<PAGE> 1
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
For the Fiscal Year Ended December 31, 1998
OR
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from to
------------- ------------------
Commission File Number: 000-21167
CHESTER BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 37-1359570
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, computed by reference to the last sale price February 1,
1999, as reported by the Nasdaq National Market, was approximately $14,382,505.
As of February 1, 1999 there were 2,182,125 shares issued, of which
1,472,988 shares were outstanding, 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, 1998, are incorporated by reference in Part I and Part II.
Portions of the registrant's proxy statement for its April 2, 1999,
annual meeting of stockholders (the "1999 Proxy Statement") are incorporated by
reference in Part III.
PART I
ITEM 1. Business
This annual report on Form 10-K contains forward-looking statements regarding
the Company, its business, prospects and results of operations that involve
risks and uncertainties. The Company's actual results could differ materially
from the results that may be anticipated by such forward-looking statements and
discussed elsewhere herein. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed herein as well as
those discussed under the captions "Risk Factors" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" as well as those
discussed elsewhere throughout this annual report and on Form 10-K. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date of this report. The Company undertakes no obligation
to revise any forward-looking statements in order to reflect events or
circumstances that may subsequently arise. Readers are urged to carefully review
and consider the various disclosures made by the Company in this report and in
the Company's other reports filed with the Securities and Exchange Commission
that attempt to advise interested parties of the risks and factors that my
affect the Company's business, prospects and results of operations.
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, 1998, the Company had total
consolidated assets of $142.8 million, total consolidated deposits of $99.4
million, and consolidated stockholders' equity of $21.7 million. The Company's
principal office is located at 1112 State Street, Chester, Illinois 62233 and
its telephone number is (618) 826-5038.
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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 and
three full-service branches located in Pinckneyville, Sparta, and Red Bud,
Illinois. Chester National Bank's principal executive 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 and one Loan Production Office in Cape Girardeau,
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, land
loans, and multi-family loans. At December 31, 1998, the Banks' gross loan
portfolio totaled $48.7 million, of which 75.6% were one- to four-family
residential mortgage loans, 7.1% were consumer loans, 12.4% were commercial real
estate and multi-family loans, and 3.9% were commercial 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 $52.6
million and $21.9 million, respectively, at December 31, 1998.
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. The Perryville market is rural and small,
and economic stability is supported by its largest employer, Gilster-Mary Lee.
The economic 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
$48.2 million at December 31, 1998, representing 33.8% 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,
--------------------------------------------------------------------------
1998 1997 1996
----------- ----------- ------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Type of Loan:
Commercial loans: ................... $ 1,874 3.85% $ 2,527 4.15% $ 279 0.51%
Mortgage loans:
Conventional ...................... 37,600 77.28 47,438 77.89 44,064 79.62
FHA ............................... 133 0.27 162 0.27 251 0.45
Commercial ........................ 5,457 11.22 5,082 8.34 4,606 8.32
Construction ...................... 115 .24 1,002 1.65 197 0.36
-------- ------ -------- ------ -------- ------
Total mortgage loans ............ 43,305 89.01 53,684 88.15 49,118 88.75
-------- ------ -------- ------ -------- ------
Consumer loans:
Automobile ........................ 751 1.54 1,102 1.81 1,642 2.97
Home improvement .................. 981 2.02 1,402 2.30 1,334 2.41
Credit cards ...................... 805 1.65 999 1.64 982 1.77
Savings account ................... 352 0.72 418 0.69 513 0.93
Other ............................. 587 1.21 767 1.26 1,474 2.66
-------- ------ -------- ------ -------- ------
Total consumer loans ............ 3,476 7.14 4,688 7.70 5,945 10.74
-------- ------ -------- ------ -------- ------
Total loans ..................... 48,655 100.00% 60,899 100.00% 55,342 100.00%
====== ====== ======
Less:
Loans in process .................. 9 41 95
Deferred fees (costs) and discounts (12) (46) 21
Allowance for losses .............. 449 436 384
Loans receivable, net ......... $ 48,209 $ 60,468 $ 54,842
======== ======== ========
Type of Security:
Residential real estate:
One- to four-family ............... $ 36,798 75.63% $ 47,173 77.46% $ 42,808 77.36%
Multi-family ...................... 597 1.23 706 1.16 819 1.48
Commercial real estate .............. 5,457 11.22 5,082 8.34 4,606 8.32
Commercial loans .................... 1,874 3.85 2,527 4.15 279 0.50
Agriculture and land ................ 453 .93 723 1.19 885 1.60
Consumer loans ...................... 3,476 7.14 4,688 7.70 5,945 10.74
-------- ------ ------
Total loans ..................... 48,655 100.00% 60,899 100.00% 55,342 100.00%
====== ====== ======
Less:
Loans in process .................. 9 41 95
Deferred fees (costs) and discounts (12) (46) 21
Allowance for losses .............. 449 436 384
-------- -------- --------
Loans receivable, net ............. $ 48,209 $ 60,468 $ 54,842
======== ======== ========
</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, 1998, $36.8 million, or 75.6% 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 $33,667 at
December 31, 1998. The Banks presently originate for retention in their
portfolio both adjustable rate mortgage ("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, 1998, $11.5 million, or 23.7% 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 terms, 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, 1998, the initial
interest rate on ARM loans offered by the Banks ranged from 6.75% to 7.50% 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, 1998, commercial real estate loans aggregated $5.5
million, or 11.2% of the total consolidated loan portfolio and multi-family
loans aggregated $597,000 or 1.2% of the total consolidated loan portfolio. The
principal balance of such loans in the Banks' consolidated loan portfolio ranged
from approximately $2,200 to $800,000 at December 31, 1998. 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 $384,000 or 0.8% 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
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the 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, 1998, construction loans totaled $115,000, or .2% 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, 1998, the agriculture and land consolidated loan
portfolio totaled $453,000 or .9% 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.
COMMERCIAL BUSINESS LENDING. The Banks became active in the origination
of small commercial business loans in order to diversify their credit risk and
increase the average yield and repricing speed of their interest-earning
assets. At December 31, 1998, the commercial business loans aggregated $1.9
million, or 3.9% of the total loan portfolio. The principal balance of such
loans in the Banks' loan portfolio ranged from approximately $2,000 to $340,000
at December 31, 1998. Substantially all of these loans were made with borrowers
located within the Banks' market area. Such loans are generally secured by
equipment, inventory, stock, and professional offices. Commercial business
loans are generally made for one year or less, with the rate tied to prime,
repricing accordingly.
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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 varying terms. At December 31, 1998 the Banks'
consumer loans totaled $3.5 million, or 7.1% 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
of home improvement loans. At December 31, 1998, home improvement loans totaled
$981,000, or 2.0% 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, 1998, there were 990 credit card accounts with a total balance
of $805,000. 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 12.9% and a "rebate" feature. The Banks may
alter the general terms of this program as they seek to expand their credit card
program.
The third 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, 1998,
consumer loans secured by automobiles totaled $751,000, or 1.5% 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 Banks had $99,000, or .2% of total loans in unsecured consumer
loans at December 31, 1998. 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
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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 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.
MATURITY OF CONSOLIDATED LOAN PORTFOLIO. The following table sets forth
at December 31, 1998 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.
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<TABLE>
<CAPTION>
During the Year After After After
Ending Decmber 31, 3 Years 5 Years 10 Years
------------------ Through Through Through Beyond
1999 2000 2001 5 Years 10 Years 15 Years 15 Years Total
---- ---- ---- ------- -------- -------- -------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial loans $ 1,466 $ 165 $ 6 $ 55 $ 63 $ - $ 119 $1,874
Real estate mortgage........ 106 99 689 5,697 10,956 8,943 11,243 37,733
Commercial real estate...... 636 308 318 869 1,782 893 651 5,457
Construction................ 115 - - - - - - 115
Home improvement............ 113 108 166 428 166 - - 981
Automobile.................. 101 203 211 236 - - - 751
Credit cards................ 805 - - - - - - 805
Other....................... 669 116 98 49 7 - - 939
------- ----- ------- ------- -------- ------- -------- --------
Total loans.............. $ 4,011 $ 999 $ 1,488 $ 7,334 $ 12,974 $ 9,836 $ 12,013 $ 48,655
======= ===== ======= ======= ======== ======= ======== ========
</TABLE>
The following table sets forth the dollar amount of all loans due after
December 31, 1999 which have fixed interest rates and have floating or
adjustable interest rates.
<TABLE>
<CAPTION>
Fixed Floating- or
Rates Adjustable-Rates
----- ----------------
(In Thousands)
<S> <C> <C>
Commercial loans $ 139 $ 269
Real estate mortgage............................. 29,234 7,343
Commercial real estate........................... 3,059 2,812
Construction..................................... - -
Home improvement................................. 868 -
Automobile....................................... 650 -
Credit cards..................................... - -
Other............................................ 270 -
-------- --------
Total......................................... $ 34,220 $ 10,424
======== ========
</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
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generally is undertaken by a Board-approved independent fee appraiser who is
certified by the State of Illinois and the State of Missouri.
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, 1998, 1997 and 1996, the Banks' total loan originations were $10.2 million,
$20.7 million, and $11.0 million, respectively. While the Banks originate both
adjustable-rate and fixed-rate loans, 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 processed loans through their 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 years ended
December 31, 1998, and 1997 the Cape Girardeau Loan Production Office processed
$6.2 million, and $911,800, respectively, of such loans for which the Bank
received fees of $51,000, and $19,000, respectively.
12
<PAGE> 13
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,
-----------------------
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Total loans at beginning
of period............................. $60,468 $54,842 $57,021
------- ------- -------
Loans originated:
Commercial loans 1,479 2,323 623
Single-family residential............. 4,232 12,389 5,284
Commercial real estate................ 2,556 1,957 0
Construction loans.................... 175 1,655 699
Agriculture and land.................. 102 202 191
Consumer.............................. 1,677 2,181 4,220
------- ------- -------
Total loans originated.............. 10,221 20,707 11,017
------ ------ ------
Loan principal repayments............... 22,291 15,085 13,249
Increase (decrease) in
other items, net...................... (189) 4 53
------ --- ----
Total loans at
end of period......................... $48,209 $60,468 $54,842
======= ======= =======
</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. At December 31, 1998, the Banks had
outstanding commitments to originate residential loans of approximately
$902,000, all of which were at fixed rates. In addition, the Banks had
commitments to fund commercial loans and outstanding credit lines of
approximately $940,000 and $1,551,000, respectively, at December 31, 1998.
Commitments to extend credit may involve elements of interest rate risk in
excess of the amount recognized in the consolidated 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 Banks since
the time the commitment was made.
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) for originating loans be
deferred and amortized into interest income over the contractual life of the
loan. Net deferred
13
<PAGE> 14
fees or costs associated with loans that are prepaid are recognized as income at
the time of prepayment. The Banks had $12,000 of net deferred loan costs at
December 31, 1998.
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 Bank charges 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>
<CAPTION>
At December 31,
------------------------------------------------------------------------------
1998 1997 1996
------------------------------------------------------------------------------
Percentage Percentage Percentage
Principal of Gross Principal of Gross Principal of Gross
Balance Loans Balance Loans Balance Loans
--------- -------- -------- --------- --------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30 - 59 days............... $ 412 .85% $ 963 1.58% $ 757 1.37%
60 - 89 days............... 709 1.46 423 .70 186 .34
--- ---- --- --- --- ---
$1,121 2.31% $1,386 2.28% $ 943 1.71%
====== ===== ====== ===== ===== =====
</TABLE>
14
<PAGE> 15
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>
<CAPTION>
At December 31,
---------------------------------------
1998 1997 1996
----------- ----------- ----------
(Dollars in Thousands)
<S> <C> <C> <C>
Non-performing loans:
Loans accounted for on a non-accrual basis:
Real Estate:
Residential ............................... $150 $ 27 $ 11
Commercial ................................ -- -- 14
Consumer .................................... 6 10 54
------- -------- -------
Total ..................................... 156 37 79
------- -------- -------
Accruing loans which are contractually past due
90 days or more:
Residential real estate ....................... -- -- --
Consumer ...................................... -- -- --
------- -------- -------
Total ..................................... -- -- --
------- -------- -------
Total non-performing loans ................ 156 37 79
Real estate acquired by
foreclosure, net ............................ 128 38 117
------- -------- -------
Total non-performing assets ................... $284 $ 75 $196
====== ======== =======
Total non-performing loans to
net loans ................................... 0.32% 0.06% 0.14%
------- -------- -------
Total allowance for loan losses
to non-performing loans ..................... 287.41% 1159.97% 485.74%
------- -------- -------
Total non-performing assets to
total assets ................................ .20% .06% .13%
------- -------- -------
</TABLE>
15
<PAGE> 16
At December 31, 1998, 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 $128,000 in real
estate acquired by foreclosure at December 31, 1998, which consisted of five
separate pieces of property.
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:
16
<PAGE> 17
<TABLE>
<CAPTION>
At December 31,
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Loss............................................... $ -- $ -- $ 8
Doubtful........................................... 56 -- 15
Substandard ....................................... 507 373 184
Special mention.................................... 7 7 --
---- ---- ----
Total............................................ $570 $380 $207
==== ==== ====
$449 $436 $376
General loss allowances............................
Specific loss allowances........................... -- -- 8
---- ---- ----
Total loss allowances............................ $449 $436 $384
==== ==== ====
</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 loan portfolio. 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, 1998, the Banks had an allowance for loan losses of
$449,000. 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 information available to make such
determinations, future adjustments to the allowance for loan
17
<PAGE> 18
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 the existing allowance for loan losses is
adequate, there can be no assurance that regulators, in reviewing the Banks'
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 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,
----------------------------------------
1998 1997 1996
-------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Allowance at beginning of period $ 436 $ 384 $ 390
Provision for loan losses ...... 17 98 33
Recoveries ..................... 24 21 3
Charge-offs:
Residential real estate ...... (9) (6) --
Commercial real estate ....... -- (8) --
Consumer ..................... (19) (53) (42)
----- ----- -----
Total charge-offs .......... (28) (67) (42)
----- ----- -----
Allowance at end of period ... $ 449 $ 436 $ 384
===== ===== =====
Ratio of allowance to total
loans outstanding at 0.92% 0.72% 0.70%
the end of the period......... ===== ===== =====
Ratio of net charge-offs to
average loans outstanding 0.01% 0.08% 0.07%
during the period ............ ===== ===== =====
</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 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.
18
<PAGE> 19
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------------------------------------------
1998 1997 1996
---------------------------------------------------------------------------------------------------------
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 ........ $278 .74% 76.9% $250 .52% 78.6% $236 .54% 78.9%
Commercial ......... 80 1.47 11.2 68 1.34 8.3 69 1.50 8.3
Commercial .......... 47 2.51 3.9 61 2.41 1.2 8 2.87 .5
Agriculture and .... 5 1.10 0.9 5 .69 1.2 5 .56 1.6
land
Consumer ............ 39 1.12 7.1 52 1.11 7.7 66 1.11 10.7
---- ----- ---- ----- ---- -----
Total allowance for
loan losses ...... $449 100.0% $436 100.0% $384 100.0%
==== ===== ==== ===== ==== =====
</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 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, 1998, the Banks' investment portfolio and
mortgage-backed security portfolio totaled $90.1 million and consisted
principally of United States Government and agency obligations, mortgage-backed
securities, certificates of deposit in other financial institutions, municipal
obligations, equity securities, interest-bearing deposits, Federal Home Loan
Bank ("FHLB") Stock, and Federal Reserve Bank ("FRB") Stock. At December 31,
1998, 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.
As of December 31, 1998, the held to maturity investment portfolio of
the Banks contained securities with an amortized cost of $40.1 million and a
fair value of $40.3 million and consisted of United States agency obligations,
municipal and state obligations and mortgage-backed bonds. At December 31, 1998,
the Banks' investment securities available for sale portfolio consisted of U.S.
Government obligations, mortgage-backed bonds, equity securities, stock in the
FHLB, and stock in the FRB with an amortized cost of $12.5 million and a fair
19
<PAGE> 20
value of $12.5 million. At December 31, 1998, the Banks held no securities that
were classified as trading securities.
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., Federal National Mortgage Association ("FNMA"), and Federal
Home Loan Mortgage Corporation ("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,
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 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.
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.
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,
1998, net mortgage-backed and related securities totaled $21.9 million, or 15.3%
of total assets. At December 31, 1998, 5.0% of
20
<PAGE> 21
the mortgage-backed and mortgage related securities were adjustable-rate and
95.0% were fixed rate. The mortgage-backed securities portfolio had coupon rates
ranging from 5.00% to 7.50% and had a weighted average yield of 6.14% at
December 31, 1998. The estimated fair value of the Banks' mortgage-backed
securities at December 31, 1998 was $21.9 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 generally have similar characteristics 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 $10.6 million at December 31, 1998. 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,
1998, 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 risk investments. At December 31, 1998, the
Banks did not have any derivatives or high risk securities.
Of the Banks' $21.9 million mortgage-backed securities portfolio at
December 31, 1998, $12.7 million with a weighted average yield of 6.18% had
contractual maturities within ten
21
<PAGE> 22
years and $9.2 million with a weighted average yield of 6.07% 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.
The following table sets forth the composition of the Banks'
mortgage-backed securities portfolio at the dates indicated.
22
<PAGE> 23
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------------
1998 1997 1996
--------------------------------------------------------------------------------
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
fair value):
GNMA ............................... $ 1,878 8.59% $ 395 2.87% $ 450 2.83%
FNMA ............................... 3,870 17.69 1,247 9.04 1,449 9.12
FHLMC............................... 5,527 25.27 -- -- -- --
------- ------ ------- ------ ------- ------
Total mortgage-backed
securities available for sale ... 11,275 51.55 1,642 11.91 1,899 11.95
------- ------ ------- ------ ------- ------
Held to maturity (at amortized cost):
GNMA ............................... -- -- 1,170 8.49 1,335 8.40
FNMA ............................... -- -- 101 0.73 124 0.78
FHLMC .............................. -- -- 3,483 25.26 4,200 26.42
Collateralized mortgage obligations 10,595 48.45 7,392 53.61 8,339 52.45
------- ------ ------- ------ ------- ------
Total mortgage-backed
securities held to maturity .... 10,595 48.45 12,146 88.09 13,998 88.05
------- ------ ------- ------ ------- ------
Total mortgage-backed securities ...... $21,870 100.00% $13,788 100.00% $15,897 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
The following table shows purchases, sales and repayments of
mortgage-backed securities during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1998 1997 1996
---------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Mortgage-backed securities, net,
at beginning of period .............. $ 13,788 $ 15,897 $ 15,413
Purchases ............................. 17,125 3,331 2,981
Sales ................................. (250) -- --
Repayments ............................ (8,919) (5,513) (2,519)
Increase (decrease) in other items, net 126 73 22
-------- -------- --------
Mortgage-backed securities, net,
at end of period .................... $ 21,870 $ 13,788 $ 15,897
======== ======== ========
</TABLE>
The following tables set forth the composition of the Banks' investment
portfolio at the dates indicated.
