SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1997
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
(State or other jurisdiction of incorporation or organization)
37-1359570
(I.R.S. Employer 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 [ ] No [X]
The number of outstanding shares of the registrant's Common Stock, par value
$.01 per share, was 2,182,125 on March 31, 1997.
FORM 10-Q
Index
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets........................... 2
Consolidated Statements of Income..................... 3
Consolidated Statement of Stockholders' Equity........ 4
Consolidated Statements of Cash Flows................. 5
Notes to Consolidated Financial Statements............ 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......... 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................... 16
Item 2. Changes in Securities................................. 16
Item 3. Defaults upon Senior Securities....................... 16
Item 4. Submission of Matters to a Vote
of Securities Holders................................. 16
Item 5. Other Information..................................... 16
Item 6. Exhibits and Reports on Form 8-K...................... 16
Signature.............................................................. 17
Exhibit Index.......................................................... 18
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The financial statements provided herein for periods prior to October 4, 1996
are for Chester Savings Bank, FSB (the "Bank"), which is the predecessor of
Chester Bancorp, Inc. (the "Company") prior to October 4, 1996.
1
CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 1997 and December 31, 1996
(Unaudited)
March 31, December 31,
1997 1996
------------- -------------
Assets
Cash ................................................... $ 1,782,742 $ 1,925,684
Interest-bearing deposits .............................. 2,266,743 4,191,595
Federal funds sold ..................................... 4,000,000 16,000,000
------------- -------------
Total cash and cash equivalents ............... 8,049,485 22,117,279
Certificates of deposit ................................ 591,065 888,265
Investment securities:
Available for sale, at market value ................. 21,455,890 12,508,487
Held to maturity, at cost ........................... 37,088,023 36,254,076
Mortgage-backed securities:
Available for sale, at market value ................. 1,848,590 1,898,532
Held to maturity, at cost ........................... 16,292,277 13,998,304
Loans receivable, net .................................. 53,561,608 54,842,131
Accrued interest receivable ............................ 949,327 863,692
Real estate acquired by foreclosure, net ............... 118,305 116,747
Office property and equipment, net ..................... 1,922,845 1,949,535
Income taxes receivable ................................ -- 18,051
Deferred tax asset, net ................................ 39,021 23,792
Other assets ........................................... 349,049 363,858
------------- -------------
$ 142,265,485 $ 145,842,749
============= =============
Liabilities and Stockholders' Equity
Savings deposits ....................................... $ 101,005,911 $ 102,246,850
Securities sold under agreements to repurchase ......... 8,340,000 11,340,000
Accrued interest payable ............................... 122,025 112,623
Advance payments by borrowers for taxes and insurance .. 723,401 447,666
Income taxes payable ................................... 104,340 --
Accrued expenses and other liabilities ................. 293,515 268,632
------------- -------------
Total liabilities ............................. 110,589,192 114,415,771
------------- -------------
Commitments and contingencies
Stockholders' equity::
Common stock, $.01 par value, 3,000,000 shares
authorized, 2,182,125 issued and outstanding
at March 31, 1997 and December 31, 1996 .......... 21,821 21,821
Additional paid-in capital .......................... 20,872,026 20,865,158
Retained earnings, substantially restricted ......... 12,517,959 12,271,098
Unrealized gain (loss) on securities available
for sale, net of tax ............................. (36,083) (14,499)
Unearned ESOP shares ................................ (1,699,430) (1,716,600)
------------- -------------
Total stockholders' equity .................... 31,676,293 31,426,978
------------- -------------
$ 142,265,485 $ 145,842,749
============= =============
See accompanying notes to unaudited consolidated financial statements
2
CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Three Months Ended March 31, 1997 and 1996
(Unaudited)
Three Months Ended
March 31,
1997 1996
----------- -----------
Interest income:
Loans receivable .................................. $ 1,168,220 $ 1,244,178
Mortgage-backed securities ........................ 271,684 263,074
Investments ....................................... 689,049 531,548
Interest-bearing deposits and federal funds sold .. 175,493 241,241
----------- -----------
Total interest income .................... 2,304,446 2,280,041
----------- -----------
Interest expense:
Savings deposits .................................. 1,088,702 1,151,227
Securities sold under agreements to repurchase .... 84,851 183,336
----------- -----------
Total interest expense ................... 1,173,553 1,334,563
----------- -----------
Net interest income ...................... 1,130,893 945,478
Provision for loan losses .................................. 15,000 7,500
----------- -----------
Net interest income after provision for loan losses 1,115,893 937,978
----------- -----------
Noninterest income:
Late charges and other fees ....................... 39,196 26,852
Loss on sale of certificates of deposit ........... -- (53,714)
Gain on sale of investment securities, net ........ 3,750 6,837
