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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
FEE REQUIRED
For the Fiscal Year Ended December 31, 1996
OR
Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
NO FEE REQUIRED
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 Identification Number)
incorporation or organization)
1112 State Street, Chester, Illinois 62233
(Address of Principal Executive Offices)
(618) 826-5038
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
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 twelve months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days. YES /X/ NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/ .
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, computed by reference to the last sale price on March 14, 1997,
as reported by the Nasdaq National Market, was approximately $23,836,710.
As of March 14, 1997 there were issued and outstanding 2,182,125 shares of
the Registrant's Common Stock.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Stockholders for the year
ended December 31, 1996, are incorporated by reference in Part II.
Portions of the registrant's proxy statement for its April 4, 1997, annual
meeting of stockholders (the "1997 Proxy Statement") are incorporated by
reference in Part III.
PART I
ITEM 1. Business
Chester Bancorp, Inc.
Chester Bancorp, Inc. (the "Company") is a Delaware corporation that was
organized in March 1996. The only significant assets of the Company are the
outstanding capital stock of Chester National Bank ("Chester National Bank")
and Chester National Bank of Missouri ("Chester National Bank of Missouri")
(collectively the "Banks"). The Company is regulated as a bank holding company
by the Federal Reserve System ("Federal Reserve").
The Company employs executive officers and a support staff if and as the
need arises. Such personnel are provided by the Banks and are not paid
separate remuneration for such services. The Company reimburses the Banks for
the use of their personnel. At December 31, 1996, the Company had total
consolidated assets of $145.8 million, total consolidated deposits of $102.2
million, and consolidated stockholders' equity of $31.4 million. The Company's
principal office is located at 1112 State Street, Chester, Illinois 62233 and
its telephone number is (618) 826-5038.
Chester National Bank and Chester National Bank of Missouri
Chester National Bank and Chester National Bank of Missouri are national
banks headquartered in Chester, Illinois and Perryville, Missouri,
respectively. The predecessor entity to the Banks was originally chartered in
1919 as an Illinois-chartered mutual savings and loan association under the
name "Chester Building and Loan Association." In 1989, Chester Building and
Loan Association acquired Heritage Federal Savings and Loan Association
("Heritage Federal") which at the time of acquisition had assets of
approximately $50 million and offices in Sparta, Red Bud, and Pinckneyville,
Illinois. In 1990, Chester Building and Loan Association converted to a
federal charter and adopted the name "Chester Savings Bank, FSB." In 1996,
Chester Savings Bank, FSB converted from mutual to stock ownership and
converted from a federal savings bank into two national banks, Chester National
Bank and Chester National Bank of Missouri.
Chester National Bank conducts its business from its main office, four
full-service branches located in Carbondale, Pinckneyville, Sparta, and Red
Bud, Illinois, and one loan production office in Cape Girardeau, Missouri.
Chester National Bank's principal executive
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office is located at 1112 State Street, Chester, Illinois, and its telephone
number at that address is (618) 826-5038. Chester National Bank of Missouri
conducts its business from its main office in Perryville, Missouri. Chester
National Bank of Missouri's principal executive office is located at 1010 N.
Main, Perryville, Missouri 63775, and its telephone number at that address is
573-547-7611. The Banks' deposits are insured by the Federal Deposit Insurance
Corporation ("FDIC") and the Banks are regulated by the Office of the
Comptroller of the Currency ("OCC").
The Banks primarily engage in the business of attracting retail deposits
from the general public in the Banks' respective market areas and using such
funds together with borrowings and funds from other sources to primarily
originate mortgage loans secured by one- to four-family residential real
estate. The Banks also originate consumer loans, commercial real estate loans,
and multi-family loans. At December 31, 1996, the Banks' gross loan portfolio
totaled $55.3 million, of which 81.2% were one- to four-family residential
mortgage loans, 10.7% were consumer loans and 6.4% were commercial real estate
and multi-family loans. In addition, the Banks have maintained a significant
portion of their assets in marketable securities. The Banks' investment
portfolios have been weighted toward United States Treasury and agency
securities. The portfolios also have included a significant amount of tax
exempt state and municipal securities. In addition, the Banks have invested in
mortgage-backed securities to supplement their lending operations. Investment
and mortgage-backed securities totaled $48.8 million and $15.9 million,
respectively, at December 31, 1996.
Recent Developments
On October 4, 1996, Chester Savings Bank, FSB, 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
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 2,182,125 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.
Market Area/Local Economy
The Banks offer a range of retail banking services to residents of their
market areas. The Banks' market areas include Randolph, Jackson, Williamson
and Perry counties in Illinois as well as Perry and Cape Girardeau counties in
Missouri.
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The local market area is primarily rural and covers a fairly large
geographic area in southwestern Illinois and southeastern Missouri. The
closest major metropolitan area is the St. Louis area, approximately 60 miles
to the north. The largest town served is Carbondale, which has a population of
approximately 27,000, while the smallest town served, Red Bud, has a population
of approximately 3,000. Perryville, Missouri has a population of approximately
7,000.
The economy in southwestern Illinois is historically based in coal mining
and agriculture, although both industries have declined in recent decades. The
decline of mining employment has had a significant adverse impact on the
economy of the market area, particularly in Randolph and Perry counties,
Illinois. Loan demand in these counties has been limited as unemployment is
high and the population has been declining. Randolph County's already weak
economy was adversely affected in early 1996 when Spartan Printing Company, one
of the County's largest manufacturing employers with approximately 1,000
employees, closed. Somewhat offsetting the unfavorable operating environment
in Randolph and Perry Counties has been the Jackson County market, whose
largest city, Carbondale, is home to Southern Illinois University
("University"). The University has enhanced the economic stability of Jackson
County both through direct employment and by supporting a number of ancillary
businesses. The Perryville market is rural and small, and economic stability
is supported by its largest employer, Gilster-Mary Lee. The operating
environment in Perryville has generally been more favorable than Randolph and
Perry Counties, Illinois.
Lending Activities
GENERAL. The principal lending activity of the Banks is the origination
of conventional mortgage loans for the purpose of purchasing, constructing or
refinancing owner-occupied, one- to four-family residential property. To a
significantly lesser extent, the Banks also originate multi-family, commercial
real estate, land and consumer loans. The Banks' net loans receivable totaled
$54.8 million at December 31, 1996, representing 37.6% of total assets.
LOAN PORTFOLIO ANALYSIS. The following table sets forth the composition
of the Banks' consolidated loan portfolio by type of loan and type of security
as of the dates indicated. The Banks had no concentration of loans exceeding
10% of total loans other than as set forth below.
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<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------
1996 1995 1994
----------------- ---------------- ----------------
Type of Loan: Amount Percent Amount Percent Amount Percent
- ------------- ------ ------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans: $45,906 82.95% $47,213 81.45% $48,275 81.68%
Conventional................
FHA......................... 251 0.45 344 0.59 405 0.69
Commercial.................. 3,043 5.50 2,870 4.95 3,588 6.07
Construction................ 197 0.36 1,172 2.02 485 0.82
------- ------- ------- ------ ------- -------
Total mortgage loans....... 49,397 89.26 51,599 89.01 52,753 89.26
------- ------- ------- ------ ------- -------
Consumer Loans:
Automobile................... 1,642 2.97 1,713 2.95 1,339 2.26
Home improvement............. 1,334 2.41 1,348 2.33 1,211 2.05
Credit cards................. 982 1.77 939 1.62 828 1.40
Savings account.............. 513 0.93 440 0.76 506 0.86
Other........................ 1474 2.66 1,928 3.33 2,463 4.17
------- ------- ------- ------ ------- -------
Total consumer loans....... 5,945 10.74 6,368 10.99 6,347 10.74
------- ------- ------- ------ ------- -------
Total loans................ 55,342 100.00% 57,967 100.00% 59,100 100.00%
====== ====== =======
Less:
Loans in process............. 95 533 676
Deferred fees and discounts.. 21 23 21
Allowance for losses......... 384 390 246
------- ------- -------
Loans receivable, net........ $54,842 $57,021 $58,157
======= ======= =======
Type of Security:
- -----------------
Residential real estate: $44,958 81.24% $47,201 81.43% $47,579 80.51%
One- to four-family.........
Multi-family................ 511 0.92 600 1.03 764 1.29
Commercial real estate....... 3,043 5.50 2,870 4.95 3,588 6.07
Agriculture and land......... 885 1.60 928 1.60 822 1.39
Consumer loans............... 5,945 10.74 6,368 10.99 6,347 10.74
------- ------- ------- ------ ------- -------
Total loans................ 55,342 100.00% 57,967 100.00% 59,100 100.00%
====== ====== ======
Less:
Loans in process............. 95 533 676
Deferred fees and discounts.. 21 23 21
Allowance for losses......... 384 390 246
------- ------- -------
Loans receivable, net...... $54,842 $57,021 $58,157
======= ======= =======
</TABLE>
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RESIDENTIAL REAL ESTATE LENDING. The primary lending activity of the
Banks is the origination of mortgage loans to enable borrowers to purchase or
refinance existing one- to four-family homes. Management believes that this
policy of focusing on one- to four-family residential mortgage loans located in
its market area has been successful in contributing to interest income while
keeping credit losses low. At December 31, 1996, $45.0 million, or 81.2% of
the Banks' gross consolidated loan portfolio, consisted of loans secured by
one- to four-family residential real estate. The average principal balance of
the loans in the Banks' one- to four-family portfolio was approximately $28,000
at December 31, 1996. The Banks presently originate for retention in their
portfolio both ARM loans with terms of up to 25 years and fixed-rate mortgage
loans with terms of up to 20 years. Borrower demand for ARM loans versus
fixed-rate mortgage loans is a function of the level of interest rates, the
expectations of changes in the level of interest rates and the difference
between the initial interest rates and fees charged for each type of loan. The
relative amount of fixed-rate mortgage loans and ARM loans that can be
originated at any time is largely determined by the demand for each in a
competitive environment. At December 31, 1996, $15.6 million, or 28.3% of the
Banks' gross loans, were subject to periodic interest rate adjustments.
The loan fees charged, interest rates and other provisions of the Banks'
ARM loans are determined by the Banks based on their own pricing criteria and
competitive market conditions. The Banks originate one-year ARM loans secured
by owner-occupied residences whose interest rates and payments generally are
adjusted annually to a rate typically equal to 2.75% above the one-year or,
occasionally the three-year, constant maturity United States Treasury ("CMT")
index. The Banks occasionally offer ARM loans with initial rates below those
which would prevail under the foregoing computations, determined by the Banks
based on market factors and competitive rates for loans having similar features
offered by other lenders for such initial periods. At December 31, 1996, the
initial interest rate on ARM loans offered by the Banks ranged from 6.75% to
7.75% per annum. The periodic interest rate cap (the maximum amount by which
the interest rate may be increased or decreased in a given period) on the
Banks' ARM loans is generally 2% per year and the lifetime interest rate cap is
generally 6% over the initial interest rate of the loan.
The Banks do not originate negative amortization loans. The terms and
conditions of the ARM loans offered by the Banks, including the index for
interest rates, may vary from time to time. The Banks believe that the
adjustment features of their ARM loans provide flexibility to meet competitive
conditions as to initial rate concessions while preserving the Banks'
objectives by limiting the duration of the initial rate concession.
The retention of ARM loans in the Banks' consolidated loan portfolio helps
reduce the Banks' exposure to changes in interest rates There are, however,
unquantifiable credit risks resulting from the potential of increased costs due
to changed rates to be paid by the customer. It is possible that during
periods of rising interest rates the risk of default on ARM loans may increase
as a result of repricing and the increased costs to the borrower. Furthermore,
because the ARM loans originated by the Banks generally provide, as a marketing
incentive, for initial rates of interest below the rate which would apply were
the adjustment index used for pricing initially (discounting), these loans are
subject to increased risks of default or delinquency.
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Another consideration is that although ARM loans allow the Banks to increase
the sensitivity of their asset base to changes in the interest rates, the
extent of this interest sensitivity is limited by the periodic and lifetime
interest rate adjustment limits. Because of these considerations, the Banks
have no assurance that yields on ARM loans will be sufficient to offset
increases in the Banks' cost of funds.
While fixed-rate single-family residential real estate loans are normally
originated with five to seven year balloon payments or terms up to 20 years,
such loans typically remain outstanding for substantially shorter periods.
This is because borrowers often prepay their loans in full upon sale of the
property pledged as security or upon refinancing the original loan. In
addition, substantially all mortgage loans in the Banks' consolidated loan
portfolio contain due-on-sale clauses providing that the Banks may declare the
unpaid amount due and payable upon the sale of the property securing the loan.
Typically, the Banks enforce these due-on-sale clauses to the extent permitted
by law and as business judgment dictates. Thus, average loan maturity is a
function of, among other factors, the level of purchase and sale activity in
the real estate market, prevailing interest rates and the interest rates
payable on outstanding loans.
The Banks generally require title insurance insuring the status of their
liens on all of the real estate secured loans. The Banks also require
earthquake, fire and extended coverage casualty insurance and, if appropriate,
flood insurance in an amount at least equal to the outstanding loan balance.
Appraisals are obtained on all properties and are conducted by independent
fee appraisers approved by the Board of Directors. The Banks' lending policies
generally limit the maximum loan-to-value ratio on mortgage loans secured by
owner-occupied properties to 80% of the lesser of the appraised value or the
purchase price, with the condition that the loan-to-value ratio may be
increased to 95% provided that private mortgage insurance coverage is obtained
for the amount in excess of 80%.
COMMERCIAL REAL ESTATE AND MULTI-FAMILY LENDING: Historically, the Banks
have engaged in limited amounts of commercial real estate and multi-family
lending. At December 31, 1996, commercial real estate loans aggregated $3.0
million, or 5.5% of the total consolidated loan portfolio and multi-family
loans aggregated $511,000 or 0.9% of the total consolidated loan portfolio.
The principal balance of such loans in the Banks' consolidated loan portfolio
ranged from approximately $3,000 to $550,000 at December 31, 1996.
Substantially all of these loans are secured by properties located in the
Banks' market area. Such properties include churches, a library, golf courses
and professional offices. Of this amount, approximately $459,000, or 15.1%,
were secured by churches. Commercial real estate and multi-family loans are
generally made for balloon terms of 5 to 10 years with a maximum amortization
of 20 years.
Commercial real estate and multi-family loans generally involve greater
risks than one- to four-family residential mortgage loans. Payments on loans
secured by such properties often depend on successful operation and management
of the properties. Repayment of such loans may be subject to a greater extent
to adverse conditions in the real estate market or the economy. The Banks seek
to minimize these risks in a variety of ways, including limiting the
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size of such loans, limiting the maximum loan-to-value ratio to 75% and
strictly scrutinizing the financial condition of the borrower, the quality of
the collateral and the management of the property securing the loan. All of
the properties securing the Banks' income property loans are inspected by the
Banks' lending personnel before the loan is made. The Banks also obtain
appraisals on each property in accordance with applicable regulations.
CONSTRUCTION LENDING. The Banks originate residential construction loans
to individuals to construct one- to four-family homes. The Banks generally do
not originate speculative construction loans (i.e., loans to builders to
construct homes for which there are no contracts for sale in place). At
December 31, 1996, construction loans totaled $197,000, or 0.4% of the gross
consolidated loan portfolio.
Substantially all construction loans made to individuals provide for the
Banks to originate a permanent loan upon the completion of construction, which
is generally an ARM loan as described under "Residential Real Estate Lending,"
above. The origination fee for construction loans is generally 1.0% of the
principal amount. Construction loans are generally made for terms of up to six
months.
Construction lending is generally considered to involve a higher level of
risk as compared to one- to four-family residential permanent lending because
of the inherent difficulty in estimating both a property's value at completion
of the project and the estimated cost of the project. The nature of these
loans is such that they are generally more difficult to evaluate and monitor.
If the estimate of value proves to be inaccurate, the Banks may be confronted
at, or prior to, the maturity of the loan, with a project whose value is
insufficient to assure full repayment.
AGRICULTURE AND LAND LENDING. The Banks originate loans secured by farm
residences and combinations of farm residences and farm real estate. The Banks
also originate loans for the acquisition of land upon which the purchaser can
then build. At December 31, 1996, the agriculture and land consolidated loan
portfolio totaled $885,000, or 1.6% of total loans, substantially all of which
were secured by properties located in the Banks' market area. Agriculture and
land loans are generally made for the same terms and at the same interest rates
as those offered on commercial real estate and multi-family loans, with a
loan-to-value ratio which is generally limited to 75%.
Loans secured by farm real estate generally involve greater risks than
one- to four-family residential mortgage loans. Payments on loans secured by
such properties may, in some instances, be dependent on farm income from the
properties. To address this risk, the Banks historically have not considered
farm income when qualifying borrowers. In addition, such loans are more
difficult to evaluate. If the estimate of value proves to be inaccurate, the
Banks may be confronted with a property the value of which is insufficient to
assure full repayment in the event of default and foreclosure.
CONSUMER AND OTHER LOANS. The Banks offer a variety of secured or
guaranteed consumer loans, including automobile loans, home improvement loans,
unsecured loans and loans secured by savings deposits. Consumer loans are made
at fixed interest rates and for
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varying terms. At December 31, 1996 the Banks' consumer loans totaled $5.9
million, or 10.7% of total loans. The Banks view consumer lending as an
important component of their business operations because consumer loans
generally have shorter terms and higher yields than one- to four-family real
estate loans, thus reducing exposure to changes in interest rates. In
addition, the Banks believe that offering consumer loans helps to expand and
create stronger ties to their customer base.
The largest category of consumer loans in the Banks' portfolio consists
principally of direct loans secured by automobiles. The Banks generally do not
originate loans secured by recreational vehicles. At December 31, 1996,
consumer loans secured by automobiles totaled $1.6 million, or 3.0% of the
Banks' total consolidated loan portfolio. Automobile loans are offered with
maturities of up to 60 months for new automobiles and up to 48 months for used
automobiles. Loans secured by used automobiles will have maximum terms which
vary depending upon the age of the automobile and will be made based on amounts
as set forth in the NADA "bluebook."
The second largest category of consumer loans in the Banks' portfolio
consists of home improvement loans. At December 31, 1996, home improvement
loans totaled $1.3 million, or 2.4% of the Banks' total consolidated loan
portfolio. The Banks' home improvement loans are secured by the borrower's
principal residence. The maximum amount of a home improvement loan is
generally 80% of the appraised value of a borrower's real estate collateral
less the amount of any prior mortgages or related liabilities. With respect to
substantially all home improvement loans, the Banks hold the first mortgage on
the borrower's residence. Home improvement loans are approved with fixed
interest rates which are determined by the Banks based upon market conditions.
Such loans may be fully amortized over the life of the loan or have a balloon
feature. The maximum term for a home improvement loan is five years.
The Banks began offering proprietary VISA credit cards during 1993 and, at
December 31, 1996, there were 963 credit card accounts with a total balance of
$982,000. This program has been offered to residents of the Banks' primary
market area but card recipients need not otherwise be customers of the Banks.
The VISA card program currently provides an individual borrowing limit of
$3,500 or less, a fixed rate of interest of 9.9% and a "rebate" feature. The
Banks may alter the general terms of this program as they seek to expand their
credit card program.
The Banks had $523,000, or 0.9% of total loans in unsecured consumer loans
at December 31, 1996. These loans are made for a maximum of 30 months or less
with fixed rates of interest and are offered primarily to existing customers of
the Banks.
The Banks employ strict underwriting standards for consumer loans. These
procedures include an assessment of the applicant's payment history on other
debts and ability to meet existing obligations and payments on the proposed
loans. Although the applicant's creditworthiness is a primary consideration,
the underwriting process also includes a comparison of the value of the
security, if any, to the proposed loan amount. The Banks underwrite and
originate substantially all of their consumer loans internally which management
believes limits
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exposure to audit risks relating to loans underwritten or purchased from
brokers or other outside sources.
Consumer loans may entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
assets that depreciate rapidly, such as automobiles. In the latter case,
repossessed collateral for a defaulted consumer loan may not provide an
adequate source of repayment for the outstanding loan and the remaining
deficiency often does not warrant further substantial collection efforts
against the borrower. In addition, consumer loan collections are dependent on
the borrower's continuing financial stability, and thus are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
Furthermore, the application of various federal and state laws, including
federal and state bankruptcy and insolvency laws, may limit the amount which
can be recovered on such loans. Such loans may also give rise to claims and
defenses by the borrower against the Banks as the holder of the loan, and a
borrower may be able to assert claims and defenses which it has against the
seller of the underlying collateral.
COMMERCIAL BUSINESS LENDING. The Banks intend to attempt to originate
small commercial business loans in order to diversify their credit risk and
increase the average yield and repricing speed of their interest-earning
assets. The Banks are developing the capabilities for this type of lending.
MATURITY OF CONSOLIDATED LOAN PORTFOLIO. The following table sets forth
at December 31, 1996 certain information regarding the dollar amount of loans
maturing in the Banks' portfolio based on their contractual terms to maturity.
Demand loans (loans having no stated repayment schedule and no stated maturity)
and overdrafts are reported as due in one year or less. Loan balances do not
include undisbursed loan proceeds, unearned discounts, and allowance for loan
losses.
<TABLE>
During the Year After After After
Ended December 31, 3 Years 5 Years 10 Years
------------------------- Through Through Through Beyond
1997 1998 1999 5 Years 10 Years 15 Years 15 Years Total
------- ------ ------- ------- -------- -------- -------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage $ 113 $ 87 $ 537 $1,921 $11,162 $16,513 $14,939 $45,272
Commercial real estate,
agriculture and land 433 35 362 442 1,304 654 698 3,928
Construction 197 - - - - - - 197
Home improvement 73 148 217 605 291 - - 1,334
Automobile 138 354 411 739 - - - 1,642
Credit cards 982 - - - - - - 982
Other 865 378 400 70 274 - - 1,987
------ ------ ------ ------ ------- ------- ------- -------
Total loans $2,801 $1,002 $1,927 $3,777 $13,031 $17,167 $15,637 $55,342
====== ====== ====== ====== ======= ======= ======= =======
</TABLE>
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The following table sets forth the dollar amount of all loans due after
December 31, 1997, which have fixed interest rates and have floating or
adjustable interest rates.
<TABLE>
<CAPTION>
Fixed Floating- or
Rates Adjustable-Rates
-------- ----------------
<S> <C> <C>
(In Thousands)
Real estate mortgage $30,384 $14,775
Commercial real estate, agriculture and land 2,742 753
Construction - -
Home improvement 1,261 -
Automobile 1,504 -
Credit cards - -
Other 1,122 -
------- -------
Total $37,013 $15,528
======= =======
</TABLE>
Scheduled contractual principal repayments of loans generally do not
reflect the actual life of such assets. The average life of loans ordinarily
is substantially less than their contractual terms because of prepayments. In
addition, due-on-sale clauses on loans generally give the Banks the right to
declare loans immediately due and payable in the event, among other things,
that the borrower sells the real property subject to the mortgage and the loan
is not repaid. The average life of mortgage loans tends to increase, however,
when current mortgage loan market rates are higher than rates on existing
mortgage loans and, conversely, decrease when rates on existing mortgage loans
are higher than current mortgage loan market rates.
LOAN SOLICITATION AND PROCESSING. Loan applicants come primarily from
walk-in customers including previous and present customers of the Banks and to
a lesser extent referrals by real estate agents. Upon receipt of a loan
application from a prospective borrower, a credit report and other data are
obtained to verify specific information relating to the loan applicant's
employment, income and credit standing. An appraisal of the real estate
offered as collateral generally is undertaken by a Board-approved independent
fee appraiser who is certified by the State of Illinois.
All mortgage loans must be approved by the Banks' Executive Committee.
Unsecured consumer loans up to $3,500 and secured consumer loans up to $20,000
may be approved by an individual loan officer. Amounts in excess of these
limits must be approved by the Executive Committee. Management of the Banks
believes its local decision-making capabilities and the accessibility of their
senior officers is an attractive quality to customers within their market area.
The Banks' loan approval process allows consumer loans to be approved in one
to two days and mortgage loans to be approved and closed in approximately two
weeks.
LOAN ORIGINATIONS, SALES AND PURCHASES. During the years ended December
31, 1996, 1995 and 1994, the Banks' total loan originations were $11.0 million,
$15.3 million, and $13.0 million, respectively. While the Banks originate both
adjustable-rate and fixed-rate loans,
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their ability to generate each type of loan depends upon relative customer
demand for loans in their market.
Consistent with their asset/liability management strategy, the policy of
the Banks has been to retain in their portfolio nearly all of the loans that
they originate. Any loan sales are generally made without recourse to the
Banks.
The Banks have originated loans for sale through their newly formed Cape
Girardeau loan production office, however, such loans are funded by the
purchaser of the loan at closing and closed in the name of such purchaser.
During the year ended December 31, 1996, the Banks originated $ 870,000 of such
loans which were funded by two investors and $618,000 for the year ended
December 31, 1995.
The following table shows total loans originated and repaid during the
periods indicated. No loans were purchased or sold during the periods
indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1995 1994
--- ---- ----
<S> <C> <C> <C>
(In Thousands)
Total loans at beginning
of period................. $57,021 $58,157 $61,193
------- ------- -------
Loans originated:
Single-family residential.. 5,680 6,349 3,833
Commercial real estate..... 504 57 1,436
Construction loans......... 803 2,262 699
Agriculture and land....... 191 364 278
Consumer................... 3,839 6,249 6,791
------- ------- -------
Total loans originated... 11,017 15,281 13,037
------- ------- -------
Loan principal repayments.. 13,249 16,063 16,157
Increase (decrease) in
other items, net........... 53 (354) 84
------- ------- -------
Total loans at
end of period.............. $54,842 $57,021 $58,157
======= ======= =======
</TABLE>
LOAN COMMITMENTS. The Banks issue, without fee, commitments for one- to
four-family residential mortgage loans conditioned upon the occurrence of
certain events. Such commitments are made in writing on specified terms and
conditions and at a specified interest rate and are honored for up to three
months from the date of loan approval. The savings Bank
12
<PAGE> 13
had outstanding net loan commitments of approximately $419,000 at December 31,
1996, of which $247,000 were for fixed rate loans. In addition, the Banks had
commitments to fund outstanding credit lines of $176,000 at December 31, 1996.
LOAN ORIGINATION AND OTHER FEES. The Banks, in some instances, receive
loan origination fees. Loan fees are a percentage of the principal amount of
the mortgage loan which are charged to the borrower for funding the loan. The
amount of fees charged by the Banks is generally up to 1.0% for mortgage loans
and construction loans. Current accounting standards require that origination
fees received (net of certain loan origination costs) be deferred and amortized
into interest income over the contractual life of the loan. Net deferred fees
or costs associated with loans that are prepaid are recognized as income at the
time of prepayment. The Banks had $13,000 of net deferred loan fees at
December 31, 1996.
NON-PERFORMING ASSETS AND DELINQUENCIES. When a mortgage loan borrower
fails to make a required loan payment when due, the Banks institute collection
procedures. The first written notice is mailed to a delinquent borrower 10-15
days after the due date, followed by a second written notice mailed and a
telephone call approximately 15 days thereafter. On or about 60 days after the
due date, a certified letter is sent to the delinquent borrower. Foreclosure
procedures are instituted on or about 90 days after the due date if the
delinquency continues to that date.
Consumer loan collection procedures are substantially the same as those
for mortgage loans. In most cases, delinquencies are cured promptly; however,
if, by the 120th day of delinquency the delinquency has not been cured, the
Banks begin legal action to repossess the collateral. At the 120th day of
delinquency, the Banks charge off the full principal amount of the loan.
The Board of Directors is informed monthly as to the status of all
mortgage and consumer loans that are delinquent more than 30 days, the status
on all loans currently in foreclosure, and the status of all foreclosed and
repossessed property owned by the Banks.
The following table sets forth information regarding the Banks' delinquent
loans, excluding loans 90 days or more delinquent and accounted for on a
non-accrual basis.
<TABLE>
At December 31,
-----------------------------------------------------------------------
1996 1995 1994
--------------------- ------------------------ ----------------------
Percentage Percentage Percentage
Principal of Gross Principal of Gross Principal of Gross
Balance Loans Balance Loans Balance Loans
--------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Loans delinquent for:
30 - 59 days......... $757 1.37% $443 0.76% $379 0.64%
60 - 89 days......... 186 .34 65 0.12 56 0.10
---- -----
$943 1.71% $508 0.88% $435 0.74%
==== =====
</TABLE>
13
<PAGE> 14
The following table sets forth information with respect to the Banks'
non-performing assets at the dates indicated. The Banks have no restructured
loans within the meaning of SFAS No. 15 at any of the dates indicated.
<TABLE>
At December 31,
---------------------------
1996 1995 1994
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Non-performing loans:
Loans accounted for on a non-accrual basis:
Real Estate:
Residential................................ $ 11 $ 56 $337
Commercial................................. 14 49 --
Consumer..................................... 54 40 6
Total...................................... 79 145 343
Accruing loans which are contractually
past due 90 days or more:
Residential real estate...................... -- -- 37
Consumer....................................... -- 14 --
Total...................................... -- 14 37
Total non-performing loans................. 79 159 380
Real estate acquired by
foreclosure, net............................. 117 209 64
Total non-performing assets.................... $196 $368 $444
Total non-performing loans to
net loans.................................... 0.14% 0.28% 0.65%
Total non-performing assets to
total assets................................. .13% 0.27% 0.31%
</TABLE>
Interest income which would have been recorded for the year ended December
31, 1996 and the year ended December 31, 1995 had non-accruing loans been
current in accordance with their original terms amounted to approximately
$7,000 and $25,000, respectively. The amounts of interest included in the
results of operations on such loans for the year ended December 31, 1996 and
the year ended December 31, 1995 amounted to approximately $4,000 and $18,000,
respectively.
14
<PAGE> 15
At December 31, 1996, management of the Banks was unaware of any material
loans not disclosed in the above table but where known information about
possible credit problems of the borrowers caused management to have serious
doubts as to the ability of such borrowers to comply with their loan repayment
terms at that date and which may result in future inclusion in the
non-performing assets category.
REAL ESTATE ACQUIRED BY FORECLOSURE. The Banks had $117,000 in real
estate acquired by foreclosure at December 31, 1996, which consisted of five
parcels of residential real estate, the largest of which was $52,000.
ASSET CLASSIFICATION. The Banks are subject to various regulations
regarding problem assets of banks. The regulations require that each insured
institution review and classify their assets on a regular basis. In addition,
in connection with examinations of insured institutions, examiners have the
authority to identify problem assets and, if appropriate, require them to be
classified. There are three classifications for problem assets: substandard,
doubtful and loss. Substandard assets have one or more defined weaknesses and
are characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that
the weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified as loss is considered uncollectible
and of such little value that continuance as an asset of the institution is not
warranted. If an asset or portion thereof is classified as loss, the insured
institution establishes specific allowances for loan losses for the full amount
of the portion of the asset classified as loss. All or a portion of general
loan loss allowances established to cover possible losses related to specific
valuation allowances for loan losses generally do not qualify as regulatory
capital. Assets that do not currently expose the insured institution to
sufficient risk to warrant classification in one of the aforementioned
categories but possess weaknesses are designated "special mention" and
monitored by the Banks.
The aggregate amounts of the Banks' classified assets including assets
designated special mention and general and specific loss allowances at the
dates indicated, were as follows:
15
<PAGE> 16
<TABLE>
<CAPTION>
At December 31,
---------------------
1996 1995 1994
----- ---- ----
(In Thousands)
<S> <C> <C> <C>
Loss........................ $ 8 $ 8 $ --
Doubtful.................... 15 -- --
Substandard assets.......... 184 344 497
Special mention............. -- -- --
---- ---- ----
Total..................... $207 $352 $497
==== ==== ====
General loss allowances..... $376 $382 $246
Specific loss allowances.... 8 8 --
---- ---- ----
Total loss allowances..... $384 $390 $246
==== ==== ====
</TABLE>
ALLOWANCE FOR LOAN LOSSES. The Banks have established a systematic
methodology for determining provisions for loan losses. The methodology is set
forth in a formal policy and considers the need for an overall general
valuation allowance as well as specific allowances for individual loans.
In originating loans, the Banks recognize that losses will be experienced
and that the risk of loss will vary with, among other things, the type of loan
being made, the creditworthiness of the borrower over the term of the loan,
general economic conditions and, in the case of a secured loan, the quality of
the security for the loan. The Banks increase their allowance for loan losses
by charging provisions for loan losses against the Banks' income.
The allowance for loan losses is maintained to cover losses inherent in
the portfolio of performing loans. Management reviews the adequacy of the
allowance at least quarterly based on management's assessment of numerous
factors, including, but not necessarily limited to, general economic
conditions, consolidated loan portfolio composition, prior loss experience, and
independent appraisals. In addition to the allowance for estimated losses on
identified problem loans, an overall unallocated allowance is established to
provide for unidentified credit losses. In estimating such losses, management
considers various risk factors including geographic location, loan collateral,
and payment history. Specific valuation allowances are established to absorb
losses on loans for which full collectibility may not be reasonably assured.