23
<PAGE> 24
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------------
1998 1997 1996
----------------------- ------------------------ ------------------------
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 fair value)-
Securities of U.S. government ......... $ 3,014 4.4% $17,509 32.0% $11,475 16.4%
Securities of U.S. agencies ........... 6,994 10.3 -- -- -- --
------- ------- ------- ------- ------- --------
Total investment securities
available for sale .................. 10,008 14.7 17,509 32.0 11,475 16.4
------- ------- ------- ------- ------- --------
Held to maturity ( at amortized cost):
Securities of U.S. agencies ........... 33,962 49.8 14,942 27.3 14,512 20.8
Mortgage-backed bonds ................. 1,258 1.8 2,634 4.8 10,912 15.6
Securities of states and municipalities 4,896 7.2 7,657 14.0 10,830 15.5
------- ------- ------- ------- ------- --------
Total investment securities held to
maturity ........................... 40,116 58.8 25,233 46.1 36,254 51.9
------- ------- ------- ------- ------- --------
Total investment securities ......... 50,124 73.5 42,742 78.1 47,729 68.3
Interest-bearing deposits .................. 8,709 12.8 3,063 5.6 4,192 6.0
Federal funds sold ......................... 5,788 8.5 6,395 11.7 16,000 22.9
Certificates of deposit .................... 95 .1 290 .6 888 1.3
Bankers acceptances ........................ 994 1.4 -- -- -- --
Equity securities .......................... 1,302 1.9 1,172 2.2 --
FHLB stock ................................. 801 1.2 622 1.1 622 0.9
FRB stocks ................................. 405 .6 405 .7 411 0.6
============================================================================
Total investments ................... $68,218 100.0% $54,689 100.0% $69,842 100.0%
============================================================================
</TABLE>
24
<PAGE> 25
<TABLE>
<CAPTION>
At December 31, 1998
-----------------------------------------------------------------------------------
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 fair value)-
Securities of U.S. government...... $ 3,014 5.85% $ -- --% $ -- --% $ -- --%
Securities of U.S. agencies ....... -- -- 6,994 6.06% -- --% -- --%
Held to maturity (at amortized cost):
Securities of U.S. agencies ........ 33,962 5.09% -- --% -- --% -- --%
Mortgage-backed bonds .............. 1,258 4.91% -- --% -- --% -- --%
Securities of states and
municipalities(1) ................. 1,169 6.25% 1,973 7.16% 1,754 8.19% -- --%
------- ----- ------- ----
Total investment securities .... $39,403 $8,967 $1,754 $--
======= ====== ====== ====
</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 $43.9 million
($43.9 million at amortized cost) at December 31, 1998. The portfolio consisted
of short to medium-term (up to ten years) securities, of which $10.0 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, 1998, totaled $5.1 million at estimated fair value ($4.9 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, 1998, general obligation bonds and revenue bonds totaled
$3.0 million and $1.9 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, 1998, the Banks' municipal bond portfolio was
comprised of 49 bonds, the average principal amount of which was $100,000. At
such date the weighted average life of the portfolio was approximately 3.8 years
and had an weighted average coupon rate of 5.18%. 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 $1.1 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, 1998 had $95,000 million of such deposits. In order to obtain FDIC
insurance coverage, these deposits are placed
25
<PAGE> 26
at various financial institutions throughout the United States by a broker in
amounts less than $100,000.
GOVERNMENT SPONSORED ENTERPRISE SECURITIES. At December 31, 1998, the
Banks' investment portfolio included securities issued by the FNMA and the
FHLMC. At December 31, 1998, such bonds had an aggregate amortized cost of $3.5
million and a fair value of $3.5 million, an average life of approximately 2.3
years, and an average coupon rate of 5.70%.
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, 1998, the Banks had $10.0 million borrowings from the FHLB-Chicago.
At December 31, 1998, the Banks had $10.9 million outstanding in reverse
repurchase agreements.
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.
26
<PAGE> 27
The following table sets forth certain information concerning the
Banks' time deposits and other interest-bearing deposits at December 31, 1998.
<TABLE>
<CAPTION>
Weighted Percentage
Average Original Minimum Balance of Total
Interest Rate Term Category Amount (in thousands) Deposits
-------------- ---- -------- ------- -------------- --------
<S> <C> <C> <C> <C> <C> <C>
--% None Non-interest bearing checking $ 100 $ 748 0.75%
1.93 None NOW accounts 100 8,419 8.47
3.35 None Money market demand 2,500 16,282 16.37
2.74 None Statement savings 30 8,534 8.58
Certificates of Deposit
3.50 91-day Fixed-term, fixed-rate 500 205 0.21
4.40 4 months Fixed-term, fixed-rate 5,000 282 0.28
4.45 6 months Fixed-term, fixed-rate 500 6,886 6.93
4.46 6 months Fixed-term, fixed-rate 50,000 412 .41
5.25 7 months Fixed-term, fixed-rate 5,000 2,864 2.88
4.94 1 year Fixed-term, fixed-rate 500 10,671 10.73
5.04 18 months Fixed-term, fixed-rate 500 2,561 2.58
5.73 30 months Fixed-term, fixed-rate 100 8,505 8.55
5.49 30 months Fixed-term, fixed-rate 500 25,136 25.28
5.49 4 years Fixed-term, fixed-rate 500 396 0.40
7.75 6 years Fixed-term, fixed-rate 500 21 0.02
4.97 Various Fixed-term, fixed-rate 100,000 7,513 7.56
-------- ------
$ 99,435 100.0%
======== =====
</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,
1998.
<TABLE>
<CAPTION>
Certificates
Maturity Period of Deposit
- --------------------------------------------------- --------------
(In Thousands)
<S> <C>
Three months or less............................... $ 6,800
Over three through six months...................... 300
Over six through 12 months......................... 1,215
Over 12 months..................................... 1,757
-------
Total......................................... $10,072
=======
</TABLE>
27
<PAGE> 28
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,
------------------------------------------------------------------------------------------
1998 1997 1996
-------------------------------- ------------------------------- --------------------
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 ... $ 748 0.75% 316 $ 432 $ 0.45% $ (132) $ 564 0.55%
NOW checking .................... 8,419 8.47 765 7,654 8.03 (1,032) 8,686 8.50
Statement savings................ 8,534 8.58 (151) 8,685 9.11 (1,437) 10,142 9.92
Money market demand ............. 16,282 16.37 664 15,618 16.38 (1,066) 16,684 16.32
Fixed-rate certificates which
mature in the year ending(1)(2):
Within 1 year ................ 39,939 40.17 (6,505) 46,444 48.70 7,771 38,673 37.82
After 1 year, but
within 2 years ............... 15,361 15.45 4,048 11,313 11.86 (9,577) 20,890 20.43
After 2 years, but
within 5 years ............... 10,152 10.21 4,936 5,216 5.47 (1,392) 6,608 6.46
---------------------------------------------------------------------------------------------
Total ...................... $ 99,435 100.00%$ 4,073 $ 95,362 100.00%$ (4,471) $102,247 100.00%
============================================================================================
</TABLE>
(1) At December 31, 1998 and at December 31, 1997, and 1996, jumbo certificates
amounted to $10.0 million, $7.0 million and $7.1 million, respectively.
(2) IRA accounts included in certificate balances are $8.5 million, $8.9
million and, $8.6 million at December 31, 1998 and December 31, 1997 and
1996, respectively.
28
<PAGE> 29
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,
------------------------------------------------
1998 1997 1996
------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
2.00 - 2.99%............................. $ 40 $ 17 $ --
3.00 - 4.99%............................. 12,861 9,740 15,528
5.00 - 6.99%............................. 52,513 53,180 50,581
7.00 - 8.99%............................. 38 36 62
------- ------- --------
Total................................ $65,452 $62,973 $ 66,171
======= ======= ========
</TABLE>
The following table sets forth the amount and maturities of time
deposits at December 31, 1998.
<TABLE>
<CAPTION>
Amount Due
--------------------------------------------------------------
Percent
Over Over Over of Total
Less than 1-2 2-3 3-4 Certificate
One Year Years Years Years Total Accounts
-------- ----- ----- ----- ----- --------
<C> <C> <C> <C> <C> <C> <C>
2.00 - 2.99%...... $ 40 $ -- $ -- $ -- $ 40 .1%
3.00 - 4.99%...... 12,861 -- -- -- 12,861 19.6
5.00 - 6.99%...... 27,028 15,345 10,108 32 52,513 80.2
7.00 - 8.99%...... 10 16 -- 12 38 .1
------- ------- ------- ------- ------- ------
Total ....... $39,939 $15,361 $10,108 $ 44 $65,452 100.0%
=============================================================================== ======
</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,
------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------ ---------------------------- --------------------------
Interest- Interest- Interest-
Bearing Certifi- Bearing Certifi- Bearing Certifi-
Demand cates of Demand cates of Demand cates of
Deposits Deposits Deposits Deposits Deposits Deposit
-------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Average Balance ... $ 33,101 $ 62,392 $ 32,986 $ 64,566 $ 40,889 $ 66,015
Average Rate ...... 2.84% 5.26% 2.78% 5.24% 2.80% 5.17%
</TABLE>
The following table sets forth the savings activities of the Banks for
the periods indicated.
29
<PAGE> 30
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Beginning Balance ........ $ 95,362 $ 102,247 $ 106,718
Net increase (decrease) .. 1,899 (9,747) (7,569)
before interest credited
Interest credited ........ 2,174 2,862 3,098
--------- --------- ---------
Net increase (decrease) in
savings deposits ....... 4,073 (6,885) (4,471)
--------- --------- ---------
Ending Balance ........... $ 99,435 $ 95,362 $ 102,247
========= ========= =========
</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 are 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. At December 31, 1998, the Banks had $10.0 million of fixed-term advances
from the FHLB, with a weighted average interest rate of 4.76%, due in 2008.
During the years ended December 31, 1997 and 1996, the Banks had no borrowings
from the FHLB-Chicago.
The Banks also use reverse repurchase agreements due generally within
one year as a source of funds. At December 31, 1998, reverse repurchase
agreements totaled $10.9 million with a weighted average interest rate of 4.59%
secured by a pledge of certain investment and mortgage-backed securities with an
amortized cost of $11.0 million and a fair value of $11.0 million. At December
31, 1998, $10.3 million of the agreements are maintained with Gilster-Mary Lee.
The following tables set forth certain information regarding short-term
borrowings by the Banks at the dates and for the periods indicated.
30
<PAGE> 31
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Weighted average rate paid on
securities sold under agreements
to repurchase............................. 4.59% 5.30% 4.93%
</TABLE>
<TABLE>
<CAPTION>
At or For the Year
Ended December 31,
-----------------------------------------------------
1998 1997 1996
-----------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Maximum amount of securities sold
under agreements to repurchase
at any month end............................. $10,880 $8,380 $18,340
Approximate average securities sold
under agreements to repurchase
outstanding................................... $9,523 $6,915 $15,057
Approximate weighted average rate
paid on securities sold under
agreements to repurchase(1)................... 5.00% 5.02% 4.93%
</TABLE>
(1) Computed using the weighted rates of each individual transaction.
INTEREST RATE RISK MANAGEMENT
Interest rate sensitivity is closely monitored through the Company's
asset-liability management procedures. At the end of this section is a table
reflecting the Company's interest rate gap (rate sensitive assets minus rate
sensitive liabilities) analysis at December 31, 1998, individually and
cumulatively, through various time periods.
At December 31, 1998, the static gap analyses indicated substantial
liability sensitivity over a one-year time period. Generally, such a position
indicates that an overall rise in interest rates would result in an unfavorable
impact on the Company's net interest margin, as liabilities would reprice more
quickly than assets. Conversely, the net interest margin would be expected to
improve with an overall decline in interest rates. As savings, NOW and money
market accounts are subject to withdrawal on demand, they are presented in the
analysis as immediately repriceable. Based on the Company's experience, pricing
such deposits is not expected to change in direct correlation with changes in
the general level of short-term interest rates. Accordingly, management believes
that gradual increase in the general level of interest rates will not have a
material effect on the Company's net interest income.
The asset/liability management process, which involves structuring the
consolidated balance sheet to allow approximately equal amounts of assets and
liabilities to reprice at the same time, is a process essential to minimize the
effect of fluctuating interest rates
31
<PAGE> 32
on net interest income. The following table reflects the Company's interest rate
gap (rate-sensitive assets minus rate-sensitive liabilities) analysis as of
December 31, 1998, individually and cumulatively, through various time periods.
Loans scheduled to reprice are reported in the earliest possible repricing
interval for this analysis.
Remaining Maturity if Fixed Rate,
Earliest Possible Repricing Interval if Floating Rate
<TABLE>
<CAPTION>
More than
three More than
Three months one year
months through through More than
or less one year five years five years Total
------- -------- ----------- ----------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable, net $ 7,532 $ 10,714 $ 13,206 $ 16,757 $ 48,209
Investment and mortgage-
backed securities 38,648 5,076 22,934 7,845 74,503
Other interest-earning assets 15,586 -- -- -- 15,586
-------- -------- --------- --------- ---------
Total interest-earning assets 61,766 15,790 36,140 24,602 138,298
-------- -------- --------- --------- ---------
INTEREST-BEARING LIABILITIES:
Savings, NOW, and money
market accounts $ 33,983 $ -- $ -- $ -- $ 33,983
Certificates of deposit 17,651 22,390 25,411 -- 65,452
Reverse repurchase agreements 10,880 -- -- -- 10,880
FHLB advances -- -- -- 10,000 10,000
-------- -------- --------- --------- ---------
Total interest-bearing liabilities 62,514 22,390 25,411 10,000 120,315
-------- -------- --------- --------- ---------
Interest sensitivity gap $ (748) $ (6,600) $ 10,729 $ 14,602 $ 17,983
======== ======== ======== ======== ========
Cumulative interest-sensitivity
gap $ (748) $ (7,348) $ 3,381 $ 17,983
======== ======== ======== ========
Ratio of cumulative gap to
to total assets (.52%) (5.15%) 2.37% 12.59%
======== ======== ======== =======
</TABLE>
As indicated in the preceding table, the Company operates on a
short-term basis similar to most financial institutions, as its liabilities,
with savings and NOW accounts included, could reprice more quickly than its
assets. However, the process of asset/liability management in a financial
institution is subject to economic events not easily predicted.
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
32
<PAGE> 33
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, 1998, the Banks had 29 full-time employees and seven
part time employees, none of whom were represented by a collective bargaining
unit. The Banks believe their relationships with their employees is good.
YEAR 2000 ISSUES
Over the next year, many companies, including financial institutions
such as the Company, will face potentially serious issues associated with the
inability of existing data processing hardware and software to appropriately
recognize calendar dates beginning in the year 2000. Many computer programs that
can only distinquish the final two digits of the year entered may read entries
for the year 2000 as the year 1900 and compute payment, interest or delinquency
based on the wrong date or are expected to be unable to compute payment,
interest or delinquency. In 1997, the Company began the process of identifying
the many software applications and hardware devices expected to be impacted by
this issue. The Company outsources its principal data processing activities to a
thrid party, and purchased most of its software applications from third party
vendors. The Company believes that its vendors are actively addressing the
problems associated with the "Year 2000" issue. The Company has completed the
assessment phase of its program and is currently in the testing phase of
determining Year 2000 readiness.
The Company has spent approximately $7,500 to-date in Year 2000
computer upgrades and does not expect that the remaining out-of-pocket cost of
its Year 2000 compliance effort will be material to its financial condition. The
most significant cost associated with the Company's Year 2000 program has been
the effort put forth by current employees. The internal cost incurred by Company
employees are not maintained separately by the Company.
The major applications which pose the greatest Year 2000 risk to the
Company if implementation of its readiness program is not successful are the
Company's data services systems supported by third party vendors, loan customers
inability to meet contractual payment obligations in the event the Year 2000
problem has a significant impact on their business, and failure of items
processing equipment which renders customers bank statements and banking
transactions. The potential problems which could result from the inability of
these applications to correctly process the Year 2000 are the inaccurate
calculation of interest income and expense, service delivery interruptions to
the Company's banking customers, credit losses resulting from the Company's loan
customers inability to make contractual credit obligations, interrupted
33
<PAGE> 34
financial data gathering, and poor customer relations resulting from inaccurate
or delayed transaction processing.
The Company intends on completing all Year 2000 remediation and testing
activities by mid 1999. Although the Company has initiated Year 2000
communications with key vendors, service providers and other parties material to
the Company's operations and is monitoring the progress of such third parties in
their Year 2000 compliance efforts, such third parties nonetheless represent a
risk that cannot be assessed with precision or controlled with certainty. For
that reason, the Company has developed a contingency plan to address
alternatives in the event that Year 2000 failures of automatic systems and
equipment occur.
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 "1998 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
34
<PAGE> 35
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.
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
35
<PAGE> 36
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.
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;
36
<PAGE> 37
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 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
37
<PAGE> 38
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.
38
<PAGE> 39
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, 1998.
<TABLE>
<CAPTION>
Year Building Land Building
Location County Opened Owned/Leased Owned/Leased Square Footage Deposits
- -------- ------ ------ ------------ ------------ -------------- --------
<S> <C> <C> <C> <C> <C> <C>
Chester National Bank
Main Office
1112 State Street Randolph 1919 Owned Owned 10,345 $54,159
Chester, Illinois 62233
Chester National Bank
Branch Offices
101 South Main Perry 1989(1) Owned Owned 1,950 9,442
Pinckneyville, Illinois
62274
165 West Broadway Randolph 1989(1) Owned Owned 11,142 23,413
Sparta, Illinois 62286
1414 South Main Randolph 1989(1) Owned Owned 1,032 5,652
Red Bud, Illinois 62278
Chester National Bank
of Missouri Main Office
1010 North Main Perry 1990 Owned Owned 3,900 6,768
Perryville, Missouri
63775
Chester National Bank
of Missouri Loan
Production Office
125 South Broadview Cape 1995 Leased(2) Leased 720 N/A
Plaza, Suite #1 Girardeau
Cape Girardeau,
Missouri 63703
</TABLE>
- ---------------
(1) Acquired in connection with the acquisition of Heritage Federal in 1989.
