UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2002
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 897,668 on August 5, 2002.
================================================================================
FORM 10-Q
Index
<Table>
<Caption>
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
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...................................... 10
Notes to Unaudited Consolidated Financial Statements................................. 11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................................... 13
Item 3. Quantitative and Qualitative Disclosures About Market Risks.......................... 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................... 23
Item 2. Changes in Securities................................................................ 23
Item 3. Defaults upon Senior Securities...................................................... 23
Item 4. Submission of Matters to a Vote
of Securities Holders............................................................... 23
Item 5. Other Information.................................................................... 23
Item 6. Exhibits and Reports on Form 8-K..................................................... 23
Signature........................................................................................ 24
</Table>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
3
CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2002 and December 31, 2001
(Unaudited)
<Table>
<Caption>
June 30, December 31,
Assets 2002 2001
------ -------------- --------------
Cash $ 1,170,264 $ 851,602
Interest-bearing deposits 8,280,635 3,406,480
Federal funds sold 12,300,000 16,760,000
-------------- --------------
Total cash and cash equivalents 21,750,899 21,018,082
Certificates of deposit 3,500,000 --
Investment securities:
Available for sale, at fair value (cost of $900,000 and $1,659,955 at
June 30, 2002 and December 31, 2001, respectively) 902,029 1,632,477
Held to maturity, at cost (fair value of $36,587,305 and $35,273,053 at
June 30, 2002 and December 31, 2001, respectively) 35,852,479 34,572,352
Nonmarketable securities 3,626,300 3,547,000
Mortgage-backed securities:
Available for sale, at fair value (cost of $0 and $500,338 at
June 30, 2002 and December 31, 2001, respectively) -- 511,578
Held to maturity, at cost (fair value of $4,568,676 and $6,689,342 at
June 30, 2002 and December 31, 2001, respectively) 4,426,460 6,598,411
Loans receivable, net of allowance for loan loss ($576,248 at
June 30, 2002 and $590,590 at December 31, 2001, respectively) 37,318,861 41,097,027
Accrued interest receivable 897,543 778,175
Office property and equipment, net 1,478,852 1,527,507
Other assets 518,479 478,689
-------------- --------------
$ 110,271,902 $ 111,761,298
============== ==============
Liabilities and Stockholders' Equity
------------------------------------
Deposits
Non-interest bearing $ 3,914,814 $ 5,022,030
Interest bearing 85,384,512 86,391,754
Borrowed money 5,000,000 5,000,000
Accrued interest payable 49,929 61,826
Advance payments by borrowers for taxes and insurance 448,588 183,378
Accrued expenses and other liabilities 154,984 154,510
-------------- --------------
Total liabilities 94,952,827 96,813,498
-------------- --------------
Stockholders' equity:
Common stock, $.01 par value, 3,000,000 shares authorized, 2,182,125
shares issued at June 30, 2002 and December 31, 2001 21,821 21,821
Additional paid-in capital 21,127,843 21,268,104
Retained earnings, substantially restricted 15,960,180 15,737,450
Accumulated other comprehensive income (loss) 1,258 (10,068)
Unearned ESOP shares (1,400,640) (1,428,120)
Unearned restricted stock awards -- (61,092)
Treasury stock, at cost: 1,191,257 and 1,204,155 shares at
June 30, 2002 and December 31, 2001, respectively (20,391,387) (20,580,295)
-------------- --------------
Total stockholders' equity 15,319,075 14,947,800
-------------- --------------
$ 110,271,902 $ 111,761,298
============== ==============
</Table>
See accompanying notes to unaudited consolidated financial statements.
4
CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Three Months Ended June 30, 2002 and 2001
(Unaudited)
<Table>
<Caption>
Three Months Ended
June 30,
-----------------------------
2002 2001
------------ ------------
Interest income:
Loans receivable $ 723,468 $ 933,728
Mortgage-backed securities 64,665 212,452
Investments 578,463 587,763
Interest-bearing deposits and federal funds sold 72,575 211,195
------------ ------------
Total interest income 1,439,171 1,945,138
------------ ------------
Interest expense:
Savings deposits 555,508 1,019,745
Borrowed money 60,667 60,667
------------ ------------
Total interest expense 616,175 1,080,412
------------ ------------
Net interest income 822,996 864,726
Provision for loan losses -- --
------------ ------------
Net interest income after provision for loan losses 822,996 864,726
------------ ------------
Noninterest income:
Late charges and other fees 47,523 47,269
Gain on sale of mortgage-backed securities, net -- 8,618
Other 14,031 42,296
------------ ------------
Total noninterest income 61,554 98,183
------------ ------------
Noninterest expense:
Compensation and employee benefits 305,436 317,718
Occupancy 66,471 71,320
Data processing 36,038 35,494
Professional fees 49,489 54,102
Advertising 11,528 12,772
Federal deposit insurance premiums 3,943 4,596
Other 85,386 81,017
------------ ------------
Total noninterest expense 558,291 577,019
------------ ------------
Income before income tax expense 326,259 385,890
Income tax expense 85,624 106,060
------------ ------------
Net income $ 240,635 $ 279,830
============ ============
Earnings per common share - basic $ .29 $ .25
============ ============
Earnings per common share - diluted $ .27 $ .24
============ ============
</Table>
See accompanying notes to unaudited consolidated financial statements.
