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, 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 1,553,288 on September 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
1
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CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1998 and December 31, 1997
(Unaudited)
September 30, December 31,
Assets 1998 1997
------ ---- ----
Cash $ 1,394,213 $ 1,833,006
Interest-bearing deposits 5,643,270 3,063,057
Federal funds sold 3,500,000 6,395,000
------------- -------------
Total cash and cash equivalents 10,537,483 11,291,063
Certificates of deposit 95,000 290,000
Investment securities:
Available for sale, at market value (cost of $7,328,159 and 7,371,969 19,708,063
$19,674,051 at September 30, 1998 and December 31, 1997, respectively)
Held to maturity, at cost (market value of $46,891,847 and $25,413,09 at 46,583,029 25,232,519
September 30, 1998 and December 31, 1997, respectively)
Mortgage-backed securities:
Available for sale, at market value (cost of $1,268,834 and $1,623,616 1,290,309 1,641,949
at September 30, 1998 and December 31, 1997, respectively)
Held to maturity, at cost (market value of $21,674,651 and $12,179,290 21,552,972 12,145,702
at September 30, 1998 and December 31, 1997, respectively)
Loans receivable, net 49,499,523 60,467,735
Accrued interest receivable 994,507 887,375
Real estate acquired by foreclosure, net 116,704 38,233
Office property and equipment, net 1,708,867 1,766,748
Deferred tax asset, net 11,901 16,818
Other assets 348,989 290,444
------------- -------------
$ 140,111,253 $ 133,776,649
============= =============
Liabilities and Stockholders' Equity
Savings deposits $ 95,880,410 $ 95,362,100
Borrowed money 20,880,389 8,380,389
Accrued interest payable 251,708 158,899
Advance payments by borrowers for taxes and insurance 339,784 439,274
Income taxes payable 24,400 288,891
Accrued expenses and other liabilities 85,641 158,778
------------- -------------
Total liabilities 117,462,332 104,788,331
------------- -------------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 3,000,000 shares authorized, 2,182,125
shares issued at September 30, 1998 and December 31, 1997 21,821 21,821
Additional paid-in capital 21,626,310 21,766,390
Retained earnings, substantially restricted 13,662,249 13,088,331
Accumulated other comprehensive income 40,477 32,454
Unamortized restricted stock awards (601,222) (725,868)
Unearned ESOP shares (1,606,700) (1,647,920)
Treasury stock, at cost: 628,837 and 229,079 shares at
September 30, 1998 and December 31, 1997, respectively (10,494,014) (3,546,890)
------------ -------------
Total stockholders' equity 22,648,921 28,988,318
------------- -------------
$ 140,111,253 $ 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 September 30, 1998 and 1997
(Unaudited)
Three Months Ended
September 30
---------------------------------
1998 1997
---- ----
Interest income:
Loans receivable $ 1,065,463 $ 1,294,472
Mortgage-backed securities 336,101 261,344
Investments 694,544 588,330
Interest-bearing deposits and federal funds sold 163,042 127,990
----------- -----------
Total interest income 2,259,150 2,272,136
----------- -----------
Interest expense:
Savings deposits 1,046,760 1,071,146
Borrowed money 241,258 82,976
----------- -----------
Total interest expense 1,288,018 1,154,122
----------- -----------
Net interest income 971,132 1,118,014
Provision for loan losses - 29,000
----------- -----------
Net interest income after provision for loan losses 971,132 1,089,014
----------- -----------
Noninterest income:
Late charges and other fees 48,374 47,590
Other 4,233 6,929
----------- -----------
Total noninterest income 52,607 54,519
----------- -----------
Noninterest expense:
Compensation and employee benefits 327,561 628,343
Occupancy 73,229 107,178
Data processing 33,990 49,177
Advertising 20,978 14,422
Federal deposit insurance premiums 14,396 15,872
Other 171,924 151,978
----------- -----------
Total noninterest expense 642,078 966,970
----------- -----------
Income before income tax expense 381,661 176,563
Income tax expense 115,659 19,159
----------- -----------
Net income $ 266,002 $ 157,404
=========== ===========
Earnings per common share - basic $ .16 $ .08
=========== ===========
Earnings per common share - diluted $ .16 $ .08