(2) Lease expires in June, 1999 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
39
<PAGE> 40
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, 1998, 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, 1998, 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, 1998, 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 7A. Quantitative and Qualitative Disclosures About Market Risks.
The Company's principal financial objective is to achieve long-term
profitability while reducing its exposure to fluctuating market interest rates.
The Company has sought to reduce the exposure of its earnings to changes in
market interest rates by attempting to manage the mismatch between asset and
liability maturities and interest rates. The principal element in achieving this
objective is to increase the interest-rate sensitivity of the Company's
interest-earning assets by originating adjustable rate residential mortgage
loans and shorter term consumer loans and maintaining a consistent level of
short- and intermediate-term investment securities and interest-bearing
deposits.
The Company does not maintain a trading account for any class of financial
instrument nor does it engage in hedging activities or purchase high-risk
derivative instruments. Furthermore, the Company is not subject to foreign
currency exchange rate risk or commodity price risk.
40
<PAGE> 41
Interest rate risk is the risk of loss in value due to changes in interest
rates. Management monitors and considers methods of managing interest rate risk
by monitoring changes in net portfolio value ("NPV") and its interest rate GAP
position (See "Interest Rate Risk Management" for the interest rate gap
analysis). The Company attempts to manage the various components of its balance
sheet to minimize the impact of sudden and sustained changes in interest rates
on net interest income.
In order to reduce the exposure to interest rate risk, the Company has developed
strategies to manage its liquidity, shorten the effective maturities of certain
interest-earning assets, and increase the effective maturities of certain
interest-bearing liabilities. The Company has focused on: (i) residential
lending of ARMs, which generally reprice within one to three years; (ii)
non-residential lending of adjustable or floating rate and/or short- term loans;
(iii) investment activities of short- and medium-term securities; (iv)
maintaining and increasing its passbook and transaction deposit accounts, which
are considered to be relatively resistant to changes in interest rates; and (v)
utilizing long-term borrowings to adjust the term to repricing of its
liabilities.
Interest rate sensitivity analysis is used to measure the Company's interest
rate risk by computing estimated changes in NPV of its cash flows from assets,
liabilities and off-balance sheet items in the event of an increase or decrease
of 100 basis points of assumed changes in market interest rates. NPV is equal to
the market value of assets minus the market value of liabilities, with
adjustments made for off-balance sheet items. The following table sets forth as
of December 31, 1998 the estimated changes in NPV based on the indicated
interest rate environments. NPV is calculated by an outside consulting firm
based on the net present value of estimated cash flows utilizing market
prepayment assumptions and market rates of interest. No effect has been given to
any steps that management of the Company may take to counter the effects of
interest rate movements presented in the table.
<TABLE>
<CAPTION>
Change in
Interest Rates Net Portfolio Value
in Basis Points -------------------
(Rate Shock) Amount $ Change % Change
-----------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
300 18,561 (3,366) (15.35%)
200 19,610 (2,317) (10.57%)
100 20,730 (1,197) (5.46%)
Static 21,927 -- --
(100) 23,211 1,284 5.86%
(200) 24,591 2,664 12.15%
(300) 26,077 4,150 18.93%
</TABLE>
The Company's asset and liability structure results in a decrease in NPV in a
rising interest rate scenario and an increase in NPV in a declining interest
rate scenario. During periods of rising rates, the value of monetary assets
declines. Conversely, during periods of falling rates, the value of monetary
assets increases. However, the level of change in value of specific assets and
liabilities due to changes in rates is not the same in a rising rate environment
as in a falling rate environment.
41
<PAGE> 42
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
other types may lag behind changes in market rates. Additionally, certain
assets, such as substantially all of the Company's ARM loans, have features that
restrict changes in interest rates on a short-term basis and over the life of
the asset. Further, in the event of a change in interest rates, expected rates
of prepayments on loans and early withdrawals from certificates could likely
deviate significantly from those assumed in calculating the table. Therefore,
the data presented in the foregoing table should not be relied upon as
indicative of actual results.
ITEM 8. Financial Statements and Supplementary Data.
The sections of the Annual Report to the Stockholders for the fiscal year ended
December 31, 1998, 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, 1998 and 1997" are hereby
incorporated by reference. No other sections of such Annual Report are
incorporated herein by this reference.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
ITEM 10. Directors and Executive Officers of the Registrant.
The sections of the 1999 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 1999 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
42
<PAGE> 43
The section of the 1999 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 1999 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, 1998 is incorporated by
reference as Exhibit 13 to this Annual 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, 1998, 1997, and 1996.
Chester Bancorp, Inc. and Subsidiaries Consolidated Statements of Income for
the Years Ended December 31, 1998, 1997, and 1996.
Chester Bancorp, Inc. and Subsidiaries Consolidated Statements of Comprehensive
Income for the Years Ended December 31, 1998, 1997, 1996.
Chester Bancorp, Inc. and Subsidiaries Consolidated Statements of Stockholders'
Equity for the Years Ended December 31, 1998, 1997, and 1996.
Chester Bancorp, Inc. and Subsidiaries Consolidated Statements of Cash Flows
for the Years Ended December 31, 1998, 1997, and 1996.
Chester Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial
Statements December 31, 1998 and 1997.
(a)(2) Financial Statement Schedules. Not applicable.
(a)(3) Exhibits
43
<PAGE> 44
<TABLE>
<CAPTION>
Regulation S-K Document Reference to Prior
Exhibit Number Filing or Exhibit Number
Attached 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* (2)
10.2 Employment Agreement with Edward K. Collins* (2)
10.3 Stock Option Plan* (1)
10.4 Management Recognition and Development Plan* (1)
10.5 Employee Stock Ownership Plan and Trust Agreement* (1)
13 Annual Report to Stockholders for Fiscal Year Ended December 31, 13
1998.
21 Subsidiaries of Chester Bancorp, Inc. (1)
27 Financial Data Schedule 27
99 Proxy Statement for the 1999 Annual meeting of the Stockholders 99
of Chester Bancorp, Inc.
</TABLE>
(1) Documents incorporated by reference to the Company's Registration Statement
on Form S-1 filed with the SEC on August 12, 1996, (No. 333-2470) at the
corresponding exhibit. All such previously filed documents are hereby
incorporated by reference in accordance with Item 601 of Regulation S-K.
(2) Documents incorporated by reference to the Company's Form 10-K for the year
ended December 31, 1997 (File No. 000-21167) filed on March 20, 1998, at the
corresponding exhibit. All such previously filed documents are hereby
incorporated by reference in accordance with Item 601 of Regulations 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.
44
<PAGE> 45
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 ____, 1999 By__________________________
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 ____, 1999 By__________________________
Edward K. Collins,
Treasurer, Secretary, and Director
March ____, 1999 By__________________________
Allen R. Verseman,
Director
March ____, 1999 By__________________________
Carl H. Welge,
Director
March ____, 1999 By__________________________
Thomas E. Welch, Jr.
Director
March ____, 1999 By__________________________
John R. Beck, M.D.
Director
March ____, 1999 By__________________________
James C. McDonald,
Director
45
<PAGE> 1
CHESTER BANCORP, INC.
[CHESTER BANCORP. LOGO]
1998 Annual Report
<PAGE> 2
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
----
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 16
Consolidated Financial Statements 17
Notes to Consolidated Financial Statements 22
Stockholder Information Inside Back Cover
<PAGE> 3
MESSAGE TO OUR STOCKHOLDERS
- --------------------------------------------------------------------------------
To Our Stockholders:
Chester Bancorp, Inc. has completed its second full year as a public
company. 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 Banks 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 and Red Bud, Illinois, and
a loan production office in Cape Girardeau, Missouri, enable the Banks to
provide quality banking service to several local communities in the region.
The Company is expanding in the Perryville market with the opening of a
branch office in the new Bucheit building located on Route 51 in Perryville.
The Company initially offered 2,182,125 shares of common stock to the
public on October 4, 1996. The Company has reduced the number of outstanding
shares of its common stock to 1,481,988 as of December 31, 1998, through various
repurchases of the Company's capital stock. Beginning on April 4, 1997, the
Company announced its initial repurchase plan to repurchase 5% of its then
outstanding capital stock, with this repurchase plan being completed in 1997. On
October 7, 1997, the Company announced a further plan to repurchase an
additional 10% of its then outstanding shares, with this plan being completed
during 1998. In addition, the Company has continued to repurchase shares from
time to time, to the extent that such repurchases are then determined to be
advisable by the Board of Directors and authorized by the appropriate regulatory
authorities. The Company will continue this practice which is 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 sincere appreciation to our stockholders and customers
for your support during 1998. We look forward to an exciting and profitable
1999.
Sincerely,
Michael W. Welge
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, 1998, there were 624 stockholders of record and 1,481,988 shares
of common stock issued and outstanding.
The following table sets forth the high and low closing prices as reported
by Nasdaq National Market 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
March 31, 1997 $15.500 $13.125 $.06
June 30, 1997 $15.500 $14.000 $.06
September 30, 1997 $18.750 $14.750 $.06
December 31, 1997 $20.500 $15.375 $.07
March 31, 1998 $18.750 $17.125 $.07
June 30, 1998 $18.000 $16 .750 $.07
September 30, 1998 $18.000 $17.000 $.07
December 31, 1998 $17.250 $16.750 $.07
</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) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets $ 142,796 $ 133,777 $ 145,843 $ 134,781 $ 141,755
Loans receivable, net 48,209 60,468 54,842 57,021 58,157
Mortgage-backed securities, net(1) 21,870 13,788 15,897 15,413 13,136
Investments, net(2) 68,218 54,689 69,842 57,605 64,410
Savings deposits(3) 99,435 95,362 102,247 106,718 129,712
Securities sold under agreements to
repurchase(3) 10,880 8,380 11,340 15,000 --
Federal Home Loan Bank advances 10,000 -- -- --
Stockholders' equity 21,705 28,988 31,427 11,712 10,675
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income $ 9,077 $ 9,182 $ 9,307 $ 9,035 $ 8,696
Interest expense 5,122 4,647 5,300 5,474 5,089
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 3,955 4,535 4,007 3,561 3,607
Provision for loan losses 17 98 33 161 69
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for
loan losses 3,938 4,437 3,974 3,400 3,538
Loss on sale of certificates of deposit -- -- (54) -- --
Gain on sale of investment securities and
mortgage-backed securities 33 16 42 98 --
Other noninterest income 207 203 180 140 114
Noninterest expense 2,514 2,835 3,338 2,338 2,374
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,664 1,821 804 1,300 1,278
Income taxes 514 511 109 299 285
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 1,150 $ 1,310 $ 695 $ 1,001 $ 993
====================================================================================================================================
Earnings per share -- basic $ .75 $ .68 $ .19 N/A N/A
====================================================================================================================================
Earnings per share -- diluted $ .73 $ .67 $ .19 N/A N/A
====================================================================================================================================
</TABLE>
3
<PAGE> 6
SELECTED CONSOLIDATED FINANCIAL INFORMATION (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
At or for the Year Ended December 31,
------------------------------------------------------
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
KEY OPERATING RATIOS(3):
Performance Ratios:
Return on average assets (net income divided
by average assets) 0.82% 0.96% 0.49% 0.73% 0.69%
Return on average equity (net income divided
by average equity) 4.63 4.28 4.12 8.94 9.76
Interest rate spread (difference between
average yield on interest-earning assets and
average cost of interest-bearing
liabilities)(4) 2.31 2.69 2.74 2.60 2.61
Net interest margin (net interest income as a
percentage of average interest-earning
assets)(4) 3.03 3.60 3.15 2.87 2.79
Noninterest expense to average assets 1.79 2.07 2.38(6) 1.70 1.66
Average interest-earning assets to average
interest-bearing liabilities 118.91 125.71 110.41 106.48 104.91
Asset Quality:
Allowance for loan losses to total loans at
end of period .92 0.72 0.70 0.68 0.42
Ratio of allowance for loan losses to
non-performing loans 287.41 1,159.97 485.74 244.79 64.65
Net charge offs to average outstanding loans
during the period .01 0.08 0.07 0.03 0.05
Ratio of non-performing assets to total
assets(5) .20 0.06 0.13 0.27 0.31
Capital Ratios:
Average equity to average assets 17.74 22.39 12.00 8.15 7.12
Equity to assets at end of period 15.20 21.67 21.55 8.69 7.53
</TABLE>
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Number of:
Real estate loans outstanding 1,127 1,317 1,466 1,484 1,542
Deposit accounts 9,970 10,391 12,632 12,282 12,742
Full-service offices 5 5 6 6 6
Loan production offices 1 1 1 1 --
</TABLE>
- ---------------
(1) Includes mortgage backed securities available for sale of $11.3 million,
$1.6 million, $1.9 million, and $2.2 million at December 31, 1998, 1997,
1996, and 1995, respectively.
(2) Includes investment securities, interest-bearing deposits, federal funds
sold, and certificates of deposits. Includes securities available for sale
of $12.5 million, $19.7 million, $12.5 million, and $7.1 million at
December 31, 1998, 1997, 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) Information is presented on a tax equivalent basis assuming a tax rate of
34%.
(5) 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.
(6) 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, securities sold under agreements to repurchase and
advances from the Federal Home Loan Bank (FHLB). 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.
The Company's profitability is also affected by the level of provisions for
loan losses, noninterest income and noninterest 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.
When used in this Annual Report the words or phrases "will likely result,"
"are expected to," "will continue," "is anticipated," "estimate," "project" or
similar expressions are intended to identify "forward- looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties, including, among
other things, changes in economic conditions in the Company's market area,
changes in policies by regulatory agencies, fluctuations in interest rates,
demand for loans in the Company's market area and competition, that could cause
actual results to differ materially from the historical earnings and those
presently anticipated or projected. The Company wishes to caution readers not to
place undue reliance on any such forward-looking statements, which speak only as
of the date made. The Company wishes to advise readers that the factors listed
above could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements.
The Company does not undertake, and specifically declines any obligation,
to publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
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
5
<PAGE> 8
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.
FINANCIAL CONDITION
Assets.
The Company's total assets increased by $9.0 million, or 6.7%, to $142.8
million at December 31, 1998 from $133.8 million at December 31, 1997. The
increase in the Company's asset size was reflective of increases in investment
securities and mortgage-backed securities, offset by a decline in loans
receivable. The funding for the increased asset size resulted from a $4.1
million increase in the level of savings deposits, a $2.5 million increase in
securities sold under agreements to repurchase, and $10.0 million of FHLB
advances received during the first quarter of 1998.
Loans receivable decreased $12.3 million, or 20.3%, to $48.2 million at
December 31, 1998 from $60.5 million at December 31, 1997. The primary reason
for the decline in loans receivable relates to the significant level of
prepayments experienced by the Company during 1998. Refinancing volume was high
due to the low level of interest rates throughout 1998. In addition, new
originations declined from $20.7 million in 1997 to $6.2 million in 1998. In
1997, management made a conscious effort to originate loans in the St. Louis
residential lending market through various wholesale channels. The program
generated $8 million of new loan volume in 1997. A similar program was not
utilized in 1998. Also, local demand for mortgage loans has been limited the
past few years because of significant competition in the Company's primary
market area. In 1999, management will focus on: increasing commercial lending by
participating in government guaranteed lending arrangements; expanding the
Company's presence in the growing Perryville, Missouri area; and, renewed focus
on consumer lending.
Mortgage-backed securities at December 31, 1998 were $21.9 million compared
to $13.8 million at December 31, 1997. Investment securities increased $7.7
million, or 17.1%, to $52.6 million at December 31, 1998 from $44.9 million at
December 31, 1997. The excess funds received from the repayment of loans and the
funds received from FHLB advances were primarily invested in U.S. government
agency securities and mortgage-backed securities
Certificates of deposit decreased $195,000, or 67.2%, to $95,000 at
December 31, 1998 from $290,000 at December 31, 1997. 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, federal funds sold, and bankers'
acceptances, on a combined basis, increased $5.5 million, or 48.8%, to $16.8
million at December 31, 1998 from $11.3 million at December 31, 1997. The
increase in interest-bearing deposits resulted primarily from the sale of $4.5
million of investment securities in the fourth quarter of 1998. Management is
currently evaluating longer term investing opportunities for the proceeds from
these sales.
Liabilities.
Savings deposits increased $4.1 million, or 4.3%, to $99.4 million at
December 31, 1998 from $95.4 million at December 31, 1997. The increase in
savings deposits reflects a $3.3 million increase in the level of deposits from
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.
Securities sold under agreements to repurchase increased $2.5 million from
$8.4 million at December 31, 1997 to $10.9 million at December 31, 1998. These
agreements averaged $9.5 million during 1998 compared to a 1997 average balance
of $6.9 million. At December 31, 1998, $10.3 million of the agreements are
maintained with 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, 1998
and 1997, the balance of funds on deposit with the Company was $24.3 million and
$18.5 million, respectively, which included the securities sold under agreements
to repurchase. Gilster-Mary Lee notified the Company at the time of the Bank's
stock conversion of its intent to maintain smaller deposit balances with the
institution in the future; however, this situation has not developed. A
significant loss of funds from Gilster-Mary Lee could impair future earnings as
there is no intent to replace the Gilster-Mary Lee savings deposits or
securities sold under agreements to repurchase with other wholesale funds. At
December 31, 1998, the Company maintained an adequate liquidity level to cover
the withdrawal of such deposits and/or additional reduction of such borrowings.
6
<PAGE> 9
Advances from the Federal Home Loan Bank (FHLB) were $10.0 million at
December 31, 1998, whereas the Company had no FHLB advances at December 31,
1997. The advances have ten year terms at a fixed rate of interest. Management
invested the funds from the advances into U.S. government agency securities with
a one year maturity.
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.
