1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1999
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
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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 1,445,288 on March 31, 1999.
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FORM 10-Q
Index
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets.......................................................... 4
Consolidated Statements of Income.................................................... 5
Consolidated Statement of Stockholders' Equity....................................... 6
Consolidated Statements of Cash Flows................................................ 7
Consolidated Statements of Comprehensive Income...................................... 8
Notes to Consolidated Financial Statements........................................... 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................................ 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................... 18
Item 2. Changes in Securities................................................................ 18
Item 3. Defaults upon Senior Securities...................................................... 18
Item 4. Submission of Matters to a Vote
of Securities Holders................................................................ 18
Item 5. Other Information.................................................................... 18
Item 6. Exhibits and Reports on Form 8-K..................................................... 18
Signature........................................................................................ 19
Exhibit Index.................................................................................... 20
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 1999 and December 31, 1998
(Unaudited)
March 31, December 31,
Assets 1999 1998
------ ---- ----
Cash $ 1,515,896 $ 1,305,850
Interest-bearing deposits 8,581,552 8,708,822
Federal funds sold 3,803,000 5,788,000
Bankers' acceptances -- 994,167
------------- -------------
Total cash and cash equivalents 13,900,448 16,796,839
Certificates of deposit 95,000 95,000
Investment securities:
Available for sale, at fair value (cost of $25,680,182 and $12,467,687 at 25,571,744 12,515,769
March 31, 1999 and December 31, 1998, respectively)
Held to maturity, at cost (fair value of $20,219,520 and $40,277,481 at 20,053,951 40,116,367
March 31, 1999 and December 31, 1998, respectively)
Mortgage-backed securities:
Available for sale, at fair value (cost of $16,076,567 and $11,170,541 at 16,148,268 11,275,061
March 31, 1999 and December 31, 1998, respectively)
Held to maturity, at cost (fair value of $10,437,077 and $10,619,540 at 10,441,685 10,595,289
March 31, 1999 and December 31, 1998, respectively)
Loans receivable, net 46,071,803 48,208,662
Accrued interest receivable 808,880 909,953
Real estate acquired by foreclosure, net 152,769 127,613
Office property and equipment, net 1,704,266 1,684,381
Income taxes receivable 60,541 155,261
Deferred tax asset, net 28,937 --
Other assets 384,851 316,062
------------- -------------
$ 135,423,143 $ 142,796,257
============= =============
Liabilities and Stockholders' Equity
Savings deposits $ 99,405,274 $ 99,434,579
Borrowed money 14,000,000 20,880,389
Accrued interest payable 180,698 215,420
Advance payments by borrowers for taxes and insurance 634,177 419,552
Deferred tax liability, net -- 44,174
Accrued expenses and other liabilities 42,855 97,055
------------- -------------
Total liabilities 114,263,004 121,091,169
------------- -------------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 3,000,000 shares authorized, 2,182,125 shares
issued at March 31, 1999 and December 31, 1998 21,821 21,821
Additional paid-in capital 21,660,283 21,650,837
Retained earnings, substantially restricted 13,930,074 13,803,400
Accumulated other comprehensive income (23,035) 93,610
Unearend ESOP shares (1,579,240) (1,592,980)
Unearned restricted stock awards (518,126) (559,674)
Treasury stock, at cost: 736,837 and 700,137 shares at
March 31, 1999 and December 31, 1998, respectively (12,331,638) (11,711,926)
------------- -------------
Total stockholders' equity 21,160,139 21,705,088
------------- -------------
$ 135,423,143 $ 142,796,257
============= =============
See accompanying notes to unaudited consolidated financial statements.