The amount of the allowance is based on the estimated value of the collateral
securing the loan and other analyses pertinent to each situation.
At December 31, 1996, the Banks had an allowance for loan losses of
$384,000. Management believes that the amount maintained in the allowance will
be adequate to absorb losses inherent in the consolidated portfolio. Although
management believes that it uses the best information available to make such
determinations, future adjustments to the allowance for loan
16
<PAGE> 17
losses may be necessary and results of operations could be significantly and
adversely affected if circumstances differ substantially from the assumptions
used in making the determinations.
While the Banks believe they have established their existing allowance for
loan losses in accordance with GAAP, there can be no assurance that regulators,
in reviewing the Banks' consolidated loan portfolio, will not request the Banks
to increase significantly their allowance for loan losses. In addition,
because future events affecting borrowers and collateral cannot be predicted
with certainty, there can be no assurance that a substantial increase will not
be necessary should the quality of any loans deteriorate as a result of the
factors discussed above. Any material increase in the allowance for loan
losses may adversely affect the Banks' financial condition and results of
operations.
The following table sets forth an analysis of the Banks' allowances for
loan losses for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1996 1995 1994
------ -------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Allowance at beginning of period......... $390 $246 $207
Provision for loan losses................ 33 161 69
Recoveries............................... 3 -- --
Charge-offs:
Residential real estate................ -- -- (23)
Consumer............................... (42) (17) (7)
---- ---- ----
Total charge-offs.................... (42) (17) (30)
---- ---- ----
Allowance at end of period............. $384 $390 $246
==== ==== ====
Ratio of allowance to total
loans outstanding at
the end of the period.................. 0.70% 0.68% 0.42%
==== ==== ====
Ratio of net charge-offs to
average loans outstanding
during the period...................... 0.07% 0.03% 0.05%
==== ==== ====
</TABLE>
The following table sets forth the breakdown of the allowance for loan
losses by loan category for the periods indicated. The portion of the
allowance to each loan category does not necessarily represent the total
available for losses within that category since the total allowance applies to
the entire consolidated loan portfolio. The allocation of the allowance to
each category is not necessarily indicative of future losses and does not
restrict the use of the allowance to absorb losses in any other category.
17
<PAGE> 18
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------------------------
1996 1995 1994
---------------------------- ---------------------------- ----------------------------
As a % % of As a % % of As a % % of
of Out- Loans in of Out- Loans in of Out- Loans in
standing Category standing Category standing Category
Loans in to Total Loans in to Total Loans in to Total
Amount Category Loans Amount Category Loans Amount Category Loans
------ -------- -------- ------ -------- -------- ------ -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate - mortgage:
Residential ................. $244 .54% 82.2% $244 0.51% 82.4% $143 0.30% 81.8%
Commercial................... 69 2.27 5.5 69 2.40 5.0 42 1.17 6.1
Agriculture and land......... 5 .56 1.6 5 0.54 1.6 3 0.36 1.4
Consumer ..................... 66 1.11 10.7 72 1.13 11.0 58 0.91 10.7
---- ----- ----- ---- ------ ------ ---- ----- ------
Total allowance for
loan losses................... $384 100.0% $390 100.0% $246 100.0%
==== ===== ==== ====== ==== ======
</TABLE>
INVESTMENT ACTIVITIES
GENERAL. The Banks' policies generally limit investments to U.S.
Government and agency securities, certificates of deposit in other financial
institutions and municipal bonds, and mortgage-backed securities. All of the
Banks' investment securities are subject to market risk insofar as an increase
in market rates of interest may cause a decrease in their market value.
Investment decisions are made by the Company's Chairman, President and Chief
Financial Officer Michael W. Welge and reported at the monthly Board of
Directors' meetings.
At December 31, 1996, the Banks' investment portfolio totaled $69.8
million and consisted principally of United States Government and agency
obligations, mortgage-backed securities, certificates of deposit in other
financial institutions, municipal obligations, interest-bearing deposits, FHLB
stock and FRB stock. At December 31, 1996, the Banks' investment portfolio did
not contain any securities of a single issuer (other than the United States
Government and agencies thereof) which had an aggregate book value in excess of
10% of the Banks' equity at that date.
The Banks adopted SFAS 115 effective January 1, 1994. SFAS 115 requires
that investments be categorized as held to maturity, trading, or available for
sale, based upon management's intent as to the ultimate disposition of each
security acquired. As of December 31, 1996, the held to maturity investment
portfolio of the Banks contained securities with an amortized cost of $36.3
million and a fair value of $36.2 million and consisted of United States agency
obligations, municipal and state obligations and mortgage-backed bonds. At
December 31, 1996, the Banks' investment securities available for sale
portfolio consisted of U.S. Government obligations, stock in Federal Home Loan
Bank, and stock in Federal Reserve Bank with an amortized cost of $12.5 million
and a fair value of $12.5 million. At December 31, 1996, the Banks held no
securities that were classified as trading securities.
18
<PAGE> 19
INVESTMENT STRATEGY. Historically, the Banks have maintained a
substantial proportion of their assets in investments and mortgage-related
securities. The objectives of these investments are to: (i) provide sufficient
liquidity to fund the operational needs of the Banks, (ii) provide a stable
base of income with minimal credit risk, (iii) invest those deposit funds in
excess of the mortgage and consumer lending volumes available to the Banks in
their market area, (iv) invest the deposit and reverse repurchase agreement
funds attributable to Gilster-Mary Lee, and (v) generally assist in managing
the interest rate risk of the Banks. The Banks invest in U.S. Government and
U.S. Government agency securities, securities of U.S. Government-sponsored
enterprises (e.g., FNMA and FHLMC), tax-exempt securities of states and
municipalities, short-term interest-bearing deposits and federally insured
certificates of deposits in other financial institutions, FHLB-Chicago stock,
Federal Reserve Bank stock, and mortgage-related securities (including
mortgage-backed securities and collateralized mortgage obligations). The
foregoing securities serve different functions within the context of the Banks'
investment practices.
U.S. Government securities, all of which were available for sale at
December 31, 1996, function as the Banks' principal source of liquidity for
their operations. Accordingly, the Banks limit maturities to five years or
less and typically purchase shorter maturities of two years or less. Though
the primary function of the U.S. Government securities portfolio is liquidity,
the Banks seek to improve the yield or expected total return of the portfolio
by selectively readjusting the maturity structure of the portfolio as
securities mature, or occasionally, through sale and investment.
U.S. Government agency, Government-sponsored enterprise, and tax-exempt
state and municipal securities and short-term interest-bearing deposits and
federally insured certificates of deposits in other financial institutions
function as an income base and non-lending investment vehicle for the Banks.
Management views the foregoing investments generally as substitutes of each
other, and the relative proportion of them in the portfolio depends on the
relative yields of each as compared to their perceived credit risks and
interest rate sensitivities. As these investments mature, the Banks seek to
reinvest the proceeds in those investments that, at that time, provide an
attractive trade-off among the foregoing factors. With respect to the
tax-exempt state and municipal securities portfolio, the Banks also seek to
invest so as to meet specific community needs in their primary market area and
to take advantage of the federal and, on some securities, state tax exemption
for the interest thereon. As a general rule, the Banks limit their tax-exempt
investments to those having a rating by a nationally recognized statistical
rating organization of "AA" or better or those unrated securities issued by
entities within their market area. Generally, the Banks also limit the
maturities of all of the foregoing securities to five years or less.
Currently, the Banks plan to replace maturing certificates of deposit with
other types of investments.
MORTGAGE-BACKED SECURITIES. The Banks purchase mortgage-backed securities
primarily to supplement their lending activities and, to a lesser extent, to:
(1) generate positive interest rate spreads on large principal balances with
minimal administrative expense; (ii) lower the credit risk of the Banks as a
result of the guarantees provided by FHLMC, FMNA, and GNMA; (iii) enable the
Banks to use mortgage-backed securities as collateral for financing; and (iv)
increase the Banks' liquidity.
19
<PAGE> 20
The Banks have invested primarily in federal agency securities,
principally FNMA, FHLMC and GNMA. The Banks also invest in collateralized
mortgage obligations ("CMOs") that have fixed interest rates. At December 31,
1996, net mortgage-backed and related securities totaled $15.9 million, or
10.9% of total assets. At December 31, 1996, 10.7% of the mortgage-backed and
mortgage related securities were adjustable-rate and 89.3% were fixed rate.
The mortgage-backed securities portfolio had coupon rates ranging from 5.00% to
12.00% and had a weighted average yield of 6.30% at December 31, 1996. The
estimated fair value of the Banks' mortgage-backed securities available for
sale at December 31, 1996 was $1.9 million.
Mortgage-backed securities (which also are known as mortgage participate
certificates or pass-through certificates) typically represent a participation
interest in a pool of single-family or multi-family mortgages. The principal
and interest payments on these mortgages are passed from the mortgage
originators, through intermediaries (generally United States Government
agencies and government sponsored enterprises) that pool and resell the
participation interests in the form of securities, to investors such as the
Banks. Such United States Government agencies and government sponsored
enterprises, which guarantee the payment of principal and interest to
investors, primarily include the FHLMC, FNMA and the GNMA. Mortgage-backed
securities typically are issued with stated principal amounts, and the
securities are backed by pools of mortgages that have loans with interest rates
that fall within a specific range and have varying maturities. Mortgage-backed
securities generally yield less than the loans that underlie such securities
because of the cost of payment guarantees and credit enhancements. In
addition, mortgage-backed securities are usually more liquid than individual
mortgage loans and may be used to collateralize certain liabilities and
obligations of the Banks. These types of securities also permit the Banks to
optimize their regulatory capital because they have a low risk weighting.
CMOs are generally classified as derivative financial instruments because
they are created by redirecting the cash flows from the pool of mortgages or
mortgage-backed securities underlying these securities to create two or more
classes (or tranches) with different maturity or risk characteristics designed
to meet a variety of investor needs and preferences. Management believes these
securities may represent attractive alternatives relative to other investments
due to the wide variety of maturity, repayment and interest rate options
available. The Banks held investment grade CMOs with a net carrying value of
$8.3 million at December 31, 1996. CMOs may be sponsored by private issuers,
such as mortgage bankers or money center banks, or by United States Government
agencies and government sponsored entities. At December 31, 1996, the Banks
did not own any privately issued CMOs.
Derivatives also include "off balance sheet" financial products whose
value is dependent on the value of an underlying financial asset, such as a
stock, bond, foreign currency, or a reference rate or index. Such derivatives
include "forwards," "futures," "options" or "swaps." The Banks have not
invested in, and currently do not intend to invest in, these "off balance
sheet" derivative instruments, although the Banks' investment policies do not
prohibit such investments. The Banks evaluate their mortgage-related
securities portfolio quarterly for compliance with applicable regulatory
requirements, including testing for identification of high
20
<PAGE> 21
risk investments pursuant to Federal Financial Institutions Examination Counsel
standards. At December 31, 1996, the Banks did not have any derivatives or
high risk securities.
Of the Banks' $15.9 million mortgage-backed securities portfolio at
December 31, 1996, $10.0 million with a weighted average yield of 6.38% had
contractual maturities within ten years and $5.9 million with a weighted
average yield of 6.15% had contractual maturities over ten years. However, the
actual maturity of a mortgage-backed security may be less than its stated
maturity due to prepayments of the underlying mortgages. Prepayments that are
faster than anticipated may shorten the life of the security and may result in
a loss of any premiums paid and thereby reduce the net yield on such
securities. Although prepayments of underlying mortgages depend on many
factors, including the type of mortgages, the coupon rate, the age of
mortgages, the geographical location of the underlying real estate
collateralizing the mortgages and general levels of market interest rates, the
difference between the interest rates on the underlying mortgages and the
prevailing mortgage interest rates generally is the most significant
determinant of the rate of prepayments. During periods of declining mortgage
interest rates, if the coupon rate of the underlying mortgages exceeds the
prevailing market interest rates offered for mortgage loans, refinancing
generally increases and accelerates the prepayment of the underlying mortgages
and the related security. Under such circumstances, the Banks may be subject
to reinvestment risk because, to the extent that the Banks' mortgage-backed
securities amortize or prepay faster than anticipated, the Banks may not be
able to reinvest the proceeds of such repayments and prepayments at a
comparable rate. In contrast to mortgage-backed securities in which cash flow
is received (and hence, prepayment risk is shared) pro rata by all securities
holders, the cash flow from the mortgages or mortgage-backed securities
underlying CMOs are segmented and paid in accordance with a predetermined
priority to investors holding various tranches of such securities or
obligations. A particular tranche of CMOs may therefore carry prepayment risk
that differs from that of both the underlying collateral and other tranches.
At December 31, 1996, adjustable-rate investments accounted for 10.7% of the
Banks' mortgage-backed securities portfolio.
21
<PAGE> 22
The following table sets forth the composition of the Banks'
mortgage-backed securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------
1996 1995 1994
---------------------- ----------------------- ----------------------
Carrying Percent of Carrying Percent of Carrying Percent of
Value Portfolio Value Portfolio Value Portfolio
-------- ---------- -------- ---------- -------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities:
Available for sale (at
market value):
GNMA.................................... $ 450 2.83% $ 517 3.35% $ -- --%
FNMA.................................... 1,449 9.12 1,690 10.97 -- --
------- ------ ------- ------ ------- ------
Total mortgage-backed
securities available for sale.......... 1,899 11.95 2,207 14.32 -- --
------- ------ ------- ------ ------- ------
Held to maturity (at amortized costs):
GNMA...................................... 1,335 8.40 1,515 9.83 2,626 19.99
FNMA...................................... 124 0.78 153 0.99 3,117 23.73
FHLMC..................................... 4,200 26.42 5,326 34.56 7,393 56.28
Collateralized mortgage obligations....... 8,339 52.45 6,212 40.30 -- --
------- ------ ------- ------ ------- ------
Total mortgage-backed
securities held to maturity............ 13,998 88.05 13,206 85.68 13,136 100.00
------- ------ ------- ------ ------- ------
Total mortgage-backed securities........ $15,897 100.00% $15,413 100.00% $13,136 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
22
<PAGE> 23
The following table shows purchases, sales and repayments of
mortgage-backed securities during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
(In Thousands)
Mortgage-backed securities, net,
at beginning of period $15,413 $13,136 $ 7,402
Purchases.................................. 2,981 6,200 8,060
Sales...................................... -- (2,409) --
Repayments................................. (2,519) (1,637) (2,341)
Increase (decrease) in other items, net.... 22 123 15
------- ------- -------
Mortgage-backed securities, net,
at end of period......................... $15,897 $15,413 $13,136
======= ======= =======
</TABLE>
The following tables set forth the composition of the Banks' investment
portfolio at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------
1996 1995 1994
-------------------- -------------------- ---------------------
Carrying Percent of Carrying Percent of Carrying Percent of
Value Portfolio Value Portfolio Value Portfolio
-------- ---------- -------- ---------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
Available for sale (at market value)-
securities of U.S. government $11,475 16.4% $ 6,524 11.3% $ -- --%
Held to maturity (at cost):
Securities of U.S. government.......... -- -- -- -- 11,743 18.2
Securities of U.S. agencies............ 14,512 20.8 10,017 17.4 7,392 11.5
Mortgage-backed bonds.................. 10,912 15.6 8,606 15.0 7,296 11.3
Securities of states and municipalities 10,830 15.5 13,199 22.9 14,679 22.8
------- ----- ------- ----- ------- -----
Total investment securities held to
maturity............................... 36,254 51.9 31,822 55.3 41,110 63.8
------- ----- ------- ----- ------- -----
Total investment securities 47,729 68.3 $38,346 66.6 41,110 63.8
Interest-bearing deposits.............. 4,192 6.0 3,493 6.1 1,623 2.5
Federal funds sold..................... 16,000 22.9 5,400 9.4 2,500 3.9
Certificates of deposit................ 888 1.3 9,762 16.9 18,582 28.9
FHLB stock, at cost.................... 622 0.9 604 1.0 595 0.9
FRB stocks, at cost 411 0.6 -- -- -- --
------- ----- ------- ----- ------- -----
Total investments $69,842 100.0% $57,605 100.0% $64,410 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
23
<PAGE> 24
<TABLE>
<CAPTION>
At December 31, 1996
----------------------------------------------------------------------------------
More than More than
One Year or Less One to Five Years Five to Ten Years More than Ten Years
------------------- ------------------- ------------------- -------------------
Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
-------- -------- -------- -------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities:
Available for sale (at market value)-
securities of U.S. government $ 5,510 5.44% $ 5,965 5.27% $ -- -- % $-- -- %
Held to maturity (at amortized cost): -- -- -- --
Securities of U.S. agencies 9,983 5.56% 4,529 6.23% -- -- -- --
Mortgage-backed bonds 8,812 5.64% 2,100 5.80% -- -- -- --
Securities of states and
municipalities(1).................... 4,590 5.37% 4,352 5.40% 1,599 6.60% 289 6.30%
------- ------- ------ ----
Total investment securities $28,895 5.53% $16,946 5.63% $1,599 6.60% $289 6.30%
======= ======= ====== ====
</TABLE>
(1) Tax exempt state and municipal securities are presented on a tax equivalent
basis.
- --
U.S. GOVERNMENT AND AGENCY OBLIGATIONS. The Banks' portfolio of United
States Government and agency obligations had a fair value of $26.0 million
($26.0 million at amortized cost) at December 31, 1996. The portfolio
consisted of short to medium-term (up to five years) securities, of which $11.5
million (at amortized cost) of U.S. Government obligations were held in the
Banks' available for sale portfolio.
MUNICIPAL BONDS. The Banks' municipal bond portfolio, which at December
31, 1996, totaled $10.8 million at estimated fair value ($10.8 million at
amortized cost), was comprised primarily of general obligation bonds (i.e.,
backed by the general credit of the issuer) and revenue bonds (i.e., backed
only by revenues from the specific project being financed) issued by various
housing authorities and public hospital, water and sanitation districts in
various states. At December 31, 1996, general obligation bonds and revenue
bonds totaled $8.2 million and $2.6 million, respectively. The bonds are
purchased with laddered maturities of up to four years with an average
principal amount of approximately $250,000. Most of the municipal bonds are
rated by a nationally recognized statistical rating organization (e.g., Moody's
or Standard and Poor's) and the unrated bonds have been purchased principally
from local authorities. At December 31, 1996, the Banks' municipal bond
portfolio was comprised of 80 bonds, the average principal amount of which was
$136,000. At such date the weighted average life of the portfolio was
approximately 3.5 years and had a weighted average coupon rate of 5.30%. At
that date, the largest security in the portfolio was a revenue bond issued by a
local government, with an amortized cost of $1.0 million and a fair value of
$1.0 million. Because interest earned on municipal bonds is exempt from
federal, and, in certain cases, state and local income taxes, the municipal
bond portfolio has contributed to an effective income tax rate for the Banks
below the federal tax rate and one that the Banks believe is below their peers.
CERTIFICATES OF DEPOSIT. The Banks have invested in certificates of
deposit at other banks with maturities of six months to five years and at
December 31, 1996 had $888,000 of such deposits. In order to obtain FDIC
insurance coverage, these deposits are placed at
24
<PAGE> 25
various financial institutions throughout the United States by a broker in
amounts less than $100,000.
GOVERNMENT SPONSORED ENTERPRISE SECURITIES. At December 31, 1996, the
Banks' held to maturity investment portfolio included securities issued by the
FNMA and the FHLMC. At December 31, 1996, such bonds had an aggregate
amortized cost of $10.9 million, an average life of approximately 2 months, and
an average coupon rate of 5.67%.
DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS
GENERAL. Deposits, repurchase agreements and loan repayments are the
major sources of the Banks' funds for lending and other investment purposes.
Scheduled loan repayments are a relatively stable source of funds, while
deposit inflows and outflows and loan prepayments are influenced significantly
by general interest rates and money market conditions. Borrowings through the
FHLB-Chicago or reverse repurchase agreements may be used on a short-term basis
to compensate for reductions in the availability of funds from other sources.
At December 31, 1996, the Banks had no borrowings from the FHLB-Chicago. At
December 31, 1996, the Banks had $11.3 million outstanding in reverse
repurchase agreements which resulted from a transfer of funds in 1995 from a
money market deposit account to a reverse repurchase agreement.
DEPOSIT ACCOUNTS. Substantially all of the Banks' depositors are
residents of the State of Illinois or Missouri. Deposits are attracted from
within the Banks' market area through the offering of a broad selection of
deposit instruments, including NOW accounts, money market deposit accounts,
regular savings accounts, certificates of deposit and retirement savings plans.
Deposit account terms vary, according to the minimum balance required, the
time periods the funds must remain on deposit and the interest rate, among
other factors. In determining the terms of their deposit accounts, the Banks
consider current market interest rates, profitability to the Banks, matching
deposit and loan products and their customer preferences and concerns. The
Banks review their deposit mix and pricing weekly.
25
<PAGE> 26
The following table sets forth certain information concerning the Banks'
time deposits and other interest-bearing deposits at December 31, 1996.
<TABLE>
Weighted Percentage
Average Original Minimum of Total
Interest Rate Term Category Amount Balance Deposits
- ------------- -------- ------------------------ --------- ---------- -----------
<S> <C> <C> <C> <C> <C>
(in thousands)
-- % None Non-interest bearing $ 100 $ 564 0.55%
checking
1.90 None NOW accounts 100 8,686 8.49
3.36 None Money market demand 2,500 16,684 16.32
2.75 None Passbook 30 10,142 9.92
Certificates of Deposit
-----------------------
3.50 91-day Fixed-term, fixed-rate 500 202 0.20
4.51 4 months Fixed-term, fixed-rate 5,000 624 0.61
4.50 6 months Fixed-term, fixed-rate 500 9,387 9.18
4.60 6 months Fixed-term, fixed-rate 50,000 1,800 1.76
4.92 1 year Fixed-term, fixed-rate 500 11,264 11.01
5.09 18 months Fixed-term, fixed-rate 500 2,952 2.89
5.71 30 months Fixed-term, fixed-rate 100 8,595 8.41
5.52 30 months Fixed-term, fixed-rate 500 27,724 27.11
5.03 4 years Fixed-term, fixed-rate 500 796 0.78
7.75 6 years Fixed-term, fixed-rate 500 39 0.04
4.95 Various Fixed-term, fixed-rate 100,000 2,788 2.73
-------- -----
$102,247 100.0%
======== =====
</TABLE>
The following table indicates the amount of the Banks' certificates of
deposit of $100,000 or more by time remaining until maturity as of December 31,
1996.
<TABLE>
<CAPTION>
Certificates
Maturity Period of Deposit
------------------------------------ --------------
(In Thousands)
<S> <C>
Three months or less............... $1,056
Over three through six months...... 4,148
Over six through 12 months......... 415
Over 12 months..................... 1,511
------
Total.............................. $7,130
======
</TABLE>
26
<PAGE> 27
DEPOSIT FLOW
The following table sets forth the balances of savings deposits in the
various types of savings accounts offered by the Banks at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------------------------
1996 1995 1994
------------------------------ ------------------------------- ------------------
Percent Percent Percent
of Increase of Increase of
Amount Total (Decrease) Amount Total (Decrease) Amount Total
-------- ------- ---------- -------- ------- ---------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest-bearing checking.... $ 564 0.55% $ 516 $ 48 0.04% $ (15) $ 63 0.05%
NOW checking..................... 8,686 8.49 (195) 8,881 8.32 195 8,686 6.70
Passbook......................... 10,142 9.92 (327) 10,469 9.81 (970) 11,439 8.82
Money market demand(1)........... 16,684 16.32 28 16,656 15.61 (15,905) 32,561 25.10
Fixed-rate certificates
which mature in the year
ending(2)(3):....................
Within 1 year.................. 38,673 37.83 (7,755) 46,428 43.51 (5,031) 51,459 39.67
After 1 year, but
within 2 years................. 20,890 20.43 7,700 13,190 12.36 (5,824) 19,014 14.66
After 2 years, but
within 5 years................. 6,608 6.46 (4,438) 11,046 10.35 4,556 6,490 5.00
-------- ------- -------- -------- ------- --------- -------- -------
Total........................ $102,247 100.00% $(4,471) $106,718 100.00% $(22,994) $129,712 100.00%
======== ======= ======== ======== ======= ========= ======== =======
</TABLE>
(1) The reduction in the balance of money market demand accounts in 1995 was
the result of a $15.0 million transfer to reverse repurchase agreements by
Gilster-Mary Lee during the year ended December 31, 1995.
(2) At December 31, 1996, 1995, and 1994, jumbo certificates amounted to $7.1
million, $5.8 million and $7.5 million, respectively.
(3) IRA accounts included in certificate balances are $8.6 million, $8.6
million and, $9.0 million at December 1, 1996, 1995 and 1994,
respectively.
27
<PAGE> 28
TIME DEPOSITS BY RATES
The following table sets forth the time deposits in the Banks classified
by rates at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
------------------------
1996 1995 1994
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
2.00 - 3.99%....... -- 195 $11,110
4.00 - 5.99%....... 66,108 66,132 64,973
6.00 - 7.99%....... 63 4,306 789
8.00 - 9.99%....... -- 31 92
------- ------- -------
Total........... $66,171 $70,664 $76,964
======= ======= =======
</TABLE>
The following table sets forth the amount and maturities of time deposits
at December 31, 1996.
<TABLE>
Amount Due
Percent
Over Over Over of Total
Less than 1-2 2-3 3-4 Certificate
One Year Years Years Years Total Accounts
--------- ------- ------ ----- -------
<S> <C> <C> <C> <C> <C>
2.00 - 3.99%....... $ -- -- -- -- --
4.00 - 5.99%....... 38,636 20,880 6,551 41 66,108
6.00% - 7.99%...... 38 10 15 -- 63
8.00 - 9.99%....... -- -- -- -- --
------- ------- ------ --- -------
Total......... $38,674 $20,890 $6,566 $41 $66,171
======= ======= ====== === =======
</TABLE>
The following table sets forth the average balances and interest rates
based on monthly balances for transaction accounts and certificates of deposit
for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------
1996 1995 1994
--------------------- --------------------- ---------------------
Interest- Interest- Interest-
Bearing Certifi- Bearing Certifi- Bearing Certifi-
Demand cates of Demand cates of Demand cates of
Deposits Deposit Deposits Deposit Deposits Deposit
-------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Average Balance....... $40,889 $66,015 $40,943 $79,365 $52,771 $78,275
Average Rate.......... 2.80% 5.17% 3.28% 4.96% 3.14% 4.39%
</TABLE>
28
<PAGE> 29
The following table sets forth the savings activities of the Banks for the
periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1996 1995 1994
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Beginning Balance............. $106,718 $129,712 $130,231
Net increase (decrease)
before interest credited (7,569) (26,610) (4,441)
Interest credited 3,098 3,616 3,922
-------- -------- --------
Net increase (decrease) in
savings deposits.............. (4,471) (22,994) (519)
-------- -------- --------
Ending Balance................ $102,247 $106,718 $129,712
======== ======== ========
</TABLE>
BORROWINGS
The Banks have the ability to use advances from the FHLB-Chicago to
supplement their supply of lendable funds and to meet deposit withdrawal
requirements. The FHLB-Chicago functions as a central reserve bank providing
credit for savings and loan associations and certain other member financial
institutions. As a member of the FHLB-Chicago, the Banks are required to own
capital stock in the FHLB-Chicago and is authorized to apply for advances on
the security of such stock and certain of their mortgage loans and other assets
(principally securities which are obligations of, or guaranteed by, the U.S.
Government) provided certain creditworthiness standards have been met.
Advances are made pursuant to several different credit programs. Each credit
program has its own interest rate and range of maturities. Depending on the
program, limitations on the amount of advances are based on the financial
condition of the member institution and the adequacy of collateral pledged to
secure the credit. During the years ended December 31, 1996, 1995 and 1994,
the Banks had no borrowings from the FHLB-Chicago, although it may decide to
make use of such instruments in the future.
The Banks also use reverse repurchase agreements due generally within one
year as a source of funds. At December 31, 1996, reverse repurchase agreements
totaled $11.3 million with a weighted average interest rate of 4.93% secured by
a pledge of certain investment and mortgage-backed securities with an amortized
cost of $12.6 million and a market value of $12.5 million. See "1996 Annual
Report - Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
The following tables set forth certain information regarding short-term
borrowings by the Banks at the dates and for the periods indicated.
29
<PAGE> 30
<TABLE>
<CAPTION>
At December 31,
---------------------
1996 1995 1994
----- ----- ----
<S> <C> <C> <C>
Weighted average rate paid on
securities sold under agreements
to repurchase....................... 4.93% 5.10% --
</TABLE>
<TABLE>
<CAPTION>
At or For the Year
Ended December 31,
--------------------------
1996 1995 1994
------- ------- -----
(Dollars in Thousands)
<S> <C> <C> <C>
Maximum amount of securities sold
under agreements to repurchase
at any month end.................................... $18,340 $15,000 --
Approximate average securities sold
under agreements to repurchase
outstanding......................................... $15,057 $3,750 --
Approximate weighted average rate
paid on securities sold under
agreements to repurchase(1)......................... 4.93% 5.17% --
</TABLE>
(1) Computed using the weighted rates of each individual transaction.
COMPETITION
In the face of significant competition by financial and non-bank entities
over the last few years, the Banks have had limited success in increasing their
retail deposit base, excluding the historical benefit of the large corporate
relationship with Gilster-Mary Lee and the Heritage Federal acquisition. The
Banks compete for deposits and loans with a number of financial institutions in
a four contiguous county market area that has approximately 135,000 people. In
three of the counties served, the Banks' market share is low and average branch
size is below average. A number of the competing financial institutions are
larger than the Banks and are subsidiaries of larger regional bank holding
companies. The Banks also face competition, to an unquantifiable extent, from
money market mutual funds and local and regional securities firms.
PERSONNEL
As of December 31, 1996, the Banks had 37 full-time employees and six part
time employees, none of whom were represented by a collective bargaining unit.
The Banks believe their relationships with their employees is good.
30
<PAGE> 31
REGULATION OF THE BANKS
The Banks are national banks subject to regulation, supervision and
examination by the OCC. In addition, the Banks' deposits are insured by the
FDIC up to the maximum amount permitted by law, and are therefore subject to
regulation, supervision and examination by the FDIC. See "1996 Annual Report -
Note 11 Regulatory Matters."
The Company and the Banks are legal entities separate and distinct.
Various legal limitations restrict the Banks from lending or otherwise
supplying funds to the Company (an "affiliate"), generally limiting such
transactions with the affiliate to 10% of each bank's capital and surplus, and
limiting all such transactions to 20% of each bank's capital and surplus. Such
transactions, including extensions of credit, sales of securities or assets and
provision of services, also must be on terms and conditions consistent with
safe and sound banking practices, including credit standards, that are
substantially the same or at least as favorable to each bank as those
prevailing at the time for transactions with unaffiliated companies.
Federal banking laws and regulations govern all areas of the operation of
the Banks, including reserves, loans, mortgages, capital, issuance of
securities, payment of dividends and establishment of branches. Federal bank
regulatory agencies also have the general authority to limit the dividends paid
by insured banks and bank holding companies if such payments should be deemed
to constitute an unsafe and unsound practice. The respective primary federal
regulators of the Company and the Banks have authority to impose penalties,
initiate civil and administrative actions and take other steps intended to
prevent the Banks from engaging in unsafe or unsound practices.
Federally insured banks are subject, with certain exceptions, to certain
restrictions or extensions of credit to their parent holding companies or other
affiliates, on investments in the stock or other securities of affiliates and
on the taking of such stock or securities as collateral from any borrower. In
addition, such banks are prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit or the providing of any
property or service.
Banks are also subject to the provisions of the Community Reinvestment Act
of 1977, which requires the appropriate federal bank regulatory agency, in
connection with its regular examination of a bank, to assess the bank's record
in meeting the credit needs of the community serviced by the bank, including
low and moderate income neighborhoods. The regulatory agency's assessment of
the bank's record is made available to the public. Further, such assessment is
required of any bank which has applied, among other things, to establish a new
branch office that will accept deposits, relocate an existing office or merge
or consolidate with, or acquire the assets or assume the liabilities of, a
federally regulated financial institution.
Dividends from the Banks will constitute the major source of funds for
dividends to be paid by the Company. The amount of dividends payable by the
Banks to the Company will depend upon the Banks' earnings and capital position,
and is limited by federal and state laws, regulations and policies.
31
<PAGE> 32
As national banks, the Banks may not pay dividends from their paid-in
surplus. All dividends must be paid out of undivided profits then on hand,
after deducting expenses, including reserves for losses and bad debts. In
addition, a national bank is prohibited from declaring a dividend on its shares
of common stock until its surplus equals its stated capital, unless there has
been transferred to surplus no less than one-tenth of the bank's net profits of
the preceding two consecutive half-year periods (in the case of an annual
dividend). The approval of the OCC is required if the total of all dividends
declared by a national bank in any calendar year exceeds the total of its net
profits for that year combined with its retained net profits for the proceeding
two years, less any required transfers to surplus.