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>
1998 1997
------------------------------------------- -----------------------------
At Average
December 31, Average Yield/ Average
(DOLLARS IN THOUSANDS) 1998 Balance Interest Cost Balance Interest
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable, net(1) 8.30% $ 52,893 $ 4,496 8.50% $ 58,127 $ 5,040
Investments, net(2)(6) 5.96 47,607 2,735 5.74 46,873 2,753
Mortgage-backed securities, net 6.14 18,670 1,145 6.13 16,453 1,050
Interest-bearing deposit 5.55 16,128 839 5.20 9,868 538
----------------------------- -----------------------------
Total interest-earning assets 6.76 135,298 9,215 6.81 131,321 9,381
------------ ------------------------- -----------
Non-interest-earning assets 4,796 5,454
--------------- ---------------
Total assets $ 140,094 $ 136,775
=============== ===============
INTEREST-BEARING LIABILITIES:
Deposits 4.36 $ 95,493 4,223 4.42 $ 97,552 4,300
FHLB advances 4.76 8,767 423 4.82 -- --
Securities sold under agreements
to repurchase 4.59 9,523 476 5.00 6,915 347
----------------------------- -----------------------------
Total interest-bearing
liabilities 4.41 113,783 5,122 4.50 104,467 4,647
------------ ------------------------- -----------
Non-interest-bearing liabilities 1,458 1,690
--------------- ---------------
Total liabilities 115,241 106,157
Stockholders' equity 24,853 30,618
--------------- ---------------
Total liabilities and
stockholders' equity $ 140,094 $ 136,775
=============== ===============
Net interest income $ 4,093 $ 4,734
=========== ===========
Interest rate spread(4)(6) 2.35% 2.31%
==== ===========
Net interest margin(5) N/A 3.03%
=== ===========
Ratio of average interest-earning
assets to average interest-bearing
liabilities 118.91%
===========
</TABLE>
<TABLE>
<CAPTION>
1997 1996
---------- -------------------------------------------
Average Average
Yield/ Average Yield/
(DOLLARS IN THOUSANDS) Cost Balance Interest Cost
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable, net(1) 8.67% $ 55,758 $ 4,867 8.73%
Investments, net(2)(6) 5.87 48,262 2,785 5.77
Mortgage-backed securities, net 6.38 16,408 1,083 6.60
Interest-bearing deposit 5.45 14,227 807 5.67
-----------------------------
Total interest-earning assets 7.14 134,655 9,542 7.09
---------- -------------------------
Non-interest-earning assets 5,824
---------------
Total assets $ 140,479
===============
INTEREST-BEARING LIABILITIES:
Deposits 4.41 $ 106,904 4,557 4.26
FHLB advances -- -- -- --
Securities sold under agreements
to repurchase 5.02 15,057 743 4.93
-----------------------------
Total interest-bearing
liabilities 4.45 121,961 5,300 4.35
---------- -------------------------
Non-interest-bearing liabilities 1,662
---------------
Total liabilities 123,623
Stockholders' equity 16,856
---------------
Total liabilities and
stockholders' equity $ 140,479
===============
Net interest income $ 4,242
===========
Interest rate spread(4)(6) 2.69% 2.74%
========== ===========
Net interest margin(5) 3.60% 3.15%
========== ===========
Ratio of average interest-earning
assets to average interest-bearing
liabilities 125.71% 110.41%
========== ===========
</TABLE>
- ---------------
(1) Average balance includes non-accrual loans.
(2) Includes FHLB stock, FRB stock and investment securities.
(3) Includes interest-bearing deposits, federal funds sold, bankers'
acceptances, 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.
7
<PAGE> 10
(6) Information is presented on a tax-equivalent basis assuming a tax rate of
34%. The tax-equivalent adjustments were approximately $138,000, $199,000
and $235,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
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 when 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>
1998 Compared to 1997 1997 Compared to 1996
------------------------------------ ------------------------------------
Total Total
Rate/ Increase Rate/ Increase
(Dollars in thousands) Volume Rate Volume (Decrease) Volume Rate Volume (Decrease)
- --------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable, net(1) $(454) $ (99) $ 9 $(544) $ 207 $ (34) $ 0 $ 173
Investments, net(2) 43 (61) 0 (18) (80) 48 0 (32)
Mortgage-backed
securities, net 142 (41) (6) 95 3 (36) 0 (33)
Interest-bearing
deposits(3) 341 (25) (15) 301 (247) (31) 9 (269)
- --------------------------------------------------------------------------------------------------------
Total net change in
income on interest-
earning assets 72 (226) (12) (166) (117) (53) 9 (161)
- --------------------------------------------------------------------------------------------------------
Interest-bearing
liabilities:
Deposits (91) 10 4 (77) (398) 160 (19) (257)
FHLB advances 440 -- (17) 423 -- -- -- --
Securities sold under
agreements to
repurchase 131 (2) 0 129 (401) 13 (8) (396)
- --------------------------------------------------------------------------------------------------------
Total net change in
expense on interest-
bearing liabilities 480 8 (13) 475 (799) 173 (27) (653)
- --------------------------------------------------------------------------------------------------------
Net change in net
interest income $(408) $(234) $ 1 $(641) $ 682 $(226) $ 36 $ 492
========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1996 Compared to 1995
-------------------------------------------
Total
Rate/ Increase
(Dollars in thousands) Volume Rate Volume (Decrease)
- -----------------------------------------------------------------------
INTEREST-EARNING ASSETS:
<S> <C> <C> <C> <C>
Loans receivable, net(1) $138 $ (23) 1 $(160)
Investments, net(2) 304 65 10 379
Mortgage-backed
securities, net 196 (57) (11) 128
Interest-bearing
deposits(3) (195) 163 (35) (67)
- -----------------------------------------------------------------------
Total net change in
income on interest-
earning assets 167 148 (35) 280
- -----------------------------------------------------------------------
Interest-bearing
liabilities:
Deposits (589) (156) 23 (722)
FHLB advances -- -- -- --
Securities sold under
agreements to
repurchase 585 (9) (27) 549
- -----------------------------------------------------------------------
Total net change in
expense on interest-
bearing liabilities (4) (165) (4) (173)
- -----------------------------------------------------------------------
Net change in net
interest income $171 $ 313 $(31) $ 453
=======================================================================
</TABLE>
(1) Average balance includes nonaccrual loans.
(2) Includes FHLB stock, FRB stock and investment securities.
(3) Includes interest-bearing deposits, federal funds sold, bankers'
acceptances and certificates of deposit.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31,1998 AND 1997
Net Income.
The Company's net income for 1998 was $1.1 million compared to $1.3 million
for 1997. The lower net income level in 1998 reflects a $580,000 decline in net
interest income which was partially offset by a $320,000 decrease in noninterest
expense. The decline in net interest income resulted from a decrease in the
Company's interest rate spread. Net income in 1997 was negatively impacted by
the accelerated vesting of restricted stock awards due to the death of one of
the Company's directors. The expense recorded by the Company in 1997 for the
vesting of restricted stock awards related to the deceased director totaled
$305,000.
Net Interest Income.
Net interest income decreased $580,000, or 12.8%, to $4.0 million for 1998
from $4.5 million for 1997. This decrease was the result of a decline in the
Company's interest rate spread from 2.69% for 1997 to 2.31% for 1998. The
decrease in the Company's interest rate spread was mainly attributable to a
decline in the average yield for each component of interest-earning assets. This
decline is reflective of the lower interest rate environment experienced during
1998 and a change in the asset mix that has occurred over the past year. For
1997, average loans comprised 44% of total earning assets, whereas for 1998
average loans comprised only 39% of total earning assets. Net interest income
was also impacted by a decline in the ratio of average interest-earning assets
to average interest-bearing liabilities from 125.71% in 1997 to 118.91% in 1998.
The reduction in the ratio was primarily attributable to management's continued
planned use of funds to repurchase the Company's common stock.
8
<PAGE> 11
Interest Income.
Interest income on loans receivable totaled $4.5 million for 1998 compared
to $5.0 million for 1997. The $543,000, or 10.8%, decrease in interest income on
loans receivable resulted from a $5.2 million, or 9.0%, decrease in the average
balance of loans receivable. The impact of decreased volume was further impacted
by a decline in the average yield on loans receivable from 8.67% in 1997 to
8.50% in 1998. The decrease in the average balance resulted from significant
loan prepayments coupled with a significant reduction in origination volume.
Interest income on mortgage-backed securities increased $95,000, or 9.0%,
to $1.15 million for 1998 from $1.05 million for 1997. The increase in interest
income on mortgage-backed securities resulted from a $2.2 million, or 13.5%,
increase in the average balance of mortgage-backed securities. The impact of an
increased average balance was partially offset by a decline in the average yield
on mortgage-backed securities from 6.38% in 1997 to 6.13% in 1998. The increase
in the average balance resulted primarily from a greater emphasis on
mortgage-backed securities as a means of investing excess funds resulting from
significant loan repayments.
Interest earned on investment securities was $2.6 million for both 1998 and
1997. The impact of the $734,000, or 1.6%, increase in the average balance of
investment securities was offset by a decrease in the average yield. During
1998, management increased the Company's investment in held to maturity
securities and reduced the level of investments available-for-sale. At December
31, 1998, investment securities held to maturity comprised 76% of the investment
portfolio, while at December 31, 1997 investment securities held to maturity
were 56% of the investment portfolio.
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
requires all derivative instruments to be recorded on the balance sheet at
estimated fair value. Among other things, the Statement provides that on the
date of initial application, an entity may transfer any held-to-maturity
security into the available-for-sale category. The Company adopted this
Statement on October 1, 1998. Although the Company did not have any derivative
instruments to record, management reconsidered their ability and intent to hold
certain debt securities to maturity and transferred $11,064,440 and $10,510,911
of investment securities and mortgage-backed securities classified as held to
maturity, respectively, to available for sale on October 1, 1998.
Interest income on interest-bearing deposits increased $301,000, or 56.1%,
during 1998. The increase in interest income on interest-bearing deposits
resulted from an increase in the average balance of interest-bearing deposits of
$6.3 million, or 63.4%, for 1998. The increase in the average balance was due to
the increased availability of funds that resulted from significant loan
repayments. The increase in interest income on interest-bearing deposits was
partially offset by a decrease in the average yield on interest-bearing deposits
from 5.45% in 1997 to 5.20% in 1998.
Interest Expense.
Interest expense increased $475,000, or 10.2%, during 1998. Interest
expense on savings deposits decreased $77,000, or 1.8%, to $4.2 million for 1998
from $4.3 million for 1997. This decrease resulted primarily from the $2.1
million, or 2.1%, reduction in the average balance of deposits from $97.6
million for 1997 to $95.5 million for 1998. The decrease in interest expense on
deposits was not significantly impacted by the slight increase in the average
cost of deposits. The decline in average deposits was mainly impacted by
management's decision to continue to compete less aggressively on savings rates
and a full year's impact from the closing of the Company's Carbondale, Illinois
branch location on June 30, 1997. Interest expense on reverse repurchase
agreements increased $129,000, or 37.2%, to $476,000 for 1998 from $347,000 for
1997, This increase resulted primarily from the $2.6 million, or 37.7%, increase
in the average balance of securities sold under agreements to repurchase from
$6.9 million for 1997 to $9.5 million for 1998. The increase in the average
balance of securities sold under agreements to repurchase was attributable to
Gilster-Mary Lee increasing the level of funds maintained with the Company.
Interest expense on FHLB advances was $423,000 for 1998 compared to no
expense in 1997. The Company borrowed $10.0 million from the FHLB in February
1998 and invested the funds in a U.S. government agency security with a one-year
maturity. The Company had no FHLB advances outstanding during 1997. The average
balance and the average cost on FHLB advances for 1998 was $8.8 million and
4.82% respectively.
Provision for Loan Losses.
The allowance for loan losses is established through a provision for loan
losses based on management's evaluation of the risk inherent in its loan
portfolio and the general economy. Such evaluation considers numerous factors
including general economic conditions, loan portfolio composition, prior loss
experience, the estimated fair value of the underlying collateral, and other
factors that warrant recognition in providing for an adequate loan loss
allowance.
9
<PAGE> 12
During 1998, the Company's provision for loan losses was $17,000 compared
to $98,000 in 1997. Management decreased the provision in 1998 due to the
reduction in the loan portfolio experienced in 1998.
The Company's allowance for loan losses was $449,000, or .92%, of loans
outstanding at December 31, 1998, compared to $436,000, or .72%, of loans
outstanding at December 31, 1997. The Company's level of net loans charged-off
during the year ended December 31, 1998 was $4,000, which represented .01% of
average loans receivable outstanding. This percentage of charge-offs decreased
from the .08% level of charge-offs experienced in 1997. 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, 1998.
The financial statements of the Company are prepared in accordance with
generally accepted accounting principles (GAAP) and, accordingly, provisions for
loan losses are based on management's assessment of the factors set forth above.
The Company regularly reviews its loan portfolio, including problem loans, to
determine whether any loans are impaired, require classification and/or the
establishment of appropriate reserves. Management believes it has established
its existing allowance for loan losses in accordance with GAAP; however, future
additions may be necessary if economic conditions or other circumstances differ
substantially from the assumptions used in making the initial determination.
Noninterest Income.
Noninterest income was $240,000 for 1998 compared $219,000 for 1997. The
$21,000, or 9.4%, increase resulted primarily from an increase in gains
recognized from sales of investment securities and mortgage-backed securities.
As noted previously, the Company transferred $11,064,440 and $10,510,911 of
investment securities and mortgage-backed securities, respectively, classified
as held to maturity to available for sale on October 1, 1998. During the fourth
quarter, management sold $4.5 million of the investment securities transferred
and $250,000 of the mortgage-backed securities transferred which resulted in a
combined net gain on sale of $33,000. During 1998, late charges, deposit account
fees and other fees increased $55,000 as a result of the Company's Cape Girardeu
loan office selling all of its loan production to other financial institutions
for a fee. Management expects this activity to continue in 1999. The $50,000
decline in other noninterest income was primarily the result of fiscal 1997
including a settlement payment for On-Line Financial stock.
Noninterest Expense.
Noninterest expense decreased $320,000, or 11.3%, for 1998. The decrease in
noninterest expense resulted primarily from a $279,000 decrease in compensation
and employee benefits coupled with a $94,000 decline in occupancy expense.
Compensation and employee benefits decreased $279,000, or 18.3%, in 1998
due to the 1997 restricted stock award amortization including $305,000 related
to the accelerated vesting of restricted stock awards due to the death of one of
the Company's directors. The impact of this was partially offset by a full
year's amortization of restricted stock awards in 1998 for the other
participants in the plan compared to nine months of amortization in 1997 due to
the establishment of the plan in April 1997. Compensation expense also benefited
from the termination of the Director Emeritus Retirement Plan in June 1998. As a
result of this termination, the deferred compensation accrual related to this
plan was reduced by $60,000 during the second quarter of 1998.
Occupancy expense decreased $94,000, or 25.6%, in 1998 due primarily to the
write-off in 1997 of leasehold improvements associated with the Carbondale,
Illinois branch location which was closed on June 30, 1997.
Income Tax Expense.
Income tax expense for 1998 was $514,000 compared to $511,000 for 1997. The
Company's effective tax rate for 1998 and 1997 was 30.9% and 28.1%,
respectively. The effective tax rate for each year was below the statutory
federal rate of 34% due to the Company's investment in tax exempt securities.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
Net Income.
The Company's net income for 1997 was $1.3 million compared to $695,000 for
1996. The lower net income level in 1996 was the result of the one-time special
assessment imposed by the Federal Deposit Insurance Corporation (FDIC) on
SAIF-assessable deposits in 1996. 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 for 1996 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 income in 1997 was negatively impacted by the accelerated vesting of
restricted
10
<PAGE> 13
stock awards due to the death of one of the Company's directors. The expense
recorded by the Company for the vesting of restricted stock awards totaled
$305,000.
Net Interest Income.
Net interest income increased $528,000, or 13.2%, to $4.5 million for 1997
from $4.0 million for 1996. This increase was the result of an increase in the
Company's net interest margin from 3.15% for 1996 to 3.60% for 1997. The
improvement in the Company's net interest margin was mainly attributable to the
increase in the ratio of average interest-earning assets to average
interest-bearing liabilities from 110.41% in 1996 to 125.71% in 1997. The
improvement in the ratio was primarily attributable to a full year's impact from
the investment of $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 $5.0 million for 1997 compared
to $4.9 million for 1996. The $173,000, or 3.6%, increase in interest income on
loans receivable resulted primarily from a $2.4 million, or 4.2%, increase in
the average balance of loans receivable. The impact of increased volume was
partially offset by a decline in the average yield on loans receivable from
8.73% in 1996 to 8.67% in 1997. The increase in the average balance resulted
from management's focus on the St. Louis residential lending market and a
renewed emphasis on commercial business lending.
Interest income on mortgage-backed securities decreased $33,000, or 3.1%,
to $1.05 million for 1997 from $1.08 million for 1996. The decrease in interest
income on mortgaged-backed securities resulted from a decline in the average
yield from 6.60% in 1996 to 6.38% in 1997. The $16.5 million average balance of
mortgaged-backed securities in 1997 was consistent with the 1996 average
balance.
Interest earned on investment securities was $2.6 million for both 1997 and
1996. The impact of the $1.4 million, or 2.9%, decrease in the average balance
of investment securities was offset by an increase in the average yield. During
1997, management increased the Company's investment in available-for-sale
securities and reduced the level of investments held to maturity. At December
31, 1997, investment securities available for sale comprised 44% of the
investment portfolio, while at December 31, 1996 investment securities available
for sale were only 26% of the investment portfolio. The increased level of
available-for-sale securities resulted from a significant reduction in overnight
deposits and the need to maintain a more liquid investment portfolio.
Interest income on interest-bearing deposits decreased $270,000, or 33.4%,
during 1997. The decline in interest income on interest-bearing deposits
resulted from a decrease in the average balance of interest-bearing deposits of
$4.4 million, or 30.6%, for 1997. The decline in the average balance was due to:
the investment of overnight deposits into higher yielding investments (e.g.,
loans receivable); the use of overnight deposits to partially fund savings
withdrawals and maturing reverse repurchase agreements; and a full year's impact
related to the reinvestment of proceeds from certificate of deposit maturities
and sales that occurred in 1996 into other investments. The decrease in interest
income on interest-bearing deposits was also impacted by a decrease in the
average yield on interest-bearing deposits from 5.67% in 1996 to 5.45% in 1997.
Interest Expense.
