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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1996
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
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(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 October 31, 1996.
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<PAGE>
FORM 10-Q
Index
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets ............................................................. 2
Statements of Income ....................................................... 3
Statement of Retained Earnings ............................................. 5
Statements of Cash Flows ................................................... 6
Notes to Financial Statements .............................................. 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ................... 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .................................................. 15
Item 2. Changes in Securities .............................................. 15
Item 3. Defaults upon Senior Securities .................................... 15
Item 4. Submission of Matters to a Vote of Securities Holders .............. 15
Item 5. Other Information .................................................. 15
Item 6. Exhibits and Reports on Form 8-K ................................... 15
Signature................................................................... 16
Exhibit Index............................................................... 17
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The financial statements provided herein are for Chester Savings Bank, FSB (the
"Bank"), which is the predecessor of Chester Bancorp, Inc. (the "Company") prior
to October 4, 1996.
1
<PAGE>
<TABLE>
CHESTER SAVINGS BANK, FSB
Balance Sheets
September 30, 1996 and December 31, 1995
(Unaudited)
<CAPTION>
September 30, December 31,
Assets 1996 1995
------ --------------- ---------------
<S> <C> <C>
Cash ........................................................................................... $ 3,104,378 $ 1,773,061
Interest-bearing deposits ...................................................................... 15,614,926 3,493,066
Federal funds sold ............................................................................. 6,000,000 5,400,000
--------------- ---------------
Total cash and cash equivalents ....................................................... 24,719,304 10,666,127
Certificates of deposit ........................................................................ 1,284,602 9,761,774
Investment securities:
Available for sale, at market value .......................................................... 21,933,637 6,524,190
Held to maturity, at cost .................................................................... 29,155,184 31,821,755
Mortgage-backed securities:
Available for sale, at market value .......................................................... 2,119,155 2,207,139
Held to maturity, at cost .................................................................... 14,973,166 13,205,662
Loans receivable, net .......................................................................... 55,977,059 57,021,009
Accrued interest receivable .................................................................... 1,051,037 636,592
Real estate acquired by foreclosure, net ....................................................... 104,607 209,248
Stock in Federal Home Loan Bank, at cost ...................................................... 622,000 604,300
Office property and equipment, net ............................................................. 1,771,237 1,843,286
Deferred tax asset, net ........................................................................ 230,279 --
Other assets ................................................................................... 829,603 279,910
--------------- ---------------
$ 154,770,870 $ 134,780,992
=============== ===============
Liabilities and Retained Earnings
---------------------------------
Savings deposits ............................................................................... $ 122,358,325 $ 106,717,849
Securities sold under agreements to repurchase ................................................. 18,340,000 15,000,000
Accrued interest on savings deposits ........................................................... 86,995 314,060
Accrued interest on securities sold under agreements to repurchase ............................. 59,248 141,938
Advance payments by borrowers for taxes and insurance .......................................... 717,183 573,009
Income taxes payable ........................................................................... 97,619 36,252
Deferred tax liability, net .................................................................... -- 103,886
Accrued expenses and other liabilities ......................................................... 1,056,582 181,551
--------------- ---------------
Total liabilities ..................................................................... 142,715,952 123,068,545
--------------- ---------------
Commitments and contingencies Retained earnings - substantially restricted:
Unappropriated ........................................................................ 11,989,178 11,676,334
Unrealized gain on securities available
for sale, net of tax ................................................................ 65,740 36,113
--------------- ---------------
Total retained earnings ...................................................... 12,054,918 11,712,447
--------------- ---------------
$ 154,770,870 $ 134,780,992
=============== ===============
See accompanying notes to unaudited financial statements
</TABLE>
2
<PAGE>
<TABLE>
CHESTER SAVINGS BANK, FSB
Statements of Income
Three Months Ended September 30, 1996 and 1995
(Unaudited)
<CAPTION>
Three Months Ended
September 30,
----------------------------------
1996 1995
--------------- ---------------
<S> <C> <C>
Interest income:
Loans receivable ..................................................................... $ 1,192,969 $ 1,258,064
Mortgage-backed securities ........................................................... 279,930 244,709
Investment securities ................................................................ 680,246 543,958
Interest-bearing deposits and federal funds sold ..................................... 178,546 214,529
Other ................................................................................ 10,467 9,542
--------------- ---------------
Total interest income ....................................................... 2,342,158 2,270,802
--------------- ---------------
Interest expense:
Savings deposits ..................................................................... 1,033,611 1,406,978
Securities sold under agreements to repurchase ....................................... 333,753 2,145
--------------- ---------------
Total interest expense ...................................................... 1,367,364 1,409,123
--------------- ---------------
Net interest income ......................................................... 974,794 861,679
Provision for loan losses ..................................................................... 2,500 3,495
--------------- ---------------
Net interest income after provision for loan losses .................................. 972,294 858,184
--------------- ---------------
Noninterest income:
Late charges and other fees .......................................................... 29,073 25,836
Gain on sale of investment securities, net ........................................... 17,397 25,796
Gain on sale of mortgage-backed securities, net ...................................... -- 45,919
Other ................................................................................ 7,983 9,939
--------------- ---------------
Total noninterest income .................................................... 54,453 107,490
--------------- ---------------
Noninterest expense:
Compensation and employee benefits ................................................... 350,628 292,165
Occupancy ............................................................................ 88,326 80,621
Data processing ...................................................................... 38,156 40,994
Advertising .......................................................................... 16,026 13,919
Federal insurance premiums ........................................................... 62,395 71,109
SAIF special assessment .............................................................. 812,498 --
Other ................................................................................ 130,371 107,554
--------------- ---------------
Total noninterest expense ................................................... 1,498,400 606,362
--------------- ---------------
Income (loss) before income tax expense (benefit) ........................... (471,653) 359,312
Income tax expense (benefit) .................................................................. (237,869) 86,000
--------------- ---------------
Net income (loss) ........................................................... $ (233,784) $ 273,312
=============== ===============
See accompanying notes to unaudited financial statements.
