions
---------------- --------------- ---------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------
Total capital (to risk-weighted
assets):
Company $15,495 35.7% $3,476 8.0% $-- N/A
Chester National Bank 11,759 30.7 3,064 8.0 3,829 10.0%
Chester National Bank of Missouri 3,602 71.3 404 8.0 505 10.0
Tier I capital (to risk-weighted
assets):
Company 14,958 34.4% 1,738 4.0% -- N/A
Chester National Bank 11,286 29.5 1,532 4.0 2,298 6.0%
Chester National Bank of Missouri 3,538 70.1 202 4.0 303 6.0
Tier I capital (to average assets):
Company 14,958 13.3% 3,362 3.0% -- N/A
Chester National Bank 11,286 11.2 3,014 3.0 5,024 5.0%
Chester National Bank of Missouri 3,538 31.4 338 3.0 563 5.0
</Table>
<Table>
<Caption>
December 31, 2000
------------------------------------------------------
To Be Well
Capitalized
Under
Prompt
For Capital Corrective
Adequacy Action
Actual Purposes Provisions
---------------- --------------- ---------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------
Total capital (to risk-weighted
assets):
Company $20,451 43.6% $3,756 8.0% $-- N/A
Chester National Bank 16,026 39.6 3,235 8.0 4,043 10.0%
Chester National Bank of Missouri 3,469 58.1 478 8.0 597 10.0
Tier I capital (to risk-weighted
assets):
Company 19,899 42.4% 1,878 4.0% -- N/A
Chester National Bank 15,549 38.5 1,617 4.0 2,426 6.0%
Chester National Bank of Missouri 3,394 56.9 239 4.0 358 6.0
Tier I capital (to average assets):
Company 19,899 17.1% 3,488 3.0% -- N/A
Chester National Bank 15,549 15.0 3,119 3.0 5,198 5.0%
Chester National Bank of Missouri 3,394 30.5 334 3.0 556 5.0
</Table>
NOTE 10. EMPLOYEE BENEFITS
DEFINED BENEFIT PENSION PLAN -- Substantially all employees are included in
a trusteed defined benefit pension plan. The benefits contemplated by the plan
are funded through payments to the Financial Institutions Retirement Fund, which
27
CHESTER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
NOTE 10. EMPLOYEE BENEFIT (CONTINUED)
operates as an industry-wide plan and does not report relative plan assets and
actuarial liabilities of the individual participating associations. The cost of
funding is charged to current operations. There is no unfunded liability for
past service. Expense for the years ended December 2001, 2000 and 1999 was
$66,000, $24,000, and $27,500, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN -- The Company has an employee stock
ownership plan which 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. The Company loan is being repaid with level principal payments over
30 years. All shares are held in a suspense account for allocation among the
participants as the loan is repaid. 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 market
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 $95,960, $92,299, and $92,198 for the years ended December 31, 2001,
2000 and 1999, respectively.
The ESOP shares follow:
<Table>
<Caption>
December 31,
------------------------
2001 2000
- ----------------------------------------------------------------------------------------
Allocated shares 31,758 26,262
Unreleased shares 142,812 148,308
- ----------------------------------------------------------------------------------------
Total ESOP shares 174,570 174,570
========================================================================================
Fair value of unreleased shares $2,649,163 $2,474,890
========================================================================================
</Table>
RESTRICTED STOCK AWARDS -- The 1997 Management Recognition and Development
Plan provides that 82,921 shares of common stock can be awarded to directors and
employees in key management positions to encourage such directors and key
employees to remain with the Company. The shares vest over a five year period
beginning on the adoption date. The value of the common stock contributed to the
Plan is being amortized to compensation expense over the vesting period.
Compensation expense was $166,194 for each of the years ended December 31, 2001,
2000 and 1999.
STOCK OPTION PLAN -- The 1997 Stock Option Plan provides for the granting
of options for a maximum of 218,212 shares of common stock to directors, key
officers and employees. The options vest in five equal installments beginning on
the first anniversary of the grant date of the options.
On April 4, 2000, the Company adopted the 2000 Stock Option Plan, which
provided for the granting of options for a maximum of 50,000 shares of common
stock to directors, key officers and employees. Interest in the plan for each
participant vests in five equal installments beginning on the first anniversary
of the grant date of the options. On December 12, 2000, 16,000 shares were
granted at a price per share of $16.69. On August 14, 2001, 14,000 shares were
granted at a price per share of $17.00.
