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 March 31, 1998
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 1,817,363 on March 31, 1998.
2
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....................................... 4
Consolidated Statements of Cash Flows................................................ 5
Notes to Consolidated Financial Statements........................................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................................ 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................... 15
Item 2. Changes in Securities................................................................ 15
Item 3. Defaults upon Senior Securities...................................................... 15
Item 4. Submission of Matters to a Vote
of Securities Holders................................................................ 15
Item 5. Other Information.................................................................... 15
Item 6. Exhibits and Reports on Form 8-K..................................................... 15
Signature........................................................................................ 16
Exhibit Index.................................................................................... 17
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
1
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CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 1998 and December 31, 1997
(Unaudited)
March 31, December 31,
Assets 1998 1997
------ ---- ----
Cash $ 1,732,804 $ 1,833,006
Interest-bearing deposits 12,233,526 3,063,057
Federal funds sold 11,495,000 6,395,000
------------- -------------
Total cash and cash equivalents 25,461,330 11,291,063
Certificates of deposit 262,700 290,000
Investment securities:
Available for sale, at market value 10,719,000 19,708,063
Held to maturity, at cost 32,335,689 25,232,519
Mortgage-backed securities:
Available for sale, at market value 1,564,836 1,641,949
Held to maturity, at cost 12,856,511 12,145,702
Loans receivable, net 56,073,277 60,467,735
Accrued interest receivable 876,370 887,375
Real estate acquired by foreclosure, net 38,233 38,233
Office property and equipment, net 1,741,257 1,766,748
Deferred tax asset, net 12,807 16,818
Other assets 329,280 290,444
------------- -------------
$ 142,271,290 $133,776,649
============= ============
Liabilities and Stockholders' Equity
-------------------------------------
Savings deposits $ 94,966,480 $ 95,362,100
Borrowed money 19,380,389 8,380,389
Accrued interest payable 278,208 158,899
Advance payments by borrowers for taxes and insurance 711,043 439,274
Income taxes payable 132,727 288,891
Accrued expenses and other liabilities 110,778 158,778
------------- -------------
Total liabilities 115,579,625 104,788,331
------------- -------------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 3,000,000 shares authorized, 2,182,125
shares issued at March 31, 1998 and December 31, 1997 21,821 21,821
Additional paid-in capital 21,608,701 21,766,390
Retained earnings, substantially restricted 13,282,040 13,088,331
Unrealized gain on securities available
for sale, net of tax 38,998 32,454
Unamortized restricted stock awards (684,319) (725,868)
Unearned ESOP shares (1,630,750) (1,647,920)
Treasury stock, at cost: 364,762 and 229,079 shares at
March 31, 1998 and December 31, 1997, respectively (5,944,826) (3,546,890)
------------- -------------
26,691,665 28,988,318
------------- -------------
Total stockholders' equity $ 142,271,290 $ 133,776,649
============= =============
See accompanying notes to unaudited consolidated financial statements
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CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Three Months Ended March 31, 1998 and 1997
(Unaudited)
Three Months Ended
------------------
March 31,
---------
1998 1997
---- ----
Interest income:
Loans receivable $ 1,255,831 $ 1,168,220
Mortgage-backed securities 214,741 271,684
Investments 602,093 689,049
Interest-bearing deposits and federal funds sold 231,803 175,493
----------- -----------
Total interest income 2,304,468 2,304,446
----------- -----------
Interest expense:
Savings deposits 1,046,756 1,088,702
Borrowed money 166,988 84,851
----------- -----------
Total interest expense 1,213,744 1,173,553
----------- -----------
Net interest income 1,090,724 1,130,893
Provision for loan losses 11,800 15,000
----------- -----------
Net interest income after provision for loan losses 1,078,924 1,115,893
----------- -----------
Noninterest income:
Late charges and other fees 50,548 39,196
Gain on sale of investment securities, net - 3,750
Other 4,379 22,410
----------- -----------
Total noninterest income 54,927 65,356
----------- -----------
Noninterest expense:
Compensation and employee benefits 345,654 348,477
Occupancy 60,733 77,371
Data processing 47,402 37,362
Advertising 10,521 12,980
Federal insurance premiums 14,832 19,753
Other 198,654 172,817
----------- -----------
Total noninterest expense 677,796 668,760
----------- -----------
Income before income tax expense 456,055 512,489