Other ............................................. 22,410 16,359
----------- -----------
Total noninterest income ................. 65,356 (3,666)
----------- -----------
Noninterest expense:
Compensation and employee benefits ................ 348,477 327,266
Occupancy ......................................... 77,371 70,651
Data processing ................................... 37,362 41,041
Advertising ....................................... 12,980 10,504
Federal insurance premiums ........................ 19,753 61,732
Other ............................................. 172,817 102,426
----------- -----------
Total noninterest expense ................ 668,760 613,620
----------- -----------
Income before income tax expense ......... 512,489 320,692
Income tax expense ......................................... 145,000 77,000
----------- -----------
Net income ............................... $ 367,489 $ 243,692
=========== ===========
Earnings per share ......................................... $ .18 N/A
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
3
CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Three Months Ended March 31, 1997
(Unaudited)
Unrealized
gain
(loss) on
Retained securities
Common stock Additional earnings, available Unearned Total
-------------------------- paid-in substantially for sale, ESOP Stockholders'
Shares Amount capital restricted net of tax shares equity
------------ ------------ ------------ ------------- ------------ ------------ ------------
Balance, December 31, 1996 ... 2,182,125 $ 21,821 $ 20,865,158 $ 12,271,098 $ (14,499) $ (1,716,600) $ 31,426,978
Net income ................... -- -- -- 367,489 -- -- 367,489
Dividends on common stock
at $.06 per share .......... -- -- -- (120,628) -- -- (120,628)
Amortization of ESOP awards .. -- -- 6,868 -- -- 17,170 24,038
Change in unrealized gain
(loss) on securities
available for sale, net .... -- -- -- -- (21,584) -- (21,584)
------------ ------------ ------------ ------------- ------------ ------------ ------------
Balance, March 31, 1997 ...... 2,182,125 $ 21,821 $ 20,872,026 $ 12,517,959 $ (36,083) $ (1,699,430) $ 31,676,293
============ ============ ============ ============= ============ ============ ============
See accompanying notes to unaudited consolidated financial statements.
4
CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three months ended March 31, 1997 and 1996
(Unaudited)
March 31, March 31,
1997 1996
------------ ------------
Cash flows from operating activities:
Net income ............................................... $ 367,489 $ 243,692
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization:
Office properties and equipment .................... 35,162 25,770
Deferred fees, discounts, and premiums ............. (207,384) (26,655)
Stock plans ........................................ 24,038 --
(Increase) decrease in accrued interest receivable ... (85,635) (291,303)
Increase (decrease) in accrued interest payable ...... 9,402 (117,318)
Increase (decrease) in income taxes, net ............. 120,391 44,792
Loss on sale of certificates of deposit .............. -- 53,714
Gain on sale of investment securities, net ........... (3,750) (6,837)
Provision for loan losses ............................ 15,000 7,500
Net change in other assets and other liabilities ..... 39,692 (298,264)
------------ ------------
Net cash provided by (used in) operating activities 314,405 (364,909)
------------ ------------
Cash flows from investing activities:
Principal repayments on:
Loans receivable ....................................... 3,596,577 4,623,553
Mortgage-backed securities ............................. 1,094,638 462,698
Proceeds from the maturity of certificates of deposit .... 297,000 1,081,000
Proceeds from the maturity of investment securities ...... 47,763,670 18,398,567
Proceeds from the sale of certificates of deposit ........ -- 4,486,286
Proceeds from the sale of investment securities .......... 1,498,594 3,010,078
Cash invested in:
Loans receivable ....................................... (2,324,194) (3,361,562)
Mortgage-backed securities ............................. (3,364,715) (1,972,500)
Investment securities .................................. (58,849,465) (28,753,812)
Federal Home Loan Bank stock ........................... -- (17,700)
Purchase of office properties and equipment .............. (8,472) (13,746)
------------ ------------
Net cash provided by (used in) investing activities (10,296,367) (2,057,138)
------------ ------------
Cash flows from financing activities:
Increase (decrease) in savings deposits .................. (1,240,939) 1,796,783
Decrease in securities sold under agreements to repurchase (3,000,000) --
Dividends paid ........................................... (120,628) --
Increase in advance payments by borrowers for
taxes and insurance .................................... 275,735 249,885
------------ ------------
Net cash provided by (used in) financing
activities ....................................... (4,085,832) 2,046,668
------------ ------------
Net increase (decrease) in cash and cash
equivalents ...................................... (14,067,794) (375,379)
Cash and cash equivalents, beginning of period ............. 22,117,279 10,666,127
------------ ------------
Cash and cash equivalents, end of period ................... $ 8,049,485 $ 10,290,748
============ ============
Supplemental information:
Interest paid ............................................ $ 1,164,151 $ 1,454,605
Income taxes paid ........................................ $ 6,397 $ 32,208
============ ============
Noncash investing and financing activities -
interest credited to savings deposits .................... $ 748,878 $ 812,979
============ ============
See accompanying notes to unaudited consolidated financial statements.