The OCC has the authority to prohibit any bank from engaging in an unsafe
or unsound practice in conducting its business. The payment of dividends,
depending upon the financial condition of the bank, could be deemed to
constitute such an unsafe or unsound practice. The Federal Reserve and the OCC
have indicated their view that it generally would be an unsafe and unsound
practice to pay dividends except out of current operating earnings. Moreover,
the Federal Reserve has indicated that bank holding companies should serve as a
source of managerial and financial strength to their subsidiary banks.
Accordingly, the Federal Reserve has stated that a bank holding company should
not maintain a level of cash dividends to its shareholders that places undue
pressure on the capital of its bank subsidiaries, or that can be funded only
through additional borrowings or other arrangements that may undermine the bank
holding company's ability to serve as a source of strength.
The amount of dividends actually paid during any one period are strongly
affected by the Banks' management policy of maintaining a strong capital
position. Federal law further provides that no insured depository institution
may make any capital distribution (which would include a cash dividend) if,
after making the distribution, the institution would not satisfy one or more of
its minimum capital requirements. Moreover, the federal bank regulatory
agencies also have the general authority to limit the dividends paid by insured
banks if such payments should be deemed to constitute an unsafe and unsound
practice.
BANK HOLDING COMPANY REGULATION
GENERAL. Bank holding companies are subject to comprehensive regulation by
the Federal Reserve under the Bank Holding Company Act ("BHCA") and the
regulations of the Federal Reserve. As a bank holding company, the Company is
required to file with the Federal Reserve annual reports and such additional
information as the Federal Reserve may require and is subject to regular
examinations by the Federal Reserve. The Federal Reserve also has extensive
enforcement authority over bank holding companies, including, among other
things, the ability to assess civil money penalties, to issue cease and desist
or removal orders, and to require that a Company divest subsidiaries (including
its bank subsidiaries). In general, enforcement actions may be initiated for
violations of law and regulations and unsafe or unsound practices.
32
<PAGE> 33
Under the BHCA, a bank holding company must obtain Federal Reserve
approval before: (1) acquiring, directly or indirectly, ownership or control
of any voting shares of another bank or bank holding company if, after such
acquisition, it would own or control more than 5% of such shares (unless it
already owns or controls the majority of such shares); (2) acquiring all or
substantially all of the assets of another bank or bank holding company; or (3)
merging or consolidating with another bank holding company.
Any direct or indirect acquisition by a bank holding company or its
subsidiaries of more than 5% of the voting shares of, or substantially all of
the assets of, any bank located outside of the state in which the operations of
the bank holding company's banking subsidiaries are "principally conducted",
may not be approved by the Federal Reserve unless the laws of the state in
which the bank to be acquired is located specifically authorize such an
acquisition. The term "principally conducted" generally means the state in
which the total deposits of all banking subsidiaries is the largest. The
Company's business is "principally conducted" in the State of Illinois. Most
states have authorized interstate bank acquisitions by out-of-state bank
holding companies on either a regional or a national basis, and most such
statues require the home state of the acquiring bank holding company to have
enacted a reciprocal statue. Illinois law permits bank holding companies
located outside Illinois to acquire bank or bank holding companies located in
Illinois subject to the requirements that the laws of the state in which the
acquiring bank holding company is located permit bank holding companies located
in Illinois to acquire banks or bank holding companies in the acquiror's state
and that the laws of the state in which the acquiror is located are not unduly
restrictive when compared to those imposed by the laws of Illinois.
The BHCA also prohibits a bank holding company, with certain exceptions,
from acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company which is not a bank or bank holding company, or
from engaging directly or indirectly in activities other than those of banking,
managing or controlling banks, or providing services for its subsidiaries. The
principal exceptions to these prohibitions involve certain non-bank activities
which, by statue or by Federal Reserve regulation or order, have been
identified as activities closely related to the business of banking or managing
or controlling banks. The list of activities permitted by the Federal Reserve
includes, among other things, operating a savings institution, mortgage
company, finance company, credit card company or factoring company, performing
certain data processing operations; providing certain investment and financial
advice; underwriting and acting as an insurance agent for certain types of
credit-related insurance; leasing property on a full-payout, non-operating
basis; selling money orders, travelers' checks and United States Savings Bonds;
real estate and personal property appraising; providing tax planning and
preparation services; and, subject to certain limitations, providing securities
brokerage services for customers. The Company has no present plans to engage
in any of these activities.
DIVIDENDS. The Federal Reserve has issued a policy statement on the
payment of cash dividends by bank holding companies, which expresses the
Federal Reserve's view that a bank holding company should pay cash dividends
only to the extent that the company's net income for the past year is
sufficient to cover both the cash dividends and a rate of earning retention
that is
33
<PAGE> 34
consistent with the company's capital needs, asset quality and overall
financial condition. The Federal Reserve also indicated that it would be
inappropriate for a company experiencing serious financial problems to borrow
funds to pay dividends. Furthermore, under the prompt corrective action
regulations adopted by the Federal Reserve pursuant to FDICIA, the Federal
Reserve may prohibit a bank holding company from paying any dividends if the
Company's bank subsidiary is classified as "undercapitalized."
Bank holding companies are required to give the Federal Reserve prior
written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, is equal to 10% or more of their consolidated
net worth. The Federal Reserve may disapprove such a purchase or redemption if
it determines that the proposal would constitute an unsafe or unsound practice
or would violate any law, regulation, Federal Reserve order, or any condition
imposed by, or written agreement with, the Federal Reserve.
CAPITAL REQUIREMENTS. The Federal Reserve has established capital
requirements for bank holding companies that generally parallel the capital
requirements for national banks under the OCC's regulations. The Federal
Reserve regulations provide that capital standards will generally be applied on
a bank only (rather than a consolidated) basis in the case of a bank holding
company with less than $150 million in total consolidated assets.
FEDERAL SECURITIES LAWS
The common stock of the Company is registered with the Securities Exchange
Commission (the "SEC") and is subject to the disclosure, proxy solicitation,
insider trading restrictions and other requirements of the federal securities
laws. Shares of the Common Stock purchased by persons who are not affiliates
of the Company may be resold without registration. Shares purchased by an
affiliate of the Company may comply with the resale restrictions of Rule 144
under the Securities Act. If the Company meets the current public information
requirements of Rule 144 under the Securities Act, each affiliate of the
Company who complies with the other conditions of Rule 144 (including those
that require the affiliate's sale to be aggregated with those of certain other
persons) would be able to sell in the public market, without registration, a
number of shares not to exceed, in any three-month period, the greater of (i)
1% of the outstanding shares of the Company or (ii) the average weekly volume
of trading in such shares during the preceding four calendar weeks. Provision
may be made in the future by the Company to permit affiliates to have their
shares registered for sale under the Securities Act under certain
circumstances. There are currently no demand registration rights outstanding.
However, in the event the Company, at some future time, determines to issue
additional shares from its authorized but unissued shares, the Company might
offer registration rights to certain of its affiliates who want to sell their
shares.
34
<PAGE> 35
ITEM 2. Properties
The following table sets forth the Banks' offices, as well as certain
additional information relating to the offices, as of December 31, 1996.
<TABLE>
<CAPTION>
Year Building Land Building
Location County Opened Owned/Leased Owned/Leased Square Footage Deposits
- -------- ------ ------- ------------ ------------ -------------- --------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Chester National Bank
Main Office
- ---------------------
1112 State Street
Chester, Illinois 62233 Randolph 1919 Owned Owned 10,345 $57,662
Chester National Bank
Branch Offices
- ---------------------
2467 West Main
Carbondale, Illinois
62903 Jackson 1988 Leased(2) Leased 3,400 5,008
101 South Main
Pinckneyville,
Illinois 62274 Perry 1989(1) Owned Owned 1,950 9,819
165 West Broadway
Sparta, Illinois 62286 Randolph 1989(1) Owned Owned 11,142 26,712
1414 South Main
Red Bud, Illinois 62278 Randolph 1989(1) Owned Owned 1,032 5,572
Chester National Bank
Loan Production Office
- -----------------------
125 South Broadview
Plaza, Suite #1
Cape Girardeau,
Missouri 63703 Cape Girardeau 1995 Leased(3) Leased 720 N/A
Chester National Bank
of Missouri Main
Office
- -----------------------
1010 North Main
Perryville, Missouri
63775 Perry 1990 Owned Owned 3,900 3,742
</TABLE>
(1) Acquired in connection with the acquisition of Heritage Federal in 1989.
(2) Lease expires in 1997 with an option to renew.
(3) Lease expires in June 1997 with an option to renew.
ITEM 3. Legal Proceedings
Periodically, there have been various claims and lawsuits involving the Banks,
such as claims to enforce liens, condemnation proceedings on properties in
which the Banks hold security interests, claims involving the making and
servicing of real property loans and other issues incident to the Banks'
business. The Banks are not parties to any pending legal proceedings that
35
<PAGE> 36
management believes would have a material adverse effect on the financial
condition or operations of the Banks.
ITEM 4. Submission of Matters to a Vote of the Security Holders
During the fourth quarter of the fiscal year covered by this report, the
Company did not submit any matters to the vote of security holders through the
solicitation of proxies or otherwise.
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The section of Annual Report to the Stockholders for the fiscal year ended
December 31, 1996, entitled "Common Stock and Related Matters" is hereby
incorporated by reference. No other sections of such Annual Report are
incorporated herein by this reference.
ITEM 6. Selected Financial Data.
The section of the Annual Report to the Stockholders for the fiscal year ended
December 31, 1996, entitled "Selected Consolidated Financial Information" is
hereby incorporated by reference. No other sections of such Annual Report are
incorporated herein by this reference.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The section of the Annual Report to the Stockholders for the fiscal year ended
December 31, 1996, entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" is hereby incorporated by reference. No
other sections of such Annual Report are incorporated herein by this reference.
ITEM 8. Financial Statements and Supplementary Data.
The sections of the Annual Report to the Stockholders for the fiscal year ended
December 31, 1996, entitled "Chester Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets," "Chester Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income," "Chester Bancorp, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity," "Chester Bancorp, Inc. and
Subsidiaries Consolidated Statements of Cash Flows," "Chester Bancorp, Inc. and
Subsidiaries Notes to Consolidated Financial Statements December 31, 1996 and
1996" are hereby incorporated by reference. No other sections of such Annual
Report are incorporated herein by this reference.
36
<PAGE> 37
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable. See prior disclosure previously reported in the Company's
Annual Report to Stockholders for the fiscal year ended December 31, 1996.
PART III
ITEM 10. Directors and Executive Officers of the Registrant.
The sections of the 1997 Proxy Statement, entitled "Proposal I - Election of
Directors," and "Compliance with Section 16(a) of the Exchange Act," as well as
the "Employment Agreements" portion of the section entitled "Executive
Compensation," are hereby incorporated by reference. No other sections of such
Proxy Statement are incorporated herein by this reference.
ITEM 11. Executive Compensation.
The section of the 1997 Proxy Statement, entitled "Executive Compensation," is
hereby incorporated by reference. No other sections of such Proxy Statement
are incorporated herein by this reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The section of the 1997 Proxy Statement, entitled "Security Ownership of
Certain Beneficial Owners and Management," is hereby incorporated by reference.
No other sections of such Proxy Statement are incorporated herein by this
reference.
ITEM 13. Certain Relationships and Related Transactions.
The section of the 1997 Proxy Statement, entitled "Transactions with
Management," is hereby incorporated by reference. No other sections of such
Proxy Statement are incorporated herein by this reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(1) Financial Statements
The following information appearing in the Company's Annual Report to
Stockholders for the Fiscal Year Ended December 31, 1996 is incorporated by
reference as Exhibit 13 to this Annual
37
<PAGE> 38
Report on Form 10-K. No other sections of such Annual Report are incorporated
herein by this reference.
Annual Report Sections
Independent Auditors' Report
Chester Bancorp, Inc. and Subsidiaries Consolidated Balance Sheets for the
Years Ended December 31, 1996, 1995, and 1994.
Chester Bancorp, Inc. and Subsidiaries Consolidated Statements of Income for
the Years Ended December 31, 1996, 1995, and 1994.
Chester Bancorp, Inc. and Subsidiaries Consolidated Statements of Stockholders'
Equity for the Years Ended December 31, 1996, 1995, and 1994.
Chester Bancorp, Inc. and Subsidiaries Consolidated Statements of Cash Flows
for the Years Ended December 31, 1996, 1995, and 1994.
Chester Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial
Statements December 31, 1996 and 1995.
(a)(2) Financial Statement Schedules. Not applicable.
(a)(3) Exhibits
<TABLE>
<CAPTION>
Reference to Prior
Filing or Exhibit
Regulation S-K Number Attached
Exhibit Number Document Hereto
- -------------------- -------- --------------------
<S> <C> <C>
2 Plan of Conversion of Chester Savings Bank, FSB (1)
3.1 Certificate of Incorporation of Chester Bancorp, Inc. (1)
3.2 Bylaws of Chester Bancorp. (1)
10.1 Employment Agreement with Michael W. Welge* (1)
10.2 Employment Agreement with Edward K. Collins* (1)
10.3 Stock Option Plan* (1)
10.4 Management Recognition and Development Plan* (1)
10.5 Employee Stock Ownership Plan and Trust Agreement* (1)
10.6 Amended and Restated Director Emeritus Plan (1)
13 Annual Report to Stockholders for Fiscal Year Ended 13
December 31, 1996.
21 Subsidiaries of Chester Bancorp, Inc. (1)
27 Financial Data Schedule 27
99 Proxy Statement for the 1997 Annual meeting of the 99
Stockholders of Chester Bancorp, Inc.
</TABLE>
38
<PAGE> 39
(1) Filed as exhibits to the Company's Registration Statement on Form S-1 filed
with the SEC on August 12, 1996. All such previously filed documents are
hereby incorporated by reference in accordance with Item 601 of Regulation S-K.
* These agreements are management contracts or compensation plans or
arrangements required to be filed as exhibits to this Form 10-K.
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the last quarter of the
period covered by this report.
39
<PAGE> 40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Chester Bancorp, Inc.
March 31, 1997 By /s/ Michael W. Welge
-----------------------------------
Michael W. Welge,
Chairman of the Board, President,
Chief Financial Officer, and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
March 31, 1997 By /s/ Edward K. Collins
-----------------------------------
Edward K. Collins,
Treasurer, Secretary, and Director
March 31, 1997 By /s/ Allen R. Verseman
-----------------------------------
Allen R. Verseman,
Director
March 31, 1997 By /s/ Carl H. Welge
-----------------------------------
Carl H. Welge,
Director
March 31, 1997 By /s/ Howard A. Boxdorfer
-----------------------------------
Howard A. Boxdorfer,
Director
March 31, 1997 By /s/ Thomas E. Welch, Jr.
-----------------------------------
Thomas E. Welch, Jr.
Director
March 31, 1997 By /s/ John R. Beck, M.D.
-----------------------------------
John R. Beck, M.D.
Director
March 31, 1997 By /s/ James C. McDonald
-----------------------------------
James C. McDonald,
Director
40
<PAGE> 1
Exhibit 13
LOGO
logo
1996 annual report
<PAGE> 2
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Message to Our Stockholders 1
Common Stock and Related Matters 2
Selected Consolidated Financial Information 3
Management's Discussion and Analysis 5
Independent Auditors' Report 15
Consolidated Financial Statements 16
Notes to Consolidated Financial Statements 20
Stockholder Information Inside
Back Cover
</TABLE>
<PAGE> 3
MESSAGE TO OUR STOCKHOLDERS
- --------------------------------------------------------------------------------
On October 4, 1996, Chester Savings Bank, F.S.B. converted from mutual to
stock ownership and converted from a federal savings bank to two national banks,
Chester National Bank and Chester National Bank of Missouri. Simultaneously with
these conversions, the Company, Chester Bancorp, Inc., was formed as a holding
company for the two banks and the Company completed the initial public offering
of its common stock. The conversion from mutual ownership in a savings
association to stock ownership in a bank holding company has enabled customers,
community members and other investors to participate in the Bank's growth and
success through an equity interest in the Company. The conversion from a savings
bank to national banks will enable both Chester National Bank and Chester
National Bank of Missouri to offer increased commercial lending and a wider
variety of products and services to their customers and local communities. In
addition, the banks will be subject to various banking regulations but will not
be subject to certain regulatory requirements applicable only to thrift
institutions.
The Banks will continue to focus on maintaining profitability by increasing
their lending base while maintaining safe and sound banking practices. Both
Chester National Bank and Chester National Bank of Missouri are well positioned
as strong local community banks in the markets they serve. The Banks' multiple
locations, including main facilities in Chester, Illinois and Perryville,
Missouri, branch facilities in Sparta, Pinckneyville, Red Bud and Carbondale,
Illinois, and loan production office in Cape Girardeau, Missouri, will enable
the Banks to provide quality banking service to several local communities in the
region. The Banks intend to aggressively pursue new lending opportunities in the
growing southeast Missouri area through the Perryville location and the loan
production office in Cape Girardeau, Missouri.
The management and employees of the Banks will continue to provide top
level service to the local communities they serve in the same manner as prior to
the conversion to national banks, however, as national banks, the Banks will not
be subject to certain thrift regulatory restrictions and will be able to offer
additional commercial lending services to their customers. In addition, the
Banks are considering various new products and services which would enhance the
use of the Banks by members of the local community. Chester National Bank
intends to increase single family lending in the St. Louis County area through
selected brokered arrangements. Chester National Bank already has and will
continue to reduce its dependence on single large deposits. Staff duties are
being realigned to meet the changing customer base of the Banks.
The Company intends to increase stockholder value through both increased
stock price and the payment of dividends. While there can be no assurance that
the Company's stock price will continue to increase, the Company believes that
maintaining profitable operations at the Bank level will continue to be
positively reflected in the stock price. The initial quarterly dividend on the
Company's stock payable to holders of record on November 18, 1996 was $.05 per
share and the second quarterly dividend on the Company's stock payable to
holders of record on February 18, 1997 was $.06 per share. Future dividends are
subject to many factors, including determination and declaration by the Board of
Directors, capital requirements, regulatory limitations and results of
operations of the Company, however, the Board of Directors views the payment of
reasonable dividends as an appropriate method of returning value to its
stockholders. In addition, any future repurchase of outstanding common stock by
the Company, to the extent that such repurchase is then determined to be
advisable by the Board of Directors and authorized by the appropriate regulatory
authorities, will be considered by the Board of Directors as a method of
increasing value to the Company's stockholders.
On behalf of the Board of Directors of Chester Bancorp, Inc. and the
management and employees of Chester National Bank and Chester National Bank of
Missouri, I extend our deep appreciation to our stockholders and customers for
your support during our conversion to two national banks and the related initial
offering of Chester Bancorp, Inc. stock. We look forward to an exciting and
profitable future.
Sincerely,
[Michael Welge Sig.]
Michael W. Welge
Chairman of the Board,
President and Chief
Financial Officer
1
<PAGE> 4
COMMON STOCK AND RELATED MATTERS
- --------------------------------------------------------------------------------
The common stock of Chester Bancorp, Inc. is traded in the over-the-counter
market and is listed for quotation in the NASDAQ National Market under the
symbol "CNBA." The stock was issued on October 4, 1996 at $10.00 per share. As
of December 31, 1996, there were 696 stockholders of record and 2,182,125 shares
of common stock issued and outstanding.
The following table sets forth the high and low closing bid prices as
reported by NASDAQ and dividends paid per share of common stock for the period
indicated.
<TABLE>
<CAPTION>
Dividends
Quarter ended High Low paid
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
December 31, 1996 $13.750 $12.625 $ .05
</TABLE>
Payment of dividends on the common stock is subject to determination and
declaration by the Board of Directors and will depend upon a number of factors,
including capital requirements, regulatory limitations on the payment of
dividends, Chester Bancorp's results of operations and financial condition, tax
considerations, and general economic conditions. No assurance can be given that
dividends will be declared or, if declared, what the amount of dividends will
be, or whether such dividends, once declared, will continue.
2
<PAGE> 5
SELECTED CONSOLIDATED FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------------------------
(Dollars in thousands) 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets $ 145,843 $ 134,781 $ 141,755 $ 141,396 $ 138,869
Loans receivable, net 54,842 57,021 58,157 61,193 65,643
Mortgage-backed securities, net(1) 15,897 15,413 13,136 7,402 10,559
Investments, net(2) 69,842 57,605 64,410 67,390 57,994
Savings deposits(3) 102,247 106,718 129,712 130,231 128,731
Securities sold under agreements
to repurchase(3) 11,340 15,000 -- -- --
Stockholders' equity 31,427 11,712 10,675 9,682 8,778
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------------------
(Dollars in thousands) 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income $ 9,307 $ 9,035 $ 8,696 $ 9,132 $ 10,392
Interest expense 5,300 5,474 5,089 5,526 6,826
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income 4,007 3,561 3,607 3,606 3,566
Provision for loan losses 33 161 69 30 70
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 3,974 3,400 3,538 3,576 3,496
Loss on sale of certificates of
deposit (54) -- -- -- --
Gain (loss) on sale of investment
securities and mortgage-backed
securities 42 98 -- -- (228)
Others noninterest income 180 140 114 129 131
Noninterest expense 3,338 2,338 2,374 2,277 2,216
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and
cumulative effect of change in
accounting principle 804 1,300 1,278 1,428 1,183
Income taxes 109 299 285 307 257
- ---------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of
change in accounting principle 695 1,001 993 1,121 926
Cumulative effect of change in
accounting principle(4) -- -- -- (227) --
- ---------------------------------------------------------------------------------------------------------------------------------
Net income $ 695 $ 1,001 $ 993 $ 894 $ 926
=================================================================================================================================
Earnings per share $ .19 N/A N/A N/A N/A
==================================================================================================================================
</TABLE>
3
<PAGE> 6
SELECTED CONSOLIDATED FINANCIAL INFORMATION (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
At or for the Year Ended December 31,
-------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
KEY OPERATING RATIOS(3):
Performance Ratios:
Return on average assets (net income divided
by average assets) 0.49% 0.73% 0.69% 0.79%(5) 0.68%
Return on average equity (net income divided
by average equity 4.12 8.94 9.76 12.15(5) 11.31
Interest rate spread (difference between
average yield on interest-earning assets and
average cost of interest-bearing
liabilities)(6) 2.74 2.60 2.61 2.62 2.57
Net interest margin (net interest income as a
percentage of average interest-earning
assets)(6) 3.15 2.87 2.79 2.82 2.79
Noninterest expense to average assets 2.38(8) 1.70 1.66 1.61 1.62
Average interest-earning assets to average
interest-bearing liabilities 110.41 106.48 104.91 104.66 104.29
Asset Quality:
Allowance for loan losses to total loans at
end of period 0.70 0.68 0.42 0.34 0.28
Ratio of allowance for loan losses to
non-performing loans 485.74 244.79 64.65 59.53 38.78
Net charge offs to average outstanding loans
during the period 0.07 0.03 0.05 0.01 0.06
Ratio of non-performing assets to total
assets(7) 0.13 0.27 0.31 0.44 0.84
Capital Ratios:
Average equity to average assets 12.00 8.15 7.12 6.53 6.01
Equity to assets at end of period 21.55 8.69 7.53 6.85 6.32
</TABLE>
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Number of:
Real estate loans outstanding 1,466 1,484 1,542 1,704 1,899
Deposit accounts 12,632 12,282 12,742 13,184 13,636
Full-service offices 6 6 6 6 6
Loan production offices 1 1 -- -- --
</TABLE>
- ---------------
(1) Includes mortgage backed securities available for sale of $1.9 million and
$2.2 million at December 31, 1996 and December 31, 1995, respectively.
(2) Includes investment securities, interest-bearing deposits, federal funds
sold, certificates of deposits, and FHLB stock. Includes securities
available for sale of $12.5 million and $7.1 million at December 31, 1996
and December 31, 1995, respectively.
(3) During the year ended December 31, 1995, $15.0 million of certificates of
deposit were converted into reverse repurchase agreements and, therefore,
are not reflected in deposit totals.
(4) Resulted from the adoption of SFAS No. 109, "Accounting for Income Taxes" on
January 1, 1993.
(5) Excludes cumulative effect of change in accounting principle.
(6) Information is presented on a tax equivalent basis assuming a tax rate of
34%.
(7) Non-performing assets include loans which are contractually past due 90 days
or more, loans accounted for on a nonaccrual basis and real estate acquired
through foreclosure.
(8) Includes SAIF special assessment of $812,498. Non-interest expense to
average assets excluding SAIF special assessment is 1.80%.
4
<PAGE> 7
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. Net interest
income is affected by the relative amounts of interest-earning assets and
interest-bearing liabilities and the interest rates earned or paid on these
balances. When interest-earning assets approximate or exceed interest-bearing
liabilities, any positive interest rate spread will generate net interest
income. Net interest income is then reduced to the extent of provisions for loan
losses.
The Company's profitability is also affected by the level of noninterest
income and expense. Noninterest income consists primarily of gains and losses on
the sale of investment securities, late charges on loans, and deposit account
fees. Noninterest expense consists of salaries and benefits, occupancy related
expenses, data processing expenses, deposit insurance premiums paid to the SAIF
and other operating expenses.
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.
BUSINESS STRATEGY
The Company's current business strategy is to operate as a well
capitalized, profitable and independent community bank dedicated to financing
home ownership and consumer needs in its market area and to providing quality
service to its customers. The Company has implemented this strategy by: (1)
closely monitoring the needs of customers and providing quality service; (2)
emphasizing consumer banking by originating residential mortgage loans and
consumer loans, and by offering checking accounts and other financial services
and products; (3) maintaining asset quality; (4) maintaining significant
investments in investment and mortgage-backed securities; (5) maintaining
capital in excess of regulatory requirements; (6) increasing earnings; and, (7)
managing interest rate risk by attempting to match asset and liability
maturities and rates.
It is anticipated that, subject to market conditions, competition and
related factors, among other things, the Company intends to pursue a business
strategy that places greater emphasis on commercial real estate and consumer
lending as these types of lending, rather than residential mortgage lending, are
emphasized by commercial banks, including national banks. Commercial real estate
and consumer lending are generally considered to involve a greater degree of
risk than residential mortgage lending. Furthermore, management anticipates
considering the introduction of various new business products, including, but
not limited to debit cards, trust powers, home equity loans and commercial
deposits. Accordingly, management anticipates that the Company will incur
start-up and ongoing expenses as these new programs and services are introduced.
Since no determination has been made by management in connection with these
services and products, no costs associated with them can be projected at this
time.
5
<PAGE> 8
FINANCIAL CONDITION
Assets.
The Company's total assets increased by $11.1 million, or 8.2%, to $145.8
million at December 31, 1996 from $134.8 million at December 31, 1995. The
increase in the Company's asset size resulted from the receipt of $19.1 million
of net proceeds from the sale of common stock in accordance with the Company's
initial public offering which was completed on October 4, 1996. The impact of
the stock conversion on total assets was partially offset by a $4.5 million
decline in the level of savings deposits and a $3.7 million decrease in reverse
repurchase agreements from 1995 to 1996.
Loans receivable decreased $2.2 million, or 3.8%, to $54.8 million at
December 31, 1996 from $57.0 million at December 31, 1995. 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 has increased its investment in
mortgage-backed securities and investment securities and has sought to become
more active in consumer lending.
Mortgage-backed securities at December 31, 1996 were $15.9 million compared
to $15.4 million at December 31, 1995. Investment securities increased $9.8
million, or 25.2%, to $48.8 million at December 31, 1996 from $39.0 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
Company's primary market area, the Company has significantly increased its
investment in investment securities, and to a lesser extent, in mortgage-backed
securities.
Certificates of deposit decreased $8.9 million, or 90.9%, to $888,000 at
December 31, 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.
Cash, interest-bearing deposits, and federal funds sold, on a combined
basis, increased $11.5 million, or 107.4%, to $22.1 million at December 31, 1996
from $10.7 million at December 31, 1995. The increase resulted from management's
decision to maintain a greater investment in short-term deposits subsequent to
the stock conversion as longer term investment opportunities are evaluated.
Liabilities.
Savings deposits decreased $4.5 million, or 4.2%, to $102.2 million at
December 31, 1996 from $106.7 million at December 31, 1995. The decrease in
savings deposits reflected the impact of management's decision to reduce
interest rates on savings deposits. Management determined that it wanted to
compete less aggressively on savings rates, thus providing for a limited amount
of deposit runoff.
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.
6
<PAGE> 9
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS/COST
The following table sets forth certain information for the periods
indicated regarding average balances of assets and liabilities as well as the
total dollar amounts of interest income from average interest-earning assets and
interest expense on average interest-bearing liabilities and average yields and
costs. Yields and costs are derived by dividing income or expense by the average
monthly balance of assets or liabilities, respectively, for the periods
presented. Average balances are derived from month-end balances instead of daily
balances, which management believes has not caused any material difference in
the information presented.
<TABLE>
<CAPTION>
1996 1995
------------------------------------------- ---------------------------------------
At Average Average
December Average Yield/ Average Yield/
(Dollars in Thousands) 31, 1996 Balance Interest Cost Balance Interest Cost
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable, net(1) 8.65% $ 55,758 $ 4,867 8.73% $ 57,326 $ 5,026 8.77%
Investments, net(2)(6) 5.74 48,262 2,785 5.77 42,852 2,407 5.62
Mortgage-backed securities,
net 6.30 16,408 1,083 6.60 13,609 955 7.02
Interest-bearing deposits(3) 5.50 14,227 807 5.67 18,316 875 4.78
----------------------------- ----------------------------
Total interest-earning
assets 6.90 134,655 9,542 7.09 132,103 9,263 7.01
--- ------------------------- --------------------
Non-interest-earning assets 5,824 5,165
--------------- ---------------
Total assets $ 140,479 $ 137,268
======== ========
INTEREST-BEARING LIABILITIES:
Deposits 4.36 $ 106,904 4,557 4.26 $ 120,308 5,280 4.39
Reverse repurchase agreements 4.93 15,057 743 4.93 3,750 194 5.17
----------------------------- -----------------------------
Total interest-bearing
liabilities 4.42 121,961 5,300 4.35 124,058 5,474 4.41
--- ------------------------- --------------------
Non-interest-bearing
liabilities 1,662 2,016
--------------- ---------------
Total liabilities 123,623 126,074
Stockholders' equity 16,856 11,194
--------------- ---------------
Total liabilities and
retained earnings $ 140,479 $ 137,268
======== ========
Net interest income $ 4,242 $ 3,789
======= =======
Interest rate spread(4)(6) 2.48% 2.74% 2.60%
========= ======= ====
Net interest margin(5)(6) N/A 3.15% 2.87%
========= ======= =====
Ratio of average
interest-earning assets to
average interest-bearing
liabilities 110.41% 106.48%
======= ======
</TABLE>
<TABLE>
<CAPTION>
1994
-------------------------------------------
Average
Average Yield/
(Dollars in Thousands) Balance Interest Cost
- -------------------------------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable, net(1) $ 58,698 $ 4,832 8.23%
Investments, net(2)(6) 41,537 2,095 5.04
Mortgage-backed securities,
net 10,972 770 7.02
Interest-bearing deposits(3) 26,272 1,230 4.68
-----------------------------
Total interest-earning
assets 137,479 8,927 6.49
-------------------------
Non-interest-earning assets 5,521
---------------
Total assets $ 143,000
========
INTEREST-BEARING LIABILITIES:
Deposits $ 131,046 5,089 3.88
Reverse repurchase agreements -- -- --
-----------------------------
Total interest-bearing
liabilities 131,046 5,089 3.88
-------------------------
Non-interest-bearing
liabilities 1,775
---------------
Total liabilities 132,821
Stockholders' equity 10,179
---------------
Total liabilities and
retained earnings $ 143,000
========
Net interest income $ 3,838
=======
Interest rate spread(4)(6) 2.61%
=======
Net interest margin(5)(6) 2.79%
=======
Ratio of average
interest-earning assets to
average interest-bearing
liabilities 104.91%
=======
</TABLE>
- ---------------
(1) Average balance includes non-accrual loans.
(2) Includes FHLB stock and investment securities.
(3) Includes interest-bearing deposits, federal funds sold, and certificates of
deposit.
(4) Represents the difference between the average yield on interest-earning
assets and the average cost of interest-bearing liabilities.
(5) Represents net interest income as a percentage of average interest-earning
assets.
(6) Information is presented on a tax-equivalent basis assuming a tax rate of
34%. The tax-equivalent adjustments were approximately $235,000, $228,000
and $231,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
7
<PAGE> 10
RATE/VOLUME ANALYSIS
The following table sets forth the effects of changing volumes and rates on
net interest income of the Company. Information is provided with respect to (i)
effects on interest income and expense attributable to changes in volume
(changes in volume multiplied by prior rate); (ii) effects on interest income
and expense attributable to changes in rate (changes in rate multiplied by prior
volume); and (iii) changes in rate/volume (change in rate multiplied by change
in volume). Information is presented on a tax equivalent basis assuming a tax
rate of 34% for all years presented.