28
CHESTER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
NOTE 10. EMPLOYEE BENEFIT (CONTINUED)
Activity within the plan is summarized as follows:
<Table>
<Caption>
Year Ended December 31,
---------------------------------------------------------------
2001 2000 1999
------------------- ------------------- -------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Fixed Options Shares Price Shares Price Shares Price
- ------------------------------------------------------------------------------------------------
Outstanding at beginning of
year 224,612 $14.42 216,468 $14.24 218,212 $14.24
Granted 14,000 17.00 16,000 16.69 -- --
Exercised (873) 14.00 (6,546) 14.00 (1,744) 14.00
Forfeited (437) 14.00 (1,310) 14.00 -- --
------- ------- -------
Outstanding at end of year 237,302 14.56 224,612 14.42 216,468 14.24
======= ======= =======
Options exercisable at
year-end 166,598 121,676 83,096
======= ======= =======
Weighted-average fair value of
options granted during the
year $ 5.98 $ 5.49 N/A
====== ====== ======
</Table>
For purposes of proforma disclosures the estimated fair value of the stock
options is amortized to expense over the vesting period. The proforma effects on
income for the years ended December 31, 2001, 2000 and 1999, based on options
granted from 1997 to 2001 are as follows:
<Table>
<Caption>
Year Ended December 31,
--------------------------------------
2001 2000 1999
- -----------------------------------------------------------------------------------------------
Net income:
As reported $1,016,605 $1,091,382 $1,308,686
Pro forma 833,738 923,748 1,142,019
Net income per common share -- basic:
As reported 1.00 0.93 1.03
Pro forma 0.82 0.79 0.90
Net income per common share -- diluted:
As reported 0.97 0.91 1.01
Pro forma 0.79 0.77 0.88
</Table>
The per share fair value of stock options granted in 2001 and 2000 were
estimated on the date of grant at $5.98, and $5.49, respectively, using the
Black-Scholes option-pricing model. The following assumptions were used to
determine the per share fair value of the stock options granted in 2001:
dividend yield of .14%; risk-free interest rate of 5.00%; expected volatility of
20.01%; and an estimated life of 7 years. The following assumptions were used to
determine the per share fair value of the stock options granted in 2000:
dividend yield of .14%; risk-free interest rate of 6.00%; expected volatility of
2.25%; and an estimated life of 7 years.
NOTE 11. CONTINGENCIES
The Company is a defendant in legal actions arising from normal business
activities. Management, after consultation with legal counsel, believes that the
resolution of these actions will not have any material adverse effect on the
Company's consolidated financial statements.
29
CHESTER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
NOTE 12. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATION OF
CREDIT RISK
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers in
the way of commitments to extend credit. They involve, to varying degrees,
elements of credit risk in excess of the amount recognized in the balance
sheets.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual amount of those instruments. The Company uses the
same credit policies in making commitments and conditional obligations as they
do for on-balance-sheet instruments. Substantially all commitments to extend
credit are at adjustable rates. The Company has not issued any standby letters
of credit. A summary of the Company's commitments is as follows:
<Table>
<Caption>
Variable Range of Rates
Rate Fixed Rate Total on Fixed Rate
Commitments to extend credit Commitments Commitments Commitments Commitments
- -------------------------------------------------------------------------------------------
December 31, 2001 $ 842,483 $2,937,132 $3,779,615 7.0% - 12.9%
December 31, 2000 $1,228,474 $2,829,832 $4,058,306 8.0% - 12.9%
</Table>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract. Since
many of the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash requirements.
The Company evaluates each customer's creditworthiness on a case-by-case basis.
Credit card commitments are unsecured.
Substantially all of the Company's loans are to borrowers located in
Randolph, Jackson, Williamson and Perry counties in Illinois and Perry and Cape
Girardeau counties in Missouri.
NOTE 13. LIQUIDATION ACCOUNT
At the time of conversion to a stock corporation, the Bank established a
liquidation account for the benefit of eligible savings account holders who
continue to maintain their savings accounts with the Bank after conversion. In
the event of a complete liquidation of the Bank (and only in such event),
eligible savings account holders who continue to maintain their accounts with
the Bank shall be entitled to receive a distribution from the liquidation
account after payment to all creditors but before any liquidation distribution
with respect to common stock. The initial liquidation account was established at
approximately $11.9 million. This account is proportionately reduced for any
subsequent reduction in the eligible holders' deposit accounts. The creation and
maintenance of the liquidation account will not restrict the use or application
of any of the capital accounts of the Company, except that the Company may not
declare or pay a cash dividend on, or purchase any of, its capital stock, if the
effect of such dividends or repurchase would be to cause the Company's net worth
to be reduced below the aggregate amount then required for the liquidation
account, or the amount required by federal or state law.