5
CHESTER BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements were
prepared in accordance with instructions for Form 10-Q and, therefore, do not
include all information and notes necessary for a complete presentation of
financial position, results of operations, changes in stockholders' equity, and
cash flows in conformity with generally accepted accounting principles. However,
all adjustments (consisting only of normal recurring accruals) which, in the
opinion of management are necessary for a fair presentation of the unaudited
consolidated financial statements, have been included in the consolidated
statements of income for the three months ended March 31, 1997 and 1996.
Operating results for the three months ended March 31, 1997 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997.
(2) Stock Conversion
On October 4, 1996, the Bank converted from a federal mutual savings
bank to a federal capital stock savings bank and simultaneously formed the
Company, a Delaware corporation, to act as the holding company of the converted
savings bank. Pursuant to the plan, the Bank converted to a national bank known
as Chester National Bank, and a newly chartered bank subsidiary was formed by
the Company known as Chester National Bank of Missouri. The stock conversion
resulted in the sale and issuance of 2,182,125 shares of $0.01 par value common
stock at a price of $10.00 per share which resulted in gross proceeds of
$21,821,250. After reducing gross proceeds for conversion costs of $939,363, net
proceeds totaled $20,881,887. The stock of Chester National Bank and Chester
National Bank of Missouri are held by the Company. In conjunction with the
conversion, the Company loaned $1,745,700 to the Bank's employee stock ownership
plan for the purchase of 174,570 shares in the stock conversion.
(3) Earnings Per Share
Earnings per share are based upon the weighted average number of common
shares outstanding during the period. Only ESOP shares committed to be released
are considered outstanding for purposes of computing earnings per share.
The Company completed its initial public stock offering on October 4,
1996. Earnings per share are not applicable for periods prior to the conversion
date. The average number of common shares outstanding was 2,011,323 for the
three months ended March 31, 1997.
(4) Employee Stock Ownership Plan
During 1996, the Company established a tax-qualified ESOP. The plan
covers substantially all employees who have attained the age of 21 and completed
one year of service. In connection with the conversion to a stock corporation,
the ESOP purchased 174,570 shares of the Company's common stock at a
subscription price of $10.00 per share using funds loaned by the Company. All
shares are held in a suspense account for allocation among the participants as
the loan is repaid with level principal payments over 25 years. Shares released
from the suspense account are allocated among the participants based upon their
pro rata annual compensation. The purchases of the shares by the ESOP were
recorded by the Company as unearned ESOP shares in a contra equity account. As
ESOP shares are committed to be released to compensate employees, the contra
equity account is reduced and the Company recognizes compensation expense equal
to the fair market value of the shares committed to be released. Dividends on
allocated ESOP shares are recorded as a reduction of retained earnings;
dividends on allocated ESOP shares are recorded as a reduction of debt.
Compensation expense related to the ESOP was $24,038 for the three months ended
March 31, 1997.
The ESOP shares as of March 31, 1997 are as follows:
Allocated shares .................. 2,910
Committed to be released shares ... 1,717
Unreleased shares ................. 169,943
---------
Total ESOP shares ............. 174,570
=========
Fair value of unreleased shares ... 2,527,902
=========
(5) Recent Developments
On April 4, 1997, stockholders of the Company approved the 1997 Stock
Option Plan (the Stock Plan)
6
and the 1997 Management Recognition and Development Plan (the MRP). The Stock
Plan provides for the granting of options for a maximum of 218,212 shares of
common stock at a price not less than 100% of the fair market value of the
shares on the date of grant. In conjunction with the approval of the MRP, 82,921
shares of common stock were awarded to employees. These shares were granted in
the form of restricted stock and will be paid to eligible employees under a five
year vesting schedule.