5
CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Six Months Ended June 30, 2002 and 2001
(Unaudited)
<Table>
<Caption>
Six Months Ended
June 30,
-----------------------------
2002 2001
------------ ------------
Interest income:
Loans receivable $ 1,484,673 $ 1,922,117
Mortgage-backed securities 155,677 459,234
Investments 1,114,521 1,161,725
Interest-bearing deposits and federal funds sold 140,912 423,214
------------ ------------
Total interest income 2,895,783 3,966,290
------------ ------------
Interest expense:
Savings deposits 1,147,674 2,129,047
Borrowed money 120,667 110,667
------------ ------------
Total interest expense 1,268,341 2,239,714
------------ ------------
Net interest income 1,627,442 1,726,576
Provision for loan losses -- --
------------ ------------
Net interest income after provision for loan losses 1,627,442 1,726,576
------------ ------------
Noninterest income:
Late charges and other fees 96,608 88,639
Gain on sale of investment securities, net 7,571 10,652
Gain on sale of mortgage-backed securities, net 3,851 8,618
Other 22,622 51,759
------------ ------------
Total noninterest income 130,652 159,668
------------ ------------
Noninterest expense:
Compensation and employee benefits 623,428 636,934
Occupancy 139,114 145,383
Data processing 76,294 73,832
Professional fees 100,056 101,943
Advertising 23,056 25,544
Federal deposit insurance premiums 8,401 9,615
Other 162,922 160,859
------------ ------------
Total noninterest expense 1,133,271 1,154,110
------------ ------------
Income before income tax expense 624,823 732,134
Income tax expense 137,174 205,541
------------ ------------
Net income $ 487,649 $ 526,593
============ ============
Earnings per common share - basic $ .58 $ .46
============ ============
Earnings per common share - diluted $ .54 $ .45
============ ============
</Table>
See accompanying notes to unaudited consolidated financial statements.
6
CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Six Months Ended June 30, 2002
(Unaudited)
<Table>
<Caption>
Retained Accumulated
Common stock Additional earnings, other
---------------------------- paid-in substantially comprehensive
Shares Amount capital restricted income (loss)
------------ ------------ ------------ ------------- -------------
Balance, December 31, 2001 2,182,125 $ 21,821 $ 21,268,104 $ 15,737,450 $ (10,068)
Net income -- -- -- 487,649 --
Purchase of treasury stock -- -- -- -- --
Treasury stock issued for MRP -- -- (166,516) (10,407) --
Stock options exercised -- -- -- (1,528) --
Amortization of restricted
stock awards -- -- -- -- --
Amortization of ESOP awards -- -- 26,255 -- --
Dividends on common stock
at $.30 per share -- -- -- (252,984) --
Change in accumulated other
comprehensive income (loss) -- -- -- -- 11,326
------------ ------------ ------------ ------------ ------------
Balance, June 30, 2002 2,182,125 $ 21,821 $ 21,127,843 $ 15,960,180 $ 1,258
============ ============ ============ ============ ============
<Caption>
Unearned Unamortized Treasury Stock Total
ESOP restricted ----------------------------- Stockholders'
shares stock awards Shares Amount equity
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2001 $ (1,428,120) $ (61,092) 1,204,155 $(20,580,295) $ 14,947,800
Net income -- -- -- -- 487,649
Purchase of treasury stock -- -- 742 (13,987) (13,987)
Treasury stock issued for MRP -- -- (11,894) 176,923 --
Stock options exercised -- -- (1,746) 25,972 24,444
Amortization of restricted
stock awards -- 61,092 -- -- 61,092
Amortization of ESOP awards 27,480 -- -- -- 53,735
Dividends on common stock
at $.30 per share -- -- -- -- (252,984)
Change in accumulated other
comprehensive income (loss) -- -- -- -- 11,326
------------ ------------ ------------ ------------ ------------
Balance, June 30, 2002 $ (1,400,640) $ -- 1,191,257 $(20,391,387) $ 15,319,075
============ ============ ============ ============ ============
</Table>
See accompanying notes to unaudited consolidated financial statements.
