<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 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 37-1359570
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1112 State Street, Chester, Illinois 62233
Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (618) 826-5038
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of outstanding shares of the registrant's Common Stock, par
value $.01 per share, was 2,109,025 on June 30, 1997.
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<PAGE> 2
FORM 10-Q
Index
<TABLE>
<CAPTION>
Page
Number
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets ..................... 2
Consolidated Statements of Income ............... 3
Consolidated Statement of Stockholders' Equity .. 5
Consolidated Statements of Cash Flows ........... 6
Notes to Consolidated 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 ............................... 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
</TABLE>
<PAGE> 3
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
<PAGE> 4
CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 1997 and December 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
Assets 1997 1996
------------ -------------
<S> <C> <C>
Cash $ 1,591,476 $ 1,925,684
Interest-bearing deposits 1,525,414 4,191,595
Federal funds sold 8,925,000 16,000,000
------------ ------------
Total cash and cash equivalents 12,041,890 22,117,279
Certificates of deposit 294,000 888,265
Investment securities:
Available for sale, at market value 20,760,500 12,508,487
Held to maturity, at cost 22,411,718 36,254,076
Mortgage-backed securities:
Available for sale, at market value 1,784,708 1,898,532
Held to maturity, at cost 15,215,392 13,998,304
Loans receivable, net 59,232,296 54,842,131
Accrued interest receivable 932,130 863,692
Real estate acquired by foreclosure, net 112,625 116,747
Office property and equipment, net 1,891,880 1,949,535
Income taxes receivable - 18,051
Deferred tax asset, net 15,084 23,792
Other assets 338,022 363,858
------------ ------------
$135,030,245 $145,842,749
============ ============
Liabilities and Stockholders' Equity
Savings deposits $ 95,950,478 $102,246,850
Securities sold under agreements to repurchase 6,490,000 11,340,000
Accrued interest payable 138,714 112,623
Advance payments by borrowers for taxes and insurance 1,008,647 447,666
Income taxes payable 173,513 -
Accrued expenses and other liabilities 1,454,129 268,632
------------ ------------
Total liabilities 105,215,481 114,415,771
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 3,000,000 shares authorized,
2,182,125 issued at June 30, 1997 and December 31, 1996 21,821 21,821
Additional paid-in capital 20,880,611 20,865,158
Retained earnings, substantially restricted 12,777,070 12,271,098
Unrealized gain (loss) on securities available
for sale, net of tax 2,972 (14,499)
Unearned ESOP shares (1,682,260) (1,716,600)
Unamortized restricted stock awards (1,102,850) -
Treasury stock, at cost: 73,100 shares and -0- shares at
June 30, 1997 and December 31, 1996, respectively (1,082,600) -
------------ ------------
Total stockholders' equity 29,814,764 31,426,978
------------ ------------
$135,030,245 $145,842,749
============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements
2
<PAGE> 5
CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Three Months Ended June 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
1997 1996
---- ----
<S> <C> <C>
Interest income:
Loans receivable $1,240,404 $1,222,412
Mortgage-backed securities 283,739 273,151
Investments 708,830 664,380
Interest-bearing deposits and federal funds sold 111,273 104,133
---------- ----------
Total interest income 2,344,246 2,264,076
---------- ---------
Interest expense:
Savings deposits 1,077,718 1,134,868
Securities sold under agreements to repurchase 101,472 169,872
---------- ----------
Total interest expense 1,179,190 1,304,740
---------- ----------
Net interest income 1,165,056 959,336
Provision for loan losses 15,000 7,500
---------- ----------
Net interest income after provision for loan losses 1,150,056 951,836
---------- ----------
Noninterest income:
Late charges and other fees 41,977 25,637
Gain on sale of investment securities, net 16,719 -
Other 5,681 6,976
---------- ----------
Total noninterest income 64,377 32,613
---------- ----------
Noninterest expense:
Compensation and employee benefits 391,139 318,575
Occupancy 72,542 69,411
Data processing 41,212 37,653
Advertising 14,255 9,409
Federal insurance premiums 17,598 61,254
Other 143,234 80,962
---------- ----------
Total noninterest expense 679,980 577,264
---------- ----------
Income before income tax expense 534,453 407,185
Income tax expense 157,000 104,249
---------- ----------
Net income $ 377,453 $ 302,936
========== ==========
Earnings per share $ 0.19 NA
========== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE> 6
CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Six Months Ended June 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1997 1996
---- ----
<S> <C> <C>
Interest income:
Loans receivable $2,408,624 $2,466,590
Mortgage-backed securities 555,423 536,225
Investments 1,397,879 1,195,928
Interest-bearing deposits and federal funds sold 286,766 345,374
---------- ----------
Total interest income 4,648,692 4,544,117
---------- ----------
Interest expense:
Savings deposits 2,166,420 2,286,095
Securities sold under agreements to repurchase 186,323 353,208
---------- ----------
Total interest expense 2,352,743 2,639,303
---------- ----------
Net interest income 2,295,949 1,904,814
Provision for loan losses 30,000 15,000
---------- ----------
Net interest income after provision for loan losses 2,265,949 1,889,814
---------- ----------
Noninterest income:
Late charges and other fees 81,173 52,489
Loss on sale of certificates of deposit - (53,714)
Gain on sale of investment securities, net 20,469 6,837
Other 28,091 23,335
---------- ----------
Total noninterest income 129,733 28,947
---------- ----------
Noninterest expense:
Compensation and employee benefits 739,616 645,841
Occupancy 149,913 140,062
Data processing 78,574 78,694
Advertising 27,235 19,913
Federal insurance premiums 37,351 122,986
Other 316,051 183,388
---------- ----------
Total noninterest expense 1,348,740 1,190,884
---------- ----------
Income before income tax expense 1,046,942 727,877
Income tax expense 302,000 181,249
---------- ----------
Net income $ 744,942 $ 546,628
========== ==========
Earnings per share $ 0.38 NA
========== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE> 7
CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Six Months Ended June 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Unrealized gain
Retained (loss) on
Common stock Additional earnings, securities Unearned
----------------------- paid-in substantially available for ESOP
Shares Amount capital restricted sale, net of tax shares
------ -------- ----------- ------------- ---------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 2,182,125 $21,821 $20,865,158 $12,271,098 $(14,499) $(1,716,600)
Net income - - - 744,942 - -
Dividends on common stock
at $.12 per share - - - (238,970) - -
Purchase of treasury stock - - - - - -
Grant of unamortized
restricted stock awards - - - - - -
Amortization of
unamortized restricted
stock awards - - - - - -
Amortization of ESOP
awards - - 15,453 - - 34,340
Change in unrealized gain
(loss) on securities
available for sale, net - - - - 17,471 -
--------- -------- ----------- ----------- ------------ -----------
Balance, June 30, 1997 2,182,125 $ 21,821 $20,880,611 $12,777,070 $ 2,972 $(1,682,260)
========= ======== ============ =========== ============ ============
<CAPTION>
Unamortized Treasury Stock Total
restricted stock --------------------- Stockholders'
awards Shares Amount equity
---------------- ------ ------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 $ - - $ - $31,426,978
Net income - - - 744,942
Dividends on common stock
at $.12 per share - - - (238,970)
Purchase of treasury stock - 73,100 (1,082,600) (1,082,600)
Grant of unamortized
restricted stock awards (1,160,894) - - (1,160,894)
Amortization of
unamortized restricted
stock awards 58,044 - - 58,044
Amortization of ESOP
awards - - - 49,793
Change in unrealized gain
(loss) on securities
available for sale, net - - - 17,471
---------- --------- ----------- ------------
Balance, June 30, 1997 $(1,102,850) 73,100 $(1,082,600) 29,814,764
=========== ========= =========== ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE> 8
CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six months ended June 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
June 30, June 30,
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 744,942 $ 546,628
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization:
Office properties and equipment 70,763 51,540
Deferred fees, discounts, and premiums (248,324) (30,178)
Stock plans 107,837 -
(Increase) decrease in accrued interest receivable (68,438) (258,276)
Increase (decrease) in accrued interest payable 26,091 (279,521)
Increase (decrease) in income taxes, net 189,564 (4,960)
Loss on sale of certificates of deposit - 53,714
Gain on sale of investment securities, net (20,469) (6,837)
Provision for loan losses 30,000 15,000
Net change in other assets and other liabilities 45,170 (410,586)
------------ -----------
Net cash provided by (used in) operating activities . 877,136 (323,476)
------------ -----------
Cash flows from investing activities:
Principal repayments on:
Loans receivable 4,184,806 9,092,670
Mortgage-backed securities 2,263,569 888,439
Proceeds from the maturity of certificates of deposit 594,000 2,387,000
Proceeds from the maturity of investment securities 72,936,835 24,758,070
Proceeds from the sale of certificates of deposit - 4,486,286