7
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 investments and mortgage-backed 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 reverse repurchase agreements.
The operations of the Company are significantly influenced by general
economic conditions and related monetary and fiscal policies of financial
institutions regulatory agencies. Deposit flows and the cost of funds are
influenced by interest rates on competing investments and general market rates
of interest. Lending activities are affected by the demand for financing real
estate and other types of loans, which in turn is affected by the interest rates
at which such financing may be offered and other factors affecting loan demand
and the availability of funds.
On October 4, 1996, the Company, formerly known as Chester Savings
Bank, FSB (the Bank), completed its conversion from a federal mutual savings
bank to a federal capital stock savings bank and simultaneously formed Chester
Bancorp, Inc., a Delaware corporation, to act as the holding company of the
converted savings bank. Pursuant to the plan of conversion, the Bank converted
to a national bank known as Chester National Bank, and a newly chartered bank
subsidiary was formed by the Company known as Chester National Bank of Missouri.
The stock conversion resulted in the sale and issuance of 2,181,125 shares of
$.01 par value common stock at a price of $10.00 per share. In conjunction with
the conversion, the Company loaned $1,745,700 to the Company's employee stock
ownership plan for the purchase of 174,570 shares of common stock in connection
with the stock conversion. After reducing gross proceeds for conversion costs of
$939,363 and $1,745,700 related to the sale of shares to the Company's employee
stock ownership plan, net proceeds totaled $19,136,187.
FINANCIAL CONDITION
ASSETS. The Company's total assets decreased by $3.6 million, or 2.5%,
to $142.3 million at March 31, 1997 from $145.8 million at December 31, 1996.
The decrease in the Company's asset size was primarily attributable to the $3.0
million reduction of reverse repurchase agreements during the quarter ended
March 31, 1997.
Loans receivable decreased $1.3 million, or 2.3%, to $53.6 million at
March 31, 1997 from $54.8 million at December 31, 1996. Because of conditions in
the Company's primary market area, such as population shrinkage, low economic
growth, and significant competition, the demand for mortgage loans has been
limited. As a result, the Company continues to increase its investment in
mortgage-backed securities and investment securities and has sought to become
more active in the St. Louis, Missouri mortgage lending market.
Mortgage-backed securities at March 31, 1997 were $18.1 million
compared to $15.9 million at December 31, 1996. Investment securities increased
$9.8 million, or 20.1%, to $58.5 million at March 31, 1997 from $48.8 million at
December 31, 1996. The increases in mortgage-backed securities and investment
securities were mainly attributable to management's decision to invest the stock
conversion proceeds into higher yielding investments rather than in overnight
deposits. For the first few months following the stock conversion, management
invested the proceeds from the sale of stock in short-term deposits while longer
term investment opportunities were evaluated.
8
Certificates of deposit decreased $297,000 to $591,000 at March 31,
1997 from $888,000 at December 31, 1996. Management began in 1995 to liquidate
its certificate of deposit portfolio and has continued to reinvest the proceeds
from certificate of deposit maturities into other types of investments.
Cash, interest-bearing deposits, and federal funds sold, on a combined
basis, decreased $14.1 million, or 63.6%, to $8.0 million at March 31, 1997 from
$22.1 million at December 31, 1996. At December 31, 1996, management had
invested a significant portion of the proceeds from the stock conversion into
overnight deposits. During the quarter ended March 31, 1997, management
completed its evaluation of longer term investment opportunities and invested
excess overnight deposits into mortgage-backed securities and various types of
investment securities.
LIABILITIES. Savings deposits decreased $1.2 million, or 1.2%, to
$101.0 million at March 31, 1997 from $102.2 million at December 31, 1996.