</TABLE>
3
<PAGE>
<TABLE>
CHESTER SAVINGS BANK, FSB
Statements of Income
Nine Months Ended September 30, 1996 and 1995
(Unaudited)
<CAPTION>
Nine Months Ended
September 30,
----------------------------------
1996 1995
--------------- ---------------
<S> <C> <C>
Interest income:
Loans receivable ..................................................................... $ 3,659,559 $ 3,752,168
Mortgage-backed securities ........................................................... 816,155 720,357
Investment securities ................................................................ 1,857,194 1,636,683
Interest-bearing deposits and federal funds sold ..................................... 523,920 641,694
Other ................................................................................ 29,447 28,027
--------------- ---------------
Total interest income ....................................................... 6,886,275 6,778,929
--------------- ---------------
Interest expense:
Savings deposits ..................................................................... 3,319,706 4,100,531
Securities sold under agreements to repurchase ....................................... 686,961 2,145
--------------- ---------------
Total interest expense ...................................................... 4,006,667 4,102,676
--------------- ---------------
Net interest income ......................................................... 2,879,608 2,676,253
Provision for loan losses ..................................................................... 17,500 6,482
--------------- ---------------
Net interest income after provision for loan losses
2,862,108 2,669,771
--------------- ---------------
Noninterest income:
Late charges and other fees .......................................................... 81,562 74,269
Loss on sale of certificates of deposit .............................................. (53,714) --
Gain on sale of investment securities, net ........................................... 24,234 127,399
Gain on sale of mortgage-backed securities, net ...................................... -- 45,919
Other ................................................................................ 31,318 23,780
--------------- ---------------
Total noninterest income .................................................... 83,400 271,367
--------------- ---------------
Noninterest expense:
Compensation and employee benefits ................................................... 996,469 836,061
Occupancy ............................................................................ 228,388 224,059
Data processing ...................................................................... 116,850 120,879
Advertising .......................................................................... 35,939 42,154
Federal insurance premiums ........................................................... 185,381 221,064
SAIF special assessment .............................................................. 812,498 --
Other ................................................................................ 313,759 304,197
--------------- ---------------
Total noninterest expense ................................................... 2,689,284 1,748,414
--------------- ---------------
Income (loss) before income tax expense (benefit) ........................... 256,224 1,192,724
Income tax expense (benefit) .................................................................. (56,620) 297,000
--------------- ---------------
Net income (loss) ........................................................... $ 312,844 $ 895,724
=============== ===============
See accompanying notes to unaudited financial statements.
</TABLE>
4
<PAGE>
<TABLE>
CHESTER SAVINGS BANK, FSB
Statement of Retained Earnings
Nine Months Ended September 30, 1996
(Unaudited)
<CAPTION>
Unrealized
gain on
securities
available for Total retained
Unappropriated sale, net of tax earnings
--------------- ---------------- ---------------
<S> <C> <C> <C>
Balance, December 31, 1995 ..................................................... $ 11,676,334 $ 36,113 $ 11,712,447
Net income ..................................................................... 312,844 -- 312,844
Change in unrealized gain on securities available for sale, net of tax ......... -- 29,627 29,627
--------------- --------------- ---------------
Balance, September 30, 1996 .................................................... $ 11,989,178 $ 65,740 $ 12,054,918
=============== =============== ===============
See accompanying notes to unaudited financial statements.