Interest expense decreased $653,000, or 12.3%, during 1997. Interest
expense on savings deposits decreased $257,000, or 5.6%, to $4.3 million for
1997 from $4.6 million for 1996. This decrease resulted primarily from the $9.4
million, or 8.7%, reduction in the average balance of deposits from $106.9
million for 1996 to $97.6 million for 1997. The decrease in interest expense on
deposits was partially offset by an increase in the average cost of deposits
from 4.26% in 1996 to 4.41% in 1997. The decline in average deposits was mainly
impacted by three factors: (1) management's decision to continue to compete less
aggressively on savings rates; (2) the closing of the Company's Carbondale,
Illinois branch location on June 30, 1997; and (3) the reduction of funds held
in savings accounts which were used by depositors to purchase stock
subscriptions which were sold in accordance with the Bank's stock conversion in
October 1996. Interest expense on reverse repurchase agreements decreased
$396,000, or 53.3%, to $347,000 for 1997 from $743,000 for 1996. This decrease
resulted primarily from the $8.1 million, or 54.1%, reduction in the average
balance of reverse repurchase agreements from $15.1 million for 1996 to $6.9
million for 1997.
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
11
<PAGE> 14
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 1997, the Company's provision for loan losses was $98,000 compared
to $33,000 in 1996. Management increased the provision in 1997 to compensate for
the growth in the loan portfolio experienced in 1997 and to maintain the loan
loss allowance at a consistent level with 1996.
The Company's allowance for loan losses was $436,000, or .72%, of loans
outstanding at December 31, 1997, compared to $384,000, or .70%, of loans
outstanding at December 31, 1996. The Company's level of net loans charged-off
during the year ended December 31, 1997 was $46,000, which represented .08% of
average loans receivable. This percentage of charge-offs increased slightly from
the level of charge-offs experienced in 1996.
Noninterest Income.
Noninterest income was $219,000 for 1997 compared to $168,000 for 1996. The
$51,000, or 30.6%, increase resulted primarily from the impact of the $54,000
loss on sale of certificates of deposit 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. There were no certificates of deposit sold in 1997. During 1997, late
charges and other fees increased $19,000 as a result of a $2.00 increase in the
monthly service charge on demand deposit accounts. In addition, the gain on sale
of investment securities declined $26,000 in 1997 due to a reduction in the
level of investment securities sold. During 1997, proceeds from the sale of
investment securities available for sale totaled $4.0 million, while 1996
proceeds from the sale of investment securities available for sale totaled $19.0
million.
Noninterest expense.
Noninterest expense decreased $503,000, or 15.1%, for 1997. In 1996,
noninterest expense included the one-time special assessment 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 fluctuation in noninterest expense resulted from a $175,000 increase in
compensation and employee benefits, an $81,000 increase in occupancy expense, a
$164,000 reduction in federal insurance premiums, and a $184,000 increase in
other noninterest expense.
Compensation and employee benefits increased $175,000, or 13.0%, in 1997
due to a full year's impact of the Company's ESOP and the partial year's impact
of the restricted stock award plan which was initiated in April 1997.
Compensation expense related to the ESOP increased $74,000 in 1997, while
restricted stock award amortization during the year totaled $435,000. The
restricted stock award amortization included $305,000 related to the accelerated
vesting of restricted stock awards due to the death of one of the Company's
directors. These increases to compensation were partially offset by the impact
of the amendment made to the Company's retirement plan for members of the Board
of Directors who reach director emeritus status. In the amendment, the benefit
period and the annual benefit multiple covered by the plan were reduced from 10
years and $500, respectively, to 5 years and $300, respectively. As a result of
this amendment, the deferred compensation accrual related to this plan was
reduced by $99,000 during the fourth quarter of 1997.
Occupancy expense increased $81,000, or 28.1%, in 1997 due to the write-off
of leasehold improvements associated with the Carbondale, Illinois branch
location which was closed on June 30, 1997.
Federal insurance premiums declined $164,000, or 70.6%, during 1997 due to
a decline in rates charged by the FDIC on SAIF assessable deposits. As a result
of the Deposit Insurance Funds Act of 1996 and the resultant recapitalization of
the SAIF, the annual assessment rate on SAIF deposits decreased on January 1,
1997 from .23% to .0648%.
The increase in noninterest expense of $184,000 resulted from a $158,000
increase in professional fees and assorted costs associated with being a public
company. Included in this expense amount are professional fees related to the
establishment of the Company's new benefit plans, costs associated with the
administrative responsibilities of maintaining stockholder records, incremental
costs related to required public reporting of financial information, and a
general increase in professional fees due to the additional public reporting
responsibilities. Noninterest expense was also impacted by an increase in losses
from the sale of foreclosed real estate of $22,000.
Income Tax Expense.
Income tax expense for 1997 was $511,000 compared to $109,000 for 1996. The
Company's effective tax rate for 1997 and 1996 was 28.1% and 13.5%,
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.
12
<PAGE> 15
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 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, 1998, the Company had $11.5 million
of adjustable rate mortgages, $56.8 million of investment securities,
mortgage-backed securities and interest-bearing deposits maturing within one
year, and $12.3 million of investment securities and mortgage-backed securities
maturing within one to five years. In addition, at December 31, 1998, the
Company had $3.5 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds consist of deposits, securities sold
under agreements to repurchase, repayments and prepayments of loans and
mortgage-backed securities, maturities of investments and interest-bearing
deposits, and funds provided from operations. While scheduled repayments of
loans and mortgage-backed securities and maturities of investment securities are
predictable sources of funds, deposit flows and loan prepayments are greatly
influenced by general interest rates, economic conditions and competition. The
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 anticipates that loan repayments and
other sources of funds will be adequate to meet and exceed the Company's
liquidity needs for 1999.
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, 1998,
cash and cash equivalents totaled $16.8 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, 1998, purchases of investment securities and
mortgage-backed securities totaled $109.3 million and $17.1 million,
respectively, while loan originations totaled $6.2 million. These investments
were funded primarily from loan and mortgage-backed security repayments of $27.2
million, investment security sales and maturities of $102.3 million, and FHLB
advances of $10.0 million.
In April 1997, the Company announced its initial repurchase plan to
repurchase 5% of its then outstanding common stock. Since that time the Company
has continued to repurchase shares when it was determined to be advisable by the
Board of Directors and authorized by the appropriate regulatory authorities. As
of December 31, 1998, the Company had repurchased approximately 734,000, or
33.6%, of its common shares. Management expects to continue to repurchase common
shares when it is viewed as a method of increasing value to the Company's
stockholders,
Liquidity management is both a daily and long-term function of business
management. If the Company requires funds beyond its ability to generate them
internally, the Company believes that it could borrow additional funds from the
Federal Home Loan Bank (FHLB). At December 31, 1998, the Company had $10.0
million of long-term advances from the FHLB.
At December 31, 1998, the Company exceeded all of its regulatory capital
requirements.
13
<PAGE> 16
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
Reporting Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and losses) in a full set
of general purpose financial statements. SFAS No. 130 requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements, and requires an enterprise to
(a) classify items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. The Company adopted the provisions
of SFAS No. 130 as of December 31, 1998, and now reports comprehensive income on
a separate statement. Application of SFAS No. 130 did not impact amounts
previously reported for net income or affect the comparability of previously
issued financial statements.
Disclosures About Segments of an Enterprise and Related Information
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information," which requires business segments to be
reported based on the way management organizes segments within the Company for
making operating decisions and assessing performance. SFAS No. 131 is effective
for fiscal years beginning after December 15, 1997. The Company has not included
disclosures regarding specific segments since management makes operating
decisions and assesses performance based on the Company as a whole.
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities", which
requires all derivative instruments to be recorded on the balance sheet at
estimated fair value. Changes in the fair value of derivative instruments are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. The Statement also provides that
on the date of initial application, an entity may transfer any held-to-maturity
security into the available-for-sale category. SFAS No. 133 is effective for
fiscal years beginning after June 15, 1999. The Company adopted this Statement
on October 1, 1998. Although the Company does not have any derivative
instruments to record, management reconsidered their ability and intent to hold
certain debt securities to maturity and transferred $11,064,440 and $10,510,911
of investment securities and mortgage-backed securities, respectively, to
available for sale on October 1, 1998. As a result of the transfers: a market
valuation account was established for the available-for-sale debt securities of
$215,565 to increase the recorded balance of such securities to their fair
value; a deferred tax liability of $81,915 was recorded to reflect the tax
effect of the market valuation account; and the net increase resulting from the
market valuation adjustment of $133,650 was recorded as a transition adjustment
in the Consolidated Statements of Comprehensive Income.
YEAR 2000 ISSUES
Over the next year, many companies, including financial institutions such
as the Company, will face potentially serious issues associated with the
inability of existing data processing hardware and software to appropriately
recognize calendar dates beginning in the year 2000. Many computer programs that
can only distinguish the final two digits of the year entered may read entries
for the year 2000 as the year 1900 and compute payment, interest or delinquency
based on the wrong date or are expected to be unable to compute payment,
interest or delinquency. In 1997, the Company began the process of identifying
the many software applications and hardware devices expected to be impacted by
this issue. The Company outsources its principal data processing activities to a
third party, and purchases most of its software applications from third party
vendors. The Company believes that its vendors are actively addressing the
problems
14
<PAGE> 17
associated with the "Year 2000" issue. The Company has completed the assessment
phase of its program and is currently in the testing phase of determining Year
2000 readiness.
The Company has spent approximately $7,500 to-date in Year 2000 computer
upgrades and does not expect that the remaining out-of-pocket cost of its Year
2000 compliance effort will be material to its financial condition. The most
significant cost associated with the Company's Year 2000 program has been the
effort put forth by current employees. The internal costs incurred by Company
employees are not maintained separately by the Company.
The major applications which pose the greatest Year 2000 risk to the
Company if implementation of its readiness program is not successful are the
Company's data services systems supported by third party vendors, loan customers
inability to meet contractual payment obligations in the event the Year 2000
problem has a significant impact on their business, and items processing
equipment which renders customers bank statements and banking transactions. The
potential problems which could result from the inability of these applications
to correctly process the Year 2000 are the inaccurate calculation of interest
income and expense, service delivery interruptions to the Company's banking
customers, credit losses resulting from the Company's loan customers inability
to make contractual credit obligations, interrupted financial data gathering,
and poor customer relations resulting from inaccurate or delayed transaction
processing.
The Company intends on completing all Year 2000 remediation and testing
activities by early 1999. Although the Company has initiated Year 2000
communications with key vendors, service providers and other parties material to
the Company's operations and is monitoring the progress of such third parties in
their Year 2000 compliance efforts, such third parties nonetheless represent a
risk that cannot be assessed with precision or controlled with certainty. For
that reason, the Company has developed a contingency plan to address
alternatives in the event that Year 2000 failures of automatic systems and
equipment occur.
15
<PAGE> 18
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, 1998 and 1997,
and the related consolidated statements of income, comprehensive income,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1998. 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.
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 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, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
KPMG LLP
St. Louis, Missouri
January 22, 1999
16
<PAGE> 19
CHESTER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1998 AND 1997 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 1,305,850 $ 1,833,006
Interest-bearing deposits 8,708,822 3,063,057
Federal funds sold 5,788,000 6,395,000
Bankers' acceptances 994,167 --
- ------------------------------------------------------------------------------------------
Total cash and cash equivalents 16,796,839 11,291,063
Certificates of deposit 95,000 290,000
Investment securities:
Available for sale, at fair value (cost of $12,467,687 and
$19,674,051 at December 31, 1998 and 1997, respectively) 12,515,769 19,708,063
Held to maturity, at cost (fair value of $40,277,481 and
$25,413,098 at December 31, 1998 and 1997, respectively) 40,116,367 25,232,519
Mortgage-backed securities:
Available for sale, at fair value (cost of $11,170,541 and
$1,623,616 at December 31, 1998 and 1997, respectively) 11,275,061 1,641,949
Held to maturity, at cost (fair value of $10,619,540 and
$12,179,290 at December 31, 1998 and 1997, respectively) 10,595,289 12,145,702
Loans receivable, net 48,208,662 60,467,735
Accrued interest receivable 909,953 887,375
Real estate acquired by foreclosure, net 127,613 38,233
Office properties and equipment, net 1,684,381 1,766,748
Income taxes receivable 155,261 --
Deferred tax asset, net -- 16,818
Other assets 316,062 290,444
- ------------------------------------------------------------------------------------------
$142,796,257 $133,776,649
==========================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings deposits $99,434,579 $95,362,100
Borrowed money 20,880,389 8,380,389
Accrued interest payable 215,420 158,899
Advance payments by borrowers for taxes and insurance 419,552 439,274
Income taxes payable -- 288,891
Deferred tax liability, net 44,174 --
Accrued expenses and other liabilities 97,055 158,778
- ------------------------------------------------------------------------------------------
Total liabilities 121,091,169 104,788,331
- ------------------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 3,000,000 shares authorized,
2,182,125 shares issued at December 31, 1998 and 1997 21,821 21,821
Additional paid-in capital 21,650,837 21,766,390
Retained earnings, substantially restricted 13,803,400 13,088,331
Accumulated other comprehensive income 93,610 32,454
Unearned ESOP shares (1,592,980) (1,647,920)
Unamortized restricted stock awards (559,674) (725,868)
Treasury stock, at cost: 700,137 and 229,079 shares at
December 31, 1998 and 1997, respectively (11,711,926) (3,546,890)
- ------------------------------------------------------------------------------------------
Total stockholders' equity 21,705,088 28,988,318
- ------------------------------------------------------------------------------------------
$142,796,257 $133,776,649
==========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE> 20
CHESTER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE YEARS ENDED DECEMBER 31, 1998 1998 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans receivable $4,496,309 $5,039,655 $4,866,508
Mortgage-backed securities 1,145,034 1,050,249 1,083,420
Investments 2,596,529 2,554,389 2,549,847
Interest-bearing deposits, federal funds sold, and
bankers' acceptance 839,157 537,704 807,444
- ---------------------------------------------------------------------------------------------------
Total interest income 9,077,029 9,181,997 9,307,219
- ---------------------------------------------------------------------------------------------------
Interest expense:
Savings deposits 4,223,085 4,299,985 4,557,361
Borrowed money 898,580 346,946 742,910
- ---------------------------------------------------------------------------------------------------
Total interest expense 5,121,665 4,646,931 5,300,271
- ---------------------------------------------------------------------------------------------------
Net interest income 3,955,364 4,535,066 4,006,948
Provision for loan losses 16,800 97,800 32,885
- ---------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 3,938,564 4,437,266 3,974,063
- ---------------------------------------------------------------------------------------------------
Noninterest income:
Late charges, deposit account fees, and other fees 188,691 134,078 115,423
Loss on sale of certificates of deposit -- -- (53,714)
Gain on sale of investment securities, net 30,318 16,256 42,093
Gain on sale of mortgage-backed securities, net 2,352 -- --
Other 18,448 68,779 63,914
- ---------------------------------------------------------------------------------------------------
Total noninterest income 239,809 219,113 167,716
- ---------------------------------------------------------------------------------------------------
Noninterest expense:
Compensation and employee benefits 1,241,287 1,520,102 1,344,793
Occupancy 274,119 368,562 287,726
Data processing 157,330 174,781 153,507
Advertising 65,570 64,067 52,298
Federal deposit insurance premiums 57,813 68,399 232,579
SAIF special assessment -- -- 812,498
Other 718,189 638,657 454,520
- ---------------------------------------------------------------------------------------------------
Total noninterest expense 2,514,308 2,834,568 3,337,921
- ---------------------------------------------------------------------------------------------------
Income before income tax expense 1,664,065 1,821,811 803,858
Income tax expense 514,338 511,445 108,716
- ---------------------------------------------------------------------------------------------------
Net income $1,149,727 $1,310,366 $ 695,142
===================================================================================================
Earnings per common share -- basic $ .75 $ .68 $ .19
Earnings per common share -- diluted $ .73 $ .67 $ .19
===================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE> 21
CHESTER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE YEARS ENDED DECEMBER 31, 1998 1998 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $1,149,727 $1,310,366 $695,142
Other comprehensive income, net of tax:
Unrealized holding gain (loss) on securities available for
sale (52,239) 57,032 (24,514)
Transition adjustment from transfer of securities to
available for sale on October 1, 1998 133,650 -- --
Less adjustment for realized gains included in net income
(net of tax of $12,415, $6,177, and $15,995 for 1998,
1997, and 1996, respectively) (20,255) (10,079) (26,098)
- --------------------------------------------------------------------------------------------------
Total other comprehensive income 61,156 46,953 (50,612)
- --------------------------------------------------------------------------------------------------
Comprehensive income $1,210,883 $1,357,319 $644,530
==================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE> 22
CHESTER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retained Accumulated
Common stock Additional earnings, other Unearned Unamortized
Three years ended ------------------------ paid-in substantially comprehensive ESOP restricted
December 31, 1998 Shares Amount capital restricted income shares stock awards
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 -- $ -- $ -- $11,676,334 $ 36,113 $ -- $ --
Net income -- -- -- 695,142 -- --
----
Net proceeds from sale of
common stock 2,182,125 21,821 20,860,066 -- -- (1,745,700) --
Dividends on common stock at
$.05 per share -- -- -- (100,378) -- -- --
Amortization of ESOP awards -- -- 5,092 -- -- 29,100 --
Change in accumulated other
comprehensive income -- -- -- -- (50,612) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 2,182,125 21,821 20,865,158 12,271,098 (14,499) (1,716,600) --
Net income -- -- -- 1,310,366 -- -- --
Issuance of restricted stock
awards -- -- 1,160,894 -- -- -- (1,160,894)
Purchase of treasury stock -- -- -- -- -- -- --
Issuance of treasury stock
for restricted stock awards -- -- (305,494) (16,366) -- -- --
Amortization of restricted
stock awards -- -- -- -- -- -- 435,026
Amortization of ESOP awards -- -- 39,492 -- -- 68,680 --
Tax benefit from stock
related compensation -- -- 6,340 -- -- -- --
Dividends on common stock at
$.25 per share -- -- -- (476,767) -- -- --
Change in accumulated other
comprehensive income -- -- -- -- 46,953 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 2,182,125 21,821 21,766,390 13,088,331 32,454 (1,647,920) (725,868)
Net income -- -- -- 1,149,727 -- -- --
Purchase of treasury stock -- -- -- -- -- -- --
Issuance of treasury stock
for restricted stock awards -- -- (170,996) (9,161) -- -- --
Amortization of restricted
stock awards -- -- -- -- -- -- 166,194
Amortization of ESOP awards -- -- 40,656 -- -- 54,940 --
Tax benefit from stock
related compensation -- -- 14,787 -- -- -- --
Dividends on common stock at
$.28 per share -- -- -- (425,497) -- -- --
Change in accumulated other
comprehensive income -- -- -- -- 61,156 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 2,182,125 $ 21,821 $21,650,837 $13,803,400 $ 93,610 $(1,592,980) $ (559,674)
===================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Treasury stock Total
Three years ended ------------------------ stockholders'
December 31, 1998 Shares Amount equity
- -------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 -- $ -- $11,712,447
Net income -- -- 695,142
Net proceeds from sale of
common stock -- -- 19,136,187
Dividends on common stock at
$.05 per share -- -- (100,378)
Amortization of ESOP awards -- -- 34,192
Change in accumulated other
comprehensive income -- -- (50,612)
- -------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 -- -- 31,426,978
Net income -- -- 1,310,366
Issuance of restricted stock
awards -- -- --
Purchase of treasury stock 250,900 (3,868,750) (3,868,750)
Issuance of treasury stock
for restricted stock awards (21,821) 321,860 --
Amortization of restricted
stock awards -- -- 435,026
Amortization of ESOP awards -- -- 108,172
Tax benefit from stock
related compensation -- -- 6,340
Dividends on common stock at
$.25 per share -- -- (476,767)
Change in accumulated other
comprehensive income -- -- 46,953