Income tax expense 135,007 145,000
----------- -----------
Net income $ 321,048 $ 367,489
=========== ===========
Earnings per common share - basic $ .18 $ .18
=========== ===========
Earnings per common share - assuming dilution $ .18 $ .18
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
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CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Three Months Ended March 31, 1998
(Unaudited)
Unrealized
gain
on
Retained securities
Additional earnings, available for Unearned
Common stock paid-in substantially sale, net of ESOP
Shares Amount capital restricted tax shares
------ ------ ------- ---------- --- ------
Balance, December 31, 1997 2,182,125 $21,821 $21,766,390 $13,088,331 $32,454 $(1,647,920)
Net income - - - 321,048 - -
Purchase of treasury stock - - - - - -
Issuance of treasury stock for
restricted stock awards - - (170,996) (9,161) - -
Amortization of restricted stock
awards - - - - - -
Amortization of ESOP awards - - 13,307 - - 17,170
Dividends on common stock
at $.07 per share - - - (118,178) - -
Change In unrealized gain on
securities available for sale, net - - - - 6,544 -
--------- -------- ---------- =========== ======= ============
Balance, March 31, 1998 2,182,125 $ 21,821 $21,608,701 $13,282,040 $38,998 $ (1,630,750)
========= ======== =========== =========== ======= ============
Unamortized Total
restricted Treasury Stock Stockholders'
stock awards Shares Amount equity
------------ ------ ------ ------
Balance, December 31, 1997 $(725,868) 229,079 $(3,546,890) $28,988,318
Net income - - - 321,048
Purchase of treasury stock - 147,897 (2,578,093) (2,578,093)
Issuance of treasury stock for
restricted stock awards - (12,214) 180,157 -
Amortization of restricted stock
awards 41,549 - - 41,549
Amortization of ESOP awards - - - 30,477
Dividends on common stock
at $.07 per share - - - (118,178)
Change In unrealized gain on
securities available for sale, net - - - 6,544
---------- ------- ----------- -----------
Balance, March 31, 1998 $(684,319) 364,762 $(5,944,826) $26,691,665
========== ======= =========== ===========
See accompanying notes to unaudited consolidated financial statements.
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CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three months ended March 31, 1998 and 1997
(Unaudited)
March 31, March 31,
1998 1997
---- ----
Cash flows from operating activities:
Net income $ 321,048 $ 367,489
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization:
Office properties and equipment 33,963 35,162
Deferred fees, discounts, and premiums 6,943 (207,384)
Stock plans 72,026 24,038
(Increase) decrease in accrued interest receivable 11,005 (85,635)
Increase (decrease) in accrued interest payable 119,309 9,402
Increase (decrease) in income taxes, net (156,164) 120,391
Gain on sale of investment securities, net - (3,750)
Provision for loan losses 11,800 15,000
Net change in other assets and other liabilities (86,836) 39,692
----------- -----------
Net cash provided by (used in) operating activities 333,094 314,405
----------- -----------
Cash flows from investing activities:
Principal repayments on:
Loans receivable 6,052,677 3,596,577
Mortgage-backed securities 1,863,104 1,094,638
Proceeds from the maturity of certificates of deposit 27,300 297,000
Proceeds from the maturity of investment securities 28,604,890 47,763,670
Proceeds from the sale of investment securities - 1,498,594
Cash invested in:
Loans receivable (1,695,788) (2,324,194)
Mortgage-backed securities (2,501,417) (3,364,715)
Investment securities (26,685,000) (58,849,465)
Purchase of office properties and equipment (8,472) (8,472)
----------- -----------
Net cash provided by (used in) investing activities 5,657,294 (10,296,367)
----------- -----------
Cash flows from financing activities:
Increase (decrease) in savings deposits (395,620) (1,240,939)
Increase (decrease) in securities sold under agreements to repurchase 1,000,000 (3,000,000)
Increase in FHLB advances 10,000,000 -
Purchase of treasury stock (2,578,092) -
Dividends paid (118,178) (120,628)
Increase in advance payments by borrowers for
taxes and insurance 271,769 275,735
----------- -----------
Net cash provided by (used in) financing
activities 8,179,879 (4,085,832)
----------- -----------
Net increase (decrease) in cash and cash
equivalents 14,170,267 (14,067,794)
Cash and cash equivalents, beginning of period 11,291,063 22,117,279
----------- -----------
Cash and cash equivalents, end of period $25,461,330 $8,049,485
=========== ===========
Supplemental information:
Interest paid $1,094,435 $1,164,151
Income taxes paid $291,171 $6,397
=========== ===========
Noncash investing and financing activities -
interest credited to savings deposits $761,113 $748,878
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
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CHESTER BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three months Ended March 31, 1998 and 1997
(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 months ended March 31, 1998 and 1997.
