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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 000-21167
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Chester Bancorp, Inc.
(Exact name of registrant as specified in its charter)
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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 1,713,863 on June 30, 1998.
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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
Consolidated Statements of Comprehensive Income.................... 7
Notes to Consolidated Financial Statements......................... 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...................... 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 17
Item 2. Changes in Securities.............................................. 17
Item 3. Defaults upon Senior Securities.................................... 17
Item 4. Submission of Matters to a Vote
of Securities Holders.............................................. 17
Item 5. Other Information.................................................. 17
Item 6. Exhibits and Reports on Form 8-K................................... 17
Signature...................................................................... 18
Exhibit Index.................................................................. 19
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 1998 and December 31, 1997
(Unaudited)
June 30, December 31,
Assets 1998 1997
------------- -------------
Cash $ 1,624,907 $ 1,833,006
Interest-bearing deposits 6,753,920 3,063,057
Federal funds sold 11,940,000 6,395,000
------------- -------------
Total cash and cash equivalents 20,318,827 11,291,063
Certificates of deposit 135,400 290,000
Investment securities:
Available for sale, at market value 8,712,281 19,708,063
Held to maturity, at cost 34,947,919 25,232,519
Mortgage-backed securities:
Available for sale, at market value 1,416,541 1,641,949
Held to maturity, at cost 19,146,928 12,145,702
Loans receivable, net 52,539,925 60,467,735
Accrued interest receivable 1,008,039 887,375
Real estate acquired by foreclosure, net 29,379 38,233
Office property and equipment, net 1,722,127 1,766,748
Deferred tax asset, net 16,677 16,818
Other assets 358,967 290,444
------------- -------------
$ 140,353,010 $ 133,776,649
============= =============
Liabilities and Stockholders' Equity
Savings deposits $ 94,541,310 $ 95,362,100
Borrowed money 19,380,389 8,380,389
Accrued interest payable 209,879 158,899
Advance payments by borrowers for taxes and insurance 916,027 439,274
Income taxes payable 33,442 288,891
Accrued expenses and other liabilities 90,325 158,778
------------- -------------
Total liabilities 115,171,372 104,788,331
------------- -------------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 3,000,000 shares authorized, 2,182,125
shares issued at June 30, 1998 and December 31, 1997 21,821 21,821
Additional paid-in capital 21,616,348 21,766,390
Retained earnings, substantially restricted 13,499,322 13,088,331
Accumulated other comprehensive income 32,683 32,454
Unamortized restricted stock awards (642,770) (725,868)
Unearned ESOP shares (1,620,440) (1,647,920)
Treasury stock, at cost: 468,262 and 229,079 shares at
June 30, 1998 and December 31, 1997, respectively (7,725,326) (3,546,890)
------------- -------------
Total stockholders' equity 25,181,638 28,988,318
------------- -------------
$ 140,353,010 $ 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 June 30, 1998 and 1997
(Unaudited)
Three Months Ended
June 30,
------------------------------
1998 1997
---------- ----------
Interest income:
Loans receivable $1,147,133 $1,240,404
Mortgage-backed securities 255,310 283,739
Investments 613,393 708,830
Interest-bearing deposits and federal funds sold 272,259 111,273
---------- ----------
Total interest income 2,288,095 2,344,246
---------- ----------
Interest expense:
Savings deposits 1,042,326 1,077,718
Borrowed money 240,037 101,472
---------- ----------
Total interest expense 1,282,363 1,179,190
---------- ----------
Net interest income 1,005,732 1,165,056
Provision for loan losses 5,000 15,000
---------- ----------
Net interest income after provision for loan losses 1,000,732 1,150,056
---------- ----------
Noninterest income:
Late charges and other fees 45,972 41,977
Gain on sale of investment securities, net -- 16,719
Other 4,660 5,681
---------- ----------
Total noninterest income 50,632 64,377
---------- ----------
Noninterest expense:
Compensation and employee benefits 269,303 391,139
Occupancy 65,363 72,542
Data processing 44,392 41,212
Advertising 12,874 14,255
Federal insurance premiums 14,833 17,598
Other 171,182 143,234
---------- ----------
Total noninterest expense 577,947 679,980
---------- ----------
Income before income tax expense 473,417 534,453
Income tax expense 146,055 157,000
---------- ----------
Net income $ 327,362 $ 377,453
========== ==========
Earnings per common share - basic $ .19 $ .19
========== ==========
Earnings per common share - assuming dilution $ .19 $ .19
========== ==========
See accompanying notes to unaudited consolidated financial statements.