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CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Three Months Ended March 31, 1999 and 1998
(Unaudited)
Three Months Ended
------------------
March 31,
---------
1999 1998
---- ----
Interest income:
Loans receivable $ 974,715 $1,255,831
Mortgage-backed securities 350,270 214,741
Investments 604,836 602,093
Interest-bearing deposits, federal funds sold and bankers' acceptances 186,444 231,803
---------- ----------
Total interest income 2,116,265 2,304,468
---------- ----------
Interest expense:
Savings deposits 1,048,204 1,046,756
Borrowed money 179,353 166,988
---------- ----------
Total interest expense 1,227,557 1,213,744
---------- ----------
Net interest income 888,708 1,090,724
Provision for loan losses -- 11,800
---------- ----------
Net interest income after provision for loan losses 888,708 1,078,924
---------- ----------
Noninterest income:
Late charges and other fees 40,383 50,548
Other 4,290 4,379
---------- ----------
Total noninterest income 44,673 54,927
---------- ----------
Noninterest expense:
Compensation and employee benefits 336,262 345,654
Occupancy 68,412 60,733
Data processing 37,225 47,402
Advertising 16,352 10,521
Federal deposit insurance premiums 14,547 14,832
Other 145,220 198,654
---------- ----------
Total noninterest expense 618,018 677,796
---------- ----------
Income before income tax expense 315,363 456,055
Income tax expense 97,661 135,007
---------- ----------
Net income $ 217,702 $ 321,048
========== ==========
Earnings per common share - basic $ .17 $ .18
========== ==========
Earnings per common share - diluted $ .16 $ .18
========== ==========
See accompanying notes to unaudited consolidated financial statements.
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CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Three Months Ended March 31, 1999
(Unaudited)
Retained Accumulated
Common stock Additional earnings, other
--------------------- paid-in substantially comprehensive
Shares Amount capital restricted income
------ ------ ------- ---------- ------
Balance, December 31, 1998 2,182,125 $ 21,821 $ 21,650,837 $ 13,803,400 $ 93,610
Net income -- -- -- 217,702 --
Purchase of treasury stock -- -- -- -- --
Amortization of restricted stock
awards -- -- -- -- --
Amortization of ESOP awards -- -- 9,446 -- --
Dividends on common stock
at $.07 per share -- -- -- (91,028) --
Change in accumulated
other comprehensive income -- -- -- (116,645)
--------- --------- ------------ ------------ ------------
Balance, March 31, 1999 2,182,125 $ 21,821 $ 21,660,283 $ 13,930,074 $ (23,035)
========= ========= ============ ============ ============
Unearned Unamortized Treasury Stock Total
ESOP restricted ------------------- Stockholders'
shares stock awards Shares Amount equity
------ ------------ ------ ------ ------
Balance, December 31, 1998 $ (1,592,980) $ (559,674) 700,137 $(11,711,926) $ 21,705,088
Net income -- -- -- -- 217,702
Purchase of treasury stock -- -- 36,700 (619,712) (619,712)
Amortization of restricted stock
awards -- 41,548 -- -- 41,548
Amortization of ESOP awards 13,740 -- -- -- 23,186
Dividends on common stock
at $.07 per share -- -- -- -- (91,028)
Change in accumulated other
comprehensive income -- -- -- -- (116,645)
------------ ------------ ------- ------------ ------------
Balance, March 31, 1999 $ (1,579,240) $ (518,126) 736,837 $(12,331,638) $ 21,160,139
============ ============ ======= ============ ============
See accompanying notes to unaudited consolidated financial statements.
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CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three months ended March 31, 1999 and 1998
(Unaudited)
March 31, March 31,
1999 1998
---- ----
Cash flows from operating activities:
Net income $ 217,702 $ 321,048
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization:
Office properties and equipment 36,528 33,963
Deferred fees, discounts, and premiums (106,425) 6,943
Stock based compensation 64,734 72,026
Decrease in accrued interest receivable 101,073 11,005
Increase (decrease) in accrued interest payable (34,722) 119,309
Increase (decrease) in income taxes payable 94,720 (156,164)
Provision for loan losses -- 11,800
Net change in other assets and other liabilities (122,989) (86,836)
------------ ------------
Net cash provided by (used in) operating activities 250,621 333,094
------------ ------------
Cash flows from investing activities:
Principal repayments on:
Loans receivable 3,387,556 6,052,677
Mortgage-backed securities 2,901,531 1,863,104
Proceeds from the maturity of certificates of deposit -- 27,300
Proceeds from the maturity of investment securities available for sale 2,735,000 --
Proceeds from the maturity of investment securities held to maturity 64,679,760 28,604,890
Proceeds from the sale of investment securities available for sale 147,187 --
Cash invested in:
Investment securities held to maturity (44,641,958) (26,685,000)
Investment securities available for sale (16,000,000) --
Mortgage-backed securities held to maturity (1,133,000) (2,501,417)
Mortgage-backed securities available for sale (6,480,685) --
Loans receivable (1,393,249) (1,695,788)
Proceeds from sale of real estate acquired by foreclosure 113,068 --
Purchase of office properties and equipment (56,413) (8,472)
------------ ------------
Net cash provided by (used in) investing activities 4,258,797 5,657,294