<TABLE>
<CAPTION>
1996 Compared to 1995 1995 Compared to 1994
----------------------------------- -----------------------------------
Total Total
Rate/ Increase Rate/ Increase
(Dollars in Thousands) Volume Rate Volume (Decrease) Volume Rate Volume (Decrease)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNINGS ASSETS:
Loans receivable, net(1) $(138) $(23) $ 1 $(160) $(113) $317 $(10) $194
Investments, net(2) 304 65 10 379 66 241 4 311
Mortgage-backed
securities, net 196 (57) (11) 128 185 -- -- 185
Interest-bearing
deposits(3) (195) 163 (35) (67) (372) 26 (9) (355)
- -------------------------------------------------------------------------------------------------------
Total net change in
income on
interest-earning
assets 167 148 (35) 280 (234) 584 (15) 335
- -------------------------------------------------------------------------------------------------------
Interest-bearing
liabilities:
Deposits (589) (156) 23 (722) (417) 668 (61) 190
Reverse repurchase
agreements 585 (9) (27) 549 194 -- -- 194
- -------------------------------------------------------------------------------------------------------
Total net change in
expense on interest-
bearing liabilities (4) (165) (4) (173) (223) 668 (61) 384
- -------------------------------------------------------------------------------------------------------
Net change in net
interest income $ 171 $313 $(31) $ 453 $ (11) $(84) $ 46 $(49)
========================================================================================================
<CAPTION>
1994 Compared to 1993
------------------------------------
Total
Rate/ Increase
(Dollars in Thousands) Volume Rate Volume (Decrease)
- ----------------------------
<S> <C> <C> <C> <C>
INTEREST-EARNINGS ASSETS:
Loans receivable, net(1) $(400) $(335) 25 $(710)
Investments, net(2) 229 146 21 396
Mortgage-backed
securities, net 171 (124) (28) 19
Interest-bearing
deposits(3) (57) (88) 3 (142)
- ----------------------------
Total net change in
income on
interest-earning
assets (57) (401) 21 (437)
- ----------------------------
Interest-bearing
liabilities:
Deposits 38 (482) 7 (437)
Reverse repurchase
agreements -- -- -- --
- ----------------------------
Total net change in
expense on interest-
bearing liabilities 38 (482) 7 (437)
- ----------------------------
Net change in net
interest income $ (95) $ 81 $ 14 $--
============================
</TABLE>
(1) Average balance includes nonaccrual loans.
(2) Includes FHLB stock and investment securities.
(3) Includes interest-bearing deposits, federal funds sold, and certificates of
deposit.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
Net Income.
The Company's net income for 1996 was $695,000 compared to $1.0 million for
1995. The $306,000 decline in net income for 1996 was the result of the one-time
special assessment imposed by the Federal Deposit Insurance Corporation (FDIC)
on SAIF-assessable deposits. The special assessment for the Company totaled
$812,000 and was paid during the quarter ended December 31, 1996. The actual
reduction of net income was $617,000, after considering the tax deductibility of
the special assessment. Without considering the impact of the one-time special
assessment, net income for 1996 would have been $1.3 million.
Net Interest Income.
Net interest income increased $446,000, or 12.5%, to $4.0 million for 1996
from $3.6 million for 1995. This increase was the result of an increase in the
Company's tax-equivalent interest rate spread from 2.60% for 1995 to 2.74% for
1996. The improvement in the Company's interest rate spread was mainly
attributable to the combined impact of an eight basis point increase in the
average yield on interest-earning assets and a six basis point decrease in the
average cost of interest-bearing liabilities. Net interest income also benefited
from an increase in the ratio of average interest-earning assets to average
interest-bearing liabilities from 106.48% in 1995 to 110.41% in 1996. 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.
Interest Income.
Interest income on loans receivable totaled $4.9 million for 1996 compared
to $5.0 million for 1995. The $160,000, or 3.2%, decrease in interest income on
loans receivable resulted primarily from a $1.6 million, or 2.7%, decline in the
average balance of loans receivable. The decline was also impacted by a decrease
in the average yield on loans receivable from 8.77% in 1995 to 8.73% in 1996.
Interest income on mortgage-backed securities increased $128,000, or 13.4%,
to $1.1 million for 1996 from $1.0 million for 1995. The increase resulted from
an increase in the average balance of mortgage-backed securities of $2.8
million, or 20.6% in 1996. The increased investment in 1996 was attributable to
limited mortgage loan demand in the
8
<PAGE> 11
Company'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 decline in
the average yield on mortgage-backed securities from 7.02% for 1995 to 6.60% for
1996. The average yield on mortgage-backed securities decreased due to the
impact of repayments of higher yielding mortgage-backed securities in prior
years and the subsequent purchase of mortgage-backed securities with lower
yields.
Interest earned on investment securities was $2.6 million for 1996 compared
to $2.2 million for 1995. The increase of $371,000, or 17.0%, for 1996 was
mainly the result of an increase in the average balance of investments of $5.4
million, or 12.6%, for the year ended December 31, 1996. The increased
investment in 1996 was attributable to limited mortgage loan demand in the
Company'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 improvement in interest on investments was also positively
impacted by an increase in the average yield on investment securities of fifteen
basis points. The increased yield in 1996 was due to the purchase of higher
yielding investments in 1996 and 1995.
Interest income on interest-bearing deposits decreased $67,000, or 7.7%,
during 1996. The decline in interest income on interest-bearing deposits
resulted from a decrease in the average balance of interest-bearing deposits of
$4.1 million, or 22.3%, for 1996. The decline in the average balance was mainly
due to the reinvestment of proceeds from certificate of deposit maturities and
sales into higher yielding investments. The decrease in interest income on
interest-bearing deposits was partially offset by an increase in the average
yield on interest-bearing deposits from 4.78% in 1995 to 5.67% in 1996.
Interest Expense.
Interest expense decreased $173,000, or 3.2%, during 1996. Interest expense
on savings deposits decreased $722,000, or 13.7%, to $4.6 million for 1996 from
$5.3 million for 1995. This decrease resulted primarily from the $13.4 million,
or 11.1%, reduction in the average balance of deposits from $120.3 million for
1995 to $106.9 million for 1996. The decrease in interest expense on deposits
was also impacted by a decline in the average cost of deposits from 4.39% in
1995 to 4.26% in 1996. The decline in average deposits was mainly due to the
conversion of $15.0 million of deposit liabilities into reverse repurchase
agreements on September 30, 1995. The reverse repurchase agreements averaged
$15.1 million for fiscal year 1996 and resulted in interest expense of $743,000
in 1996 compared to $194,000 in 1995. The increase in interest expense on
reverse repurchase agreements in 1996 was reflective of the initiation of such
agreements on September 30, 1995. To a lesser extent, the fluctuation in the
average balance of deposits was impacted by management's decision to reduce
interest rates on savings deposits. Management determined that it wanted to
compete less aggressively on savings rates, thus providing for a limited amount
of deposit runoff. The decline in the average balance of deposits was not as
great as expected due to funds held in savings accounts for stock subscriptions
sold during the offering period which commenced in August 1996 and closed on
October 4, 1996.
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 1996, the Company's provision for loan losses was $33,000 compared
to $161,000 in 1995. The provision for 1996 was to maintain the loan loss
allowance at a consistent level with 1995.
The Company's allowance for loan losses was $384,000, or .70% of loans
outstanding at December 31, 1996, compared to $390,000, or .68% of loans
outstanding at December 31, 1995. The Company's level of net loans charged-off
during the year ended December 31, 1996 was $38,000, which represented .07% of
average loans receivable outstanding. This percentage of charge-offs increased
slightly from 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 is adequate at December 31, 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 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,
9
<PAGE> 12
however, future additions may be necessary if economic conditions or other
circumstances differ substantially from the assumptions used in making the
initial determination.
Noninterest Income.
Noninterest income was $168,000 for 1996 compared to $238,000 for 1995. The
$70,000, or 29.6%, decrease resulted from a $54,000 loss on the sale of
certificates of deposit and a $46,000 reduction in gains recognized from the
sale of mortgage-backed securities, partially offset by a $27,000 increase in
other noninterest income. Proceeds from the sale of mortgage-backed securities
during 1995 totaled $2.4 million whereas no sales of mortgage-backed securities
occurred in 1996. The $4.5 million of proceeds from the sale of certificates of
deposit during 1996 resulted from management's decision to liquidate the
certificate of deposit portfolio with one of its brokers. The Company also made
the decision to not reinvest in certificates of deposit as they matured. The
proceeds from the maturity and sale of certificates of deposit were invested in
mortgage-backed securities and other investment securities. The increase in
other noninterest income resulted from the receipt of state income tax refunds
for prior years that totaled $25,000.
Noninterest Expense.
Noninterest expense increased $1.0 million, or 42.8%, for 1996. The
increase in noninterest expense resulted primarily from the one-time special
assessment imposed by the FDIC on SAIF-assessable deposits. The special
assessment for the Company totaled $812,000 and was paid during the quarter
ended December 31, 1996. The remainder of the increase in noninterest expense
was attributable to a $250,000 increase in compensation and employee benefits
for 1996. 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 1996, $207,000
of expense related to the plan was recognized. The director's retirement plan is
funded by life insurance contracts. The cash surrender value of life insurance
contracts totaled $181,000 as of December 31, 1996, and is included in other
assets in the consolidated balance sheet. In future periods, compensation and
employee benefits expense 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 conversion to a stock
institution.
Income Tax Expense.
Income tax expense for 1996 was $109,000 compared to $299,000 for 1995. The
Company's effective tax rate for 1996 and 1995 was 13.5% and 23.0%,
respectively. The effective tax rate for each year was below the statutory
federal rate of 34% due to the Company's significant investment in tax exempt
securities.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
Net Income.
The Company's net income for 1995 was $1.0 million compared to $993,000 for
1994. The fluctuation in net income was positively impacted by a $124,000
increase in noninterest income and a $35,000 decrease in noninterest expense,
and was negatively impacted by a $92,000 increase in the provision for loan
losses and a $45,000 decrease in net interest income.
Net Interest Income.
Net interest income totaled $3.56 million for 1995 compared to $3.61
million for 1994. The $45,000, or 1.3%, decrease in net interest income was
primarily the result of a decline in the Company's interest rate spread from
2.61% in 1994 to 2.60% in 1995. Although the Company's interest rate spread
declined, net interest income benefited from an increase in the ratio of average
interest-earning assets to average interest-bearing liabilities from 104.91% in
1994 to 106.48% in 1995.
Interest Income.
Interest income totaled $9.0 million for 1995 compared to $8.7 million for
1994. The $339,000, or 3.9%, increase in interest income resulted primarily from
an increase in the tax equivalent average yield on interest-earning assets to
7.01% in 1995 from 6.49% in 1994. This increase was partially offset by a $5.4
million, or 3.9%, decline in average interest-earning assets from $137.5 million
in 1994 to $132.1 million in 1995. The increase in average yield on
interest-earning assets was primarily the result of market interest rates which
began rising in 1994 and continued through the first part of 1995, thus
resulting in upward adjustments in rates on the Company's adjustable-rate
mortgages and enabling the Company to originate loans and purchase investments
at higher rates.
10
<PAGE> 13
Interest income earned on loans receivable increased $194,000, or 4.0%, to
$5.0 million in 1995 from $4.8 million in 1994. This fluctuation was mainly due
to the increase in the average yield on loans receivable from 8.23% in 1994 to
8.77% in 1995. This improvement in yield was partially offset by a $1.4 million,
or 2.3%, decline in the average balance of loans receivable. The higher yield in
1995 was primarily due to the impact of rising interest rates on adjustable-rate
mortgages that repriced during 1994 and 1995 and the continued increase in the
level of higher yielding consumer loans.
Interest income on mortgage-backed securities increased $185,000, or 24.0%,
to $955,000 in 1995 from $770,000 in 1994. This increase is a result of the
average balance of mortgage-backed securities increasing from $11.0 million in
1994 to $13.6 million in 1995. This $2.6 million, or 24.0%, increase in the
average balance was attributable to $6.2 million and $8.1 million of
mortgage-backed security purchases made in 1995 and 1994, respectively, which
exceeded repayment and sales activity. The average yield on mortgage-backed
securities remained constant at 7.02% for both 1995 and 1994.
Interest earned on investment securities was $2.2 million in 1995 compared
to $1.9 million in 1994. The $315,000, or 16.9%, increase was the result of an
increase in the tax equivalent average yield from 5.04% in 1994 to 5.62% in
1995, coupled with a 3.2% increase in the average balance of investments. The
increased yield in 1995 was due to the replacement of lower yielding investments
that matured during 1994 and 1995 with purchases of higher yielding investment
securities.
Interest income on interest-bearing deposits decreased $355,000, or 28.9%,
to $875,000 in 1995 from $1.2 million in 1994. This decline was primarily
attributable to the average balance of interest-bearing deposits decreasing $8.0
million, or 30.3%, to $18.3 million in 1995 from $26.3 million in 1994. The
decline in the average balance was mainly due to the reinvestment of proceeds
from certificate of deposit maturities into higher yielding investment
securities and mortgage-backed securities. This decrease was partially offset by
an increase in the average yield on interest-bearing deposits from 4.68% in 1994
to 4.78% in 1995.
Interest Expense.
Interest expense increased $384,000, or 7.6%, to $5.5 million in 1995 from
$5.1 million in 1994. This increase resulted from the net impact of an increase
in the average cost of deposits from 3.88% in 1994 to 4.39% in 1995, offset by
an 8.2% decline in the average balance of deposits. The increase in the average
cost of deposits reflected the impact of rising interest rates which began in
1994 and continued through the first part of 1995. The decline in average
deposits was partially due to the conversion of $15.0 million of deposit
liabilities into reverse repurchase agreements during October 1995. The reverse
repurchase agreements were outstanding only in 1995 and had interest expense of
$194,000. The remaining decrease in average deposits was attributable to
increased competition in the Company's market place and also reflected
management's decision to compete less aggressively on rates, thereby permitting
some deposit runoff.
Provision For Loan Losses.
During 1995, the Company's provision for loan losses was $161,000 compared
to $69,000 for 1994. Consequently, the allowance for loan losses increased to
$390,000, or .68% of loans outstanding at December 31, 1995, compared to
$246,000, or .42% of loans outstanding at December 31, 1994. Management
determined that an increase in the allowance for loan losses, especially for
residential real estate loans, was necessary based on the following: the
historical level of the allowance for loan losses to outstanding loans was low
compared to its peers; the continued increase in credit card loans, which are
unsecured and generally have a higher risk of default; the average level of
non-performing residential real estate loans increased in 1995; and, the
increased concern over prevailing economic conditions in the Company's primary
market area. Based on these factors, management determined that an increase in
the allowance for loan losses, especially for residential real estate loans, to
a level consistent with its peers was necessary.
Noninterest Income.
The Company's noninterest income increased $124,000, or 108.5%, from
$114,000 in 1994 to $238,000 in 1995. This increase resulted from a $21,000
increase in late charges and other fees and $52,000 and $46,000 of gains
recognized from the sale of investment securities and mortgage-backed
securities, respectively. Proceeds from the sale of investment securities and
mortgage-backed securities totaled $29.4 million and $2.4 million, respectively.
There were no sales of investment securities or mortgage-backed securities in
1994. On November 15, 1995, the Financial Accounting Standards Board issued a
special report, A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities (the Special Report), that
allowed, from the date of issuance of the Special Report through December 31,
1995, all entities a one-time opportunity to reconsider their ability and intent
to hold securities to maturity and transfer securities from held to maturity
without "tainting" the remainder held to maturity securities. As a result of the
Special Report, management reconsidered the classification of held to maturity
securities and during December 1995 transferred $7.6 million and $2.2 million of
investment securities and mortgage-backed securities, respectively, to
11
<PAGE> 14
available for sale. The investment securities transferred were comprised of U.S.
agency securities and mortgage-backed bonds.
The proceeds from sales of investment securities in 1995 consisted of $7.5
million for the U.S. agency securities and mortgage-backed bonds transferred to
available for sale in conjunction with the provisions of the Special Report, as
discussed above, and $21.9 million of U.S. government securities that were
classified as available for sale.
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
at December 31, 1994. The sale of these mortgage-backed securities occurred only
after a substantial portion of the original principal outstanding had been
collected.
Noninterest Expense.
Noninterest expense was $2.3 million for 1995 and $2.4 million for 1994.
The $35,000, or 1.5%, decrease primarily represented the net result of a $77,000
decrease in compensation and employee benefits, offset by a $52,000 reduction in
gains on real estate acquired by foreclosure. The decrease in compensation and
employee benefits was mainly the result of a $100,000 decline in bonuses paid to
employees in 1995 as compared to 1994. The fluctuation in gain/loss on real
estate acquired by foreclosure was due primarily to the 1994 balance including
the impact of a $43,000 gain on sale of one foreclosed property that had been in
real estate owned for a number of years.
Income Tax Expense.
The Company's effective tax rate for 1995 and 1994 was 23.0% and 22.3%,
respectively. The effective tax rate for each year was below the statutory
federal rate of 34% due to the Company's significant investment in tax exempt
securities.
ASSET/LIABILITY MANAGEMENT
The principal operating objective of the Company is the achievement of a
positive interest rate spread that can be sustained during fluctuations in
prevailing interest rates. Since the Company's principal interest-earning assets
have substantially longer terms to maturity than its primary source of funds,
i.e., deposit liabilities, increases in general interest rates will generally
result in an increase in the Company's cost of funds before the yield on its
asset portfolio adjusts upward. The Company has generally sought to reduce its
exposure to adverse changes in interest rates by attempting to achieve a closer
match between the periods in which their interest-bearing liabilities and
interest-earning assets can be expected to reprice through the origination of
adjustable-rate mortgages and investment in loans and securities with shorter
terms.
The term "interest rate sensitivity" refers to those assets and liabilities
which mature and reprice periodically in response to fluctuations in market
rates and yields. Many banks have historically operated in a mismatched position
with interest-sensitive liabilities greatly exceeding interest-sensitive assets
in the short-term time periods. As noted above, one of the principal goals of
the Company's asset/liability program is to more closely match the interest rate
sensitivity characteristics of the asset and liability portfolios.
In order to manage interest rate risk, the Company's Executive Committee
monitors the difference between the Company's maturing and repricing assets and
liabilities to develop and implement strategies to decrease the "negative gap"
between the two. The primary responsibilities of the committee are to assess the
Company's asset/liability mix, recommend strategies to the Board of Directors
that will enhance income while managing the Company's vulnerability to changes
in interest rates and report to the Board of Directors the results of the
strategies used.
In order to increase the interest rate sensitivity of its assets, the
Company has originated adjustable rate residential mortgage loans and maintained
a consistent level of short- and intermediate-term investment securities and
interest-bearing deposits. At December 31, 1996, the Company had $15.6 million
of adjustable rate mortgages, $50.0 million of investment securities and
interest-bearing deposits maturing within one year, and $18.4 million of
investment securities and mortgage-backed securities maturing within one to five
years. In addition, at December 31, 1996, the Company had $5.9 million of
consumer loans which typically have maturities of five years or less.
In managing its future interest rate sensitivity, the Company intends to
continue to stress the origination of adjustable rate mortgages and loans with
shorter maturities, the maintenance of a consistent level of short- and
intermediate-term securities, and pricing strategies that will extend the term
of deposit liabilities.
12
<PAGE> 15
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 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 December 31, 1996,
cash and cash equivalents totaled $22.1 million.
The primary investing activities of the Company include origination of
loans and purchase of mortgage-backed securities and investment securities.
During the year ended December 31, 1996, purchases of investment securities and
mortgage-backed securities totaled $102.4 million and $3.0 million,
respectively, while loan originations totaled $11.0 million. These investments
were funded primarily from loan and mortgage-backed security repayments of $15.8
million, investment security sales and maturities of $93.0 million, $4.3 million
of certificate of deposit maturities, and $4.5 million of certificate of deposit
sales.
Reverse repurchase agreements decreased to $11.3 million at December 31,
1996 from $15.0 million at December 31, 1995; however, they averaged $15.1
million during 1996. All such agreements are maintained with Gilster-Mary Lee
Corporation (Gilster-Mary Lee), a food manufacturing and packaging company
headquartered in Chester, Illinois. The Chairman of the Board of the Company is
also the Executive Vice President, Treasurer and Secretary of Gilster-Mary Lee.
Over the last several years, the Company has maintained a deposit relationship
with Gilster-Mary Lee, which at times has had as much as $25 million in funds on
deposit, typically with short terms. At December 31, 1996, the balance of funds
on deposit with the Company was $16.3 million, which included the reverse
repurchase agreements. Gilster-Mary Lee has notified the Company 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 reverse repurchase agreements with other
wholesale funds. At December 31, 1996, the Company 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 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 of Chicago (FHLB). At December 31, 1996, the Company had
no outstanding advances from the FHLB.
At December 31, 1996, the Company exceeded all of its regulatory capital
requirements.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated 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 PRONOUNCEMENTS
Accounting For Mortgage Servicing Rights.
In May 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 122, Accounting for Mortgage
Servicing Rights, an amendment of FASB Statement No. 65 (SFAS 122). SFAS 122
amends Statement of Financial Accounting Standards No. 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
13
<PAGE> 16
retained should allocate the total cost of the mortgage loans to the mortgage
servicing rights and the loans (without 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 mortgage 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 (without mortgage servicing rights) and no cost should be
allocated to the 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 should 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 Company adopted
the provisions of SFAS 122 on January 1, 1996 with no effect on the Company's
financial position, as the Company sold no originated loans with servicing
rights retained during 1996.
Accounting For Stock-Based Compensation.
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123). SFAS 123
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.
SFAS 123 defines a fair value based method of accounting for an employee stock
option or similar equity instruments and encourages all entities to adopt that
method of accounting. SFAS 123 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
beginning after December 15, 1994. The adoption of SFAS 123 will not have any
impact on the Company's financial condition or results of operations until the
proposed stock option plan is established in fiscal 1997.
Accounting For Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities.
On June 28, 1996, the FASB issued Statement of Financial Accounting
Standards No. 125, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities (SFAS 125). SFAS 125 is effective for
transfers and servicing financial assets and extinguishments of liabilities
occurring after December 31, 1996 and is to be applied prospectively. This
statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments 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. Management of the Company does not expect
that adoption of SFAS 125 will have a material impact on the Company's financial
position, results of operations, or liquidity.
14
<PAGE> 17
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
The Board of Directors
Chester Bancorp, Inc.
Chester, Illinois:
We have audited the accompanying consolidated balance sheets of Chester
Bancorp, Inc. and subsidiaries (the Company) as of December 31, 1996 and 1995,
and the related consolidated statements of income, stockholders' equity, and
cash flows for the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits. The
accompanying consolidated financial statements of the Company for the year ended
December 31, 1994, were audited by other auditors whose report thereon dated
January 18, 1995, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 1996 and 1995 consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of Chester Bancorp Inc. and subsidiaries as of December 31, 1996 and
1995, and the results of their operations and their cash flows for the years
then ended, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
St. Louis, Missouri
January 31, 1997
15
<PAGE> 18
CHESTER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1996 and 1995 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 1,925,684 $ 1,773,061
Interest-bearing deposits 4,191,595 3,493,066
Federal funds sold 16,000,000 5,400,000
- ------------------------------------------------------------------------------------------
Total cash and cash equivalents 22,117,279 10,666,127
Certificates of deposit 888,265 9,761,774
Investment securities:
Available for sale, at market value (cost of $12,538,936
and $7,111,505 at December 31, 1996 and 1995,
respectively) 12,508,487 7,128,490
Held to maturity, at cost (market value of $36,236,481 and
$31,903,611 at December 31, 1996 and 1995,
respectively) 36,254,076 31,821,755
Mortgage-backed securities:
Available for sale, at market value (cost of $1,891,468
and $2,169,407 at December 31, 1996 and 1995,
respectively) 1,898,532 2,207,139
Held to maturity, at cost (market value of $13,995,987 and
$13,331,707 at December 31, 1996 and 1995,
respectively) 13,998,304 13,205,662
Loans receivable, net 54,842,131 57,021,009
Accrued interest receivable 863,692 636,592
Real estate acquired by foreclosure, net 116,747 209,248
Office property and equipment, net 1,949,535 1,843,286
Income taxes receivable 18,051 --
Deferred tax asset, net 23,792 --
Other assets 363,858 279,910
- ------------------------------------------------------------------------------------------
$145,842,749 $134,780,992
===========================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings deposits $102,246,850 $106,717,849
Securities sold under agreements to repurchase 11,340,000 15,000,000
Accrued interest payable 112,623 455,998
Advance payments by borrowers for taxes and insurance 447,666 573,009
Income taxes payable -- 36,252
Deferred tax liability, net -- 103,886
Accrued expenses and other liabilities 268,632 181,551
- ------------------------------------------------------------------------------------------
Total liabilities 114,415,771 123,068,545
- ------------------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 3,000,000 shares authorized,
2,182,125 shares issued and outstanding at December 31,
1996 21,821 --
Additional paid-in capital 20,865,158 --
Retained earnings, substantially restricted 12,271,098 11,676,334
Unrealized gain (loss) on securities available for sale,
net of taxes (14,499) 36,113
Unearned ESOP shares (1,716,600) --
- ------------------------------------------------------------------------------------------
Total stockholders' equity 31,426,978 11,712,447
- ------------------------------------------------------------------------------------------
$145,842,749 $134,780,992
==========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE> 19
CHESTER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three years ended December 31, 1996 1996 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans receivable $4,866,508 $5,026,068 $4,831,691
Mortgage-backed securities 1,083,420 955,249 770,264
Investments 2,549,847 2,178,885 1,863,713
Interest-bearing deposits and federal funds sold 807,444 874,839 1,230,257
- ---------------------------------------------------------------------------------------------------
Total interest income 9,307,219 9,035,041 8,695,925
- ---------------------------------------------------------------------------------------------------
Interest expense:
Savings deposits 4,557,361 5,279,535 5,089,295
Securities sold under agreements to repurchase 742,910 194,144 --
- ---------------------------------------------------------------------------------------------------
Total interest expense 5,300,271 5,473,679 5,089,295
- ---------------------------------------------------------------------------------------------------
Net interest income 4,006,948 3,561,362 3,606,630
Provision for loan losses 32,885 161,319 69,309
- ---------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 3,974,063 3,400,043 3,537,321
- ---------------------------------------------------------------------------------------------------
Noninterest income:
Late charges and other fees 115,423 102,363 81,412
Loss on sale of certificates of deposit (53,714) -- --
Gain on sale of investment securities, net 42,093 52,497 --
Gain on sale of mortgage-backed securities, net -- 45,919 --
Other 63,914 37,376 32,835
- ---------------------------------------------------------------------------------------------------
Total noninterest income 167,716 238,155 114,247
- ---------------------------------------------------------------------------------------------------
Noninterest expense:
Compensation and employee benefits 1,344,793 1,095,268 1,172,522
Occupancy 287,726 293,634 300,908
Data processing 153,507 166,809 158,242
Advertising 52,298 54,576 60,303
Federal insurance premiums 232,579 294,762 300,982
SAIF special assessment 812,498 -- --
Other 460,242 415,255 414,451
(Gain) loss on real estate acquired by foreclosure, net (5,722) 17,994 (33,626)
- ---------------------------------------------------------------------------------------------------
Total noninterest expense 3,337,921 2,338,298 2,373,782
- ---------------------------------------------------------------------------------------------------
Income before income tax expense 803,858 1,299,900 1,277,786
Income tax expense 108,716 299,000 284,742
- ---------------------------------------------------------------------------------------------------
Net income $ 695,142 $1,000,900 $ 993,044
=====================================================================================================
Earnings per share $ .19 N/A N/A
=====================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE> 20
CHESTER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unrealized
gain (loss)
Retained on securities
Common stock Additional earnings, available Unearned Total
Three years ended ------------------------ paid-in substantially for sale, ESOP stockholders'
December 31, 1996 Shares Amount capital restricted net of tax shares equity
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 -- $ -- $ -- $9,682,390 $ -- $ -- $9,682,390
Net income -- -- -- 993,044 -- -- 993,044
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 -- -- -- 10,675,434 -- -- 10,675,434
Net income -- -- -- 1,000,900 -- -- 1,000,900
Cumulative effect of
transfer of securities
to available for sale,
net of tax -- -- -- -- (33,465) -- (33,465)
Change in unrealized gain
(loss) on securities
available for sale, net
of tax -- -- -- -- 69,578 -- 69,578
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 -- -- -- 11,676,334 36,113 -- 11,712,447
Net income -- -- -- 695,142 -- -- 695,142
Net proceeds from sale of
common stock 2,182,125 21,821 20,860,066 -- -- (1,745,700) 19,136,187
Dividends on common stock
at $.05 per share -- -- -- (100,378) -- -- (100,378)
Amortization of ESOP
awards -- -- 5,092 -- -- 29,100 34,192
Change in unrealized gain
(loss) on securities
available for sale, net
of tax -- -- -- -- (50,612) -- (50,612)
- ---------------------------------------------------------------------------------------------------------------------------------
2,182,125 $ 21,821 $20,865,158 $12,271,098 $ (14,499) $(1,716,600) $31,426,978
==============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE> 21
CHESTER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three years ended December 31, 1996 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 695,142 $ 1,000,900 $ 993,044
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization:
Office properties and equipment 123,311 118,168 128,605
Deferred fees, discounts, and premiums (163,643) (82,198) (38,833)
Stock plan 34,192 -- --
(Increase) decrease in accrued interest receivable (227,100) 148,520 (153,928)
Increase (decrease) in accrued interest payable (343,375) 415,812 6,354
Increase (decrease) in income taxes, net (154,492) 63,349 (12,475)
Loss on sale of certificates of deposit 53,714 -- --
Gain on sale of investment securities, net (42,093) (52,497) --
Gain on sale of mortgage-backed securities -- (45,919) --
Provision for loan losses 32,885 161,319 69,309
FHLB stock dividend -- (9,100) --
Net change in other assets and other liabilities 3,133 (301,156) 58,569
- ---------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 11,674 1,417,198 1,050,645
- ---------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Principal repayments on:
Loans receivable 13,249,189 16,062,634 16,156,976
Mortgage-backed securities 2,519,007 1,637,310 2,340,955
Investment securities 157,329 -- --
Proceeds from the maturity of certificates of deposit 4,335,000 10,784,000 8,417,000
Proceeds from the sale of certificates of deposit 4,484,286 -- --
Proceeds from the maturity of investment securities
available for sale 3,500,000 2,825,000 --
Proceeds from the maturity of investment securities held
to maturity 70,490,000 13,375,000 13,930,790
Proceeds from the sale of investment securities available
for sale 19,011,640 29,417,029 --
Proceeds from the sale of mortgage-backed securities -- 2,409,229 --
Proceeds from redemption of Federal Home Loan Bank stock -- -- 280,200
Cash invested in:
Loans receivable (11,017,164) (15,280,965) (13,036,846)
Mortgage-backed securities held to maturity (2,981,406) (6,199,609) (8,059,825)
Investment securities available for sale (27,473,733) (21,785,788) --
Investment securities held to maturity (74,975,877) (20,951,499) (20,381,146)
Certificates of deposit -- (1,976,000) (5,041,055)
FHLB stock (17,700) -- --
Federal Reserve Bank stock (411,000) -- --
Proceeds from sales of real estate acquired through
foreclosure 20,000 54,950 68,200
Purchase of office properties and equipment (229,560) (15,370) (912,978)
- ---------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 660,011 10,355,921 (6,237,729)
- ---------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Decrease in savings deposits (4,470,999) (22,994,084) (519,546)
Increase (decrease) in securities sold under agreements to
repurchase (3,660,000) 15,000,000 --
Decrease in advance payments by borrowers for taxes and
insurance (125,343) (356,214) (124,114)
Proceeds from issuance of common stock, net 19,136,187 -- --
Dividends paid (100,378) -- --
- ---------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 10,779,467 (8,350,298) (643,660)
- ---------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 11,451,152 3,422,821 (5,830,744)
Cash and cash equivalents, beginning of year 10,666,127 7,243,306 13,074,050
- ---------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $22,117,279 $10,666,127 $ 7,243,306
==============================================================================================================================
Supplemental information:
Interest paid $ 5,643,646 $ 5,057,867 $ 5,082,941
Income taxes paid 231,000 228,740 297,000
==============================================================================================================================
Noncash investing and financing activities:
Loans transferred to real estate acquired by foreclosure $ 93,651 $ 296,524 $ 169,710
Interest credited to savings deposits 3,098,000 3,616,000 3,922,000
Securities transferred to available for sale -- 9,758,681 --
==============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE> 22
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Following are the significant accounting policies which Chester Bancorp,
Inc. and subsidiaries (the Company) follow in preparing and presenting their
consolidated financial statements:
Reorganization to a Stock Corporation
On October 4, 1996, Chester Savings Bank, FSB (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
(collectively referred to as the Banks). The stock conversion resulted in the
sale and issuance of 2,182,125 shares of $.01 par value common stock at a price
of $10.00 per share. After reducing gross proceeds for conversion costs of
$939,363, net proceeds totaled $20,881,887. The stock of the Banks will be held
by the Company. In conjunction with the conversion, the Company loaned
$1,745,700 to the Banks' employee stock ownership plan for the purchase of
174,570 shares in the stock conversion.
