<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
+ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Fiscal Year Ended December 31, 1999
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 + 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,
2000, as reported by the Nasdaq National Market, was approximately $12,052,676.
As of February 1, 2000 there were 2,182,125 shares issued, of which
1,378,953 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, 1999, are incorporated by reference in Part I and Part II.
Portions of the registrant's proxy statement for its April 7, 2000,
annual meeting of stockholders (the "2000 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 October 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, 1999, the Company had total
consolidated assets of $120.4 million, total consolidated deposits of $90.8
million, and consolidated stockholders' equity of $20.9 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
two full-service branches located in 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 and
one in-store branch office in Perryville, Missouri. Chester National Bank of
Missouri's principal executive office is located at 1010 N. Main, Perryville,
Missouri 63775, and its telephone number at that address is (573)-547-7611. The
Banks' deposits are insured by the Federal Deposit Insurance Corporation
("FDIC") and the Banks are regulated by the Office of the Comptroller of the
Currency ("OCC").
The Banks primarily engage in the business of attracting retail
deposits from the general public in the Banks' respective market areas and using
such funds together with borrowings and funds from other sources to primarily
originate mortgage loans secured by one- to four-family residential real estate.
The Banks also originate consumer loans, commercial real estate loans, land
loans, multi-family loans, and commercial loans. At December 31, 1999, the
Banks' gross loan portfolio totaled $48.9 million, of which 74.3% were one- to
four-family residential mortgage loans, 6.8% were consumer loans, 13.5% were
commercial real estate, multi-family loans, agriculture and land loans, and 5.4%
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 $41.2 million and $21.7 million,
respectively, at December 31, 1999.
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, commercial loans, land and consumer loans.
The Banks' net loans receivable totaled $48.3 million at December 31, 1999,
representing 40.1% 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,
----------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Type of Loan:
Commercial loans: $ 2,632 5.38% $ 1,874 3.85% $ 2,527 4.15%
Mortgage loans:
Conventional..................... 36,083 73.81 37,733 77.55 47,600 78.16
Commercial....................... 5,574 11.41 5,457 11.22 5,082 8.34
Construction..................... 1,292 2.64 115 0.24 1,002 1.65
-------- ------ -------- ------ ------- ------
Total mortgage loans........... 42,949 87.86 43,305 89.01 53,684 88.15
-------- ------ -------- ------ ------- ------
Consumer loans:
Automobile....................... 767 1.57 751 1.54 1,102 1.81
Home improvement................. 806 1.65 981 2.02 1,402 2.30
Credit cards..................... 780 1.60 805 1.65 999 1.64
Savings account.................. 491 1.00 352 0.72 418 0.69
Other............................ 459 0.94 587 1.21 767 1.26
-------- ------ -------- ------ ------- ------
Total consumer loans........... 3,303 6.76 3,476 7.14 4,688 7.70
-------- ------ -------- ------ ------- ------
Total loans.................... 48,884 100.00% 48,655 100.00% 60,899 100.00%
====== ====== ======
Less:
Loans in process................. 3 9 41
Deferred fees (costs) and discounts (1) (12) (46)
Allowance for losses............. 605 449 436
-------- -------- --------
Loans receivable, net........ $ 48,277 $ 48,209 $ 60,468
======== ======== ========
Type of Security:
Residential real estate:
One- to four-family.............. $ 36,302 74.26% $ 36,798 75.63% $ 47,173 77.46%
Multi-family..................... 587 1.20 597 1.23 706 1.16
Commercial real estate............. 5,815 11.90 5,457 11.22 5,082 8.34
Commercial loans................... 2,633 5.38 1,874 3.85 2,527 4.15
Agriculture and land............... 244 0.50 453 0.93 723 1.19
Consumer loans..................... 3,303 6.76 3,476 7.14 4,688 7.70
-------- ------ -------- ------ ------- ------
Total loans.................... 48,884 100.00% 48,655 100.00% 60,899 100.00%
====== ====== ======
Less:
Loans in process................. 3 9 41
Deferred fees (costs) and discounts (1) (12) (46)
Allowance for losses............. 605 449 436
-------- -------- --------
Loans receivable, net............ $ 48,277 $ 48,209 $ 60,468
======== ======== ========
</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, 1999, $36.3 million, or 74.3% 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 $37,314 at
December 31, 1999. 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, 1999, $12.0 million, or 24.6% 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, 1999, 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, 1999, commercial real estate loans aggregated $5.8
million, or 11.9% of the total consolidated loan portfolio and multi-family
loans aggregated $587,000 or 1.2% of the total consolidated loan portfolio. The
principal balance of such loans in the Banks' consolidated loan portfolio ranged
from approximately $2,000 to $995,000 at December 31, 1999. 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 $345,000 or 0.7% were secured by churches.
Commercial real estate and multi-family loans are generally made for balloon
terms of 5 to 10 years with a maximum amortization of 20 years.
Commercial real estate and multi-family loans generally involve
greater risks than one- to four-family residential mortgage loans. Payments on
loans secured by such properties often depend on successful operation and
management of the properties. Repayment of such loans may be subject to a
greater extent to adverse conditions in the real estate market or the economy.
The Banks seek to minimize these risks in a variety of ways, including limiting
the
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size of such loans, limiting the maximum loan-to-value ratio to 75% and strictly
scrutinizing the financial condition of the borrower, the quality of the
collateral and the management of the property securing the loan. All of the
properties securing the Banks' income property loans are inspected by the Banks'
lending personnel before the loan is made. The Banks also obtain appraisals on
each property in accordance with applicable regulations.
CONSTRUCTION LENDING. The Banks originate residential construction
loans to individuals to construct one- to four-family homes. The Banks generally
do not originate speculative construction loans (i.e., loans to builders to
construct homes for which there are no contracts for sale in place). At December
31, 1999, construction loans totaled $1.3 million, or 2.6% 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, 1999, the agriculture and land consolidated loan
portfolio totaled $244,000 or .5% 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, 1999, the commercial
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business loans aggregated $2.6 million, or 5.4%, of the loan portfolio. The
principal balance of such loans in the Banks' loan portfolio ranged from
approximately $3,000 to $1.0 million at December 31, 1999. 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 commercial real
estate. Commercial business loans are generally made for one year or less, with
the rate tied to prime, repricing accordingly.
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, 1999 the Banks'
consumer loans totaled $3.3 million, or 6.8% 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, 1999, home improvement loans
totaled $806,000, or 1.7% 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, 1999, there were 1,037 credit card accounts with a total
balance of $780,000. 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, 1999, consumer loans secured by automobiles totaled $767,000, or 1.6% 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."
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The Banks had $83,000, or .2% of total loans in unsecured consumer
loans at December 31, 1999. These loans are made for a maximum of 30 months or
less with fixed rates of interest and are offered primarily to existing
customers of the Banks.
The Banks employ strict underwriting standards for consumer loans.
These procedures include an assessment of the applicant's payment history on
other debts and ability to meet existing obligations and payments on the
proposed loans. Although the applicant's creditworthiness is a primary
consideration, the underwriting process also includes a comparison of the value
of the security, if any, to the proposed loan amount. The Banks underwrite and
originate substantially all of their consumer loans internally which management
believes limits 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, 1999 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 December 31, 3 Years 5 Years 10 Years
------------------------- Through Through Through Beyond
2000 2001 2002 5 Years 10 Years 15 Years 15 Years Total
---- ---- ---- ------- -------- -------- -------- -----
(Dollars in
Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial loans............ $ 2,206 $ 34 $ 90 $ 44 $ 141 $ - $ 117 $ 2,632
Real estate mortgage........ 100 504 2,005 3,751 13,372 6,798 9,553 36,083
Commercial real estate...... 430 395 263 535 1,570 729 1,652 5,574
Construction................ 1,051 - - - - 103 138 1,292
Home improvement............ 130 95 173 311 97 - - 806
Automobile.................. 123 165 224 255 - - - 767
Credit cards................ 780 - - - - - - 780
Other....................... 736 104 65 38 7 - - 950
------- ------- ------- ------- -------- ------- -------- --------
Total loans.............. $ 5,556 $ 1,297 $ 2,820 $ 4,934 $ 15,187 $ 7,630 $ 11,460 $ 48,884
======= ======= ======= ======= ======== ======= ======== ========
</TABLE>
The following table sets forth the dollar amount of all loans due after
December 31, 2000 which have fixed interest rates and have floating or
adjustable interest rates.
<TABLE>
<CAPTION>
Fixed Floating- or
Rates Adjustable-Rates
----- ----------------
(Dollars in Thousands)
<S> <C> <C>
Commercial loans................................. $ 125 $ 302
Real estate mortgage............................. 28,764 7,216
Commercial real estate........................... 2,609 2,535
Construction..................................... 241 -
Home improvement................................. 677 -
Automobile....................................... 644 -
Credit cards..................................... - -
Other............................................ 215 -
-------- --------
Total......................................... $ 33,275 $ 10,053
======== ========
</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/or 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, 1999, 1998 and 1997, the Banks' total loan originations were $15.6
million, $10.2 million, and $20.7 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, 1999, 1998 and 1997 the Cape Girardeau Loan Production Office
processed $2.6 million, $6.2 million, and $911,800 respectively, of such loans
for which the Bank received fees of $18,000, $51,000, and $19,000, respectively.
The Cape Girardeau Loan Production Office was closed in July, 1999.
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,
-----------------------
1999 1998 1997
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Total loans at beginning
of period............................. $48,209 $60,468 $54,842
------- -------- -------
Loans originated:
Commercial loans 2,927 1,479 2,323
Single-family residential............. 7,355 4,232 12,389
Commercial real estate................ 1,024 2,556 1,957
Construction loans.................... 2,142 175 1,655
Agriculture and land.................. 42 102 202
Consumer.............................. 2,130 1,677 2,181
------- -------- -------
Total loans originated.............. 15,620 10,221 20,707
------- -------- -------
Loan principal repayments............... 14,994 22,291 15,085
Increase (decrease) in
other items, net...................... (558) (189) 4
------- -------- -------
Total loans at
end of period......................... $48,277 $48,209 $60,468
======= ======= =======
</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, 1999, the Banks had
outstanding commitments to originate residential loans of approximately
$613,000, all of which were at fixed rates. In addition, the Banks had
commitments to fund outstanding credit lines of approximately $1.4 million at
December 31, 1999. 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 $1,000 of net deferred loan costs at
December 31, 1999.
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 90th 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 consumer
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,
-------------------------------------------------------------------------------
1999 1998 1997
------------------------ ----------------------- ------------------------
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............... $ 226 0.46% $ 412 0.85% $ 963 1.58%
60 - 89 days............... 67 0.14 709 1.46 423 0.70
------- ---- ------ ---- ------ ----
$ 293 0.60% $1,121 2.31% $1,386 2.28%
======= ===== ====== ==== ====== =====
</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 at any of the dates indicated.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------
1999 1998 1997
---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C>
Non-performing loans:
Loans accounted for on a non-accrual basis:
Real Estate:
Residential.................................... $ 86 $ 150 $ 27
Commercial..................................... -- -- --
Consumer......................................... 1 6 10
------- ------- --------
Total.......................................... 87 156 37
------- ------- --------
Accruing loans which are contractually
past due 90 days or more:
Residential real estate............................ -- -- --
Consumer........................................... -- -- --
------- ------- --------
Total.......................................... -- -- --
------- ------- --------
Total non-performing loans..................... 87 156 37
Real estate acquired by
foreclosure, net................................. 186 128 38
------- ------- --------
Total non-performing assets........................ $ 273 $ 284 $ 75
======= ======= ========
Total non-performing loans to
net loans........................................ 0.18% 0.32% 0.06%
------- ------- --------
Total allowance for loan losses
to non-performing loans.......................... 698.60% 287.41% 1159.97%
------- ------- --------
Total non-performing assets to
total assets..................................... 0.23% 0.20% 0.06%
======= ======= ========
</TABLE>
15
<PAGE> 16
At December 31, 1999, 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 $186,000 in
real estate acquired by foreclosure at December 31, 1999, 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,
1999 1998 1997
---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C>
Loss............................................... $ 10 $ -- $ --
Doubtful........................................... -- 56 --
Substandard ....................................... 280 507 373
Special mention.................................... 355 7 7
----- ----- -----
Total............................................ $ 645 $ 570 $ 380
===== ===== =====
$ 595 $ 449 $ 436
General loss allowances............................
Specific loss allowances........................... 10 -- --
----- ----- -----
Total loss allowances............................ $ 605 $ 449 $ 436
===== ===== =====
</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, 1999, the Banks had an allowance for general loan
losses of $595,000. 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,
-----------------------------------------------
1999 1998 1997
---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C>
Allowance at beginning of period................... $ 449 $ 436 $ 384
Provision for loan losses.......................... 200 17 98
Recoveries......................................... 7 24 21
Charge-offs:
Residential real estate.......................... (35) (9) (6)
Commercial real estate - - (8)
Consumer......................................... (16) (19) (53)
----- ----- -----
Total charge-offs.............................. (51) (28) (67)
----- ----- -----
Allowance at end of period....................... $ 605 $ 449 $ 436
===== ===== =====
Ratio of allowance to total
loans outstanding at
the end of the period............................ 1.25% 0.92% 0.72%
===== ===== =====
Ratio of net charge-offs to
average loans outstanding
during the period................................ 0.09% 0.01% 0.08%
===== ===== =====
</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,
---------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------- ----------------------------- -----------------------------
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............... $ 365 0.98% 77.7% $ 278 0.74% 76.9% $ 250 0.52% 78.6%
Commercial................ 103 1.93 9.7 80 1.47 11.2 68 1.34 8.3
Commercial................. 93 3.53 5.4 47 2.51 3.9 61 2.41 4.2
Agriculture and land...... 5 2.05 0.5 5 1.10 0.9 5 0.69 1.2
Consumer................... 39 1.18 6.7 39 1.12 7.1 52 1.11 7.7
----- ----- ----- ----- ----- -----
Total allowance for
loan losses............. $ 605 100.0% $ 449 100.0% $ 436 100.0%
===== ===== ===== ===== ===== =====
</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 increases 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, 1999, the Banks' investment portfolio,
mortgage-backed security portfolio and interest-bearing deposits totaled $67.5
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,
investment-bearing deposits, Federal Home Loan Bank Stock ("FHLB"), and Federal
Reserve Bank Stock ("FRB"). At December 31, 1999, 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, 1999, the held to maturity investment portfolio
of the Banks contained securities with an amortized cost of $36.2 million and a
fair value of $35.0 million and consisted of United States agency obligations,
municipal and state obligations and mortgage-backed bonds. At December 31, 1999,
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 $5.0 million and a fair
value
19
<PAGE> 20
of $5.0 million. At December 31, 1999, 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 securities sold under agreements to
repurchase 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,
1999, net mortgage-backed and related securities totaled $21.7 million, or 18.1%
of total assets. At December 31, 1999, 4.0% of
20
<PAGE> 21
the mortgage-backed and mortgage related securities were adjustable-rate and
96.0% 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 5.87% at
December 31, 1999. The estimated fair value of the Banks' mortgage-backed
securities at December 31, 1999 was $21.4 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 $9.6 million at December 31, 1999. 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, 1999, 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, 1999, the
Banks did not have any derivatives or high risk securities.