7
CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six months ended June 30, 2002 and 2001
(Unaudited)
<Table>
<Caption>
June 30, June 30,
2002 2001
------------ ------------
Cash flows from operating activities:
Net income $ 487,649 $ 526,593
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization:
Office properties and equipment 71,111 80,774
Deferred fees, discounts, and premiums 39,575 (77,263)
Stock plans 139,271 141,334
Provisions for deferred taxes (7,583) --
Increase (decrease) in accrued interest receivable (119,368) 167,699
Decrease in accrued interest payable (11,897) (70,949)
Increase in income taxes, net 66,016 12,093
(Gain) on sale of investment securities and nonmarketable securities, net (7,571) (10,652)
(Gain) on sale of mortgage-backed securities, net (3,851) (8,618)
Dividend on FHLB Stock (79,300) (31,700)
Net change in other assets and other liabilities (110,022) 63,720
------------ ------------
Net cash provided by operating activities 464,030 793,031
------------ ------------
Cash flows from investing activities:
Investment securities:
Available-for-sale:
Purchases (900,000) (4,096,486)
Proceeds from sales 1,667,527 1,510,652
Proceeds from calls and maturities -- 1,000,000
Held-to-maturity:
Purchases (17,785,000) (20,035,000)
Proceeds from maturities and paydowns 16,479,000 17,778,430
Nonmarketable equity securities:
Purchases -- (2,000,000)
Mortgage-backed securities:
Available-for-sale:
Proceeds from sales 435,101 1,410,369
Proceeds from maturities and paydowns 69,383 577,376
Held-to-maturity:
Purchases -- (997,672)
Proceeds from maturities and paydowns 2,157,432 2,386,798
Principal repayments on loans 5,910,561 7,021,828
Origination of loans (2,171,105) (5,032,262)
Purchase of certificates of deposit (6,000,000) --
Proceeds from the maturity of certificates of deposit 2,500,000 1,000,000
Proceeds from sales of real estate acquired through foreclosure 44,563 --
Purchase of office properties and equipment (22,456) (105,931)
------------ ------------
Net cash provided by investing activities 2,385,006 418,102
------------ ------------
Cash flows from financing activities:
Decrease in savings deposits (2,114,458) (1,214,359)
Proceeds from FHLB advances -- 5,000,000
Increase in advance payments by borrowers for taxes and insurance 265,210 161,268
Purchase of treasury stock (13,987) (490,825)
Dividends paid (252,984) (284,629)
------------ ------------
Net cash provided by (used in) financing activities (2,116,219) 3,171,455
------------ ------------
Net increase in cash and cash equivalents 732,817 4,382,588
Cash and cash equivalents, beginning of period 21,018,082 11,688,354
------------ ------------
Cash and cash equivalents, end of period $ 21,750,899 $ 16,070,942
============ ============
</Table>
8
CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six months ended June 30, 2002 and 2001
(Continued)
<Table>
<Caption>
June 30, June 30,
2002 2001
------------ ------------
Supplemental information:
Interest paid $ 1,280,239 $ 2,310,662
Income taxes paid $ 98,395 $ 184,051
Noncash investing and financing activities:
Loans transferred to real estate acquired by foreclosure $ 39,232 $ --
Interest credited to savings deposits $ 814,935 $ 1,414,156
</Table>
See accompanying notes to unaudited consolidated financial statements.
9
CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Unaudited)
<Table>
<Caption>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net income $ 240,635 $ 279,830 $ 487,649 $ 526,593
Other comprehensive income, net of tax
Unrealized holding gain (loss) on
securities available for sale $ 1,258 $ (21,416) $ 4,244 $ 41,877
Less adjustment for realized gains
included in net income $ -- $ 5,343 $ 7,082 $ 11,947
------------ ------------ ------------ ------------
Total other comprehensive income (loss) $ 1,258 $ (16,073) $ 11,326 $ 53,824
------------ ------------ ------------ ------------
Comprehensive income $ 241,893 $ 263,757 $ 498,975 $ 580,417
============ ============ ============ ============
</Table>
See accompanying notes to unaudited consolidated financial statements.