Prior to the stock conversion, the Company had not issued any stock, had no
assets or liabilities, and had not engaged in any business activities other than
of an organizational nature. Accordingly, operating activities prior to October
4, 1996 reflect the operations of the Bank only.
Business
The Company provides a full range of financial services to individual and
corporate customers through its home office in Chester, Illinois, and its four
banking offices in neighboring cities in Southern Illinois and one banking
office in Perryville, Missouri. The Company is subject to competition from other
financial institutions in the area, is subject to the regulations of certain
federal agencies, and undergoes periodic examinations by those regulatory
authorities.
Basis of Presentation
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of the
balance sheet and revenues and expenses for the year. Actual results could
differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change
in the near term relate to the determination of the allowance for loan losses
and the valuation of real estate acquired by foreclosure or in satisfaction of
loans. In connection with the determination of the allowances for losses on
loans and real estate acquired by foreclosure, management obtains independent
appraisals for significant properties.
Management believes that the allowances for losses on loans and real estate
acquired by foreclosure are adequate. While management uses available
information to recognize such losses, future additions to the allowances may be
necessary based upon changes in economic conditions. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowances for losses. Such agencies may
require the Company to recognize additions to the allowances based upon their
judgment about information available to them at the time of their examination.
Statement of Financial Accounting Standards (SFAS) No. 107, Disclosures
About Fair Value of Financial Instruments, requires that the estimated fair
value of the Company's financial instruments be disclosed. Fair value estimates
of financial instruments are made at a specific point in time, based on relevant
market information and information about the financial instruments. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the entire holdings or a significant portion of a
particular financial instrument. Because no market exists for a significant
portion of the Company's financial instruments, some fair value estimates are
subjective in nature and involve uncertainties and matters of significant
judgment. Changes in assumptions could significantly affect these estimates.
Fair value estimates are presented for existing on-balance-sheet and
off-balance-sheet financial
20
<PAGE> 23
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Basis of Presentation (Continued)
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a significant effect on
fair value estimates and have not been considered in any of the estimates (see
note 18).
Principles of Consolidation
The consolidated financial statements include the accounts of Chester
Bancorp, Inc. and its wholly-owned subsidiaries, Chester National Bank and
Chester National Bank of Missouri. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Consolidated Statements of Cash Flows
For purposes of the consolidated statements of cash flows, the Company
considers all interest-bearing deposits with original maturities of three months
or less and federal funds sold to be cash equivalents.
Investment Securities and Mortgage-Backed Securities
The Company classifies its debt securities in one of the following
categories: available for sale or held to maturity. Held-to-maturity securities
are those securities in which the Company has the ability and intent to hold
until maturity. All other securities not included in held to maturity are
classified as available for sale.
Available-for-sale securities are recorded at fair value. Held-to-maturity
securities are recorded at amortized cost, adjusted for the amortization of
premiums or discounts. Unrealized gains and losses, net of the related tax
effect, on available-for-sale securities are excluded from earnings and reported
as a separate component of stockholders' equity until realized.
A decline in the market value of any security below cost that is deemed to
be "other than temporary" results in a charge to earnings and the establishment
of a new cost basis for the security.
Premiums and discounts are amortized over the lives of the respective
securities as an adjustment to yield using the interest method. Dividend and
interest income are recognized when earned. Realized gains and losses are
included in earnings and are derived using the specific-identification method
for determining the cost of securities sold.
On November 15, 1995, the Financial Accounting Standards Board (FASB)
issued a special report, A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities (the Special
Report). Due to uncertainties surrounding the regulatory capital treatment for
unrealized gains and losses on available-for-sale securities, the Special Report
was issued to allow all entities a one-time opportunity to reconsider their
ability and intent to hold securities to maturity and transfer securities from
held to maturity without "tainting" the remaining held-to-maturity securities.
These transfers were only allowed during the period from the date of issuance of
the Special Report through December 31, 1995. As a result of the Special Report,
management reconsidered the classification of held-to-maturity securities and
transferred $7,589,274 and $2,169,407 of investment securities and
mortgage-backed securities, respectively, to available for sale during December
1995.
Loans Receivable and Related Fees
Loans receivable are carried at cost, as management has determined the
Company has the ability to hold them to maturity and because it is management's
intention to hold them for the foreseeable future. Interest is credited to
income as earned; however, interest receivable is accrued only if deemed
collectible.
Loan fees and the related incremental direct costs of originating loans are
deferred and are amortized over the lives of the related loans using the
interest method.
21
<PAGE> 24
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Loans Receivable and Related Fees (Continued)
The allowance for loan losses is maintained at an amount considered
adequate to provide for potential losses. The provision for loan losses is based
on periodic analysis of the loan portfolio by management. In this regard,
management considers numerous factors, including, but not necessarily limited
to, general economic conditions, loan portfolio composition, prior loss
experience, and independent appraisals. In addition to the allowance for
estimated losses on identified problem loans, an overall unallocated allowance
is established to provide for unidentified credit losses. In estimating such
losses, management considers various risk factors including geographic location,
loan collateral, and payment history.
Effective January 1, 1995, the Company adopted SFAS No. 114, Accounting by
Creditors for Impairment of a Loan, and SFAS No. 118, Accounting by Creditors
for Impairment of a Loan -- Income Recognition and Disclosures, which amends
SFAS No. 114. SFAS No. 114, as amended by SFAS No. 118, defines the recognition
criteria for loan impairment and the measurement methods for certain impaired
loans and loans for which terms have been modified in troubled-debt
restructurings (a restructured loan). Specifically, a loan is considered
impaired when it is probable a creditor will be unable to collect all amounts
due -- both principal and interest -- according to the contractual terms of the
loan agreement. When measuring impairment, the expected future cash flows of an
impaired loan are required to be discounted at the loan's effective interest
rate. Alternatively, impairment can be measured by reference to an observable
market price, if one exists, or the fair value of the collateral for a
collateral-dependent loan. Regardless of the historical measurement method used,
SFAS No. 114 requires a creditor to measure impairment based on the fair value
of the collateral when the creditor determines foreclosure is probable.
Additionally, impairment of a restructured loan is measured by discounting the
total expected future cash flows at the loan's effective rate of interest as
stated in the original loan agreement.
The Company applies the recognition criteria of SFAS No. 114 to
multi-family residential loans, commercial real estate loans, agriculture loans,
and restructured loans. Smaller balance, homogeneous loans, including
one-to-four family residential loans and consumer loans, are collectively
evaluated for impairment. SFAS No. 118 amends SFAS No. 114 to allow a creditor
to use existing methods for recognizing interest income on impaired loans. The
Company has elected to continue to use its existing nonaccrual methods for
recognizing interest on impaired loans. The adoption of SFAS No. 114 and SFAS
No. 118 resulted in no prospective adjustment to the allowance for loan losses
and did not affect the Company's policies regarding charge-offs or recoveries.
Real Estate Acquired by Foreclosure
Real estate acquired by foreclosure is initially recorded on an individual
property basis at estimated fair value on the date of foreclosure, thus
establishing a new cost basis. Subsequent to foreclosure, real estate is
periodically evaluated by management and a valuation allowance is established if
the estimated fair value, less cost to sell, of the property declines.
Subsequent increases in fair value are recorded through a reversal of the
valuation allowance, but not below zero. Costs incurred in maintaining the
properties are charged to expense.
Profit on sales of real estate owned is recognized when title has passed,
minimum down payment requirements have been met, the terms of any notes received
by the Company are such to satisfy continuing payment requirements, and the
Company is relieved of any requirement for continued involvement in the real
estate. Otherwise, recognition of profit is deferred until such criteria are
met.
Office Properties and Equipment
Office properties and equipment are stated at cost less accumulated
depreciation.
Depreciation is charged to expense using the straight-line method based on
the estimated useful lives of the related assets. Estimated lives are 10 to 35
years for buildings and improvements and 3 to 15 years for furniture and
equipment.
22
<PAGE> 25
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Securities Sold Under Agreements to Repurchase
The Company enters into sales of securities under repurchase agreements
(the agreements). The agreements are treated as financings, and the obligation
to repurchase securities sold is reflected as a liability in the consolidated
balance sheets.
Income Taxes
The Company files a consolidated federal income tax return. Deferred income
taxes result from income and expense recognition in different accounting periods
for income tax purposes than for financial reporting purposes (temporary
differences).
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
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 for 1996 have been computed based upon net income for the
period from October 1, 1996 to December 31, 1996 totaling $382,298. The average
number of common shares outstanding was 2,011,920. The effect on earnings per
share for the period from October 1, 1996 to October 4, 1996 is not considered
significant. Earnings per share for 1995 and 1994 are not applicable.
Reclassifications
Certain reclassifications of 1995 and 1994 amounts have been made to
conform with the 1996 financial statement presentation.
(2) INVESTMENT SECURITIES
The amortized cost and market value of investment securities classified as
available for sale at December 31, 1996 and 1995 follows:
<TABLE>
<CAPTION>
December 31, 1996
---------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities of U.S. government $11,505,936 $ 2,187 $ (32,636) $11,475,487
Stock in Federal Home Loan Bank 622,000 -- -- 622,000
Stock in Federal Reserve Bank 411,000 -- -- 411,000
- ---------------------------------------------------------------------------------------------------
$12,538,936 $ 2,187 $ (32,636) $12,508,487
===================================================================================================
</TABLE>
23
<PAGE> 26
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
(2) INVESTMENT SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
December 31, 1995
---------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities of U.S. government $6,507,205 $ 22,826 $ (5,841) $6,524,190
Stock in Federal Home Loan Bank 604,300 -- -- 604,300
- --------------------------------------------------------------------------------------------------
$7,111,505 $ 22,826 $ (5,841) $7,128,490
==================================================================================================
</TABLE>
Gross realized gains, gross realized losses, and gross proceeds on sales of
investment securities classified as available for sale follows:
<TABLE>
<CAPTION>
1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Gross realized gains $ 42,093 $ 140,933
Gross realized losses -- (88,436)
- ---------------------------------------------------------------------------------------
Net realized gain $ 42,093 $ 52,497
=======================================================================================
Gross proceeds $19,011,640 $29,417,029
=======================================================================================
</TABLE>
There were no sales of investment securities during the year ended December
31, 1994.
The amortized cost and market value of investment securities classified as
available for sale at December 31, 1996, by contractual maturity, follows:
<TABLE>
<CAPTION>
Amortized Market
cost value
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Within one year $5,510,899 $5,510,050
Between one and five years 5,995,037 5,965,437
- ---------------------------------------------------------------------------------------
11,505,936 11,475,487
No stated maturity 1,033,000 1,033,000
- ---------------------------------------------------------------------------------------
$12,538,936 $12,508,487
=======================================================================================
</TABLE>
The amortized cost and market value of investment securities classified as
held to maturity at December 31, 1996 and 1995 follows:
<TABLE>
<CAPTION>
December 31, 1996
-------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities of U.S. agencies $14,511,454 $ 15,409 $ (46,088) $14,480,775
Mortgage-backed bonds 10,912,280 98,692 (8,755) 11,002,217
Securities of states and
municipalities 10,830,342 4,972 (81,825) 10,753,489
- ------------------------------------------------------------------------------------------------------
$36,254,076 $ 119,073 $ (136,668) $36,236,481
======================================================================================================
</TABLE>
24
<PAGE> 27
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
(2) INVESTMENT SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
December 31, 1995
-----------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities of U.S. agencies $10,017,220 $ 10,758 $ (15,838) $10,012,140
Mortgage-backed bonds 8,606,035 9,822 (18,145) 8,597,712
Securities of states and
municipalities 13,198,500 121,509 (26,250) 13,293,759
- ----------------------------------------------------------------------------------------------------
$31,821,755 $ 142,089 $ (60,233) $31,903,611
====================================================================================================
</TABLE>
The amortized cost and market value of investment securities classified as
held to maturity at December 31, 1996, by contractual maturity, follows:
<TABLE>
<CAPTION>
Amortized Market
cost value
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Within one year $23,385,411 $23,362,560
Between one and five years 10,980,665 10,929,054
Between five and ten years 1,599,000 1,655,867
After ten years 289,000 289,000
- ---------------------------------------------------------------------------------------
$36,254,076 $36,236,481
=======================================================================================
</TABLE>
(3) MORTGAGE-BACKED SECURITIES
The amortized cost and market value of mortgage-backed securities
classified as available for sale at December 31, 1996 and 1995 follows:
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GNMA $ 436,399 $ 13,501 $ -- $ 449,900
FNMA 1,455,069 4,363 (10,800) 1,448,632
- ----------------------------------------------------------------------------------------------------
$1,891,468 $ 17,864 $ (10,800) $1,898,532
====================================================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
-----------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GNMA $ 498,912 $ 17,830 $ -- $ 516,742
FNMA 1,670,495 20,190 (288) 1,690,397
- ----------------------------------------------------------------------------------------------------
$2,169,407 $ 38,020 $ (288) $2,207,139
====================================================================================================
</TABLE>
25
<PAGE> 28
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
(3) MORTGAGE-BACKED SECURITIES (CONTINUED)
Gross realized gains, gross realized losses, and gross proceeds from sales
of mortgage-backed securities for the year ended December 31, 1995 follows:
<TABLE>
<S> <C>
Gross realized gains $ 57,364
Gross realized losses (11,445)
- --------------------------------------------------------------------------
Net realized gain $ 45,919
==========================================================================
Gross proceeds $2,409,229
==========================================================================
</TABLE>
There were no sales of mortgage-backed securities during the years ended
December 31, 1996 or 1994.
The sale of mortgage-backed securities during the year ended December 31,
1995 consisted of mortgage-backed securities classified as held to maturity and
were in effect maturities as the sale of these mortgage-backed securities
occurred only after a substantial portion of the original principal outstanding
had been collected.
The amortized cost and market value of mortgage-backed securities
classified as available for sale at December 31, 1996, by contractual maturity,
are shown below. Expected maturities will differ from contractual maturities due
to scheduled repayments and because borrowers may have the right to prepay
obligations with or without prepayment penalties. The following table does not
take into consideration the effects of scheduled repayments or the effects of
possible prepayments:
<TABLE>
<CAPTION>
Amortized Market
cost value
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Between one and five years $1,455,069 $1,448,632
After ten years 436,399 449,900
- ---------------------------------------------------------------------------------------
$1,891,468 $1,898,532
=======================================================================================
</TABLE>
The amortized cost and market value of mortgage-backed securities
classified as held to maturity at December 31, 1996 and 1995 follows:
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GNMA $1,334,857 $ 42,077 $ -- $1,376,934
FNMA 124,545 4,201 (1,063) 127,683
FHLMC 4,199,918 15,763 (5,827) 4,209,854
Collateralized mortgage obligations 8,338,984 7,509 (64,977) 8,281,516
- ----------------------------------------------------------------------------------------------------
$13,998,304 $ 69,550 $ (71,867) $13,995,987
====================================================================================================
</TABLE>
26
<PAGE> 29
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
(3) MORTGAGE-BACKED SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
December 31, 1995
-----------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GNMA $1,514,450 $ 49,175 $ -- $1,563,625
FNMA 153,343 5,300 -- 158,643
FHLMC 5,326,161 63,628 -- 5,389,789
Collateralized mortgage obligations 6,211,708 29,309 (21,367) 6,219,650
- ----------------------------------------------------------------------------------------------------
$13,205,662 $ 147,412 $ (21,367) $13,331,707
====================================================================================================
</TABLE>
The amortized cost and market value of mortgage-backed securities
classified as held to maturity at December 31, 1996, by contractual maturity,
are shown below. Expected maturities will differ from contractual maturities due
to scheduled repayments and because borrowers may have the right to prepay
obligations with or without prepayment penalties. The following table does not
take into consideration the effects of scheduled repayments or the effects of
possible prepayments:
<TABLE>
<CAPTION>
Amortized Market
cost value
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Within one year $ -- $ --
Between one and five years 5,065,332 5,077,275
Between five and ten years 3,519,166 3,483,323
After ten years 5,413,806 5,435,389
- ---------------------------------------------------------------------------------------
$13,998,304 $13,995,987
=======================================================================================
</TABLE>
Collateralized mortgage obligations at December 31, 1996 and 1995 were
collateralized by mortgage-backed securities issued by the Federal National
Mortgage Association or the Federal Home Loan Mortgage Corporation.
27
<PAGE> 30
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
(4) LOANS RECEIVABLE, NET
A comparative summary of loans receivable follows:
<TABLE>
<CAPTION>
1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Loans secured by real estate:
Residential:
1-4 family $44,958,078 $47,200,677
Multifamily 510,468 600,141
- ---------------------------------------------------------------------------------------
Total residential 45,468,546 47,800,818
Agriculture and land 884,915 928,001
Commercial 3,043,413 2,869,803
- ---------------------------------------------------------------------------------------
Total loans secured by real estate 49,396,874 51,598,622
- ---------------------------------------------------------------------------------------
Consumer loans:
Automobile loans 1,641,439 1,712,752
Home improvement 1,333,817 1,348,307
Credit cards 982,005 939,105
Loans secured by deposits 513,393 440,367
Other 1,474,156 1,927,939
- ---------------------------------------------------------------------------------------
Total consumer loans 5,944,810 6,368,470
- ---------------------------------------------------------------------------------------
55,341,684 57,967,092
- ---------------------------------------------------------------------------------------
Less:
Loans in process 94,770 532,810
Unearned discount, net 7,567 12,944
Deferred loan fees 13,075 10,615
Allowance for losses 384,141 389,714
- ---------------------------------------------------------------------------------------
499,553 946,083
- ---------------------------------------------------------------------------------------
$54,842,131 $57,021,009
=======================================================================================
</TABLE>
The weighted average interest rate on loans was 8.65% and 8.76% at December
31, 1996 and 1995, respectively.
At December 31, 1996, 1995, and 1994, the Company was servicing loans for
others with aggregate unpaid principal balances of approximately $87,000,
$1,221,000, and $1,727,000, respectively.
A summary of activity in the allowance for losses for the years ended
December 31, 1996, 1995, and 1994 follows:
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ 389,714 $ 245,725 $ 207,005
Provision charged to expense 32,885 161,319 69,309
Charge-offs (42,073) (17,380) (30,714)
Recoveries 3,615 50 125
- -------------------------------------------------------------------------------------------------------------
Balance, end of year $ 384,141 $ 389,714 $ 245,725
=============================================================================================================
</TABLE>
28
<PAGE> 31
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
(4) LOANS RECEIVABLE, NET (CONTINUED)
A summary of loans receivable contractually in arrears three months or more
is as follows:
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C>
Residential real estate loans $ 11,003 $ 55,982
Commercial real estate loans 13,647 49,404
Consumer loans 54,433 53,818
- --------------------------------------------------------------------------------------
$ 79,083 $159,204
=======================================================================================
Percent of loans receivable .14% .28%
=======================================================================================
Number of loans 29 20
=======================================================================================
</TABLE>
A summary of loans on which interest is not being accrued and impaired
loans at December 31, 1996 and 1995 follows:
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C>
Nonaccrual loans $ 13,647 $ 41,945
Impaired loans continuing to accrue interest -- --
- --------------------------------------------------------------------------------------
Total impaired loans $ 13,647 $ 41,945
=======================================================================================
</TABLE>
The allowance for losses on impaired loans was $8,389 at December 31, 1996
and 1995. The average balance of impaired loans during the years ended December
31, 1996 and 1995 was $37,229 and $175,336, respectively.
A summary of interest income on nonaccrual and other impaired loans for the
years ended December 31, 1996 and 1995 follows:
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C>
Income recognized:
Nonaccrual loans $ -- $ 6,133
Impaired loans continuing to accrue interest -- --
- --------------------------------------------------------------------------------------
$ -- $ 6,133
=======================================================================================
Interest income if interest had accrued:
Nonaccrual loans $ 2,885 $ 15,847
Impaired loans continuing to accrue interest -- --
- --------------------------------------------------------------------------------------
$ 2,885 $ 15,847
=======================================================================================
</TABLE>
(5) ACCRUED INTEREST RECEIVABLE
A comparative summary of accrued interest receivable follows:
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C>
Loans receivable $385,378 $213,157
Mortgage-backed securities 75,379 74,919
Investment securities 385,744 286,800
Interest-bearing deposits 17,191 61,716
- --------------------------------------------------------------------------------------
$863,692 $636,592
======================================================================================
</TABLE>
29
<PAGE> 32
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
(6) REAL ESTATE ACQUIRED BY FORECLOSURE, NET
A comparative summary of real estate acquired by foreclosure is as follows:
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Foreclosed real estate $ 116,747 $ 26,434
Real estate in judgment -- 182,814
- --------------------------------------------------------------------------------------------------
$ 116,747 $ 209,248
==================================================================================================
</TABLE>
A summary of activity in the allowance for losses of real estate acquired
by foreclosure follows:
<TABLE>
<CAPTION>
1995
- -------------------------------------------------------------------------------
<S> <C>
Balance, beginning of year $ 96,888
Provision charged to expense --
Charge-offs (96,888)
Recoveries --
- -------------------------------------------------------------------------------
Balance, end of year $ --
===============================================================================
</TABLE>
(7) OFFICE PROPERTIES AND EQUIPMENT, NET
A comparative summary of office properties and equipment follows:
<TABLE>
<CAPTION>
1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 190,434 $ 190,434
Office buildings and improvements 2,329,665 2,326,913
Furniture, fixtures and equipment 1,195,725 968,918
- ---------------------------------------------------------------------------------------
3,715,824 3,486,265
Less accumulated depreciation 1,766,289 1,642,979
- ---------------------------------------------------------------------------------------
$1,949,535 $1,843,286
=======================================================================================
</TABLE>
Depreciation expense for the years ended December 31, 1996, 1995, and 1994
amounted to $123,311, $118,168, and $128,605, respectively.
30
<PAGE> 33
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
(8) DEPOSITS
A comparative summary of deposits follows:
<TABLE>
<CAPTION>
1996 1995
---------------------- ----------------------
Stated Percent Percent
rate Amount to total Amount to total
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Demand deposits:
NOW accounts 0-2.40% $ 9,249,657 9.1% $ 8,928,957 8.4%
Money market demand 0-3.90 16,684,162 16.3 16,655,540 15.6
Passbook 2.50-2.75 10,141,837 9.9 10,469,368 9.8
- ----------------------------------------------------------------------------------------------
36,075,656 35.3 36,053,865 33.8
- ----------------------------------------------------------------------------------------------
Certificates of deposit:
Less than 3.00 -- -- -- --
3.00-4.99 15,528,015 15.2 28,005,074 26.2
5.00-6.99 50,580,964 49.5 40,232,644 37.7
7.00-8.99 62,215 -- 2,426,266 2.3
- ----------------------------------------------------------------------------------------------
66,171,194 64.7 70,663,984 66.2
- ----------------------------------------------------------------------------------------------
$102,246,850 100.0% $106,717,849 100.0%
=============================================================================================
</TABLE>
The weighted average interest rate on deposits was 4.36% and 4.36% at
December 31, 1996 and 1995, respectively.
A summary of the maturities of certificates of deposit at December 31, 1996
and 1995 follows:
<TABLE>
<CAPTION>
1996 1995
----------------------- -----------------------
Amount Percent Amount Percent
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Within one year $38,673,567 58.4% $46,427,751 65.7%
Second year 20,889,977 31.6 13,190,439 18.7
Third year 6,566,505 9.9 10,389,828 14.7
Fourth year 41,145 .1 655,966 .9
- --------------------------------------------------------------------------------------------
$66,171,194 100.0% $70,663,984 100.0%
============================================================================================
</TABLE>
Interest expense on deposits, by type, for the years ended December 31,
1996, 1995, and 1994 is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Passbook $ 367,827 $ 295,348 $ 338,938
NOW accounts 174,069 226,206 227,073
Money market demand 603,283 819,795 1,088,818
Certificates of deposit 3,412,182 3,938,186 3,434,466
- ---------------------------------------------------------------------------------------
$4,557,361 $5,279,535 $5,089,295
=======================================================================================
</TABLE>
Certificates of deposit of $100,000 or more totaled $7,129,894 and
$5,844,512 at December 31, 1996 and 1995, respectively. Investment securities
and mortgage-backed securities with a carrying value of approximately $9.4
million and $8.3 million at December 31, 1996 and 1995, respectively, were
pledged to secure certain certificates of deposit in excess of insurance of
accounts limitations.
31
<PAGE> 34
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
(8) DEPOSITS (CONTINUED)
A corporation affiliated with the Chairman of the Board of the Company had
savings deposits of approximately $5.0 million and $4.3 million with the Company
at December 31, 1996 and 1995, respectively.
(9) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The agreements totaled $11,340,000 and $15,000,000 at December 31, 1996 and
1995, respectively. The agreements are treated as financings, and the
obligations to repurchase securities sold are reflected as a liability. The
agreements mature within one year. All of the agreements were to repurchase
identical securities. The investment securities and mortgage-backed securities
underlying the agreements were delivered to a designated safekeeping agent.
These investment securities and mortgage-backed securities had an amortized cost
and market value of $12,594,006 and $12,497,411, respectively, at December 31,
1996 and $16,567,655 and $16,612,086, respectively, at December 31, 1995.
The agreements averaged approximately $15,057,000 and $3,750,000 during
1996 and 1995, respectively. There were no such agreements in 1994. The maximum
amount outstanding at any month-end during 1996 and 1995 was $18,340,000 and
$15,000,000, respectively. The weighted average interest rate on the agreements
was 4.93% and 5.10% at December 31, 1996 and 1995, respectively. All of the
agreements were with a corporation affiliated with the Chairman of the Board of
the Company.
(10) INCOME TAXES
The composition of income tax expense for the years ended December 31,
1996, 1995, and 1994 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 220,436 $ 325,477 $ 272,989
State (11,531) 8,500 19,249
Deferred (100,189) (34,977) (7,496)
- --------------------------------------------------------------------------------------------------------------
$ 108,716 $ 299,000 $ 284,742
==============================================================================================================
</TABLE>
The reasons for the difference between expected federal income tax expense
computed at the federal statutory rate of 34% and the actual amount are as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------------------------- --------------------------- ---------------------------
Amount Percent Amount Percent Amount Percent
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Computed "expected" income tax
expense $ 273,312 34.0% $ 441,966 34.0% $ 434,447 34.0%
Items affecting federal income
tax rate:
State income taxes, net of
federal benefit (7,610) (1.0) 5,610 .4 12,704 1.0
Tax-exempt interest (155,157) (19.3) (150,148) (11.5) (152,500) (11.9)
Other (1,829) (.2) 1,572 .1 (9,909) (.8)
- ---------------------------------------------------------------------------------------------------------------------------------
$ 108,716 13.5% $ 299,000 23.0% $ 284,742 22.3%
=================================================================================================================================
</TABLE>
32
<PAGE> 35
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
(10) INCOME TAXES (CONTINUED)
The components of deferred tax assets and deferred tax liabilities at
December 31, 1996 and 1995 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
General loan loss allowance $ 148,816 $ 147,725
Deferred compensation 80,317 --
Available-for-sale securities market valuation 8,886 --
Other, net 7,996 4,953
- -------------------------------------------------------------------------------
Total deferred tax assets 246,015 152,678
- -------------------------------------------------------------------------------
Deferred tax liabilities:
Available-for-sale securities market valuation -- (18,603)
Excess of tax bad debt reserves over base year (129,355) (154,897)
Tax depreciation in excess of that recorded for book
purposes (66,875) (57,131)
FHLB stock dividends (25,993) (25,933)
- -------------------------------------------------------------------------------
Total deferred tax liabilities (222,223) (256,564)
- -------------------------------------------------------------------------------
Net deferred tax asset (liability) $ 23,792 $(103,886)
===============================================================================
</TABLE>
If certain conditions were met, the Bank, in determining taxable income,
was allowed a special bad debt deduction based on specified experience formulas
or on a percentage of taxable income before such deduction. The Bank used the
percentage of taxable income method in 1995 and 1994 since this method resulted
in the maximum bad debt deduction. The bad debt deduction under the percentage
method was limited to 8% of taxable income.
The special bad deduction accorded thrift institutions is covered under
Section 593 of the Internal Revenue Code. On August 20, 1996 the Small Business
Job Protection Act of 1996 (the Act) was signed into law. This Act included the
repeal of Section 593 effective for tax years beginning after December 31, 1995.
The repeal of the thrift reserve method generally requires thrift institutions
to recapture into income the portion of bad debt reserves that exceed the base
year reserve. The recapture will generally be taken into income ratably over six
tax years. However, if the Company meets a residential loan requirement for the
tax years beginning in 1996 and 1997, recapture of the reserve can be deferred
until the tax year beginning in 1998. At December 31, 1996, the Company had bad
debts deducted for tax purposes in excess of the base year reserve of
approximately $334,000. The Company has recognized a deferred income tax
liability for this amount.
Certain events covered by IRC Section 593(e), which was not repealed, will
trigger a recapture of the base year reserve. The base year reserve of thrift
institutions would be recaptured if a thrift ceases to quality as a bank for
federal income tax purposes. The base year reserves of thrift institutions also
remain subject to income tax penalty provisions which, in general, require
recapture upon certain stock redemptions of, and excess distributions to,
stockholders. At December 31, 1996, retained earnings included approximately
$2.1 million of base year reserves for which no deferred federal income tax
liability has been recognized.
(11) REGULATORY MATTERS
The Company and its subsidiary banks are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory -- and possibly
additional discretionary -- actions by regulators that, if undertaken, could
have a direct material effect on the Company's consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and its subsidiary banks must meet
specific capital guidelines that involve quantitative measures of the Company
and its subsidiary banks' assets, liabilities, and certain off-balance-sheet
items as calculated under
33
<PAGE> 36
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
(11) REGULATORY MATTERS (CONTINUED)
regulatory accounting practices. The Company and its subsidiary banks' capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulations to ensure capital adequacy
require the Company and its subsidiary banks to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1996, the Company and the subsidiary banks meet all capital adequacy
requirements to which they are subject.
As of December 31, 1995, the most recent notification from regulatory
agencies categorized the bank as well capitalized under the regulatory framework
for prompt correction action. To be categorized as well capitalized, banks must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
of 10%, 6%, and 5%, respectively. There are no conditions or events since that
notification that management believes have changed the Bank's category.
The Company and subsidiary banks actual and required capital amounts and
ratios as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Capital
Actual requirements
--------------- ---------------
(Dollars in thousands) Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total capital
(to risk-weighted assets):
Company $31,825 59.9% $ 4,252 8.00%
Chester National Bank 23,011 47.5 3,879 8.00
Chester National Bank of Missouri 3,083 50.9 485 8.00
Tier I capital
(to risk-weighted assets):
Company $31,441 59.2% $ 2,126 4.00%
Chester National Bank 22,684 46.8 1,940 4.00
Chester National Bank of Missouri 3,026 50.0 242 4.00
Tier I capital
(to average assets):
Company $31,441 21.5% $ 4,397 3.00%
Chester National Bank 22,684 18.2 3,739 3.00
Chester National Bank of Missouri 3,026 25.4 357 3.00
</TABLE>
(12) PENSION PLAN
Substantially all employees are included in a trusteed defined benefit
pension plan. The benefits contemplated by the plan are funded through payments
to the Financial Institutions Retirement Fund, which operates as an
industry-wide plan and does not report relative plan assets and actuarial
liabilities of the individual participating associations. The cost of funding is
charged to current operations. There is no unfunded liability for past service.
Expense for the years ended December 31, 1996, 1995, and 1994 was $38,726,
$83,840, and $71,000, respectively.
(13) 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
34
<PAGE> 37
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
(13) EMPLOYEE STOCK OWNERSHIP PLAN (CONTINUED)
repaid with level principal payments over 15 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
unallocated ESOP shares are recorded as a reduction of debt. Compensation
expense related to the ESOP was $34,192 for the year ended December 31, 1996.
The ESOP shares as of December 31, 1996 are as follows:
<TABLE>
<S> <C>
Allocated shares $ --
Committed to be released shares 2,910
Unreleased shares 171,660
- -------------------------------------------------------------------------
Total ESOP shares $ 174,570
=========================================================================
Fair value of unreleased shares $2,253,038
=========================================================================
</TABLE>
(14) DIRECTOR EMERITUS RETIREMENT PLAN
On January 18, 1996, the Company adopted a retirement plan for directors
who reach director emeritus status. Eligibility for director emeritus status is
achieved when a director reaches age 81 or 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 Company or any predecessor institution that was previously merged with the
Company. Vesting for past service as a director occurred 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 $181,481 as of December 31, 1996, and is
included in other assets in the consolidated balance sheet. Expense related to
the plan was $207,324 for the year ended December 31, 1996.
