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, 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
------------------------------
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 1,411,953 on September 30, 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....................................... 7
Consolidated Statements of Cash Flows................................................ 8
Consolidated Statements of Comprehensive Income...................................... 9
Notes to Consolidated Financial Statements........................................... 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................................ 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................... 19
Item 2. Changes in Securities................................................................ 19
Item 3. Defaults upon Senior Securities...................................................... 19
Item 4. Submission of Matters to a Vote
of Securities Holders................................................................ 19
Item 5. Other Information.................................................................... 19
Item 6. Exhibits and Reports on Form 8-K..................................................... 19
Signature........................................................................................ 20
Exhibit Index.................................................................................... 21
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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4
CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1999 and December 31, 1998
(Unaudited)
September 30, December 31,
Assets 1999 1998
------ ---- ----
Cash $ 2,542,542 $ 1,305,850
Interest-bearing deposits 2,131,788 8,708,822
Federal funds sold 1,920,000 5,788,000
Bankers' acceptances - 994,167
------------- -------------
Total cash and cash equivalents 6,594,330 16,796,839
Certificates of deposit 95,000 95,000
Investment securities:
Available for sale, at fair value (cost of $5,403,414 and $12,467,687 at 5,376,884 12,515,769
September 30, 1999 and December 31, 1998, respectively)
Held to maturity, at cost (fair value of $38,017,227 and $40,277,481 at 38,971,066 40,116,367
September 30, 1999 and December 31, 1998, respectively)
Mortgage-backed securities:
Available for sale, at fair value (cost of $7,611,768 and $11,170,541 at 7,486,070 11,275,061
September 30, 1999 and December 31, 1998, respectively)
Held to maturity, at cost (fair value of $16,102,706 and $10,619,540 at 16,264,039 10,595,289
September 30, 1999 and December 31, 1998, respectively)
Loans receivable, net 48,933,601 48,208,662
Accrued interest receivable 962,805 909,953
Real estate acquired by foreclosure, net 288,086 127,613
Office property and equipment, net 1,643,154 1,684,381
Income taxes receivable 111,206 155,261
Deferred tax asset, net 72,662 -
Other assets 351,476 316,062
------------- ------------
$ 127,150,379 $142,796,257
============= ============
Liabilities and Stockholders' Equity
Savings deposits $ 95,825,949 $ 99,434,579
Borrowed money 10,000,000 20,880,389
Accrued interest payable 167,111 215,420
Advance payments by borrowers for taxes and insurance 361,247 419,552
Deferred tax liability, net - 44,174
Accrued expenses and other liabilities 117,060 97,055
------------ -----------
Total liabilities 106,471,367 121,091,169
------------- -----------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 3,000,000 shares authorized, 2,182,125
shares issued at September 30, 1999 and December 31, 1998 21,821 21,821
Additional paid-in capital 21,511,961 21,650,837
Retained earnings, substantially restricted 14,140,973 13,803,400
Accumulated other comprehensive income (loss) (94,378) 93,610
Unearned ESOP shares (1,551,760) (1,592,980)
Unearned restricted stock awards (435,028) (559,674)
Treasury stock, at cost: 770,172 and 700,137 shares at
September 30, 1999 and December 31, 1998, respectively (12,914,577) (11,711,926)
------------- ------------
Total stockholders' equity 20,679,012 21,705,088
------------- -------------
$ 127,150,379 $ 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 September 30, 1999 and 1998
(Unaudited)
Three Months Ended
------------------
September 30,
-------------
1999 1998
---- ----
Interest income:
Loans receivable $ 988,210 $1,065,463
Mortgage-backed securities 369,533 336,101