Reverse repurchase agreements decreased $3.0 million from $11.3 million at
December 31, 1996 to $8.3 million at March 31, 1997. These agreements, however,
averaged only $7.2 million during the 1997 quarter. All such agreements are
maintained with Gilster-Mary Lee Corporation (Gilster-Mary Lee), a food
manufacturing and packaging company headquartered in Chester, Illinois. The
Chairman of the Board of the Company is also the Executive Vice President,
Treasurer and Secretary of Gilster-Mary Lee. Over the last several years, the
Company has maintained a deposit relationship with Gilster-Mary Lee, which at
times has had as much as $25 million in funds on deposit, typically with short
terms. At March 31, 1997, the balance of funds on deposit with the Company was
$16.5 million, which included the reverse repurchase agreements. Gilster-Mary
Lee notified the Company previously of its intent to maintain much smaller
deposit balances with the institution in the future. The loss of funds may
impair future earnings as there is no intent to replace the savings deposits or
reverse repurchase agreements with other wholesale funds. At March 31, 1997, the
Company maintained an adequate liquidity level to cover the withdrawal of such
deposits and/or additional reduction of such borrowings.
RESULTS OF OPERATIONS
The Company's operating results depend primarily on its level of net
interest income, which is the difference between the interest income earned on
its interest-earning assets (loans, mortgage-backed securities, investment
securities, and interest-bearing deposits) and the interest expense paid on its
interest-bearing liabilities (deposits and borrowings). Operating results are
also significantly affected by provisions for losses on loans, noninterest
income, and noninterest expense. Each of these factors is significantly affected
not only by the Company's policies, but, to varying degrees, by general economic
and competitive conditions and by policies of federal regulatory authorities.
NET INCOME. The Company's net income for the three months ended March
31, 1997 was $367,000 compared to $244,000 for the three months ended March 31,
1996. The $124,000 increase in net income was positively impacted by a $185,000
increase in net interest income and a $69,000 increase in noninterest income,
and was negatively impacted by a $55,000 increase in noninterest expense and a
$68,000 increase in income tax expense.
NET INTEREST INCOME. Net interest income totaled $1.1 million for the
three months ended March 31, 1997 compared to $945,000 for the three months
ended March 31, 1996. The $185,000, or 19.6%, increase in net interest income
was the result of a significant increase in the Company's ratio of average
interest-earning assets to average interest-bearing liabilities. The ratio
increased from 106.47% in the 1996 quarter to 126.45% in the 1997 quarter. The
improvement in the ratio was primarily attributable to the $19.1 million of net
proceeds received from the issuance of common stock on October 4, 1996. The
improvement in net interest income was partially offset by a decline in the
Company's interest rate spread from 2.79% for the three months ended March 31,
1996 to 2.54% for the three months ended March 31, 1997.
INTEREST INCOME. Interest income on loans receivable decreased $76,000,
or 6.1%, for the three months ended March 31, 1997. This fluctuation was due to
a decline in the average yield on loans receivable from 8.87% for the 1996
quarter to 8.71% for the 1997 quarter, coupled with a $2.5 million, or 4.4%
decrease in the average balance of loans receivable.
9
Interest income on mortgaged-backed securities increased $9,000 for the
three months ended March 31, 1997. The increase resulted from an increase in the
average balance of mortgage-backed securities. For the three months ended March
31, 1997, the average balance of mortgage-backed securities increased $1.3
million, or 8.0%. The increased investment in 1997 was attributable to limited
mortgage loan demand in the Company's market area and to management's decision
to invest the stock conversion proceeds into higher yielding investments. The
impact of increased volume was partially offset by a 29 basis point decline in
the average yield on mortgage-backed securities for the three months ended March
31, 1997.
Interest earned on investment securities was $689,000 for the three
months ended March 31, 1997 compared to $532,000 for the three months ended
March 31, 1996. The increase of $158,000, or 29.6%, for the three months ended
March 31, 1997 was the result of an increase in the average balance of
investments of $11.9 million, or 28.8%. The increased investment in 1997 was
mainly attributable to management's decision to invest the stock conversion
proceeds into higher yielding investments rather than overnight deposits. For
the first few months following the stock conversion, management invested the
proceeds from the sale of stock in short-term deposits, while longer term
investment opportunities were evaluated. Other factors impacting the increased
level of investments for the 1997 quarter were limited mortgage loan demand in
the Company's market area and reinvestment of the proceeds from maturities and
sales of certificates of deposit into higher yielding investments. The
improvement in interest on investments was partially offset by a 12 basis point
decrease in the average yield on investment securities for the three months
ended March 31, 1997.