Of the Banks' $21.7 million mortgage-backed securities portfolio
at December 31, 1999, $12.1 million with a weighted average yield of 6.32% had
contractual maturities within ten
21
<PAGE> 22
years and $9.7 million with a weighted average yield of 6.27% 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,
-------------------------------------------------------------------------
1999 1998 1997
---------------------- ---------------------- ----------------------
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>
Mortgage-backed securities:
Available for sale (at fair value):
GNMA.................................. $ 1,487 6.84% $ 1,878 8.59% $ 395 2.87%
FNMA.................................. 2,819 12.97 3,870 17.69 1,247 9.04
FHLMC................................. 2,704 12.44 5,527 25.27 - -
-------- ------ -------- ------ ------- ------
Total mortgage-backed
securities available for sale....... 7,010 32.25 11,275 51.55 1,642 11.91
-------- ------ -------- ------ ------- ------
Held to maturity (at amortized cost):
GNMA.................................. - - - - 1,170 8.49
FNMA.................................. 3,110 14.31 - - 101 0.73
FHLMC................................. 1,980 9.11 - - 3,483 25.26
Collateralized mortgage obligations... 9,635 44.33 10,595 48.45 7,392 53.61
-------- ------ -------- ------ ------- ------
Total mortgage-backed
securities held to maturity......... 14,725 67.75 10,595 48.45 12,146 88.09
-------- ------ -------- ------ ------- ------
Total mortgage-backed securities........ $ 21,735 100.00% $ 21,870 100.00% $13,788 100.00%
======== ====== ======== ====== ======= ======
</TABLE>
The following table shows purchases, sales and repayments of
mortgage-backed securities during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1999 1998 1997
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Mortgage-backed securities, net,
at beginning of period $ 21,870 $ 13,788 $ 15,897
Purchases.................................... 10,882 17,125 3,331
Sales........................................ -- (250) --
Repayments................................... (10,786) (8,919) (5,513)
Increase (decrease) in other items, net...... (231) 126 73
-------- -------- --------
Mortgage-backed securities, net,
at end of period........................... $ 21,735 $ 21,870 $ 13,788
======== ======== ========
</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,
-----------------------------------------------------------------------------------
1999 1998 1997
------------------------ ------------------------- ------------------------
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............ $ 500 1.1% $ 3,014 4.4% $17,509 32.0%
Securities of U.S. agencies.............. 2,183 4.8 6,994 10.3 -- --
------- ----- ------- ----- ------- -----
Total investment securities
available for sale................... 2,683 5.9 10,008 14.7 17,509 32.0
------- ----- ------- ----- ------- -----
Held to maturity (at amortized cost):
Securities of U.S. agencies.............. 27,458 60.0 33,962 49.8 14,942 27.3
Mortgage-backed securities............... 3,000 6.6 1,258 1.8 2,634 4.8
Securities of states and municipalities.. 5,735 12.5 4,896 7.2 7,657 14.0
------- ----- ------- ----- ------- -----
Total investment securities held to
maturity............................. 36,193 79.1 40,116 58.8 25,233 46.1
------- ----- ------- ----- ------- -----
Total investment securities 38,876 85.0 50,124 73.5 42,742 78.1
Interest-bearing deposits.................... 4,592 10.0 8,709 12.8 3,063 5.6
Federal funds sold........................... -- -- 5,788 8.5 6,395 11.7
Certificates of deposit...................... -- -- 95 0.1 290 0.6
Bankers acceptances.......................... -- -- 994 1.4 -- --
Equity securities............................ 1,073 2.3 1,302 1.9 1,172 2.2
FHLB stock .................................. 801 1.8 801 1.2 622 1.1
FRB stocks................................... 405 0.9 405 0.6 405 0.7
======= ===== ======= ===== ======= =====
Total investments $45,747 100.0% $68,218 100.0% $54,689 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
24
<PAGE> 25
<TABLE>
<CAPTION>
At December 31, 1999
--------------------------------------------------------------------------------------
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........ $ 500 5.87% $ -- --% $ -- --% $ -- --%
Securities of U.S. agencies.......... -- -- 2,183 6.01% -- --% -- --%
Held to maturity (at amortized cost):
Securities of U.S. agencies.......... 199 5.39% 17,975 5.76% 8,285 7.25% 999 7.00%
Mortgage-backed bonds................ -- --% -- --% -- --% 3,000 7.00%
Securities of states and
municipalities(1)................... 1,144 6.39% 1,254 7.82% 2,553 8.32% 784 6.21%
------ ------- ------- ------ ----
Total investment securities $1,843 $21,412 $10,838 $4,783
====== ======= ======= ======
</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 $29.1 million
($30.2 million at amortized cost) at December 31, 1999. The portfolio consisted
of short to medium-term (up to ten years) securities, of which $2.7 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, 1999, totaled $5.8 million at estimated fair value ($5.7 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, 1999, general obligation bonds and revenue bonds totaled
$3.3 million and $2.4 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, 1999, the Banks' municipal bond portfolio was
comprised of 51 bonds, the average principal amount of which was $112,000. At
such date the weighted average life of the portfolio was approximately 6.2 years
and had an weighted average coupon rate of 5.34%. At that date, the largest
security in the portfolio was a revenue bond issued by a local government, with
an amortized cost of $1.1 million and a fair value of $1.2 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.
GOVERNMENT SPONSORED ENTERPRISE SECURITIES. At December 31, 1999, the
Banks' investment portfolio included securities issued by the FNMA and the
FHLMC. At December 31, 1999, such bonds had an aggregate amortized cost of $10.3
million and a fair
25
<PAGE> 26
value of $9.9 million, an average life of approximately 7.6 years, and an
average coupon rate of 6.98%.
DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS
GENERAL. Deposits, securities sold under agreements to repurchase 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, federal funds purchased or securities sold under
agreements to repurchase may be used on a short-term basis to compensate for
reductions in the availability of funds from other sources. At December 31,
1999, the Banks had $5.0 million borrowings from the FHLB-Chicago. At December
31, 1999, the Banks had $2.8 million outstanding in federal funds purchased. At
December 31, 1999, the Banks had no securities sold under agreements to
repurchase.
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, 1999.
<TABLE>
<CAPTION>
Weighted Balance Percentage
Average Original Minimum (Dollars in of Total
Interest Rate Term Category Amount Thousands) Deposits
- ------------- -------- ----------------------------- ------- ----------- ----------
<S> <C> <C> <C> <C> <C>
--% None Non-interest bearing checking $ 100 $ 1,441 1.59%
1.96 None NOW accounts 100 7,493 8.26
3.70 None Money market demand 2,500 18,038 19.88
2.25 None Statement savings 30 7,338 8.09
Certificates of Deposit
-----------------------------
3.50 91-day Fixed-term, fixed-rate 500 269 0.30
4.00 4 months Fixed-term, fixed-rate 5,000 50 0.06
4.25 6 months Fixed-term, fixed-rate 500 5,960 6.57
4.25 6 months Fixed-term, fixed-rate 50,000 362 0.40
5.09 7 months Fixed-term, fixed-rate 5,000 2,321 2.56
4.00 1 year Fixed-term, fixed-rate 500 292 0.32
4.51 1 year Fixed-term, fixed-rate 500 8,775 9.67
4.89 18 months Fixed-term, fixed-rate 500 3,149 3.47
5.41 30 months Fixed-term, fixed-rate 500 27,653 30.47
5.21 4 years Fixed-term, fixed-rate 500 195 0.22
5.04 Various Fixed-term, fixed-rate 100,000 7,417 8.17
------- -----
$90,753 100.0%
======= =====
</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,
1999.
<TABLE>
<CAPTION>
Certificates
Maturity Period of Deposit
- -------------------------------------------------------- -------------
(Dollars
in Thousands)
<S> <C>
Three months or less.................................... $6,942
Over three through six months........................... 688
Over six through 12 months.............................. 533
Over 12 months.......................................... 1,115
------
Total.............................................. $9,278
======
</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,
----------------------------------------------------------------------------------------
1999 1998 1997
----------------------------------------------------------------------------------------
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..... $ 1,441 1.58% $ 693 $ 748 0.75% $ 316 $ 432 0.45%
NOW checking...................... 7,493 8.26 (926) 8,419 8.47 765 7,654 8.03
Statement savings................. 7,338 8.09 (1,196) 8,534 8.58 (151) 8,685 9.11
Money market demand............... 18,038 19.88 1,756 16,282 16.37 664 15,618 16.38
Fixed-rate certificates which
mature in the year ending(1)(2):
Within 1 year................... 39,954 44.02 15 39,939 40.17 (6,505) 46,444 48.70
After 1 year, but
within 2 years.................. 13,284 14.64 (2,077) 15,361 15.45 4,048 11,313 11.86
After 2 years, but
within 5 years.................. 3,205 3.53 (6,947) 10,152 10.21 4,936 5,216 5.47
------- ---- ------- ------- ------ ------- ------- ------
Total........................ $90,753 100.00% $(8,682) $99,435 100.00% $ 4,073 $95,362 100.00%
======= ====== ======= ======= ====== ======= ======= ======
</TABLE>
(1) At December 31, 1999 and at December 31, 1998, and 1997, certificates of
deposits of $100,000 or more amounted to $9.3 million, $10.1 million and
$7.0 million, respectively.
(2) IRA accounts included in certificate balances are $7.5 million, $8.5 million
and, $8.9 million at December 31, 1999 and December 31, 1998 and 1997,
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,
---------------------------------------------------
1999 1998 1997
----------- ----------- ----------
(Dollars in Thousands)
<S> <C> <C> <C>
2.00 - 2.99%............................. $ -- $ 40 $ 17
3.00 - 4.99%............................. 23,072 12,861 9,740
5.00 - 6.99%............................. 33,354 52,513 53,180
7.00 - 8.99%............................. 17 38 36
------- ------- -------
Total................................ $56,443 $65,452 $62,973
======= ======= =======
</TABLE>
The following table sets forth the amount and maturities of time
deposits at December 31, 1999.
<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
--------- ----- ----- ----- ----- -----------
<S> <C> <C> <C> <C> <C> <C>
3.00 - 4.99%............. $19,687 $ 522 $2,788 $75 $23,072 40.9%
5.00 - 6.99%............. 20,250 12,762 342 -- 33,354 59.1
7.00 - 8.99%............. 17 -- -- -- 17 0.0
------- ------- ------ --- -------
Total $39,954 $13,284 $3,130 $75 $56,443 100.0%
======= ======= ====== === =======
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>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------- ----------------------------- ---------------------------
Interest- Interest- Interest-
Bearing Bearing Bearing
Demand Certificates Demand Certificates Demand Certificates
Deposits of Deposit Deposits of Deposit Deposits of Deposit
-------- ------------ -------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Average Balance...... $32,802 $62,262 $33,101 $62,392 $32,986 $64,566
Average Rate......... 2.75% 5.05% 2.84% 5.26% 2.78% 5.24%
</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,
----------------------------------------------
1999 1998 1997
----------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Beginning Balance....................... $ 99,435 $ 95,362 $102,247
-------- -------- --------
Net increase (decrease)
before interest credited (11,111) 1,899 (9,747)
Interest credited 2,429 2,174 2,862
-------- -------- --------
Net increase (decrease) in
savings deposits (8,682) 4,073 (6,885)
Ending Balance.......................... $ 90,753 $ 99,435 $ 95,362
======== ======== ========
</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, 1999, the Banks had $5.0 million, of fixed-term,
callable advances from the FHLB, with a weighted average interest rate of 5.01%,
due in 2009. At December 31, 1998, the Banks had $10.0 million of fixed-term,
callable advances from the FHLB, with a weighted average interest rate of 4.76%,
due in 2008. The FHLB advances are subject to call at the initial call date and
quarterly thereafter. During the year ended December 31, 1997, the Banks had no
borrowings from the FHLB-Chicago.
The Banks also use securities sold under agreements to repurchase due
generally within one year as a source of funds. At December 31, 1999, the Banks
had no securities sold under agreements to repurchase. At December 31, 1998,
securities sold under agreements to repurchase 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 were maintained with Gilster-Mary Lee.
30
<PAGE> 31
The Banks also use federal funds purchased as a source of funds.
Federal funds purchased were $2.8 million at December 31, 1999, whereas the
Banks had no federal funds purchased at December 31, 1998 and 1997. Federal
funds purchased are secured by a pledge of certain investment and
mortgage-backed securities with an amortized cost of $13.5 million and a fair
value of $13.5 million at December 31, 1999.
The following tables set forth certain information regarding short-term
borrowings by the Banks at the dates and for the periods indicated.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------
1999 1998 1997
--------- --------- ----------
<S> <C> <C> <C>
Weighted average rate paid on
securities sold under agreements
to repurchase......................... 4.37% 4.59% 5.30%
</TABLE>
<TABLE>
<CAPTION>
At or For the Year
Ended December 31,
----------------------------------------------
1999 1998 1997
--------- --------- ----------
<S> <C> <C> <C>
(Dollars in Thousands)
Maximum amount of securities sold
under agreements to repurchase
at any month end....................... $4,540 $10,880 $8,380
Approximate average securities sold
under agreements to repurchase
outstanding............................. $2,588 $ 9,523 $6,915
Approximate weighted average rate
paid on securities sold under
agreements to repurchase(1)............. 4.37% 5.00% 5.02%
</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, 1999, individually and
cumulatively, through various time periods.
At December 31, 1999, the static gap analyses indicated substantial
liability sensitivity over a one-year time periods. 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
31
<PAGE> 32
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 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, 1999, 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 $ 2,332 $ 3,224 $ 9,051 $ 33,670 $ 48,277
Investment and mortgage-
backed securities. 6,075 1,922 25,684 29,208 62,889
Other interest-earning assets 4,592 -- -- -- 4,592
-------- -------- -------- -------- --------
Total interest-earning assets 12,999 5,146 34,735 62,878 115,758
-------- -------- -------- -------- --------
INTEREST-BEARING LIABILITIES:
Savings, NOW, and money
market accounts $ 34,310 $ -- $ -- $ -- $ 34,310
Certificates of deposit 15,661 24,293 16,488 1 56,443
Other borrowed money 2,807 -- -- 5,000 7,807
-------- -------- -------- -------- --------
Total interest-bearing liabilities 52,778 24,293 16,488 5,001 98,560
-------- -------- -------- -------- --------
Interest sensitivity gap $(39,779) $(19,147) $ 18,247 $ 57,877 $ 17,198
-------- -------- -------- -------- --------
Cumulative interest-sensitivity
gap $(39,779) $(58,926) $(40,679) $ 17,198
-------- -------- -------- --------
Ratio of cumulative gap to
to total assets. (.03%) (.05%) (.03%) .01%
-------- -------- -------- --------
</TABLE>
32
<PAGE> 33
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 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, 1999, the Banks had 27 full-time employees and
eight part time employees, none of whom were represented by a collective
bargaining unit. The Banks believe their relationships with their employees is
good.