Investments 638,370 694,544
Interest-bearing deposits, federal funds sold and bankers' acceptances 62,796 163,042
---------- ----------
Total interest income 2,058,909 2,259,150
---------- ----------
Interest expense:
Savings deposits 1,008,472 1,046,760
Borrowed money 132,922 241,258
---------- ----------
Total interest expense 1,141,394 1,288,018
---------- ----------
Net interest income 917,515 971,132
Provision for loan losses - -
---------- ----------
Net interest income after provision for loan losses 917,515 971,132
---------- ----------
Noninterest income:
Late charges and other fees 30,753 48,374
Other 4,883 4,233
---------- ----------
Total noninterest income 35,636 52,607
---------- ----------
Noninterest expense:
Compensation and employee benefits 320,707 327,561
Occupancy 69,486 73,229
Data processing 37,025 33,990
Advertising 11,922 20,978
Federal deposit insurance premiums 14,400 14,396
Other 150,733 171,924
---------- ----------
Total noninterest expense 604,273 642,078
---------- ----------
Income before income tax expense 348,878 381,661
Income tax expense 107,527 115,659
---------- ----------
Net income $ 241,351 $ 266,002
========== ==========
Earnings per common share - basic $ .19 $ .18
========== ==========
Earnings per common share - diluted $ .19 $ .17
========== ==========
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, 1999 and 1998
(Unaudited)
Nine Months Ended
------------------
September 30,
-------------
1999 1998
---- ----
Interest income:
Loans receivable $2,919,570 $3,468,427
Mortgage-backed securities 1,115,602 806,152
Investments 1,876,921 1,910,030
Interest-bearing deposits, federal funds sold and bankers'
acceptances 341,111 667,104
---------- ----------
Total interest income 6,253,204 6,851,713
---------- ----------
Interest expense:
Savings deposits 3,069,338 3,135,842
Borrowed money 475,863 648,283
---------- ----------
Total interest expense 3,545,201 3,784,125
---------- ----------
Net interest income 2,708,003 3,067,588
Provision for loan losses - 16,800
---------- ----------
Net interest income after provision for loan losses 2,708,003 3,050,788
---------- ----------
Noninterest income:
Late charges and other fees 106,746 144,894
Other 15,474 13,272
---------- ----------
Total noninterest income 122,220 158,166
---------- ----------
Noninterest expense:
Compensation and employee benefits 1,000,231 942,518
Occupancy 208,256 199,325
Data processing 113,579 125,784
Advertising 46,157 44,373
Federal deposit insurance premiums 43,502 44,061
Other 469,185 541,760
---------- ----------
Total noninterest expense 1,880,910 1,897,821
---------- ----------
Income before income tax expense 949,313 1,311,133
Income tax expense 294,238 396,721
---------- ----------
Net income $ 655,075 $ 914,412
========== ==========
Earnings per common share - basic $ .51 $ .57
========== ==========
Earnings per common share - diluted $ .50 $ .55
========== ==========
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, 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 - - - 655,075 -
Purchase of treasury stock - - - - -
Issuance of treasury stock for
restricted stock awards - - (166,110) (9,874) -
Exercised stock options - - 763 - -
Amortization of restricted stock awards - - - - -
Amortization of ESOP awards - - 27,997 - -
Dividends on common stock
at $.24 per share - - - (307,628) -
Change in accumulated
other comprehensive income - - - - (187,988)
--------- ------- ----------- ----------- ----------
Balance, September 30, 1999 2,182,125 $21,821 $21,511,961 $14,140,973 $ (94,378)
========= ======= =========== =========== ==========
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 - - - - 655,075
Purchase of treasury stock - - 82,772 (1,391,606) (1,391,606)
Issuance of treasury stock for
restricted stock awards - - (11,865) 175,984 -
Exercised stock options - - (872) 12,971 12,208
Amortization of restricted stock awards - 124,646 - - 124,646
Amortization of ESOP awards 41,220 - - - 69,217
Dividends on common stock
at $.24 per share - - - - (307,628)
Change in accumulated
other comprehensive income - - - - (187,988)
----------- --------- ------- ------------ -----------
Balance, September 30, 1999 $(1,551,760) $(435,028) 770,172 $(12,914,577) $20,679,012
=========== ========= ======= ============ ===========
See accompanying notes to unaudited consolidated financial statements.