------------ ------------
Cash flows from financing activities:
Increase (decrease) in savings deposits (29,305) (395,620)
Increase (decrease) in securities sold under agreements to repurchase (6,880,389) 1,000,000
Increase in FHLB advances -- 10,000,000
Increase in advance payments by borrowers for taxes and insurance 214,625 271,769
Purchase of treasury stock (619,712) (2,578,092)
Dividends paid (91,028) (118,178)
------------ ------------
Net cash provided by (used in) financing activities (7,405,809) 8,179,879
------------ ------------
Net increase (decrease) in cash and cash equivalents (2,896,391) 14,170,267
Cash and cash equivalents, beginning of period 16,796,839 11,291,063
------------ ------------
Cash and cash equivalents, end of period $ 13,900,448 $ 25,461,330
============ ============
Supplemental information:
Interest paid $ 1,262,280 $ 1,094,435
Income taxes paid 2,940 291,171
============ ============
Noncash investing and financing activities:
Loans transferred to real estate acquired by foreclosure $ 168,224 $ --
Interest credited to savings deposits $ 626,101 $ 761,113
============ ============
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
March 31,
---------
1999 1998
---- ----
Net income $ 217,702 $ 321,048
Other comprehensive income,
net of tax - unrealized gain (loss) on
securities available for sale $(116,645) $ 6,544
--------- ---------
Comprehensive income $ 101,057 $ 327,592
========= =========
See accompanying notes to unaudited consolidated financial statements.
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CHESTER BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three Months Ended March 31, 1999 and 1998
(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
financial statements as of and for the three months ended March 31, 1999 and
1998.
Operating results for the three months ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999.
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures About
Segments of an Enterprise and Related Information, which requires business
segments to be reported based on the way management organizes segments within
the Company for making operating decisions and assessing performance. SFAS No.
131 is effective for fiscal years beginning after December 15, 1997. The Company
has not included disclosures regarding specific segments since management makes
operating decisions and assesses performance based on the Company as a whole.
(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 three months ended March 31, 1999 and
1998 follows:
March 31, March 31,
1999 1998
---- ----
Basic EPS:
Net income $ 217,702 $ 321,048
========== ==========
Average common shares outstanding 1,319,398 1,773,663
========== ==========
Basic EPS $ 0.17 $ 0.18
========== ==========
Diluted EPS:
Net income $ 217,702 $ 321,048
========== ==========
Average common shares outstanding 1,319,398 1,773,663
Dilutive potential due to stock options 33,031 43,067
---------- ----------
Average number of common shares and dilutive potential
common shares outstanding 1,352,429 1,816,730
========== ==========
Diluted EPS $ 0.16 $ .18
========== ==========
(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
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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 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 $23,186 and $30,477 for the three months ended
March 31, 1999 and 1998, respectively.
(3) Employee Stock Ownership Plan (Continued)
The ESOP shares as of March 31, 1999 are as follows:
Allocated shares 15,272
Committed to be released shares 1,374
Unreleased shares 157,924
----------
Total ESOP shares 174,570
==========
Fair value of unreleased shares $2,645,227
==========
(4) Restricted Stock Awards
On April 4, 1997, the Company adopted the 1997 Management Recognition
and Development Plan. The plan provides that 82,921 common 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 is amortized to compensation expense over the vesting period.
Compensation expense was $41,548 for both the three months ended March 31, 1999
and 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, securities sold under agreements to repurchase,
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.
In February, 1999, the Company opened a full service branch
facility within a retail store located in Perryville, Missouri. In June, 1999,
the Company will close the loan origination office in Cape Girardeau, Missouri.
Loan originations in the secondary market will be processed through the
Perryville, MO location.
When used in this report the words or phrases "will likely
result," "are expected to," "is anticipated," "estimate," "project," or similar
expressions are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such statements
are subject to certain risks and uncertainties, including, among other things,
changes in economic conditions in the Company's market area, changes in policies
by regulatory agencies, fluctuations in interest rates, demand for loans in the
Company's market area and competition, that could cause actual results to differ
materially from the historical earnings and those presently anticipated or
projected. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made. The
Company wishes to advise readers that the factors listed above could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.