</TABLE>
5
<PAGE>
<TABLE>
CHESTER SAVINGS BANK, FSB
Statements of Cash Flows
Nine months ended September 30, 1996 and 1995
(Unaudited)
<CAPTION>
September 30, September 30,
1996 1995
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................................................... $ 312,844 $ 895,724
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization:
Office properties and equipment .................................................... 88,548 90,138
Deferred fees, discounts, and premiums ............................................. 64,793 81,759
(Increase) decrease in accrued interest receivable ................................... (414,445) (98,524)
Increase (decrease) in accrued interest payable ...................................... (309,755) 336,599
Increase (decrease) in income taxes, net ............................................. (294,486) 113,357
Loss on sale of certificates of deposit .............................................. 53,714 --
Gain on sale of investment securities, net ........................................... (24,234) (127,399)
Gain on sale of mortgage-backed securities, net ...................................... -- (45,919)
Provision for loan losses ............................................................ 17,500 6,482
FHLB stock dividend .................................................................. -- (9,100)
Net change in other assets and other liabilities ..................................... 325,338 (225,213)
--------------- ---------------
Net cash provided by (used in) operating activities ................................ (180,183) 1,017,904
--------------- ---------------
Cash flows from investing activities:
Principal repayments on:
Loans receivable ....................................................................... 13,315,244 13,807,985
Mortgage-backed securities ............................................................. 1,472,270 1,195,000
Proceeds from the maturity of certificates of deposit .................................... 3,939,000 9,334,432
Proceeds from the maturity of investment securities ...................................... 46,575,000 6,823,981
Proceeds from the sale of certificates of deposit ........................................ 4,486,286 --
Proceeds from the sale of investment securities .......................................... 8,013,672 18,197,569
Proceeds from the sale of mortgage-backed securities ..................................... -- 2,409,229
Cash invested in:
Loans receivable ....................................................................... (12,206,485) (12,220,512)
Mortgage-backed securities ............................................................. (2,972,500) (4,200,859)
Investment securities .................................................................. (67,499,078) (28,076,503)
Certificates of deposit ................................................................ -- (1,414,000)
Federal Home Loan Bank stock ........................................................... (17,700) --
Proceeds from sales of real estate acquired through
foreclosure ............................................................................ 19,500 4,716
Purchase of office properties and equipment .............................................. (16,499) (15,370)
--------------- ---------------
Net cash provided by (used in) investing activities ................................ (4,891,290) 5,845,668
--------------- ---------------
Cash flows from financing activities:
Increase (decrease) in savings deposits .................................................. (6,180,774) (22,252,349)
Increase in securities sold under agreements to repurchase ............................... 3,340,000 15,000,000
Stock subscriptions ...................................................................... 21,821,250 --
Increase (decrease) in advance payments by borrowers for
taxes and insurance .................................................................... 144,174 (321,132)
--------------- ---------------
Net cash provided by (used in) financing
activities ....................................................................... 19,124,650 (7,573,481)
--------------- ---------------
Net increase (decrease) in cash and cash
equivalents ...................................................................... 14,053,177 (709,909)
Cash and cash equivalents, beginning of period ............................................. 10,666,127 7,243,306
--------------- ---------------
Cash and cash equivalents, end of period ................................................... $ 24,719,304 $ 6,533,397
=============== ===============
Supplemental information:
Interest paid ............................................................................ $ 4,316,422 $ 3,766,077
Income taxes paid ........................................................................ $ 231 $ 157,740
Noncash investing and financing activities:
Loans transfered to real estaste acquired by foreclosure ................................. $ 77,724 $ 97,272
Interest credited to savings deposits .................................................... $ 2,580,423 $ 2,756,733
See accompanying notes to unaudited financial statements.
</TABLE>
6
<PAGE>
Chester Savings Bank, FSB
Notes to Financial Statements (unaudited)
(1) Basis of Presentation
---------------------
The accompanying unaudited 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 retained earnings, 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 financial
statements, have been included in the statements of income for the three and
nine months ended September 30, 1996 and 1995.
Operating results for the three and nine months ended September 30,
1996 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1996.
(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 estimated conversion costs of
$1,000,000, net proceeds totaled $20,821,250. The stock of Chester National Bank
and Chester National Bank of Missouri will be 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
------------------
The 2,182,125 shares of common stock were issued on October 4, 1996;
accordingly, earnings per share for the three and nine months ended September
30, 1996 and 1995 are not presented.
(4) Director Emeritus Retirement Plan
---------------------------------
On January 18, 1996, the Bank adopted a retirement plan for directors
who reach director emeritus status. Eligibility for director emeritus status is
achieved when a director: (i) reaches age 81 or (ii) upon retirement if the
director has served as a director for 15 years or more. A director emeritus,
upon the later of the first anniversary of designation as a director emeritus,
or the date on which the director emeritus attains age 65, will receive, on an
annual basis for a period of 10 years following designation as a director
emeritus, an amount equal to $500 multiplied by the number of full years of
service as a director of the Bank or any predecessor institution that was
previously merged with the Bank. Vesting for past service as a director will
occur on December 31, 1996. Benefits to be paid for future service will be
accrued over the remaining period of service as a director. During December
1995, the plan was funded through the purchase of life insurance contracts on
the directors. The cash surrender value of the life insurance contracts totaled
$181,000 as of September 30, 1996 and is included in other assets in the balance
sheet. During the three and nine months ended September 30, 1996, $52,000 and
$155,000, respectively, of expense related to the plan was recognized.