=========== ===========
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, 1998 and 1997
(Unaudited)
Nine Months Ended
September 30,
------------------
1998 1997
---- ----
Interest income:
Loans receivable $ 3,468,427 $ 3,703,096
Mortgage-backed securities 806,152 816,767
Investments 1,910,030 1,986,209
Interest-bearing deposits and federal funds sold 667,104 414,756
---------- -----------
Total interest income 6,851,713 6,920,828
----------- -----------
Interest expense:
Savings deposits 3,135,842 3,237,566
Borrowed money 648,283 269,299
----------- -----------
Total interest expense 3,784,125 3,506,865
----------- -----------
Net interest income 3,067,588 3,413,963
Provision for loan losses 16,800 59,000
----------- -----------
Net interest income after provision for loan losses 3,050,788 3,354,963
----------- -----------
Noninterest income:
Late charges and other fees 144,894 128,763
Gain on sale of investment securities, net - 20,469
Other 13,272 35,021
----------- -----------
Total noninterest income 158,166 184,253
------------ -----------
Noninterest expense:
Compensation and employee benefits 942,518 1,367,960
Occupancy 199,325 257,091
Data processing 125,784 127,752
Advertising 44,373 41,658
Federal deposit insurance premiums 44,061 53,223
Other 541,760 468,029
----------- -----------
Total noninterest expense 1,897,821 2,315,713
----------- -----------
Income before income tax expense 1,311,133 1,223,503
Income tax expense 396,721 321,159
----------- -----------
Net income $ 914,412 $ 902,344
=========== ===========
Earnings per common share - basic $ .56 $ .46
=========== ===========
Earnings per common share - diluted $ .54 $ .46
=========== ===========
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, 1998
(Unaudited)
Retained Accumulated
Common stock Additional earnings, other
--------------------- paid-in substantially comprehensive
Shares Amount capital restricted income
------ ----- ------- ---------- ------
Balance, December 31, 1997 2,182,125 $21,821 $21,766,390 $13,088,331 $32,454
Net income - - - 914,412 -
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 - - 30,916 - -
Dividends on common stock
at $.21 per share - - - (331,333) -
Change in accumulated
other comprehensive income - - - - 8,023
--------- ------- ----------- ----------- -------
Balance, September 30, 1998 2,182,125 $21,821 $21,626,310 $13,662,249 $40,477
========= ======= =========== =========== =======
Unearned Unamortized Treasury Stock Total
ESOP restricted ----------------------- Stockholders'
shares stock awards Shares Amount equity
------ ------------ ------ ------ ------
Balance, December 31, 1997 $(1,647,920) $ (725,868) 229,079 $ (3,546,890) $28,988,318
Net income - - - - 914,412
Purchase of treasury stock - - 411,972 (7,127,281) (7,127,281)
Issuance of treasury stock for
restricted stock awards - - (12,214) 180,157 -
Amortization of restricted stock
awards - 124,646 - - 124,646
Amortization of ESOP awards 41,220 - - - 72,136
Dividends on common stock
at $.21 per share - - - - (331,333)
Change in accumulated
other comprehensive income - - - - 8,023
----------- ---------- -------- ------------ -----------
Balance, September 30, 1998 $(1,606,700) $ (601,222) 628,837 $(10,494,014) $22,648,921
=========== ========== ======== ============ ===========
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, 1998 and 1997
(Unaudited)
September 30, September 30,
1998 1997
---- ----
Cash flows from operating activities:
Net income $ 914,412 $ 902,344
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization:
Office properties and equipment 102,633 140,890
Deferred fees, discounts, and premiums 36,441 (310,197)
Stock plans 196,782 469,027
(Increase) decrease in accrued interest receivable (107,132) (47,065)
Increase (decrease) in accrued interest payable 92,809 51,171
Increase (decrease) in income taxes payable (264,491) 154,958
Gain on sale of investment securities, net - (20,469)
Provision for loan losses 16,800 59,000
Net change in other assets and other liabilities (131,682) (10,139)
------------- ------------
Net cash provided by (used in) operating activities 856,572 1,389,520
------------- ------------
Cash flows from investing activities:
Principal repayments on:
Loans receivable 16,411,101 9,510,028
Mortgage-backed securities 6,321,616 3,707,731
