1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------------- ----------------------
Commission file number: 000-21167
------------------------------
Chester Bancorp, Inc.
(Exact name of registrant as specified in its charter)
------------------------------
Delaware 37-1359570
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1112 State Street, Chester, Illinois 62233
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (618) 826-5038
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of outstanding shares of the registrant's Common Stock, par
value $.01 per share, was 1,987,025 on September 30, 1997.
================================================================================
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FORM 10-Q
Index
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets ........................ 2
Consolidated Statements of Income .................. 3
Consolidated Statement of Stockholders' Equity ..... 5
Consolidated Statements of Cash Flows .............. 6
Notes to Consolidated Financial Statements ......... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ...... 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................... 16
Item 2. Changes in Securities ............................... 16
Item 3. Defaults upon Senior Securities ..................... 16
Item 4. Submission of Matters to a Vote
of Securities Holders .............................. 16
Item 5. Other Information ................................... 16
Item 6. Exhibits and Reports on Form 8-K .................... 16
Signature ...................................................... 17
Exhibit Index .................................................. 18
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The financial statements provided herein for periods prior to October 4, 1996
are for Chester Savings Bank, FSB (the "Bank"), which is the predecessor of
Chester Bancorp, Inc. (the "Company") prior to October 4, 1996.
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CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1997 and December 31, 1996
(Unaudited)
September 30, December 31,
Assets 1997 1996
------------- ------------
Cash $ 1,349,900 $ 1,925,684
Interest-bearing deposits 2,618,094 4,191,595
Federal funds sold 4,710,000 16,000,000
------------- ------------
Total cash and cash equivalents 8,677,994 22,117,279
Certificates of deposit 294,000 888,265
Investment securities:
Available for sale, at market value 19,739,187 12,508,487
Held to maturity, at cost 23,160,464 36,254,076
Mortgage-backed securities:
Available for sale, at market value 1,712,144 1,898,532
Held to maturity, at cost 13,867,200 13,998,304
Loans receivable, net 61,278,367 54,842,131
Accrued interest receivable 910,757 863,692
Real estate acquired by foreclosure, net 46,296 116,747
Office property and equipment, net 1,831,730 1,949,535
Income taxes receivable - 18,051
Deferred tax assets, net 104,565 23,792
Other assets 370,926 363,858
------------- ------------
$ 131,993,630 $145,842,749
============= ============
Liabilities and Stockholders' Equity
Savings deposits $ 94,753,530 $102,246,850
Securities sold under agreements to repurchase 6,490,000 11,340,000
Accrued interest payable 163,795 112,623
Advance payments by borrowers for taxes and insurance 478,182 447,666
Income taxes payable 244,315 -
Deferred tax liability, net - -
Accrued expenses and other liabilities 1,432,113 268,632
------------- ------------
Total liabilities 103,561,935 114,415,771
------------- ------------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 3,000,000 shares authorized,
1,987,025 and 2,182,125 issued and outstanding at September
30, 1997 and and December 31, 1996, respectively 21,821 21,821
Additional paid-in capital 20,889,197 20,865,158
Retained earnings, substantially restricted 12,823,450 12,271,098
Unrealized gain (loss) on securities available
for sale, net of tax 28,958 (14,499)
Unearned ESOP shares (1,665,090) (1,716,600)
Unamortized restricted stock awards (767,146) -
Treasury stock, at cost: 195,100 shares and -0- shares at
September 30, 1997 and December 31, 1996, respectively (2,899,225) -
------------- ------------
Total stockholders' equity 28,431,695 31,426,978
------------- ------------
$ 131,993,630 $145,842,749
============= ============
See accompanying notes to unaudited consolidated financial statements
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CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Three Months Ended September 30, 1997 and 1996
(Unaudited)
Three Months Ended
September 30,
1997 1996
---------- -----------
Interest income:
Loans receivable $1,294,472 $ 1,192,969
Mortgage-backed securities 261,344 279,930
Investments 588,330 690,713
Interest-bearing deposits and federal funds sold 127,990 178,546
---------- -----------
Total interest income 2,272,136 2,342,158
---------- -----------
Interest expense:
Savings deposits 1,071,146 1,033,611
Securities sold under agreements to repurchase 82,976 333,753
---------- -----------
Total interest expense 1,154,122 1,367,364
---------- -----------
Net interest income 1,118,014 974,794
Provision for loan losses 29,000 2,500
---------- -----------
Net interest income after provision for loan losses 1,089,014 972,294
---------- -----------
Noninterest income:
Late charges and other fees 47,590 29,073
Gain on sale of investment securities, net - 17,397
Other 6,929 7,983
---------- -----------
Total noninterest income 54,519 54,453
---------- -----------
Noninterest expense:
Compensation and employee benefits 353,398 350,628
MRP - Accelerated vesting 274,945 -
Occupancy 107,178 88,326
Data processing 49,177 38,156
Advertising 14,422 16,026
Federal insurance premiums 15,872 62,395
SAIF special assessment - 812,498
Other 151,978 130,371
---------- -----------
Total noninterest expense 966,970 1,498,400
---------- -----------
Income before income tax expense 176,563 (471,653)
Income tax expense (benefit) 19,159 (237,869)
---------- -----------
Net income (loss) $ 157,404 $ (233,784)
========== ===========
Earnings per share $0.08 NA
========== ===========
See accompanying notes to unaudited consolidated financial statements.