(15) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and financial
guarantees.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
financial guarantees written is represented by the contractual amount of these
instruments. The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since certain of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained if deemed necessary by the Company upon extension of credit is based on
management's credit evaluation of the counterparty.
At December 31, 1996, the Company had outstanding commitments to originate
residential loans of approximately $419,350, $246,600 of which were at fixed
rates. In addition, the Company had commitments to fund outstanding credit lines
of approximately $176,000 at December 31, 1996. Commitments to extend credit may
involve elements of interest
35
<PAGE> 38
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
(15) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (CONTINUED)
rate risk in excess of the amount recognized in the balance sheets. Interest
rate risk on commitments to extend credit results from the possibility that
interest rates may have moved unfavorably from the position of the Company since
the time the commitment was made.
(16) LITIGATION
The Company is involved in various litigation arising in the ordinary
course of business. In the opinion of management, at the present time,
disposition of the suits and claims will not have a material effect on the
financial position of the Company.
(17) LIQUIDATION ACCOUNT
At the time of Conversion, the Bank established a liquidation account for
the benefit of eligible savings account holders who continue to maintain their
savings accounts with the Bank after conversion. In the event of a complete
liquidation of the Bank (and only in such event), eligible savings account
holders who continue to maintain their accounts with the Bank shall be entitled
to receive a distribution from the liquidation account after payment to all
creditors but before any liquidation distribution with respect to common stock.
The initial liquidation account was established at approximately $11.9 million.
This account will be proportionately reduced for any subsequent reduction in the
eligible holders' deposit accounts. The creation and maintenance of the
liquidation account will not restrict the use or application of any of the
capital accounts of the Company, except that the Company may not declare or pay
a cash dividend on, or repurchase any of, its capital stock, if the effect of
such dividend or repurchase would be to cause the Company's net worth to be
reduced below the aggregate amount then required for the liquidation account, or
the amount required by federal or state law.
(18) FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's interest-earning assets and
interest-bearing liabilities at December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
------------------------- -------------------------
Carrying Estimated Carrying Estimated
value fair value value fair value
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest-earning assets:
Cash and cash equivalents $22,117,279 $22,117,279 $10,666,127 $10,666,127
Certificates of deposit 888,265 888,265 9,761,774 9,761,774
Investment securities 47,729,563 47,711,968 38,345,945 38,427,801
Mortgage-backed securities 15,896,836 15,894,519 15,412,801 15,538,846
Loans receivable 54,842,131 55,420,000 57,021,009 57,982,083
Stock in Federal Home Loan Bank 622,000 622,000 604,300 604,300
Stock in Federal Reserve Bank 411,000 411,000 -- --
- ------------------------------------------------------------------------------------------
$142,507,074 $143,065,031 $131,811,956 $132,980,931
=======================================================================================
Interest-bearing liabilities:
Deposits:
Checking, money market demand,
and passbooks $36,075,656 $36,075,656 $36,053,865 $36,053,865
Certificates of deposit 66,171,194 66,132,000 70,663,984 70,525,081
Securities sold under
agreements to repurchase 11,340,000 11,340,000 15,000,000 15,000,000
- ------------------------------------------------------------------------------------------
$113,586,850 $113,547,656 $121,717,849 $121,578,946
=======================================================================================
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument listed above:
Cash and Cash Equivalents
Cash and cash equivalents consist of cash, interest-bearing deposits with
maturities of three months or less, and federal funds sold. The carrying value
is considered a reasonable estimate of fair value of these financial instruments
due to their short-term nature.
36
<PAGE> 39
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
(18) FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
Certificates of Deposit
The carrying value is considered a reasonable estimate of fair value of the
financial instrument due to original maturities not exceeding one year.
Investment and Mortgage-Backed Securities
Fair values are based on quoted market prices or dealer quotes.
Loans Receivable
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type, such as residential real estate,
commercial real estate, and consumer loans. Each loan category is further
segmented into fixed and adjustable rate interest terms and by performing and
nonperforming categories.
The fair value of loans is calculated by discounting scheduled cash flows
through the estimated maturity using estimated market discount rates that
reflect the credit and interest rate risk inherent in the loan. The estimate of
maturity is based on the Company's historical experience, with repayments for
each loan classification modified, as required, by an estimate of the effect of
current economic and lending conditions.
Stock in Federal Home Loan Bank and Federal Reserve Bank
Stock in Federal Home Loan Bank and stock in Federal Reserve Bank are
valued at cost, which represents redemption value and approximates fair value.
Deposits
The fair value of deposits with no stated maturity, such as checking, money
market demand, and passbook, is equal to the amount payable on demand at
December 31, 1996.
The fair value of certificates of deposit, all of which have stated
maturities, is based on the discounted value of contractual cash flows. The
discount rate is estimated using the rates currently offered for deposits of
similar remaining maturities.
Securities Sold Under Agreements to Repurchase
The carrying value is considered a reasonable estimate of fair value of
this financial instrument due to original maturities not exceeding one year.
(19) RECENT REGULATORY DEVELOPMENTS
On September 30, 1996, the Deposit Insurance Funds Act of 1996 (DIFA) was
signed into law. DIFA authorized the FDIC to impose a one-time special
assessment on SAIF-assessable deposits of depository institutions. This special
assessment, which was based on SAIF-assessable deposits at March 31, 1995, was
intended to recapitalize the SAIF. The one-time special assessment for the
Company totaled approximately $812,000.
37
<PAGE> 40
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
(20) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data for the year ended December 31, 1996 is
as follows:
<TABLE>
<CAPTION>
Quarter ended
--------------------------------------------------------
(thousands of dollars, March 31, June 30, September 30, December 31,
except per share data) 1996 1996 1996 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total interest income $ 2,280 $ 2,264 $ 2,342 $ 2,421
Total interest expense 1,335 1,304 1,367 1,294
- ----------------------------------------------------------------------------------------------
Net interest income 945 960 975 1,127
Provision for losses on loans 7 8 3 15
- ----------------------------------------------------------------------------------------------
Net interest income after
provision for losses on loans 938 952 972 1,112
Noninterest income (4) 34 54 84
Noninterest expense 613 578 1,498(1) 649
- ----------------------------------------------------------------------------------------------
Income (loss) before income tax
expense (benefit) 321 408 (472) 547
Income tax expense (benefit) 77 105 (238) 165
- ----------------------------------------------------------------------------------------------
Net income (loss) $ 244 $ 303 $ (234) $ 382
=======================================================================================
Earnings per share $ N/A $ N/A $ N/A $ .19
=======================================================================================
(1) Includes SAIF special assessment of $812,000.
</TABLE>
Selected quarterly financial data for the year ended December 31, 1995 is
as follows:
<TABLE>
<CAPTION>
Quarter ended
--------------------------------------------------------
(thousands of dollars, March 31, June 30, September 30, December 31,
except per share data) 1995 1995 1995 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total interest income $ 2,244 $ 2,264 $ 2,271 $ 2,256
Total interest expense 1,329 1,365 1,409 1,371
- ----------------------------------------------------------------------------------------------
Net interest income 915 899 862 885
Provision for losses on loans (2) 4 4 155
- ----------------------------------------------------------------------------------------------
Net interest income after
provision for losses on loans 917 895 858 730
Noninterest income 78 86 107 (33)
Noninterest expense 572 570 606 590
- ----------------------------------------------------------------------------------------------
Income before income tax expense 423 411 359 107
Income tax expense 109 102 86 2
- ----------------------------------------------------------------------------------------------
Net income $ 314 $ 309 $ 273 $ 105
=======================================================================================
Earnings per share $ N/A $ N/A $ N/A $ N/A
=======================================================================================
</TABLE>
38
<PAGE> 41
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
(21) PARENT COMPANY FINANCIAL INFORMATION
The following are a condensed balance sheet as of December 31, 1996 and a
condensed statement of income and cash flows for the period ended December 31,
1996 for Chester Bancorp, Inc. (parent company only):
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
(in thousands) 1996
- -------------------------------------------------------------------------------
<S> <C>
Assets:
Cash $ 265
Investment securities 5,488
Investment in subsidiaries 25,635
- -------------------------------------------------------------------------------
$ 31,388
===============================================================================
Liabilities and stockholders' equity:
Other liabilities 22
Stockholders' equity 31,366
- -------------------------------------------------------------------------------
$ 31,388
===============================================================================
</TABLE>
CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
(in thousands) 1996
- -------------------------------------------------------------------------------
<S> <C>
Interest income $ 66
Interest expense --
- -------------------------------------------------------------------------------
66
Operating expenses 12
- -------------------------------------------------------------------------------
Income before income taxes and equity in undistributed
earnings of subsidiaries 54
Income tax expense 22
- -------------------------------------------------------------------------------
Income before equity in undistributed earnings of
subsidiaries 32
Equity in undistributed earnings of subsidiaries 663
- -------------------------------------------------------------------------------
Net income $ 695
===============================================================================
</TABLE>
39
<PAGE> 42
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
(21) PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
(in thousands) 1996
- -------------------------------------------------------------------------------
<S> <C>
Operating activities:
Net income $ 695
Equity in undistributed earnings of subsidiaries (663)
Other, net 22
- -------------------------------------------------------------------------------
Net cash provided by operating activities 54
- -------------------------------------------------------------------------------
Investing activities:
Capital contributions to subsidiaries (13,337)
Increase in investment securities (5,488)
- -------------------------------------------------------------------------------
Net cash used in investing activities (18,825)
- -------------------------------------------------------------------------------
Financing activities:
Proceeds from issuance of stock 19,136
Dividends paid (100)
- -------------------------------------------------------------------------------
Net cash provided by financing activities 19,036
- -------------------------------------------------------------------------------
Net change in cash and cash equivalents 265
Cash and cash equivalents at beginning of year --
- -------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 265
===============================================================================
</TABLE>
40
<PAGE> 43
STOCKHOLDER INFORMATION
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
BOARD OF DIRECTORS TRANSFER AGENT
Michael W. Welge, Chairman Registrar and Transfer Company
John R. Beck, M.D. 10 Commerce Drive
Howard A. Boxdorfer Cranford, NJ 07016
Edward K. Collins (800) 368-5948
James C. McDonald
Allen R. Verseman GENERAL INQUIRIES AND REPORTS
Thomas E. Welch, Jr.
Carl H. Welge A copy of the Company's 1996 Annual Report to
the Securities and Exchange Commission, Form
CORPORATE HEADQUARTERS 10-K, may be obtained without charge by written
request of stockholders to:
1112 State Street Michael W. Welge, President
Chester, IL 62233 Chester Bancorp, Inc.
(618) 826-5038 1112 State Street
ANNUAL MEETING Chester, IL 62233
Friday, April 4, 1997 OFFICERS
10:00 A.M. Michael W. Welge
American Legion Hall President and Chief Financial Officer
500 E. Opdyke St.
Chester, IL 62233 Edward K. Collins
STOCK LISTING Secretary and Treasurer
NASDAQ FDIC DISCLAIMER
Symbol: CNBA This Annual Report has not been reviewed, or
confirmed for accuracy or relevance, by the
GENERAL COUNSEL FDIC.
Bryan Cave LLP
One Metropolitan Square
Suite 3600
St. Louis, MO 63102-2750
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
1010 Market Street
St. Louis, MO 63101
</TABLE>
<PAGE> 44
logo
LOGO
1112 State Street - Chester, Illinois 62233 - Telephone (618) 826-5038
<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>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,926
<INT-BEARING-DEPOSITS> 4,192
<FED-FUNDS-SOLD> 16,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 14,407
<INVESTMENTS-CARRYING> 50,252
<INVESTMENTS-MARKET> 0
<LOANS> 54,842
<ALLOWANCE> 0
<TOTAL-ASSETS> 145,843
<DEPOSITS> 102,247
<SHORT-TERM> 11,340
<LIABILITIES-OTHER> 828
<LONG-TERM> 0
0
0
<COMMON> 20,888
<OTHER-SE> 10,540
<TOTAL-LIABILITIES-AND-EQUITY> 145,843
<INTEREST-LOAN> 5,950
<INTEREST-INVEST> 2,550
<INTEREST-OTHER> 807
<INTEREST-TOTAL> 9,307
<INTEREST-DEPOSIT> 4,557
<INTEREST-EXPENSE> 5,300
<INTEREST-INCOME-NET> 4,007
<LOAN-LOSSES> 33
<SECURITIES-GAINS> 42
<EXPENSE-OTHER> 3,338
<INCOME-PRETAX> 804
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 695
<EPS-PRIMARY> .19
<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>
<PAGE> 1
[CHESTER BANCORP, INC. LETTERHEAD]
February 21, 1997
Dear Stockholder:
You are cordially invited to attend the First Annual Meeting of
Stockholders of Chester Bancorp, Inc. to be held at the American Legion Hall
located at 500 E. Opdyke St., Chester, Illinois, on Friday, April 4, 1997, at
10:00 a.m., local time. Effective October 4, 1996, the Corporation became the
holding company for Chester National Bank and Chester National Bank of
Missouri.
The Notice of First Annual Meeting of Stockholders and Proxy Statement
appearing on the following pages describe the formal business to be transacted
at the meeting. During the meeting, we will also report on the operations of
the Corporation. Directors and officers of the Corporation, as well as a
representative of KPMG Peat Marwick LLP, the Corporation's independent
auditors, will be present to respond to appropriate questions of stockholders.
IT IS IMPORTANT THAT YOUR SHARES ARE REPRESENTED AT THIS MEETING, WHETHER
OR NOT YOU ATTEND THE MEETING IN PERSON AND REGARDLESS OF THE NUMBER OF SHARES
YOU OWN. TO MAKE SURE YOUR SHARES ARE REPRESENTED, WE URGE YOU TO COMPLETE AND
MAIL THE ENCLOSED PROXY CARD. IF YOU ATTEND THE MEETING, YOU MAY VOTE IN
PERSON EVEN IF YOU HAVE PREVIOUSLY MAILED A PROXY CARD.
We look forward to seeing you at the meeting.
Sincerely,
Michael W. Welge
------------------------------------
Michael W. Welge
Chairman of the Board, President and
Chief Financial Officer
<PAGE> 2
CHESTER BANCORP, INC.
1112 STATE STREET
CHESTER, ILLINOIS 62233
(618) 826-5038
NOTICE OF FIRST ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON APRIL 4, 1997
NOTICE IS HEREBY GIVEN that the First Annual Meeting of Stockholders of
Chester Bancorp, Inc. ("Corporation") will be held at the American Legion Hall
located at 500 E. Opdyke St., Chester, Illinois, on Friday, April 4, 1997, at
10:00 a.m., local time, for the following purposes:
(1) To elect three directors to serve for three year terms;
(2) To consider and vote upon a proposal to adopt the Chester
Bancorp, Inc. 1997 Stock Option Plan;
(3) To consider and vote upon a proposal to adopt the Chester
Bancorp, Inc. 1997 Management Recognition and Development Plan; and
(4) To consider and act upon such other matters as may properly
come before the meeting or any adjournments thereof.
NOTE: The Board of Directors is not aware of any other business to come
before the meeting.
Any action may be taken on the foregoing proposals at the meeting on the
date specified above or on any date or dates to which, by original or later
adjournment, the meeting may be adjourned. Stockholders of record at the close
of business on February 14, 1997 are entitled to notice of and to vote at the
meeting and any adjournments or postponements thereof.
You are requested to complete and sign the enclosed form of proxy, which
is solicited by the Board of Directors, and to mail it promptly in the enclosed
envelope. The proxy will not be used if you attend the meeting and vote in
person.
BY ORDER OF THE BOARD OF DIRECTORS
EDWARD K. COLLINS
SECRETARY
Chester, Illinois
February 21, 1997
IMPORTANT: THE PROMPT RETURN OF PROXIES WILL SAVE THE CORPORATION THE EXPENSE
OF FURTHER REQUESTS FOR PROXIES IN ORDER TO ENSURE A QUORUM. A SELF-ADDRESSED
ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. NO POSTAGE IS REQUIRED IF MAILED IN
THE UNITED STATES.
<PAGE> 3
PROXY STATEMENT
OF
CHESTER BANCORP, INC.
1112 STATE STREET
CHESTER, ILLINOIS 62233
FIRST ANNUAL MEETING OF STOCKHOLDERS
APRIL 4, 1997
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Chester Bancorp, Inc. ("Corporation"), the
holding company for Chester National Bank and Chester National Bank of Missouri
(together the "Banks"), to be used at the First Annual Meeting of Stockholders
of the Corporation ("Annual Meeting"). The Annual Meeting will be held at the
American Legion Hall located at 500 E. Opdyke St., Chester, Illinois on Friday,
April 4, 1997, at 10:00 a.m., local time. This Proxy Statement and the
enclosed proxy card are being first mailed to stockholders on or about February
21, 1997.
VOTING AND PROXY PROCEDURE
Stockholders of record as of the close of business on February 14, 1997
are entitled to one vote for each share of common stock ("Common Stock") of the
Corporation then held. As of February 14, 1997, the Corporation had 2,182,125
shares of Common Stock issued and outstanding. The presence, in person or by
proxy, of at least a majority of the total number of outstanding shares of
Common Stock entitled to vote is necessary to constitute a quorum at the Annual
Meeting. Abstentions will be counted as shares present and entitled to vote at
the Annual Meeting for purposes of determining the existence of a quorum.
Broker non-votes will not be considered shares present and will not be included
in determining whether a quorum is present.
The Board of Directors solicits proxies so that each stockholder has the
opportunity to vote on the proposals to be considered at the Annual Meeting.
When a proxy card is returned properly signed and dated, the shares represented
thereby will be voted in accordance with the instructions on the proxy card.
Where no instructions are indicated, proxies will be voted FOR the nominees for
directors set forth below, FOR adoption of the Chester Bancorp, Inc. 1997 Stock
Option Plan and FOR adoption of the Chester Bancorp, Inc. 1997 Management
Recognition and Development Plan. If a stockholder attends the Annual Meeting,
he or she may vote by ballot. If a stockholder does not return a signed proxy
card or does not attend the Annual Meeting and vote in person, his or her
shares will not be voted.
Stockholders who execute proxies retain the right to revoke them at any
time. Proxies may be revoked by written notice delivered in person or mailed
to the Secretary of the Corporation or by filing a later proxy prior to a vote
being taken on a particular proposal at the Annual Meeting. Attendance at the
Annual Meeting will not automatically revoke a proxy, but a stockholder in
attendance may request a ballot and vote in person, thereby revoking a prior
granted proxy.
The three directors to be elected at the Annual Meeting will be elected by
a plurality of the votes cast by stockholders present in person or by proxy and
entitled to vote. Stockholders are not permitted to cumulate their votes for
the election of directors. With respect to the election of directors, votes
may be cast for or withheld from each nominee. Votes that are withheld and
broker non-votes will have no effect on the outcome of the election because
directors will be elected by a plurality of votes cast. With respect to the
other proposals to be voted upon, stockholders may vote for a proposal, against
a proposal or may abstain from voting. Adoption of the 1997 Stock Option Plan
and the 1997 Management Recognition and Development Plan will require the
affirmative vote of a majority of the outstanding shares. Thus, abstentions
and broker non-votes will have the same effect as a vote against adoption of
the 1997 Stock Option Plan and the 1997 Management Recognition and Development
Plan.
<PAGE> 4
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Persons and groups who beneficially own in excess of 5% of the
Corporation's Common Stock are required to file certain reports disclosing such
ownership pursuant to the Securities Exchange Act of 1934, as amended
("Exchange Act"). Based on such reports, the following table sets forth, as of
February 14, 1997, certain information as to those persons who were beneficial
owners of more than 5% of the outstanding shares of Common Stock. Management
knows of no persons other than those set forth below who beneficially owned
more than 5% of the outstanding shares of Common Stock at February 14, 1997.
The following table also sets forth, as of February 14, 1997, information as to
the shares of Common Stock beneficially owned by each director, by the named
executive officers of the Corporation, and by all executive officers and
directors of the Corporation as a group.
<TABLE>
<CAPTION>
Number of Shares Percent of Shares
Name Beneficially Owned (1) Outstanding
- ------------------------------------ ---------------------- -----------------
<S> <C> <C>
DIRECTORS AND BENEFICIAL
OWNERS OF MORE THAN 5%
Chester National Bank Employee Stock
Ownership Plan and Trust
1112 State Street
Chester, Illinois 62233 174,570(2) 8.00%
Michael W. Welge 214,348(2)(3) 9.82%
Howard A. Boxdorfer 23,500 1.08%
Thomas E. Welch, Jr. 15,189(2) *
John R. Beck, M.D. 50,000 2.29%
Allen R. Verseman 51,500(4) 2.36%
James C. McDonald 20,150 *
Carl H. Welge 12,500 *
NAMED EXECUTIVE OFFICERS(5)
Edward K. Collins 31,254(2)(6) 1.43%
All Executive Officers and
Directors as a Group (8 persons) 593,011 27.18%
</TABLE>
_______________
* Less than 1 percent of shares outstanding.
(1) In accordance with Rule 13d-3 under the Exchange Act, a person is deemed
to be the beneficial owner, for purposes of this table, of any shares of
Common Stock if he or she has voting or investment power with respect to
such security. The table includes shares owned by spouses, other
immediate family members in trust, shares held in retirement accounts or
funds for the benefit of the named individuals, and other forms of
ownership, over which shares the persons named in the table may possess
voting and/or investment power.
(2) Shares held in accounts under the Corporation's ESOP, as to which the
holders have voting power but not investment power, are included as
follows: Mr. Collins, 129 shares, Mr. Welch, 189 shares and Mr. M. Welge,
48 shares.
(3) Includes 50,000 shares over which Mr. M. Welge has sole voting and
investment power, 164,300 shares over which Mr. M. Welge has shared
investment and voting power and 48 shares held in the ESOP.
(4) Includes 50,000 shares over which Mr. Verseman has sole voting and
investment power and 1,500 shares over which Mr. Verseman has shared
investment and voting power.
(5) Under SEC regulations, the term "named executive officer" is defined to
include the chief executive officer, regardless of compensation level, and
the four most highly compensated executive officers, other than the chief
executive officer, whose total annual salary and bonus for the last
completed fiscal year exceeded $100,000. Edward K. Collins was the
Corporation's only "named executive officer" for the fiscal year ended
December 31, 1996. He is also a director of the Corporation.
(6) Includes 30,000 shares over which Mr. Collins has sole voting and
investment power, 1,125 shares over which Mr. Collins has shared
investment and voting power and 129 shares held in the ESOP.
2
<PAGE> 5
PROPOSAL I -- ELECTION OF DIRECTORS
The Corporation's Board of Directors consists of eight members and is
divided into three classes with three-year staggered terms, with approximately
one-third of the directors elected each year. Three directors will be elected
at the Annual Meeting to serve for a three year period, or until their
respective successors have been elected and qualified. The nominees for
election this year are Thomas E. Welch, Jr., John R. Beck, M.D. and James C.
McDonald. The nominees are current members of the Boards of Directors of the
Corporation and the Banks.
It is intended that the proxies solicited by the Board of Directors will
be voted for the election of the above named nominees. If any nominee is
unable to serve, the shares represented by all valid proxies will be voted for
the election of such substitute as the Board of Directors may recommend or the
Board of Directors may adopt a resolution to amend the Bylaws and reduce the
size of the Board. At this time the Board of Directors knows of no reason why
any nominee might be unavailable to serve.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF MESSRS.
WELCH, BECK AND MCDONALD.
The following table sets forth certain information regarding the nominees
for election at the Annual Meeting, as well as information regarding those
directors continuing in office after the Annual Meeting.
<TABLE>
<CAPTION>
Year First
Elected Term to
Name Age(1) Director(2) Expire(3)
- ----- ------ ----------- ---------
<S> <C> <C> <C>
BOARD NOMINEES
Thomas E. Welch, Jr. 57 1990 2000
John R. Beck, M.D. 62 1989 2000
James C. McDonald 67 1990 2000
DIRECTORS CONTINUING IN OFFICE
Edward K. Collins 52 1996 1998
Allen R. Verseman 62 1992 1998
Carl H. Welge(4) 53 1980 1998
Michael W. Welge(4) 56 1980 1999
Howard A. Boxdorfer 81 1970 1999
</TABLE>
______________
(1) As of December 31, 1996.
(2) Includes prior service on the Board of Directors of Chester National Bank.
(3) Assuming the individual is re-elected.
(4) Michael W. Welge and Carl H. Welge are second cousins.
The present principal occupation and other business experience during the
last five years of each nominee for election and each director continuing in
office is set forth below:
Thomas E. Welch, Jr. has been employed as an officer of Chester National
Bank since 1990 when Heritage Federal was acquired by Chester National Bank.
Mr. Welch is the Senior Vice President and Compliance Officer for Chester
National Bank and manages the Sparta branch.
John R. Beck, M.D. is a self-employed physician. He is a member of the
Hospital staff of Memorial Hospital, Chester, Illinois, and a director of Home
Health Care.
3
<PAGE> 6
James C. McDonald has been employed for 44 years at the U.S. Postal
Service. He is a Trustee of the Presbyterian Church, Sparta, Illinois, and is
a member of the Sparta Building Commission and the Sparta Senior Citizen Board.
Edward K. Collins is Treasurer and Secretary of the Corporation and has
been Executive Vice President and Chief Executive Officer of Chester National
Bank since January 1995. He is responsible for Chester National Bank's
supervisions and performance of operations and lending. Prior to his
employment at Chester National Bank, Mr. Collins was Executive Vice President
and Senior Loan Officer of Union Bank of Illinois from August 1991 to December
1994 and was President, Chief Executive Officer and a Director of First
National Bank & Trust, Syracuse, Nebraska, from August 1988 to August 1991.
Mr. Collins is a member of the Board of Directors of the Chester Chamber of
Commerce.
Allen R. Verseman has been employed for 28 years at Gilster-Mary Lee and
currently serves as Plant Superintendent.
Carl H. Welge has been employed for seven years at Gilster-Mary Lee and
currently serves as Accounts Receivable Supervisor. He is a member of the
Memorial Hospital Board of Directors and a member of the Friends of Chester
Public Library.
Michael W. Welge is Chairman of the Board of Directors, President and
Chief Financial Officer. He has responsibility for various management
functions, including financial management and investment portfolio management,
determination of all employee compensation and employment decisions. Mr. Welge
has been employed for the past 35 years at Gilster-Mary Lee where he currently
serves as its Executive Vice President, Secretary and Treasurer. He has been
active in civic affairs and is a past President of both the Chester Chamber of
Commerce and the Chester School Board. He is a Board member and past Chairman
of the Board of Directors of Millers Mutual Insurance Company of Alton,
Illinois. For the past 16 years Mr. Welge has served as an Alderman of the
City Council of Chester. Mr. Welge has also been the President and a director
of several local corporations and clubs.
Howard A. Boxdorfer has been employed as an officer of Chester National
Bank since 1969 and has been President since 1980. He is a member of the Lions
Club and the Chester Chamber of Commerce.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The Boards of Directors of the Corporation and the Banks conduct their
business through meetings of the Boards and through their committees. During
the fiscal year ended December 31, 1996, the Board of Directors of the
Corporation held 3 meetings in connection with its initial organization and 11
subsequent meetings, the Board of Directors of Chester National Bank held 14
meetings, and the Board of Directors of Chester National Bank of Missouri held
3 meetings. No director of the Corporation or the Banks attended fewer than
75% of the total meetings of the Boards and committees on which such person
served during this period.
Each year an Audit Committee is appointed, and consists of the entire
Board of Directors with the exception of those Directors that are employees of
the Banks. The purpose of this Committee is to review financial data of the
Banks and retain the Banks' independent auditor. During the fiscal year ended
December 31, 1996, the Audit Committee met 12 times.
The Executive Committee consists of Directors M. Welge, Boxdorfer and
Collins, the Secretary and two rotating Directors. The Executive Committee
meets weekly, and the committee has full authority of the Board of Directors in
order to conduct business in a timely manner. The Executive Committee also
functions as the Banks' Loan Committee and Asset Liability Committee. All
actions of the Executive Committee are subsequently ratified by the full Board
of Directors. The Executive Committee met 52 times during the fiscal year
ended December 31, 1996.
4
<PAGE> 7
The Board of Directors of the Corporation acts as a nominating committee
for selecting the nominees for election as directors. During the fiscal year
ended December 31, 1996, the Board of Directors met once in its capacity as
nominating committee to select nominees for election at the Annual Meeting.
DIRECTORS' COMPENSATION
DIRECTORS' COMPENSATION
BOARD AND COMMITTEE FEES. Directors received a fee of $750 per month
during the year ended December 31, 1996, with no additional fees paid for
committee meetings, except for the rotating Directors who serve on the
Executive Committee who receive $50 per meeting attended. Director's fees
totaled $76,200 for the year ended December 31, 1996.
DIRECTOR EMERITUS PLAN. Effective January 18, 1996, the Board of
Directors of Chester National Bank adopted the Director Emeritus Plan to
compensate and reward directors for service to the Bank. The Director Emeritus
Plan was adopted by Chester National Bank of Missouri following its
organization in fiscal 1996. Under the Director Emeritus Plan, a director is
designated a Director Emeritus upon (i) attaining age 81 or (ii) upon
retirement if the director has served as a director for 15 years or more. Upon
designation, a Director Emeritus will receive an annual fee equal to the
product of $500 and the Director Emeritus' years of service as a regular Board
member. The fee is payable for a 10-year period beginning on the later to
occur of (i) the first anniversary of the Director Emeritus' designation or
(ii) the date the Director Emeritus attains age 65. In the event of a Director
Emeritus' death prior to his receipt of all Director Emeritus fees, the Banks
will make a lump sum payment equal to the lesser of the remaining payments due
or three times the Director Emeritus fee to the Director Emeritus' designated
beneficiary. The Director Emeritus Plan has been funded with life insurance
policies. The estimated expense of the Director Emeritus Plan is expected to
be approximately $37,000 for fiscal 1997.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation(1)
-----------------------------------------------
Name and Other Annual
Position Year Salary($) Bonus($) Compensation($)(2)
- -------- ------ --------- -------- ------------------
<S> <C> <C> <C> <C>
Edward K. Collins 1996 $80,000 -- $--
Treasurer and Secretary of the Corporation 1995 $70,000 $7,000 $8,370
and Executive Vice President, Chief Executive
Officer and Director of Chester National Bank
</TABLE>
(1) Compensation information for the fiscal year ended December 31, 1994 has
been omitted as the Corporation was not a public company, nor a subsidiary
thereof, at such time.
(2) Does not include perquisites which, in the aggregate, did not exceed the
lesser of $50,000 or 10% of salary and bonus.
EMPLOYMENT AGREEMENTS
Effective October 4, 1996, the Corporation and the Banks entered into a
three-year employment agreement with Mr. Collins. Under the agreement, the
initial salary level for Mr. Collins will be $80,000, which amount will be paid
by Chester National Bank and may be increased at the discretion of the Board of
Directors or an authorized committee of the Board. On each anniversary of the
commencement date of the agreement, the term of the agreement may be extended
for an additional year. The agreement is terminable by the Employers at any
time or upon the occurrence of certain events specified by federal regulations.
5
<PAGE> 8
The employment agreement provides for severance payments and other
benefits in the event of involuntary termination of employment in connection
with any change in control of the Employers. Severance payments also will be
provided on a similar basis in connection with a voluntary termination of
employment where, subsequent to a change in control, Mr. Collins is assigned
duties inconsistent with his position, duties, responsibilities and status
immediately prior to such change in control. The term "change in control" is
defined in the agreement as having occurred when, among other things, (a) a
person other than the Corporation purchases shares of Common Stock pursuant to
a tender or exchange offer for such shares, (b) any person (as such term is
used in Sections 13(d) and 14(d)(2) of the Exchange Act) is or becomes the
beneficial owner, directly or indirectly, of securities of the Corporation
representing 25% or more of the combined voting power of the Corporation's then
outstanding securities, (c) the membership of the Board of Directors changes as
the result of a contested election, or (d) stockholders of the Corporation
approve a merger, consolidation, sale or disposition of all or substantially
all of the Corporation's assets, or a plan of partial or complete liquidation.
The severance payments from the Employers will equal 2.99 times Mr.
Collins' average annual compensation during the five-year period preceding the
change in control. Such amount will be paid in a lump sum within 10 business
days following the termination of employment. Assuming that a change in
control had occurred at December 31, 1996, Mr. Collins would be entitled to
severance payments of $234,715. Section 280G of the Internal Revenue Code of
1986, as amended ("Code"), states that severance payments that equal or exceed
three times the base compensation of the individual are deemed to be "excess
parachute payments" if they are contingent upon a change in control.