10
CHESTER BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(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 accounting principles generally accepted in the
United States of America. 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 June 30, 2002 and
December 31, 2001 and for the three and six months ended June 30, 2002 and 2001.
Operating results for the three months ended June 30, 2002 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2002.
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 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 six months ended June 30, 2002
and 2001 follows:
<Table>
<Caption>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Basic EPS:
Net income $ 240,635 $ 279,830 $ 487,649 $ 526,593
============ ============ ============ ============
Average common shares outstanding 839,602 1,123,217 838,478 1,133,513
------------ ------------ ------------ ------------
Basic EPS $ 0.29 $ 0.25 $ .58 $ .46
============ ============ ============ ============
Diluted EPS:
Net income $ 240,635 $ 279,830 $ 487,649 $ 526,593
============ ============ ============ ============
Average common shares outstanding 839,602 1,123,217 838,478 1,133,513
Dilutive potential due to stock plans 62,524 32,660 61,303 30,991
------------ ------------ ------------ ------------
Average number of common shares and dilutive
potential common shares outstanding 902,126 1,155,877 899,781 1,164,504
------------ ------------ ------------ ------------
Diluted EPS $ 0.27 $ .24 $ .54 $ .45
============ ============ ============ ============
</Table>
11
(3) Employee Stock Ownership Plan (ESOP)
During 1996, the Company established a tax-qualified ESOP. The plan
covers substantially all employees who have attained the age of 21 and completed
one year of service. In connection with the conversion to a stock corporation,
the ESOP purchased 174,570 shares of the Company's common stock at a
subscription price of $10.00 per share using funds loaned by the Company. All
shares are held in a suspense account for allocation among the participants as
the loan is repaid with level principal payments over 30 years. Shares released
from the suspense account are allocated among the participants based upon their
pro rata annual compensation. The 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 $53,735 and $46,014 for the six months ended
June 30, 2002 and 2001, respectively.
The ESOP shares as of June 30, 2002 are as follows:
<Table>
Allocated shares 32,558
Committed to be released shares 2,748
Unreleased shares 139,264
------------
Total ESOP shares 174,570
============
Fair value of unreleased shares $ 2,924,544
============
</Table>
(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 $61,092 and $83,098 for the six months ended June 30,
2002 and 2001, respectively.
12
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, 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.
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 $1.5 million,
or 1.3%, to $110.3 million at June 30, 2002 from $111.8 million at December 31,
2001. The decrease in the Company's asset size was mainly attributable to a
$2.1, or 2.3%, decrease in savings deposits.
Loans receivable deceased $3.8 million, or 9.2%, to $37.3
million at June 30, 2002 from $41.1 million at December 31, 2001. The decrease
in loans receivable resulted from a combined impact of decreased loan
origination volume and an increase in principal repayments on loans receivable.
During this period of record low interest rates and economic instability,
management has decided to continue to focus on originating high quality loans.
Management has also decided not to aggressively compete on rate terms with other
lenders in the Banks' market area. As a result, the Company has experienced some
constriction in the loan portfolio.
Mortgage-backed securities at June 30, 2002 were $4.4 million
compared to $7.1 million at December 31, 2001. Investment securities, including
nonmarketable equity securities, increased $629,000, or 1.6%, to $40.4 million
at June 30, 2002, from $39.8 million at December 31, 2001. As a function of
13
management's plan to re-align the mix of interest earning assets, proceeds from
maturities, calls and sales of investment securities and mortgage-backed
securities, along with principal repayments on loans and mortgage-backed
securities, were re-invested in short-term, callable investment securities.
Cash, interest-bearing deposits, certificates of deposits, and
federal funds sold, on a combined basis, increased $4.2 million, or 20.1%, to
$25.3 million at June 30, 2002 from $21.0 million at December 31, 2001. The
overall increase in cash, cash equivalents and certificates of deposit was a
direct result of the re-alignment of interest earning assets. In addition,
excess deposits in interest bearing accounts and federal funds sold were
invested in higher yielding certificates of deposit.
LIABILITIES. Savings deposits decreased $2.1 million, or 2.3%,
during the six months ended June 30, 2002. Borrowed money was $5.0 million at
June 30, 2002 and December 31, 2001.
Over the last several years, the Company has maintained a
deposit relationship 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. That relationship has provided as
much as $25 million in funds on deposit, typically with short terms. At June 30,
2002 and December 31, 2001, the balance of funds on deposit with the Company was
$20.4 million, and $21.8 million, respectively.