(5) Recent Regulatory Developments
------------------------------
On September 30, 1996, the Deposit Insurance Funds Act of 1996 (the
Act) was signed into law. The Act authorizes the FDIC to impose a one-time
special assessment on SAIF-assessable deposits of depository institutions. This
special assessment, which is based on SAIF-assessable deposits at March 31,
1995, is intended to recapitalize the SAIF. The one-time special assessment for
the Bank totaled $812,000 and was accrued on September 30, 1996. The actual
reduction of net income was $504,000, after considering the tax deductibility of
the special assessment.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Financial Condition
Assets. The Bank's total assets increased by $20.0 million, or 14.8%,
to $154.8 million at September 30, 1996 from $134.8 million at December 31,
1995. The increase in the Bank's asset size resulted from the receipt of $21.8
million of stock subscriptions in accordance with the Company's initial public
offering of stock which was completed on October 4, 1996.
Loans receivable decreased $1.0 million, or 1.8%, to $56.0 million at
September 30, 1996 from $57.0 million at December 31, 1995. Because of
conditions in the Bank'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 Bank has increased its investment in
mortgage-backed securities and investment securities and has sought to become
more active in consumer lending. Consumer lending is generally considered to
involve greater risk than mortgage lending.
Mortgage-backed securities at September 30, 1996 were $17.1 million
compared to $15.4 million at December 31, 1995. Investment securities increased
$12.7 million, or 33.2%, to $51.1 million at September 30, 1996 from $38.3
million at December 31, 1995. The increases in mortgage-backed securities and
investment securities were mainly attributable to management's decision to
reinvest the proceeds from maturities and sales of certificates of deposit into
higher yielding investments. Also, since mortgage demand has been limited in the
Bank's primary market area, the Bank has significantly increased its investment
in investment securities, and to a lesser extent, in mortgage-backed securities.
Certificates of deposit decreased $8.5 million, or 86.8%, to $1.3
million at September 30, 1996 from $9.8 million at December 31, 1995. Management
began in 1995 to liquidate its certificate of deposit portfolio and has
reinvested the proceeds from certificate of deposit sales and maturities into
other types of investments with higher yields.
Liabilities. Savings deposits increased $15.6 million, or 14.7%, to
$122.4 million at September 30, 1996 from $106.7 million at December 31, 1995.
The increase in savings deposits resulted primarily from the receipt of $21.8
million of stock subscriptions in accordance with the Company's initial public
offering of stock which was completed on October 4, 1996.
Results of Operations
The Bank'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 Bank's policies, but, to varying degrees, by general economic
and competitive conditions and by policies of federal regulatory authorities.
Net Income. The Bank's net income (loss) for the three and nine months
ended September 30, 1996 was $(234,000) and $313,000, respectively, compared to
$273,000 and $896,000 for the three and nine months ended September 30, 1995,
respectively. The $507,000 and $583,000 declines in net income for the three and
nine months ended September 30, 1996, respectively, were primarily the result of
the one-time special assessment imposed by the Federal Deposit Insurance
Corporation (FDIC) on SAIF-assessable deposits. The special assessment of the
Bank totaled $812,000 and was accrued during the quarter ended September 30,
1996, The actual reduction of net income was $504,000, after considering the tax
deductibility of the special assessment. Without considering the impact of the
one-time special assessment, net income for the three and nine months ended
September 30, 1996 would have been $270,000 and $817,000, respectively.
Net Interest Income. Net interest income totaled $975,000 for the three
months ended September 30, 1996 compared to $862,000 for three months ended
September 30, 1995. The $113,000, or 13.1%, increase in net interest income was
the result of an increase in the Bank's interest rate spread from 2.34% for the
three months ended September 30, 1995 compared to 2.61% for the three months
ended September 30, 1996. The improvement in the interest rate spread resulted
primarily from a decline in the average cost of interest-bearing liabilities
from 4.55% for the three months ended September 30, 1995 compared to 4.24% for
the three months ended September 30, 1996.
Net interest income increased $203,000, or 7.6%, to $2.9 million for
the nine months ended September 30, 1996 from $2.7 million for the nine months
ended September 30, 1995. This fluctuation was the result of the increase in the
Bank's interest rate spread from 2.43% for the nine months ended September 30,
1995 to 2.64% for the nine months ended September 30, 1996. The improvement in
8
<PAGE>
the Bank's interest rate spread was attributable to the combined impact of an 11
basis point increase in the average yield on interest-earning assets and a 10
basis point decrease in the average cost of interest-bearing liabilities.
Interest Income. Interest income on loans receivable decreased $65,000,
or 5.2% for the three months ended September 30, 1996 as compared to the three
months ended September 30, 1995. This fluctuation was mainly due to a decline in
the average yield on loans receivable from 8.86% for the three months ended
September 30, 1995 to 8.53% for the three months ended September 30, 1996. The
decline in interest income on loans receivable was also the result of an
$812,000, or 1.4%, decrease in the average balance of loans receivable.
Interest income on loans receivable totaled $3.7 million for the nine
months ended September 30, 1996 compared to $3.8 million for the nine months
ended September 30, 1995. The $93,000, or 2.5%, decrease in interest income on
loans receivable resulted from a $1.5 million, or 2.6%, decline in the average
balance of loans receivable. The average yield on loans receivable remained
constant at 8.71% for both nine month periods.