Operating results for the three months ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998.
(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
Effective December 31, 1997, the Company adopted SFAS No. 128, Earnings
Per Share (SFAS 128). SFAS 128 supersedes APB Opinion No. 15, Earnings Per Share
(APB 15) and specifies the computation, presentation, and disclosure
requirements for earnings per share (EPS) for entities with publicly held common
stock or potential common stock. SFAS 128 was issued to simplify the computation
of EPS and to make the U.S. standard more compatible with the EPS standards of
other countries and that of the International Accounting Standards Committee
(IASC). It replaces the presentation of primary EPS with a presentation of basic
EPS and fully diluted EPS with diluted 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 numerator
and denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation. Basic EPS, unlike primary EPS, excludes dilution
and is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
entities. Diluted EPS is computed similarly to fully diluted EPS under APB 15.
The Company had no potentially dilutive securities during the three months ended
March 31, 1997.
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(3) Earnings per Share (Continued)
The computation of EPS at March 31, 1998 follows:
March 31,
1998
----
(in thousands, except per share amounts)
Basic EPS:
Income available to common stockholders $ 321,048
===========
Average common shares outstanding 1,773,663
===========
Basic EPS $ 0.18
===========
Diluted EPS:
Income available to common stockholders $ 321,048
===========
Average common shares outstanding 1,773,663
===========
Dilutive potential due to stock options 43,067
-----------
Average number of common shares and dilutive potential common
shares outstanding 1,816,730
Diluted EPS ===========
$ 0.18
===========
(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 unallocated ESOP shares are recorded as a reduction of debt.
Compensation expense related to the ESOP was $30,477 for the three months ended
March 31, 1998.
The ESOP shares as of March 31, 1998 are as follows:
Allocated shares 9,778
Committed to be released shares 1,717
Unreleased shares 163,075
----------
Total ESOP shares 174,570
==========
Fair value of unreleased shares $2,792,659
==========
(5) Restricted Stock Awards
On April 4, 1997, the Company adopted the 1997 Management Recognition
and Development Plan. The plan provides that common stock totaling 82,921 shares
can be issued to directors and employees in key management positions to
encourage such directors and key employees to remain with the Company. Interest
in the plan for each participant vests in five equal installments beginning
April 4, 1998. The adoption of the plan has been recorded in the consolidated
financial statements through a $1,160,894 credit to additional paid-in capital
with a corresponding charge to a contra equity account for restricted shares.
The contra equity account will be amortized to compensation expense over the
period of vesting. Compensation expense was $41,549 for the three months ended
March 31, 1998.
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(6) Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income which establishes standards for reporting and display of comprehensive
income and it components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. Under SFAS 130, comprehensive income is
divided into net income and other comprehensive income. For the three-month
periods ended March 31, 1998 and 1997, unrealized gain on debt and equity
securities available for sale is the Company's only other comprehensive income
component. Comprehensive income for the three-month periods ended March 31, 1998
and 1997 is summarized as follows:
Three Months Ended
March 31,
1998 1997
---- ----
Net Income $321,048 $367,489
Other comprehensive income - unrealized
gain on debt and equity securities available-for-sale,
net of tax $ 6,544 $(21,584)
-------- --------
$327,592 $345,905
======== ========
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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 securities of the U. S. government,
mortgage-backed securities, and other securities. To a lesser extent, the
Company engages in various forms of consumer lending. The Company's
profitability depends primarily on its net interest income, which is the
difference between the interest income it earns on its loans, mortgage-backed
securities and investment portfolio and its cost of funds, which consists mainly
of interest paid on deposits, reverse repurchase agreements, and FHLB Advances.
The operations of the Company are significantly influenced by
general economic conditions and related monetary and fiscal policies of
financial institutions regulatory agencies. Deposit flows and the cost of funds
are influenced by interest rates on competing investments and general market
rates of interest. Lending activities are affected by the demand for financing
real estate and other types of loans, which in turn is affected by the interest
rates at which such financing may be offered and other factors affecting loan
demand and the availability of funds.
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 increased by $8.5 million,
or 6.3%, to $142.3 million at March 31, 1998 from $133.8 million at December 31,
1997. The increase in the Company's asset size was attributable to an increase
in short term interest-bearing deposits which was primarily funded by the $10.0
million of FHLB advances received during the quarter ended March 31, 1998.