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, certificates of deposit 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
loan losses, noninterest income, and noninterest expense. Each of these factors
is significantly affected not only by the Company's policies, but, to varying
degrees, by general economic and competitive conditions and by policies of
federal regulatory authorities.
NET INCOME. The Company's net income for the three and six
months ended June 30, 2002 was $240,635 and $487,649, respectively, compared to
$279,830 and $526,593 for the three and six months ended June 30, 2001,
respectively. The $39,000 decrease in net income for the three and six months
ended June 30, 2002, respectively, was the result of a decline in net interest
income, positively offset by a decline in interest expense, a decrease in
noninterest expense and a decrease in income tax expense.
NET INTEREST INCOME. Net interest income totaled $823,000 for
the three months ended June 30, 2002 compared to $865,000 for the three months
ended June 30, 2001. The $42,000, or 4.8%, decrease in net interest income was
the result of a decrease in the ratio of average interest-earning assets to
average interest-bearing liabilities of 112.7% for the three months ended June
30, 2002 compared to 116.5% for the three months ended June 30, 2001. The
decrease was positively offset by an increase in the Company's interest rate
spread to 2.95% for the three months ended June 30, 2002 from 2.45% for the
three months ended June 30, 2001.
Net interest income totaled $1.6 million for the six months
ended June 30, 2002 compared to $1.7 million for the six months ended June 30,
2001. The $99,000, or 5.7%, decrease in net interest income was the result of a
decrease in the ratio of average interest-earning assets to average
interest-bearing liabilities of 112.3% for the six months ended June 30, 2002
compared to 116.3% for the six months ended June 30, 2001. The decrease was
positively offset by an increase in the Company's interest rate spread to 2.93%
for the six months ended June 30, 2002 from 2.44% for the six months ended June
30, 2001.
INTEREST INCOME. Interest income on loans receivable decreased
$210,000, or 22.5%, for the three months ended June 30, 2002. The decrease in
interest income on loans receivable was the result of a $8.2 million, or 17.9%,
decrease in the average balance of loans receivable, coupled with a decline in
the
14
average yield on loans receivable to 7.69% for the three months ended June 30,
2002 from 8.15% for the three months ended June 30, 2001.
Interest income on loans receivable decreased $437,000, or
22.8%, for the six months ended June 30, 2002. The decrease in interest income
on loans receivable was the result of a $7.9 million, or 17.1%, decrease in the
average balance of loans receivable for the six months ended June 30, 2002. The
average yield on loans receivable was 7.71% and 8.28% for the six months ended
June 30, 2002 and June 30, 2001, respectively.
Interest income on mortgage-backed securities decreased
$148,000, or 69.6%, for the quarter and decreased $304,000, or 66.1%, for the
six months ended June 30, 2002. The decrease in interest income on
mortgage-backed securities for the three months ended June 30, 2002 was the
result of a $9.1 million, or 65.3%, decrease in the average balance of
mortgage-backed securities, combined with a 73 basis point decrease in the
average yield on mortgage-backed securities. The decrease in interest income on
mortgage-backed securities for the six months ended June 30, 2002 was the result
of a $9.4, or 62.8%, decrease in the average balance of mortgage-backed
securities, combined with a decrease in the average yield to 5.62% for the six
months ended June 30, 2002 from 6.16% for the six months ended June 30, 2001.
Management invested the funds received from the repayments of mortgage-backed
securities into short-term, interest-bearing deposits.
Interest earned on investment securities was $578,000 for the
three months ended June 30, 2002, compared to $588,000 for the three months
ended June 30, 2001. The $9,300, or 1.6% decrease in interest income on
investment securities was the result of a decrease in the average yield on
investment securities to 5.52% for the three months ended June 30, 2002 from
6.48% for the three months ended June 30, 2001, positively offset by an increase
in the average balance of investment securities of $5.9 million, or 15.2% for
the three months ended June 30, 2002.
Interest earned on investment securities was $1.1 million for
the six months ended June 30, 2002 compared to $1.2 million for the six months
ended June 30, 2001. The $47,000, or 4.1% decrease on investment securities was
the result of a 93 basis point decline in the average yield on investment
securities, positively offset by a $4.5 million, or 11.9%, increase in the
average balance of investment securities for the six months ended June 30, 2002.