Proceeds from the maturity of certificates of deposit 195,000 594,000
Proceeds from the maturity of investment securities 56,617,595 90,372,640
Proceeds from the sale of investment securities - 2,019,623
Proceeds from the redemption of FRB Stock - 6,000
Cash invested in:
Loans receivable (5,616,848) (16,008,966)
Mortgage-backed securities (15,378,533) (3,364,715)
Investment securities (65,622,734) (86,150,491)
Proceeds from sale of real estate acquired by foreclosure 47,197 70,451
Purchase of office properties and equipment (44,752) (23,084)
------------- ------------
Net cash provided by (used in) investing activities (7,070,358) 733,217
------------- ------------
Cash flows from financing activities:
Increase (decrease) in savings deposits 518,310 (7,493,320)
Increase (decrease) in securities sold under agreements to repurchase 2,500,000 (4,850,000)
Increase in FHLB advances 10,000,000 -
Purchase of treasury stock (7,127,281) (2,899,225)
Dividends paid (331,333) (349,992)
Increase in advance payments by borrowers for taxes and insurance (99,490) 30,516
------------- ------------
Net cash provided by (used in) financing activities 5,460,206 (15,562,021)
------------- ------------
Net increase (decrease) in cash and cash equivalents (753,580) (13,439,284)
Cash and cash equivalents, beginning of period 11,291,063 22,117,279
------------- ------------
Cash and cash equivalents, end of period $ 10,537,483 $ 8,677,995
============= ============
Supplemental information:
Interest paid $3,691,316 $ 3,519,120
Income taxes paid 661,212 147,989
============== ============
Noncash investing and financing activities -
interest credited to savings deposits $2,173,699 $ 2,285,200
============ ============
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 Nine Months Ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
Net Income $266,002 $157,404 $914,412 $902,344
Other comprehensive income, net of tax:
Unrealized gain on securities
available for sale $ 7,794 $ 25,986 $ 8,023 $ 43,457
Reclassification adjustment
for realized gains included in
net income $ -- $ -- $ -- $(12,691)
-------- -------- -------- --------
$273,796 $183,390 $922,435 $933,110
======== ======== ======== ========
See accompanying notes to unaudited consolidated financial statements.
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CHESTER BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Nine months Ended September 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 nine months ended September 30, 1998 and
1997.
Operating results for the nine months ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998.
(2) Earnings Per Share (EPS)
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 Company.
The computation of EPS for the nine months ended September 30, 1998 and
1997 follows:
September 30, September 30,
1998 1997
---- ----
Basic EPS:
Net income $ 914,412 $ 902,344
========== ==========
Average common shares outstanding 1,647,085 1,968,679
========== ==========
Basic EPS $ 0.56 $ 0.46
========== ==========
Diluted EPS:
Net income $ 914,412 $ 902,344
========== ==========
Average common shares outstanding 1,647,085 1,968,679
Dilutive potential due to stock options 40,233 10,973
---------- ----------
Average number of common shares and dilutive potential common
shares outstanding 1,687,318 1,979,652
========== ==========
Diluted EPS $ 0.54 $ .46
========== ==========
(3) Employee Stock Ownership Plan (ESOP)
During 1996, the Company established a tax-qualified ESOP. The plan
covers substantially all employees who have attained the age of 21 and completed
one year of service. In connection with the conversion to a stock corporation,
the ESOP purchased 174,570 shares of the Company's common stock at a
subscription price of $10.00 per share using funds loaned by the Company. All
shares are held in a suspense account for allocation among the participants as
the loan is repaid with level principal payments over 30 years. Shares released
from the suspense account are allocated among the participants based upon their
pro rata annual compensation. The
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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
$72,136 and $75,548 for the nine months ended September 30, 1998 and September
30, 1997, respectively.