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 "1999 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
33
<PAGE> 34
regulators of the Company and the Banks have authority to impose penalties,
initiate civil and administrative actions and take other steps intended to
prevent the Banks from engaging in unsafe or unsound practices.
Federally insured banks are subject, with certain exceptions, to
certain restrictions or extensions of credit to their parent holding companies
or other affiliates, on investments in the stock or other securities of
affiliates and on the taking of such stock or securities as collateral from any
borrower. In addition, such banks are prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit or the providing of any
property or service.
Banks are also subject to the provisions of the Community Reinvestment
Act of 1977, which requires the appropriate federal bank regulatory agency, in
connection with its regular examination of a bank, to assess the bank's record
in meeting the credit needs of the community serviced by the bank, including low
and moderate income neighborhoods. The regulatory agency's assessment of the
bank's record is made available to the public. Further, such assessment is
required of any bank which has applied, among other things, to establish a new
branch office that will accept deposits, relocate an existing office or merge or
consolidate with, or acquire the assets or assume the liabilities of, a
federally regulated financial institution.
Dividends from the Banks will constitute the major source of funds for
dividends to be paid by the Company. The amount of dividends payable by the
Banks to the Company will depend upon the Banks' earnings and capital position,
and is limited by federal and state laws, regulations and policies.
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
34
<PAGE> 35
funded only through additional borrowings or other arrangements that may
undermine the bank holding company's ability to serve as a source of strength.
The amount of dividends actually paid during any one period are
strongly affected by the Banks' management policy of maintaining a strong
capital position. Federal law further provides that no insured depository
institution may make any capital distribution (which would include a cash
dividend) if, after making the distribution, the institution would not satisfy
one or more of its minimum capital requirements. Moreover, the federal bank
regulatory agencies also have the general authority to limit the dividends paid
by insured banks if such payments should be deemed to constitute an unsafe and
unsound practice.
BANK HOLDING COMPANY REGULATION
GENERAL Bank holding companies are subject to comprehensive regulation
by the Federal Reserve under the Bank Holding Company Act ("BHCA") and the
regulations of the Federal Reserve. As a bank holding company, the Company is
required to file with the Federal Reserve annual reports and such additional
information as the Federal Reserve may require and is subject to regular
examinations by the Federal Reserve. The Federal Reserve also has extensive
enforcement authority over bank holding companies, including, among other
things, the ability to assess civil money penalties, to issue cease and desist
or removal orders, and to require that a Company divest subsidiaries (including
its bank subsidiaries). In general, enforcement actions may be initiated for
violations of law and regulations and unsafe or unsound practices.
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
35
<PAGE> 36
the acquiror is located are not unduly restrictive when compared to those
imposed by the laws of Illinois.
The BHCA also prohibits a bank holding company, with certain
exceptions, from acquiring direct or indirect ownership or control of more than
5% of the voting shares of any company which is not a bank or bank holding
company, or from engaging directly or indirectly in activities other than those
of banking, managing or controlling banks, or providing services for its
subsidiaries. The principal exceptions to these prohibitions involve certain
non-bank activities which, by statue or by Federal Reserve regulation or order,
have been identified as activities closely related to the business of banking or
managing or controlling banks. The list of activities permitted by the Federal
Reserve includes, among other things, operating a savings institution, mortgage
company, finance company, credit card company or factoring company, performing
certain data processing operations; providing certain investment and financial
advice; underwriting and acting as an insurance agent for certain types of
credit-related insurance; leasing property on a full-payout, non-operating
basis; selling money orders, travelers' checks and United States Savings Bonds;
real estate and personal property appraising; providing tax planning and
preparation services; and, subject to certain limitations, providing securities
brokerage services for customers. The Company has no present plans to engage in
any of these activities.
DIVIDENDS The Federal Reserve has issued a policy statement on the
payment of cash dividends by bank holding companies, which expresses the Federal
Reserve's view that a bank holding company should pay cash dividends only to the
extent that the company's net income for the past year is sufficient to cover
both the cash dividends and a rate of earning retention that is 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.
36
<PAGE> 37
FEDERAL SECURITIES LAWS
The common stock of the Company is registered with the Securities
Exchange Commission (the "SEC") and is subject to the disclosure, proxy
solicitation, insider trading restrictions and other requirements of the federal
securities laws. Shares of the Common Stock purchased by persons who are not
affiliates of the Company may be resold without registration. Shares purchased
by an affiliate of the Company may comply with the resale restrictions of Rule
144 under the Securities Act. If the Company meets the current public
information requirements of Rule 144 under the Securities Act, each affiliate of
the Company who complies with the other conditions of Rule 144 (including those
that require the affiliate's sale to be aggregated with those of certain other
persons) would be able to sell in the public market, without registration, a
number of shares not to exceed, in any three-month period, the greater of (i) 1%
of the outstanding shares of the Company or (ii) the average weekly volume of
trading in such shares during the preceding four calendar weeks. Provision may
be made in the future by the Company to permit affiliates to have their shares
registered for sale under the Securities Act under certain circumstances. There
are currently no demand registration rights outstanding. However, in the event
the Company, at some future time, determines to issue additional shares from its
authorized but unissued shares, the Company might offer registration rights to
certain of its affiliates who want to sell their shares.
37
<PAGE> 38
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, 1999.
<TABLE>
<CAPTION>
Year Building Land Building
Location County Opened Owned/Leased Owned/Leased Square Footage Deposits
- -------- ------ ------ ------------ ------------ -------------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Chester National Bank
Main Office
1112 State Street Randolph 1919 Owned Owned 10,345 $56,067
Chester, Illinois 62233
Chester National Bank
Branch Offices
165 West Broadway Randolph 1989 Owned Owned 11,142 22,499
Sparta, Illinois 62286
1414 South Main Randolph 1989 Owned Owned 1,032 5,337
Red Bud, Illinois 62278
Chester National Bank
of Missouri Main Office
1010 North Main Perry 1990 Owned Owned 3,900 6,829
Perryville, Missouri
63775
Chester National Bank
of Missouri Branch Office
1011 S. Perryville Blvd Perry 1999 Leased Leased 120 21
Perryville, Missouri
63775
</TABLE>
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 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.
38
<PAGE> 39
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, 1999, 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, 1999, 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, 1999, 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.
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
39
<PAGE> 40
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 200 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, 1999 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
in Basis Points Net Portfolio Value
-------------------
(Rate Shock) Amount $ Change % Change
------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
200 18,891 (3,348) (15.05%)
Static 22,239 -- --
(200) 24,525 2,286 10.28%
</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.
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.
40
<PAGE> 41
ITEM 8. Financial Statements and Supplementary Data.
The sections of the Annual Report to the Stockholders for the fiscal year ended
December 31, 1999, 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, 1999 and 1998" 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 2000 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 2000 Proxy Statement, entitled "Executive Compensation," is
hereby incorporated by reference. No other sections of such Proxy Statement are
incorporated herein by this reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The section of the 2000 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 2000 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
41
<PAGE> 42
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, 1999 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 as of the
Years Ended December 31, 1999 and 1998.
Chester Bancorp, Inc. and Subsidiaries Consolidated Statements of Income for the
Years Ended December 31, 1999, 1998, and 1997.
Chester Bancorp, Inc. and Subsidiaries Consolidated Statements of Comprehensive
Income for the Years Ended December 31, 1999, 1998, 1997.
Chester Bancorp, Inc. and Subsidiaries Consolidated Statements of Stockholders'
Equity for the Years Ended December 31, 1999, 1998, and 1997.
Chester Bancorp, Inc. and Subsidiaries Consolidated Statements of Cash Flows for
the Years Ended December 31, 1999, 1998, and 1997.
Chester Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial
Statements December 31, 1999 and 1998.
(a)(2) Financial Statement Schedules. Not applicable.
(a)(3) Exhibits
42
<PAGE> 43
<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
1999.
21 Subsidiaries of Chester Bancorp, Inc. (1)
27 Financial Data Schedule 27
99 Proxy Statement for the 2000 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, 1998 (File No. 000-21167) filed on March 30, 1999, 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.
43
<PAGE> 44
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 24, 2000 By Michael W. Welge
------------------
Michael W. Welge,
Chairman of the Board, President,
Chief Financial Officer, and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
March 24, 2000 By Edward K. Collins
-----------------
Edward K. Collins,
Treasurer, Secretary, and Director
March 24, 2000 By Allen R. Verseman
-----------------
Allen R. Verseman,
Director
March 24, 2000 By Carl H. Welge
-------------
Carl H. Welge,
Director
March 24, 2000 By Thomas E. Welch
---------------
Thomas E. Welch, Jr.
Director
March 24, 2000 By John R. Beck
------------
John R. Beck, M.D.
Director
March 24, 2000 By James C. McDonald
-----------------
James C. McDonald,
Director
44
<PAGE> 1
Chester Bancorp. Inc.
[LOGO]
1999 Annual Report
<PAGE> 2
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Message to Our Stockholders 1
Common Stock and Related Matters 2
Selected Consolidated Financial Information 3
Management's Discussion and Analysis 5
Independent Auditors' Report 12
Consolidated Financial Statements 13
Notes to Consolidated Financial Statements 18
Stockholder Information Inside Back Cover
</TABLE>
<PAGE> 3
MESSAGE TO OUR STOCKHOLDERS
- --------------------------------------------------------------------------------
To Our Stockholders:
Chester Bancorp, Inc. has completed another successful year as a public
company. It has now been almost 3 1/2 years since October 4, 1996, when 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 at $10 per
share.
The Banks continue to focus on maintaining profitablilty 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.
Although the price of the Company's common stock has remained stable during
1999, we have continued to increase dividends and the Company's management is
focused on increasing our earnings per share.
The Banks' multiple locations, including main facilities in Chester,
Illinois, and Perryville, Missouri, and branch facilities in Sparta and Red Bud,
Illinois, enable the Banks to provide quality banking service to several local
communities in the region.
We have not had significant loan growth in our primary markets, but we have
had increased lending in the Southeast Missouri -- Cape Girardeau area and we
expect this trend to continue.
During 1999, the Company expanded further into the Perryville market with
the completion of a branch office in the new Bucheit building located on Route
51 in Perryville. We believe that this high visibility location will provide us
with an increased share of the growing Perryville lending market. The Company is
also a shareholder in Perry County Financial Corporation and participates in the
Perryville market through this investment.
Also during 1999, we completed the sale of our branch in Pinckneyville,
Illinois. The purchase and assumption transaction included the sale of
approximately $10,000,000 of deposits at a premium. We believe that based upon
the premium obtained in the sale and the dynamic strategic focus of the Company,
the sale was in the best interests of the Company and the shareholders.
Since October 4, 1996, the date that the Company initially offered
2,182,125 shares of common stock to the public, the Company has continually and
gradually reduced the number of outstanding shares of its common stock through
various repurchases to 1,389,553 as of December 31, 1999. We intend to continue
to repurchase shares from time to time, to the extent that such repurchases are
then determined to be advisable by the Board of Directors, authorized by the
appropriate regulatory authorities and comply with applicable legal
requirements. This practice is considered by the Board of Directors as a method
of increasing value to the Company's stockholders. Such repurchases have enabled
the Company to maintain growth in earnings per share.
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 1999. We look forward to an exciting and profitable
2000.
Sincerely,
Michael Welge Sig.
Michael W. Welge
Chairman of the Board,
President and Chief
Financial Officer
1
<PAGE> 4
COMMON STOCK AND RELATED MATTERS
- --------------------------------------------------------------------------------
The common stock of Chester Bancorp, Inc. is traded in the over-the-counter
market and is listed for quotation in the Nasdaq National Market under the
symbol "CNBA." The stock was issued on October 4, 1996 at $10.00 per share. As
of December 31, 1999, there were 1,389,553 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
March 31, 1999 $16.937 $16.750 $ .07
June 30, 1999 $16.812 $16.687 $ .08
September 30, 1999 $17.125 $16.687 $ .09
December 31, 1999 $16.750 $16.250 $ .09
</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 will continue.
2
<PAGE> 5
SELECTED CONSOLIDATED FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets $120,392 $142,796 $133,777 $145,843 $134,781
Loans receivable, net 48,277 48,209 60,468 54,842 57,021
Mortgage-backed securities, net(1) 21,734 21,870 13,758 15,897 15,413
Investments, net(2) 45,747 68,218 54,689 69,842 57,605
Savings deposits(3) 90,753 99,435 95,362 102,247 106,718
Securities sold under agreements to
repurchase(3) -- 10,880 8,380 11,340 15,000
Federal funds purchased 2,807 -- -- -- --
Federal Home Loan Bank advances 5,000 10,000 -- -- --
Stockholders' equity 20,873 21,705 28,988 31,427 11,712
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income $ 8,266 $ 9,077 $ 9,182 $ 9,307 $ 9,035
Interest expense 4,640 5,122 4,647 5,300 5,474
- -------------------------------------------------------------------------------------------------------------------
Net interest income 3,626 3,955 4,535 4,007 3,561
Provision for loan losses 200 17 98 33 161
- -------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 3,426 3,938 4,437 3,974 3,400
Loss on sale of certificates of deposit -- -- -- (54) --
Gain on sale of investment securities
and mortgage-backed securities -- 33 16 42 98
Other non-interest income 1,069 207 203 180 140
Non-interest expense 2,532 2,514 2,835 3,338 2,338
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,963 1,664 1,821 804 1,300
Income taxes 654 514 511 109 299
- -------------------------------------------------------------------------------------------------------------------
Net income $ 1,309 $ 1,150 $ 1,310 $ 695 $ 1,001
===================================================================================================================
Earnings per share -- basic $ 1.03 $ 0.75 $ 0.68 $ 0.19 N/A
===================================================================================================================
Earnings per share -- diluted $ 1.01 $ 0.73 $ 0.67 $ 0.19 N/A
===================================================================================================================
</TABLE>
3
<PAGE> 6
SELECTED CONSOLIDATED FINANCIAL INFORMATION (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
At or for the Year Ended December 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
KEY OPERATING RATIOS(3):
Performance Ratios:
Return on average assets (net income divided by
average assets) 1.00% 0.82% 0.96% 0.49% 0.73%
Return on average equity (net income divided by
average equity) 6.38 4.63 4.28 4.12 8.94
Interest rate spread (difference between average
yield on interest-earning assets and average
cost of interest-bearing liabilities)(4) 2.39 2.31 2.69 2.74 2.60
Net interest margin (net interest income as a
percentage of average interest-earning
assets)(4) 2.97 3.03 3.60 3.15 2.87
Non-interest expense to average assets 1.93 1.79 2.07 2.38(6) 1.70
Average interest-earning assets to average
interest-bearing liabilities 115.71 118.91 125.71 110.41 106.48
Asset Quality:
Allowance for loan losses to total loans at end
of period 1.24 0.92 0.72 0.70 0.68
Ratio of allowance for loan losses to
non-performing loans 698.60 287.41 1,159.97 485.74 244.79
Net charge-offs to average outstanding loans
during the period 0.09 .01 0.08 0.07 0.03
Ratio of non-performing assets to total
assets(5) 0.23 .20 0.06 0.13 0.27
Capital Ratios:
Average equity to average assets 15.62 17.74 22.39 12.00 8.15
Equity to assets at end of period 17.34 15.20 21.67 21.55 8.69
</TABLE>
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Number of:
Real estate loans outstanding 1,050 1,127 1,317 1,466 1,484
Deposit accounts 8,216 9,970 10,391 12,632 12,282
Full-service offices 4 5 5 6 6
</TABLE>
- ---------------
(1) Includes mortgage backed securities available for sale of $17.0 million,
$11.3 million, $1.6 million, $1.9 million, and $2.2 million at December 31,
1999, 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 $5.0 million, $12.5 million, $19.7 million, $12.5 million, and $7.1
million at December 31, 1999, 1998, 1997, 1996 and 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 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,
federal funds purchased 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 Savings Association Insurance Fund 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
5
<PAGE> 8
customers. The Company has implemented this strategy by: (1) closely monitoring
the needs of customers and providing quality service; (2) emphasizing consumer
banking by originating residential mortgage loans and consumer loans, and by
offering checking accounts and other financial services and products; (3)
maintaining asset quality; (4) maintaining significant investments in investment
and mortgage-backed securities; (5) maintaining capital in excess of regulatory
requirements; (6) increasing earnings; and, (7) managing interest rate risk by
attempting to match asset and liability maturities and rates.