Interest income on interest-bearing deposits decreased
$139,000, or 65.6%, during the three months ended June 30, 2002. The decrease
primarily resulted from a decrease in the average yield on interest-bearing
deposits to 1.56% for the three months ended June 30, 2002 from 4.17% for the
three months ended June 30, 2001, combined with a $1.5 million, or 7.5%,
decrease in the average balance of interest-bearing deposits.
Interest income on interest-bearing deposits decreased
$282,000, or 66.7%, during the six months ended June 30, 2002. The decrease was
the result of a decrease in the average yield on interest-bearing deposits to
1.47% for the six months ended June 30, 2002 from 4.53% for the six months ended
June 30, 2001.
INTEREST EXPENSE. Interest expense on savings deposits
decreased $464,000, or 45.5%, to $556,000 for the three months ended June 30,
2002 from $1.0 million for the three months ended June 30, 2001. The decrease in
interest expense was the result of an $8.1 million, or 8.4%, decrease in the
average balance of deposits, combined with a decrease in the average cost of
deposits to 2.50% for the three months ended June 30, 2002 from 4.21% for the
three months ended June 30, 2001.
Interest expense on savings deposits decreased $981,000, or
46.1%, to $1.1 million for the six months ended June 30, 2002 from $2.1 million
for the six months ended June 30, 2001. The decrease in interest expense on
savings deposits was the result of a $7.7 million, or 8.0%, decrease in the
average balance of deposits. The average cost of deposits decreased between the
two periods with an average rate of 2.57% for
15
the six months ended June 30, 2002 compared to 4.39% for the six months ended
June 30, 2001.
Interest expense on borrowed money remained constant at
$61,000 for the three months ended June 30, 2002 and 2001, respectively. The
average balance on borrowed money was $5.0 million for both the three month
periods ended June 30, 2002 and 2001.
Interest expense on borrowed money increased $10,000, or 9.0%,
to $121,000 for the six months ended June 30, 2002 from $111,000 for the six
months ended June 30, 2001. The increase in interest expense on borrowed money
was the result of a $414,000, or 9.0%, increase in the average balance of
borrowed money.
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 quarters ended June 30, 2002 and 2001, the
provision for loan losses was zero as no significant problem loans were
identified and the allowance for loan losses was deemed by management to be
adequate.
The Company's allowance for loan losses was $576,000, or 1.5%,
of loans outstanding at June 30, 2002 compared to $591,000, or 1.4%, of loans
outstanding at December 31, 2001. The Company's level of net loans charged-off
during the six months ended June 30, 2002 was $14,000, which represents a
minimal percentage of average loans outstanding. Based on current levels of the
allowance for loan losses in relation to loans receivable and delinquent loans,
management's continued effort to favorably resolve problem loan situations, and
the low level of charge-offs in recent years, management believes the allowance
is adequate at June 30, 2002. At June 30, 2002, loans 90 days or more delinquent
totaled $35,000, or .09% of net loans receivable, compared to $129,000, or .31%
of net loans receivable at December 31, 2001, and $256,000, or .56% of net loans
receivable at June 30, 2001.
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
accounting principles generally accepted in the United States of America (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 $62,000 for the
three months ended June 30, 2002, compared to $98,000 for the three months ended
June 30, 2001. The decrease in noninterest income for the three months ended
June 30, 2002 was mainly attributable to a $28,000 decrease in other income. The
Company did not realize any net gains during the three months ended June 30,
2002, compared to a realized net gain on the sale of available for sale
mortgage-backed securities of $9,000 during the comparable three month period
ending June 30, 2001.
Noninterest income was $131,000 for the six months ended June
30, 2002, compared to $160,000 for the six months ended June 30, 2002. The
decrease was attributable to a $29,000 decrease in other income, positively
offset by an $8,000 increase in fee income. During the six months ended June 30,
2002, the Company realized $11,000 net gain on the sale of available for sale
investment securities and mortgage-backed securities compared to a $19,000 net
gain realized on the sale of investment securities and
16
mortgage-backed securities during the comparable six month period ended June 30,
2001.
NONINTEREST EXPENSE. Noninterest expense decreased $19,000, or
3.2%, for the three months ended June 30, 2002. The decrease in noninterest
expense for the three months ended June 30, 2002 resulted from a $12,000
decrease in compensation expense, a $5,000 decrease in occupancy expense and a
$5,000 decrease in professional fees, partially offset by a $4,000 increase in
other expense. Each of these fluctuations is the result of normal operating
procedures.