Interest income on interest-bearing deposits decreased $66,000, or
27.3%, during the three months ended March 31, 1997. The decline in interest
income on interest-bearing deposits resulted from a decrease in the average
balance of interest-bearing deposits of $4.2 million, or 23.9%, for the three
months ended March 31, 1997. The decline in the average balance was mainly due
to the reinvestment of proceeds from certificate of deposit maturities and sales
into higher yielding investments. The decrease in interest income on
interest-bearing deposits was also impacted by a decrease in the average yield
on interest-bearing deposits of 24 basis points for the three months ended March
31, 1997.
INTEREST EXPENSE. Interest expense on savings deposits decreased
$63,000, or 5.4%, to $1.09 million for the three months ended March 31, 1997
from $1.15 million for the three months ended March 31, 1996. The decline in
interest expense on savings deposits was the result of a $6.4 million, or 5.9%,
decrease in the average balance of deposits. The decline in deposits was mainly
attributable to increased competition in the Company's market place and also
reflected management's decision to compete less aggressively on rates. The
average cost of deposits remained relatively constant between the two quarters
with an average rate of 4.30% for the three months ended March 31, 1997 compared
to 4.28% for the three months ended March 31, 1996.
Interest expense on reverse repurchase agreements decreased $98,000, or
53.7%, to $85,000 for the three months ended March 31, 1997 from $183,000 for
the three months ended March 31, 1996. The decline in interest expense on
reverse repurchase agreements resulted primarily from a $7.8 million, or 52.1%,
decrease in the average balance of reverse repurchase agreements during the 1997
quarter. The decrease in interest expense was also impacted by a 15 basis point
decline in the average cost of reverse repurchase agreements.
PROVISION FOR LOAN LOSSES. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and the general economy. Such evaluation
considers numerous factors including general economic conditions, loan portfolio
composition, prior loss experience, the estimated fair value of the underlying
collateral, and other factors that warrant recognition in providing for an
adequate loan loss allowance.
During the quarter ended March 31, 1997, the Company's provision for
loan losses was $15,000 compared to $7,500 for the comparable 1996 quarter. The
provision in 1997 was to maintain the loan loss allowance at a relatively
consistent level with 1996.
10
The Company's allowance for loan losses was $376,000, or .70%, of loans
outstanding at March 31, 1997 compared to $384,000, or .70%, of loans
outstanding at December 31, 1996. The Company's level of net loans charged-off
during the quarter ended March 31, 1997 was $23,000, which represented .04% of
average loans receivable outstanding. Based on current levels in the allowance
for loan losses in relation to loans receivable and delinquent loans,
management's continued effort to favorably resolve problem loan situations, and
the low level of charge-offs in recent years, management believes the allowance
is adequate at March 31, 1997.
The breakdown of general loss allowances and specific loss allowances
is made for regulatory accounting purposes only. General loan loss allowances
are added back to capital to the extent permitted in computing risk-based
capital. Both general and specific loss allowances are charged to expense. The
financial statements of the Company are prepared in accordance with generally
accepted accounting principles (GAAP) and, accordingly, provisions for loan
losses are based on management's assessment of the factors set forth above. The
Company regularly reviews its loan portfolio, including problem loans, to
determine whether any loans are impaired, require classification and/or the
establishment of appropriate reserves. Management believes it has established
its existing allowance for loan losses in accordance with GAAP, however, future
additions may be necessary if economic conditions or other circumstances differ
substantially from the assumptions used in making the initial determination. The
allowance for loan losses is established through a provision for loan losses
based on management's evaluation of the risk inherent in its loan portfolio and
the general economy. Such evaluation considers numerous factors including
general economic conditions, loan portfolio composition, prior loss experience,
the estimated fair value of the underlying collateral, and other factors that
warrant recognition in providing for an adequate loan loss allowance.
NONINTEREST INCOME. Noninterest income was $65,000 for the three months
ended March 31, 1997 compared to $(4,000) for the three months ended March 31,
1996. The $69,000 increase resulted primarily from a $54,000 loss during the
1996 quarter on the sale of certificates of deposit. The $4.5 million of
proceeds from the sale of certificates of deposit during 1996 resulted from
management's decision to liquidate the certificate of deposit portfolio with one
of its brokers. The Company also made the decision to not reinvest in
certificates of deposit as they matured. The proceeds from the maturity and sale
of certificates of deposit were invested in mortgage-backed securities and other
investment securities. The increase in noninterest income was also positively
impacted by state income tax refunds for prior years that totaled $18,000.