Interest income on mortgage-backed securities increased $35,000 and
$96,000 for the three and nine months ended September 30, 1996, respectively.
The increase in both instances resulted from an increase in the average balance
of mortgage-backed securities. For the three and nine months ended September 30,
1996, the average balance of mortgage-backed securities increased $2.9 million,
or 20.6%, and $3.0 million, or 22.3%, respectively. The increased investment in
1996 was attributable to limited mortgage loan demand in the Bank's market area
and to management's decision to reinvest the proceeds from maturities and sales
of certificates of deposit into higher yielding investments. The impact of
increased volume was partially offset by a 36 basis point and 53 basis point
decline in the average yield on mortgage-backed securities for the three and
nine months ended September 30, 1996, respectively.
Interest earned on investment securities was $680,000 and $1.9 million
for the three and nine months ended September 30, 1996, respectively, compared
to $544,000 and $1.6 million for the three and nine months ended September 30,
1995, respectively. The increases of $136,000, or 25.1%, and $221,000, or 13.5%,
for the three and nine months ended September 30, 1996, respectively, were
mainly the result of an increase in the average balance of investments of $6.7
million, or 14.6%, and $4.2 million, or 9.5%, for the three and nine months
ended September 30, 1996, respectively. The increased investment in 1996 was
attributable to limited mortgage loan demand in the Bank's market area and to
management's decision to reinvest the proceeds from maturities and sales of
certificates of deposit into higher yielding investments. The improvements in
interest on investments were also positively impacted by a 43 basis point and 18
basis point increase in the average yield on investment securities for the three
and nine months ended September 30, 1996, respectively. The increased yield in
1996 was due to the purchase of higher yielding investments in 1995 and 1996.
Interest income on interest-bearing deposits decreased $36,000, or
16.8%, and $118,000, or 18.4%, during the three and nine months ended September
30, 1996, respectively. The decline in interest income on interest-bearing
deposits resulted from decreases in the average balance of interest-bearing
deposits of $3.7 million, or 24.0%, and $5.7 million, or 31.9%, for the three
and nine months ended September 30, 1996, respectively. 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 decreases
in interest income on interest-bearing deposits were partially offset by an
increase in the average yield on interest-bearing deposits of 54 basis points
and 95 basis points for the three and nine months ended September 30, 1996,
respectively.
Interest Expense. Interest expense decreased $42,000, or 3.0%, to $1.37
million for the three months ended September 30, 1996 from $1.41 million for the
three months ended September 30, 1995. The decline in interest expense was the
result of a decrease in the average cost of interest-bearing liabilities from
4.55% for the three months ended September 30, 1995 to 4.24% for the three
months ended September 30, 1996, partially offset by a $5.3 million, or 4.2%,
increase in the average balance of interest-bearing liabilities. The lower cost
of interest-bearing liabilities in 1996 was due to a reduction by the Bank in
savings rates paid on deposit accounts. The increase in the average balance of
interest-bearing liabilities was attributable to funds held in savings accounts
for stock subscriptions sold in accordance with the Bank's initial public
offering which closed on October 4, 1996.
Interest expense decreased $96,000, or 2.3%, to $4.0 million for the
nine months ended September 30, 1996 from $4.1 million for the nine months ended
September 30, 1995. The decline in interest expense resulted from a decrease in
the average cost of interest-bearing liabilities from 4.38% for the nine months
ended September 30, 1995 to 4.28% for the nine months ended September 30, 1996.
The average balance of interest-bearing liabilities remained constant at
approximately $124.8 million for both 1996 and 1995.
On September 30, 1995, one of the Bank's customers (See "Liquidity and
Capial Resources" discussion for additional information) converted $15.0 million
of deposit liabilities into reverse repurchase agreements. The reverse
9
<PAGE>
repurchase agreements were outstanding for the remainder of 1995 and increased
to $18.3 million at September 30, 1996. Interest expense on reverse repurchase
agreements was $334,000 and $687,000 for the three and nine months ended
September 30, 1996, respectively, compared to $2,000 for the comparable periods
in 1995, which was reflective of the initiation of such agreements on
September 30, 1995.
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.
The Bank's allowance for loan losses was $392,000, or .70%, of loans
outstanding at September 30, 1996, compared to $390,000, or .68%, of loans
outstanding at December 31, 1995. The Bank's level of charge-offs during the
nine months ended September 30, 1996 was $15,000, which represented .03% of
average loans outstanding. This percentage of charge-offs was consistent with
the level of charge-offs experienced in 1995. 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
was adequate at September 30, 1996.
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 Bank 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
Bank 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 reserves may
be necessary if economic conditions or other circumstances differ substantially
from the assumptions used in making the initial determination.