Noninterest expense decreased $21,000, or 1.8%, for the six
months ended June 30, 2002. The decrease in noninterest expense for the six
months ended June 30, 2002 resulted from a $14,000 decrease in compensation
expense, a $6,000 decrease in occupancy expense and a $2,000 decrease in
advertising expense, partially offset by a $2,000 increase in data processing
expense and $2,000 increase in other expense. These fluctuations are the result
of normal operating procedures.
INCOME TAX EXPENSE. Income tax expense for the three and six
months ended June 30, 2002 was $86,000 and $137,000 compared to $106,000 and
$206,000 for the three and six months ended June 30, 2001. The Company's
effective tax rate for the three and six months ended June 30, 2002 was 26.6%
and 22.0%, respectively, compared to 27.5% and 28.1% for the three and six
months ended June 30, 2001. The effective tax rate for each period was below the
statutory rate of 34% due to the Company's investment in tax-exempt securities.
The Company recorded an adjustment of $26,000 to income tax expense during the
first quarter 2002. This adjustment was the result of a reevaluation of
estimated tax expense in conjunction with the year-end tax return. Before the
effect of this transaction, the effective tax rate for the three and six month
period ending June 30, 2002 would have been 34.2% and 26.1%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds consist of deposits,
federal funds purchased, 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 2002.
A major portion of the Company's liquidity consists of cash
and cash equivalents, which include investments in highly liquid, short-term
deposits. The level of these assets is dependent on the Company's operating,
investing, lending and financing activities during any given period. At June 30,
2002, cash and cash equivalents, including certificates of deposits, totaled
$25.3 million.
The primary investing activities of the Company include
origination of loans and purchase of mortgage-backed securities and investment
securities. During the six months ended June 30, 2002, purchases of investment
securities and mortgaged-backed securities totaled $18.7 million while loan
originations totaled $2.2 million. These investments were funded primarily from
loan and mortgage-backed security repayments of $8.6 million and investment
securities and sales, calls and maturities of $20.6 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 by
purchasing federal funds or borrow funds from the Federal Home Loan Bank (FHLB).
At June 30, 2002, the Company had $5.0 million in outstanding advances from the
FHLB.
17
At June 30, 2002, 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 June 30, 2002 are as follows:
<Table>
<Caption>
For capital
Actual adequacy purposes
--------------------------- ---------------------------
(Dollars in thousands) Amount Ratio Amount Ratio
- ---------------------- ----------- ----------- ----------- -----------
Total capital (to risk-weighted assets):
Company $ 15,817 39.7% 3,190 8.00%
Chester National Bank $ 12,016 34.1% 2,823 8.00%
Chester National Bank of Missouri $ 3,668 81.7% 359 8.00%
Tier 1 capital (to risk-weighted assets):
Company $ 15,319 38.4% 1,595 4.00%
Chester National Bank $ 11,575 32.8% 1,411 4.00%
Chester National Bank of Missouri $ 3,611 80.4% 180 4.00%
Tier 1 capital (to average assets):
Company $ 15,319 13.9% 4,414 4.00%
Chester National Bank $ 11,575 11.6% 3,989 4.00%
Chester National Bank of Missouri $ 3,611 35.0% 412 4.00%
</Table>
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related data
presented herein have been prepared in accordance with accounting principles
generally accepted in the United States of America, 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.
18
NONPERFORMING ASSETS
The following table sets forth information with respect to the Company's
nonperforming assets at the dates indicated.