The Company does not undertake, and specifically declines any
obligation, to publicly release the results of any revisions which may be made
to any forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
FINANCIAL CONDITION
ASSETS. The Company's total assets decreased by $7.3 million,
or 5.1%, to $135.5 million at March 31, 1999 from $142.8 million at December 31,
1998. The decrease in the Company's asset size was
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attributable to a decrease in investment securities which was primarily due to
the $6.9 million decrease in securities sold under agreements to repurchase
during the quarter ended March 31, 1999.
Loans receivable decreased $2.1 million, or 4.4%, to $46.1
million at March 31, 1999 from $48.2 million at December 31, 1998. 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 1999. As a result, the Company increased its investment
in mortgage-backed securities.
Mortgage-backed securities at March 31, 1999 were $26.6
million compared to $21.9 million at December 31, 1998. Investment securities
decreased $7.0 million, or 13.3%, to $45.6 million at March 31, 1999, from $52.6
million at December 31, 1998. During the three months ended March 31, 1999, the
Company funded the repayment of securities sold under agreements to repurchase
with the proceeds from the maturity of the investment securities underlying the
agreements. Management invested the funds received from the repayment of loans
receivable into mortgage-backed securities during the three months ended March
31, 1999.
Cash, interest-bearing deposits, federal funds sold and
bankers' acceptances, on a combined basis, decreased $2.9 million, or 17.2%, to
$13.9 million at March 31, 1999 from $16.8 million at December 31, 1998. During
the three months ended March 31, 1999, management invested funds received from
the decline in cash and cash equivalents into mortgage-backed securities.
LIABILITIES. Savings deposits decreased $29,000, or .03%
during the three months ended March 31, 1999. Borrowed money decreased $6.9
million as a result of a $6.9 million decrease in securities sold under
agreements to repurchase during the three months ended March 31, 1999.
Securities sold under agreements to repurchase decreased $6.9
million from $10.9 million at December 31, 1998 to $4.0 million at March 31,
1999. All such agreements are maintained with Gilster-Mary Lee Corporation
(Gilster-Mary Lee), a food manufacturing and packaging company headquartered in
Chester, Illinois. The Chairman of the Board of the Company is also the
Executive Vice President, Treasurer and Secretary of Gilster-Mary Lee. Over the
last several years, the Company has maintained a deposit relationship with
Gilster-Mary Lee, which at times has had as much as $25 million in funds on
deposit, typically with short terms. At March 31, 1999, the balance of funds on
deposit with the Company was $12.3 million, which included the securities sold
under agreements to repurchase.
Advances from the FHLB were $10.0 million at March 31, 1999
and December 31, 1998. The advances have terms of 10 years at a fixed interest
rate. The funds were invested in U. S. government agency securities.
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 months
ended March 31, 1999 was $217,702, compared to $321,048 for the three months
ended March 31, 1998. Net income for the three months ended March 31, 1999 was
negatively impacted by a decrease in net interest income and was positively
impacted by a decline in noninterest expense.
NET INTEREST INCOME. Net interest income totaled $889,000 for
the three months ended March 31, 1999 compared to $1.1 million for the three
months ended March 31, 1998. The $202,000, or 18.5%,
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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 March 31, 1998
compared to 2.19% for the three months ended March 31, 1999. The decline in the
Company's interest rate spread was attributable to a 57 basis point decrease in
the average yield on interest-bearing assets for the three months ended March
31, 1999. The reduced yield on interest-earning assets was due to the change in
asset mix that has occurred over the past year. For the three months ended March
31, 1998, average loans comprised 44% of total interest-earning assets, whereas
for the comparable 1999 period they comprised only 36%.
INTEREST INCOME. Interest income on loans receivable decreased
$275,000, or 21.9%, for the three months ended March 31, 1999. The decrease in
interest income on loans receivable was the result of a $11.5 million, or 19.6%,
decrease in the average balance of loans receivable, coupled with a 25 basis
point decline in the average yield on loans receivable for the three months
ended March 31, 1999.
Interest income on mortgage-backed securities increased
$136,000, or 63.1%, for the three months ended March 31, 1999. The increase in
interest income on mortgage-backed securities for the three months ended March
31, 1999 was the result of a $10.0 million, or 71.6%, increase in the average
balance of mortgage-backed securities, negatively impacted by a decline in the
average yield from 6.18% for the three months ended March 31, 1998 to 5.86% for
the three months ended March 31, 1999.