(3) Employee Stock Ownership Plan (Continued)
The ESOP shares as of September 30, 1998 are as follows:
Allocated shares 9,778
Committed to be released shares 4,121
Unreleased shares 160,671
------------
Total ESOP shares 174,570
============
Fair value of unreleased shares $2,761,533
============
(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 $124,646 and $393,478 for the nine
months ended September 30, 1998 and September 30, 1997, respectively.
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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 $6.3 million,
or 4.7%, to $140.1 million at September 30, 1998 from $133.8 million at December
31, 1997. The increase in the Company's asset size was attributable to an
increase in investment securities which was primarily funded by the $10.0
million of FHLB advances received during the quarter ended March 31, 1998.
Loans receivable decreased $11.0 million, or 18.1%, to $49.5
million at September 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 during 1998. As a result, the Company increased
its investment in marketable securities and mortgage-backed securities. The
focus by management on the St. Louis residential lending market in 1997 has not
been continued during the nine months ended September 30, 1998.
Mortgage-backed securities at September 30, 1998 were $22.8
million compared to $13.8 million at December 31, 1997. Investment securities
increased $9.0 million, or 20.1%, to $54.0 million at September 30, 1998 from
$44.9 million at December 31, 1997. During the nine months ended September 30,
1998, management invested the funds received from the repayment of loans
receivable and FHLB advances into investment securities and mortgage-backed
securities.
Cash, interest-bearing deposits, and federal funds sold, on a
combined basis, decreased $754,000, or 6.7%, to $10.5 million at September 30,
1998 from $11.3 million at December 31, 1997. During
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the nine months ended September 30, 1998, management invested funds received
from excess loan repayments and FHLB advances into higher yielding investment
securities and mortgage-backed securities.
LIABILITIES. Savings deposits increased $518,000, or .5%, to
$95.9 million at September 30, 1998 from $95.4 million at December 31, 1997.
Borrowed money increased $12.5 million as a result of a $2.5 increase in reverse
repurchase agreements and $10.0 of borrowings from the FHLB.
Reverse repurchase agreements increased $2.5 million from $8.4
million at December 31, 1997 to $10.9 million at September 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 September 30, 1998, the balance of funds
on deposit with the Company was $23.9 million, which included the reverse
repurchase agreements.
Advances from the FHLB were $10.0 million at September 30,
1998, whereas the company had no FHLB advances at December 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 for the three and nine
months ended September 30, 1998 was $266,002 and $914,412, respectively,
compared to $157,404 and $902,344 for the three and nine months ended September
30, 1997, respectively. The $109,000 and $12,000 increase in net income for the
three and nine months ended September 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. During the quarter
ended September 30, 1997, the Company recognized a net charge of $170,000 for
accelerated vesting of management recognition shares due to the death of a
participant.
NET INTEREST INCOME. Net interest income totaled $971,000 for
the three months ended September 30, 1998 compared to $1.1 million for the three
months ended September 30, 1997. The $147,000, or 13.1%, decrease in net
interest income was the result of a decrease in the Company's interest rate
spread from 2.57% for the three months ended September 30, 1997 compared to
2.27% for the three months ended September 30, 1998. The decline in the
Company's interest rate spread was attributable to a 28 basis point decrease in
the average yield on interest-bearing assets for the three months ended
September 30, 1998, whereas the average cost of interest-bearing liabilities was
consistent between the two periods. The reduced yield on interest-earning assets
was due to the change in asset mix that has occured over the past year. For the
three months ended September 30, 1997, average loans comprised 47% of total
interest-earning assets, whereas for the comparable 1998 period they comprised
only 37%. Management expects this trend to continue for the remainder of 1998.