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CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Nine Months Ended September 30, 1997 and 1996
(Unaudited)
Nine Months Ended
September 30,
1997 1996
---------- ----------
Interest income:
Loans receivable $3,703,096 $3,659,559
Mortgage-backed securities 816,767 816,155
Investments 1,986,209 1,886,641
Interest-bearing deposits and federal funds sold 414,756 523,920
---------- ----------
Total interest income 6,920,828 6,886,275
---------- ----------
Interest expense:
Savings deposits 3,237,566 3,319,706
Securities sold under agreements to repurchase 269,299 686,961
---------- ----------
Total interest expense 3,506,865 4,006,667
---------- ----------
Net interest income 3,413,963 2,879,608
Provision for loan losses 59,000 17,500
---------- ----------
Net interest income after provision for loan losses 3,354,963 2,862,108
---------- ----------
Noninterest income:
Late charges and other fees 128,763 81,562
Loss on sale of certificates of deposit - (53,714)
Gain on sale of investment securities, net 20,469 24,234
Other 35,021 31,318
---------- ----------
Total noninterest income 184,253 83,400
---------- ----------
Noninterest expense:
Compensation and employee benefits 1,093,015 996,469
MRP - Accelerated vesting 274,945 -
Occupancy 257,091 228,388
Data processing 127,752 116,850
Advertising 41,658 35,939
Federal insurance premiums 53,223 185,381
SAIF special assessment - 812,498
Other 468,029 313,759
---------- ----------
Total noninterest expense 2,315,713 2,689,284
---------- ----------
Income before income tax expense 1,223,503 256,224
Income tax expense (benefit) 321,159 (56,620)
---------- ----------
Net income (loss) $ 902,344 $ 312,844
========== ==========
Earnings per share $0.46 NA
========== ==========
See accompanying notes to unaudited consolidated financial statements.
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CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Nine Months Ended September 30, 1997
(Unaudited)
Unrealized gain
Retained (loss) on
Common Stock Additional earnings, securities Unearned Unamortized
-------------------- paid-in substantially available for ESOP restricted stock
Shares Amount capital restricted sale, net of tax shares awards
--------- ------- ---------- ------------- ---------------- ------------ ----------------
Balance, December 31, 1996 2,182,125 $21,821 $20,865,159 $12,271,098 $ (14,499) $(1,716,600) $ -
Net income - - - 902,344 - - -
Dividends on common stock
at $.18 per share - - - (349,992) - - -
Purchase of treasury stock - - - - - - -
Grant of unamortized
restricted stock awards - - - - - - (1,160,894)
Amortization of unamortized
restricted stock awards - - - - - - 393,478
Amortization of ESOP awards - - 24,038 - - 51,510 -
Change in unrealized gain
(loss) on securities
available for sale, net - - - - 43,457 - -
--------- ------- ----------- ----------- -------- ----------- -----------
Balance, September 30, 1997 2,182,125 $21,821 $20,889,197 $12,823,450 $ 28,958 $(1,665,090) $ (767,416)
========= ======= =========== =========== ======== =========== ===========
Treasury Stock Total
--------------------- Stockholders'
Shares Amount equity
------ ------ ------------
Balance, December 31, 1996 - $ - $31,426,979
Net income - - 902,344
Dividends on common stock
at $.18 per share - - (349,992)
Purchase of treasury stock 195,100 (2,899,225) (2,899,225)
Grant of unamortized
restricted stock awards - - (1,160,894)
Amortization of unamortized
restricted stock awards - - 393,478
Amortization of ESOP awards - - 75,548
Change in unrealized gain
(loss) on securities
available for sale, net - - 43,457
------- ----------- -----------
Balance, September 30, 1997 195,100 $(2,899,225) $28,431,695
======= =========== ===========
See accompanying notes to unaudited consolidated financial statements.