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CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Six Months Ended June 30, 1998 and 1997
(Unaudited)
Six Months Ended
June 30,
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1998 1997
---------- ----------
Interest income:
Loans receivable $2,402,964 $2,408,624
Mortgage-backed securities 470,051 555,423
Investments 1,215,486 1,397,879
Interest-bearing deposits and federal funds sold 504,062 286,766
---------- ----------
Total interest income 4,592,563 4,648,692
---------- ----------
Interest expense:
Savings deposits 2,089,082 2,166,420
Borrowed money 407,025 186,323
---------- ----------
Total interest expense 2,496,107 2,352,743
---------- ----------
Net interest income 2,096,456 2,295,949
Provision for loan losses 16,800 30,000
---------- ----------
Net interest income after provision for loan losses 2,079,656 2,265,949
---------- ----------
Noninterest income:
Late charges and other fees 96,520 81,173
Gain on sale of investment securities, net -- 20,469
Other 9,039 28,091
---------- ----------
Total noninterest income 105,559 129,733
---------- ----------
Noninterest expense:
Compensation and employee benefits 614,957 739,616
Occupancy 126,096 149,913
Data processing 91,794 78,574
Advertising 23,395 27,235
Federal insurance premiums 29,655 37,351
Other 369,836 316,051
---------- ----------
Total noninterest expense 1,255,743 1,348,740
---------- ----------
Income before income tax expense 929,472 1,046,942
Income tax expense 281,062 302,000
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Net income $ 648,410 $ 744,942
========== ==========
Earnings per common share - basic $ .38 $ .38
========== ==========
Earnings per common share - assuming dilution $ .37 $ .37
========== ==========
See accompanying notes to unaudited consolidated financial statements.
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CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Six Months Ended June 30, 1998
(Unaudited)
Retained Accumulated
Common stock Additional earnings, other Unearned
--------------------------- paid-in substantially comprehensive ESOP
Shares Amount capital restricted income shares
------- ------------ ------------ ------------- ------------- ------------
Balance, December 31, 1997 2,182,125 $ 21,821 $ 21,766,390 $ 13,088,331 $ 32,454 $ (1,647,920)
Net income -- -- -- 648,410 -- --
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 -- -- 20,954 -- -- 27,480
Dividends on common stock
at $.14 per share -- -- -- (228,258) -- --
Change in accumulated
other comprehensive income -- -- -- -- 279 --
--------- ------------ ------------ ------------ ------------ ------------
Balance, June 30, 1998 2,182,125 $ 21,821 $ 21,616,348 $ 13,499,322 $ 32,683 $ (1,620,440)
========= ============ ============ ============ ============ ============
Unamortized Treasury Stock Total
restricted -------------------------- Stockholders'
stock awards Shares Amount equity
------------- ------- ------------ -------------
Balance, December 31, 1997 $ (725,868) 229,079 $ (3,546,890) $ 28,988,318
Net income -- -- -- 648,410
Purchase of treasury stock -- 251,397 (4,358,593) (4,358,593)
Issuance of treasury stock for
restricted stock awards -- (12,214) 180,157 --
Amortization of restricted stock
awards 83,098 -- -- 83,098
Amortization of ESOP awards -- -- -- 48,434
Dividends on common stock
at $.14 per share -- -- -- (228,258)
Change in accumulated
other comprehensive income -- -- -- 229
------------ ------- ------------ ------------
Balance, June 30, 1998 $ (642,770) 468,262 $ (7,725,326) $ 25,181,638
============ ======= ============ ============
See accompanying notes to unaudited consolidated financial statements.