FINANCIAL CONDITION
Assets.
The Company's total assets decreased by $22.4 million, or 15.7%, to $120.4
million at December 31, 1999 from $142.8 million at December 31, 1998. The
decrease in the Company's asset size resulted from an $8.7 million decline in
the level of savings deposits and a $13.1 decrease in borrowed money. The
decrease in savings deposits was mainly attributable to the sale of the
Company's Pinckneyville branch. The purchase and assumption transaction included
the sale of $9.3 million of deposits at a premium.
Loans receivable increased $69,000 or .1%, to $48.3 million at December 31,
1999 from $48.2 million at December 31, 1998. The average balance on loans
receivable decreased $5.3 million, or 10.0% for 1999. Repayments on loans
receivable were $15.0 million for 1999 compared to $18.3 million for 1998.
Heavier loan repayments were experienced during the first half of 1999 due to
refinancing of loans. New loan originations increased from $6.2 million in 1998
to $15.6 million in 1999. Loan portfolio growth occurred during the second half
of 1999.
Mortgage-backed securities at December 31, 1999 were $21.7 million compared
to $21.9 million at December 31, 1998. Investment securities decreased $11.5
million, or 21.8%, to $41.2 million at December 31, 1999. The funds received
from the decline in mortgage-backed securities and investment securities were
used to fund the decline in savings deposits and borrowed money.
On a combined basis cash, interest-bearing deposits, federal funds sold,
certificates of deposit, and bankers' acceptances (overnight deposits),
decreased $11.1 million, or 65.4%, to $5.8 million at December 31, 1999 from
$16.9 million at December 31, 1998. The overnight deposits were used to fund the
decline in savings deposits and borrowed money.
Liabilities.
Savings deposits decreased $8.7 million, or 8.7%, to $90.8 million at
December 31, 1999 from $99.4 million at December 31, 1998. The decrease in
savings deposits reflects a $9.3 million decrease in savings deposits from the
sale of the Company's Pinckneyville branch. The sale of the Pinckneyville branch
is part of the Company's long-term strategy to focus its resources on its other
operations in Randolph County, Illinois and Perry County, Missouri.
Borrowed money decreased $13.1 million, or 62.6%, from $20.9 million at
December 31, 1998 to $7.8 million at December 31, 1999. FHLB advances decreased
$5.0 million or 50.0% to $5.0 million at December 31, 1999. Federal funds
purchased were $2.8 million at December 31, 1999, whereas the Company had no
federal funds purchased at December 31, 1998. Securities sold under agreements
to repurchase decreased $10.9 million from $10.9 million at December 31, 1998.
There were no securities sold under agreements to repurchase at December 31,
1999.
Over the last several years, the Company has maintained a deposit
relationship with Gilster-Mary Lee Corporation, (Gilster-Mary Lee), a food
manufacturing and packaging company headquartered in Chester, Illinois. The
Chairman of the Board of the Company is also the Executive Vice President,
Treasurer and Secretary of Gilster-Mary Lee. Over the last several years, the
Company has maintained a deposit relationship with Gilster-Mary Lee, which at
times has had as much as $25 million in funds on deposit, typically with short
terms. At December 31, 1999 and 1998, the balance of funds on deposit with the
Company was $14.8 million and $24.3 million, respectively, which included the
securities sold under agreements to repurchase.
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, 1999, the Company maintained an adequate liquidity level to cover
the withdrawal of such deposits and/or additional reduction of such borrowings.
RESULTS OF OPERATIONS
The Company's operating results depend primarily on its level of net
interest income, which is the difference between the interest income earned on
its interest-earning assets (loans, mortgage-backed securities, investment
securities, and
6
<PAGE> 9
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>
1999 1998 1997
------------------------------- ------------------------------- --------------------
Average Average
Average Yield/ Average Yield/ Average
(Dollars in thousands) Balance Interest Cost Balance Interest Cost Balance Interest
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable, net(1) $ 47,580 $3,931 8.26% $ 52,893 $4,496 8.50% $ 58,127 $5,040
Investments, net(2) 44,546 2,599 5.83 47,607 2,735 5.74 46,873 2,753
Mortgage-backed securities,
net 24,867 1,459 5.87 18,670 1,145 6.13 16,453 1,050
Interest-bearing deposits(3) 8,831 392 4.44 16,128 839 5.20 9,868 538
------------------------------------------------------------------------------------------
Total interest-earning
assets 125,824 8,381 6.66 135,298 9,215 6.81 131,321 9,381
------------------- ------------------- --------
Noninterest-earning assets 5,435 4,796 5,454
-------- -------- --------
Total assets $131,259 $140,094 $136,775
======== ======== ========
INTEREST-BEARING LIABILITIES:
Deposits $ 96,389 4,048 4.20 95,493 4,223 4.42 $ 97,552 4,300
Securities sold under
agreements to repurchase 2,588 113 4.37 9,523 476 5.00 6,915 347
Federal funds purchased 381 22 5.77 4.82 -- --
FHLB Advances 9,384 457 4.87 8,767 423 4.88 -- --
------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 108,742 4,640 4.27 113,783 5,122 104,467 4,647
------------------- -------- --------
Noninterest-bearing
liabilities 2,008 1,458 1,690
-------- -------- --------
Total liabilities 110,750 115,241 106,157
Stockholders' equity 20,509 24,853 30,618
-------- -------- --------
Total liabilities and
stockholders' equity $131,259 $140,094 $136,775
======== ======== ========
Net interest income $3,741 $4,093 $4,734
====== ====== ======
Interest rate spread(4) 2.39% 2.31%
====== ======
Net interest margin(5) 2.97% 3.03%
====== ======
Ratio of average
interest-earning assets to
average interest-bearing
liabilities 115.71% 118.91%
====== ======
<CAPTION>
1997
-------
Average
Yield/
(Dollars in thousands) Cost
- -------------------------------------
<S> <C>
INTEREST-EARNING ASSETS:
Loans receivable, net(1) 8.67%
Investments, net(2) 5.87
Mortgage-backed securities,
net 6.38
Interest-bearing deposits(3) 5.45
-------
Total interest-earning
assets 7.14
-------
Noninterest-earning assets
Total assets
INTEREST-BEARING LIABILITIES:
Deposits 4.41
Securities sold under
agreements to repurchase 5.02
Federal funds purchased --
FHLB Advances --
-------
Total interest-bearing
liabilities 4.45
-------
Noninterest-bearing
liabilities
Total liabilities
Stockholders' equity
Total liabilities and
stockholders' equity
Net interest income
Interest rate spread(4) 2.69%
======
Net interest margin(5) 3.60%
======
Ratio of average
interest-earning assets to
average interest-bearing
liabilities 125.71%
======
</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.
(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
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>
1999 COMPARED TO 1998 1998 Compared to 1997
------------------------------------ ------------------------------------
Total Total
Rate/ Increase Rate/ Increase
(Dollars in thousands) Volume Rate Volume (Decrease) Volume Rate Volume (Decrease)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable, net(1) $(452) $(127) $ 14 $(565) $(454) $ (99) $ 9 $(544)
Investments, net(2) (176) 43 (3) (136) 43 (61) 0 (18)
Mortgage-backed
securities, net 380 (49) (17) 314 142 (41) (6) 95
Interest-bearing
deposits(3) (380) (123) 56 (447) (314) (25) (15) 301
- -------------------------------------------------------------------------------------------------------
Total net change in
income on interest-
earning assets (628) (256) 50 (834) 72 (226) (12) (166)
- -------------------------------------------------------------------------------------------------------
Interest-bearing
liabilities:
Deposits 40 (210) (5) (175) (91) 10 4 (77)
FHLB advances 30 4 -- 34 440 -- (17) 423
Federal funds purchased -- -- 22 22 -- -- -- --
Securities sold under
agreements to
repurchase (347) (60) 44 (363) 131 (2) 0 129
- -------------------------------------------------------------------------------------------------------
Total net change in
expense on interest-
bearing liabilities (277) (266) 61 (482) 480 8 (13) 475
Net change in net
interest income $(351) $ 10 $(11) $(352) $(408) $(234) $ 1 $(641)
=======================================================================================================
<CAPTION>
1997 Compared to 1996
------------------------------------
Total
Rate/ Increase
(Dollars in thousands) Volume Rate Volume (Decrease)
- ----------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable, net(1) $ 207 $ (34) $ 0 $ 173
Investments, net(2) (80) 48 0 (32)
Mortgage-backed
securities, net 3 (36) 0 (33)
Interest-bearing
deposits(3) (247) (31) 9 (269)
- ----------------------------------------------------------------
Total net change in
income on interest-
earning assets (117) (53) 9 (161)
- ----------------------------------------------------------------
Interest-bearing
liabilities:
Deposits (398) 160 (19) (257)
FHLB advances -- -- -- --
Federal funds purchased -- -- -- --
Securities sold under
agreements to
repurchase (401) 13 (8) (396)
- ----------------------------------------------------------------
Total net change in
expense on interest-
bearing liabilities (799) 173 (27) (653)
Net change in net
interest income $ 682 $(226) $ 36 $ 492
================================================================
</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' acceptance
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
Net Income.
The Company's net income for 1999 was $1.3 million compared to $1.1 million
for 1998. The higher net income level in 1999 reflects the sale of the Company's
Pinckneyville branch. The premium received by the Company totaled $0.9 million
and was received by the Company during the quarter ended December 31, 1999. The
actual increase in net income for 1999 was $610,000, after considering the tax
effect of the gain. Without considering the impact of the gain from the sale of
the branch, net income for 1999 would have been $698,000.
Net Interest Income.
Net interest income decreased $329,000, or 8.3%, to $3.6 million for 1999
from $4.0 million for 1998. The decrease in net interest income was the result
of a decline in the ratio of average interest-earning assets to average
interest-bearing liabilities of 115.7% in 1999 from 118.9% 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 and reduced
borrowing.
Interest Income.
Interest income on loans receivable totaled $3.9 million for 1999 compared
to $4.5 million for 1998. The $566,000, or 12.6%, decrease in interest income on
loans receivable resulted from a $5.3 million, or 10.0%, 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 of 8.26% in 1999 from
8.50% in 1998.
Interest income on mortgage-backed securities increased $314,000, or 27.5%,
to $1.5 million for 1999 from $1.2 million for 1998. The increase in interest
income on mortgage-backed securities resulted from a $6.2 million, or 33.2%,
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 of 5.87% in 1999 from 6.13% in 1998.
8
<PAGE> 11
Management invested a portion of the short-term interest bearing funds into
higher yielding mortgage-backed securities during the first quarter of 1999.
Interest earned on investment securities totaled $2.5 million for 1999
compared to $2.6 million for 1998. The $112,000, or 4.3% decrease in interest
income on investment securities resulted from a $3.1 million, or 6.4%, decrease
in the average balance of investment securities, positively impacted by an
increase in the average yield on investment securities of 5.83% in 1999 from
5.75% in 1998. Management invested into higher yielding, longer maturity
investment securities during the first half of 1999.
Interest income on interest-bearing deposits, federal fund sold and
bankers' acceptances, totaled $392,000 for 1999 compared to $839,000 for 1998.
The $447,000, or 53.3%, decrease in interest income on interest-bearing deposits
resulted from a $7.3 million, or 45.2%, decrease in the average balance of
interest-bearing deposits. The decrease in the average balance was due increased
funding of savings withdrawals and a decline in borrowed money. The impact of
decreased volume was further impacted by a decline in the average yield on
interest-bearing deposits of 4.44% in 1999 from 5.20% in 1998.
Interest Expense.
Interest expense decreased $481,000, or 9.4%, during 1999. Interest expense
on savings deposits decreased $175,000, or 4.2%, to $4.0 million for 1999 from
$4.2 million for 1998. This decrease resulted primarily from the decrease in the
average cost of deposits from 4.4% in 1998 to 4.2% in 1999. The sale of the
Company's Pinckneyville branch, on November 14, 1999, had a slight impact in the
decrease of interest expense. Interest expense on securities sold under
agreement to repurchase decreased $363,000, or 76.3%, to $113,000 for 1999 from
$476,000 for 1998. This decrease resulted primarily from the $6.9 million, or
72.8%, decrease in the average balance of securities sold under agreements to
repurchase from $9.5 million for 1998 to $2.6 million for 1999. The decrease in
the average balance of securities sold under agreements to repurchase was
attributable to Gilster-Mary Lee decreasing the level of funds maintained with
the Company.
Interest expense on FHLB advances increased $34,000, or 8.0%, for 1999 from
$423,000 for 1998. 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. In February, 1999, a $5.0 million FHLB advance was called and the
Company borrowed funds with federal funds purchased. The average balance and the
average cost on FHLB advances for 1999 and 1998 was $9.4 million and 4.87%, and
$8.8 million and 4.82%, respectively.
Interest expense on federal funds purchased was $22,000 for 1999. The
average balance and the average cost on federal funds purchased for 1999 was
$381,000 and 5.77%, respectively. Federal funds purchased were $2.8 million at
December 31, 1999, whereas the Company had no federal funds purchased at
December 31, 1998. Federal funds purchased and FHLB advances were used to
partially fund the sale of the Company's Pinckneyville branch transaction.