Net interest income totaled $3.1 million for the nine months
ended September 30, 1998 compared to $3.4 million for the nine months ended
September 30, 1997. The $346,000, or 10.1%, decrease in net interest income was
the result of a decline in the Company's interest rate spread from 2.67% for the
nine months ended September 30, 1997 to 2.37% for the nine months ended
September 30, 1998. The decline in the
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Company's interest rate spread was attributable to the combined impact of a 23
basis point decrease in the average yield on interest-earning assets and a 7
basis point increase in the average cost of interest-bearing liabilities for the
nine months ended September 30, 1998. The reduced yield on interest-earning
assets resulted from the change in asset mix, as previously discussed, and a
decline in the average yield for each component of interest-earning asets due to
the decline in interest rates during 1998.
INTEREST INCOME. Interest income on loans receivable decreased
$229,000, or 17.7%, for the three months ended September 30, 1998. The decrease
in interest income on loans receivable was the result of a $10.5 million, or
17.4% decrease in the average balance of loans receivable.
Interest income on loans receivable decreased $235,000, or
6.3%, for the nine months ended September 30, 1998. This fluctuation was due to
a decline in the average yield on loans receivable from 8.66% for the nine
months ended September 30, 1997 to 8.51% for the nine months ended September 30,
1998, coupled with a $2.7 million, or 4.7%, decrease in the average balance of
loans receivable.
Interest income on mortgage-backed securities increased
$75,000, or 28.6%, for the three months ended September 30, 1998 and decreased
$11,000, or 1.3%, for the nine months ended September 30, 1998. The increase in
interest income on mortgage-backed securities for the three months ended
September 30, 1998 was the result of a $5.5 million, or 33.8%, increase in the
average balance of mortgage-backed securities, negatively impacted by a decline
in the average yield from 6.39% for the three months ended September 30, 1997 to
6.15% for the three months ended September 30, 1998. The decrease in interest
income on mortgage-backed securities for the nine months ended September 30,
1998 resulted from a 25 basis point decline in the average yield on
mortgage-backed securities. for the nine months ended September 30, 1998.
Interest earned on investment securities was $695,000 and $1.9
million for the three and nine months ended September 30, 1998, respectively,
compared to $588,000 and $2.0 million for the three and nine months ended
September 30, 1997, respectively. The increase of $106,000, or 18.1%, for the
three months ended September 30, 1998 was mainly the result of an increase in
the average balance of investments of $7.1 million, or 16.3%, for the three
months ended September 30, 1998. The decrease of $76,000, or 3.8%, for the nine
months ended September 30, 1998 was mainly the result of a decrease in the
average balance of investment securities of $2.2 million, or 4.5%, for the nine
months ended September 30, 1998. The increase in investment securities during
the quarter ended September 30, 1998 resulted from the investment of funds held
in short term deposits at June 30, 1998 into higher yielding investment
securities.
Interest income on interest-bearing deposits increased
$35,000, or 27.4%, and increased $252,000, or 60.8%, during the three and nine
months ended September 30, 1998, respectively. The increase in both instances
resulted from an increase in the average balance of interest-bearing deposits.
For the three and nine months ended September 30, 1998, the average balance of
interest-bearing deposits increased $3.0 million, or 32.5%, and $6.6 million, or
64.3%, respectively. The increase in interest-bearing deposits resulted
primarily from management's decision to invest excess funds into short-term
interest bearing deposits during the first two quarters of 1998 while longer
term investments opportunities were evaluated.