Loans receivable decreased $4.4 million, or 7.3%, to $56.1
million at March 31, 1998 from $60.5 million at December 31, 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 increased its investment in
short-term interest-bearing deposits. The focus on the St. Louis residential
lending market in 1997 has not been continued during the three months ended
March 31, 1998.
Mortgage-backed securities at March 31, 1998 were $14.4
million compared to $13.8 million at December 31, 1997. Investment securities
decreased $1.9 million, or 4.2%, to $43.0 million at March 31, 1998 from $44.9
million at December 31, 1997. The increases in mortgage-backed securities was
mainly attributable to an emphasis on increasing the company's mortgage-backed
securities portfolio. The decrease in investment securities resulted primarily
from an increased investment in mortgage-backed securities and overnight
deposits.
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Cash, interest-bearing deposits, and federal funds sold, on a
combined basis, increased $14.2 million, or 125.5%, to $25.5 million at March
31, 1998 from $11.3 million at December 31, 1997. During the quarter ended March
31, 1998, management invested the funds from FHLB advances and investment
maturities into short-term interest-bearing deposits, while longer term
investments opportunities are evaluated.
LIABILITIES. Savings deposits decreased $396,000, or .4%, to
$95.0 million at March 31, 1998 from $95.4 million at December 31, 1997.
Borrowed money increased $11.0 million as a result of a $1.0 increase in reverse
repurchase agreements and $10.0 of borrowings from the FHLB.
Reverse repurchase agreements increased $1.0 million from $8.4
million at December 31, 1997 to $9.4 million at March 31, 1998. 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 March 31, 1998, the balance of funds on deposit with the
Company was $19.9 million, which included the reverse repurchase agreements.
Advances from the FHLB were $10.0 million at March 31, 1998,
whereas the company had no FHLB advances at March 31, 1997. The advances have
terms up to 10 years at a fixed interest rate and were primarily for interest
rate risk management purposes.
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 decreased $46,000, or
12.6%, to $321,000 for the quarter ended March 31, 1998, from $367,000 for the
quarter ended March 31, 1997. The decrease resulted primarily from a $40,000
decrease in net interest income.
NET INTEREST INCOME. Net interest income totaled $1.09 million
for the three months ended March 31, 1998 compared to $1.13 million for the
three months ended March 31, 1997. The $40,000, or 3.6% decrease in net interest
income was the result of a decrease in the Company's ratio of average interest
earning assets to average interest-bearing liabilities. The ratio decreased from
126.45% in the 1997 quarter to 122.35% in the 1998 quarter. The decrease in the
ratio primarily resulted from the purchase of $6.4 million of treasury stock by
the Company over the past 12 months.
INTEREST INCOME. Interest income on loans receivable increased
$88,000, or 7.5%, for the three months ended March 31, 1998. The increase in
interest income on loans receivable was the result of a $5.1 million, or 9.7%,
increase in the average balance of loans receivable. The impact of the increased
volume was partially offset by a decline in the average yield on loans
receivable from 8.70% for the three months ended March 31, 1997 to 8.54% for the
three months ended March 31, 1998. The increase in the average balance resulted
from increased loan production during 1997 due to management's focus on the St.
Louis lending market.
Interest income on mortgage-backed securities decreased
$57,000 for the three months ended March 31, 1998. The decrease in interest
income on mortgage-backed securities was the result of a $3.1 million, or 18.4%,
decrease in the average balance of mortgage-backed securities, coupled with a
decline in the
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average yield from 6.37% for the three months ended March 31, 1997 to 6.18% for
the three months ended March 31, 1998.
Interest earned on investment securities was $602,000 for the
three months ended March 31, 1998 compared to $689,000 for the three months
ended March 31, 1997. The decrease of $87,000, or 12.6%, for the three months
ended March 31, 1998 was mainly the result of a $10.5 million, or 19.6%,
decrease in the average balance of investments. The impact of decreased volume
was partially offset by an increase in the average yield on investments from
5.55% for the three months ended March 31, 1997 to 5.97% for the three months
ended March 31, 1998.
Interest income on interest-bearing deposits increased
$56,000, or 32.1%, during the three months ended March 31, 1998. The increase in
interest income on interest-bearing deposits resulted from an increase in the
average balance of interest-bearing deposits of $4.5 million, or 34.0%, for the
three months ended March 31, 1998. The increase in interest income on
interest-bearing deposits was negatively impacted by a decrease in the average
yield on interest-bearing deposits of 8 basis points for the three months ended
March 31, 1998. The increase in the average balance resulted primarily from the
investment of funds received from FHLB advances into short-term interest-bearing
deposits during the quarter ended March 31, 1998.