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CHESTER BANCORP, INC., AND SUBSIDIARIES
Consolidated Statements of Cash Flow
Nine months ended September 30, 1999 and 1998
(unaudited)
September 30, September 30,
1999 1998
---- ----
Cash flows from operating activities:
Net income $ 655,075 $ 914,412
Adustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization:
Office properties and equipment 112,143 102,633
Deferred fees, discounts, and premiums (48,972) 36,441
Stock based compensation 193,863 196,782
Increase in accrued interest receivable (52,852) (107,132)
Increase (decrease) in accrued interest payable (48,309) 92,809
Increase (decrease) in income taxes, net 44,055 (264,491)
Provision for loan losses - 16,800
Provision for losses on real estate acquired through foreclosure 10,000 -
Net change in other assets and other liabilities (15,229) (131,682)
------------ ------------
Net cash provided by operating activities 849,774 856,572
Cash flows from investing activities:
Principal repayments on:
Loans receivable 10,985,125 16,411,101
Mortgage-backed securities 8,819,512 6,321,616
Proceeds from the maturity of certificates of deposit - 195,000
Proceeds from the maturity of investment securities available for sale 7,235,000 12,500,000
Proceeds from the maturity of investment securities held to maturity 95,555,670 44,117,595
Proceeds from the sale of investment securities available for sale 229,437 -
Cash invested in:
Loans receivable (12,006,683) (5,616,848)
Mortgage-backed securities held to maturity (10,882,216) (15,378,533)
Investment securities held to maturity (94,410,532) (65,622,734)
Investment securities available for sale (400,000) -
Proceeds from sales of real estate acquired through foreclosure 127,850 47,197
Purchase of office property and equipment (70,916) (44,752)
------------ ------------
Net cash provided by (used in) investing activities 5,182,247 (7,070,358)
Cash flows from financing activities:
Increase (decrease) in savings deposits (3,608,630) 518,310
Increase (decrease) in securities sold under agreements to repurchase (10,880,389) 2,500,000
Proceeds from FHLB advances - 10,000,000
Increase (decrease) in advance payments by borrowers for taxes and insurance (58,305) (99,490)
Purchase of treasury stock (1,391,606) (7,127,281)
Proceeds from stock options exercised 12,028 -
Dividends paid (307,628) (331,333)
------------ ------------
Net cash provided by (used in) financing activities (16,234,530) 5,460,206
------------ ------------
Net increase (decrease) in cash and cash equivalents (10,202,509) (753,580)
Cash and cash equivalents, beginning of period 16,796,839 11,291,063
------------ ------------
Cash and cash equivalents, end of period $ 6,594,330 $ 10,537,483
============ ============
Supplemental information:
Interest paid $ 3,593,510 $ 3,691,316
Income taxes paid 272,321 661,212
============ ============
Noncash investing and financing activities:
Loans transferred to real estate acquired by foreclosure $ 388,596 $ 125,668
Interest credited to savings deposits 2,016,533 2,173,699
============ ============
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,
------------- -------------
1999 1998 1999 1998
----- ---- ---- ----
Net income $ 241,351 $266,002 $ 655,075 $914,412
Other comprehensive income,
net of tax - unrealized gain (loss) on
securities available for sale $ (25,572) $ 7,794 $(187,988) $ 8,023
--------- -------- --------- --------
Comprehensive income $ 215,779 $273,796 $ 467,087 $922,435
========= ======== ========= ========
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, 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, cash
flows, and comprehensive income 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 and
nine months ended September 30, 1999 and 1998.
Operating results for the nine months ended September 30, 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 and nine months ended September
30, 1999 and 1998 follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------ ------------
1999 1998 1999 1998
---- ----- ---- ----
Basic EPS:
Net income $ 241,351 $ 266,002 $ 655,075 $ 914,412
=========== =========== =========== =========
Average common shares outstanding 1,268,212 1,519,772 1,279,227 1,618,326
=========== =========== =========== =========
Basic EPS $ 0.19 $ 0.18 $ 0.51 $ 0.57
=========== =========== =========== =========
Diluted EPS:
Net income $ 241,351 $ 266,002 $ 655,075 $ 914,412
=========== =========== =========== =========
Average common shares outstanding 1,268,212 1,519,772 1,279,227 1,618,326
Dilutive potential due to stock options 31,356 38,131 31,582 40,233
----------- ----------- ----------- ---------
Average number of common shares
and dilutive potential common
shares outstanding 1,299,568 1,557,903 1,310,809 1,658,559
=========== =========== =========== =========
Diluted EPS $ 0.19 $ .17 $ 0.50 $ 0.55
=========== =========== =========== =========
(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
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(3) Employee Stock Ownership Plan (Continued)
principal payments over 30 years. Shares released from the suspense account are
allocated among the participants based upon their pro rata annual compensation.
The purchases of the shares by the ESOP were recorded by the Company as unearned
ESOP shares in a contra equity account. As ESOP shares are committed to be
released to compensate employees, the contra equity account is reduced and the
Company recognizes compensation expense equal to the fair 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
$69,217 and $72,136 for the nine months ended September 30, 1999 and 1998,
respectively.