Interest earned on investment securities was $605,000 for the
three months ended March 31, 1999, compared to $602,000 for the three months
ended March 31, 1998. Interest income on investment securities remained
consistent due to an increase in the average balance of investment securities of
$2.2 million, or 5.1%, negatively offset by a decline in the average yield on
investment securities from 5.97% for the three months ended March 31, 1998 to
5.23% for the three months ended March 31, 1999.
Interest income on interest-bearing deposits decreased
$51,000, or 22.1%, during the three months ended March 31, 1999. The decrease
resulted from a decrease in the average balance of interest-bearing deposits of
$1.3 million, or 7.3%, for the three months ended March 31, 1999.
INTEREST EXPENSE. Interest expense on savings deposits was
$1.05 million for both the three months ended March 31, 1999 and 1998. The
average balance of deposits increased $4.1 million, or 4.3%, positively offset
by a decrease in the average cost of deposits from 4.38% for the three months
ended March 31, 1998, to 4.21% for the three months ended March 31, 1999.
Interest expense on borrowed money increased $12,000 for the
three months ended March 31, 1999. Interest expense on securities sold under
agreements to repurchase decreased $47,000, or 43.9%, to $60,000 for the three
months ended March 31, 1999 from $107,000 for the three months ended March 31,
1998. Interest expense on FHLB advances increased $59,000, or 98.3%, to $119,000
for the three months ended March 31, 1999. The decrease in interest expense on
securities sold under agreements to repurchase was attributable to a 33.7%
decline in the average balance of securities sold under agreements to
repurchase. The increase in interest expense on FHLB advances was due to these
borrowers occuring in the middle of the first quarter of 1998.
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 March 31, 1999, the provision for
loan losses was zero as no significant problem loans were identified and the
loan portfolio continued to decline. The loan loss provision was $12,000 for the
quarter ending March 31, 1998.
The Company's allowance for loan losses was $417,000, or .90%,
of loans outstanding at
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March 31, 1999, compared to $449,000, or .92%, of loans outstanding at December
31, 1998. The Company's level of net loans charged-off during the quarter ended
March 31, 1999 was $32,000, which represented a .3% 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 March 31,
1999.
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.
NONINTEREST INCOME. Noninterest income was $45,000 for the
three months ended March 31, 1999 compared to $55,000 for the three months ended
March 31, 1998. The decrease in noninterest income for the three months ended
March 31, 1999 resulted from a $10,000 decrease in other fee income.
NONINTEREST EXPENSE. Noninterest expense decreased $60,000, or
8.8%, for the three months ended March 31, 1999. The decrease in noninterest
expense for the three months ended March 31, 1999 resulted from a $9,000
decrease in compensation expense, a $10,000 decrease in data processing expense
and a $53,000 decrease in other expense, partially offset by an $8,000 increase
in occupancy expense and a $6,000 increase in advertising expense. Each of these
fluctuations are the result of normal operating procedures.
INCOME TAX EXPENSE. Income tax expense for the three months
ended March 31, 1999 was $98,000, compared to income tax expense of $135,000 for
the three months ended March 31, 1998. The Company's effective tax rate for the
three months ended March 31, 1999 was 31.0%, compared to 29.6% for the three
months ended March 31, 1998. 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 1999.
A major portion of the Company's liquidity consists of cash
and cash equivalents, which include investments in highly liquid, short-term
deposits. The level of these assets is dependent on the Company's operating,
investing, lending and financing activities during any given period. At March
31, 1999, cash and cash equivalents totaled $13.9 million.
The primary investing activities of the Company include
origination of loans and purchase of mortgage-backed securities and investment
securities. During the three months ended March 31, 1999,
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purchases of investment securities and mortgage-backed securities totaled $60.6
million and $7.6 million, respectively, while loan originations totaled $1.4
million. These investments were funded primarily from loan and mortgage-backed
security repayments of $6.3 million and investment securities sales and
maturities of $67.6 million.
Liquidity management is both a daily and long-term function of
business management. If the Company requires funds beyond its ability to
generate them internally, the Company believes that it could borrow additional
funds from the Federal Home Loan Bank (FHLB). At March 31, 1999, the Company had
$10.0 million in outstanding advances from the FHLB.