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CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine months ended September 30, 1997 and 1996
(Unaudited)
September 30, September 30,
1997 1996
------------ ------------
Cash flows from operating activities:
Net income $ 902,344 $ 312,844
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization:
Office properties and equipment 140,890 88,548
Deferred fees, discounts, and premiums (310,197) 64,793
Stock plans 469,027 -
(Increase) decrease in accrued interest receivable (47,065) (414,445)
Increase (decrease) in accrued interest payable 51,171 (309,755)
Increase (decrease) in income taxes, net 154,958 (294,486)
Loss on sale of certificates of deposit - 53,714
Gain on sale of investment securities, net (20,469) (24,234)
Provision for loan losses 59,000 17,500
FHLB Stock Dividend - -
Net change in other assets and other liabilities (10,139) 325,338
------------ ------------
Net cash provided by (used in) operating activities. 1,389,520 (180,183)
------------ ------------
Cash flows from investing activities:
Principal repayments on:
Loans receivable 9,510,028 13,315,244
Mortgage-backed securities 3,707,731 1,472,270
Proceeds from the maturity of certificates of deposit 594,000 3,939,000
Proceeds from the maturity of investment securities 90,372,640 46,575,000
Proceeds from the sale of certificates of deposit - 4,486,286
Proceeds from the sale of investment securities 2,019,623 8,013,672
Proceeds from the redemption of FRB Stock 6,000 -
Cash invested in:
Loans receivable (16,008,966) (12,206,485)
Mortgage-backed securities (3,364,715) (2,972,500)
Investment securities (86,150,491) (67,499,078)
Federal Home Loan Bank stock - (17,700)
Proceeds from sale of real estate acquired by foreclosure 70,451 19,500
Purchase of office properties and equipment (23,084) (16,499)
------------ ------------
Net cash provided by (used in) investing activities 733,217 (4,891,290)
------------ ------------
Cash flows from financing activities:
Increase (decrease) in savings deposits (7,493,320) (6,180,774)
Increase (decrease) in securities sold under agreements to repurchase (4,850,000) 3,340,000
Stock subscriptions - 21,821,250
Dividends paid (349,992) -
Purchase of treasury stock (2,899,225) -
Increase in advance payments by borrowers for taxes and insurance 30,516 144,174
------------ ------------
Net cash provided by (used in) financing activities (15,562,021) 19,124,650
Net increase (decrease) in cash and cash equivalents (13,439,284) 14,053,177
Cash and cash equivalents, beginning of period 22 ,117,279 10,666,127
------------ ------------
Cash and cash equivalents, end of period $ 8,677,995 $ 24,719,304
============ ============
Supplemental information:
Interest paid $ 3,519,120 $ 4,316,422
Income taxes paid $ 147,989 $ 231
Noncash investing and financing activities -
interest credited to savings deposits $ 2,285,200 $ 2,580,423
See accompanying notes to unaudited consolidated financial statements.
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CHESTER BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements were prepared
in accordance with instructions for Form 10-Q and, therefore, do not include
all information and notes necessary for a complete presentation of financial
position, results of operations, changes in stockholders' equity, and cash
flows in conformity with generally accepted accounting principles. However,
all adjustments (consisting only of normal recurring accruals) which, in the
opinion of management are necessary for a fair presentation of the unaudited
consolidated financial statements, have been included in the consolidated
statements of income for the three and nine months ended September 30, 1997 and
1996.
Operating results for the nine months ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997.
(2) Stock Conversion
On October 4, 1996, the Bank converted from a federal mutual savings bank
to a federal capital stock savings bank and simultaneously formed the Company,
a Delaware corporation, to act as the holding company of the converted savings
bank. Pursuant to the plan, 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 2,182,125 shares of $0.01 par value common
stock at a price of $10.00 per share which resulted in gross proceeds of
$21,821,250. After reducing gross proceeds for conversion costs of $939,363,
net proceeds totaled $20,881,887. The stock of Chester National Bank and
Chester National Bank of Missouri are held by the Company. In conjunction with
the conversion, the Company loaned $1,745,700 to the Bank's employee stock
ownership plan for the purchase of 174,570 shares in the stock conversion.
(3) Earnings Per Share
Earnings per share are based upon the weighted average number of common
shares outstanding during the period. Only ESOP shares committed to be
released are considered outstanding for purposes of computing earnings per
share.
The Company completed its initial public stock offering on October 4,
1996. Earnings per share are not applicable for periods prior to the
conversion date. The average number of common shares outstanding was 1,969,753
and 1,968,679 for the three and nine months ended September 30, 1997,
respectively.
(4) Employee Stock Ownership Plan
During 1996, the Company established a tax-qualified ESOP. The plan
covers substantially all employees who have attained the age of 21 and
completed one year of service. In connection with the conversion to a stock
corporation, the ESOP purchased 174,570 shares of the Company's common stock at
a subscription price of $10.00 per share using funds loaned by the Company.
All shares are held in a suspense account for allocation among the participants
as the loan is repaid with level principal payments over 25 years. Shares
released from the suspense account are allocated among the participants based
upon their pro rata annual compensation. The purchases of the shares by the
ESOP were recorded by the Company as unearned ESOP shares in a contra equity
account. As ESOP shares are committed to be released to compensate employees,
the contra equity account is reduced and the Company recognizes compensation
expense equal to the fair market value of the shares committed to be released.