Provision for Loan Losses.
The allowance for loan losses is established through a provision for loan
losses based on management's evaluation of the risk inherent in its loan
portfolio and the general economy. Such evaluation considers numerous factors
including general economic conditions, loan portfolio composition, prior loss
experience, the estimated fair value of the underlying collateral, and other
factors that warrant recognition in providing for an adequate loan loss
allowance.
During 1999, the Company's provision for loan losses was $200,000 compared
to $17,000 in 1998. Management increased the provision in 1999 due to an
increase of the commercial loan portfolio and an increase in net charge-offs.
The Company's allowance for loan losses was $605,000, or 1.24%, of loans
outstanding at December 31, 1999, compared to $449,000, or .92%, of loans
outstanding at December 31, 1998. The Company's level of net loans charged-off
during the year ended December 31, 1999 was $43,000, which represented .09% of
average loans receivable outstanding. This percentage of charge-offs increased
from the .01% level of charge-offs experienced in 1998. 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, 1999.
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
9
<PAGE> 12
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 $1.1 million for 1999 compared to $240,000 for 1998.
The $829,000, or 345.8%, increase resulted primarily from the sale of the
Company's Pinckneyville branch. The sale transaction for the Company totaled
$0.9 million and was recorded during the quarter ended December 31, 1999.
Without considering the impact of the sale transaction, net noninterest income
for 1999 would have been $153,633, a decrease of $86,000. During 1999, late
charges, deposit account fees and other fees decreased $55,000 because the
Company closed it's Cape Girardeau, Missouri loan office. In 1998, the Cape
Girardeau office generated fee income through the selling of its loan
production. Additionally, the Company experienced a $33,000 net gain on
available for sale securities during 1998.
Noninterest Expense.
Noninterest expense increased $18,000, or .7%, for 1999. The increase in
noninterest expense resulted primarily from a $102,000 increase in compensation
and employee benefits, positively offset with a $25,000 decrease in advertising
expense and a $77,000 decrease in other noninterest expense.
Compensation and employee benefits increased $102,000, or 8.2%, in 1999 due
to 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.
Income Tax Expense.
Income tax expense for 1999 was $654,000 compared to $514,000 for 1998. The
Company's effective tax rate for 1999 and 1998 was 33.3% and 30.9%,
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.
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, 1999, the Company had $12.0 million
of adjustable rate mortgages, $6.8 million of investment securities,
mortgage-backed securities and interest-bearing deposits maturing within one
year, and $25.8 million of investment securities and mortgage-backed securities
maturing within one to five years. In addition, at December 31, 1999, the
Company had $3.3 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
10
<PAGE> 13
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 2000.
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, 1999,
cash and cash equivalents totaled $5.8 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, 1999, purchases of investment securities and
mortgage-backed securities totaled $94.6 million and $10.9 million,
respectively, while loan originations totaled $15.6 million. These investments
were funded primarily from loan and mortgage-backed security repayments of $25.8
million and investment security sales and maturities of $106.0 million.
In April 1997, the Company announced its initial 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, 1999, the Company had repurchased approximately 793,000, or 36.3%,
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) or through federal funds purchased. At December
31, 1999, the Company had $5.0 million of long-term, callable advances from the
FHLB and $2.8 million borrowed though federal funds purchased.
At December 31, 1999, the Company exceeded all of its regulatory capital
requirements.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related data presented herein
have been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and results of operations in
terms of historical dollars without considering changes in the relative
purchasing power of money over time because of inflation. Unlike most industrial
companies, virtually all of the assets and liabilities of the Company are
monetary in nature. As a result, interest rates have a more significant impact
on the Company's performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
Accounting for 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.
11
<PAGE> 14
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, 1999 and 1998,
and the related consolidated statements of income, stockholders' equity,
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 1999. 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, 1999 and 1998, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
[KPMG LLP LOGO]
St. Louis, Missouri
January 28, 2000
12
<PAGE> 15
CHESTER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1999 AND 1998 1999 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 1,245,259 $ 1,305,850
Interest-bearing deposits 4,592,041 8,708,822
Federal funds sold -- 5,788,000
Bankers' acceptances -- 994,167
- --------------------------------------------------------------------------------------------
Total cash and cash equivalents 5,837,300 16,796,839
Certificates of deposit -- 95,000
Investment securities:
Available for sale, at fair value (cost of $5,003,271 and
$12,467,687 at December 31, 1999 and 1998, respectively) 4,961,045 12,515,769
Held to maturity, at cost (fair value of $34,977,915 and
$40,277,481 at December 31, 1999 and 1998, respectively) 36,193,546 40,116,367
Mortgage-backed securities:
Available for sale, at fair value (cost of $7,175,687 and
$11,170,541 at December 31, 1999 and 1998, respectively) 7,009,588 11,275,061
Held to maturity, at cost (fair value of $14,413,424 and
$10,619,540 at December 31, 1999 and 1998, respectively) 14,724,664 10,595,289
Loans receivable, net 48,277,319 48,208,662
Accrued interest receivable 1,151,180 909,953
Real estate acquired by foreclosure, net 186,288 127,613
Office properties and equipment, net 1,524,196 1,684,381
Income taxes receivable -- 155,261
Deferred tax asset, net 198,513 --
Other assets 328,183 316,062
- --------------------------------------------------------------------------------------------
$120,391,822 $142,796,257
============================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings deposits $ 90,752,941 $ 99,434,579
Borrowed money 7,807,000 20,880,389
Accrued interest payable 139,069 215,420
Advance payments by borrowers for taxes and insurance 376,431 419,552
Income taxes payable 326,001 --
Deferred tax liability, net -- 44,174
Accrued expenses and other liabilities 117,198 97,055
- --------------------------------------------------------------------------------------------
Total liabilities 99,518,640 121,091,169
- --------------------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 3,000,000 shares authorized,
2,182,125 shares issued at December 31, 1999 and 1998 21,821 21,821
Additional paid-in capital 21,521,985 21,650,837
Retained earnings, substantially restricted 14,681,473 13,803,400
Accumulated other comprehensive (loss) income (129,165) 93,610
Unearned ESOP shares (1,538,040) (1,592,980)
Unamortized restricted stock awards (393,480) (559,674)
Treasury stock, at cost: 792,572 and 700,137 shares at
December 31, 1999 and 1998, respectively (13,291,412) (11,711,926)
- --------------------------------------------------------------------------------------------
Total stockholders' equity 20,873,182 21,705,088
- --------------------------------------------------------------------------------------------
$120,391,822 $142,796,257
============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
13
<PAGE> 16
CHESTER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE YEARS ENDED DECEMBER 31, 1999 1999 1998 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans receivable $3,930,511 $4,496,309 $5,039,655
Mortgage-backed securities 1,459,347 1,145,034 1,050,249
Investments 2,484,070 2,596,529 2,554,389
Interest-bearing deposits, federal funds sold, and
bankers' acceptances 392,270 839,157 537,704
- ------------------------------------------------------------------------------------------------------
Total interest income 8,266,198 9,077,029 9,181,997
- ------------------------------------------------------------------------------------------------------
Interest expense:
Savings deposits 4,047,612 4,223,085 4,299,985
Borrowed money 592,623 898,580 346,946
- ------------------------------------------------------------------------------------------------------
Total interest expense 4,640,235 5,121,665 4,646,931
- ------------------------------------------------------------------------------------------------------
Net interest income 3,625,963 3,955,364 4,535,066
Provision for loan losses 200,000 16,800 97,800
- ------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 3,425,963 3,938,564 4,437,266
- ------------------------------------------------------------------------------------------------------
Noninterest income:
Late charges, deposit account fees, and other fees 134,181 188,691 134,078
Gain on sale of investment securities, net 11 30,318 16,256
Gain on sale of mortgage-backed securities, net -- 2,352 --
Gain on sale of branch 915,534 -- --
Other 19,441 18,448 68,779
- ------------------------------------------------------------------------------------------------------
Total noninterest income 1,069,167 239,809 219,113
- ------------------------------------------------------------------------------------------------------
Noninterest expense:
Compensation and employee benefits 1,342,858 1,241,287 1,520,102
Occupancy 288,861 274,119 368,562
Data processing 160,961 157,330 174,781
Advertising 40,859 65,570 64,067
Federal deposit insurance premiums 57,641 57,813 68,399
Other 641,173 718,189 638,657
- ------------------------------------------------------------------------------------------------------
Total noninterest expense 2,532,353 2,514,308 2,834,568
- ------------------------------------------------------------------------------------------------------
Income before income tax expense 1,962,777 1,664,065 1,821,811
Income tax expense 654,091 514,338 511,445
- ------------------------------------------------------------------------------------------------------
Net income $1,308,686 $1,149,727 $1,310,366
======================================================================================================
Earnings per common share -- basic $ 1.03 $ 0.75 $ 0.68
Earnings per common share -- diluted $ 1.01 $ 0.73 $ 0.67
======================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE> 17
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, 1999 Shares Amount capital restricted (loss) income shares stock awards
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 2,182,125 $21,821 20,865,158 12,271,098 (14,499) (1,716,600) $ --
Net income -- -- -- 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 award -- -- -- -- -- -- 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 unrealized gain
(loss) on securities
available for sale, net of
tax -- -- -- -- 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 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 unrealized gain
(loss) on securities
available for sale, net of
tax -- -- -- -- 61,156 -- --
- --------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 2,182,125 $21,821 21,650,837 13,803,400 93,610 (1,592,980) $ (559,674)
Net income -- -- -- 1,308,686 -- -- --
Purchase of treasury stock -- -- -- -- -- -- --
Issuance of treasury stock
for restricted stock awards -- -- (166,110) (9,874) -- -- --
Stock options exercised -- -- -- (1,526) -- -- --
Amortization of stock awards -- -- -- -- -- -- 166,194
Amortization of ESOP awards -- -- 37,258 -- -- 54,940 --
Dividends on common stock at
$.33 per share -- -- -- (419,213) -- -- --
Change in unrealized gain
(loss) on securities
available for sale, net of
tax -- -- -- -- (222,775) -- --
- --------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 2,182,125 $21,821 21,521,985 14,681,473 (129,165) (1,538,040) $ (393,480)
==========================================================================================================================
<CAPTION>
Treasury stock Total
Three years ended ---------------------- stockholders'
December 31, 1999 Shares Amount equity
- --------------------------------------------------------------------
<S> <C> <C> <C>
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 award -- -- 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 unrealized gain
(loss) on securities
available for sale, net of
tax -- -- 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 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 unrealized gain
(loss) on securities
available for sale, net of
tax -- -- 61,156
- --------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 700,137 $(11,711,926) 21,705,088
Net income -- -- 1,308,686
Purchase of treasury stock 106,044 (1,781,412) (1,781,412)
Issuance of treasury stock
for restricted stock awards (11,865) 175,984 --
Stock options exercised (1,744) 25,942 24,416
Amortization of stock awards -- -- 166,194
Amortization of ESOP awards -- -- 92,198
Dividends on common stock at
$.33 per share -- -- (419,213)
Change in unrealized gain
(loss) on securities
available for sale, net of
tax -- -- (222,775)
- --------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 792,572 $(13,291,412) 20,873,182
====================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE> 18
CHESTER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE YEARS ENDED DECEMBER 31, 1999 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $1,308,686 $1,149,727 $1,310,366
Other comprehensive income, net of tax:
Unrealized holding gain (loss) on securities available for
sale (222,768) (52,239) 57,032
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 $4, $12,415, and $6,177 for 1999, 1998,
and 1997, respectively) (7) (20,255) (10,079)
- ---------------------------------------------------------------------------------------------------------------
Total other comprehensive income (222,775) 61,156 46,953
- ---------------------------------------------------------------------------------------------------------------
Comprehensive income $1,085,911 $1,210,883 $1,357,319
===============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE> 19
CHESTER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE YEARS ENDED DECEMBER 31, 1999 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,308,686 $ 1,149,727 $ 1,310,366
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization:
Office properties and equipment 147,765 140,073 212,292
Deferred fees, discounts, and premiums 5,134 (648,052) (665,837)
Stock plans 258,392 261,790 543,198
Increase in accrued interest receivable (241,227) (22,578) (23,683)
Increase (decrease) in accrued interest payable (76,351) 56,521 46,276
Increase (decrease) in income taxes, net 326,001 (407,474) 291,479
Gain on sale of investment securities, net (11) (30,318) (16,256)
Gain on sale of mortgage-backed securities, net -- (2,352) --
Gain on sale of branch (915,534) -- --
Provision for loan losses 200,000 16,800 97,800
Net change in other assets and other liabilities 124,230 (87,341) (36,440)
- --------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,137,085 426,796 1,759,195
- --------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Principal repayments on:
Loans receivable 14,993,527 18,288,784 15,002,900
Mortgage-backed securities 10,786,485 8,919,266 5,513,055
Investment securities -- 104,682 88,001
Proceeds from the maturity of certificates of deposit 95,000 195,000 693,000
Proceeds from the maturity of investment securities
available for sale 7,235,000 14,000,000 5,500,000
Proceeds from the maturity of investment securities held
to maturity 98,104,167 83,805,890 102,527,000
Proceeds from the sale of investment securities available
for sale 629,437 4,527,500 4,006,250
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 (15,620,100) (6,219,094) (20,706,983)
Mortgage-backed securities held to maturity (10,882,216) (17,124,741) (3,331,285)
Investment securities available for sale (400,000) (147,187) (16,624,424)
Investment securities held to maturity (94,215,397) (109,114,765) (91,009,152)
Certificates of deposit -- -- (95,000)
FHLB stock -- (178,700) --
Cash paid upon sale of branch (8,277,427) -- --
Proceeds from sales of real estate acquired through
foreclosure 248,292 48,205 73,002
Purchase of office properties and equipment (72,046) (57,706) (29,505)
- --------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 2,624,722 (2,703,087) 1,612,859
- --------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase (decrease) in savings deposits, net of branch
sale 595,789 4,072,479 (6,884,750)
Increase (decrease) in securities sold under agreements to
repurchase (10,880,389) 2,500,000 (2,959,611)
Proceeds from (payments on) FHLB advances (5,000,000) 10,000,000 --
Proceeds from federal funds purchased 2,807,000
Decrease in advance payments by borrowers for taxes and
insurance (43,121) (19,722) (8,392)
Purchase of treasury stock (1,781,412) (8,345,193) (3,868,750)
Dividends paid (419,213) (425,497) (476,767)
- --------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (14,721,346) 7,782,067 (14,198,270)
- --------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (10,959,539) 5,505,776 (10,826,216)
Cash and cash equivalents, beginning of year 16,796,839 11,291,063 22,117,279
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 5,837,300 $ 16,796,839 $ 11,291,063
==============================================================================================================
Supplemental information:
Interest paid $ 4,716,586 $ 5,065,144 $ 4,600,655
Income taxes paid 328,090 603,609 195,357
==============================================================================================================
Noncash investing and financing activities:
Loans transferred to real estate acquired by foreclosure $ 408,299 $ 136,577 $ 24,534
Interest credited to savings deposits 2,428,952 2,173,699 2,861,760
Securities transferred to available for sale -- 21,575,351 --
==============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE> 20
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
(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 is 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.