The ESOP shares as of September 30, 1999 are as follows:
Allocated shares 15,272
Committed to be released shares 4,122
Unreleased shares 155,176
----------
Total ESOP shares 174,570
==========
Fair value of unreleased shares $2,589,499
==========
(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 $124,646 for both for nine months ended September 30,
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. On July 1, 1999,
the Company closed its loan origination office in Cape Girardeau, Missouri. Loan
originations in the secondary market are now processed through the Perryville,
Missouri location.
In August, 1999, the Company entered into an agreement with
First National Bank in Pinckneyville for the purchase and sale of the Company's
Pinckneyville Branch operation in Pinckneyville, Illinois. The transaction was
approved by the Office of Comptroller of Currency on September 27, 1999, and the
Company expects the transaction to be completed in November, 1999. The sale of
the Pinckneyville Branch is part of the Company's long-term strategy to focus
its resources on its other operations in Randolph County, Illinois and Perry
County, Missouri.
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 $15.6 million,
or 11.0%, to $127.2 million at September 30, 1999 from $142.8 million at
December 31, 1998. The decrease in the Company's asset size was attributable
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to decreases in investment securities and cash and cash equivalents. These
decreases were primarily due to a $10.9 million decrease in securities sold
under agreements to repurchase and a $3.6 million decrease in deposits during
the nine months ended September 30, 30, 1999.
Securities sold under agreements to repurchase decreased $10.9
million from $10.9 million at December 31, 1998. There were no securities sold
under agreements to repurchase at September 30, 1999. The majority of such
agreements were 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, 1999, and December 31, 1998, the balance of funds on
deposit with the Company was $9.1 million and $24.3 million, respectively, which
included the securities sold under agreements to repurchase.
Loans receivable increased $725,000, or 1.5%, to $48.9 million
at September 30, 1999 from $48.2 million at December 31, 1998. The increase in
loans receivable resulted from a combined impact of increased commercial loan
origination volume of $2.4 million, and a $5.4 million reduction in principal
repayments on loans receivable. The reduction in repayments is primarily due to
the stabalized interest rate environment that has been experienced during 1999.
Included in the commercial loan orginations is a $1.6 million loan to
Gilster-Mary Lee secured by deposit accounts maintained by the Company.
Mortgage-backed securities at September 30, 1999 were $23.8
million compared to $21.9 million at December 31, 1998. Investment securities
decreased $8.3 million, or 15.7%, to $44.3 million at September 30, 1999, from
$52.6 million at December 31, 1998. During the nine months ended September 30,
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 a portion of the short-term
interest-bearing funds into higher yielding mortgage-backed securities during
the nine months ended September 30, 1999.
Cash, interest-bearing deposits, federal funds sold and
bankers' acceptances, on a combined basis, decreased $10.2 million, or 60.7%, to
$6.6 million at September 30, 1999 from $16.8 million at December 31, 1998.
During the nine months ended September 30, 1999, management used funds from cash
and cash equivalents to purchase mortgage-backed securities, purchase additional
shares of treasury stock and fund excess savings withdrawals.
LIABILITIES. Savings deposits decreased $3.6 million, or 3.6%,
to $95.8 million at September 30, 1999 from $99.4 million at December 31, 1998.
Borrowed money decreased $10.9 million as a result of a $10.9 million decrease
in securities sold under agreements to repurchase.
Advances from the FHLB were $10.0 million at September 30,
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 and nine
months ended September 30, 1999 was $241,000 and $655,000, respectively,
compared to $266,000 and $914,000 for the three and nine months ended September
30, 1998, respectively. The $25,000 and $259,000 decrease in net income for the
three and nine months ended September 30, 1999, respectively, was negatively
impacted by a decrease in net interest income and a decline in noninterest
income, partially offest by the positive impact of a decrease in non-interest
expense.
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NET INTEREST INCOME. Net interest income totaled $918,000 for
the three months ended September 30, 1999 compared to $971,000 for the three
months ended September 30, 1998. The $54,000, or 5.5%, decrease in net interest
income was the result of a decline in the ratio of average interest-earning
assets to average interest-bearing liabilities from 118.34% for the three months
ended September 30, 1998 to 115.86% for the three months ended September 30,
1999. The reduction in the ratio was primarily attributable to management's
continued planned use of funds to repurchase the company's common stock. The
impact of this was partially offset by an increase in the third quarter interest
rate spread.
Net interest income totaled $2.7 million for the nine months
ended September 30, 1999 compared to $3.1 million for the nine months ended
September 30, 1998. The $360,000, or 11.7%, decrease in net interest income was
the result of a decline in the ratio of average interest-earning assets to
average interest-bearing liabilities from 120.34% for the nine months ended
September 30, 1998 to 115.68% for the nine months ended September 30, 1999. In
addition, the interest rate spread for the nine months ended September 30, 1999
declined to 2.32% from 2.37% for the comparable 1998 period.