Dividends on allocated ESOP shares are recorded as a reduction of retained
earnings; dividends on allocated ESOP shares are recorded as a reduction of
debt. Compensation expense related to the ESOP was $75,548 for the nine months
ended September 30, 1997.
The ESOP shares as of September 30, 1997 are as follows:
Allocated shares 2,910
Committed to be released shares 5,151
Unreleased shares 166,509
----------
Total ESOP shares 174,570
==========
Fair value of unreleased shares $2,560,076
==========
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The principal business of Chester Bancorp, Inc. and its subsidiaries
(the Company) consists of attracting deposits from the general public and using
these funds to originate mortgage loans secured by one- to four-family
residences and to invest in 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 and reverse repurchase agreements.
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, formerly known as Chester Savings Bank,
FSB (the Bank), 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.
FINANCIAL CONDITION
ASSETS. The Company's total assets decreased by $13.8 million, or 9.5%,
to $131.9 million at September 30, 1997 from $145.8 million at December 31,
1996. The decrease in the company's asset size was attributable to the $4.9
reduction in reverse repurchase agreements during the first nine months of 1997
and a decrease of $7.5 million in deposits.
Loans receivable increased $6.4 million, or 11.7%, to $61.2 million at
September 30, 1997 from $54.8 million at December 31, 1996. The increase in
loans receivable resulted from the combined impact of increased origination
volume through the continued focus on the St. Louis mortgage lending market and
a $3.8 million reduction in principal repayments on loans receivable. The
reduction in repayments is primarily due to the stabilized interest rate
environment that has been experienced during 1997.
Because of conditions in the Company's primary market area, such as
population shrinkage, low economic growth, and significant competition, the
demand for mortgage loans has been limited. As a result, the Company continues
to increase its investment in mortgage-backed securities and investment
securities and has sought to become more active in the St. Louis, Missouri
mortgage lending market and consumer lending.
Mortgage-backed securities at September 30, 1997 were $15.6 million
compared to $15.9 million at December 31, 1996. Investment securities decreased
$5.8 million, or 12.0%, to $42.9 million at September 30, 1997 from $48.8
million at December 31, 1996. The Bank reinvested the proceeds from
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maturies and sales of certificates of deposit into higher yielding
mortgage-backed securities during 1995 and 1996. During 1997 the Bank received
principal repayments on their mortgage-backed securities, resulting in a net
decrease of $317,000 in the mortgage-backed securities portfolio at September
30, 1997. The decrease in investment securities resulted primarily from an
increased investment in higher yielding loans receivable and mortgage-backed
securities.
Certificates of deposit decreased $594,000 to $294,000 at September 30,
1997 from $888,000 at December 31, 1996. Management began in 1995 to liquidate
its certificate of deposit portfolio and has continued to reinvest the proceeds
from certificate of deposit maturities into other types of investments.
Cash, interest-bearing deposits, and federal funds sold, on a combined
basis, decreased $13.4 million, or 60.8%, to $8.7 million at September 30, 1997
from $22.1 million at December 31, 1996. At December 31, 1996, management had
invested a significant portion of the proceeds from the stock conversion into
overnight deposits.
LIABILITIES. Savings deposits decreased $7.5 million, or 7.3%, to $94.7
million at September 30, 1997 from $102.2 million at December 31, 1996. Reverse
repurchase agreements decreased $4.9 million from $11.3 million at December 31,
1996 to $6.5 million at September 30, 1997. The majority of such agreements are
maintained with Gilster-Mary Lee Corporation (Gilster-Mary Lee), a food
manufacturing and packaging company headquartered in Chester, Illinois. The
Chairman of the Board of the Company is also the Executive Vice President,
Treasurer and Secretary of Gilster-Mary Lee. 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 September 30, 1997, the balance of funds on deposit with the Company
was $12.7 million, which included the reverse repurchase agreements.
Gilster-Mary Lee notified the Company previously of its intent to maintain much
smaller deposit balances with the institution in the future. The loss of funds
may impair future earnings as there is no intent to replace the savings deposits
or reverse repurchase agreements with other wholesale funds. At September 30,
1997, 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.
NET INCOME. The Company's net income for the three and nine months
ended September 30, 1997 was $157,000 and $902,000 respectively, compared to
$(234,000) and $313,000 for the three and nine months ended September 30, 1996,
respectively. The $391,000 and $589,000 increase in net income for the three
and nine months ended September 30, 1997, respectively, was a combination of the
one-time assessment imposed by the Federal Deposit Insurance Corporation (FDIC)
on SAIF-assessable deposits and an accelerated vesting of management recognition
shares due to the death of one of the Bank's directors. The special assessment
of the Bank totaled $812,000 and was accrued during the quarter ended September
30, 1996. The actual reduction of net income was $504,000, after considering
the tax deductibility of the special assessment. The after-tax charge on the
mangement recognition shares for the Bank totaled $170,466 and was accrued for
during the quarter ended September 30, 1997. Without considering the impact of
the one-time assessment and the accelerated vesting of management recognition
shares, net income increased $57,000 and $255,000 for the three and nine months
ended September 30, 1997, respectively.