Business
The Company provides a full range of financial services to individual and
corporate customers through its home office in Chester, Illinois, and its two
banking offices in neighboring cities in Southern Illinois and two banking
offices 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.
The Company has not included segment 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 loan losses,
management obtains independent appraisals for significant properties.
Fair Value of Financial Instruments
Statement of Financial Standards (SFAS) No. 107, Disclosures About Fair
Value of Financial Instruments, requires that the estimated fair value of the
Company's financial instruments be disclosed. Fair value estimates of financial
instruments are made at a specific point in time, based on relevant market
information and information about the financial instruments. These estimates do
not reflect any premium or discount that could result from offering for sale at
one time the entire holdings or a significant portion of a particular financial
instrument. Because no market exists for a significant portion of the Company's
financial instruments, some fair value estimates are subjective in nature and
involve uncertainties and matters of significant judgment. Changes in
assumptions could significantly affect these estimates. Fair value estimates are
presented for existing on-balance-sheet and off-balance-sheet financial
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.
18
<PAGE> 21
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(CONTINUED)
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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, as amended by SFAS No. 137, Accounting for Derivative Instruments
and Hedging Activities -- Deferral of the Effective Date of FASB Statement No.
133, is effective for all fiscal quarters of all fiscal years beginning after
June 15, 2000, 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
19
<PAGE> 22
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(CONTINUED)
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. Generally, the Company's policy is to exclude from income
interest delinquent over 90 days. Such interest ultimately collected is credited
to income in the period received. Loans receivable are returned to accrual
status when interest receivable is 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 loan 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 probable 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 loan losses 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.
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,
20
<PAGE> 23
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(CONTINUED)
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
21
<PAGE> 24
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(CONTINUED)
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Earnings Per Share
Basic earnings per share (EPS), 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.
Reclassifications
Certain reclassifications of 1998 and 1997 amounts have been made to
conform with the 1999 financial statement presentation.
(2) EARNINGS PER SHARE
The computation of EPS for the years ended December 31, 1999, 1998, and
1997 follows:
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic income
Net income $1,308,686 $1,149,727 $1,310,366
==========================================================================================
Average common shares outstanding $1,265,404 1,535,617 1,925,475
==========================================================================================
Basic EPS $ 1.03 .75 .68
==========================================================================================
Diluted EPS:
Net income $1,308,686 $1,149,727 $1,310,366
==========================================================================================
Average common shares outstanding 1,265,404 1,535,617 1,925,475
Dilutive potential due to stock options 32,836 39,033 16,983
- ------------------------------------------------------------------------------------------
Average number of common shares and dilutive
potential common shares outstanding $1,298,240 $1,574,650 $1,942,458
==========================================================================================
Diluted EPS $ 1.01 $ .73 $ .67
==========================================================================================
</TABLE>
Nonvested common shares related to the restricted stock awards granted in
1998 were not included in the computation of diluted EPS because to do so would
have been antidilutive for 1999 and 1998.
22
<PAGE> 25
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(CONTINUED)
- --------------------------------------------------------------------------------
(3) INVESTMENT SECURITIES
The amortized cost and fair value of investment securities classified as
available for sale at December 31, 1999 and 1998 follows:
<TABLE>
<CAPTION>
December 31, 1999
---------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities of U.S. government $ 500,071 $ 242 $ -- $ 500,313
Securities of U.S. government and
Agencies 2,225,000 -- (42,467) 2,182,533
Equity securities 1,072,500 -- -- 1,072,500
Stock in Federal Home Loan Bank 800,700 -- -- 800,700
Stock in Federal Reserve Bank 405,000 -- -- 405,000
- --------------------------------------------------------------------------------------------
$ 5,003,271 $ 242 $(42,467) $ 4,961,045
============================================================================================
</TABLE>
<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 and
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>
Gross realized gains, gross realized losses, and gross proceeds on sales of
investment securities classified as available for sale follows:
<TABLE>
<CAPTION>
1999 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross realized gain $ 11 $ 30,318 $ 16,256
=========================================================================================
Gross proceeds $629,437 $4,527,500 $4,006,250
=========================================================================================
</TABLE>
The amortized cost and fair value of investment securities classified as
available for sale at December 31, 1999, by contractual maturity, follows:
<TABLE>
<CAPTION>
Amortized Fair
cost value
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Within one year $ 500,071 $ 500,313
Between one and five years 2,225,000 2,182,533
- ----------------------------------------------------------------------------------------
2,725,071 2,682,845
No stated maturity 2,278,200 2,278,200
- ----------------------------------------------------------------------------------------
$5,003,271 $4,961,045
========================================================================================
</TABLE>
23
<PAGE> 26
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(CONTINUED)
- --------------------------------------------------------------------------------
(3) INVESTMENT SECURITIES (CONTINUED)
The amortized cost and fair value of investment securities classified as
held to maturity at December 31, 1999 and 1998 follows:
<TABLE>
<CAPTION>
December 31, 1999
----------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities of U.S. government and
agencies $27,458,273 $ -- $(1,024,775) $26,433,499
Mortgage-backed bonds 3,000,000 -- (227,812) 2,772,188
Securities of states and
municipalities 5,735,272 125,463 (88,507) 5,772,228
- --------------------------------------------------------------------------------------------
$36,193,546 $125,463 $(1,341,094) $34,977,915
============================================================================================
</TABLE>
<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 and
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>
The amortized cost and fair value of investment securities classified as
held to maturity at December 31, 1999, by contractual maturity, follows:
<TABLE>
<CAPTION>
Amortized Fair
cost value
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Within one year $ 1,343,476 $ 1,342,454
Between one and five years 19,228,769 18,618,258
Between five and ten years 10,838,299 10,594,822
Over ten years 4,783,002 4,422,381
- ----------------------------------------------------------------------------------------
$36,193,546 $34,977,915
========================================================================================
</TABLE>
24
<PAGE> 27
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(CONTINUED)
- --------------------------------------------------------------------------------
(4) MORTGAGE-BACKED SECURITIES
The amortized cost and fair value of mortgage-backed securities classified
as available for sale at December 31, 1999 and 1998 follows:
<TABLE>
<CAPTION>
December 31, 1999
------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GNMA $1,496,829 $14,039 $ (23,987) $1,486,881
FNMA 2,903,650 -- (84,771) 2,818,879
FHLMC 2,775,208 -- (71,380) 2,703,828
- --------------------------------------------------------------------------------------------------
$7,175,687 $14,039 $(180,138) $7,009,588
==================================================================================================
</TABLE>
<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>
Gross realized gains, gross realized losses, and gross proceeds on sales of
investment securities classified as available for sale as of December 31, 1999,
1998, and 1997 follows:
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross realized gains $-- $ 4,262 $--
Gross realized losses -- (1,910) --
- --------------------------------------------------------------------------------------
Net realized gains $-- 2,352 --
======================================================================================
Gross proceeds $-- $249,779 $--
======================================================================================
</TABLE>
The amortized cost and fair value of mortgage-backed securities classified
as available for sale at December 31, 1999, 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 $ 510,993 508,665
Between one and five years 1,778,238 1,738,822
Between five and ten years 3,237,354 3,136,761
After ten years 1,649,102 1,625,340
- ---------------------------------------------------------------------------------------
$7,175,687 7,009,588
=======================================================================================
</TABLE>
25
<PAGE> 28
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(CONTINUED)
- --------------------------------------------------------------------------------
(4) MORTGAGE-BACKED SECURITIES (CONTINUED)
The amortized cost and fair value of mortgage-backed securities classified
as held to maturity at December 31, 1999 and 1998 follows:
<TABLE>
<CAPTION>
December 31, 1999
------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FNMA $ 3,109,639 $ -- $ (65,760) $ 3,043,879
FHLMC 1,979,963 -- (60,004) 1,919,959
Collateralized mortgage obligations 9,635,063 -- (185,476) 9,449,587
- -------------------------------------------------------------------------------------------------
$14,724,664 $ -- $(311,240) $14,413,424
=================================================================================================
</TABLE>
<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>
The amortized cost and fair value of mortgage-backed securities classified
as held to maturity at December 31, 1999, 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>
Between one and five years $ 2,533,658 $ 2,527,417
Between five and ten years 4,140,764 4,016,347
After ten years 8,050,242 7,869,661
- ---------------------------------------------------------------------------------------------
$14,724,664 $14,413,424
=============================================================================================
</TABLE>
26
<PAGE> 29
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(CONTINUED)
- --------------------------------------------------------------------------------
(5) LOANS RECEIVABLE, NET
A comparative summary of loans receivable follows:
<TABLE>
<CAPTION>
1999 1998
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Loans secured by real estate:
Residential:
1-4 family $36,301,877 $36,797,825
Multifamily 587,153 597,123
- ---------------------------------------------------------------------------------------------
Total residential 36,889,030 37,394,948
Agriculture and land 244,257 453,190
Commercial 5,815,172 5,456,639
- ---------------------------------------------------------------------------------------------
Total loans secured by real estate 42,948,459 43,304,777
- ---------------------------------------------------------------------------------------------
Commercial loans 2,632,400 1,874,055
Consumer loans:
Automobile loans 766,602 751,440
Home improvement 806,287 980,669
Credit cards 780,313 804,673
Loans secured by deposits 491,459 352,286
Other 458,411 586,935
- ---------------------------------------------------------------------------------------------
Total consumer loans 3,303,072 3,476,003
- ---------------------------------------------------------------------------------------------
Total loans 48,883,931 48,654,835
- ---------------------------------------------------------------------------------------------
Less:
Loans in process 2,576 8,731
Deferred loan fees, net (1,311) (11,201)
Allowance for losses 605,347 448,643
- ---------------------------------------------------------------------------------------------
606,612 446,173
- ---------------------------------------------------------------------------------------------
Loans receivable, net $48,277,319 $48,208,662
=============================================================================================
</TABLE>
The weighted average interest rate on loans was 8.10% and 8.30% at December
31, 1999 and 1998, respectively.
A summary of activity in the allowance for losses for the years ended
December 31, 1999, 1998, and 1997 follows:
<TABLE>
<CAPTION>
1999 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $448,643 $436,138 $384,141
Provision charged to expense 200,000 16,800 97,800
Charge-offs (50,608) (27,896) (67,360)
Recoveries 7,312 23,601 21,557
- -----------------------------------------------------------------------------------------------
Balance, end of year $605,347 $448,643 $436,138
===============================================================================================
</TABLE>
27
<PAGE> 30
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(CONTINUED)
- --------------------------------------------------------------------------------
(5) LOANS RECEIVABLE, NET (CONTINUED)
A summary of loans receivable contractually in arrears three months or more
is as follows:
<TABLE>
<CAPTION>
1999 1998
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Residential real estate loans $86,073 $149,916
Consumer loans 579 6,185
===========================================================================================
$86,652 $156,101
===========================================================================================
Percent of loans receivable .18 .32
===========================================================================================
Number of loans 4 10
===========================================================================================
</TABLE>
There were no impaired loans at December 31, 1999, 1998, or 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>
1999 1998
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Loans receivable $ 274,146 $322,250
Mortgage-backed securities 114,152 109,069
Investment securities 762,882 478,634
- ---------------------------------------------------------------------------------------------
$1,151,180 $909,953
=============================================================================================
</TABLE>
(7) OFFICE PROPERTIES AND EQUIPMENT, NET
A comparative summary of office properties and equipment follows:
<TABLE>
<CAPTION>
1999 1998
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 163,227 $ 190,434
Office buildings and improvements 2,054,744 2,344,278
Furniture, fixtures and equipment 1,304,025 1,268,323
- ---------------------------------------------------------------------------------------------
3,521,996 3,803,035
Less accumulated depreciation 1,997,800 2,118,654
- ---------------------------------------------------------------------------------------------
$1,524,196 $1,684,381
=============================================================================================
</TABLE>
Depreciation expense for the years ended December 31, 1999, 1998, and 1997
amounted to $147,765, $140,073, and $212,292, respectively.
28
<PAGE> 31
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(CONTINUED)
- --------------------------------------------------------------------------------
(8) DEPOSITS
A comparative summary of savings deposits follows:
<TABLE>
<CAPTION>
1999 1998
----------------------- -----------------------
Stated Percent Percent
rate Amount of total Amount of total
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Demand deposits:
NOW accounts 0-2.00% $ 8,933,512 9.8% $ 9,166,456 9.2%
Money market demand 0-3.90 18,037,833 19.9 16,282,063 16.4
Passbook 2.50-2.75 7,338,494 8.1 8,534,011 8.6
- -------------------------------------------------------------------------------------------------------
$34,309,839 37.8 $33,982,530 34.2
- -------------------------------------------------------------------------------------------------------
Certificates of deposit:
Less than 3.00 -- -- 40,000 --
3.00-4.99 23,072,406 25.4 12,861,591 13.0
5.00-6.99 33,353,669 36.8 52,512,504 52.8
7.00-8.99 17,027 -- 37,954 --
- -------------------------------------------------------------------------------------------------------
56,443,102 62.2 65,452,049 65.8
- -------------------------------------------------------------------------------------------------------
$90,752,941 100.0% $99,434,579 100.0%
=======================================================================================================
</TABLE>
The weighted average interest rate on deposits was 4.21% and 4.36% at
December 31, 1999 and 1998, respectively.
A summary of the maturities of certificates of deposit at December 31, 1999
and 1998 follows:
<TABLE>
<CAPTION>
1999 1998
--------------------- ---------------------
Amount Percent Amount Percent
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Within one year $39,954,440 70.8% $39,938,882 61.0%
Second year 13,283,200 23.5 15,360,805 23.5
Third year 3,130,315 5.6 10,107,933 15.4
Fourth year 74,571 .1 32,173 .1
Thereafter 576 -- 12,256 --
- ---------------------------------------------------------------------------------------------
$56,443,102 100.0% $65,452,049 100.0%
=============================================================================================
</TABLE>
Interest expense on savings deposits, by type, for the years ended December
31, 1999, 1998, and 1997 is summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Passbook $ 189,410 $ 243,252 $ 260,560
NOW accounts 164,911 151,666 161,671
Money market demand 547,857 546,682 494,391
Certificates of deposit 3,145,434 3,281,485 3,383,363
- -------------------------------------------------------------------------------------------------
$4,047,612 $4,223,085 $4,299,985
=================================================================================================
</TABLE>
Certificates of deposit of $100,000 or more totaled $9,277,593 and
$10,071,981 at December 31, 1999 and 1998, respectively. Investment securities
and mortgage-backed securities with a carrying value of approximately $5.3
million and $4.1 million at December 31, 1999 and 1998, respectively, were
pledged to secure certain certificates of deposit in excess of insurance of
accounts limitations.