- -------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 229,079 (3,546,890) 28,988,318
Net income -- -- 1,149,727
Purchase of treasury stock 483,272 (8,345,193) (8,345,193)
Issuance of treasury stock
for restricted stock awards (12,214) 180,157 --
Amortization of restricted
stock awards -- -- 166,194
Amortization of ESOP awards -- -- 95,596
Tax benefit from stock
related compensation -- -- 14,787
Dividends on common stock at
$.28 per share -- -- (425,497)
Change in accumulated other
comprehensive income -- -- 61,156
- -------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 700,137 $(11,711,926) $21,705,088
=========================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE> 23
CHESTER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE YEARS ENDED DECEMBER 31, 1998 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,149,727 $ 1,310,366 $ 695,142
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization:
Office properties and equipment 140,073 130,554 123,311
Deferred fees, discounts, and premiums (648,052) (665,837) (163,643)
Stock plans 261,790 543,198 34,192
Increase in accrued interest receivable (22,578) (23,683) (227,100)
Increase (decrease) in accrued interest payable 56,521 46,276 (343,375)
Increase (decrease) in income taxes, net (407,474) 291,479 (154,492)
Loss on sale of certificates of deposit -- -- 53,714
Gain on sale of investment securities, net (30,318) (16,256) (42,093)
Gain on sale of mortgage-backed securities, net (2,352) -- --
Provision for loan losses 16,800 97,800 32,885
Net change in other assets and other liabilities (87,341) (36,440) 3,133
- ----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 426,796 1,677,457 11,674
- ----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Principal repayments on:
Loans receivable 18,288,784 15,084,638 13,249,189
Mortgage-backed securities 8,919,266 5,513,055 2,519,007
Investment securities 104,682 88,001 157,329
Proceeds from the maturity of certificates of deposit 195,000 693,000 4,335,000
Proceeds from the sale of certificates of deposit -- -- 4,484,286
Proceeds from the maturity of investment securities
available for sale 14,000,000 5,500,000 3,500,000
Proceeds from the maturity of investment securities held
to maturity 83,805,890 102,527,000 70,490,000
Proceeds from the sale of investment securities available
for sale 4,527,500 4,006,250 19,011,640
Proceeds from the sale of mortgage-backed securities 249,779 -- --
Proceeds from redemption of Federal Reserve Bank stock -- 6,000 --
Cash invested in:
Loans receivable (6,219,094) (20,706,983) (11,017,164)
Mortgage-backed securities held to maturity (17,124,741) (3,331,285) (2,981,406)
Investment securities available for sale (147,187) (16,624,424) (27,473,733)
Investment securities held to maturity (109,114,765) (91,009,152) (74,975,877)
Certificates of deposit -- (95,000) --
FHLB stock (178,700) -- (17,700)
Federal Reserve Bank stock -- -- (411,000)
Proceeds from sales of real estate acquired through
foreclosure 48,205 73,002 20,000
Purchase of office properties and equipment (57,706) (29,505) (229,560)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (2,703,087) 1,694,597 660,011
- ----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase (decrease) in savings deposits 4,072,479 (6,884,750) (4,470,999)
Increase (decrease) in securities sold under agreements to
repurchase 2,500,000 (2,959,611) (3,660,000)
Proceeds from FHLB advances 10,000,000 -- --
Decrease in advance payments by borrowers for taxes and
insurance (19,722) (8,392) (125,343)
Proceeds from issuance of common stock, net -- -- 19,136,187
Purchase of treasury stock (8,345,193) (3,868,750) --
Dividends paid (425,497) (476,767) (100,378)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 7,782,067 (14,198,270) 10,779,467
- ----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 5,505,776 (10,826,216) 11,451,152
Cash and cash equivalents, beginning of year 11,291,063 22,117,279 10,666,127
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 16,796,839 $11,291,063 $22,117,279
==========================================================================================================
Supplemental information:
Interest paid $ 5,065,144 4,600,655 $ 5,643,646
Income taxes paid 603,609 195,357 231,000
==========================================================================================================
Noncash investing and financing activities:
Loans transferred to real estate acquired by foreclosure $ 136,577 24,534 $ 93,651
Interest credited to savings deposits 2,173,699 2,861,760 3,098,000
Securities transferred to available for sale 21,575,351 -- --
==========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE> 24
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
(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 three
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.
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures About
Segments of an Enterprise and Related Information, which requires business
segments to be reported based on the way management organizes segments within
the Company for making operating decisions and assessing performance. SFAS No.
131 is effective for fiscal years beginning after December 15, 1997. The Company
has not included disclosures regarding specific segments since management makes
operating decisions and assesses performance based on the Company as a whole.
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 allowance for losses on
loans, management obtains independent appraisals for significant properties.
Fair Value of Financial Instruments
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
22
<PAGE> 25
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(CONTINUED)
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair Value of Financial Instruments (Continued)
judgment. Changes in assumptions could significantly affect these estimates.
Fair value estimates are presented for existing on-balance-sheet and
off-balance-sheet financial 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.
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 Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
which establishes standards for reporting and display of comprehensive income
and its components (revenues, expenses, gains, and losses) in a full set of
general purpose financial statements. SFAS No. 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements, and requires an enterprise to
(a) classify items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a balance sheet. The Company adopted the provisions of SFAS No. 130
as of December 31, 1998 and now reports comprehensive income on a separate
statement. Application of SFAS No. 130 did not impact amounts previously
reported for net income or affect the comparability of previously issued
financial statements.
Consolidated Statements of Cash Flows
For purposes of the consolidated statements of cash flows, the Company
considers all interest-bearing deposits and bankers' acceptances 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 as either: 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 other comprehensive income.
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.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which requires all derivative instruments to
be recorded on the balance sheet at estimated fair value. Changes in the fair
value of derivative instruments are recorded each period in current earnings or
other comprehensive income, depending on
23
<PAGE> 26
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(CONTINUED)
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investment Securities and Mortgage-Backed Securities (Continued)
whether a derivative is designated as part of a hedge transaction and, if it is,
the type of hedge transaction. The Statement also provides that on the date of
initial application, an entity may transfer any held-to-maturity security into
the available-for-sale category. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999, with earlier application permitted. The Company
adopted this Statement on October 1, 1998. Although the Company does not have
any derivative instruments to record, management reconsidered their ability and
intent to hold certain debt securities to maturity and transferred $11,064,440
and $10,510,911 of investment securities and mortgage-backed securities,
respectively, to available for sale on October 1, 1998. As a result of the
transfers, a market valuation account was established for the available-for-sale
debt securities of $215,565 to increase the recorded balance of such securities
to their fair value, a deferred tax liability of $81,915 was recorded to reflect
the tax effect of the market valuation account, and the net increase resulting
from the market valuation adjustment of $133,650 was recorded as a transition
adjustment in the statement of comprehensive income.
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 loans receivable 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.
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.
Management believes that the allowance for losses on loans is adequate.
While management uses available information to recognize such losses, future
additions to the allowance 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 allowance for
losses. Such agencies may require the Company to recognize additions to the
allowance based upon their judgment about information available to them at the
time of their examination.
A loan is considered impaired when it is probable the Company 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 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, the Company measures impairment based on the fair value
of the collateral when it determines foreclosure is probable. Additionally,
impairment of loans for which terms have been modified in a troubled-debt
restructuring 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 for impaired loans 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. Interest income on impaired loans is recognized on a
cash basis.
24
<PAGE> 27
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(CONTINUED)
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Real Estate Acquired by Foreclosure
Real estate acquired by foreclosure is initially recorded on an individual
property basis at estimated fair value, less cost to sell, 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.
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.
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.
Stock Option Plan
The Company accounts for its stock option plan in accordance with the
provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. As such, compensation
expense is recorded on the date of grant only if the current market price of the
underlying stock exceeds the exercise price. The Company has also adopted SFAS
123, Accounting for Stock-Based Compensation, which permits entities to
recognize as expense over the vesting period the fair value of all stock-based
awards on the date of grant. Alternatively, SFAS 123 allows entities to apply
the provisions of APB Opinion No. 25 and provide pro forma net income and
earnings per share for employee stock option grants made in 1996 and future
years as if the fair-value-based method defined in SFAS 123 had been applied.
The Company has elected to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure provisions of SFAS 123.
25
<PAGE> 28
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(CONTINUED)
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Earnings Per Share
Effective December 31, 1997, the Company adopted SFAS No. 128, Earnings Per
Share (SFAS 128). SFAS 128 supersedes APB Opinion No. 15, Earnings Per Share
(APB 15) and specifies the computation, presentation, and disclosure
requirements for earnings per share (EPS) for entities with publicly held common
stock or potential common stock. It replaces the presentation of primary EPS
with a presentation of basic EPS and fully diluted EPS with diluted EPS. It also
requires dual presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation. (See note 2.)
Basic EPS, unlike primary EPS, excludes dilution and is computed by dividing
income available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity.
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 Company had no
potentially dilutive securities during 1996.
Reclassifications
Certain reclassifications of 1997 and 1996 amounts have been made to
conform with the 1998 financial statement presentation.
(2) EARNINGS PER SHARE
The computation of EPS at December 31, 1998, 1997, and 1996 follows:
<TABLE>
<CAPTION>
(in thousands, except per share amounts) 1998 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic EPS:
Net income $1,149,727 $1,310,366 $ 382,298
==========================================================================================
Average common shares outstanding 1,535,617 1,925,475 2,011,920
==========================================================================================
Basic EPS $ .75 $ .68 $ .19
==========================================================================================
Diluted EPS:
Net income $1,149,727 $1,310,366 $ 382,298
==========================================================================================
Average common shares outstanding 1,535,617 1,925,475 2,011,920
Dilutive potential due to stock options 39,033 16,983 --
- ------------------------------------------------------------------------------------------
Average number of common shares and dilutive
potential common shares outstanding 1,574,650 1,942,458 2,011,920
==========================================================================================
Diluted EPS $ .73 $ .67 $ .19
==========================================================================================
</TABLE>
Nonvested common shares related to the restricted stock awards granted in
1997 were not included in the computation of diluted EPS because to do so would
have been antidilutive for 1998 and 1997.
26
<PAGE> 29
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(CONTINUED)
- --------------------------------------------------------------------------------
(3) INVESTMENT SECURITIES
The amortized cost and fair value of investment securities classified as
available for sale at December 31, 1998 and 1997 follows:
<TABLE>
<CAPTION>
December 31, 1998
---------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities of U.S. government $ 2,999,419 $14,643 $ -- $ 3,014,062
Securities of U.S. government agencies 6,960,631 33,439 -- 6,994,070
Equity securities 1,301,937 -- -- 1,301,937
Stock in Federal Home Loan Bank 800,700 -- -- 800,700
Stock in Federal Reserve Bank 405,000 -- -- 405,000
- --------------------------------------------------------------------------------------------
$12,467,687 $48,082 $ -- $12,515,769
============================================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
---------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities of U.S. government $17,492,301 $21,061 $(4,299) $17,509,063
Equity securities 1,154,750 17,250 -- 1,172,000
Stock in Federal Home Loan Bank 622,000 -- -- 622,000
Stock in Federal Reserve Bank 405,000 -- -- 405,000
- --------------------------------------------------------------------------------------------
$19,674,051 $38,311 $(4,299) $19,708,063
============================================================================================
</TABLE>
Gross realized gains, gross realized losses, and gross proceeds on sales of
investment securities classified as available for sale follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross realized gains $ 30,318 $ 16,256 $ 42,093
Gross realized losses -- -- --
- ------------------------------------------------------------------------------------------
Net realized gain $ 30,318 $ 16,256 $ 42,093
==========================================================================================
Gross proceeds $4,527,500 $4,006,250 $19,011,640
==========================================================================================
</TABLE>
The amortized cost and fair value of investment securities classified as
available for sale at December 31, 1998, by contractual maturity, follows:
<TABLE>
<CAPTION>
Amortized Fair
cost value
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Within one year $2,999,419 $3,014,062
Between one and five years 6,960,631 6,994,070
- ---------------------------------------------------------------------------------------
9,960,050 10,008,132
No stated maturity 2,507,637 2,507,637
- ---------------------------------------------------------------------------------------
$12,467,687 $12,515,769
=======================================================================================
</TABLE>
27
<PAGE> 30
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(CONTINUED)
- --------------------------------------------------------------------------------
(3) INVESTMENT SECURITIES (CONTINUED)
The amortized cost and fair value of investment securities classified as
held to maturity at December 31, 1998 and 1997 follows:
<TABLE>
<CAPTION>
December 31, 1998
---------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities of U.S. government agencies $33,962,412 $ 4,152 $(48,424) $33,918,140
Mortgage-backed bonds 1,257,603 -- (1,946) 1,255,657
Securities of states and
municipalities 4,896,352 207,332 -- 5,103,684
- --------------------------------------------------------------------------------------------
$40,116,367 $211,484 $(50,370) $40,277,481
============================================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
---------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities of U.S. government
agencies $14,942,096 $ 938 $(18,484) $14,924,550
Mortgage-backed bonds 2,633,827 -- (2,446) 2,631,381
Securities of states and
municipalities 7,656,596 201,606 (1,035) 7,857,167
- --------------------------------------------------------------------------------------------
$25,232,519 $202,544 $(21,965) $25,413,098
============================================================================================
</TABLE>
The amortized cost and fair value of investment securities classified as
held to maturity at December 31, 1998, by contractual maturity, follows:
<TABLE>
<CAPTION>
Amortized Fair
cost value
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Within one year $36,388,882 $36,350,362
Between one and five years 1,973,485 2,026,813
Between five and ten years 1,754,000 1,900,306
- ---------------------------------------------------------------------------------------
$40,116,367 $40,277,481
=======================================================================================
</TABLE>
28
<PAGE> 31
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(CONTINUED)
- --------------------------------------------------------------------------------
(4) MORTGAGE-BACKED SECURITIES
The amortized cost and fair value of mortgage-backed securities classified
as available for sale at December 31, 1998 and 1997 follows:
<TABLE>
<CAPTION>
December 31, 1998
------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GNMA $ 1,838,636 $ 39,691 $ -- $ 1,878,327
FNMA 3,842,777 26,760 -- 3,869,537
FHLMC 5,489,128 40,708 (2,639) 5,527,197
- --------------------------------------------------------------------------------------------------
$11,170,541 $107,159 $(2,639) $11,275,061
==================================================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GNMA $ 381,199 $14,142 $ -- $ 395,341
FNMA 1,242,417 7,380 (3,189) 1,246,608
- --------------------------------------------------------------------------------------------------
$1,623,616 $21,522 $(3,189) $1,641,949
==================================================================================================
</TABLE>
Gross realized gains, gross realized losses, and gross proceeds on sales of
investment securities classified as available for sale for the year ended
December 31, 1998 follows:
<TABLE>
<CAPTION>
<S> <C>
Gross realized gains $ 4,262
Gross realized losses (1,910)
- ------------------------------------------------------------------------
Net realized gains $ 2,352
========================================================================
Gross proceeds $249,779
========================================================================
</TABLE>
There were no sales of mortgage-backed securities during the years ended
December 31, 1997 or 1996.
The amortized cost and fair value of mortgage-backed securities classified
as available for sale at December 31, 1998, 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 Fair
cost value
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Within one year $ 1,753,848 $ 1,771,951
Between one and five years 3,340,125 3,371,211
Between five and ten years 4,060,533 4,079,062
After ten years 2,016,035 2,052,837
- ------------------------------------------------------------------------------------------
$11,170,541 $11,275,061
==========================================================================================
</TABLE>
29
<PAGE> 32
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(CONTINUED)
- --------------------------------------------------------------------------------
(4) MORTGAGE-BACKED SECURITIES (CONTINUED)
The amortized cost and fair value of mortgage-backed securities classified
as held to maturity at December 31, 1998 and 1997 follows:
<TABLE>
<CAPTION>
December 31, 1998
---------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Collateralized mortgage obligations $10,595,289 $35,495 $(11,244) $10,619,540
=============================================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
---------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GNMA $ 1,170,128 $44,250 $ -- $ 1,214,378
FNMA 100,809 3,272 (601) 103,480
FHLMC 3,483,117 19,184 (1,920) 3,500,381
Collateralized mortgage obligations 7,391,648 3,172 (33,769) 7,361,051
- ---------------------------------------------------------------------------------------------
$12,145,702 $69,878 $(36,290) $12,179,290
=============================================================================================
</TABLE>
The amortized cost and fair value of mortgage-backed securities classified
as held to maturity at December 31, 1998, 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 Fair
cost value
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Within one year $ 34,855 $ 34,733
Between five and ten years 3,459,561 3,461,087
After ten years 7,100,873 7,123,720
- -----------------------------------------------------------------------------------------
$10,595,289 $10,619,540
=========================================================================================
</TABLE>
30
<PAGE> 33
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(CONTINUED)
- --------------------------------------------------------------------------------
(5) LOANS RECEIVABLE, NET
A comparative summary of loans receivable follows:
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Loans secured by real estate:
Residential:
1-4 family $36,797,825 $47,173,434
Multifamily 597,123 705,899
- ---------------------------------------------------------------------------------------
Total residential 37,394,948 47,879,333
Agriculture and land 453,190 722,571
Commercial 5,456,639 5,082,556
- ---------------------------------------------------------------------------------------
Total loans secured by real estate 43,304,777 53,684,460
- ---------------------------------------------------------------------------------------
Commercial loans 1,874,055 2,526,630
Consumer loans:
Automobile loans 751,440 1,101,681
Home improvement 980,669 1,401,613
Credit cards 804,673 999,336
Loans secured by deposits 352,286 418,346
Other 586,935 767,283
- ---------------------------------------------------------------------------------------
Total consumer loans 3,476,003 4,688,259
- ---------------------------------------------------------------------------------------
Total loans 48,654,835 60,899,349
- ---------------------------------------------------------------------------------------
Less:
Loans in process 8,731 41,675
Unearned discount, net -- 3,967
Deferred loan fees, net (11,201) (50,166)
Allowance for losses 448,643 436,138
- ---------------------------------------------------------------------------------------
446,173 431,614
- ---------------------------------------------------------------------------------------
Loans receivable, net $48,208,662 $60,467,735
=======================================================================================
</TABLE>
The weighted average interest rate on loans was 8.30% and 8.52% at December
31, 1998 and 1997, respectively.