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The Company's net income before the impact from the accelerated vesting
of management recognition shares was $329,000 (or $.17 per share based on
average shares outstanding of 1,969,753). The net charge of $170,466 recognized
during the quarter ended September 30, 1997 negatively impacted earnings per
share by $.09, resulting in a $.08 earnings per share for the quarter ended
September 30, 1997.
NET INTEREST INCOME. Net interest income totaled $1.1 million for the
three months ended September 30, 1997 compared to $975,000 for the three months
ended September 30, 1996. The $143,000, or 14.7%, increase in net interest
income was the result of a significant increase in the Company's ratio of
average interest-earning assets to average interest-bearing liabilities. The
ratio increased from 106.00% in the 1996 period to 126.67% in the 1997 period.
Net interest income totaled $3.4 million for the nine months ended September 30,
1997 compared to $2.9 million for the nine months ended September 30, 1996. The
$534,000, or 18.5%, increase in net interest income was the result of a
significant increase in the Company's ratio of average interest-earning assets
to average interest-bearing liabilities. The ratio increased from 106.33% in
the 1996 period to 125.70% in the 1997 period. The improvement in the ratio was
primarily attributable to the $19.1 million of net proceeds received from the
issuance of common stock on October 4, 1996.
INTEREST INCOME. Interest income on loans receivable increased
$101,000, or 8.5%, for the three months ended September 30, 1997, as compared to
the three months ended September 30, 1996. The increase in interest income on
loans receivable was the result of an $4.5 million, or 8.1%, increase in the
average balance of loans receivable.
Interest income on loans receivable increased $44,000, or 1.2%, for the
nine months ended September 30, 1997. The increase in interest income on loans
receivable was the result of an $1.08 million, or 1.9%, increase in the average
balance of loans receivable. The impact of increased volume was partially
offset by a decline in the average yield on loans receivable from 8.71% for the
nine months ending September 30, 1996 to 8.66% for the nine months ending
September 30, 1997.
Interest income on mortgage-backed securities decreased $19,000 for the
three months ended September 30, 1997 and remained constant for both nine month
periods. The decrease in interest income on mortgage backed securities was the
result of an $449,000, or 2.7%, decrease in the average balance of
mortgage-backed securities, coupled with a decline in the average yield from
6.65% for the three months ended September 30, 1996 to 6.39% for the three
months ended September 30, 1997. The consistency of interest income on
mortgage-backed securities resulted from a $606,000, or 3.7%, increase in the
average balance of mortgage-backed securities, negatively offset by a 23 basis
point decline in the average yield on mortgage-backed securities for the nine
months ended September 30, 1997.
Interest earned on investment securities was $588,000 and $2.0 million
for the three and nine months ended September 30, 1997, respectively, compared
to $691,000 and $1.9 million for the three and nine months ended September 30,
1996, respectively. The decrease of $102,000, or 14.8%, for the three months
ended September 30, 1997 was mainly the result of a decrease in the average
balance of investments of $9.1 million, or 17.5% for the three months ended
September 30, 1997. The increase of $100,000, or 5.3%, for the nine months
ended September 30, 1997 was mainly the result of an increase in the average
balance of investment securities of $479,000, or 1.0%, for the nine months
ended September 30, 1997.
Interest income on interest-bearing deposit decreased $51,000, or 28.3%,
and $109,000, or 20.8%, during the three and nine months ended September 30,
1997, respectively. The decline in interest income on interest-bearing deposits
resulted from decreases in the average balance of interest-bearing deposits of
$2.3 million, or 20.0%, and $1.9 million, or 16.1%, for the three and nine
months ended September 30, 1997, respectively. The decline in the average
balance was mainly due to the reinvestment of proceeds from sales and maturities
of certificates of deposit into higher yielding investments. The decline in
interest income on interest-bearing deposits were also negatively impacted by a
65 basis point and 32 basis point decrease in the
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average yield on interest-bearing deposits for the three and nine months ended
September 30, 1997, respectively.
INTEREST EXPENSE. Interest expense on savings deposits increased
$37,000, or 3.6%, to $1.07 million for the three months ended September 30, 1997
from $1.03 million for the three months ended September 30, 1996. The increase
in interest expense resulted from an increase in the average costs of
interest-bearing liabilities from 3.72% for the three months ended September 30,
1996 to 4.48% for the three months ended September 30, 1997, partially offset by
a $15.4 million, or 13.9%, decrease in the average balance of interest-bearing
liabilities. The decrease in the average balance of interest-bearing liabilities
was partially attributable to funds held in savings accounts for stock
subscriptions sold in accordance with the Bank's initial public offering which
closed on October 4, 1996. The decline in deposits was also attributable to
increased competition in the Company's market place and also reflected
management's decision to compete less aggressively on rates. Management
anticipates that the closing of the Company's Carbondale, Illinois branch
location on June 30, 1997 will reduce savings deposits in the near future.