Proceeds from the sale of investment securities 2,019,232 3,010,078
Cash invested in:
Loans receivable (8,599,049) (7,736,646)
Mortgage-backed securities (3,364,715) (1,972,500)
Investment securities (69,067,134) (40,617,253)
Federal Home Loan Bank stock - (17,700)
Proceeds from sale of real estate acquired by foreclosure - 20,000
Purchase of office properties and equipment (13,108) (16,499)
------------ -----------
Net cash provided by (used in) investing activities 954,436 (5,718,055)
------------ -----------
Cash flows from financing activities:
Increase (decrease) in savings deposits (6,296,372) (1,309,277)
Increase (decrease) in securities sold under agreements to repurchase (4,850,000) 2,740,000
Dividends paid (238,970) -
Purchase of treasury stock (1,082,600) -
Increase in advance payments by borrowers for taxes and insurance 560,981 270,341
------------ -----------
Net cash provided by (used in) financing activities (11,906,961) 1,701,064
------------ -----------
Net increase (decrease) in cash and cash equivalents (10,075,389) (4,340,467)
Cash and cash equivalents, beginning of period 22,117,279 10,666,127
------------ -----------
Cash and cash equivalents, end of period $ 12,041,890 $ 6,325,660
============ ===========
Supplemental information:
Interest paid $ 2,361,558 $ 2,643,644
Income taxes paid 99,224 186,208
============ ===========
Noncash investing and financing activities -
interest credited to savings deposits $ 1,561,024 $ 1,665,424
============ ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE> 9
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 and six months ended June 30, 1997 and 1996.
Operating results for the six months ended June 30, 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 1,976,461
and 1,976,490 for the three and six months ended June 30, 1997, respectively.
(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 $49,793 for the six months
ended June 30, 1997.
The ESOP shares as of June 30, 1997 are as follows:
Allocated shares 2,910
Committed to be released shares 3,434
Unreleased shares 168,226
----------
Total ESOP shares 174,570
==========
Fair value of unreleased shares $2,481,334
==========
7
<PAGE> 10
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 $10.8 million, or 7.4%,
to $135.0 million at June 30, 1997 from $145.8 million at December 31, 1996.
The decrease in the company's asset size was attributable to the $4.9 reduction
in reverse repurchase agreements during the first six months of 1997 and a
decrease of $6.3 million in deposits.
Loans receivable increased $4.4 million, or 8.0%, to $59.2 million at June
30, 1997 from $54.8 million at December 31, 1996. The increase in loans
receivable resulted from the combined impact of increased origination volume
through the continued focus on the St. Louis mortgage lending market and a $5.1
million reduction in principal repayments on loans receivable. The reduction
in repayments is primarily due to the stabilized interest rate environment that
has been experienced during 1997.
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 and consumer lending.
Mortgage-backed securities at June 30, 1997 were $17.0 million compared to
$15.9 million at December 31, 1996. Investment securities decreased $5.6
million, or 11.5%, to $43.2 million at June 30, 1997 from $48.8 million at
December 31, 1996. The increase in mortgage-backed securities was mainly
attributable
8
<PAGE> 11
to an emphasis on increasing the company's mortgage-backed securities
portfolio. The decrease in investment securities resulted primarily from an
increased investment in higher yielding loans receivable and mortgage-backed
securities.
Certificates of deposit decreased $594,000 to $294,000 at June 30, 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 $10.1 million, or 45.6%, to $12.0 million at June 30, 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.
LIABILITIES. Savings deposits decreased $6.3 million, or 6.2%, to $96.0
million at June 30, 1997 from $102.2 million at December 31, 1996. Reverse
repurchase agreements decreased $4.9 million from $11.3 million at December 31,
1996 to $6.5 million at June 30, 1997. The majority of 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 June 30, 1997, the balance of funds on deposit with the Company was
$13.9 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 June 30, 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 and six months ended
June 30, 1997 was $377,000 and $745,000, respectively, compared to $303,000 and
$547,000 for the three and six months ended June 30, 1996, respectively. The
$75,000 and $198,000 increase in net income for the three and six months ended
June 30, 1997, respectively, was positively impacted by an increase in net
interest income and noninterest income, and was negatively impacted by an
increase in noninterest expense and income tax expense.