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CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six months ended June 30, 1998 and 1997
(Unaudited)
June 30, June 30,
1998 1997
------------ ------------
Cash flows from operating activities:
Net income $ 648,410 $ 744,942
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization:
Office properties and equipment 67,926 70,763
Deferred fees, discounts, and premiums 123,108 (248,324)
Stock plans 131,532 107,837
(Increase) decrease in accrued interest receivable (120,664) (68,438)
Increase (decrease) in accrued interest payable 50,980 26,091
Increase (decrease) in income taxes, net (255,449) 189,564
Gain on sale of investment securities, net -- (20,469)
Provision for loan losses 16,800 30,000
Net change in other assets and other liabilities (136,976) 45,170
------------ ------------
Net cash provided by (used in) operating activities 525,667 877,136
------------ ------------
Cash flows from investing activities:
Principal repayments on:
Loans receivable 11,239,170 4,184,806
Mortgage-backed securities 4,311,895 2,263,569
Proceeds from the maturity of certificates of deposit 154,600 594,000
Proceeds from the maturity of investment securities 43,605,321 72,936,835
Proceeds from the sale of investment securities -- 2,019,232
Cash invested in:
Loans receivable (3,376,872) (8,599,049)
Mortgage-backed securities (11,114,032) (3,364,715)
Investment securities (42,388,326) (69,067,134)
Proceeds from sale of real estate acquired by foreclosure 24,534 --
Purchase of office properties and equipment (23,305) (13,108)
------------ ------------
Net cash provided by (used in) investing activities 2,432,985 954,436
------------ ------------
Cash flows from financing activities:
Increase (decrease) in savings deposits (820,790) (6,296,372)
Increase (decrease) in securities sold under agreements to repurchase 1,000,000 (4,850,000)
Increase in FHLB advances 10,000,000 --
Purchase of treasury stock (4,358,593) (1,082,600)
Dividends paid (228,258) (238,970)
Increase in advance payments by borrowers for
taxes and insurance 476,753 560,981
------------ ------------
Net cash provided by (used in) financing
activities 6,069,112 (11,906,961)
------------ ------------
Net increase (decrease) in cash and cash
equivalents 9,027,764 (10,075,389)
Cash and cash equivalents, beginning of period 11,291,063 22,117,279
------------ ------------
Cash and cash equivalents, end of period $ 20,318,827 $ 12,041,890
============ ============
Supplemental information:
Interest paid $ 2,445,126 $ 2,361,558
Income taxes paid 536,511 99,224
============ ============
Noncash investing and financing activities -
interest credited to savings deposits $ 1,421,240 $ 1,561,024
============ ============
See accompanying notes to unaudited consolidated financial statements.
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CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1998 1997 1998 1997
-------- -------- -------- --------
Net Income $327,362 $377,453 $648,410 $744,942
Other comprehensive income $ 6,315 $ 28,689 229 4,760
-------- -------- -------- --------
$333,677 $406,142 $648,639 $749,702
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CHESTER BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Six months Ended June 30, 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 and six months ended June 30, 1998 and 1997.
Operating results for the six months ended June 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998.
(2) Earnings Per Share
Basic 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.
The computation of EPS at June 30, 1998 and 1997 follows:
June 30, June 30,
1998 1997
---------- ----------
(in thousands, except per share amounts)
Basic EPS:
Income available to common stockholders $ 648,410 $ 744,942
========== ==========
Average common shares outstanding 1,720,860 1,976,461
========== ==========
Basic EPS $ 0.38 $ 0.38
========== ==========
Diluted EPS:
Income available to common stockholders $ 648,410 $ 744,942
========== ==========
Average common shares outstanding 1,720,860 1,976,461
Dilutive potential due to stock options 39,421 10,169
---------- ----------
Average number of common shares and dilutive potential common
shares outstanding 1,760,281 1,986,630
========== ==========
Diluted EPS $ 0.37 $ .37
========== ==========
(3) 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 30 years. Shares released
from the suspense account are allocated among the participants based upon their
pro rata annual compensation. The purchases of the shares by the ESOP were
recorded by the Company as unearned ESOP shares in a contra equity account. As
ESOP shares are committed to be released to compensate employees, the contra
equity account is reduced and the Company recognizes compensation expense equal
to the fair 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 $48,434 for the six months ended
June 30, 1998.
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(3) Employee Stock Ownership Plan (Continued)
The ESOP shares as of June 30, 1998 are as follows:
Allocated shares 9,778
Committed to be released shares 2,748
Unreleased shares 162,044
----------
Total ESOP shares 174,570
==========
Fair value of unreleased shares $2,785,131
==========
(4) 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 $83,098 for the six months ended
June 30, 1998.