NOTE 14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has estimated fair value amounts by using available market
information and appropriate valuation methodologies. However, considerable
judgment is necessarily required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
30
CHESTER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
NOTE 14. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Approximate carrying values and estimated fair values are summarized below:
<Table>
<Caption>
December 31,
--------------------------------------------------------
2001 2000
-------------------------- --------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
- -------------------------------------------------------------------------------------------------
Interest-earning assets:
Cash and cash equivalents $21,018,082 $21,018,082 $11,688,354 $11,688,354
Certificates of deposit -- -- 1,000,000 1,000,000
Investment securities 39,751,829 40,452,530 38,804,981 38,809,586
Mortgage-backed securities 7,109,989 7,200,920 15,585,407 15,514,895
Loans 41,097,027 41,513,000 47,340,779 44,638,000
Accrued interest receivable 778,175 778,175 1,108,650 1,108,650
Interest-bearing liabilities:
Deposits:
Checking, money market demand,
and passbooks 38,089,911 38,089,911 38,263,382 38,263,382
Certificates of deposit 53,323,873 53,946,174 58,728,104 58,743,618
Fixed-term advances from FHLB 5,000,000 5,000,000 -- --
Accrued interest payable 61,826 61,826 187,733 187,733
</Table>
The carrying value of cash and cash equivalents, certificates of deposit,
checking, money market, demand and passbooks are considered reasonable estimates
of those instruments fair values.
The fair value of investment securities and mortgage-backed securities is
based on quoted market prices and prices obtained from independent pricing
services. Nonmarketable securities, for which current market values are not
readily available, are believed to have carrying values, which approximate
market values. The fair value of loans and certificates of deposit, are
estimated based on present values using published rates currently available that
are applicable to each category of such financial instruments. The carrying
value of accrued interest receivable and accrued interest payable approximates
its fair value.
No adjustment was made to the interest rates for changes in credit of
performing loans for there are no known credit concerns. Management segregates
loans in appropriate risk categories. Management believes that the risk factor
embedded in the interest rates along with the general reserves applicable to the
performing loan portfolio results in a fair valuation of such loans.
The fair value of fixed-term advances from FHLB is based on the discounted
value of contractual cash flows. The discount rate is estimated using rates
currently available to the Company for similar terms to maturity.
The Company does not have unrecognized financial instruments, other than
those discussed in Note 12, which are subject to fair value disclosure. The
difference between the fair value and the face value for the instruments
disclosed in Note 12 was not considered material.
The fair value estimates presented herein are based on pertinent
information available to management as of December 31, 2001 and 2000. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since that date and,
therefore, current estimates of fair value may differ significantly from the
amounts presented herein.
31
CHESTER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
NOTE 15. PARENT COMPANY FINANCIAL INFORMATION
The following are condensed balance sheets and condensed statements of
income and cash flows for Chester Bancorp, Inc. (parent company only):
CONDENSED BALANCE SHEETS
<Table>
<Caption>
December 31,
---------------------
(In thousands) 2001 2000
- -------------------------------------------------------------------------------------
Assets:
Cash $ 123 $ 71
Investment securities 200 1,073
Investment in subsidiaries 14,815 18,923
Other assets 48 48
- -------------------------------------------------------------------------------------
$15,186 $20,115
=====================================================================================
Liabilities and stockholders' equity:
Other liabilities $ 238 $ 235
Stockholders' equity 14,948 19,880
- -------------------------------------------------------------------------------------
$15,186 $20,115
=====================================================================================
</Table>
CONDENSED STATEMENTS OF INCOME
<Table>
<Caption>
Year Ended December 31,
----------------------------------
(In thousands) 2001 2000 1999
- ----------------------------------------------------------------------------------------------
Interest income $ 12 $ 20 $ 50
Dividend income from subsidiaries 5,300 2,458 1,915
Interest expense -- -- (6)
Gain on sale of investments 23 -- --
- ----------------------------------------------------------------------------------------------
5,335 2,478 1,959
Net operating expenses 280 287 286
- ----------------------------------------------------------------------------------------------
Income before income tax (benefit) and equity in
undistributed earnings of subsidiaries 5,055 2,191 1,673
Income tax (benefit) (80) (122) (80)
- ----------------------------------------------------------------------------------------------
Income before equity in undistributed earnings of
subsidiaries 5,135 2,313 1,753
Equity in undistributed earnings of subsidiaries (4,118) (1,222) (284)
- ----------------------------------------------------------------------------------------------
$ 1,017 $ 1,091 $1,309
==============================================================================================
</Table>
32
CHESTER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
NOTE 15. PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
Year Ended December 31,
-----------------------------------