NET INTEREST INCOME. Net interest income totaled $1.2 million for the
three months ended June 30, 1997 compared to $959,000 for the three months
ended June 30, 1996. The $206,000, or 21.4%, 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 106.53% in the 1996 period to 127.10% in the 1997 period. Net
interest income totaled $2.3 million for the six months ended June 30, 1997
compared to $1.9 million for the six months ended June 30, 1996. The $391,000,
or 20.5%, 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 106.50% in the 1996
period to 125.31% in the 1997 period. 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
9
<PAGE> 12
net interest income was partially offset by a decline in the Company's interest
rate spread from 2.85% and 2.82% for the three and six months ended June 30,
1996 to 2.66% and 2.65% for the three and six months ended June 30, 1997,
respectively.
INTEREST INCOME. Interest income on loans receivable increased $18,000,
or 1.5%, for the three months ended June 30, 1997. The increase in interest
income on loans receivable was the result of an $1.5 million, or 2.8% increase
in the average balance of loans receivable. The impact of increased volume was
partially offset by a decline in the average yield on loans receivable from
8.77% for the 1996 quarter to 8.67% for the 1997 quarter.
Interest income on loans receivable decreased $58,000, or 2.4% for the six
months ended June 30, 1997. This fluctuation was due to a decline in the
average yield on loans receivable from 8.82% for the six months ending June 30,
1996 to 8.69% for the six months ending June 30, 1997, coupled with a $459,000,
or 0.8%, decrease in the average balance of loans receivable.
Interest income on mortgage-backed securities increased $11,000 and
$19,000 for the three and six months ended June 30, 1997, respectively. The
increase in both instances resulted from an increase in the average balance of
mortgage-backed securities. For the three and six months ended June 30, 1997,
the average balance of mortgage-backed securities increased $1.0 million, or
6.0%, and $1.1 million,, or 7.0%, respectively. 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 15 basis point and a 21 basis point decline in the average yield on
mortgage-backed securities for the three and six months ended June 30, 1997,
respectively.
Interest earned on investment securities was $709,000 and $1.4 million for
the three and six months ended June 30, 1997, respectively, compared to
$664,000 and $1.2 million for the three and six months ended June 30, 1996,
respectively. The increases of $44,000, or 6.7%, and $202,000, or 16.9%, for
the three and six months ended June 30, 1997, respectively, were mainly the
result of an increase in the average balance of investments of $1.2 million, or
2.4%, and $6.6 million, or 14.3%, for the three and six months ended June 30,
1997, respectively. The increased investments 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 the stock in short-term deposits, while longer term investment opportunities
were evaluated. The improvements in interest on investments were also
positively impacted by a 16 basis point increase in the average yield on
investment securities for the three months ended June 30, 1997. The average
yield on investment securities remained constant at 5.70% for the six months
ending June 30, 1997.
Interest income on interest-bearing deposit increased $7,000, or 6.9%, and
decreased $59,000, or 17.0%, during the three and six months ended June 30,
1997, respectively. The increase in interest income on interest-bearing
deposits during the three months ended June 30, 1997 resulted from an increase
in the average balance of interest-bearing deposits of $651,000, or 8.6%. The
decline in interest income on interest-bearing deposits during the six months
ended June 30, 1997 resulted from a decrease in the average balance of
interest-bearing deposits of $1.7 million, or 14.0%. The decline in the
average balance was mainly due to the reinvestment of proceeds from sales and
maturities of certificates of deposit into higher yielding investments. The
decrease in interest income for the six months ended June 30, 1997 was also
impacted by a decrease in the average yield on interest-bearing deposits of 18
basis points.
INTEREST EXPENSE. Interest expense on savings deposits decreased $57,000,
or 5.0%, to $1.08 million for the three months ended June 30, 1997 from $1.13
million for the three months ended June 30, 1996. The decline in interest
expense was the result of a $8.5 million, or 8.0%, decrease in the average
balance of deposits, partially offset by the increase in the average cost of
deposits from 4.27% for the three months ended June 30, 1996 to 4.40% for the
three months ended June 30, 1997. The decline in deposits was mainly
attributable to increased competition in the Company's market place and also
reflected management's decision
10
<PAGE> 13
to compete less aggressively on rates. Management anticipates that the closing
of the Company's Carbondale, Illinois branch location on June 30, 1997 will
reduce savings deposits in the near future.
Interest expense on savings deposits decreased $120,000, or 5.2%, to $2.2
million for the six months ended June 30, 1997 from $2.3 million for the six
months ended June 30, 1996. The decline in interest expense on savings
deposits was the result of a $7.5 million, or 7.0%, decrease in the average
balance of deposits. The average cost of deposits increased between the two
quarters with an average rate of 4.35% for the six months ended June 30, 1997
compared to 4.27% for the six months ended June 30, 1996.