INTEREST INCOME. Interest income on loans receivable decreased
$77,000, or 7.3%, for the three months ended September 30, 1999. The decrease in
interest income on loans receivable was the result of a $2.0 million, or 3.9%,
decrease in the average balance of loans receivable, coupled with a 29 basis
point decline in the average yield on loans receivable for the three months
ended September 30, 1999.
Interest income on loans receivable decreased $549,000, or
15.8%, for the nine months ended September 30, 1999. The decrease in interest
income on loans receivable was the result of a $7.1 million, or 13.1%, decrease
in the average balance of loans receivable for the nine months ended September
30, 1999, coupled with a decline in the average yield on loans receivable from
8.51% for the nine months ended September 30, 1998 to 8.25% for the nine months
ended September 30, 1999.
Interest income on mortgage-backed securities increased
$33,000 and $309,000 for the three and nine months ended September 30, 1999,
respectively. The increase in both instances resulted from an increase in the
average balance of mortgage-backed securities, partially offset by a decline in
the average yield on mortgage-backed securities. For the three and nine months
ended September 30, 1999, the average balance of mortgage-backed securities
increased $3.4 million, or 15.4%, and $8.1 million, or 46.2%, respectively.
Interest income on investment securities decreased $56,000, or
8.1%, to $638,000 for the three months ended September 30, 1999. The decrease in
interest income on investment securities was the result of a $5.3 million, or
10.5%, decrease in the average balance of investment securities, coupled with a
17 basis point increase in the average yield on investment securities for the
three months ended September 30, 1999. Interest income on investment securities
remained consistent at $1.9 million for the nine months ended September 30, 1999
and 1998.
Interest income on interest-bearing deposits decreased
$100,000, or 61.5%, and decreased $326,000, or 48.9%, during the three and nine
months ended September 30, 1999, respectively. The decrease in both instances
resulted from a decrease in the average balance of interest-bearing deposits,
offset partially by a decline in the average yield on interest-bearing deposits
for the three and nine months ended September 30, 1999. For the three and nine
months ended September 30, 1999, the average balance of interest-bearing
deposits decreased $6.7 million, or 54.3%, and $6.5 million, or 38.8%,
respectively. The decline in the average yield on interest-bearing deposits
decreased 82 basis points and 87 basis points for the three and nine months
ended September 30, 1999, respectively.
INTEREST EXPENSE. Interest expense on savings deposits
decreased $38,000, or 3.7%, to $1.01 million for the three months ended
September 30, 1999 from $1.05 million for the three months ended September 30,
1998. The average balance of deposits increased $1.8 million, or 1.9%, however,
this was more than offset by a decrease in the average cost of deposits from
4.44% for the three months ended September 30, 1998 to 4.20% for the three
months ended September 30, 1999.
Interest expense on savings deposits decreased $67,000, or
2.1%, to $3.07 million for the nine months ended September 30, 1999 from $3.14
million for the nine months ended September 30, 1998. The average balance of
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deposits increased $2.9 million, or 3.0%, however, this was more than offset by
a decrease in the average cost of deposits from 4.41% for the nine months ended
September 30, 1998 to 4.19% for the nine months ended September 30, 1999.
Interest expense on borrowed money decreased $108,000 and
$172,000 for the three and nine months ended September 30, 1999, respectively.
Interest expense on securities sold under agreements to
repurchase decreased $110,000, or 91.9%, to $10,000 for the three months ended
September 30, 1999 from $120,000 for the three months ended September 30, 1998.
The decrease in interest expense on securities sold under agreements to
repurchase was the result of a $8.5 million, or 90.8% decrease in the average
balance of securities sold under agreements to repurchase.
Interest expense on securities sold under agreements to
repurchase decreased $234,000, or 67.3%, to $113,000 for the nine months ended
September 30, 1999 from $347,000 for the nine months ended September 30, 1998.
The decrease in interest expense on securities sold under agreements to
repurchase was the result of a $5.6 million, or 61.8% decrease in the average
balance of securities sold under agreements to repurchase, combined with a 75
basis point decline in the average cost of securities sold under agreements to
repurchase for the comparable 1998 period.