At March 31, 1999, 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 March 31, 1999 are as follows:
Actual Capital Requirements
----------------------------- ---------------------------
(Dollars in thousands) Amount Ratio Amount Ratio
- ---------------------------------------------------- ------- --------------- ------------- ----------- ---------------
Total capital (to risk-weighted assets):
Company $21,600 43.5% 3,973 8.00%
Chester National Bank $16,789 39.6% 3,390 8.00%
Chester National Bank of Missouri 3,301 51.2% 516 8.00%
Tier 1 capital (to risk-weighted assets):
Company $21,183 42.7% 1,987 4.00%
Chester National Bank $16,453 38.8% 1,695 4.00%
Chester National Bank of Missouri 3,220 49.9% 258 4.00%
Tier 1 capital (to average assets):
Company $21,183 15.0% 4,224 3.00%
Chester National Bank $16,453 13.0% 3,783 3.00%
Chester National Bank of Missouri 3,220 24.8% 389 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
Over the next year, 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 distinquish 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 purchased most of its software applications
from third party vendors. The Company believes that its vendors are actively
addressing the problems associated with the "Year
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2000" issue. The Company has completed the assessment phase of its program and
is currently in the testing phase of determining Year 2000 readiness.
The Company has spent approximately $7,500 to-date in Year
2000 computer upgrades and does not expect that the remaining out-of-pocket cost
of its Year 2000 compliance effort will be material to its financial condition.
The most significant cost associated with the Company's Year 2000 program has
been the effort put forth by employees. The internal cost incurred by Company
employees are not maintained separately by the Company.
The major applications which pose the greatest Year 2000 risk
to the Company if implementation of its readiness program is not successful are
the Company's data services systems supported by third party vendors, loan
customers inability to meet contractual payment obligations in the event the
Year 2000 problem has a significant impact on their business, and failure of
items processing equipment which renders customers bank statements and banking
transactions. The potential problems which could result from the inability of
these applications to correctly process the Year 2000 are the inaccurate
calculation of interest income and expense, service delivery interruptions to
the Company's banking customers, credit losses resulting from the Company's loan
customers inability to make contractual credit obligations, interrupted
financial data gathering, and poor customer relations resulting from inaccurate
or delayed transaction processing.
The Company intends on completing all Year 2000 remediation
and testing activities by mid 1999. Although the Company has initiated Year 2000
communications with key vendors, service providers and other parties material to
the Company's operations and is monitoring the progress of such third parties in
their Year 2000 compliance efforts, such third parties nonetheless represent a
risk that cannot be assessed with precision or controlled with certainty. For
that reason, the Company has developed a contingency plan to address
alternatives in the event that Year 2000 failures of automatic systems and
equipment occur.
NONPERFORMING ASSETS
The following table sets forth information with respect to the Company's
nonperforming assets at the dates indicated.
At March 31, At December 31,
------------ ---------------
1999 1998
---- ----
(Dollars in Thousands)
-----------------------------------------
Non-performing loans:
Loans accounted for on a non-accrual basis:
Real estate
Residential real estate $276 $150
Commercial -- --
Consumer 5 6
---- ----
Total 281 156
---- ----
Accruing loans which are contractually past due 90 days or more:
Residential real estate -- --
Commercial -- --
Consumer -- --
---- ----
Total -- --
---- ----
Total non-performing loans 281 156
Real estate acquired by foreclosure, net 153 128
---- ----
Total non-performing assets $434 $284
==== ====
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Total non-performing loans to net loans 0.61% 0.32%
====== ======
Total allowance for loan losses to
non-performing loans 148.05% 287.41%
====== ======
Total non-performing assets to total assets 0.32% 0.20%
====== ======
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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 24, 1999, the Company solicited proxies for the annual
meeting of stockholders of the Company held on April 2, 1999. The
meeting involved the election of two directors. The directors up for
election were elected by the vote of 1,357,585 shares for Michael W.
Welge and 1,355,636 shares for Edward K. Collins out of 1,364,973
shares present at the meeting, either in person or by proxy.
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits
See Exhibit Index
B. Reports on Form 8-K
None
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned, thereunto duly authorized.
Chester Bancorp, Inc.
By: /s/ Michael W. Welge
---------------------------------------
Michael W. Welge
Chairman of the Board, President and Chief
Financial Officer
(Duly Authorized Officer)
Dated: May 12, 1999
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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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