Interest expense on reverse repurchase agreements was $101,000 and
$186,000 for the three and six months ended June 30, 1997, respectively,
compared to $170,000 and $353,000 for the three and six months ended June 30,
1996, respectively. The decreases of $68,000, or 40.3%, and $167,000, or
47.2%, for the three and six months ended June 30, 1997, respectively, were
primarily the result of a decrease in the average balance of reverse repurchase
agreements of $7.8 million, or 49.1%, and $7.8 million, or 50.5%, for the three
and six months ended June 30, 1997, respectively. The decrease in interest
expense was offset by a 71 basis point and 30 basis point increase in the
average cost of reverse repurchase agreements for the three and six months
ended June 30, 1997, respectively.
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 June 30, 1997, the Company's provision for loan
losses was $15,000 compared to $7,500 for the comparable 1996 quarter.
The Company's allowance for loan losses was $378,000, or .64%, of loans
outstanding at June 30, 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 June 30, 1997 was $39,000, which represented .07% 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 June 30, 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 $64,000 for the three months
ended June 30, 1997 compared to $33,000 for the three months ended June 30,
1996. The fluctuation in noninterest income was due to a $17,000 increase in
gains recognized from the sale of investment securities available for sale and
a $16,000 increase in late charges and other fees.
11
<PAGE> 14
Noninterest income was $130,000 for the six months ended June 30, 1997
compared to $29,000 for the six months ended June 30, 1996. The $101,000
increase resulted primarily from a $54,000 loss on the sale of certificates of
deposit during the six months ended June 30, 1996, and a $20,000 increase in
gains recognized form the sale of investment securities during the six months
ended June 30, 1997. 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 deposits 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 and an increase
in late charges and other fees of $29,000.
NONINTEREST EXPENSE. Noninterest expense increased $103,000, or 17.8%,
for the three months ended June 30, 1997, and $158,000, or 13.3%, for the six
months ended June 30, 1997. The increase in noninterest expense for the three
and six months ended June 30, 1997 resulted from the $62,000 and $133,000
increase in other expense and the $73,000 and $94,000 increase in compensation
expense, respectively, which was partially offset by a $44,000 and $86,000
decline in federal insurance premiums respectively. The increase in other
expenses resulted primarily from legal fees related to the establishment of the
Company's stock plan and Management Recognition and Development Plan (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) and the MRP which were implemented as a result of the
stock conversion. Compensation expense related to the ESOP was $26,000 and
$50,000 for the three and six months ended June 30, 1997, respectively.
Compensation expense related to the MRP was $58,000 for the quarter ended June
30, 1997. The decline in federal insurance premiums experienced during the
three and six months ended June 30, 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 three and six months ended
June 30, 1996 was $104,000 and $181,000, respectively, compared to income tax
expense of $157,000 and $302,000 for the three and six months ended June 30,
1997, respectively. The Company's effective tax rate for the three and six
months ended June 30, 1997 was 28.8% and 24.9%, respectively, compared to 29.4%
and 25.6% for the three and six months ended June 30, 1996, respectively. The
effective tax rate for each period was below the statutory federal rate of 34%
due to the Company's investment in tax exempt securities.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds consist of deposits, reverse
repurchase agreements, 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 June 30, 1997,
cash and cash equivalents totaled $12.0 million.
12
<PAGE> 15
The primary investing activities of the Company include origination of
loans and purchase of mortgage-backed securities and investment securities.
During the six months ended June 30, 1997, purchases of investment securities
and mortgage-backed securities totaled $69.1 million and $3.4 million,
respectively, while loan originations totaled $8.5 million. These investments
were funded primarily from loan and mortgage-backed security repayments of $6.4
million and investment security sales and maturities of $74.9 million.
Liquidity management is both a daily and long-term function of business
management. If the Company requires funds beyond its ability to generate them
internally, the Company believes that it could borrow additional funds from the
Federal Home Loan Bank (FHLB). At June 30, 1997, the Company had no
outstanding advances from the FHLB.