Individuals receiving excess parachute payments are subject to a 20% excise tax
on the amount of such excess payments, and the Employers would not be entitled
to deduct the amount of such excess payments.
The agreement restricts Mr. Collins' right to compete against the
Employers for a period of one year from the date of termination of the
agreement if he voluntarily terminates his employment, except in the event of a
change in control. The Board of Directors of the Corporation or the Banks may,
from time to time, also extend employment agreements to other senior executive
officers.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The entire Board of Directors of the Corporation acts as the Compensation
Committee (the "Committee"). The Committee determines the compensation for Mr.
Collins and the other executive officers of the Corporation. The Committee met
once in 1996.
Notwithstanding anything to the contrary set forth in any of the
Corporation's previous filings under the Securities Act of 1933, as amended, or
the Exchange Act that might incorporate future filings, including this Proxy
Statement, in whole or in part, the following Report of the Compensation
Committee and Performance Graph shall not be incorporated by reference into any
such filings.
REPORT OF THE COMPENSATION COMMITTEE
Under the rules established by the SEC, the Corporation is required to
provide certain data and information in regard to the compensation and benefits
provided to the Corporation's Chief Executive Officer and other executives
officers of the Corporation. The disclosure requirements for the Chief
Executive Officer and other executive officers include the use of tables and a
report explaining the rationale and considerations that led to the fundamental
executive compensation decisions affecting those individuals. Insofar as no
separate compensation is currently payable by the Corporation, the Committee,
acting on behalf of Chester National Bank, has prepared the following report
for inclusion in this proxy statement.
The Committee's duties are to administer policies that govern executive
compensation for the Corporation. The Committee evaluates executive
performances, compensation policies and salaries and makes determinations
concerning the compensation of each named executive officer and other executive
officers. The Committee establishes the compensation levels for the coming
year. The executive compensation policy of the Corporation is designed to
establish an appropriate relationship between executive pay and the
Corporation's annual and long-term performance, long-term growth objectives, and
the Corporation's ability to attract and retain qualified executive officers.
The
6
<PAGE> 9
principles underlying the program are: (i) to attract and retain key executives
who are vital to the long-term success of the Corporation and are of the highest
caliber; (ii) to provide levels of compensation competitive with those offered
throughout the financial industry, and (iii) to motivate executives to
enhance long-term stockholder value by building their ownership in the
Corporation. The Committee also considers a variety of subjective and objective
factors in determining the compensation package for individual executives
including: (i) the performance of the Corporation with emphasis on annual and
long-term performance, (ii) the responsibilities assigned to each executive, and
(iii) the performance by each executive of assigned responsibilities as measured
by the progress of the Corporation during the year. Although the Committee did
not establish executive compensation levels on the basis of whether specific
financial goals had been achieved by the Corporation, the Committee considered
the overall profitability of the Corporation when making their decisions. The
Committee believes that management compensation levels, as a whole,
appropriately reflect the application of the Corporation's executive
compensation policy and the progress of the Corporation. During the year ended
December 31, 1996, the base compensation for Edward K. Collins was $80,000,
which represented a 14% increase from the previous year, and the Committee
believes the increase is appropriate based on the factors noted above.
PERFORMANCE GRAPH
Set forth hereunder is a performance graph comparing (a) the total return
of the Corporation's common stock for the period beginning October 8, 1996 (the
date at which the Corporation's common stock commenced trading on the NASDAQ
National Market) through December 31, 1996, (b) the cumulative total return on
stocks included in the S&P 500 Index over such period, and (c) the cumulative
total return on stock included in the SNL Bank Index over such period. The
cumulative total return on the Corporation's common stock was computed assuming
the reinvestment of cash dividends.
[LINE GRAPH]
<TABLE>
<CAPTION>
PERIOD ENDING
-----------------------------------------
INDEX 10/8/96 10/31/96 11/30/96 12/31/96
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CHESTER BANCORP, INC. 100.00 127.50 136.13 131.74
S&P 500 100.00 100.75 108.29 106.15
SNL BANK INDEX 100.00 104.70 114.74 110.88
</TABLE>
7
<PAGE> 10
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Corporation's executive
officers and directors, and persons who own more than 10% of any registered
class of the Corporation's equity securities, to file reports of ownership and
changes in ownership with the SEC. Executive officers, directors and greater
than 10% stockholders are required by regulation to furnish the Corporation
with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms it has received and
written representations provided to the Corporation by the above referenced
persons, the Corporation believes that all filing requirements applicable to
its reporting officers, directors and greater than 10% stockholders were
properly and timely complied with since the date of completion of the
Corporation's initial stock offering (October 4, 1996).
TRANSACTIONS WITH MANAGEMENT
Current law requires that all loans or extensions of credit to executive
officers and directors must be made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with other persons and does not involve more than the normal risk
of repayment or present other unfavorable features. The Banks are prohibited
from making any new loans or extensions of credit to the Banks' executive
officers and directors at different rates or terms than those offered to the
general public, and has adopted a policy to this effect. The aggregate amount
of loans by the Banks to its executive officers and directors was $347,042 at
December 31, 1996.
PROPOSAL II -- RATIFICATION OF 1997 STOCK OPTION PLAN
The Corporation's Board of Directors adopted the 1997 Stock Option Plan
("Option Plan") on January 14, 1997, subject to approval by the Corporation's
stockholders. THE FOLLOWING DESCRIPTION OF THE OPTION PLAN IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE COMPLETE TEXT OF THE OPTION PLAN WHICH IS ATTACHED
AS EXHIBIT A.
ADMINISTRATION OF THE OPTION PLAN
The Option Plan is administered by a committee of the Board of Directors
("Committee") consisting of not less than two non-employee members of the Board
of Directors. In addition to determining who will be granted options, the
Committee has the authority and discretion to determine when options will be
granted and the number of options to be granted. In making such determination,
the Committee will consider those non-employee directors, officers and
employees who are expected to make significant contributions to the long-term
success of the Corporation and the Banks. With respect to awards to officers
and employees, the Committee also determines which options are intended to
qualify for special treatment under the Code ("Incentive Stock Options") or to
be issued as options which are not intended to so qualify ("Non-Qualified Stock
Options"). The Option Plan provides that all options granted to non-employee
directors are Non-Qualified Stock Options.
The size of awards under the Option Plan is limited as follows: (i) no
officer or employee may receive an award covering in excess of 25 percent, (ii)
no non-employee director may receive in excess of five percent and (iii)
non-employee directors serving as of the effective date of the Option Plan may
not receive in excess of 30 percent in the aggregate, of the number of shares
reserved for issuance under the Option Plan.
The Board of Directors may from time to time amend or terminate the Option
Plan in any respect. An amendment to the Option Plan may be subject to
stockholder approval if such approval is necessary to comply with any tax or
regulatory requirement. No amendment or termination may retroactively impair
the rights of any person with respect to an option.
8
<PAGE> 11
SHARES SUBJECT TO THE OPTION PLAN
The Corporation has reserved an aggregate of 218,212 shares of the
Corporation's Common Stock for issuance pursuant to the exercise of stock
options which may be granted to officers, employees and non-employee directors.
In the event of a merger, consolidation, sale of all or substantially all
of the property of the Corporation, reorganization, recapitalization,
reclassification, stock dividend, stock split, reverse stock split or other
distribution, to the extent permitted by the Corporation, an appropriate and
proportionate adjustment shall be made in (i) the maximum number of shares
available, (ii) the number and kind of shares subject to outstanding options,
if any, and (iii) the price for each share.
OPTION PRICE
The exercise price of Non-Qualified Stock Options and Incentive Stock
Options may not be less than 100% of the fair market value of the shares of
Common Stock of the Corporation on the date of grant. Any Incentive Stock
Option granted to a person owning more than 10% of the Corporation's
outstanding Common Stock must have an exercise price of at least 110% of fair
market value on the date of grant. The maximum aggregate fair market value
(determined as of the date of grant) of the shares to which Incentive Stock
Options held by an individual become exercisable for the first time during any
calendar year may not exceed $100,000.
TERMS OF OPTIONS
In general, the Committee has the discretion to fix the term of each
option granted to an officer or employee under the Option Plan, except that the
maximum term of each option is 10 years, subject to earlier termination as
provided in the Option Plan (five years in the case of Incentive Stock Options
granted to an employee who owns over 10% of the total combined voting power of
all classes of the Corporation's stock). The Option Plan provides that all
awards under the Option Plan will become exercisable no more rapidly than in
equal installments over a five-year period following the date of grant.
However, unvested options will become immediately exercisable in the event of
the option holder's death or disability, or upon a change in control (as
defined in the Option Plan) of the Corporation or the Banks (to the extent
authorized or not prohibited by applicable law or regulations).
Except in limited circumstances, an option may not be transferred other
than by will or by laws of descent and distribution and, during the lifetime of
the option holder, may be exercised only by such holder. If any option expires
or terminates for any reason without having been exercised in full, the
unpurchased shares subject to such option will be available again for purposes
of the Option Plan.
FEDERAL INCOME TAX CONSEQUENCES OF NON-QUALIFIED OPTIONS
An option holder who is granted a Non-Qualified Stock Option under the
Option Plan will not realize any income for Federal income tax purposes on the
grant of an option. An option holder will realize ordinary income for Federal
income tax purposes on the exercise of an option, provided the shares are not
then subject to a substantial risk of forfeiture within the meaning of Section
83 of the Code ("Risk of Forfeiture"), in an amount equal to the excess, if
any, of the fair market value of the shares of Common Stock on the date of
exercise over the exercise price thereof. If the shares are subject to a Risk
of Forfeiture on the date of exercise, the option holder will realize ordinary
income for the year in which the shares cease to be subject to a Risk of
Forfeiture in an amount equal to the excess, if any, of the fair market value
of the shares at the date they cease to be subject to a Risk of Forfeiture over
the exercise price, unless the option holder shall have made a timely election
under Section 83 of the Code to include in his income for the year of exercise
an amount equal to the excess of the fair market value of the shares of Common
Stock on the date of exercise over the exercise price. The amount realized for
tax purposes by an option holder by reason of the exercise of a Non-Qualified
Stock Option granted under the Option Plan is subject to withholding by the
Corporation and the Corporation is entitled to a deduction in an amount equal
to the income so realized by an option holder, provided all necessary
withholding requirements under the Code are met.
Provided that the option holder satisfies certain holding period
requirements provided by the Code, an employee will realize long-term capital
gain or loss, as the case may be, if the shares issued upon exercise of a
Non-
9
<PAGE> 12
Qualified Stock Option are disposed of more than one year after (i) the
shares are transferred to the employee or (ii) if the shares were subject to a
Risk of Forfeiture on the date of exercise and a valid election under Section
83 of the Code shall not have been made, the date as of which the shares cease
to be subject to a Risk of Forfeiture. The amount recognized upon such
disposition will be the difference between the option holder's basis in such
shares and the amount realized upon such disposition. Generally, an option
holder's basis in the shares will be equal to the exercise price plus the
amount of income recognized upon exercise of the option.
FEDERAL INCOME TAX CONSEQUENCES OF INCENTIVE STOCK OPTIONS
An Incentive Stock Option holder who meets the eligibility requirements of
Section 422 of the Code will not realize income for Federal income tax
purposes, and the Corporation will not be entitled to a deduction, on either
the grant or the exercise of an Incentive Stock Option. If the Incentive Stock
Option holder does not dispose of the shares acquired within two years after
the date the Incentive Stock Option was granted to him or within one year after
the transfer of the shares to him, (i) any proceeds realized on a sale of such
shares in excess of the option price will be treated as long-term capital gain
and (ii) the Corporation will not be entitled to any deduction for Federal
income tax purposes with respect to such shares.
If an Incentive Stock Option holder disposes of shares during the two-year
or one-year periods referred to above (a "Disqualifying Disposition"), the
Incentive Stock Option holder will not be entitled to the favorable tax
treatment afforded to incentive stock options under the Code. Instead, the
Incentive Stock Option holder will realize ordinary income for Federal income
tax purposes in the year the Disqualifying Disposition is made, in an amount
equal to the excess, if any, of the fair market value of the shares of Common
Stock on the date of exercise over the exercise price.
An Incentive Stock Option holder generally will recognize long-term
capital gains or loss, as the case may be, if the Disqualifying Disposition is
made more than one year after the shares are transferred to the Incentive Stock
Option holder. The amount of any such gain or loss will be equal to the
difference between the amount realized on the Disqualifying Disposition and the
sum of (x) the exercise price and (y) the ordinary income realized by the
Incentive Stock Option holder as the result of the Disqualifying Disposition.
The Corporation will be allowed in the taxable year of a Disqualifying
Disposition a deduction in the same amount as the ordinary income recognized by
the Incentive Stock Option holder provided all necessary withholding
requirements are met.
Notwithstanding the foregoing, if the Disqualifying Disposition is made in
a transaction with respect to which a loss (if sustained) would be recognized
to the Incentive Stock Option holder, then the amount of ordinary income
required to be recognized upon the Disqualifying Disposition will not exceed
the amount by which the amount realized from the disposition exceeds the
exercise price. Generally, a loss may be recognized if the transaction is not
a "wash" sale, a gift or a sale between certain persons or entities classified
under the Code as "related persons."
ALTERNATIVE MINIMUM TAX
For purposes of computing the alternative minimum tax with respect to
shares acquired pursuant to the exercise of Incentive Stock Options, the
difference between the fair market value of the shares on the date of exercise
over the exercise price will be an item of tax preference in the year of
exercise if the shares are not subject to a Risk of Forfeiture; if the shares
are subject to a Risk of Forfeiture, the amount of the tax preference taken
into account in the year the Risk of Forfeiture ceased will be the excess of
the fair market value of the shares at the date they cease to be subject to a
Risk of Forfeiture over the exercise price. The basis of the shares for
alternative minimum tax purposes, generally, will be an amount equal to the
exercise price, increased by the amount of the tax preference taken into
account in computing the alternative minimum taxable income.
10
<PAGE> 13
NEW PLAN BENEFITS
The following table sets forth information regarding the number of options
anticipated to be granted under the Option Plan as of the effective date of the
Option Plan. Each option award specified below is intended to be granted at
100% of the fair market value of the Corporation's Common Stock on the date of
grant and that each award will become exercisable in equal installments over a
five-year period.
<TABLE>
<CAPTION>
Position with Anticipated Stock
Name the Corporation Option Grant
---- --------------- -----------------
<S> <C> <C>
Edward K. Collins Treasurer and Secretary 43,642
All current executive officers as
a group (3 persons) -- 120,015
All non-employee directors
(4 persons) -- 43,644
All non-executive officers/employees
as a group (12 persons) -- 43,641
</TABLE>
The balance of the options that may be granted under the Option Plan are
expected to be allocated in the future to current and prospective non-employee
directors, subsidiary directors, officers and employees.
ADOPTION OF THE OPTION PLAN
Subject to approval by the Corporation's stockholders, the Board of
Directors adopted the Option Plan to encourage stock ownership by employees and
non-employee directors of the Corporation and its subsidiaries by issuing
options to purchase shares of the Corporation's Common Stock enabling such
directors, officers and employees to acquire or increase their proprietary
interest in the Corporation and thereby encourage them to remain in the employ
or remain directors of the Corporation and its subsidiaries. The Board of
Directors has determined that the Option Plan is desirable, cost effective and
produces incentives which will benefit the Corporation and its stockholders.
Moreover, the Board of Directors believes that the terms of the Option Plan are
consistent with the terms of similar stock compensation programs implemented by
other recently converted financial institutions in the Banks' peer group. THE
OPTION PLAN MUST BE APPROVED BY A MAJORITY OF THE OUTSTANDING SHARES OF COMMON
STOCK OF THE CORPORATION. THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE
ADOPTION OF THE 1997 STOCK OPTION PLAN ATTACHED AS EXHIBIT A.
PROPOSAL III -- RATIFICATION OF THE 1997 MANAGEMENT
RECOGNITION AND DEVELOPMENT PLAN
The Board of Directors of the Corporation adopted a Management Recognition
and Development Plan ("MRDP") on January 14, 1997 for the benefit of officers,
employees and non-employee directors of the Corporation and its subsidiaries
subject to approval by the stockholders of the Corporation. THE FOLLOWING
DESCRIPTION OF THE MRDP IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
COMPLETE TEXT OF THE MRDP WHICH IS ATTACHED AS EXHIBIT B.
The purpose of the MRDP is to encourage and provide an additional
incentive to non-employee directors, officers and employees of the Corporation
and its subsidiaries to increase the value of the Corporation and its Common
Stock by permitting them to acquire a significant equity interest in the
Corporation. The MRDP is also intended to assist the Corporation in attracting
and retaining superior personnel and to encourage them to remain as directors
or employees of the Corporation. All awards under the MRDP are made by a
committee of the Board of Directors consisting of at least two non-employee
directors. The size of awards under the MRDP is limited as follows: (i) no
officer or employee may receive an award covering in excess of 25 percent, (ii)
no non-employee director may receive
11
<PAGE> 14
in excess of five percent and (iii) non-employee directors serving as of the
effective date of the MRDP may not receive in excess of 30 percent in the
aggregate, of the number of shares reserved for issuance under the MRDP.
MRDP awards are made in the form of restricted stock that is subject to
restrictions on transfer of ownership. MRDP awards vest over a five-year
period in equal installments beginning on the first anniversary of the
effective date of the MRDP. If the employee or non-employee director
terminates service for reasons other than death or disability, the employee or
director forfeits all rights to the allocated shares under restriction. If the
employee's or director's termination is caused by death or disability, all
restrictions expire and all shares allocated become unrestricted. MRDP awards
will also become fully vested upon a change in control (as defined in the MRDP)
of the Corporation or the Banks (to the extent authorized or not prohibited by
applicable law or regulations). Compensation expense in the amount of the fair
market value of the Common Stock at the date of the grant to the officer or
director will be recognized during the years in which the shares vest. An
eligible officer or director will be entitled to voting and other stockholder
rights with respect to the shares while restricted; however, the shares, while
restricted, may not be sold, pledged or otherwise disposed of.
A recipient of an award who receives a grant of restricted stock who does
not elect to be taxed at the time of grant will not recognize income upon an
award of shares of Common Stock, and the Corporation will not be entitled to a
deduction until the termination of the restrictions. Upon such termination,
the recipient will recognize ordinary income in an amount equal to the fair
market value of the Common Stock at the time (less any amount paid by the
recipient for such shares) and the Corporation will be entitled to a deduction
in the same amount after satisfying federal income tax withholding
requirements. However, the recipient may elect to recognize ordinary income in
the year the restricted stock is granted in an amount equal to the fair market
value of the shares at that time, determined without regard to the
restrictions. In that event, the Corporation will be entitled to a deduction
in such year and in the same amount. Any gain or loss recognized by the
recipient upon subsequent disposition of the stock will be capital in nature.
The MRDP may utilize authorized but unissued shares of Common Stock from
the Corporation in fulfillment of awards. Any such use of shares by the MRDP
could dilute the holdings of the Corporation's stockholders. The MRDP also may
purchase Common Stock in the open market through a trust established in
connection with the MRDP and funded with contributions from the Corporation.
No more than 87,285 shares may be issued under the MRDP, subject to adjustment
in the event of a stock dividend, stock split, or similar event. The Board of
Directors can terminate the MRDP at any time, and if it does so, any shares not
allocated will revert to the Corporation.
NEW PLAN BENEFITS
The following table sets forth information regarding the number of
restricted shares anticipated to be granted under the MRDP as of the date the
MRDP is approved by stockholders. Each award specified below is intended to
vest in equal installments over a five-year period.
<TABLE>
<CAPTION>
Anticipated Restricted
Position with Stock Grant
Name the Corporation (shares) (value)(1)
---- ----------------------- ------------------------
<S> <C> <C> <C>
Edward K. Collins Treasurer and Secretary 8,728 $114,555
All current executive officers as
a group (3 persons) -- 52,370 $687,356
All non-employee directors
(4 persons) -- 13,966 $183,304
All non-executive officers/employees
as a group (7 persons) -- 16,585 $217,678
</TABLE>
(1) Based on a per share value of $13.125 per share, which was the closing
price of the Corporation's common stock on December 31, 1996.
12
<PAGE> 15
The balance of the shares that may be issued pursuant to the MRDP is
expected to be allocated in the future to current and prospective non-employee
directors, subsidiary directors, officers and employees.
The Board of Directors has determined that the MRDP is desirable and will
produce incentives for management which will benefit the Corporation and its
stockholders. The Board of Directors believes that the MRDP will be a
significant factor in aligning the interests of management with those of
stockholders and that the terms of the MRDP are consistent with the terms of
similar stock compensation programs implemented by other recently converted
financial institutions in the Banks' peer group. THE MRDP MUST BE APPROVED BY
A MAJORITY OF THE OUTSTANDING SHARES OF COMMON STOCK OF THE CORPORATION. THE
BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ADOPTION OF THE MRDP ATTACHED AS
EXHIBIT B.
AUDITORS
The Board of Directors has appointed KPMG Peat Marwick LLP, independent
public accountants, to serve as the Corporation's auditors for the fiscal year
ending December 31, 1997. A representative of KPMG Peat Marwick LLP is
expected to be present at the Annual Meeting to respond to appropriate
questions from stockholders and will have the opportunity to make a statement
if he or she so desires.
OTHER MATTERS
The Board of Directors is not aware of any business to come before the
Annual Meeting other than those matters described above in this Proxy
Statement. However, if any other matters should properly come before the
Annual Meeting, it is intended that proxies in the accompanying form will be
voted in respect thereof in accordance with the judgment of the person or
persons voting the proxies.
MISCELLANEOUS
The cost of solicitation of proxies will be borne by the Corporation. The
Corporation will reimburse brokerage firms and other custodians, nominees and
fiduciaries for reasonable expenses incurred by them in sending proxy materials
to the beneficial owners of the Common Stock. In addition to solicitations by
mail, directors, officers and regular employees of the Corporation may solicit
proxies personally or by telecopier or telephone without additional
compensation.
The Corporation's 1996 Annual Report to Stockholders, including
consolidated financial statements, has been mailed to all stockholders of
record as of the close of business on February 21, 1997. Any stockholder who
has not received a copy of the Annual Report may obtain a copy by writing to
the Corporation. The Annual Report is not to be treated as part of the proxy
solicitation material or having been incorporated herein by reference.
A COPY OF THE CORPORATION'S FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER
31, 1996, AS FILED WITH THE SEC, WILL BE FURNISHED WITHOUT CHARGE TO
STOCKHOLDERS OF RECORD AS OF FEBRUARY 14, 1997 UPON WRITTEN REQUEST TO MICHAEL
W. WELGE, PRESIDENT, CHESTER BANCORP, INC., 1112 STATE STREET, CHESTER,
ILLINOIS 62233.
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<PAGE> 16
STOCKHOLDER PROPOSALS
Proposals of stockholders intended to be presented at the Corporation's
annual meeting to be held in April 1998 must be received by the Corporation no
later than October 21, 1997 to be considered for inclusion in the proxy
solicitation materials and form of proxy relating to such meeting. Any such
proposals shall be subject to the requirements of the proxy solicitation rules
adopted under the Exchange Act.
BY ORDER OF THE BOARD OF DIRECTORS
EDWARD K. COLLINS
SECRETARY
Chester, Illinois
February 21, 1997
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<PAGE> 17
EXHIBIT A
CHESTER BANCORP, INC.
1997 STOCK OPTION PLAN
SECTION 1. PURPOSE. The purposes of the Chester Bancorp, Inc. 1997 Stock
Option Plan are to promote the interests of the Company, its affiliates, and
its stockholders by (i) attracting and retaining exceptional executive
personnel and other key employees and directors of the Company and its
affiliates; (ii) motivating such employees and Eligible Directors by means of
performance-related incentives to achieve longer-range performance goals; and
(iii) enabling such employees and Eligible Directors to participate in the
long-term growth and financial success of the Company.
SECTION 2. DEFINITIONS. As used in the Plan, the following terms shall have
the meanings set forth below:
"Affiliate" shall mean the Banks or any present or future corporation that
would be a "parent" or "subsidiary" corporation as defined in Sections 424(f)
and (g), respectively, of the Code.
"Award" shall mean any grant of Options or Director Options.
"Award Agreement" shall mean any written agreement, contract, or other
instrument or document evidencing any Award, which may, but need not, be
executed or acknowledged by a Participant or Eligible Director.
"Banks" shall mean Chester National Bank and Chester National Bank of
Missouri.
"Board" shall mean the Board of Directors of the Company.
"Change in Control" shall mean an event deemed to occur if and when (a) an
offeror other than the Company purchases shares of the common stock of the
Company or the Bank pursuant to a tender or exchange offer for such shares, (b)
any person (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange
Act) is or becomes the beneficial owner, directly or indirectly, of securities
of the Company or the Bank representing twenty-five percent (25%) or more of
the combined voting power of the Company's or the Bank's then outstanding
securities, (c) the membership of the board of directors of the Company or the
Bank changes as the result of a contested election, such that individuals who
were directors at the beginning of any twenty-four month period (whether
commencing before or after the date of adoption of this Plan) do not constitute
a majority of the Board at the end of such period, or (d) shareholders of the
Company or the Bank approve a merger, consolidation, sale or disposition of all
or substantially all of the Company's or the Bank's assets, or a plan of
partial or complete liquidation. If any of the events enumerated in clauses
(a) - (d) occur, the Board shall determine the effective date of the change in
control resulting therefrom, for purposes of the Plan.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Committee" shall mean a committee of the Board consisting of at least two
nonemployee directors designated by the Board to administer the Plan. If a
separate committee is not designated by the Board, the Board shall serve as the
Committee for all purposes under the Plan.
"Company" shall mean Chester Bancorp, Inc., a Delaware corporation,
together with any successor thereto.
"Director Option" shall mean a Non-Qualified Stock Option granted to an
Eligible Director pursuant to Section 6(e).
"Disability" shall have the meaning set forth in Section 22(e)(3) of the
Code. For purposes of the Plan, all
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determinations as to whether a Participant has become disabled shall be made by
a majority of the Board upon the basis of such evidence as it deems necessary
or desirable, and shall be final and binding on all interested persons.
"Effective Date" shall mean the date of shareholder approval of the Plan.
"Eligible Director" shall mean, on any date, a person who is serving as a
member of the Board but shall not include a person who is an Employee.
"Employee" shall mean an employee of the Company or any Affiliate.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"Fair Market Value" shall be determined as follows:
(a) If the Shares are traded or quoted on the Nasdaq
Stock Market at the time of grant of the Award, then
the Fair Market Value shall be the average of the
highest and lowest selling price on such exchange on
the date such Award is granted or, if there were no
sales on such date, then on the next prior business day
on which there was a sale.
(b) If the Shares are not traded or quoted on the
Nasdaq Stock Market, then the Fair Market Value shall
be a value determined by the Committee in good faith on
such basis as it deems appropriate.
"Incentive Stock Option" shall mean a right to purchase Shares from the
Company that is granted under Section 6 of the Plan and that is intended to
meet the requirements of Section 422 of the Code or any successor provision
thereto.
"Non-Qualified Stock Option" shall mean a right to purchase Shares from
the Company that is granted under Section 6 of the Plan and that is not
intended to be an Incentive Stock Option.
"Option" shall mean an Incentive Stock Option or a Non-Qualified Stock
Option but shall not include a Director Option.
"Participant" shall mean any Employee or Eligible Director selected by the
Committee to receive an Award of Options or Director Options, as appropriate.
"Person" shall mean any individual, corporation, partnership, association,
joint-stock company, trust, unincorporated organization, government or
political subdivision thereof or other entity.
"Plan" shall mean this Chester Bancorp, Inc. 1997 Stock Option Plan.
"Rule 16b-3" shall mean Rule 16b-3 as promulgated and interpreted by the
SEC under the Exchange Act, or any successor rule or regulation thereto as in
effect from time to time.
"SEC" shall mean the Securities and Exchange Commission or any successor
thereto and shall include the staff thereof.
"Shares" shall mean common shares of the Company, or such other securities
of the Company as may be designated by the Committee from time to time.
"Ten Percent Stockholder" shall mean any stockholder who, at the time an
Incentive Stock Option is granted to such stockholder, owns (within the meaning
of Section 424(d) of the Code) more than ten percent (10%) of the voting power
of all classes of stock of the Company.
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<PAGE> 19
"Termination for Cause" shall mean termination because of a Participant's
personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty
involving personal profit, intentional failure to perform stated duties,
willful violation of any law, rule, or regulation (other than traffic
violations or similar offenses) or material breach of any provision of any
employment agreement between the Company or the Banks and a Participant.
SECTION 3. ADMINISTRATION.
(a) The Plan shall be administered by the Committee. Subject to the terms
of the Plan and applicable law, and in addition to other express powers and
authorizations conferred on the Committee by the Plan, the Committee shall have
full power and authority to: (i) designate Participants; (ii) determine the
type or types of Awards to be granted to an eligible Employee; (iii) determine
the number of Shares to be covered by, or with respect to which payments,
rights, or other matters are to be calculated in connection with, Awards; (iv)
determine the terms and conditions of any Award; (v) determine whether, to what
extent, and under what circumstances Awards may be settled or exercised in
cash, Shares, other securities, other Awards or other property, or canceled,
forfeited, or suspended; (vi) determine whether, to what extent, and under what
circumstances cash, Shares, other securities, other Awards, other property, and
other amounts payable with respect to an Award shall be deferred either
automatically or at the election of the holder thereof or of the Committee;
(vii) interpret and administer the Plan and any instrument or agreement
relating to, or Award made under, the Plan; (viii) establish, amend, suspend,
or waive such rules and regulations and appoint such agents as it shall deem
appropriate for the proper administration of the Plan; and (ix) make any other
determination and take any other action that the Committee deems necessary or
desirable for the administration of the Plan.
(b) Unless otherwise expressly provided in the Plan, all designations,
determinations, interpretations, and other decisions under or with respect to
the Plan or any Award shall be within the sole discretion of the Committee, may
be made at any time and shall be final, conclusive, and binding upon all
Persons, including the Company, and Participant, any holder or beneficiary of
any Award, any shareholder and any Employee.
SECTION 4. SHARES AVAILABLE FOR AWARDS.
(a) SHARES AVAILABLE. Subject to adjustment as provided in Section 4(b),
the number of Shares with respect to which Options and Director Options may be
granted under the Plan shall be 218,212. If, after the effective date of the
Plan, any Shares covered by an Option or Director Option granted under the
Plan, or to which such an Option or Director Option relates, are forfeited, or
if an Option or Director Option otherwise terminates or is canceled without the
delivery of Shares, then the Shares covered by such Option or Director Option,
or to which such Option or Director Option relates, or the number of Shares
otherwise counted against the aggregate number of Shares with respect to which
Options and Director Options may be granted, to the extent of any such
settlement, forfeiture, termination or cancellation, shall again be, or shall
become, Shares with respect to which Options and Director Options may be
granted. In the event that any Option or Director Option is exercised through
the delivery of Shares, the number of Shares available for Awards under the
plan shall be increased by the number of Shares surrendered.
(b) ADJUSTMENTS. In the event that any dividend or other distribution
(whether in the form of cash, Shares, other securities, or other property),
recapitalization, stock split, reverse stock split, reorganization, merger,
consolidation, split-up, spin-off, combination, repurchase, or exchange of
Shares or other securities of the Company, issuance of warrants or other rights
to purchase Shares or other securities of the Company, or other similar
corporate transaction or event affects the Shares such that an adjustment is
necessary in order to prevent dilution or enlargement of the benefits or
potential benefits intended to be made available under the Plan, then the
Committee shall proportionately adjust any or all (as necessary) of (i) the
number of Shares or other securities of the Company (or number and kind of
other securities or property) with respect to which Awards may be granted,
including an Award pursuant to Section 6(e), (ii) the number of Shares or other
securities of the Company (or number and kind of other securities or property)
subject to outstanding Awards, and (iii) the grant or exercise price with
respect to any Award; provided, in each case, that with respect to Awards of
Incentive Stock Option no such adjustment shall be authorized to the extent
that such authority would cause the Plan to violate Section 422(b)(1) of the
Code, as from time to time amended.
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<PAGE> 20
(c) SOURCES OF SHARES. Any Shares delivered pursuant to an Option or
Director Option may consist, in whole or in part, of authorized and unissued
Shares or of treasury Shares.
SECTION 5. ELIGIBILITY. An Employee, including any officer or
employee-director of the Company, who is not a member of the Committee shall be
eligible to be designated a Participant. Each Eligible Director shall be
eligible to receive Director Options in accordance with Section 6(e) hereof.
SECTION 6. OPTIONS AND DIRECTOR OPTIONS.