Interest expense on FHLB advances was $123,000 and $363,000
for the three and nine months ended September 30, 1999, respectively, compared
to $122,000 and $301,000 for the three and nine months ended September 30, 1998,
respectively. The average balance on FHLB advances was $10.0 million for the
three and nine months ended September 30, 1999, respectively. The average
balance on FHLB advances was $10.0 million and $8.4 million for the three and
nine months ended September 30, 1998, respectively. The average cost of FHLB
advances was 4.92% and 4.88% for the three month period and 4.84% and 4.81% for
the nine month period ending September 30, 1999 and 1998, respectively.
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 three and nine months ended September 30, 1999, the
provision for loan losses was zero as no significant problem loans were
identified and the loan portfolio did not increase significantly. The loan loss
provision was $17,000 for the nine months ended September 30, 1998.
The Company's allowance for loan losses was $412,000, or .84%,
of loans outstanding at September 30, 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 nine months ended September 30, 1999 was $40,000, which
represented .09% of average loans outstanding. There were no charge-offs or
recoveries during the quarter ended September 30, 1999. 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, 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 $36,000 and
$122,000 for the three and nine months
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ended September 30, 1999, respectively, compared to $53,000 and $158,000 for the
three and nine months ended September 30, 1998. The decrease in noninterest
income for the three and nine months ended September 30, 1999 was mainly
attributable to a $17,000 and $38,000 decrease in other fee income,
respectively.
NONINTEREST EXPENSE. Noninterest expense was $604,000 and
$642,000 for the three months ended September 30, 1999 and 1998, respectively,
and $1.9 million for both the nine month periods ended September 30, 1999 and
1998.
INCOME TAX EXPENSE. Income tax expense for the three and nine
months ended September 30, 1999 was $108,000 and $294,000, respectively,
compared to income tax expense of $116,000 and $397,000 for the three and nine
months ended September 30, 1998. The Company's effective tax rate for the three
and nine months ended September 30, 1999 was 30.8% and 31.0%, respectively,
compared to 30.3% and 30.3% for the three and nine months ended September 30,
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
September 30, 1999, cash and cash equivalents totaled $6.6 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, 1999, purchases of
investment securities and mortgage-backed securities totaled $94.8 million and
$10.9 million, respectively, while loan originations totaled $12.0 million.
These investments were funded primarily from loan and mortgage-backed security
repayments of $19.8 million and investment securities sales and maturities of
$103.0 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, 1999, the Company
had $10.0 million in outstanding advances from the FHLB.
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At September 30, 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 September 30, 1999 are as
follows:
Actual Capital Requirements
----------------------------------------------------
(Dollars in thousands) Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------------------------
Total capital
(to risk-weighted assets):
Company $21,185 41.7% 4,061 8.00%
Chester National Bank $16,402 37.9% 3,463 8.00%
Chester National Bank of Missouri 3,331 50.6% 526 8.00%
Tier 1 capital
(to risk-weighted assets):
Company $20,773 40.9% 2,031 4.00%
Chester National Bank $16,070 37.1% 1,732 4.00%
Chester National Bank of Missouri 3,251 49.4% 263 4.00%
Tier 1 capital
(to average assets):
Company $20,773 15.9% 3,926 3.00%
Chester National Bank $16,070 13.7% 3,517 3.00%
Chester National Bank of Missouri 3,251 28.0% 349 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
During the next several 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 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 2000" issue. The Company has
completed the assessment and testing phases of its
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program and is currently testing its contingency plan.
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 has completed all Year 2000 remediation and
testing activities. 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. The
Company completed all Year 2000 testing of the contingency plan during the third
quarter 1999 and will continue to plan, monitor and test the contingency plan.
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,
---------------- ---------------
1999 1998
---- ----
(Dollars in Thousands)
--------------------------------------------
Non-performing loans:
Loans accounted for on a non-accrual basis:
Real estate
Residential real estate $ 91 $150
Commercial -- --
Consumer 8 6
---- ----
Total 99 156
---- ----
Accruing loans which are contractually past due 90 days or
more:
Residential real estate -- --
Commercial -- --
Consumer -- --
---- ----
Total -- --
---- ----
Total non-performing loans 99 156
Real estate acquired by foreclosure, net 288 128
---- ----
Total non-performing assets $387 $284
==== ====
Total non-performing loans to net loans 0.20% 0.32%
==== ====
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Total allowance for loan losses to
non-performing loans 413.68% 287.41%
====== ======
Total non-performing assets to total assets 0.30% 0.20%
====== ======
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: November 9, 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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