INTEREST EXPENSE. Interest expense on savings deposits
decreased $24,000, or 2.3%, to $1.05 million for the three months ended
September 30, 1998 from $1.07 million for the three months ended September 30,
1997. The decline in interest expense was the result of a $1.4 million, or 1.5%,
decrease in the average balance of deposits, which was partially offset by the
decrease in the average cost of deposits from 4.48% for the three months ended
September 30, 1997 to 4.44% for the three months ended September 30, 1998. 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.
Interest expense on savings deposits decreased $192,000, or
5.8%, to $3.1 million for the nine months ended September 30, 1998 from $3.3
million for the nine months ended September 30, 1997. The decline in interest
expense on savings deposits was the result of a $3.6 million, or 3.7%, decrease
in the average balance of deposits. The average cost of deposits increased
between the two periods with an average rate of
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4.41% for the nine months ended September 30, 1998 compared to 4.38% for the
nine months ended September 30, 1997.
Interest expense on borrowed money increased $158,000 and
$379,000 for the three and nine ended September 30, 1998, respectively. Interest
expense on reverse repurchase agreements increased $37,000, or 44.6%, to
$120,000 for the three months ended September 30, 1998 from $83,000 for the
three months ended September 30, 1997. The increase in interest expense was the
result of a $2.9 million, or 45.0%, increase in the average balance of reverse
repurchase agreements, partially offset by a decline in the average cost of
reverse repurchase agreements from 5.12% for the three months ended September
30, 1997 to 5.10% for the three months ended September 30, 1998.
Interest expense on reverse repurchase agreements increased
$77,000, or 28.6%, to $347,000 for the nine months ended September 30, 1998 from
$269,000 for the nine months ended September 30, 1997. The increase in interest
expense on reverse repurchase agreements was the result of a $1.8 million, or
24.9%, increase in the average balance of reverse repurchase agreements. The
average cost of reverse repurchase agreements increased between the two periods
with an average rate of 5.10% for the nine months ended September 30, 1998
compared to 4.94% for the nine months ended September 30, 1997.
Interest expense on FHLB advances was $122,000 and $301,000
for the three and nine months ended September 30, 1998, respectively. The
Company had no FHLB advances during the three and nine months ended September
30, 1997. The average balance on FHLB advances was $10.0 million and $9.1
million for the three and nine months ended September 30, 1998, respectively.
The average cost of advances was 4.88% for the three month period and 4.81% for
the nine month period ending September 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 September 30, 1998, the Company did
not increase the allowance for loan losses due to the decline in loans
receivable. The loan loss provision was $29,000 for the quarter ending September
30, 1997 and $17,000 and $59,000 for the nine months ended September 30, 1998
and September 30, 1997, respectivley.
The Company's allowance for loan losses was $446,000, or .89%,
of loans outstanding at September 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 September 30, 1998 was $2,000, which
represented a minimal percentage of average loans 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, 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.
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NONINTEREST INCOME. Noninterest income was $53,000 for the
three months ended September 30, 1998 compared to $55,000 for the three months
ended September 30, 1997. Noninterest income was $158,000 for the nine months
ended September 30, 1998 compared to $184,000 for the nine months ended
September 30, 1997. The decrease in noninterest income for the nine months ended
September 30, 1998 resulted from the $20,000 gain recognized from the sale of
investment securities available for sale and from the $18,000 received from
state income tax refunds for prior years during the nine months ended September
30, 1997. The decrease was partially offset by a $16,000 increase in other fee
income during the nine months ended September 30, 1998.
NONINTEREST EXPENSE. Noninterest expense decreased $325,000,
or 33.6%, for the three months ended September 30, 1998, and $418,000, or 18.0%,
for the nine months ended September 30, 1998. The decrease in noninterest
expense for the three and nine months ended September 30, 1998 resulted from a
$33,000 and $58,000 decrease in occupancy expense and a $301,000 and $425,000
decrease in compensation expense, respectively. The decrease in compensation
expense for both periods primarily resulted from accelerated vesting of
management recognition shares during the period ending September 30, 1997. 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 remainder of the fluctuation in
compensation expense for the nine months ended September 30, 1998 was
attributable to the termination of the Directors Emeritus Program during the
quarter ended June 30, 1998. The decline in occupancy expense is due to the
impact of the Carbondale branch closure in 1997.