29
<PAGE> 32
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(CONTINUED)
- --------------------------------------------------------------------------------
(8) DEPOSITS (CONTINUED)
A corporation affiliated with the Chairman of the Board of the Company had
savings deposits of approximately $14.8 million and $14.0 million with the
Company at December 31, 1999 and 1998, respectively.
(9) BORROWED MONEY
A comparative summary of the borrowed money at December 31, 1999 and 1998
follows:
<TABLE>
<CAPTION>
1999 1998
------------------------- --------------------------
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%
Federal funds purchased 2,807,000 5.70 -- --
Fixed-term advances from FHLB
due in 2008 5,000,000 4.88 10,000,000 4.76
- --------------------------------------------------------------------------------------------------
$7,807,000 5.17% $20,880,389 4.67%
==================================================================================================
</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. 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.
The repurchase agreements averaged approximately $2,587,913, $9,523,000,
and $6,915,000 during 1999, 1998, and 1997, respectively. The maximum amount
outstanding at any month-end during 1999, 1998, and 1997 was $4,540,389,
$10,880,389, and $8,380,000, respectively. Interest expense on the agreements
was $113,263, $475,463, and $346,946 for the years ended December 31, 1999,
1998, and 1997, respectively. At December 31, 1998, $10,340,000 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 $457,624 and
$423,117 for the years ended December 31, 1999 and 1998, respectively. There
were no fixed-term advances from the FHLB outstanding during the year ended
December 31, 1997.
Advances from the FHLB of Chicago are secured by stock in the FHLB in the
amount of $800,700 and a blanket lien of qualifying first mortgage loans
equivalent to 165% of outstanding borrowings. As of December 31, 1999, the
Company's available credit from the FHLB cannot exceed the lesser of 35% of
total assets ($42.1 million), or 60% of one-to-four family residential mortgages
not more than 90 days delinquent ($21.7 million).
(10) INCOME TAXES
The composition of income tax expense for the years ended December 31,
1999, 1998, and 1997 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 711,027 $468,345 $527,218
State 47,468 24,228 6,030
Deferred (104,404) 21,765 (21,803)
- ---------------------------------------------------------------------------------------------
$ 654,091 $514,338 $511,445
=============================================================================================
</TABLE>
30
<PAGE> 33
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(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>
1999 1998 1997
------------------- ------------------- --------------------
Amount Percent Amount Percent Amount Percent
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Computed "expected" income tax expense $667,344 34.0% $565,782 34.0% $ 619,416 34.0%
Items affecting federal income tax rate:
Amortization of ESOP awards 10,951 .6 13,823 .8 13,427 .8
State income taxes, net of Federal benefit 31,329 1.6 15,990 1.0 3,980 .2
Tax-exempt interest (74,045) (3.8) (91,405) (5.5) (131,179) (7.2)
Other 18,512 .9 10,148 .6 5,801 .3
- ------------------------------------------------------------------------------------------------------------------
$654,091 33.3% $514,338 30.9% $ 511,445 28.1%
==================================================================================================================
</TABLE>
The components of deferred tax assets and deferred tax liabilities at
December 31, 1999 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
General loan loss allowance $ 222,746 $ 161,781
Restricted stock awards 48,353 48,350
Other 7,025 2,665
Available-for-sale securities market valuation 79,165 --
- --------------------------------------------------------------------------------------
Total deferred tax assets 357,289 212,796
- --------------------------------------------------------------------------------------
Deferred tax liabilities:
Available-for-sale securities market valuation -- (59,118)
Excess of tax bad debt reserves over base year (78,348) (104,464)
Tax depreciation in excess of that recorded for book
purposes (50,622) (58,553)
FHLB stock dividends (25,993) (25,993)
Other (3,813) (8,842)
- --------------------------------------------------------------------------------------
Total deferred tax liabilities (158,776) (256,970)
- --------------------------------------------------------------------------------------
Net deferred tax asset (liability) $ 198,513 $ (44,174)
======================================================================================
</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 meets a residential loan requirement for the tax years
beginning in 1996 and 1997, recapture of the reserve can be deferred until the
tax year beginning in 1998. At December 31, 1999, the Company had bad debts
deducted for tax purposes in excess of the base year reserve of approximately
$200,000. 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
31
<PAGE> 34
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(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, 1999, 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,
1999, the Company and the Banks meet all capital adequacy requirements to which
they are subject.
As of December 31, 1999, 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.
32
<PAGE> 35
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(CONTINUED)
- --------------------------------------------------------------------------------
(11) REGULATORY MATTERS (CONTINUED)
The Company's and the Banks' actual and required capital amounts and ratios
as of December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
December 31, 1999
--------------------------------------------
Capital
Actual requirements
------------------- ------------------
(Dollars in thousands) Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total capital
(to risk-weighted assets):
Company $21,573 44.5% $3,879 8.0%
Chester National Bank 17,268 42.0 3,290 8.0
Chester National Bank of Missouri 3,345 49.8 537 8.0
Tier I capital
(to risk-weighted assets):
Company $21,002 43.3% $1,939 4.0%
Chester National Bank 16,781 40.8 1,645 4.0
Chester National Bank of Missouri 3,261 48.5 269 4.0
Tier I capital
(to average assets):
Company $21,002 16.7% $3,779 3.0%
Chester National Bank 16,781 15.0 3,364 3.0
Chester National Bank of Missouri 3,261 26.7 366 3.0
</TABLE>
<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
</TABLE>
(12) PENSION PLAN
Substantially all employees are included in a trusteed defined benefit
pension plan. The benefits contemplated by the plan are funded through payments
to the Financial Institutions Retirement Fund, which operates as an
industry-wide plan and does not report relative plan assets and actuarial
liabilities of the individual participating associations. The cost of
33
<PAGE> 36
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(CONTINUED)
- --------------------------------------------------------------------------------
(12)PENSION PLAN (CONTINUED)
funding is charged to current operations. There is no unfunded liability for
past service. Expense for the years ended December 31, 1999, 1998, and 1997 was
$27,500, $2,438, and $6,395, 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 $92,198,
$95,596, and $108,172 for the years ended December 31, 1999, 1998, and 1997,
respectively.
The ESOP shares as of December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Allocated shares 20,766 15,272
Unreleased shares 153,804 159,298
- ----------------------------------------------------------------------------------------
Total ESOP shares 174,570 174,570
========================================================================================
Fair value of unreleased shares $2,556,992 $2,678,198
========================================================================================
</TABLE>
(14) 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, $166,194, and $435,026
for the years ended December 31, 1999, 1998, and 1997, respectively.
(15) 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
34
<PAGE> 37
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(CONTINUED)
- --------------------------------------------------------------------------------
(15) STOCK OPTION PLAN (CONTINUED)
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, 1998 218,212 $14.24
Granted -- --
Exercised 1,744 14.00
Cancelled -- --
- -----------------------------------------------------------------------------------
Balance at December 31, 1999 216,468 $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 1997 and 1998 based on the fair value at the grant date under
SFAS No. 123, the Company's net income in 1999, 1998, and 1997 would have been
reduced to the pro forma amount indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income:
As reported $1,308,686 $1,149,727 $1,310,366
Pro forma 1,142,019 915,125 1,155,050
=================================================================================================
Earnings per share -- basic:
As reported $ 1.03 $ .75 $ .68
Pro forma .90 .60 .60
=================================================================================================
Earnings per share -- diluted:
As reported $ 1.01 $ .73 $ .67
Pro forma .88 .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 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.
(16) 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
35
<PAGE> 38
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(CONTINUED)
- --------------------------------------------------------------------------------
(16) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (CONTINUED)
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, 1999, the Company had outstanding commitments to originate
residential loans of approximately $613,000, all of which were at fixed rates.
In addition, the Company had outstanding credit lines of approximately
$1,440,000 at December 31, 1999. 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.
(17) 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.
(18) 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.
36
<PAGE> 39
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(CONTINUED)
- --------------------------------------------------------------------------------
(19) FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's interest-earning assets and
interest-bearing liabilities at December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
-------------------------- --------------------------
Carrying Estimated Carrying Estimated
value fair value value fair value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest-earning assets:
Cash and cash equivalents $ 5,837,300 $ 5,837,300 $16,796,839 $16,796,839
Certificates of deposit -- -- 95,000 95,000
Investment securities 41,154,591 39,938,960 52,632,136 52,793,250
Mortgage-backed securities 21,734,252 21,423,012 21,870,350 21,894,601
Loans receivable 48,277,319 48,975,000 48,208,662 49,154,000
- -------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits:
Checking, money market demand,
and passbooks $34,309,839 $34,309,839 $33,982,530 $33,982,530
Certificates of deposit 56,443,102 56,210,000 65,452,049 65,201,000
Securities sold under agreements
to repurchase -- -- 10,880,389 10,880,389
Federal funds purchased 2,807,000 2,807,000 -- --
Fixed-term advances from FHLB 5,000,000 5,000,000 10,000,000 10,000,000
- -------------------------------------------------------------------------------------------------
</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
37
<PAGE> 40
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(CONTINUED)
- --------------------------------------------------------------------------------
(19) FAIR VALUES OF FINANCIAL INSTRUMENTS (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 and Federal Funds Purchased
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.
(20) PARENT COMPANY FINANCIAL INFORMATION
The following are condensed balance sheets as of December 31, 1999 and 1998
and condensed statements of income and cash flows for the years ended December
31, 1999, 1998, and 1997 for Chester Bancorp, Inc. (parent company only):
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash $ 6 $ 49
Investment securities 1,272 1,566
Investment in subsidiaries 19,914 20,514
Other assets 48 71
- ----------------------------------------------------------------------------------
$21,240 $22,200
==================================================================================
Liabilities and stockholders' equity:
Other liabilities $ 367 $ 495
Stockholders' equity 20,873 21,705
- ----------------------------------------------------------------------------------
$21,240 $22,200
==================================================================================
</TABLE>
38
<PAGE> 41
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(CONTINUED)
- --------------------------------------------------------------------------------
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income $ 50 $ 53 $ 218
Interest expense 6 18 14
- --------------------------------------------------------------------------------------------
44 35 204
Operating expenses 286 295 435
- --------------------------------------------------------------------------------------------
Income (loss) before income tax expense (benefit) and
equity in undistributed earnings of subsidiaries (242) (260) (231)
Income tax expense (benefit) (80) (84) (108)
- --------------------------------------------------------------------------------------------
Income (loss) before equity in undistributed earnings of
subsidiaries (162) (176) (123)
Equity in undistributed earnings of subsidiaries 1,471 1,326 1,433
- --------------------------------------------------------------------------------------------
$1,309 $1,150 $1,310
============================================================================================
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 1,309 $ 1,150 $ 1,310
Equity in undistributed earnings of subsidiaries (1,471) (1,326) (1,433)
Other, net 110 710 575
- -----------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (52) 534 452
- -----------------------------------------------------------------------------------------
Investing activities -- decrease in investment securities 294 235 3,687
- -----------------------------------------------------------------------------------------
Net cash provided by investing activities 294 235 3,687
- -----------------------------------------------------------------------------------------
Financing activities:
Dividends received from subsidiaries 1,915 7,992 --
Purchase of treasury stock (1,781) (8,345) (3,869)
Dividends paid (419) (425) (477)
- -----------------------------------------------------------------------------------------
Net cash used in financing activities (285) (778) (4,346)
- -----------------------------------------------------------------------------------------
Net change in cash and cash equivalents (43) (9) (207)
Cash and cash equivalents at beginning of year 49 58 265
- -----------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 6 $ 49 $ 58
=========================================================================================
</TABLE>
39
<PAGE> 42
CHESTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(CONTINUED)
- --------------------------------------------------------------------------------
(21) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data for the year ended December 31, 1999 is
as follows:
<TABLE>
<CAPTION>
Quarter ended
------------------------------------------------------
(Thousands of dollars, March 31, June 30, September 30, December 31,
except per share data) 1999 1999 1999 1999
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total interest income $2,116 $2,078 $2,059 $2,012
Total interest expense 1,227 1,176 1,141 1,095
- -----------------------------------------------------------------------------------------------
Net interest income 889 902 918 917
Provision for loan losses -- -- -- 200
- -----------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 889 902 918 717
Noninterest income 45 42 35 947
Noninterest expense 618 659 604 651
- -----------------------------------------------------------------------------------------------
Income before income tax expense 316 285 349 1,013
Income tax expense 98 89 108 359
- -----------------------------------------------------------------------------------------------
Net income $ 218 $ 196 $ 241 $ 654
===============================================================================================
Earnings per share -- basic $ .17 $ .15 $ .19 $ .53
===============================================================================================
Earnings per share -- diluted .16 .15 .19 .51
===============================================================================================
</TABLE>
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>
40
<PAGE> 43
STOCKHOLDER INFORMATION
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
BOARD OF DIRECTORS TRANSFER AGENT
Michael W. Welge, Chairman Registrar and Transfer Company
John R. Beck, M.D. 10 Commerce Drive
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 1999 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 7, 2000 OFFICERS
10:00 A.M.
American Legion Hall Michael W. Welge
500 E. Opdyke St. President and Chief Financial Officer
Chester, IL 62233
Edward K. Collins
STOCK LISTING Secretary and Treasurer
Nasdaq National Market FDIC DISCLAIMER
Symbol: CNBA
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 LLP
10 S. Broadway
St. Louis, MO 63102
</TABLE>
<PAGE> 44
[CHESTER BANCORP, INC. LOGO]
1112 State Street - Chester, Illinois 62233 - Telephone (618) 826-5038
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS 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-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,245
<INT-BEARING-DEPOSITS> 4,592
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 11,971
<INVESTMENTS-CARRYING> 50,918
<INVESTMENTS-MARKET> 49,391
<LOANS> 48,277
<ALLOWANCE> 605
<TOTAL-ASSETS> 120,392
<DEPOSITS> 90,753
<SHORT-TERM> 7,807
<LIABILITIES-OTHER> 959
<LONG-TERM> 0
0
0
<COMMON> 22
<OTHER-SE> 20,851
<TOTAL-LIABILITIES-AND-EQUITY> 120,392
<INTEREST-LOAN> 3,931
<INTEREST-INVEST> 3,943
<INTEREST-OTHER> 392
<INTEREST-TOTAL> 8,266
<INTEREST-DEPOSIT> 4,048
<INTEREST-EXPENSE> 4,640
<INTEREST-INCOME-NET> 3,626
<LOAN-LOSSES> 200
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,532
<INCOME-PRETAX> 1,963
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,309
<EPS-BASIC> 1.03
<EPS-DILUTED> 1.01
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 449
<CHARGE-OFFS> 51
<RECOVERIES> 7
<ALLOWANCE-CLOSE> 605
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE> 1
[Chester Bancorp. Inc. Letterhead]
March 10, 2000
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 7, 2000, 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 7, 2000
- --------------------------------------------------------------------------------
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 7, 2000,
at 10:00 a.m., local time, for the following purposes:
(1) To elect three directors to serve for three year terms;
(2) To approve the Chester Bancorp, Inc. 2000 Stock Option Plan;
and
(3) 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 25, 2000 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
March 10, 2000
- --------------------------------------------------------------------------------
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 7, 2000
- --------------------------------------------------------------------------------
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 7, 2000, at 10:00 a.m., local time. This Proxy Statement and
the enclosed proxy card are being mailed to stockholders on or about March 10,
1999.