A summary of activity in the allowance for losses for the years ended
December 31, 1998, 1997, and 1996 follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ 436,138 $ 384,141 $ 389,714
Provision charged to expense 16,800 97,800 32,885
Charge-offs (27,896) (67,360) (42,073)
Recoveries 23,601 21,557 3,615
- -------------------------------------------------------------------------------------------------------------
Balance, end of year $ 448,643 $ 436,138 $ 384,141
=============================================================================================================
</TABLE>
31
<PAGE> 34
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(CONTINUED)
- --------------------------------------------------------------------------------
(5) LOANS RECEIVABLE, NET (CONTINUED)
A summary of loans receivable contractually in arrears three months or more
is as follows:
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Residential real estate loans $ 149,916 $ 27,303
Consumer loans 6,185 10,296
- -------------------------------------------------------------------------------------------------------
$ 156,101 $ 37,599
=======================================================================================================
Percent of loans receivable .32% .06%
=======================================================================================================
Number of loans 10 7
=======================================================================================================
</TABLE>
There were no impaired loans at December 31, 1998 and 1997.
The average balance of impaired loans during the year ended December 31,
1997 was $2,105.
(6) ACCRUED INTEREST RECEIVABLE
A comparative summary of accrued interest receivable follows:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Loans receivable $ 322,250 $ 401,411
Mortgage-backed securities 109,069 64,265
Investment securities 478,634 397,538
Interest-bearing deposits -- 24,161
- --------------------------------------------------------------------------------------------------------
$ 909,953 $ 887,375
========================================================================================================
</TABLE>
(7) OFFICE PROPERTIES AND EQUIPMENT, NET
A comparative summary of office properties and equipment follows:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 190,434 $ 190,434
Office buildings and improvements 2,344,278 2,344,278
Furniture, fixtures and equipment 1,268,323 1,210,617
- --------------------------------------------------------------------------------------------------------
3,803,035 3,745,329
Less accumulated depreciation 2,118,654 1,978,581
- --------------------------------------------------------------------------------------------------------
$ 1,684,381 $ 1,766,748
========================================================================================================
</TABLE>
Depreciation expense for the years ended December 31, 1998, 1997, and 1996
amounted to $140,073, $130,554, and $123,311, respectively.
32
<PAGE> 35
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(CONTINUED)
- --------------------------------------------------------------------------------
(8) DEPOSITS
A comparative summary of deposits follows:
<TABLE>
<CAPTION>
1998 1997
----------------------- -----------------------
Stated Percent Percent
rate Amount to total Amount to total
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Demand deposits:
NOW accounts 0-2.00% $ 9,166,456 9.2% $ 8,086,304 8.5%
Money market demand 0-3.90 16,282,063 16.4 15,617,440 16.4
Passbook 2.50-2.75 8,534,011 8.6 8,685,305 9.1
- -------------------------------------------------------------------------------------------------------
33,982,530 34.2 32,389,049 34.0
- -------------------------------------------------------------------------------------------------------
Certificates of deposit:
Less than 3.00 40,000 -- 16,716 --
3.00-4.99 12,861,591 13.0 9,740,260 10.2
5.00-6.99 52,512,504 52.8 53,179,693 55.8
7.00-8.99 37,954 -- 36,382 --
- -------------------------------------------------------------------------------------------------------
65,452,049 65.8 62,973,051 66.0
- -------------------------------------------------------------------------------------------------------
$99,434,579 100.0% $95,362,100 100.0%
=======================================================================================================
</TABLE>
The weighted average interest rate on deposits was 4.36% and 4.43% at
December 31, 1998 and 1997, respectively.
A summary of the maturities of certificates of deposit at December 31, 1998
and 1997 follows:
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------
Amount Percent Amount Percent
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Within one year $39,938,882 61.0% $46,444,432 73.8%
Second year 15,360,805 23.5 11,312,839 18.0
Third year 10,107,933 15.4 5,114,846 8.1
Fourth year 32,173 .1 89,569 .1
Thereafter 12,256 -- 11,365 --
- --------------------------------------------------------------------------------------------------
$65,452,049 100.0% $62,973,051 100.0%
==================================================================================================
</TABLE>
Interest expense on savings deposits, by type, for the years ended December
31, 1998, 1997, and 1996 is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Passbook $ 243,252 $ 260,560 $ 367,827
NOW accounts 151,666 161,671 174,069
Money market demand 546,682 494,391 603,283
Certificates of deposit 3,281,485 3,383,363 3,412,182
- ------------------------------------------------------------------------------------------------
$4,223,085 $4,299,985 $4,557,361
================================================================================================
</TABLE>
Certificates of deposit of $100,000 or more totaled $10,071,981 and
$6,970,489 at December 31, 1998 and 1997, respectively. Investment securities
and mortgage-backed securities with a carrying value of approximately $4.1
million and $7.5 million at December 31, 1998 and 1997, respectively, were
pledged to secure certain certificates of deposit in excess of insurance of
accounts limitations.
33
<PAGE> 36
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(CONTINUED)
- --------------------------------------------------------------------------------
(8) DEPOSITS (CONTINUED)
A corporation affiliated with the Chairman of the Board of the Company had
savings deposits of approximately $14.0 million and $10.7 million with the
Company at December 31, 1998 and 1997, respectively.
(9) BORROWED MONEY
A comparative summary of the borrowed money at December 31, 1998 and 1997
follows:
<TABLE>
<CAPTION>
1998 1997
---------------------- ---------------------
Weighted Weighted
average average
interest interest
Amount rate Amount rate
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities sold under agreements to
repurchase $10,880,389 4.59% $8,380,389 5.30%
Fixed-term advances from FHLB due in 2008 10,000,000 4.76 -- --
- ------------------------------------------------------------------------------------------
$20,880,389 4.67% $8,380,389 5.30%
==========================================================================================
</TABLE>
Securities sold under agreements to repurchase (repurchase agreements) are
treated as financings, and the obligations to repurchase securities sold are
reflected as a liability. The repurchase agreements mature within one year. All
of the repurchase agreements were to repurchase identical securities. The
investment securities and mortgage-backed securities underlying the repurchase
agreements were delivered to a designated safekeeping agent. These investment
securities and mortgage-backed securities had an amortized cost and fair value
of $10,987,000 and $10,964,000, respectively at December 31, 1998 and $8,367,000
and $8,348,000, respectively, at December 31, 1997.
The repurchase agreements averaged approximately $9,523,000, $6,915,000,
and $15,057,000 during 1998, 1997, and 1996, respectively. The maximum amount
outstanding at any month-end during 1998, 1997, and 1996 was $10,880,000,
$8,380,000, and $18,340,000, respectively. Interest expense on the repurchase
agreements was $475,463, $346,946, and $742,910 for the years ended December 31,
1998, 1997, and 1996, respectively. At December 31, 1998 and 1997, $10,340,000
and $7,840,000, respectively, of the repurchase agreements were with a
corporation affiliated with the Chairman of the Board of the Company.
Interest expense on fixed-term advances from the FHLB was $423,117 for the
year ended December 31, 1998. There were no fixed-term advances from the FHLB
outstanding during the years ended December 31, 1997 and 1996.
Advances from the FHLB of Chicago are secured by a blanket lien of
qualifying first mortgage loans equivalent to 165% of outstanding borrowings. As
of December 31, 1998, the Company's available credit from the FHLB cannot exceed
the lesser of 35% of total assets ($50.0 million), or 60% of one-to-four family
residential mortgages not more than 90 days delinquent ($22.0 million).
(10) INCOME TAXES
The composition of income tax expense for the years ended December 31,
1998, 1997, and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $468,345 $527,218 $ 220,436
State 24,228 6,030 (11,531)
Deferred 21,765 (21,803) (100,189)
- -------------------------------------------------------------------------------------------------
$514,338 $511,445 $ 108,716
=================================================================================================
</TABLE>
34
<PAGE> 37
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(CONTINUED)
- --------------------------------------------------------------------------------
(10) INCOME TAXES (CONTINUED)
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>
1998 1997 1996
------------------ ------------------- -------------------
Amount Percent Amount Percent Amount Percent
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Computed "expected" income tax expense $565,782 34.0% $ 619,416 34.0% $ 273,312 34.0%
Items affecting federal income tax rate:
Amortization of ESOP awards 13,823 .8 13,427 .8 1,731 .2
State income taxes, net of federal
benefit 15,990 1.0 3,980 .2 (7,610) (1.0)
Tax-exempt interest (91,405) (5.5) (131,179) (7.2) (155,157) (19.3)
Other 10,148 .6 5,801 .3 (3,560) (.4)
- ------------------------------------------------------------------------------------------------------------
$514,338 30.9% $ 511,445 28.1% $ 108,716 13.5%
============================================================================================================
</TABLE>
The components of deferred tax assets and deferred tax liabilities at
December 31, 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
General loan loss allowance $ 161,781 $ 156,486
Deferred compensation -- 21,213
Restricted stock awards 48,320 50,181
Other 2,695 22,500
- --------------------------------------------------------------------------------------
Total deferred tax assets 212,796 250,380
- --------------------------------------------------------------------------------------
Deferred tax liabilities:
Available-for-sale securities market valuation (59,118) (19,891)
Excess of tax bad debt reserves over base year (104,464) (104,464)
Tax depreciation in excess of that recorded for book
purposes (58,553) (54,675)
FHLB stock dividends (25,993) (25,993)
Other (8,842) (28,539)
- --------------------------------------------------------------------------------------
Total deferred tax liabilities (256,970) (233,562)
- --------------------------------------------------------------------------------------
Net deferred tax asset (liability) $ (44,174) $ 16,818
======================================================================================
</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 special bad
deduction accorded thrift institutions was 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 met a residential loan requirement for the tax years
beginning in 1996 and 1997, recapture of the reserve could be deferred until the
tax year beginning in 1998. At December 31, 1998, the Company had bad debts
deducted for tax purposes in excess of the base year reserve of approximately
$270,000. 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 qualify as a bank for
federal
35
<PAGE> 38
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(CONTINUED)
- --------------------------------------------------------------------------------
(10) INCOME TAXES (CONTINUED)
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, 1998, 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 the 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 the Banks must meet specific capital
guidelines that involve quantitative measures of the Company and the Banks'
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company's and the 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 the 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,
1998, the Company and the Banks meet all capital adequacy requirements to which
they are subject.
As of March 31, 1997, the most recent notification from regulatory agencies
categorized the Banks as well capitalized under the regulatory framework for
prompt correction action. To be categorized as well capitalized, the 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 Banks' category.
36
<PAGE> 39
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(CONTINUED)
- --------------------------------------------------------------------------------
(11) REGULATORY MATTERS (CONTINUED)
The Company's and the Banks' actual and required capital amounts and ratios
as of December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------------
Capital
Actual requirements
---------------- ---------------
(Dollars in thousands) Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total capital (to risk-weighted assets):
Company $22,060 42.7% $4,136 8.00%
Chester National Bank 17,565 40.0 3,550 8.00
Chester National Bank of Missouri 3,290 49.7 530 8.00
Tier I capital (to risk-weighted assets):
Company $21,611 41.8% $2,068 4.00%
Chester National Bank 17,197 38.7 1,775 4.00
Chester National Bank of Missouri 3,209 48.5 265 4.00
Tier I capital (to average assets):
Company $21,611 14.9% $4,346 3.00%
Chester National Bank 17,197 13.2 3,918 3.00
Chester National Bank of Missouri 3,209 25.6 375 3.00
<CAPTION>
December 31, 1997
-----------------------------------
Capital
Actual requirements
---------------- ---------------
(Dollars in thousands) Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total capital to risk-weighted assets):
Company $29,392 59.1% $3,976 8.00%
Chester National Bank 24,357 57.8 3,368 8.00
Chester National Bank of Missouri 3,162 46.4 546 8.00
Tier I capital (to risk-weighted assets):
Company $28,956 58.3% $1,988 4.00%
Chester National Bank 23,992 57.0 1,684 4.00
Chester National Bank of Missouri 3,091 45.3 273 4.00
Tier I capital (to average assets):
Company $28,956 21.3% $4,086 3.00%
Chester National Bank 23,992 20.1 3,587 3.00
Chester National Bank of Missouri 3,091 24.1 384 3.00
</TABLE>
37
<PAGE> 40
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(CONTINUED)
- --------------------------------------------------------------------------------
(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, 1998, 1997, and 1996 was $2,438,
$6,395, and $38,726, 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. In January 1997,
the Company loan was restructured to be repaid with level principal payments
over 25 years. In January 1998, the Company loan was restructured again and is
now being repaid with level principal payments over 30 years. All shares are
held in a suspense account for allocation among the participants as the loan is
repaid. 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 $95,596,
$108,172, and $34,192 for the years ended December 31, 1998, 1997, and 1996,
respectively.
The ESOP shares as of December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Allocated shares 15,272 9,778
Committed to be released shares -- --
Unreleased shares 159,298 164,792
- ----------------------------------------------------------------------------------------
Total ESOP shares 174,570 174,570
========================================================================================
Fair value of unreleased shares $2,678,198 $2,925,058
========================================================================================
</TABLE>
(14) DIRECTOR EMERITUS RETIREMENT PLAN
On January 18, 1996, the Company adopted a retirement plan for directors
who reached director emeritus status. Eligibility for director emeritus status
was achieved when a director reached age 81 or upon retirement, if the director
has served as a director for 15 years or more. Originally, a director emeritus,
upon the later of the first anniversary of designation as a director emeritus,
or the date on which the director emeritus attained age 65, was to 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. In an amendment to the plan dated December
9, 1997, the benefit period was changed from 10 years to five years and the
annual benefit multiple was changed from $500 to $300. Vesting for past service
as a director occurred on December 31, 1996. In June 1998, the Company
terminated the director emeritus retirement plan and eliminated the
corresponding deferred compensation accrual of $59,700. Expense related to the
plan was $17,393 and $207,324 for the years ended December 31, 1997 and 1996,
respectively.
38
<PAGE> 41
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(CONTINUED)
- --------------------------------------------------------------------------------
(15) RESTRICTED STOCK AWARDS
On April 4, 1997, the Company adopted the 1997 Management Recognition and
Development Plan. The plan provides that common stock totaling 82,921 shares can
be issued to directors and employees in key management positions to encourage
such directors and key employees to remain with the Company. Interest in the
plan for each participant vests in five equal installments beginning April 4,
1998. The adoption of the plan in 1997 was recorded in the consolidated
financial statements through a $1,160,894 credit to additional paid-in capital
with a corresponding charge to a contra equity account for the restricted
shares. The contra equity account will be amortized to compensation expense over
the period of vesting. Compensation expense was $166,194 and $435,026 for the
years ended December 31, 1998 and 1997, respectively. Included in the 1997
amount was $305,494 related to full vesting of one participant's interest upon
his death in 1997.
(16) STOCK OPTION PLAN
On April 4, 1997, the Company adopted the 1997 Stock Option Plan which
provided for the granting of options for a maximum of 218,212 shares of common
stock to directors, key officers, and employees. Interest in the plan for each
participant vests in five equal installments beginning April 4, 1998. On April
4, 1997 and December 8, 1998, 200,754 and 17,458 shares were granted at a price
per share of $14.00 and $17.00, respectively. Activity within the plan is
summarized as follows:
<TABLE>
<CAPTION>
Number
of shares Price
- -------------------------------------------------------------------------------------
<S> <C> <C>
Balance at December 31, 1997 200,754 $14.00
Granted 17,458 17.00
Exercised -- --
Cancelled -- --
- -------------------------------------------------------------------------------------
Balance at December 31, 1998 218,212 $14.24
=====================================================================================
</TABLE>
The Company applies APB opinion No. 25 in accounting for stock options and,
accordingly, no compensation cost has been recognized in the consolidated
financial statements. Had the Company determined compensation cost for stock
options granted in 1998 and 1997 based on the fair value at the grant date under
SFAS No. 123, the Company's net income in 1998 and 1997 would have been reduced
to the pro forma amount indicated below:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Net income:
As reported $1,149,727 $1,310,366
Pro forma 915,125 1,155,050
============================================================================================
Earnings per share -- basic:
As reported $ .75 $ .68
Pro forma .60 .60
============================================================================================
Earnings per share -- diluted:
As reported $ .73 $ .67
Pro forma .58 .59
============================================================================================
</TABLE>
The per share fair value of stock options granted in 1998 and 1997 were
estimated on the date of grant at $5.60 and $5.80, respectively, using the
Black-Scholes option-pricing model. The following assumptions were used to
determine the
39
<PAGE> 42
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(CONTINUED)
- --------------------------------------------------------------------------------
(16) STOCK OPTION PLAN (CONTINUED)
per share fair value of the stock options granted in 1998: dividend yield of
.14%; risk-free interest rate of 6.00%; expected volatility of 4.2%; and an
estimated life of 7 years. The following assumptions were used to determine the
per share fair value of the stock options in 1997: dividend yield of .14%;
risk-free interest rate of 6.00%; expected volatility of 24.9%; and an estimated
life of 7 years.
(17) 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, 1998, the Company had outstanding commitments to originate
residential loans of approximately $902,000, all of which were at fixed rates.