Noninterest Income. Noninterest income decreased $53,000, or 49.3%, to
$54,000 for the three months ended September 30, 1996 compared to $107,000 for
the three months ended September 30, 1995. The fluctuation in noninterest income
was primarily due to a $46,000 reduction in gains recognized from the sale of
mortgage-backed securities. Proceeds from the sale of mortgage-backed securities
during the three months ended September 30, 1995 totaled $2.4 million whereas no
sales of mortgage-backed securities have occurred during the comparable period
in 1996. The proceeds from the sale of mortgage-backed securities in 1995
consisted of securities purchased prior to 1995 that were classified as held to
maturity prior to their sale. The sales of these mortgage-backed securities were
in effect maturities as the sale occurred only after a substantial portion of
the original principal outstanding had been collected.
Noninterest income was $83,000 for the nine months ended September 30,
1996 compared to $271,000 for the nine months ended September 30, 1995. The
$188,000, or 69.3%, decrease resulted from a $54,000 loss on the sale of
certificates of deposit, a $46,000 reduction in gains recognized from the sale
of mortgage-backed securities, and a $103,000 decline in gains recognized from
the sale of investment securities. Proceeds from the sale of investment
securities for the nine months ended September 30, 1996 and 1995 totaled $8.0
million and $18.1 million, respectively. The sale of investment securities for
both periods consisted of U.S. government obligations that were classified as
available for sale. The impact of mortgage-backed security sales in 1995 versus
no such sales in 1996 was discussed in the preceding paragraph. The $4.5 million
of proceeds from the sale of certificates of deposit during the nine months
ended September 30, 1996 resulted from managements's decision to liquidate the
certificate of deposit portfolio with one of its brokers due to concerns related
to the broker's management of the portfolio. The Bank 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.
Noninterest Expense. Noninterest expense increased $892,000, or 147.1%,
for the three months ended September 30, 1996, and $941,000, or 53.8%, for the
nine months ended September 30, 1996. The increase in noninterest expense for
both periods primarily resulted from the one-time special assessment imposed by
the FDIC on SAIF-assessable deposits. The special assessment for the Bank
totaled $812,000 and was accrued at September 30, 1996. The remainder of the
increase in noninterest expense was attributable to a $58,000 and $160,000
increase in compensation and employee benefits for the three and nine months
ended September 30, 1996, respectively. The increase in compensation and
employee benefits was mainly attributable to the adoption in January 1996 of a
retirement plan for members of the Board of Directors who reach director
emeritus status. During the three and nine months ended September 30, 1996,
$52,000 and $155,000, respectively, of expense related to the plan was
recognized. The cash surrender value of the life insurance contracts totaled
$181,000 as of September 30, 1996 and was included in other assets in the
balance sheet. In future periods, compensation and employee benefits expense
10
<PAGE>
can be expected to increase due to the implementation of the Employee Stock
Ownership Plan, Management Recognition Plan, and other benefit plans resulting
from the consummation of the conversation to a stock institution.
Income Tax Expense. Income tax expense for the three and nine months
ended September 30, 1995 was $86,000 and $297,000, respectively, compared to
income tax benefits of $238,000 and $57,000 for the three and nine months ended
September 30, 1996, respectively. The fluctuation in income tax expense was
mainly attributable to the $309,000 tax benefit associated with the one-time
special assessment imposed by the FDIC. This benefit coupled with the Bank's
significant investment in tax-exempt securities (which amounted to $13.1 million
at September 30, 1996) resulted in an overall tax benefit for the three and nine
months ended September 30, 1996.
Liquidity and Capital Resources
The Bank's primary sources of funds consist of deposits, securities
sold under agreements to repurchase, 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
Bank manages the pricing of its deposits to maintain a steady deposit base. The
Bank 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-earning assets, to maintain liquidity, and to meet
operating expenses. Management believes that loan repayments and other sources
of funds will be adequate to meet or exceed the Bank's liquidity needs for the
remainder of 1996.
A major portion of the Bank's liquidity consists of cash and cash
equivalents, which include investments in highly liquid, short-term deposits.
The level of these assets depends on the Bank's operating, investing, lending
and financing activities during any given period. At September 30, 1996, cash
and cash equivalents totaled $24.7 million.
The primary investing activities of the Bank include origination of
loans and purchase of mortgage-backed securities and investment securities.
During the nine months ended September 30, 1996, purchases of investment
securities and mortgage-backed securities totaled $67.5 million and $3.0
million, respectively, while loan originations totaled $12.2 million. These
investments were funded primarily from loan and mortgage-backed security
repayments of $14.8 million, investment security sales and maturities of $54.6
million, $4.0 million of certificate of deposit maturities, and $4.5 million of
certificate of deposit sales.
Securities sold under agreements to repurchase increased to $18.3
million at September 30, 1996 from $15.0 million at December 31, 1995. 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 Bank is also the Executive Vice President,
Treasurer and Secretary of Gilster-Mary Lee. Over the last several years, the
Bank has maintained a deposit relationship with Gilster-Mary Lee, which at times
has had as much as $25 million in funds on deposit, typically with short terms.
At September 30, 1996, the balance of funds on deposit with the Bank was $22.5
million, which included the securities sold under agreements to repurchase.