At June 30, 1997, the Company exceeded all of its regulatory capital
requirements. The Company's subsidiary banks actual and required capital
amounts and ratios as of June 30, 1997 are as follows:
<TABLE>
<CAPTION>
Actual Capital Requirements
------------------------------------------
(Dollars in thousands) Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total capital
(to risk-weighted assets):
Chester National Bank $23,692 57.58% 3,292 8.00%
Chester National Bank of Missouri 3,105 50.86% 488 8.00%
Tier 1 capital
(to risk-weighted assets):
Chester National Bank $23,369 56.80% 1,646 4.00%
Chester National Bank of Missouri 3,050 49.96% 244 4.00%
Tier 1 capital
(to average assets):
Chester National Bank $23,369 18.73% 3,743 3.00%
Chester National Bank of Missouri 3,050 26.79% 342 3.00%
</TABLE>
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and results of operations in
terms of historical dollars without considering changes in the relative
purchasing power of money over time because of inflation. Unlike most
industrial companies, virtually all of the assets and liabilities of the
Company are monetary in nature. As a result, interest rates have a more
significant impact on the Company's performance than the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services.
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 Extinguishment 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,
13
<PAGE> 16
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.
DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE
In February 1997, the FASB issued SFAS 129 which establishes standards for
disclosing information about an entity's capital structure. SFAS 129 is
effective for financial statements for periods ending after December 15, 1997.
Since SFAS 129 is a disclosure requirement there will be no impact on the
Company's financial statements.
REPORTING COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS 130 which establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. SFAS is effective for fiscal years beginning after December 15,
1997. SFAS 130 is a reporting and disclosure requirement and, therefore, will
have no impact on the Company's financial statements.
DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In June 1997, the FASB issued SFAS 131 which establishes standards for the way
that public enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim reports issued to shareholders.
SFAS 131 is effective for financial statements for periods beginning after
December 15, 1997. Since SFAS 131 was only recently issued, the Company has
not yet determined the impact of adopting SFAS 131. However, since SFAS 131 is
a disclosure requirement there will be no effect on the Company's financial
position or results of operations.
14
<PAGE> 17
NONPERFORMING ASSETS
The following table sets forth information with respect to the Company's
nonperforming assets at the dates indicated.
<TABLE>
<CAPTION>
At June 30, 1997 At December 31, 1996
---------------- --------------------
(Dollars in Thousands)
--------------------------------------
<S> <C> <C>
Non-performing loans:
Loans accounted for on a non-accrual basis:
Real estate:
Residential $ 11 $ 11
Commercial 0 14
Consumer 22 54
--------- ------
Total 33 79
--------- ------
Accruing loans which are contractually past due 90
days or more:
Residential real estate 0 --
Consumer 0 --
--------- ------
Total 0 --
--------- ------
Total non-performing loans 33 79
Real estate acquired by foreclosure, net 113 117
--------- ------
Total non-performing assets 146 $ 196
========= ======
Total non-performing loans to net loans .06% 0.14%
========= ======
Total allowance for loan losses to
non-performing loans 1,145.04% 485.74%
========= ======
Total non-performing assets to total assets .11% 0.13%
========= ======
</TABLE>
15
<PAGE> 18
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
16
<PAGE> 19
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned, thereunto duly authorized.
Chester Bancorp, Inc.
By: /s/ Michael W. Welge
---------------------------------------
Michael W. Welge
Chairman of the Board, President and Chief
Financial Officer
(Duly Authorized Officer)
Dated: August 14, 1997
17
<PAGE> 20
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
18
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF CHESTER BANCORP, INC. AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,591
<INT-BEARING-DEPOSITS> 1,819
<FED-FUNDS-SOLD> 8,925
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 22,545
<INVESTMENTS-CARRYING> 37,627
<INVESTMENTS-MARKET> 59,610
<LOANS> 9,610
<ALLOWANCE> 378
<TOTAL-ASSETS> 135,030
<DEPOSITS> 5,950
<SHORT-TERM> 6,490
<LIABILITIES-OTHER> 1,615
<LONG-TERM> 0
0
0
<COMMON> 22
<OTHER-SE> 30,953
<TOTAL-LIABILITIES-AND-EQUITY> 135,030
<INTEREST-LOAN> 2,409
<INTEREST-INVEST> 1,593
<INTEREST-OTHER> 287
<INTEREST-TOTAL> 4,649
<INTEREST-DEPOSIT> 2,166
<INTEREST-EXPENSE> 2,353
<INTEREST-INCOME-NET> 2,296
<LOAN-LOSSES> 30
<SECURITIES-GAINS> 20
<EXPENSE-OTHER> 1,349
<INCOME-PRETAX> 1,047
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 745
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