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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 $6.6 million,
or 4.9%, to $140.4 million at June 30, 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 $7.9 million, or 13.1, to $52.5
million at June 30, 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 six months ended June
30, 1998.
Mortgage-backed securities at June 30, 1998 were $20.6 million
compared to $13.8 million at December 31, 1997. Investment securities decreased
$1.3 million, or 2.9%, to $43.7 million at June 30, 1998 from $44.9 million at
December 31, 1997. The decrease in investment securities resulted primarily from
an increased investment in short-term interest bearing deposits.
Cash, interest-bearing deposits, and federal funds sold, on a
combined basis, increased $9.0 million, or 79.9%, to $20.3 million at June 30,
1998 from $11.3 million at December 31, 1997. During the six months ended June
30, 1998, management invested the funds from FHLB advances and investment
maturities
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into short-term interest-bearing deposits, while longer term investments
opportunities are evaluated.
LIABILITIES. Savings deposits decreased $821,000, or .9%, to
$94.5 million at June 30, 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 June 30, 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 June 30, 1998, the balance of funds on deposit with the
Company was $19.7 million, which included the reverse repurchase agreements.
Advances from the FHLB were $10.0 million at June 30, 1998, whereas the
company had no FHLB advances at June 30, 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 for the three and six
months ended June 30, 1998 was $327,000 and $648,000, respectively, compared to
$377,000 and $745,000 for the three and six months ended June 30, 1997,
respectively. The $50,000 and $97,000 decrease in net income for the three and
six months ended June 30, 1998, respectively, was negatively impacted by a
decrease in net interest income and noninterest income, and was positively
impacted by a decrease in noninterest expense and income tax expense.
NET INTEREST INCOME. Net interest income totaled $1.0 million
for the three months ended June 30, 1998 compared to $1.2 million for the three
months ended June 30, 1997. The $159,000, or 13.7%, decrease in net interest
income was the result of a decrease in the Company's interest rate spread from
2.66% for the three months ended June 30, 1997 compared to 2.30% for the three
months ended September 30, 1998. The decline in the Company's interest rate
spread was attributable to the combined impact of a 30 basis point decrease in
the average yield on interest-bearing assets and a 7 basis point increase in the
average cost of interest-bearing liabilities for the three months ended June 30,
1998.
Net interest income totaled $2.1 million for the six months
ended June 30, 1998 compared to $2.3 million for the six months ended June 30,
1997. The $199,000, or 8.7%, decrease in net interest income was the partially
the result of a decline in the Company's interest rate spread from 2.65% for the
six months ended June 30, 1997 to 2.41% for the six months ended June 30, 1998.
The decline in the Company's interest rate spread was attributable to the
combined impact of a 9 basis point decrease in the average yield on
interest-earning assets and a 10 basis point increase in the average cost of
interest-bearing liabilities for the six month ended June 30, 1998.
INTEREST INCOME. Interest income on loans receivable decreased
$93,000, or 7.5%, for the three months ended June 30, 1998. This fluctuation was
due to a decline in the average yield on loans
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receivable from 8.67% for the three months ended June 30, 1997 to 8.46% for the
three months ended June 30, 1998, coupled with a $3.1 million, or 5.3% decrease
in the average balance of loans receivable.
Interest income on loans receivable remained relatively
constant for the six months ended June 30, 1998. A $1.1 million, or 1.9%
increase in the average balance of loans receivable was offset by a decline in
the average yield on loans receivable from 8.69% for the six months ended June
30, 1997 to 8.50% for the six months ended June 30, 1998.
Interest income on mortgage-backed securities decreased
$28,000 and $85,000 for the three and six months ended June 30, 1998,
respectively. The decrease in both instances resulted from a decrease in the
average balance of mortgage-backed securities, coupled with a decline in the
average yield on mortgage-backed securities. For the three and six months ended
June 30, 1998, the average balance of mortgage-backed securities decreased $1.1
million, or 6.0%, and $2.1 million, or 12.1%, respectively.