<Table>
<Caption>
At June 30, At December 31,
2002 2001
------------ ---------------
(Dollars in Thousands)
Non-performing loans:
Loans accounted for on a non-accrual basis:
Real estate
Residential real estate $ 31 $ 124
Commercial -- --
Consumer 4 5
------------ ------------
Total 35 129
------------ ------------
Accruing loans which are contractually past due 90 days or more:
Residential real estate -- --
Commercial -- --
Consumer -- --
------------ ------------
Total -- --
------------ ------------
Total non-performing loans 35 129
Real estate acquired by foreclosure, net 20 20
------------ ------------
Total non-performing assets $ 55 $ 148
============ ============
Total non-performing loans to net loans 0.09% 0.31%
============ ============
Total allowance for loan losses to
non-performing loans 1650.67% 458.69%
============ ============
Total non-performing assets to total assets 0.05% 0.13%
============ ============
</Table>
19
<Table>
<Caption>
Chester Bancorp, Inc., and Subsidiaries
Three Months Ended June 30,
--------------------------------------------------------------------------------
2002 2001
------------------------------------- -------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
--------- --------- --------- --------- --------- ---------
(Dollars in thousands)
Interest-earning assets:
Loans receivable, net $ 37,596 $ 723 7.69% $ 45,818 $ 934 8.15%
Investments, net(1) 44,583 615 5.52% 38,696 627 6.48%
Mortgage-backed securities, net 4,827 65 5.39% 13,923 213 6.12%
Interest-bearing deposits 18,728 73 1.56% 20,248 211 4.17%
--------- --------- --------- --------- --------- ---------
Total interest-earning assets 105,734 1,476 5.58% 118,685 1,985 6.69%
--------- --------- --------- ---------
Noninterest-earning assets 4,626 4,447
--------- ---------
Total assets $ 110,360 $ 123,132
========= =========
Interest-bearing liabilities:
Deposits $ 88,790 556 2.50% $ 96,880 1,020 4.21%
Federal funds purchased 0 0 0.00% 0 0 0.00%
Other borrowings 0 0 0.00% 0 0 0.00%
FHLB advances 5,000 61 4.88% 5,000 61 4.88%
--------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities 93,790 617 2.63% 101,880 1,081 4.24%
--------- --------- --------- ---------
Noninterest-bearing liabilities 1,280 1,477
--------- ---------
Total liabilities 95,070 103,357
Retained earnings 15,290 19,775
--------- ---------
Total liabilities and retained
earnings $ 110,360 $ 123,132
========= =========
Net interest income $ 859 $ 904
========= =========
Interest rate spread 2.95% 2.45%
========= =========
Net interest margin 3.25% 3.05%
========= =========
Ratio of average interest-earning
assets to average interest-bearing
liabilities 112.73% 116.49%
========= =========
</Table>
(1) Tax exempt state and municipal securities are presented on a tax equivalent
basis.
20
<Table>
<Caption>
Chester Bancorp, Inc., and Subsidiaries
Six Months Ended June 30,
--------------------------------------------------------------------------------
2002 2001
------------------------------------- -------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
--------- --------- --------- --------- --------- ---------
(Dollars in thousands)
Interest-earning assets:
Loans receivable, net $ 38,506 $ 1,485 7.71% $ 46,447 $ 1,922 8.28%
Investments, net(1) 42,591 1,190 5.59% 38,057 1,241 6.52%
Mortgage-backed securities, net 5,538 156 5.62% 14,900 459 6.16%
Interest-bearing deposits 19,175 141 1.47% 18,724 424 4.53%
--------- --------- --------- --------- --------- ---------
Total interest-earning assets 105,810 2,972 5.62% 118,128 4,046 6.85%
--------- --------- --------- ---------
Noninterest-earning assets 4,721 4,711
--------- ---------
Total assets $ 110,531 $ 122,839
========= =========
Interest-bearing liabilities:
Deposits $ 89,222 1,148 2.57% $ 96,962 2,129 4.39%
Federal funds purchased 0 0 0.00% 0 0 0.00%
Other borrowings 0 0 0.00% 0 0 0.00%
FHLB advances 5,000 121 4.83% 4,586 111 4.84%
--------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities 94,222 1,269 2.69% 101,548 2,240 4.41%
--------- --------- --------- ---------
Noninterest-bearing liabilities 1,140 1,460
--------- ---------
Total liabilities 95,362 103,008
Retained earnings 15,169 19,831
--------- ---------
Total liabilities and retained
earnings $ 110,531 $ 122,839
========= =========
Net interest income $ 1,703 $ 1,806
========= =========
Interest rate spread 2.93% 2.44%
========= =========
Net interest margin 3.22% 3.06%
========= =========
Ratio of average interest-earning
assets to average interest-bearing
liabilities 112.30% 116.33%
========= =========
</Table>
(1) Tax exempt state and municipal securities are presented on a tax equivalent
basis.
21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
There has been no material change to the market risk position of the
Company from the end of the last fiscal year on December 31, 2001.
22
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.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits
<Table>
<Caption>
Regulation S-K Reference to Prior Filing or
Exhibit Number Document Exhibit Number Attached Hereto
-------------- -------- ------------------------------
99.1 Chief Executive Officer Certification 99.1
99.2 Chief Financial Officer Certification 99.2
</Table>
B. Reports on Form 8-K
None
23
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned, thereunto duly authorized.
Chester Bancorp, Inc.
By: /s/ Michael W. Welge
----------------------------------------
Michael W. Welge
Chairman of the Board, President and
Chief Financial Officer
(Duly Authorized Officer)
Dated: August 9, 2002
24