INTEREST EXPENSE. Interest expense on savings deposits
decreased $42,000, or 3.9%, to $1.05 million for the three months ended March
31, 1998 from $1.09 million for the three months ended March 31, 1997. The
decline in interest expense on savings deposits was the result of a $5.8
million, or 5.7%, decrease in the average balance of deposits. The decline in
deposits was mainly attributable to increased competition in the Company's
market place and also reflected management's decision to compete less
aggressively on rates. The average cost of deposits remained relatively constant
between the two quarters with an average rate of 4.38% for the three months
ended March 31, 1998 compared to 4.30% for the three months ended March 31,
1997.
Interest expense on borrowed money increased $82,000 for the
three months ended March 31, 1998 due to a $22,000 increase in interest expense
on reverse repurchase agreements and a $60,000 increase in interest expense on
FHLB advances.
Interest expense on reverse repurchase agreements increased
$22,000, or 26.7%, to $107,000 for the three months ended March 31, 1998 from
$85,000 for the three months ended March 31, 1997. The increase in interest
expense on reverse repurchase agreements resulted primarily from a $1.2 million,
or 16.8%, increase in the average balance of reverse repurchase agreements
during the 1998 quarter. The increase in interest expense was also impacted by a
37 basis point increase in the average cost of reverse repurchase agreements.
Interest expense on FHLB advances was $60,000 for the three
months ended March 31, 1998. The Company had no FHLB advances outstanding during
the three months ended March 31, 1997. The average balance on FHLB advances was
$5.0 million with an average cost of advances of 4.80% for the three months
ended March 31, 1998.
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 March 31, 1998, the Company's
provision for loan losses was $11,800 compared to $15,000 for the comparable
1997 quarter.
The Company's allowance for loan losses was $446,000, or .79%,
of loans outstanding at March 31, 1998 compared to $436,000, or .72%, of loans
outstanding at December 31, 1997. The Company's level of net loans charged-off
during the quarter ended March 31, 1998 was $2,000, which represented .001%
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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 March 31, 1998.
The breakdown of general loss allowances and specific loss
allowances is made for regulatory accounting purposes only. General loan loss
allowances are added back to capital to the extent permitted in computing
risk-based capital. Both general and specific loss allowances are charged to
expense. The financial statements of the Company are prepared in accordance with
generally accepted accounting principles (GAAP) and, accordingly, provisions for
loan losses are based on management's assessment of the factors set forth above.
The Company regularly reviews its loan portfolio, including problem loans, to
determine whether any loans are impaired, require classification and/or the
establishment of appropriate reserves. Management believes it has established
its existing allowance for loan losses in accordance with GAAP, however, future
additions may be necessary if economic conditions or other circumstances differ
substantially from the assumptions used in making the initial determination. 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 $55,000 for the
three months ended March 31, 1998 compared to $65,000 for the three months ended
March 31, 1997. The decrease in noninterest income primarily resulted from the
receipt of state income tax refunds for prior years in 1997. The refund received
during the three months ended March 31, 1997 by the Company totaled $18,000. The
remainder of the fluctuation in noninterest expense was attributable to the
$11,000 increase in other fee income.
NONINTEREST EXPENSE. Noninterest expense increased $9,000, or
1.4%, for the three months ended March 31, 1998. The increase in noninterest
expense resulted from the $26,000 increase in other expense and the $10,000
increase in data processing expense, which was partially offset by a $5,000
decline in federal insurance premiums and a $17,000 decline in occupancy
expense.
INCOME TAX EXPENSE. Income tax expense for the 1998 quarter
was $135,000 compared to $145,000 for the 1997 quarter. The Company's effective
tax rate for 1998 and 1997 was 29.6% and 28.3%, respectively. The effective tax
rate for each quarter was below the statutory federal rate of 34% due to the
Company's investment in tax exempt securities.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds consist of deposits,
reverse repurchase agreements, FHLB advances, repayments and prepayments of
loans and mortgage-backed securities, maturities of investments and
interest-bearing deposits, and funds provided from operations. While scheduled
repayments of loans and mortgage-backed securities and maturities of investment
securities are predictable sources of funds, deposit flows and loan prepayments
are greatly influenced by general interest rates, economic conditions and
competition. The Company manages the pricing of its deposits to maintain a
steady deposit base. The Company uses its liquidity resources principally to
fund existing and future loan commitments, to fund maturing certificates of
deposit and deposit withdrawals, to invest in other interest-bearing assets, to
maintain liquidity, and to meet operating expenses. Management believes that
loan repayments and other sources of funds will be adequate to meet and exceed
the Company's liquidity needs for the remainder of 1998.