Interest expense on savings deposits decreased $82,000, or 2.5%, to $3.2
million for the nine months ended September 30, 1997 from $3.3 million for the
nine months ended September 30, 1996. The decline in interest expense on
savings deposits was the result of a $10.0 million, or 9.2%, decrease in the
average balance of deposits. The average cost of deposits increased between the
two quarters with an average rate of 4.38% for the nine months ended September
30, 1997 compared to 4.08% for the nine months ended September 30, 1996.
Interest expense on reverse repurchase agreements was $83,000 and
$269,000 for the three and nine months ended September 30, 1997, respectively,
compared to $334,000 and $687,000 for the three and nine months ended September
30, 1996, respectively. The decreases of $251,000, or 75.1%, and $418,000, or
60.8%, for the three and nine months ended September 30, 1997, respectively,
were primarily the result of a decrease in the average balance of reverse
repurchase agreements of $11.4 million, or 63.9%, and $9.0 million, or 55.5%,
for the three and nine months ended September 30, 1997, 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.
During the quarter ended September 30, 1997, the Company's provision for
loan losses was $29,000 compared to $2,500 for the comparable 1996 quarter.
The Company's allowance for loan losses was $399,000, or .65%, of loans
outstanding at September 30, 1997 compared to $384,000, or .70%, of loans
outstanding at December 31, 1996. The Company's level of net loans charged-off
during the nine months ended September 30, 1997 was $44,000, which represented
.08% 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 September 30, 1997.
The breakdown of general loss allowances and specific loss allowances is
made for regulatory accounting purposes only. General loan loss allowances are
added back to capital to the extent permitted in computing risk-based capital.
Both general and specific loss allowances are charged to expense. The financial
statements of the Company are prepared in accordance with generally accepted
accounting principles (GAAP) and, accordingly, provisions for loan losses are
based on management's assessment of the factors set forth above. The Company
regularly reviews its loan portfolio, including problem loans, to determine
whether any loans are impaired, require classification and/or the establishment
of appropriate reserves. Management believes it has established its existing
allowance for loan losses in accordance with GAAP, however, future
11
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additions may be necessary if economic conditions or other circumstances differ
substantially from the assumptions used in making the initial determination.
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.
NONINTEREST INCOME. Noninterest income was $54,500 for the three months
ended September 30, 1997 compared to $54,400 for the three months ended
September 30, 1996. The consistency resulted primarily from a $17,000 increase
in gains recognized from the sale of investment securities available for sale
during the three months ended September 30, 1996 and a $18,500 increase in late
charges and other fees during the three months ended September 30, 1997.
Noninterest income was $184,000 for the nine months ended September 30,
1997 compared to $83,000 for the nine months ended September 30, 1996. The
$101,000 increase resulted primarily from a $54,000 loss on the sale of
certificates of deposit during the nine months ended September 30, 1996, and a
$20,000 increase in gains recognized from the sale of investment securities
during the nine months ended September 30, 1997. The increase in noninterest
income was also positively impacted by state income tax refunds for prior years
that totaled $18,000 and an increase in late charges and other fees of $47,000.
The $4.5 million of proceeds from the sale of certificates of deposit during
1996 resulted from management's decision to liquidate the certificate of deposit
portfolio with one of its brokers. The Company also made the decision to not
reinvest in certificates of deposits as they matured. The proceeds from the
maturity and sale of certificates of deposit were invested in mortgage-backed
securities and other investment securities.
NONINTEREST EXPENSE. Noninterest expense decreased $531,000, or 35.5%,
for the three months ended September 30, 1997, and $372,000, or 13.9%, for the
nine months ended September 30, 1997. The decrease in noninterest expense for
both periods primarily resulted from the one-time special assessment imposed by
the FDIC on SAIF-assessable deposits. The special assessment for the Bank
totaled $812,000 and was accrued at September 30, 1996. The remainder of the
fluctuation in noninterest expense was attributable to the $22,000 and $154,000
increase in other expense and the $278,000 and $371,000 increase in compensation
expense, respectively, which was partially offset by a $47,000 and $132,000
decline in regular federal insurance premiums respectively. The increase in
other expenses resulted primarily from legal fees related to the establishment
of the Company's stock plan and Management Recognition and Development Plan
(MRP) and various fees associated with being a public company. The increase in
compensation expense was attributable to the impact of the Employee Stock
Ownership Plan (ESOP) and the MRP which were implemented as a result of the
stock conversion. Compensation expense related to the ESOP was $26,000 and
$76,000 for the three and nine months ended September 30, 1997, respectively.