NONINTEREST EXPENSE. Noninterest expense increased $55,000, or 9.0%,
for the three months ended March 31, 1997. The increase in noninterest expense
resulted from the $70,000 increase in other expense and the $21,000 increase in
compensation expense, which was partially offset by a $42,000 decline in federal
insurance premiums. The increase in other expense resulted primarily from legal
fees related to the establishment of the Company's stock plan and MRP and
various fees associated with being a public company. The increase in
compensation expense was attributable to the impact of the Employee Stock
Ownership Plan (ESOP) which was implemented as result of the stock conversion.
Compensation expense related to the ESOP was $24,000 during the quarter ended
March 31, 1997. In future periods, compensation and employee benefits expense
can be expected to increase due to implementation of the MRP and other benefit
plans during the quarter ended June 30, 1997. The decline in federal insurance
premiums experienced during the three months ended March 31, 1997 resulted from
a decrease in rates charged by the Federal Deposit Insurance Corporation on SAIF
assessable deposits. As a result of the Deposit Insurance Funds Act of 1996 and
the resultant recapitalization of the SAIF, the annual assessment rate on SAIF
deposits was decreased on January 1, 1997 to .0648% from the previous rate of
.23%.
INCOME TAX EXPENSE. Income tax expense for the 1997 quarter was
$145,000 compared to $77,000 for the 1996 quarter. The Company's effective tax
rate for 1997 and 1996 was 28.3% and 24.0%, respectively. The effective tax rate
for each quarter was below the statutory federal rate of 34% due to the
Company's investment in tax exempt securities.
11
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds consist of deposits, reverse
repurchase agreements, repayments and prepayments of loans and mortgage-backed
securities, maturities of investments and interest-bearing deposits, and funds
provided from operations. While scheduled repayments of loans and
mortgage-backed securities and maturities of investment securities are
predictable sources of funds, deposit flows and loan prepayments are greatly
influenced by general interest rates, economic conditions and competition. The
Company manages the pricing of its deposits to maintain a steady deposit base.
The Company uses its liquidity resources principally to fund existing and future
loan commitments, to fund maturing certificates of deposit and deposit
withdrawals, to invest in other interest-bearing assets, to maintain liquidity,
and to meet operating expenses. Management believes that loan repayments and
other sources of funds will be adequate to meet and exceed the Company's
liquidity needs for the remainder of 1997.
A major portion of the Company's liquidity consists of cash and cash
equivalents, which include investments in highly liquid, short-term deposits.
The level of these assets is dependent on the Company's operating, investing,
lending and financing activities during any given period. At March 31, 1997,
cash and cash equivalents totaled $8.0 million.
The primary investing activities of the Company include origination of
loans and purchase of mortgage-backed securities and investment securities.
During the quarter ended March 31, 1997, purchases of investment securities and
mortgage-backed securities totaled $58.8 million and $3.4 million, respectively,
while loan originations totaled $2.3 million. These investments were funded
primarily from loan and mortgage-backed security repayments of $4.7 million,
investment security sales and maturities of $49.3 million, and a $12.0 million
decline in federal funds sold.
Liquidity management is both a daily and long-term function of business
management. If the Company requires funds beyond its ability to generate them
internally, the Company believes that it could borrow additional funds from the
Federal Home Loan Bank (FHLB). At March 31, 1997, the Company had no outstanding
advances from the FHLB.
At March 31, 1997, the Company exceeded all of its regulatory capital
requirements. The Company's subsidiary banks actual and required capital amounts
and ratios as of March 31, 1997 are as follows:
Capital
Actual Requirements
---------------- ----------------
(Dollars in thousands) Amount Ratio Amount Ratio
- -------------------------------------------- ------- ------- ------- -------
Total capital (to risk-weighted assets):
Chester National Bank .................... $23,339 55.1% 3,387 8.00%
Chester National Bank of Missouri......... 3,084 58.8% 420 8.00%
Tier 1 capital (to risk-weighted assets):
Chester National Bank .................... $23,016 54.4% 1,694 4.00%
Chester National Bank of Missouri......... 3,031 57.8% 210 4.00%
Tier 1 capital (to average assets):
Chester National Bank .................... $23,016 18.0% 3,837 3.00%
Chester National Bank of Missouri ........ 3,031 25.4% 359 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
12
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.