Gilster-Mary Lee has notified the Bank of its intent to maintain much smaller
deposit balances with the institution in the future. The loss of funds is
expected to impair future earnings as there is no intent to replace the savings
deposits or securities sold under agreements to repurchase with other wholesale
funds. At September 30, 1996, the Bank maintained an adequate liquidity level to
cover the withdrawal of such deposits and/or the reduction of such borrowings.
Liquidity management is both a daily and long-term function of business
management. If the Bank requires funds beyond its ability to generate them
internally, the Bank believes that it could borrow additional funds from the
Federal Home Loan Bank of Chicago (FHLB). At September 30, 1996, the Bank had no
outstanding advances from the FHLB.
At September 30, 1996, the Bank exceeded all of its regulatory capital
requirements.
11
<PAGE>
September 30, 1996
----------------------------------
Percent of
Amount Adjusted Total Assets
---------- ---------------------
(Dollars in Thousands)
GAAP capital ............................... $ 12,055 7.79%
Tangible capital ........................... $ 11,989 7.75%
Tangible capital requirement ............... 2,321 1.50
---------- ---------------------
Excess ..................................... $ 9,668 6.25%
========== =====================
Core capital ............................... $ 11,989 7.75%
Core capital requirement ................... 4,641 3.00
---------- ---------------------
Excess ..................................... $ 7,348 4.75%
========== =====================
Risk-based capital ......................... $ 12,381 24.44%
Risk-based capital requirement ............. 4,052 8.00
---------- ---------------------
Excess ..................................... $ 8,329 16.44%
========== =====================
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 Bank are monetary in nature.
As a result, interest rates have a more significant impact on the Bank'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.
Impact of New Accounting Pronouncements
Accounting for Mortgage Servicing Rights. In May 1995, the FASB issued
Statement of Financial Accounting Standards 122, "Accounting for Mortgage
Servicing Rights", an amendment of FASB Statement No. 65 ("SFAS 122"). SFAS 122
amends SFAS 65, "Accounting for Certain Mortgage Banking Activities", to require
that a mortgage banking enterprise recognize as separate assets rights to
service mortgage loans for others, however those servicing rights are acquired.
A mortgage banking enterprise that acquires mortgage servicing rights through
either the purchase or origination of mortgage loans and sells or securitizes
those loans with servicing rights retained should allocate the total cost of the
mortgage loans to the mortgage servicing rights and the loans (without the
mortgage servicing rights) based on their relative fair values, if it is
practicable to estimate those fair values. If it is not practicable to estimate
the fair values of the mortgages servicing rights and the mortgage loans
(without the mortgage servicing rights), the entire cost of purchasing or
originating the loans should be allocated to the mortgage loans, and no cost
should be allocated to mortgage servicing rights. SFAS 122 also requires that a
mortgage banking enterprise assess its capitalized mortgage servicing rights for
impairment based on the fair value of those rights. SFAS 122 must be applied
prospectively for fiscal years beginning after December 15, 1995, with earlier
adoption encouraged, to transactions in which a mortgage banking enterprise
sells or securitizes mortgage loans with servicing rights retained and to
impairment evaluations of all amounts capitalized as mortgage servicing rights,
including those purchased before the adoption of SFAS 122. Retroactive
capitalization of mortgage servicing rights retained in transactions in which a
mortgage banking enterprise originates mortgage loans and sells or securitizes
those loans before the adoption of SFAS 122 is prohibited. The Bank adopted the
provisions of SFAS 122 effective January 1, 1996. The adoption of SFAS 122 did
not have a material effect on the Bank's financial position.
Accounting for Employee Stock Ownership Plans. In November 1993, the
American Institute of Certified Public Accountants ("AICPA") issued SOP 93-6,
which requires an employer to record compensation expense in an amount equal to
the fair value of shares committed to be released to employees from an employee
stock ownership plan. Assuming shares of Common Stock appreciate in value over
time, the adoption of SOP 93-6 may increase compensation expense relating to the
ESOP to be established in connection with the Stock Conversion as compared with
prior guidance which required the recognition of compensation expense based on
the cost of shares acquired by ESOP. The effect of SOP 93-6 on net income and
book value per share in fiscal 1996 and future periods cannot be predicted due
to the uncertainty of the fair value of the shares of Common Stock subsequent to
their issuance.
Accounting for Stock Based Compensation. In October 1995, the FASB
issued SFAS 123, "Accounting for Stock Based Compensation," which establishes
financial accounting and reporting standards for stock based employee
compensation plans and also applies to transactions in which an entity issues
its equity instruments to acquire goods or services from nonemployees.