(a) GRANT. Subject to the provisions of the Plan, the Committee shall
have sole and complete authority to determine the Employees to whom Options
shall be granted, the number of Shares to be covered by each Option, the option
price therefor and the conditions and limitations applicable to the exercise of
the option. The Committee shall have the authority to grant Incentive Stock
Options, or to grant Non-Qualified Stock Options, or to grant both types of
options. In such case of Incentive Stock Options, the terms and conditions of
such grants shall be subject to and comply with such rules as may be prescribed
by Section 422 of the Code, as from time to time amended, and any regulations
implementing such statute, including without limitation, the requirements of
Code Section 422(d), which limits the aggregate fair market value of Shares of
which Incentive Stock Options are exercisable for the first time to $100,000
per calendar year. Each provision of the Plan and of each written option
agreement relating to an Option designated an Incentive Stock Option shall be
construed so that such Option qualifies as an Incentive Stock Option, and any
provision that cannot be so construed shall be disregarded.
(b) EXERCISE PRICE. The Committee shall establish the exercise price at
the time each Option or Director Option is granted, which price shall not be
less than one hundred percent (100%) of the per Share Fair Market Value on the
date of grant. Notwithstanding any provision contained herein, in the case of
an Incentive Stock Option, the exercise price at the time such Incentive Stock
Option is granted to any Employee who, at the time of such grant, is a Ten
Percent Stockholder, shall not be less than one hundred ten percent (110%) of
the per Share Fair Market Value on the date of grant.
(c) EXERCISE. Each Option shall be exercisable at such times and subject
to such terms and conditions as the Committee may, in its sole discretion,
specify in the applicable Award Agreement or thereafter; provided, in the case
of an Incentive Stock Option, a Participant may not exercise such Option as an
Incentive Stock Option after the earlier of (i) the date which is ten (10)
years (five (5) years in the case of a Participant who is a Ten Percent
Stockholder) after the date on which such Incentive Stock Option is granted, or
(ii) the date which is three (3) months (twelve (12) months in the case of a
Participant who becomes Disabled, or who dies) after the date on which he
ceases to be an employee of the Company or an Affiliate, and provided, further,
that no Award of Options under the Plan shall vest more rapidly than ratably
over a five-year period whereby twenty percent (20%) of the Award shall vest on
each of the first through the fifth anniversaries of the date of grant so long
as the Participant remains employed by the Company or an Affiliate; provided,
further, that an Award of Options shall be one hundred (100) percent vested
upon a Participant's death or Disability. In the event of an Employee's
Termination for Cause, his Options shall be canceled on the date he ceases to
be an Employee. The Committee may impose such conditions with respect to the
exercise of Options, including without limitation, any relating to the
application of federal or state securities laws, as it may deem necessary or
advisable. The Committee shall have the right to accelerate the exercisability
of any Option or outstanding Options in its discretion.
(d) PAYMENT. No Shares shall be delivered pursuant to any exercise of an
Option or Director Option until payment in full of the option price therefor is
received by the Company. Such payment may be made in cash or its equivalent,
or, if and to the extent permitted by the Committee, by exchanging Shares owned
by the optionee (which are not the subject of any pledge or other security
interest), or by a combination of the foregoing, provided that the combined
value of all cash and cash equivalents and the Fair Market Value of any such
Shares so tendered to the Company as of the date of such tender is at least
equal to such option price.
(e) DIRECTOR OPTIONS. Subject to the provisions of the Plan, the
Committee shall have sole and complete authority to determine the Eligible
Directors to whom Director Options shall be granted, the number of
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<PAGE> 21
shares to be covered by each Director Option and the conditions and limitations
applicable to the exercise of each Director Option. Each Award of Director
Options shall vest ratably over a five (5) year period whereby twenty percent
(20%) of the Award shall vest on each of the first through the fifth
anniversaries of the date of grant so long as the Eligible Director continues
to serve as a member of the Board or is designated a Director Emeritus;
provided, however, that the Award shall be one hundred (100) percent vested in
the event of the Eligible Director's death or Disability. A Director Option
shall be exercisable until the earlier to occur of the following two dates (i)
the tenth anniversary of the date of grant of such Director Option or (ii) one
(1) year (two (2) years in the case of an Eligible Director who becomes
Disabled, or who dies) after the date the Eligible Director ceases to be a
member of the Board, except that if the Eligible Director ceases to be a member
of the Board upon Termination for Cause, his Director Option shall be canceled
on the date he ceases to be a member of the Board. An Eligible Director may
pay the exercise price of a Director Option in the manner described in Section
6(d).
(f) EFFECT OF A CHANGE IN CONTROL. In the event of a Change in Control,
all then outstanding Options and Director Options, shall (to the extent
authorized or not prohibited by applicable law or regulations) become one
hundred percent (100%) vested and exercisable as of the effective date of the
Change in Control. If, in connection with or as a consequence of a Change in
Control, the Company or the Bank is merged into or consolidated with another
corporation, or if the Company or the Bank sells or otherwise disposes of
substantially all of its assets to another corporation, then unless provisions
are made in connection with such transaction for the continuance of the Plan
and/or the assumption or substitution of then outstanding Options and Director
Options with new options covering the stock of the successor corporation, or
parent or subsidiary thereof, with appropriate adjustments as to the number and
kind of shares and prices, such Options or Director Options shall be canceled
as of the effective date of the merger, consolidation, or sale and the
Participant or Eligible Director shall be paid in cash an amount equal to the
difference between the Fair Market Value of the Shares subject to the Options
or Director Options as of the effective date of the such corporate event and
the exercise price of the Options or Director Options, as appropriate.
(g) LIMITATION ON AWARDS. Notwithstanding anything herein to the
contrary, if this Plan is implemented within one year of the consummation of
the Company's mutual-to-stock conversion, (i) no Employee shall receive an
Award covering in excess of twenty five (25) percent, (ii) no Eligible Director
shall receive in excess of five (5) percent and (iii) Eligible Directors as of
the Effective Date shall not receive in excess of thirty (30) percent in the
aggregate, of the number of shares reserved for issuance under the Plan.
SECTION 7. AMENDMENT AND TERMINATION.
(a) AMENDMENTS TO THE PLAN. The Board may amend, alter, suspend,
discontinue, or terminate the Plan or any portion thereof at any time; provided
that no such amendment, alteration, suspension, discontinuation or termination
shall be made without shareholder approval if such approval is necessary to
comply with any tax or regulatory requirement
(b) AMENDMENTS TO AWARDS. Except as provided under Section 3, the
Committee may waive any conditions or rights under, amend any terms of, or
alter, suspend, discontinue, cancel or terminate, any Award theretofore
granted, prospectively or retroactively; provided that any such waiver,
amendment, alteration, suspension, discontinuance, cancellation or termination
that would impair the rights of any Participant or any holder or beneficiary of
any Award theretofore granted shall not to that extent be effective without the
consent of the affected Participant, holder or beneficiary.
(c) CANCELLATION. Any provision of this Plan or any Award Agreement to
the contrary notwithstanding, the Committee may cause any Award of Options
granted hereunder to be canceled in consideration of the granting to the holder
of an alternative Award of Options having a Fair Market Value equal to the Fair
Market Value of such canceled Award.
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<PAGE> 22
SECTION 8. GENERAL PROVISIONS.
(a) Nontransferability.
(i) Each Award, and each right under any Award, shall be exercisable
only by the Participant during his or her lifetime, or, if permissible under
applicable law, by the Participant's guardian or legal representative or a
transferee receiving such Award pursuant to a domestic relations order, or
Section 8(a)(ii) as determined by the Committee.
(ii) No Award may be assigned, alienated, pledged, attached, sold or
otherwise transferred or encumbered by a Participant otherwise than by will or
by the laws of descent and distribution or pursuant to a domestic relations
order, and any such purported assignment, alienation, pledge, attachment, sale,
transfer or encumbrance shall be void and unenforceable against the Company;
provided, however, that the designation of a beneficiary shall not constitute
an assignment, alienation, pledge, attachment, sale, transfer or encumbrance.
Notwithstanding the preceding sentence, the Committee shall have discretionary
authority to permit the transfer of any Non-Qualified Stock Option to members
of a Participant's immediate family, including trusts for the benefit of such
family members and partnerships in which such family members are the only
partners; provided, however, that a transferred Non-Qualified Stock Option may
be exercised by the transferee on any date only to the extent that the
Participant would have been entitled to exercise the Non-Qualified Stock Option
on such date had the Non-Qualified Stock Option not been transferred. Any
transferred Non-Qualified Stock Option shall remain subject to the terms and
conditions of the Participant's Award Agreement.
(b) NO RIGHTS TO AWARDS. No Employee, Participant or other Person shall
have any claim to be granted any Award, and there is no obligation for
uniformity of treatment of Employees, Participants, or holders or beneficiaries
of Awards. The terms and conditions of Awards need not be the same with
respect to each recipient.
(c) SHARE CERTIFICATES. All Shares or other securities of the Company
delivered under the Plan pursuant to any Award or the exercise thereof shall be
subject to such stop transfer orders and other restrictions as the Committee
may deem advisable under the Plan or the rules, regulations, and other
requirements of the SEC, any stock exchange or national securities association
upon which such Shares or other securities are then listed, and any applicable
Federal or state laws, and the Committee may cause a legend or legends to be
put on any certificates representing such Shares or other securities to make
appropriate reference to such restrictions.
(d) DELEGATION. Subject to the terms of the Plan and applicable law, the
Committee may delegate to one or more officers or managers of the Company, or
to a committee of such officers or managers, the authority, subject to such
terms and limitations as the Committee shall determine, to grant Awards to, or
to cancel, modify or waive rights with respect to, or to alter, discontinue,
suspend, or terminate Awards held by, Employees who are not officers or
directors of the Company for purposed of Section 16 of the Exchange Act, or any
successor section thereto, or who are otherwise not subject to such Section.
(e) WITHHOLDING. A Participant shall be required to pay to the Company
and the Company is hereby authorized to withhold from any Award, from any
payment due or transfer made under any Award or from any compensation or other
amount owing to a Participant the amount of any applicable withholding taxes in
respect of an Award, its exercise, or any payment or transfer under an Award
and to take such other action as may be necessary in the opinion of the Company
to satisfy all obligations for the payment of such taxes, including, but not
limited to, the withholding of the issuance of Shares to be issued upon the
exercise of any Option or Director Option until the Participant reimburses the
Company for any amount required to be withheld.
(f) AWARD AGREEMENTS. Each Award hereunder shall be evidenced by an Award
Agreement which shall be delivered to the Participant and shall specify the
terms and conditions of the Award and any rules applicable thereto.
(g) NO LIMIT ON OTHER COMPENSATION ARRANGEMENTS. Nothing contained in the
Plan shall prevent the Company or any Affiliate from adopting or continuing in
effect other compensation arrangements, which may,
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but need not, provide for the grant of options, restricted stock, Shares and
other types of Awards provided for hereunder (subject to shareholder
approval if such approval is required), and such arrangements may be either
generally applicable or applicable only in specific cases.
(h) NO RIGHT TO EMPLOYMENT. The grant of an Award shall not be construed
as giving a Participant the right to be retained in the employ of the Company
or an Affiliate. Further, the Company may at any time dismiss a Participant
from employment, free from any liability or any claim under the Plan, unless
otherwise expressly provide in the Plan or in any Award Agreement.
(i) NO RIGHTS AS STOCKHOLDER. Subject to the provisions of the applicable
Award, no Participant or holder or beneficiary of any Award shall have any
rights as a stockholder with respect to any Shares to be distributed under the
Plan until he or she has become the holder of such Shares.
(j) GOVERNING LAW. The validity, construction, and effect of the Plan and
any rules and regulations relating to the Plan and any Award Agreement shall be
determined in accordance with the laws of the State of Illinois, without giving
effect to the choice of law principles thereof.
(k) SEVERABILITY. If any provisions of the Plan or any Award is or
becomes or is deemed to be invalid, illegal, or unenforceable in any
jurisdiction or as to any Person or Award, or would disqualify the Plan or any
Award under any law deemed applicable by the Committee, such provision shall be
construed or deemed amended to conform to the applicable laws, or if it cannot
be construed or deemed amended without, in the determination of the Committee,
materially altering the intent of the Plan or the Award, such provision shall
be stricken as to such jurisdiction, Person or Award and the remainder of the
Plan and any such Award shall remain in full force and effect.
(l) OTHER LAWS. The Committee may refuse to issue or transfer any Shares
or other consideration under an Award if, acting in its sole discretion, it
determines that the issuance or transfer of such Shares or such other
consideration might violate any applicable law or regulation or entitle the
Company to recovery under Section 16(b) of the Exchange Act, and any payment
tendered to the Company by a Participant, other holder or beneficiary in
connection with the exercise of such Award shall be promptly refunded to the
relevant Participant, holder or beneficiary. Without limiting the generality
of the foregoing, no Award granted hereunder shall be construed as an offer to
sell securities of the Company, and no such offer shall be outstanding, unless
and until the Committee in its sole discretion has determined that any such
offer, if made, would be in compliance with all applicable requirements of the
U.S. federal securities laws.
(m) NO TRUST OR FUND CREATED. Neither the Plan nor any Award shall create
or be construed to create a trust or separate fund of any kind or a fiduciary
relationship between the Company and a Participant or any other Person. To the
extent that any Person acquires a right to receive payments from the Company
pursuant to an Award, such rights shall be no greater than the right of any
unsecured general creditor of the Company.
(n) RULE 16B-3 COMPLIANCE. With respect to persons subject to Section 16
of the Exchange Act, transactions under this Plan are intended to comply with
all applicable terms and conditions of Rule 16b-3 and any successor provisions.
To the extent that any provision of the Plan or action by the Committee fails
to so comply, it shall be deemed null and void, to the extent permitted by law
and deemed advisable by the Committee.
(o) HEADINGS. Heading are given to the Sections and subsections of the
Plan solely as a convenience to facilitate reference. Such headings shall not
be deemed in any way material or relevant to the construction or interpretation
of the Plan or any provision thereof.
(p) NO IMPACT ON BENEFITS. Unless specifically provided under any other
benefit plan of the Company or its Affiliates, Awards shall not be treated as
compensation for purposes of calculating an Employee's or Eligible Director's
rights under such benefit plans.
(q) INDEMNIFICATION. Each person who is or shall have been a member of
the Committee or of the
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<PAGE> 24
Board shall be indemnified and held harmless by the Company against and from
any loss, cost, liability, or expense that may be imposed upon or reasonably
incurred by him in connection with or resulting from any claim, action, suit,
or proceeding to which he may be made a party or in which he may be involved by
reason of any action taken or failure to act under the Plan and against and
from any and all amounts paid by him in settlement thereof, with the Company's
approval, or paid by him in satisfaction of any judgment in any such action,
suit, or proceeding against him, provided he shall give the Company an
opportunity, at its own expense, to handle and defend the same before he
undertakes to handle and defend it on his own behalf. The foregoing right of
indemnification shall not be exclusive and shall be independent of any other
rights of indemnification to which such persons may be entitled under the
Company's articles of incorporation or bylaws, by contract, as a matter of law,
or otherwise.
SECTION 9. TERM OF THE PLAN.
(a) EFFECTIVE DATE. The Plan shall become effective only upon approval by
a majority of the Company's stockholders at an annual or special meeting of
stockholders of the Company held not less than six (6) months after the date of
closing of the Banks' mutual-to-stock conversion nor more than twelve (12)
months after the date of adoption of the Plan by the Board.
(b) EXPIRATION DATE. The Plan shall terminate on and no Award shall be
granted under the Plan after the tenth anniversary of the Effective Date.
Unless otherwise expressly provided in the Plan or in an applicable Award
Agreement, any Award granted hereunder may, and the authority of the Board or
the Committee to amend, alter, adjust, suspend, discontinue, or terminate any
such Award or to waive any conditions or rights under any such Award shall,
continue after the tenth anniversary of the Effective Date.
A-8
<PAGE> 25
EXHIBIT B
CHESTER BANCORP, INC.
1997 MANAGEMENT RECOGNITION AND DEVELOPMENT PLAN
1. PURPOSE; DEFINITIONS.
The purpose of the Plan is to increase the proprietary and vested interest
of the key Employees of the Company and its Affiliates and Eligible Directors
in the growth, development and financial success of the Company by granting
them awards of Restricted Shares.
Whenever the following terms are used in the Plan, they shall have the
meaning specified below unless the context clearly indicated to the contrary.
"Affiliate" shall mean the Banks and any other "subsidiary" of the Company
as defined in Section 424(f) of the Code.
"Award" shall mean an award of Restricted Shares under the Plan.
"Banks" shall mean Chester National Bank and Chester National Bank of
Missouri.
"Board" shall mean the Board of Directors of the Company.
"Change in Control" shall mean an event deemed to occur if and when (a) an
offeror other than the Company purchases shares of the common stock of the
Company or the Bank pursuant to a tender or exchange offer for such shares, (b)
any person (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange
Act) is or becomes the beneficial owner, directly or indirectly, of securities
of the Company or the Bank representing twenty-five percent (25%) or more of
the combined voting power of the Company's or the Bank's then outstanding
securities (c) the membership of the board of directors of the Company or the
Bank changes as the result of a contested election, such that individuals who
were directors at the beginning of any twenty-four (24) month period (whether
commencing before or after the date of adoption of this Plan) do not constitute
a majority of the Board at the end of such period, or (d) shareholders of the
Company or the Bank approve a merger, consolidation, sale or disposition of all
or substantially all of the Company's or the Bank's assets or a plan of partial
or complete liquidation. If any of the events enumerated in clauses (a) - (d)
occur, the Board shall determine the effective date of the change in control
resulting therefrom.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Committee" shall mean a committee of the Board consisting of at least two
nonemployee directors designated by the Board to administer the Plan. If a
separate committee is not designated by the Board, the Board shall serve as the
Committee for all purposes under the Plan.
"Company" shall mean Chester Bancorp, Inc., a Delaware corporation.
"Designated Beneficiary" shall have the meaning set forth in Section 2.2
hereof.
"Disability" shall have the meaning set forth in Section 22(e)(3) of the
Code. For purposes of the Plan, all determinations as to whether a Participant
has become disabled shall be made by a majority of the Board (or, in the case
of an Eligible Director, a majority of the remaining members of the Board) upon
the basis of such evidence as its deems necessary or desirable, and shall be
final and binding on all interested persons.
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"Effective Date" shall have the meaning set forth in Section 5.1 hereof.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"Eligible Director" shall mean a director of the Company who is not also
an Employee.
"Employee" shall mean any person who is employed by the Company or an
Affiliate.
"Participant" shall mean an Eligible Director or Employee to whom an award
of Restricted Shares is granted pursuant to the Plan.
"Plan" shall mean this Chester Bancorp, Inc. 1997 Management Recognition
and Development Plan, as hereinafter amended from time to time.
"Restricted Shares" shall mean Shares which are awarded to an Eligible
Director or Employee that are subject to the transfer and forfeitability
restrictions described in Section 4.2.
"Share" shall mean a share of the Company's common stock, par value $.01
per share.
2. ADMINISTRATION.
2.1 Administration
The Plan shall be administered by the Committee, which shall have the
power to interpret the Plan and to adopt such rules for the administration,
interpretation and application of the Plan and Awards thereunder as are
consistent with its terms and provisions and to interpret, amend or revoke any
such rules. All actions taken and all interpretations and determinations made
by the Committee shall be binding upon all persons, including the Company,
stockholders, Participants and Designated Beneficiaries. The Secretary of the
Company shall be authorized to implement the Plan in accordance with its terms,
and to take such actions of a ministerial nature as shall be necessary to
effectuate the intent and purposes thereof. No member of the Committee shall
be personally liable for any action, determination or interpretation made in
good faith with respect to the Plan or the awards hereunder, and all members of
the Board shall be fully protected by the Company in respect to any such
action, determination or interpretation.
2.2 Designated Beneficiaries
If a Participant dies prior to receiving any payment due under the Plan,
such payment shall be made to his Designated Beneficiary. A Participant's
Designated Beneficiary shall be the beneficiary specifically designated by a
Participant in writing to receive amounts due the Participant in the event of
the Participant's death. In the absence of an effective designation by the
Participant, Designated Beneficiary shall mean the Participant's surviving
spouse or, if none, his estate.
3. SHARES SUBJECT TO THE PLAN.
3.1 Shares Subject to the Plan
The maximum number of Shares that may be the subject of Awards under this
Plan shall be 87,285. The Company shall reserve such number of Shares for the
purposes of the Plan out of its authorized but unissued Shares or out of Shares
held in the Company's treasury, or partly out of each. In the event that a
trust is established in connection with the Plan pursuant to Section 5.4, the
Company may authorize the trustees of the trust to purchase Shares in the open
market with funds contributed by the Company or the Banks and such shares shall
be included in the number of shares that may be the subject of Awards. In the
event that Restricted Shares are forfeited for any reason, such Shares shall
thereafter again be available for award pursuant to the Plan.
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<PAGE> 27
3.2 Changes in the Company's Shares
In the event that the Committee shall determine that any recapitalization,
reorganization, merger, consolidation, stock split, spin-off, combination, or
exchange of Shares, or other similar corporate event affects the Shares such
that an adjustment is required in order to preserve the benefits or potential
benefits intended under this Plan, the Committee shall, in such manner as it
may deem equitable, adjust any or all of the number and kind of Shares which
thereafter may be awarded under the Plan, or the number and kind of Shares
subject to outstanding awards; provided, however, that the number of Shares
subject to any award shall always be a whole number.
4. RESTRICTED SHARES
4.1 Eligibility; Awards Under the Plan
(a) Eligibility. Employees (including officers and employee directors of
the Banks) and Eligible Directors shall be eligible to participate in the Plan
upon designation by the Committee. To the extent that Shares are available for
grant under the Plan, the Committee may determine which of the Employees and
Eligible Directors shall be granted an Award and the number of Restricted
Shares covered by each Award. In selecting those Employees to whom Awards will
be granted and the number of Shares covered by such Awards, the Committee shall
consider the position and responsibilities of the eligible Employees, the
length and value of their services to the Company and its Affiliates, the
compensation paid to the Employees and any other factors the Committee may deem
relevant, and the Committee may request the written recommendation of the chief
executive officer and other senior executive officers of the Company and its
Affiliates.
(b) Limitation on Awards. Notwithstanding anything herein to the
contrary, no Employee shall receive an Award covering in excess of twenty five
(25) percent, no Eligible Directors shall receive in excess of five (5) percent
and Eligible Directors serving as of the Effective Date shall not receive in
excess of thirty (30) percent in the aggregate, of the number of shares
reserved for issuance under the Plan.
(c) Fractions of Shares. Whenever under the terms of the Plan a
fractional share would be required to be issued, the fractional share shall be
rounded up to the next full share.
4.2 Terms of Awards
The Restricted Shares awarded hereunder shall be awarded only pursuant to
a written agreement, which shall be executed by the Participant and a duly
authorized officer of the Company and which shall contain the following terms
and conditions:
(a) Acceptance of Award. An award of Restricted Shares must be accepted
by the Participant within a period of sixty (60) days (or such other period as
the Board may specify at grant) after the award date by the execution of a
Restricted Share award agreement in the form provided by the Company.
(b) Restrictions and Conditions. The Restricted Shares awarded to a
Participant pursuant to this Section 4 shall be subject to the following
restrictions and conditions:
(i) A Participant shall not be permitted to sell, transfer, pledge, assign
or otherwise encumber Restricted Shares awarded under the Plan prior to the
date on which such shares vest in accordance with clause (iii), except in
accordance with the laws of descent and distribution.
(ii) Except as provided in clause (i) and this clause (ii) the Participant
shall have, with respect to the Restricted Shares, all of the rights of a
stockholder of the Company, including the right to vote and to receive any cash
dividends received thereon. Stock dividends, if any, issued with respect to
Restricted Shares shall be treated as additional Restricted Shares that are
subject to the same restrictions and other terms and conditions that apply with
respect to the Restricted Shares with respect to which such dividends are paid.
B-3
<PAGE> 28
(iii) Subject to the applicable provisions of the Restricted
Share award agreement and this Section, a Participant's interest in Shares
shall immediately become fully vested and nonforfeitable, and the restrictions
set forth in this Section 4.2 shall lapse (x) ratably over a five (5) year
period whereby twenty percent (20%) of the Award shall vest on each of the
first through the fifth anniversaries of the date of grant so long as the
Participant continues service as an Employee or Eligible Director or is
designated a Director Emeritus or (y) upon the Participant's death or
Disability, or (z) upon a Change in Control (to the extent such treatment is
authorized or not prohibited by applicable law or regulations).
4.3 Stock Certificates
Except as otherwise provided herein, a stock certificate registered in the
name of each Participant receiving a Restricted Share award (or in the name of
a trustee for the benefit of each Participant) shall be issued in respect of
such shares. Such certificate shall bear whatever appropriate legend referring
to the terms, conditions, and restrictions applicable to such award as the
Committee shall determine. The Committee may, in its sole discretion, require
that the stock certificates evidencing Restricted Shares be held in custody by
the Company (or in trust by a trustee) until the restrictions thereon shall
have lapsed. If a trust is established in connection with the Plan, a
certificate or certificates may be solely issued in the name of the trust;
provided, however, that the trustee shall maintain a record of Awards
authorized under the Plan and the amount of cash dividends payable to a
Participant upon the vesting of any Award or installment thereof.
5. MISCELLANEOUS.
5.1 Shareholder Approval; Effective Date; Term
The Plan shall become effective only upon approval by a majority of the
Company's stockholders at an annual or special meeting of stockholders of the
Company held not less than six (6) months after the date of closing of the
Banks' mutual-to-stock conversion, and shall continue in effect until the tenth
anniversary of the Effective Date.
5.2 Amendment, Suspension or Termination of the Plan
The Plan may be wholly or partially amended or otherwise modified,
suspended or terminated at any time or from time to time by the Board;
provided, however, that no amendment or modification shall be made without
stockholder approval if such approval is necessary to comply with any tax or
regulatory requirement.
From and after the Effective Date, neither the amendment, suspension nor
termination of the Plan shall, without the consent of the Participant, alter or
impair any rights or obligations under any award theretofore granted. No
awards may be granted during any period of suspension nor after termination or
expiration of the Plan.
5.3 Regulations and Other Approvals
(a) The obligation of the Company to deliver Shares with respect to any
award granted under the Plan shall be subject to all applicable laws, rules and
regulations, including all applicable federal and state securities laws, and
the obtaining of all such approvals by governmental agencies as may be deemed
necessary or appropriate by the Board.
(b) The Board may make such changes to the Plan as may be necessary or
appropriate to comply with the rules or requirements of any governmental
authority.
(c) Each award of Shares is subject to the requirement that, if at any
time the Board determines, in its sole discretion, that the listing,
registration or qualification of Shares issuable pursuant to the Plan is
required by any securities exchange or under any United States, state or
federal law, or the consent or approval of any governmental regulatory body is
necessary or desirable as a condition of, or in connection with, issuance of
Shares, no Shares shall be issued, in whole or in part, unless listing,
registration, qualification, consent or approval has been effected or obtained
free of any conditions as acceptable to the Board.
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<PAGE> 29
(d) In the event that the disposition of Shares acquired pursuant to the
Plan is not covered by a then current registration statement under the
Securities Act of 1933, and is not otherwise exempt from such registration,
such Shares shall be restricted against transfer to the extent required by the
Securities Act of 1933 or regulations thereunder, and the Board may require any
individual receiving Shares pursuant to the Plan, as a condition precedent to
receipt of such Shares, to represent to the Banks in writing that the Shares
acquired by such individual are acquired for investment only and not with a
view to distribution. The certificate for any Shares acquired pursuant to the
Plan shall include any legend that the Board deems appropriate to reflect any
restrictions on transfer.
(e) At the time of grant of any award, the Board may provide in the
Restricted Share award agreement that any Shares received as a result of such
grant shall be subject to a right of first refusal in favor of the Company,
pursuant to which the Participant shall be required to offer to the Company any
Shares that he wishes to sell, with the price being the then fair market value
of such Shares, subject to such other terms and conditions as the Board may
specify in the award agreement.
(f) Rule 16b-3 Compliance. With respect to persons subject to Section 16
of the Exchange Act, transactions under this Plan are intended to comply with
all applicable terms and conditions of Rule 16b-3 and any successor provisions.
To the extent that any provision of the Plan or action by the Committee fails
to so comply, it shall be deemed null and void, to the extent permitted by law
and deemed advisable by the Committee.
(g) A Participant shall be required to pay to the Company or an Affiliate
the amount of any applicable withholding taxes in respect of an Award and the
Company shall be authorized to take such other action as may be necessary in
the opinion of the Company to satisfy all obligations for the payment of such
taxes, including, but not limited to, the withholding of the issuance of Shares
to be issued upon the vesting of any Award, until the Participant reimburses
the Company for any amount required to be withheld.
5.4 Trust Arrangement
All benefits under the Plan represent an unsecured promise to pay by the
Company. The Plan shall be unfunded and the benefits hereunder shall be paid
only from the general assets of the Company resulting in the Participants
having no greater rights than the Company's general creditors; provided,
however, that nothing herein shall prevent or prohibit the Company from
establishing a trust or other arrangement for the purpose of providing for the
payment of the benefits payable under the Plan.
5.5 Governing Law
The Plan and the rights of all persons claiming hereunder shall be
construed and determined in accordance with the laws of the State of Illinois
without giving effect to the choice of law principles thereof.
5.6 Titles; Construction
Titles are provided herein for convenience only and are not to serve as a
basis for interpretation or construction of the Plan. The masculine pronoun
shall include the feminine and neuter and the singular shall include the
plural, when the context so indicates.
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<PAGE> 30
REVOCABLE PROXY
CHESTER BANCORP, INC.
FIRST ANNUAL MEETING OF STOCKHOLDERS
APRIL 4, 1997
The undersigned hereby appoints the official Proxy Committee of the Board
of Directors of Chester Bancorp, Inc. ("Corporation") with full powers of
substitution to act as attorneys and proxies for the undersigned, to vote all
shares of Common Stock of the Corporation which the undersigned is entitled to
vote at the First Annual Meeting of Stockholders, to be held at the American
Legion Hall, 500 E. Opdyke St., Chester, Illinois, on Friday, April 4, 1997, at
10:00 a.m., local time, and at any and all adjournments thereof, as follows:
<TABLE>
<S> <C> <C> <C>
VOTE
1. The election as director of the nominees FOR WITHHELD
---- --------
listed below (except as marked to the [ ] [ ]
contrary below).
Thomas E. Welch, Jr.
John R. Beck, M.D.
James C. McDonald
INSTRUCTIONS: TO WITHHOLD YOUR VOTE
FOR ANY INDIVIDUAL NOMINEE, WRITE THE
NOMINEE'S NAME(S) ON THE LINE BELOW.
FOR AGAINST ABSTAIN
---- ------- --------
2. The adoption of the Chester [ ] [ ] [ ]
Bancorp, Inc. 1997 Stock
Option Plan.
3. The adoption of the Chester
Bancorp, Inc. 1997 Management [ ] [ ] [ ]
Recognition and Development Plan.
4. In their discretion, upon such other matters
as may properly come before the meeting.
</TABLE>
The Board of Directors recommends a vote "FOR" the listed propositions.
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE SPECIFIED THIS
PROXY WILL BE VOTED FOR THE PROPOSITIONS STATED. IF ANY OTHER BUSINESS IS
PRESENTED AT SUCH MEETING, THIS PROXY WILL BE VOTED BY THE BOARD OF DIRECTORS
IN ITS BEST JUDGMENT. AT THE PRESENT TIME, THE BOARD OF DIRECTORS KNOWS OF NO
OTHER BUSINESS TO BE PRESENTED AT THE ANNUAL MEETING. THIS PROXY ALSO CONFERS
DISCRETIONARY AUTHORITY ON THE BOARD OF DIRECTORS TO VOTE WITH RESPECT TO THE
ELECTION OF ANY PERSON AS DIRECTOR WHERE THE NOMINEES ARE UNABLE TO SERVE OR
FOR GOOD CAUSE WILL NOT SERVE AND MATTERS INCIDENT TO THE CONDUCT OF THE ANNUAL
MEETING.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR ALL
PROPOSALS.
<PAGE> 31
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
Should the undersigned be present and elect to vote at the Annual Meeting
or at any adjournment thereof and after notification to the Secretary of the
Corporation at the Annual Meeting of the stockholder's decision to terminate
this proxy, then the power of said attorneys and proxies shall be deemed
terminated and of no further force and effect.
The undersigned acknowledges receipt from the Corporation prior to the
execution of this proxy of the Notice of First Annual Meeting of Stockholders,
a Proxy Statement for the First Annual Meeting, dated February 21, 1997 and the
1996 Annual Report to Stockholders.
Dated: , 1996
-----------
- -------------------------- -------------------------
PRINT NAME OF Stockholder PRINT NAME OF Stockholder
- ------------------------- -------------------------
SIGNATURE OF Stockholder SIGNATURE OF Stockholder
Please sign exactly as your name appears on the enclosed card. When signing as
attorney, executor, administrator, trustee or guardian, please give your full
title. If shares are held jointly, each holder should sign.
PLEASE COMPLETE, DATE, SIGN AND MAIL THIS PROXY PROMPTLY IN THE ENCLOSED
POSTAGE-PREPAID ENVELOPE.