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 March
31, 1998, cash and cash equivalents totaled $25.5 million.
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The primary investing activities of the Company include
origination of loans and purchase of mortgage-backed securities and investment
securities. During the quarter ended March 31, 1998, purchases of investment
securities and mortgage-backed securities totaled $26.7 million and $2.5
million, respectively, while loan originations totaled $1.7 million. These
investments were funded primarily from loan and mortgage-backed security
repayments of $7.9 million and investment security sales and maturities of $28.6
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 March 31, 1998, the Company had
$10.0 million in outstanding advances from the FHLB.
At March 31, 1998, the Company exceeded all of its regulatory
capital requirements. The Company's subsidiary banks actual and required capital
amounts and ratios as of March 31, 1998 are as follows:
Actual Capital Requirements
---------------------------- -----------------------
(Dollars in thousands) Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------------
Total capital (to risk-weighted assets):
Company $27,098 52.0% 4,165 8.00%
Chester National Bank $22,910 51.5% 3,556 8.00%
Chester National Bank of Missouri 3,200 45.9% 557 8.00%
Tier 1 capital (to risk-weighted assets):
Company $27,366 52.6% 2,083 4.00%
Chester National Bank $22,541 50.7% 1,778 4.00%
Chester National Bank of Missouri 3,124 44.8% 279 4.00%
Tier 1 capital (to average assets):
Company $27,366 19.2% 4,267 3.00%
Chester National Bank $22,541 17.7% 3,822 3.00%
Chester National Bank of Missouri 3,124 23.7% 395 3.00%
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.
YEAR 2000 ISSUES
In the next eighteen months, many companies, including financial
institutions such as the Company, will face potentially serious issues
associated with the inability of existing data processing hardware and software
to appropriately recognize calendar dates beginning in the year 2000. Many
computer programs that can only distinguish the final two digits of the year
entered may read entries for the year 2000 as the year 1900 and compute payment,
interest or delinquency based on the wrong date or are expected to be unable to
compute payment, interest or delinquency. In 1997, the Company began the process
of identifying the many software applications and hardware devices expected to
be impacted by this issue. The Company outsources its principal data processing
activities to a third party, and purchases most of its software applications
from third party
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vendors. The Company believes that its vendors are actively addressing
the problems associated with the "Year 2000" issue. While the Company
expects that effort on the part of current employees will be required to
continue to monitor "Year 2000" activities, the Company does not expect the
costs of addressing these issues in a timely manner will have a material impact
on the Company's financial position or on its results of operations.
IMPACT OF NEW ACCOUNTING STANDARDS
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. SFAS 131 is a disclosure requirement that will have no effect
on the Company's financial condition or results of operation.
NONPERFORMING ASSETS
The following table sets forth information with respect to the Company's
nonperforming assets at the dates indicated.
At March 31, 1998 At December 31, 1997
----------------- --------------------
(Dollars in Thousands)
----------------------------------------------
Non-performing loans:
Loans accounted for on a non-accrual basis:
Real estate:
Residential real estate $194 $ 27
Commercial -- --
Consumer 2 10
----- ----
Total 196 37
----- ----
Accruing loans which are contractually past due 90 days or more:
Residential real estate -- --
Commercial -- --
Consumer -- --
----- -------
Total -- --
----- -------
Total non-performing loans 196 37
Real estate acquired by foreclosure, net 38 38
----- -------
Total non-performing assets $234 $ 75
===== =======
Total non-performing loans to net loans 0.35% 0.06%
===== =======
Total allowance for loan losses to
non-performing loans 227.19% 1159.97%
====== =======
Total non-performing assets to total assets 0.16% 0.06%
====== =======
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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 25, 1998, the Company solicited proxies for the annual
meeting of stockholders of the Company held on April 3, 1998. The
meeting involved the election of two directors. The directors up for
election were elected by the vote of 1,462,675 shares for Carl H. Welge
and 1,462,255 shares for Allen R.
Verseman out of 1,483,302 shares present at the meeting, either in
person or by proxy.
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits
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: May 7, 1998
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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
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