In addition, the Company had commitments to fund commercial loans and
outstanding credit lines of approximately $940,000 and $1,551,000, respectively,
at December 31, 1998. Commitments to extend credit may involve elements of
interest rate risk in excess of the amount recognized in the consolidated
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.
(18) 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.
(19) LIQUIDATION ACCOUNT
At the time of conversion to a stock corporation, 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 is 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.
40
<PAGE> 43
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(CONTINUED)
- --------------------------------------------------------------------------------
(20) FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's interest-earning assets and
interest-bearing liabilities at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
------------------------- -------------------------
Carrying Estimated Carrying Estimated
value fair value value fair value
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest-earning assets:
Cash and cash equivalents $16,796,839 $16,796,839 $11,291,063 $11,291,063
Certificates of deposit 95,000 95,000 290,000 290,000
Investment securities 52,632,136 52,793,250 44,940,582 45,121,161
Mortgage-backed securities 21,870,350 21,894,601 13,787,651 13,821,239
Loans receivable 48,208,662 49,154,000 60,467,735 61,124,000
- ------------------------------------------------------------------------------------------
$139,602,987 $140,733,690 $130,777,031 $131,647,463
==========================================================================================
Interest-bearing liabilities:
Deposits:
Checking, money market demand,
and passbooks $33,982,530 $33,982,530 $32,389,049 $32,389,049
Certificates of deposit 65,452,049 65,201,000 62,973,051 62,934,000
Securities sold under
agreements to repurchase 10,880,389 10,880,389 8,380,389 8,380,389
Fixed-term advances from FHLB 10,000,000 10,000,000 -- --
- ------------------------------------------------------------------------------------------
$120,314,968 $120,063,919 $103,742,489 $103,703,438
==========================================================================================
</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 and
bankers' acceptances 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.
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
41
<PAGE> 44
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(CONTINUED)
- --------------------------------------------------------------------------------
(20) FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
Loans Receivable (Continued)
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.
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, 1998.
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.
Fixed-term Advances From FHLB
The fair value of FHLB advances is based on the discounted value of
contractual cash flows. The discount rate is estimated using rates currently
available to the Company for similar terms to maturity.
(21) 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 $812,498. The actual reduction of net income was approximately
$504,000, after considering the tax deductibility of the special assessment.
42
<PAGE> 45
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(CONTINUED)
- --------------------------------------------------------------------------------
(22) PARENT COMPANY FINANCIAL INFORMATION
The following are condensed balance sheets as of December 31, 1998 and 1997
and condensed statements of income and cash flows for the years ended December
31, 1998, 1997, and 1996 for Chester Bancorp, Inc. (parent company only):
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
(in thousands) 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash $ 49 $ 58
Investment securities 1,566 1,801
Investment in subsidiaries 20,514 27,105
Other assets 71 52
- -------------------------------------------------------------------------------
$22,200 $29,016
===============================================================================
Liabilities and stockholders' equity:
Other liabilities $ 495 $ 28
Stockholders' equity 21,705 28,988
- -------------------------------------------------------------------------------
$22,200 $29,016
===============================================================================
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income $ 53 $ 218 $ 66
Interest expense 18 14 --
- ----------------------------------------------------------------------------------------
35 204 66
Operating expenses 295 435 12
- ----------------------------------------------------------------------------------------
Income (loss) before income tax expense (benefit) and
equity in undistributed earnings of subsidiaries (260) (231) 54
Income tax expense (benefit) (84) (108) 22
- ----------------------------------------------------------------------------------------
Income (loss) before equity in undistributed earnings of
subsidiaries (176) (123) 32
Equity in undistributed earnings of subsidiaries 1,326 1,433 663
- ----------------------------------------------------------------------------------------
Net income $1,150 $ 1,310 $ 695
========================================================================================
</TABLE>
43
<PAGE> 46
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(CONTINUED)
- --------------------------------------------------------------------------------
(22) PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 1,150 $ 1,310 $ 695
Equity in undistributed earnings of subsidiaries (1,326) (1,433) (663)
Other, net 710 575 22
- -----------------------------------------------------------------------------------------
Net cash provided by operating activities 534 452 54
- -----------------------------------------------------------------------------------------
Investing activities:
Capital contributions to subsidiaries -- -- (13,337)
Decrease (increase) in investment securities 235 3,687 (5,488)
- -----------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 235 3,687 (18,825)
- -----------------------------------------------------------------------------------------
Financing activities:
Proceeds from issuance of stock -- -- 19,136
Dividends received from subsidiaries 7,992 -- --
Purchase of treasury stock (8,345) (3,869) --
Dividends paid (425) (477) (100)
- -----------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (778) (4,346) 19,036
- -----------------------------------------------------------------------------------------
Net change in cash and cash equivalents (9) (207) 265
Cash and cash equivalents at beginning of year 58 265 --
- -----------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 49 $ 58 $ 265
=========================================================================================
</TABLE>
44
<PAGE> 47
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(CONTINUED)
- --------------------------------------------------------------------------------
(23) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data for the year ended December 31, 1998 is
as follows:
<TABLE>
<CAPTION>
Quarter ended
------------------------------------------------------
(thousands of dollars, March 31, June 30, September 30, December 31,
except per share data) 1998 1998 1998 1998
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total interest income $2,305 $2,288 $2,259 $2,225
Total interest expense 1,214 1,282 1,288 1,338
- -----------------------------------------------------------------------------------------------
Net interest income 1,091 1,006 971 887
Provision for loan losses 12 5 -- --
- -----------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 1,079 1,001 971 887
Noninterest income 55 50 53 82
Noninterest expense 678 578 642 616
- -----------------------------------------------------------------------------------------------
Income before income tax expense 456 473 382 353
Income tax expense 135 146 116 117
- -----------------------------------------------------------------------------------------------
Net income $ 321 $ 327 $ 266 $ 236
===============================================================================================
Earnings per share-- basic $ .18 $ .21 $ .18 $ .18
===============================================================================================
Earnings per share-- diluted $ .18 $ .20 $ .17 $ .18
===============================================================================================
</TABLE>
Selected quarterly financial data for the year ended December 31, 1997 is
as follows:
<TABLE>
<CAPTION>
Quarter ended
------------------------------------------------------
(thousands of dollars, March 31, June 30, September 30, December 31,
except per share data) 1997 1997 1997 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total interest income $2,304 $2,344 $2,272 $2,262
Total interest expense 1,173 1,179 1,154 1,141
- -----------------------------------------------------------------------------------------------
Net interest income 1,131 1,165 1,118 1,121
Provision for loan losses 15 15 29 39
- -----------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 1,116 1,150 1,089 1,082
Noninterest income 65 64 54 36
Noninterest expense 669 680 967 518
- -----------------------------------------------------------------------------------------------
Income before income tax expense 512 534 176 600
Income tax expense 145 157 19 191
- -----------------------------------------------------------------------------------------------
Net income $ 367 $ 377 $ 157 $ 409
===============================================================================================
Earnings per share-- basic $ .18 $ .19 $ .08 $ .23
===============================================================================================
Earnings per share-- diluted $ .18 $ .19 $ .08 $ .22
===============================================================================================
</TABLE>
45
<PAGE> 48
STOCKHOLDER INFORMATION
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS TRANSFER AGENT
Michael W. Welge, Chairman Registrar and Transfer Company
John R. Beck, M.D. 10 Commerce Drive
Edward K. Collins Cranford, NJ 07016
James C. McDonald (800) 368-5948
Allen R. Verseman
Thomas E. Welch, Jr. GENERAL INQUIRIES AND REPORTS
Carl H. Welge
A copy of the Company's 1998 Annual Report to
CORPORATE HEADQUARTERS the Securities and Exchange Commission, Form
10-K, may be obtained without charge by written
1112 State Street request of shareholders to:
Chester, IL 62233 Michael W. Welge, President
(618) 826-5038 Chester Bancorp, Inc.
1112 State Street
ANNUAL MEETING Chester, IL 62233
Friday, April 2, 1999
10:00 A.M. OFFICERS
American Legion Hall
500 E. Opdyke St. Michael W. Welge
Chester, IL 62233 President and Chief Financial Officer
Edward K. Collins
STOCK LISTING Secretary and Treasurer
Nasdaq National Market
Symbol: CNBA FDIC DISCLAIMER
This Annual Report has not been
GENERAL COUNSEL reviewed, or confirmed for
accuracy or relevance, by the FDIC.
Bryan Cave LLP
One Metropolitan Square
Suite 3600
St. Louis, MO 63102-2750
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
10 South Broadway
St. Louis, MO 63102
<PAGE> 49
[CHESTER BANCORP, INC. LOGO]
CHESTER BANCORP, INC.
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 OF 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-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,305
<INT-BEARING-DEPOSITS> 9,703
<FED-FUNDS-SOLD> 5,788
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 23,790
<INVESTMENTS-CARRYING> 50,712
<INVESTMENTS-MARKET> 50,897
<LOANS> 48,209
<ALLOWANCE> 449
<TOTAL-ASSETS> 142,796
<DEPOSITS> 99,435
<SHORT-TERM> 20,880
<LIABILITIES-OTHER> 776
<LONG-TERM> 0
0
0
<COMMON> 22
<OTHER-SE> 21,683
<TOTAL-LIABILITIES-AND-EQUITY> 142,796
<INTEREST-LOAN> 5,641
<INTEREST-INVEST> 2,597
<INTEREST-OTHER> 839
<INTEREST-TOTAL> 9,077
<INTEREST-DEPOSIT> 4,223
<INTEREST-EXPENSE> 5,122
<INTEREST-INCOME-NET> 3,955
<LOAN-LOSSES> 17
<SECURITIES-GAINS> 33
<EXPENSE-OTHER> 2,514
<INCOME-PRETAX> 1,664
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,150
<EPS-PRIMARY> .75
<EPS-DILUTED> .73
<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
February 24, 1999
Dear Stockholder:
You are cordially invited to attend the 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 2, 1999, at 10:00 a.m., local
time.
The Notice of the 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.
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,
/s/ 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 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON APRIL 2, 1999
NOTICE IS HEREBY GIVEN that the 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 2, 1999, at
10:00 a.m., local time, for the following purposes:
(1) To elect two directors to serve for three year terms; and
(2) 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 17, 1999 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 24, 1999
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
ANNUAL MEETING OF STOCKHOLDERS
APRIL 2, 1999
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 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 2, 1999, at 10:00 a.m., local time. This Proxy Statement and
the enclosed proxy card are being mailed to stockholders on or about February
24, 1999.
VOTING AND PROXY PROCEDURE
Stockholders of record as of the close of business on February 17, 1999
are entitled to one vote for each share of common stock ("Common Stock") of the
Corporation then held. As of February 17, 1999, the Corporation had 1,458,488
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. 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 two 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.
<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 1,
1999, 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 1, 1999. The following table
also sets forth, as of February 1, 1999, 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)(2) Outstanding
- ---- ------------------ -----------------
DIRECTORS AND BENEFICIAL
OWNERS OF MORE THAN 5%
<S> <C> <C>
Chester National Bank Employee Stock
Ownership Plan and Trust
1112 State Street
Chester, Illinois 62233 173,770(3) 11.91%
Gilster-Mary Lee Corporation
Employee Profit Sharing Plan 115,800 7.81%
1037 State Street
Chester, Illinois 62233
Michael W. Welge 235,179 (3)(4) 16.03%
Allen R. Verseman 54,031(5) 3.70%
John R. Beck, M.D. 53,054 3.63%
James C. McDonald 23,030 1.58%
Thomas E. Welch, Jr. 18,984(3) 1.30%
Carl H. Welge 15,554 1.06%
NAMED EXECUTIVE OFFICERS(6)
Edward K. Collins 29,421 (3) 2.00%
All Executive Officers and
Directors as a Group (7 persons) 429,253 29.30%
</TABLE>
- ---------------
(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) Includes the following shares which such persons have within 60 days after
February 1, 1999, the right to acquire upon exercise of employee stock
options or director non-qualified stock options: 8,728 shares for each of
Mr. M. Welge and Mr. Collins; 2,182 shares for each of Mr. Beck, Mr.
Verseman, Mr. McDonald, Mr.
Welch and Mr. C. Welge.
(3) 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, 1,447 shares, Mr. Welch, 1,104 shares and Mr. M.
Welge, 687 shares.
(4) Includes 75,664 shares over which Mr. M. Welge has sole voting and
investment power, 150,100 shares over which Mr. M. Welge has shared
investment and voting power, options to acquire 8,728 shares and 687 shares
held in the ESOP.
(5) Includes 50,349 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.
(6) 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, 1998. He is also a director of the Corporation.
2
<PAGE> 5
PROPOSAL I -- ELECTION OF DIRECTORS
The Corporation's Board of Directors consists of seven members and is
divided into three classes with three-year staggered terms, with approximately
one-third of the directors elected each year. Two 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 Michael W. Welge and Edward K. Collins. 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.
WELGE AND COLLINS.
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)
---- --- -------- ------
BOARD NOMINEES
<S> <C> <C> <C>
Michael W. Welge(4) 58 1980 2002
Edward K. Collins 54 1996 2002
DIRECTORS CONTINUING IN OFFICE
Carl H. Welge(4) 55 1980 2001
Allen R. Verseman 64 1992 2001
Thomas E. Welch, Jr. 59 1990 2000
John R. Beck, M.D. 64 1989 2000
James C. McDonald 69 1990 2000
</TABLE>
_________________
(1) As of December 31, 1998.
(2) Includes prior service on the Board of Directors of Chester Savings 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:
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 37 years at Gilster-Mary Lee Corporation 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
3
<PAGE> 6
Commerce and the Chester School Board. For the past 18 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.
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.
Carl H. Welge has been employed for nine years at Gilster-Mary Lee
Corporation 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.
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.
James C. McDonald has been employed for 46 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.
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.
Allen R. Verseman has been employed for 30 years at Gilster-Mary Lee
Corporation and currently serves as Plant Superintendent.
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, 1998, the Board of Directors of the Corporation
held 12 meetings, the Board of Directors of Chester National Bank held 12
meetings, and the Board of Directors of Chester National Bank of Missouri held
12 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, 1998, the Audit Committee met 12 times.
The Executive Committee consists of Directors M. Welge, 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,
1998.
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, 1998, the Board of Directors met once in its
capacity as nominating committee to select nominees for election at the Annual
Meeting.
4
<PAGE> 7
DIRECTORS' COMPENSATION
DIRECTORS' COMPENSATION
BOARD AND COMMITTEE FEES. Directors received a fee of $750 per month
during the year ended December 31, 1998, 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 $66,600
for the year ended December 31, 1998.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
---------------------------------------------------------
Name and Other Annual
Position Year Salary($) Bonus($) Compensation($)(1)
---- --------- -------- ---------------
<S> <C> <C> <C> <C>
Edward K. Collins 1998 $ 80,000 -- $ --
Treasurer and Secretary of the Corporation 1997 $ 80,000 -- $ --
and Executive Vice President, Chief Executive 1996 $ 80,000
Officer and Director of Chester National Bank
</TABLE>
____________________
(1) 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 is $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 current term of the agreement has been extended to
January 1, 2002. The agreement is terminable by the Employers at any time or
upon the occurrence of certain events specified by federal regulations.
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, 1998, Mr. Collins would be entitled to severance
payments of $237,750. Section 280G of the Internal Revenue
5
<PAGE> 8
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 1998.
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 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, 1997, the base compensation for Edward K. Collins was $80,000,
which did not represent an increase from the previous year.
6
<PAGE> 9
CHESTER BANCORP, INC.
[TOTAL RETURN PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
PERIOD ENDING
--------------------------------------------------------
INDEX 10/8/96 12/31/96 6/30/97 12/31/97 6/30/98 12/31/98
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Chester Bancorp, Inc. 100.00 101.82 116.35 140.88 136.54 134.66
S&P 500 100.00 106.15 128.02 141.57 166.65 182.03
SNL Bank Index 100.00 110.88 133.59 168.03 187.15 181.76
</TABLE>
SNL Securities LC
Charlottesville, VA (804)977-1600
<PAGE> 10
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 4,
1996 (the date on which the Corporation's common stock commenced trading on the
Nasdaq National Market) through December 31, 1998, (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.
7
<PAGE> 11
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, during the 1997 fiscal year, all filing
requirements applicable to its reporting officers, directors and greater than
10% stockholders were properly and timely complied with.
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
$205,832 at December 31, 1998.
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, 1999. 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 1998 Annual Report to Stockholders, including
consolidated financial statements, has been mailed to all stockholders of record
as of the close of business on February 17, 1999. Any stockholder who has not
8
<PAGE> 12
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, 1998, AS FILED WITH THE SEC, WILL BE FURNISHED WITHOUT CHARGE TO
STOCKHOLDERS OF RECORD AS OF FEBRUARY 17, 1999, UPON WRITTEN REQUEST TO MICHAEL
W. WELGE, PRESIDENT, CHESTER BANCORP, INC., 1112 STATE STREET, CHESTER, ILLINOIS
62233.
STOCKHOLDER PROPOSALS
Proposals of stockholders intended to be presented at the Corporation's
annual meeting to be held in April 2000 must be received by the Corporation no
later than October 21, 1999 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 24, 1999
9
<PAGE> 13
THIS PROXY IS SOLICITED BY 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 Annual Meeting of Stockholders, a Proxy
Statement for the Annual Meeting, dated February 24, 1999 and the Annual Report
to Stockholders.
Dated: _______________, 1999
- --------------------------- ---------------------------
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.
<PAGE> 14
REVOCABLE PROXY
CHESTER BANCORP, INC.
ANNUAL MEETING OF STOCKHOLDERS
APRIL 2, 1999
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 Annual Meeting of Stockholders, to be held at the American Legion
Hall, 500 E. Opdyke St., Chester, Illinois, on Friday, April 2, 1999, at 10:00
a.m., local time, and at any and all adjournments thereof, as follows:
VOTE
1. The election as director of the nominees FOR WITHHELD
listed below (except as marked to the [ ] [ ]
contrary below).
Michael W. Welge
Edward K. Collins
INSTRUCTIONS: TO WITHHOLD YOUR VOTE
FOR ANY INDIVIDUAL NOMINEE, WRITE THE
NOMINEE'S NAME(S) ON THE LINE BELOW.
_______________
2. In their discretion, upon such other matters as may properly come
before the meeting.
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.