INCOME TAX EXPENSE. Income tax expense for the three and nine
months ended September 30, 1998 was $116,000 and $397,000, respectively,
compared to income tax expense of $19,000 and $321,000 for the three and nine
months ended September 30, 1997, respectively. The Company's effective tax rate
for the three and nine months ended September 30, 1998 was 30.3% and 30.2%,
respectively, compared to 10.9% and 26.2% for the three and nine months ended
September 30, 1997, respectively. The reduced tax rates in 1997 were mainly
attributable to the $105,000 tax benefit associated with the accelerated vesting
of management recognition shares recognized in the quarter ended September 30,
1997. Before recognizing the effect 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. The effective
tax rate for each period was below the statutory rate of 34% due to the
Company's investment in tax exempt securities.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds consist of deposits,
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 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
September 30, 1998, cash and cash equivalents totaled $10.5 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, 1998, purchases of
investment securities and mortgage-backed securities totaled $65.6 million and
$15.4 million, respectively, while loan originations totaled $5.6 million. These
investments were funded primarily from loan
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and mortgage-backed security repayments of $22.7 million and investment
securities sales and maturities of $56.6 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 September 30, 1998, the Company
had $10.0 million in outstanding advances from the FHLB.
At September 30, 1998, the Company exceeded all of its
regulatory capital requirements. The Company and the Company's subsidiary banks
actual and required capital amounts and ratios as of September 30, 1998 are as
follows:
Actual Capital Requirements
----------------------------------------------------
(Dollars in thousands) Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------------
Total capital (to risk-weighted assets):
Company $23,053 46.2% 3,996 8.00%
Chester National Bank $19,252 45.3% 3,397 8.00%
Chester National Bank of Missouri 3,263 49.2% 530 8.00%
Tier 1 capital (to risk-weighted assets):
Company $22,608 45.3% 1,998 4.00%
Chester National Bank $18,887 44.5% 1,699 4.00%
Chester National Bank of Missouri 3,183 48.0% 265 4.00%
Tier 1 capital (to average assets):
Company $22,608 15.8% 4,295 3.00%
Chester National Bank $18,887 14.7% 3,843 3.00%
Chester National Bank of Missouri 3,183 25.4% 376 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 fifteen 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
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a timely manner will have a material impact on the Company's financial position
or on its results of operations. The Company has completed the assessment phase
and is currently in the testing phase. Management expects to complete
contingency planning by December 31, 1998.
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 operations.
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 September 30, At December 31,
1998 1997
---------------- --------------
(Dollars in Thousands)
--------------------------------
Non-performing loans:
Loans accounted for on a non-accrual basis:
Real estate
Residential real estate $111 $ 27
Commercial -- --
Consumer 9 10
---- ----
Total 120 37
---- ----
Accruing loans which are contractually past due 90 days or more:
Residential real estate -- --
Commercial -- --
Consumer -- --
---- ----
Total -- --
---- ----
Total non-performing loans 120 37
Real estate acquired by foreclosure, net 117 38
---- ----
Total non-performing assets $237 $ 75
==== ====
Total non-performing loans to net loans 0.24% 0.06%
==== ====
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Total allowance for loan losses to
non-performing loans 371.55 1159.97%
====== =======
Total non-performing assets to total assets 0.17% 0.06%
====== =======
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Neither the Company nor the Banks are a party to any material legal
proceedings at this time. From time to time, the Banks are involved in
various claims and legal actions arising in the ordinary course of
business.
Item 2. Changes in Securities.
None
Item 3. Defaults upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
On 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: November 3, 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
19