IMPACT OF NEW ACCOUNTING STANDARDS
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINQUISHMENTS
OF LIABILITIES
On January 1, 1997, the Company adopted SFAB issued SFAS No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinquishment of
Liabilities", which provides consistent standards for distinguishing transfers
of financial assets that are sales from transfers that are secured borrowings.
The statement also requires that a liability can be derecognized if and only if
either (a) the debtor pays the creditor and is relieved of its obligation for
the liability or (b) the debtor is legally released from the liability either
judicially or by the creditor. The Statement provides implementation guidance
for assessing isolation of transferred assets and for accounting for transfers
of partial interests, servicing of financial assets, securitizations, transfers
of sales-type and direct financing lease receivables, securities lending
transactions, repurchase transactions including "dollar rolls", "wash sales",
loan syndications and participations, risk participation in banker's
acceptances, factoring arrangements, transfers of receivables with recourse, and
extinguishments of liabilities. The adoption of SFAS No. 125 did not have a
material effect on the Company's consolidated financial statements.
EARNINGS PER SHARE
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share", which
establishes standards for computing and presenting earnings per share (EPS).
SFAS No. 128 simplifies existing standards for computing EPS and makes them
comparable to international standards. It replaces the presentation of primary
EPS with a presentation of basic EPS. It also requires dual presentation of
basic and diluted EPS on the face of the income statement for all entities with
complex capital structures and requires a reconciliation of the components of
basic and diluted EPS. Basic EPS excludes dilution and is computed by dividing
income available to common shareholders 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. SFAS No. 128 is effective
for financial statements issued for periods ending after December 31, 1997,
including interim periods, and requires restatement of all prior-period EPS data
presented. The adoption of SFAS No. 128 is not expected to have a material
impact on the Company's consolidated financial statements.
NONPERFORMING ASSETS
The following table sets forth information with respect to the Company's
nonperforming assets at the dates indicated.
13
At March 31, 1997 At December 31, 1996
----------------- --------------------
(Dollars in Thousands)
---------------------------------------
Non-performing loans:
Loans accounted for on a non-accrual basis:
Real estate:
Residential ............................................. $ 193 $ 11
Commercial .............................................. -- 14
Consumer ................................................ 48 54
---------------- --------------------
Total ............................................. 241 79
---------------- --------------------
Accruing loans which are contractually past due 90 days or more:
Residential real estate ................................. -- --
Consumer ................................................ -- --
---------------- --------------------
Total ............................................ -- --
---------------- --------------------
Total non-performing loans ....................................... 241 79
Real estate acquired by foreclosure, net ......................... 118 117
---------------- --------------------
Total non-performing assets ............................. $ 359 $ 196
================ ====================
Total non-performing loans to net loans ................. 0.45% 0.14%
================ ====================
Total allowance for loan losses to
non-performing loans ..................................... 156.02% 485.74%
================ ====================
Total non-performing assets to total assets ............ 0.25% 0.13%
================ ====================
14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Neither the Company nor the Bank is a party to any material legal
proceedings at this time. From time to time, the Bank is involved in
various claims and legal actions arising in the ordinary course of
business.
Item 2. Changes in Securities.
None
Item 3. Defaults upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
On February 21, 1997, the Company solicited proxies for the annual
meeting of stockholders of the Company held on April 4, 1997. The
meeting involved the election of three directors and ratification of
the Chester Bancorp, Inc. 1997 Stock Option Plan and the Chester
Bancorp, Inc. 1997 Management Recognition and Development Plan . The
directors up for election were each elected by the vote of 2,047,138
shares out of 2,055,386 shares present at the meeting, either in person
or by proxy. Ratification of the Chester Bancorp, Inc. 1997 Stock
Option Plan was approved by the vote of 1,694,235 for, 40,848 against
and 9,645 abstain. Ratification of the Chester Bancorp, Inc. 1997
Management Recognition and Development Plan was approved by the vote of
1,651,060 for, 81,848 against and 11,845 abstain.
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
15
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report on Form 10-Q to be signed on its
behalf by the undersigned, thereunto duly authorized.
Chester Bancorp, Inc.
By: /s/ Michael W. Welge
------------------------------------
Michael W. Welge
Chairman of the Board, President
and Chief Financial Officer
(Duly Authorized Officer)
Dated: May 14, 1997
16
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 (provided for the information of the
Securities and Exchange Commission only)
17