Interest earned on investment securities was $613,000 and $1.2
million for the three and six months ended June 30, 1998, respectively, compared
to $709,000 and $1.4 million for the three and six months ended June 30, 1997,
respectively. The decrease of $95,000, or 13.5%, and $182,000, or 13.0%, for the
three and six months ended June 30, 1998, respectively, was mainly the result of
a decrease in the average balance of investments of $6.3 million, or 12.1, and
$7.9 million, or 15.0%, for the three and six months ended June 30, 1998,
respectively. The decrease in investment securities resulted primarily from an
increased investment in short-term interest bearing deposits.
Interest income on interest-bearing deposits increased
$161,000, or 144.7%, and increased $217,000, or 75.8%, during the three and six
months ended June 30, 1998, respectively. The increase in both instances
resulted from an increase in the average balance of interest-bearing deposits.
For the three and six months ended June 30, 1998, the average balance of
interest-bearing deposits increased $12.2 million, or 148.1%, and $8.4 million,
or 77.9%, respectively. The increase in interest-bearing deposit resulted
primarily from management's decision to invest investment maturities into
short-term interest bearing deposits while longer term investments opportunities
are evaluated.
INTEREST EXPENSE. Interest expense on savings deposits
decreased $35,000, or 3.3%, to $1.04 million for the three months ended June 30,
1998 from $1.08 million for the three months ended June 30, 1997. The decline in
interest expense was the result of a $3.3 million, or 3.4%, 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 constant at 4.40% for the three months ended June 30, 1998.
Interest expense on savings deposits decreased $77,000, or
3.6%, to $2.1 million for the six months ended June 30, 1998 from $2.2 million
for the six months ended June 30, 1997. The decline in interest expense on
savings deposits was the result of a $4.6 million, or 4.6%, decrease in the
average balance of deposits. The average cost of deposits increased between the
two quarters with an average rate of 4.40% for the six months ended June 30,
1998 compared to 4.35% for the six months ended June 30, 1997.
Interest expense on borrowed money increased $139,000 and
$221,000 for the three and six months ended June 30, 1998, respectively, due to
a $19,000 and $41,000 increase in interest expense on reverse repurchase
agreements and a $120,000 and $180,000 increase in interest expense on FHLB
advances for the three and six months ended June 30, 1998, respectively.
Interest expense on reverse repurchase agreements was $120,000
and $227,000 for the three and six months ended June 30, 1998, respectively,
compared to $101,000 and $186,000 for the three and six months ended June 30,
1997, respectively. The increase of $19,000, or 18.0%, and $41,000, or 21.3%,
for the three and six months ended June 30, 1998, respectively, were primarily
the result of an increase in the average balance of reverse repurchase
agreements of $1.3 million, or 15.7%, and $1.2 million, or 16.3%, for the three
and six months ended June 30, 1998, respectively, coupled with a 14 basis point
and 24 basis point increase in
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the average cost of reverse repurchase agreements for the three and six months
ended June 30, 1998, respectively.
Interest expense on FHLB advances was $120,000 and $180,000
for the three and six months ended June 30, 1998, respectively. The Company had
no FHLB advances during the three and six months ended June 30, 1997. The
average balance on FHLB advances was $10.0 million and $7.5 million for the
three and six months ended June 30, 1998, respectively. The average cost of
advances remained constant at 4.80% for the three and six months ended June 30,
1998. The Company borrowed funds from the FHLB primarily for interest rate risk
management purposes.
PROVISION FOR LOAN LOSSES. The allowance for loan losses is
established through a provision for loan losses charged to expense based on
management's evaluation of the risk inherent in its loan portfolio and the
general economy. Such evaluation considers numerous factors including general
economic conditions, loan portfolio composition, prior loss experience, the
estimated fair value of the underlying collateral, and other factors that
warrant recognition in providing for an adequate loan loss allowance.
During the quarter ended June 30, 1998, the Company's
provision for loan losses was $5,000 compared to $15,000 for the comparable 1997
quarter.
The Company's allowance for loan losses was $444,000, or .83%,
of loans outstanding at June 30, 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 June 30, 1998 was $9,000, which represented .01% 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 June 30, 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 $51,000 for the
three months ended June 30, 1998 compared to $64,000 for the three months ended
June 30, 1997. The decrease in noninterest income was due to $17,000 recognized
from the sale of investment securities available for sale during the three
months ended June 30, 1997.