Compensation expense related to the MRP was $335,000 and $393,000 for the three
and nine months ended September 30, 1997, respectively. The accelerated vesting
of management recognition shares due to the death of one of the Bank's directors
caused the Bank to recognize an expense of $277,000 for the quarter ended
September 30, 1997. The decline in regular federal insurance premiums
experienced during the three and nine months ended September 30, 1997 resulted
from a decrease in rates charged by the Federal Deposit Insurance Corporation on
SAIF assessable deposits. As a result of the Deposit Insurance Funds Act of
1996 and the resultant recapitalization of the SAIF, the annual assessment rate
on SAIF deposits was decreased on January 1, 1997 to .0648% from the previous
rate of .23%.
INCOME TAX EXPENSE. Income tax expense for the three and nine months
ended September 30, 1997 was $19,000 and $321,000, respectively, compared to
income tax benefits of $238,000 and $57,000 for the three and nine months ended
September 30, 1996, respectively. The fluctuation in income tax expense was
mainly attributable to the $309,000 tax benefit associated with the one-time
special assessment imposed by the FDIC. This benefit coupled with the Bank's
significant investment in tax-exempt securities (which amounted to $9.6 million
at September 30, 1997) resulted in an overall tax benefit for the three and nine
months ended September 30, 1996. The income tax expense was also impacted by the
$105,000 tax benefit associated with the accelerated vesting of management
recognition shares recognized in the quarter ended
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September 30, 1997. Before recognizing the charge of the accelerated vesting
of management recognition shares, the Company's effective tax rate for the
three and nine months ended September 30, 1997 was 27.4% and 28.4%,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds consist of deposits, reverse
repurchase agreements, repayments and prepayments of loans and mortgage-backed
securities, maturities of investments and interest-bearing deposits, and funds
provided from operations. While scheduled repayments of loans and
mortgage-backed securities and maturities of investment securities are
predictable sources of funds, deposit flows and loan prepayments are greatly
influenced by general interest rates, economic conditions and competition. The
Company manages the pricing of its deposits to maintain a steady deposit base.
The Company uses its liquidity resources principally to fund existing and future
loan commitments, to fund maturing certificates of deposit and deposit
withdrawals, to invest in other interest-bearing assets, to maintain liquidity,
and to meet operating expenses. Management believes that loan repayments and
other sources of funds will be adequate to meet and exceed the Company's
liquidity needs for the remainder of 1997.
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 September 30,
1997, cash and cash equivalents totaled $8.7 million.
The primary investing activities of the Company include origination of
loans and purchase of mortgage-backed securities and investment securities.
During the nine months ended September 30, 1997, purchases of investment
securities and mortgage-backed securities totaled $86.1 million and $3.4
million, respectively, while loan originations totaled $16.0 million. These
investments were funded primarily from loan and mortgage-backed security
repayments of $13.2 million and investment security sales and maturities of
$92.4 million.
Liquidity management is both a daily and long-term function of business
management. If the Company requires funds beyond its ability to generate them
internally, the Company believes that it could borrow additional funds from the
Federal Home Loan Bank (FHLB). At September 30, 1997, the Company had no
outstanding advances from the FHLB.
At September 30, 1997, the Company exceeded all of its regulatory
capital requirements. The Company's subsidiary banks actual and required
capital amounts and ratios as of September 30, 1997 are as follows:
Actual Capital Requirements
------------------------------------
(Dollars in thousands) Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------
Total capital
(to risk-weighted assets):
Chester National Bank $24,033 57.29% 3,356 8.00%
Chester National Bank of Missouri 3,133 48.08% 521 8.00%
Tier 1 capital
(to risk-weighted assets):
Chester National Bank $23,697 56.49% 1,678 4.00%
Chester National Bank of Missouri 3,070 47.12% 261 4.00%
Tier 1 capital
(to average assets):
Chester National Bank $23,697 19.58% 3,630 3.00%
Chester National Bank of Missouri 3,070 24.93% 369 3.00%
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IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and results of operations in terms
of historical dollars without considering changes in the relative purchasing
power of money over time because of inflation. Unlike most industrial
companies, virtually all of the assets and liabilities of the Company are
monetary in nature. As a result, interest rates have a more significant impact
on the Company's performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINQUISHMENTS
OF LIABILITIES
On January 1, 1997, the Company adopted SFAB issued SFAS No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities", which provides consistent standards for distinguishing transfers
of financial assets that are sales from transfers that are secured borrowings.