12
<PAGE>
SFAS 123 defines a fair value based method of accounting. However, it also
allows an entity to continue to measure compensation cost for those plans using
the intrinsic value based method of accounting prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees ("APB
25"). SFAS 123 is effective for transactions entered into in fiscal years
beginning after December 15, 1995. Pro forma disclosures required for entities
that elect to continue to measure compensation cost using APB 25 must include
the effect of all awards granted in fiscal years that begin after December 15,
1994. The adoption of SFAS 123 will not have any impact on the Bank's financial
condition or results of operations until the Stock Option Plan is established
after the Conversion.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities. In June of 1995, the FASB issued SFAS 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities." SFAS 125 supersedes SFAS 122. SFAS 125 provides accounting and
reporting standards for transfers and servicing of financial assets and the
extinguishment of liabilities based on consistent application of a financial
components approach that focuses on control. It distinguishes transfers of
financial assets that are sales from transfers that are secured borrowings.
Under the financial components approach, after a transfer of financial assets,
an entity recognizes all financial and servicing assets it controls and
liabilities it has incurred and derecognizes financial assets it no longer
controls and liabilities that have been extinguished. The financial components
approach focuses on the assets and liabilities that exist after the transfer.
Many of these assets and liabilities are components of financial assets that
existed prior to the transfer. If a transfer does not meet the criteria for a
sale, the transfer is accounted for as a secured borrowing with pledge of
collateral.
SFAS 125 extends the "available for sale" or "trading" approach in SFAS
115 to nonsecurity financial assets that can contractually be repaid or
otherwise settled in such a way that the holder of the assets would not recover
substantially all of its recorded investment. SFAS 125 also amends SFAS 115 to
prevent a security from being classified as held to maturity if the security can
be prepaid or otherwise settled in such a way that the holder of the security
would not recover substantially all of its recorded investment.
SFAS 125 provides implementation guidance for accounting for (i)
securitizations, (ii) transfers of partial interests, (iii) servicing of
financial assets, (iv) securities lending transactions, (v) repurchase
agreements including "dollar rolls," (vi) loan syndications and participations,
(vii) risk participations in banker's acceptances, (viii) factoring
arrangements, (ix) transfers of receivables with recourse, (x) transfers of
sales type and direct financing lease receivables, and (xi) extinguishments of
liabilities.
SFAS 125 is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after December 31, 1996, and is to
be applied prospectively. Earlier or retroactive application is not permitted.
In addition, the extension of the SFAS 125 approach to certain nonsecurity
financial assets and the amendment of SFAS 115 is effective for financial assets
held on or acquired after January 1, 1997. Reclassifications that are necessary
because of the amendment do not call into question an entity's ability to hold
other debt securities to maturity in the future. Management of the Bank does not
expect the adoption of SFAS 125 will have a material effect on the Bank's
financial position or results of operations.
Nonperforming Assets
The following table sets forth information with respect to the Bank's
non-performing assets at the dates indicated. The Bank had no restructured loans
within the meaning of SFAS No. 15 at any of the dates indicated.
13
<PAGE>
At September 30, At December 31,
1996 1995
---------------- ---------------
(Dollars in Thousands)
Non-performing loans:
Loans accounted for on a non-accrual basis:
Real estate:
Residential ....................... $ 24 $ 56
Commercial ........................ 42 49
Consumer .......................... 85 40
--------------- ---------------
Total .......................... 151 145
--------------- ---------------
Accruing loans which are contractually past
due 90 days or more:
Residential real estate ........... -- --
Consumer .......................... 10 14
--------------- ---------------
Total .......................... 10 14
--------------- ---------------
Total non-performing loans ................. 161 159
Real estate acquired by foreclosure, net ... 105 209
--------------- ---------------
Total non-performing assets ....... $ 266 $ 368
=============== ===============
Total non-performing loans to
net loans ....................... .29% 0.28%
Total allowance for loan losses to
non-performing loans ............ 243.48% 244.79%
Total non-performing assets to
total assets .................... .17% 0.27%
=============== ===============
14
<PAGE>
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.
None
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
<PAGE>
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: October 31, 1996
16
<PAGE>
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
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR CHESTER BANCORP, INC. AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001010838
<NAME> CHESTER BANCORP, INC.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 3,104
<INT-BEARING-DEPOSITS> 15,615
<FED-FUNDS-SOLD> 6000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 24,053
<INVESTMENTS-CARRYING> 44,128
<INVESTMENTS-MARKET> 0
<LOANS> 55,977
<ALLOWANCE> 0
<TOTAL-ASSETS> 154,771
<DEPOSITS> 122,358
<SHORT-TERM> 18,340
<LIABILITIES-OTHER> 0
<LONG-TERM> 0
0
0
<COMMON> 0
<OTHER-SE> 12,055
<TOTAL-LIABILITIES-AND-EQUITY> 154,771
<INTEREST-LOAN> 4,476
<INTEREST-INVEST> 1,857
<INTEREST-OTHER> 553
<INTEREST-TOTAL> 6,886
<INTEREST-DEPOSIT> 3,320
<INTEREST-EXPENSE> 4,007
<INTEREST-INCOME-NET> 2,880
<LOAN-LOSSES> 18
<SECURITIES-GAINS> 24
<EXPENSE-OTHER> 2,689
<INCOME-PRETAX> 256
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 313
<EPS-DILUTED> 0
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
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<RECOVERIES> 0
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</TABLE>