Noninterest income was $106,000 for the six months ended June
30, 1998 compared to $130,000 for the six months ended June 30, 1997. The
decrease in noninterest income resulted from a $20,000 gain recognized from the
sale of investment securities available for sale and from $18,000 received from
state income tax refunds for prior years during the six months ended June 30,
1997. The decrease was partially offset by a $15,000 increase in other fee
income during the six months ended June 30, 1998.
NONINTEREST EXPENSE. Noninterest expense decreased $102,000,
or 15.0%, for the three
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months ended June 30, 1998, and $93,000, or 6.9%, for the six months ended June
30, 1998. The decrease in noninterest expense for the three and six months ended
June 30, 1998 resulted from a $7,000 and $24,000 decrease in occupancy expense
and a $122,000 and $125,000 decrease in compensation expense, respectively,
which was partially offset by a $28,000 and $54,000 increase in other expense,
respectively. The decrease in compensation experienced during the three and six
months ended June 30, 1998 resulted partially from the termination of the
Directors Emeritus Program.
INCOME TAX EXPENSE. Income tax expense for the three and six
months ended June 30, 1998 was $146,000 and $281,000, respectively, compared to
income tax expense of $157,000 and $302,000 for the three and six months ended
June 30, 1997, respectively. The Company's effective tax rate for the three and
six months ended June 30, 1998 was 30.8% and 30.2%, respectively, compared to
29.4% and 28.8% for the three and six months ended June 30, 1997, respectively.
The effective tax rate for each period 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 June 30,
1998, cash and cash equivalents totaled $20.3 million.
The primary investing activities of the Company include
origination of loans and purchase of mortgage-backed securities and investment
securities. During the six months ended June 30, 1998, purchases of investment
securities and mortgage-backed securities totaled $42.5 million and $11.1
million, respectively, while loan originations totaled $3.4 million. These
investments were funded primarily from loan and mortgage-backed security
repayments of $15.6 million and investment securities sales and maturities of
$43.6 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 June 30, 1998, the Company had
$10.0 million in outstanding advances from the FHLB.
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At June 30, 1998, the Company exceeded all of its regulatory
capital requirements. The Company's subsidiary banks actual and required capital
amounts and ratios as of June 30, 1998 are as follows:
Actual Capital Requirements
-----------------------------------------------
(Dollars in thousands) Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------
Total capital (to risk-weighted assets):
Company $25,593 50.3% 4,071 8.00%
Chester National Bank $19,947 46.6% 3,427 8.00%
Chester National Bank of Missouri 3,235 45.5% 569 8.00%
Tier 1 capital (to risk-weighted assets):
Company $25,149 49.4% 2,035 4.00%
Chester National Bank $19,585 45.7% 1,713 4.00%
Chester National Bank of Missouri 3,153 44.3% 285 4.00%
Tier 1 capital (to average assets):
Company $25,149 17.4% 4,335 3.00%
Chester National Bank $19,585 15.1% 3,895 3.00%
Chester National Bank of Missouri 3,153 25.0% 378 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 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.
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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.
DISCLOSURE ABOUT ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the FASB issued SFAS No. 133 - Accounting for Derivative
Instruments and Hedging Activities (SFAS 133). SFAS 133 establishes standards
for derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It requires an entity to recognize
all derivative instruments as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. SFAS 133 is
effective for all fiscal years beginning after June 30, 1999. Earlier
application of SFAS 133 is encouraged but should not be applied retroactively to
financial statements of prior periods. The Company is currently evaluating the
requirements and impact of SFAS 133.
NONPERFORMING ASSETS
The following table sets forth information with respect to the Company's
nonperforming assets at the dates indicated.
At June 30, 1998 At December 31, 1997
---------------- --------------------
(Dollars in Thousands)
---------------------------------------------
Non-performing loans:
Loans accounted for on a non-accrual basis:
Real estate:
Residential real estate $187 $ 27
Commercial -- --
Consumer 9 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 29 38
------ -------
Total non-performing assets $225 $ 75
====== =======
Total non-performing loans to net loans 0.37% 0.06%
====== =======
Total allowance for loan losses to
non-performing loans 226.93% 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 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: August 12, 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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