The statement also requires that a liability can be derecognized if and only if
either (a) the debtor pays the creditor and is relieved of its obligation for
the liability or (b) the debtor is legally released from the liability either
judicially or by the creditor. The Statement provides implementation guidance
for assessing isolation of transferred assets and for accounting for transfers
of partial interests, servicing of financial assets, securitizations, transfers
of sales-type and direct financing lease receivables, securities lending
transactions, repurchase transactions including "dollar rolls", "wash sales",
loan syndications and participations, risk participation in banker's
acceptances, factoring arrangements, transfers of receivables with recourse,
and extinguishments of liabilities. The adoption of SFAS No. 125 did not have
a material effect on the Company's consolidated financial statements.
EARNINGS PER SHARE
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share", which
establishes standards for computing and presenting earnings per share (EPS).
SFAS No. 128 simplifies existing standards for computing EPS and makes them
comparable to international standards. It replaces the presentation of primary
EPS with a presentation of basic EPS. It also requires dual presentation of
basic and diluted EPS on the face of the income statement for all entities with
complex capital structures and requires a reconciliation of the components of
basic and diluted EPS. Basic EPS excludes dilution and is computed by dividing
income available to common shareholders by the weighted-average number of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock or resulted in the issuance
of common stock that then shared in the earnings of the Company. SFAS No. 128
is effective for financial statements issued for periods ending after December
31, 1997, including interim periods, and requires restatement of all
prior-period EPS data presented. The adoption of SFAS No. 128 is not expected
to have a material impact on the Company's consolidated financial statements.
DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE
In February 1997, the FASB issued SFAS 129 which establishes standards for
disclosing information about an entity's capital structure. SFAS 129 is
effective for financial statements for periods ending after December 15, 1997.
Since SFAS 129 is a disclosure requirement there will be no impact on the
Company's financial statements.
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REPORTING COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS 130 which establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. SFAS is effective for fiscal years beginning after December 15,
1997. SFAS 130 is a reporting and disclosure requirement and, therefore, will
have no impact on the Company's financial statements.
DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In June 1997, the FASB issued SFAS 131 which establishes standards for the way
that public enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim reports issued to shareholders.
SFAS 131 is effective for financial statements for periods beginning after
December 15, 1997. Since SFAS 131 was only recently issued, the Company has
not yet determined the impact of adopting SFAS 131. However, since SFAS 131 is
a disclosure requirement there will be no effect on the Company's financial
position or results of operations.
NONPERFORMING ASSETS
The following table sets forth information with respect to the Company's
nonperforming assets at the dates indicated.
At September 30, 1997 At December 31, 1996
--------------------- ---------------------
(Dollars in Thousands)
--------------------------------------------
Non-performing loans:
Loans accounted for on a non-accrual basis:
Real estate:
Residential $ 69 $ 11
Commercial 0 14
Consumer 7 54
--------- ---------
Total 76 79
--------- ---------
Accruing loans which are contractually past due 90
days or more:
Residential real estate 0 --
Consumer 0 --
--------- ---------
Total 0 --
--------- ---------
Total non-performing loans 76 79
Real estate acquired by foreclosure, net 46 117
--------- ---------
Total non-performing assets 122 $ 196
========= =========
Total non-performing loans to net loans .12% 0.14%
========= =========
Total allowance for loan losses to
non-performing loans 525.14% 485.74%
========= =========
Total non-performing assets to total assets .09% 0.13%
========= =========
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Neither the Company nor the Bank is a party to any material legal
proceedings at this time. From time to time, the Bank is involved in
various claims and legal actions arising in the ordinary course of
business.
Item 2. Changes in Securities.
None
Item 3. Defaults upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
On February 21, 1997, the Company solicited proxies for the annual
meeting of stockholders of the Company held on April 4, 1997. The
meeting involved the election of three directors and ratification of
the Chester Bancorp, Inc. 1997 Stock Option Plan and the Chester
Bancorp, Inc. 1997 Management Recognition and Development Plan . The
directors up for election were each elected by the vote of 2,047,138
shares out of 2,055,386 shares present at the meeting, either in
person or by proxy. Ratification of the Chester Bancorp, Inc. 1997
Stock Option Plan was approved by the vote of 1,694,235 for, 40,848
against and 9,645 abstain. Ratification of the Chester Bancorp, Inc.
1997 Management Recognition and Development Plan was approved by the
vote of 1,651,060 for, 81,848 against and 11,845 abstain.
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits
See Exhibit Index
B. Reports on Form 8-K
None
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned, thereunto duly authorized.
Chester Bancorp, Inc.
By: /s/ Michael W. Welge
-----------------------------
Michael W. Welge
Chairman of the Board, President
and Chief Financial Officer
(Duly Authorized Officer)
Dated: October 31, 1997
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EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
3(i) Certificate of Incorporation of the Company (incorporated
herein by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (File No. 333-2470)
3(ii) Bylaws of the Company (incorporated herein by reference to
Exhibit 3.2 to the Company's Registration Statement on Form S-1
(File No. 333-2470)
27.1 Financial Data Schedule
18