(In thousands) 2001 2000 1999
- ----------------------------------------------------------------------------------------------
Operating activities:
Net income $ 1,017 $ 1,091 $ 1,309
Equity in undistributed earnings of subsidiaries (1,182) (1,236) (1,471)
Other, net 275 98 110
- ----------------------------------------------------------------------------------------------
Net cash provided by (used in) operating
activities 110 (47) (52)
- ----------------------------------------------------------------------------------------------
Investing activities -- decrease in investment
securities 873 199 294
- ----------------------------------------------------------------------------------------------
Net cash provided by investing activities 873 199 294
- ----------------------------------------------------------------------------------------------
Financing activities:
Dividends received from subsidiaries 5,301 2,458 1,915
Purchase of treasury stock (5,712) (2,040) (1,781)
Dividends paid (520) (505) (419)
- ----------------------------------------------------------------------------------------------
Net cash used in financing activities (931) (87) (285)
- ----------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 52 65 (43)
Cash and cash equivalents at beginning of year 71 6 49
- ----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 123 $ 71 $ 6
==============================================================================================
</Table>
33
CHESTER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
NOTE 16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<Table>
<Caption>
Year Ended December 31, 2001
------------------------------------------------------
Three Months Ended
(Thousands of dollars, ------------------------------------------------------
except per share data) December 31, September 30, June 30, March 31,
- -----------------------------------------------------------------------------------------------
Interest income $1,542 $1,834 $1,945 $2,021
Interest expense 789 986 1,080 1,159
- -----------------------------------------------------------------------------------------------
Net interest income 753 848 865 862
Provision for losses on loans -- -- -- --
- -----------------------------------------------------------------------------------------------
Net interest income after provision
for losses on loans 753 848 865 862
Noninterest income 109 118 98 61
Noninterest expense 562 589 577 577
- -----------------------------------------------------------------------------------------------
Income before income taxes 300 377 386 346
Income taxes 77 110 106 99
- -----------------------------------------------------------------------------------------------
Net income $ 223 $ 267 $ 280 $ 247
===============================================================================================
Basic earnings per share $ 0.27 $ 0.26 $ 0.25 $ 0.22
===============================================================================================
Diluted earnings per share $ 0.27 $ 0.25 $ 0.24 $ 0.21
===============================================================================================
</Table>
<Table>
<Caption>
Year Ended December 31, 2000
------------------------------------------------------
Three Months Ended
(Thousands of dollars, ------------------------------------------------------
except per share data) December 31, September 30, June 30, March 31,
- -----------------------------------------------------------------------------------------------
Interest income $1,964 $1,915 $1,926 $1,953
Interest expense 1,089 1,031 999 1,021
- -----------------------------------------------------------------------------------------------
Net interest income 875 884 927 932
Provision for losses on loans -- -- -- --
- -----------------------------------------------------------------------------------------------
Net interest income after
provision for losses on loans 875 884 927 932
Noninterest income 136 42 44 13
Noninterest expense 585 563 582 593
- -----------------------------------------------------------------------------------------------
Income before income taxes 426 363 389 352
Income taxes 128 106 105 100
- -----------------------------------------------------------------------------------------------
Net income $ 298 $ 257 $ 284 $ 252
===============================================================================================
Basic earnings per share $ 0.27 $ 0.22 $ 0.24 $ 0.20
===============================================================================================
Diluted earnings per share $ 0.26 $ 0.21 $ 0.23 $ 0.20
===============================================================================================
</Table>
34
STOCKHOLDER INFORMATION
- --------------------------------------------------------------------------------
<Table>
BOARD OF DIRECTORS TRANSFER AGENT
Michael W. Welge, Chairman Registrar and Transfer Company
John R. Beck, M.D. 10 Commerce Drive
Edward K. Collins Cranford, NJ 07016
James C. McDonald (800) 368-5948
Allen R. Verseman
Thomas E. Welch, Jr. FDIC DISCLAIMER
Carl H. Welge
This Annual Report has not been
CORPORATE HEADQUARTERS reviewed, or confirmed for accuracy
or relevance, by the FDIC.
1112 State Street
Chester, IL 62233 GENERAL INQUIRIES AND REPORTS
(618) 826-5038
A copy of the Company's 2001 Annual Report to
ANNUAL MEETING the Securities and Exchange Commission, Form
10-K, may be obtained without charge by written
Friday, April 5, 2002 request of shareholders to:
10:00 A.M. Michael W. Welge, President
American Legion Hall Chester Bancorp, Inc.
500 E. Opdyke St. 1112 State Street
Chester, IL 62233 Chester, IL 62233
STOCK LISTING
Nasdaq SmallCap Market
Symbol: CNBA
INDEPENDENT AUDITORS
McGladrey & Pullen, LLP
15 South Old State Capitol Plaza, Suite 200
Springfield, IL 62705
</Table>
[CHESTER BANCORP, INC. LOGO]
1112 State Street - Chester, Illinois 62233 - Telephone (618) 826-5038