VOTING AND PROXY PROCEDURE
Stockholders of record as of the close of business on February 25, 2000
are entitled to one vote for each share of common stock ("Common Stock") of the
Corporation then held. As of February 1, 2000, the Corporation had 1,378,953
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 and FOR the approval of the Chester Bancorp, Inc. 2000
Stock Option Plan. If a stockholder attends the Annual Meeting, he or she may
vote by ballot. If a stockholder does not return a signed proxy card or does not
attend the Annual Meeting and vote in person, his or her shares will not be
voted.
Stockholders who execute proxies retain the right to revoke them at any
time. Proxies may be revoked by written notice delivered in person or mailed to
the Secretary of the Corporation or by filing a later proxy prior to a vote
being taken on a particular proposal at the Annual Meeting. Attendance at the
Annual Meeting will not automatically revoke a proxy, but a stockholder in
attendance may request a ballot and vote in person, thereby revoking a prior
granted proxy.
The three directors to be elected at the Annual Meeting will be elected
by a plurality of the votes cast by stockholders present in person or by proxy
and entitled to vote. Stockholders are not permitted to cumulate their votes for
the election of directors. With respect to the election of directors, votes may
be cast for or withheld from each nominee. Votes that are withheld and broker
non-votes will have no effect on the outcome of the election because directors
will be elected by a plurality of votes cast. With respect to the other proposal
to be voted upon, stockholders may vote for a proposal, against a proposal or
may abstain from voting. Approval of the 2000 Stock Option Plan will require the
affirmative vote of a majority of the outstanding shares. Thus, abstentions and
broker non-votes will have the same effect as a vote against approval of the
2000 Stock Option Plan.
<PAGE> 4
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Persons and groups who beneficially own in excess of 5% of the
Corporation's Common Stock are required to file certain reports disclosing such
ownership pursuant to the Securities Exchange Act of 1934, as amended ("Exchange
Act"). Based on such reports, the following table sets forth, as of March 1,
2000, 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 March 1, 2000. The following table
also sets forth, as of March 1, 2000, 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
- ---- ------------------ ---------------
<S> <C> <C>
DIRECTORS AND BENEFICIAL
OWNERS OF MORE THAN 5%
Chester National Bank Employee Stock
Ownership Plan and Trust
1112 State Street
Chester, Illinois 62233 173,770(3) 12.60%
Gilster-Mary Lee Corporation
Employee Profit Sharing Plan 129,900 9.429%
1037 State Street
Chester, Illinois 62233
Michael W. Welge 258,593(3)(4) 18.52%
Allen R. Verseman 56,562(5) 4.09%
John R. Beck, M.D. 56,108 4.06%
James C. McDonald 25,910 1.87%
Thomas E. Welch, Jr. 23,058(3) 1.65%
Carl H. Welge 16,864 1.22%
NAMED EXECUTIVE OFFICERS(6)
Edward K. Collins 43,115(3) 3.09%
All Executive Officers and
Directors as a Group (7 persons) 480,210 33.40%
</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, 2000, the right to acquire upon exercise of employee stock
options or director non-qualified stock options: 18,547 shares for each of
Mr. M. Welge and Mr. Collins; 4,364 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, 2,856 shares, Mr. Welch, 1,597 shares and Mr. M.
Welge, 1,418 shares.
(4) Includes 85,128 shares over which Mr. M. Welge has sole voting and
investment power, 153,500 shares over which Mr. M. Welge has shared
investment and voting power, options to acquire 18,547 shares and 1,418
shares held in the ESOP.
(5) Includes 50,698 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, 1999. 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. Three directors will be elected at
the Annual Meeting to serve for a three year period, or until their respective
successors have been elected and qualified. The nominees for election this year
are John R. Beck, M.D, James C. McDonald and Thomas E. Welch, Jr. 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.
BECK, MCDONALD AND WELCH.
The following table sets forth certain information regarding the
nominees for election at the Annual Meeting, as well as information regarding
those directors continuing in office after the Annual Meeting.
<TABLE>
<CAPTION>
Year First
Elected Term to
Name Age(1) Director(2) Expire(3)
---- --- -------- ------
<S> <C> <C> <C>
BOARD NOMINEES
Thomas E. Welch, Jr. 60 1990 2003
John R. Beck, M.D. 65 1989 2003
James C. McDonald 70 1990 2003
</TABLE>
DIRECTORS CONTINUING IN OFFICE
<TABLE>
<S> <C> <C> <C>
Michael W. Welge(4) 59 1980 2002
Edward K. Collins 55 1996 2002
Carl H. Welge(4) 56 1980 2001
Allen R. Verseman 65 1992 2001
</TABLE>
- --------------
(1) As of December 31, 1999.
(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 38 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
3
<PAGE> 6
Chamber of Commerce and the Chester School Board. For the past 19 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 10 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 47 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. was employed as an officer of Chester National
Bank since 1990 when Heritage Federal was acquired by Chester National Bank.
Effective as of March 31, 2000, Mr. Welch retired from employment as the Senior
Vice President and Compliance Officer for Chester National Bank and manager of
the Sparta branch.
Allen R. Verseman has been employed for 31 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, 1999, 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, 1999, 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,
1999.
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, 1999, 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, 1999, 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 $66,800
for the year ended December 31, 1999.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
------------------------------------------------------
Name and Other Annual
Position Year Salary($) Bonus($) Compensation($)(1)
- -------- ---- --------- -------- ---------------
<S> <C> <C> <C>
Edward K. Collins 1999 $ 80,000 -- $ --
Treasurer and Secretary of the Corporation 1998 $ 80,000 -- $ --
and Executive Vice President, Chief Executive 1997 $ 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 $50,000 or 10% of salary and bonus.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
OPTION/SAR GRANTS IN LAST FISCAL YEAR ASSUMED ANNUAL RATES OF
INDIVIDUAL GRANTS STOCK PRICE APPRECIATION FOR
OPTION TERM
----------------------------------------------------- ------------------------------------
Number of % of Total
Securities Options/SARs Exercise
Underlying Granted to or
Options/SARs Employees in Base Price Expiration
Name Granted (#) Fiscal Year ($/Sh) Date 0% ($) 5% ($) 10% ($)
---- ----------- ----------- ---------- ---------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Edward K. Collins..... 5456 31.25% $17.00 12/8/2008 0 58,331 147,823
</TABLE>
EMPLOYMENT AGREEMENTS
The Corporation and the Banks have entered into a three-year employment
agreement with Mr. Collins. Under the agreement, the 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, 2003. 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 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
5
<PAGE> 8
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 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 approximately $240,000. Section 280G of the Internal Revenue Code of
1986, as amended ("Code"), states that severance payments that equal or exceed
three times the base compensation of the individual are deemed to be "excess
parachute payments" if they are contingent upon a change in control. Individuals
receiving excess parachute payments are subject to a 20% excise tax on the
amount of such excess payments, and the Employers would not be entitled to
deduct the amount of such excess payments.
The agreement restricts Mr. Collins' right to compete against the
Employers for a period of one year from the date of termination of the agreement
if he voluntarily terminates his employment, except in the event of a change in
control. The Board of Directors of the Corporation or the Banks may, from time
to time, also extend employment agreements to other senior executive officers.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The entire Board of Directors of the Corporation acts as the
Compensation Committee which determines the compensation for Mr. Collins and the
other officers of the Corporation. The Committee met once in 1999.
Notwithstanding anything to the contrary set forth in any of the
Corporation's previous filings under the Securities Act 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. 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, 1999, the base compensation for Edward K. Collins was $80,000,
which did not represent an increase from the previous year.
6
<PAGE> 9
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, 1999, (b) the cumulative total
return on stocks included in the Russell 2000 Index over such period, (c) the
cumulative total return on stock included in the SNL Bank Index over such
period, and (d) the cumulative total return on stocks included in the SNL Bank -
less than $250M - Asset-Size Index. The cumulative total return on the
Corporation's common stock was computed assuming the reinvestment of cash
dividends.
PERFORMANCE GRAPH
<TABLE>
<CAPTION>
Period Ending
------------------------------------------------
Index 10/8/96 12/31/96 12/31/97 12/31/98 12/31/99
- ----- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Chester Bancorp, Inc. 100.00 101.82 140.88 134.66 135.80
Russell 2000 100.00 104.90 128.36 125.09 151.68
SNL Bank Index 100.00 110.88 168.03 181.76 176.15
SNL <$250M Bank Asset-Size Index 100.00 109.18 178.17 169.36 148.72
</TABLE>
7
<PAGE> 10
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Corporation's executive
officers and directors, and persons who own more than 10% of any registered
class of the Corporation's equity securities, to file reports of ownership and
changes in ownership with the SEC. Executive officers, directors and greater
than 10% stockholders are required by regulation to furnish the Corporation with
copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms it has received
and written representations provided to the Corporation by the above referenced
persons, the Corporation believes that, during the 1999 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
$386,894 at December 31, 1999.
PROPOSAL II - APPROVAL OF 2000 STOCK OPTION PLAN
The Corporation's Board of Directors adopted the 2000 Stock Option Plan
("Option Plan") on January 11, 2000, subject to approval by the Corporation's
stockholders. THE FOLLOWING DESCRIPTION OF THE OPTION PLAN IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE COMPLETE TEXT OF THE OPTION PLAN WHICH IS ATTACHED
AS EXHIBIT A.
ADMINISTRATION OF THE OPTION PLAN
The Option Plan is administered by a committee of the Board of
Directors ("Committee") consisting of not less than two non-employee members of
the Board of Directors. In addition to determining who will be granted options,
the Committee has the authority and discretion to determine when options will be
granted and the number of options to be granted. In making such determination,
the Committee will consider those non-employee directors, officers and employees
who are expected to make significant contributions to the long-term success of
the Corporation and the Banks. With respect to awards to officers and employees,
the Committee also determines which options are intended to qualify for special
treatment under the Code ("Incentive Stock Options") or to be issued as options
which are not intended to so qualify ("Non-Qualified Stock Options").
The Board of Directors may from time to time amend or terminate the
Option Plan in any respect. An amendment to the Option Plan may be subject to
stockholder approval if such approval is necessary to comply with any tax or
regulatory requirement. No amendment or termination may retroactively impair the
rights of any person with respect to an option.
SHARES SUBJECT TO THE OPTION PLAN
The Corporation has reserved an aggregate of 50,000 shares of the
Corporation's Common Stock for issuance pursuant to the exercise of stock
options which may be granted to officers, employees and non-employee directors.
In the event of a merger, consolidation, sale of all or substantially
all of the property of the Corporation, reorganization, recapitalization,
reclassification, stock dividend, stock split, reverse stock split or other
distribution, to the extent permitted by the Corporation, an appropriate and
proportionate adjustment shall be made
8
<PAGE> 11
in (i) the maximum number of shares available, (ii) the number and kind of
shares subject to outstanding options, if any, and (iii) the price for each
share.
OPTION PRICE
The exercise price of Non-Qualified Stock Options and Incentive Stock
Options may not be less than 100% of the fair market value of the shares of
Common Stock of the Corporation on the date of grant. Any Incentive Stock Option
granted to a person owning more than 10% of the Corporations outstanding Common
Stock must have an exercise price of at least 110% of fair market value on the
date of grant. The maximum aggregate fair market value (determined as of the
date of grant) of the shares to which Incentive Stock Options held by an
individual become exercisable for the first time during any calendar year may
not exceed $100,000.
TERMS OF OPTIONS
In general, the Committee has the discretion to fix the term of each
option granted to an officer or employee under the Option Plan, except that the
maximum term of each option is 10 years, subject to earlier termination as
provided in the Option Plan (five years in the case of Incentive Stock Options
granted to an employee who owns over 10% of the total combined voting power of
all classes of the Corporation's stock). The Option Plan provides that all
awards under the Option Plan will become exercisable no more rapidly than in
equal installments over a five-year period following the date of grant. However,
unvested options will become immediately exercisable in the event of the option
holder's death or disability, or upon a change in control (as defined in the
Option Plan) of the Corporation or the Banks (to the extent authorized or not
prohibited by applicable law or regulations).
Except in limited circumstances, an option may not be transferred other
than by will or by laws of descent and distribution and, during the lifetime of
the option holder, may be exercised only by such holder. If any option expires
or terminates for any reason without having been exercised in full, the
unpurchased shares subject to such option will be available again for purposes
of the Option Plan.
FEDERAL INCOME TAX. CONSEQUENCES OF NON-QUALIFIED OPTIONS
An option holder who is granted a Non-Qualified Stock Option under the
Option Plan will not realize any income for Federal income tax purposes on the
grant of an option. An option holder will realize ordinary income for Federal
income tax purposes on the exercise of an option, provided the shares are not
then subject to a substantial risk of forfeiture within the meaning of Section
83 of the Code ("Risk of Forfeiture"), in an amount equal to the excess, if any,
of the fair market value of the shares of Common Stock on the date of exercise
over the exercise price thereof. If the shares are subject to a Risk of
Forfeiture on the date of exercise, the option holder will realize ordinary
income for the year in which the shares cease to be subject to a Risk of
Forfeiture in an amount equal to the excess, if any, of the fair market value of
the shares at the date they cease to be subject to a Risk of Forfeiture over the
exercise price, unless the option holder shall have made a timely election under
Section 83 of the Code to include in his income for the year of exercise an
amount equal to the excess of the fair market value of the shares of Common
Stock on the date of exercise over the exercise price. The amount realized for
tax purposes by an option holder by reason of the exercise of a Non-Qualified
Stock Option granted under the Option Plan is subject to withholding by the
Corporation and the Corporation is entitled to a deduction in an amount equal to
the income so realized by an option holder, provided all necessary withholding
requirements under the Code are met.
Provided that the option holder satisfies certain holding period
requirements provided by the Code, an employee will realize long-term capital
gain or loss, as the case may be, if the shares issued upon exercise of a
Non-Qualified Stock Option are disposed of more than one year after (i) the
shares are transferred to the employee or (ii) if the shares were subject to a
Risk of Forfeiture on the date of exercise and a valid election under Section 83
of the Code shall not have been made, the date as of which the shares cease to
be subject to a Risk of Forfeiture. The amount recognized upon such disposition
will be the difference between the option holder's basis in such shares and the
amount realized upon such disposition. Generally, an option holder's basis in
the shares will be equal to the exercise price plus the amount of income
recognized upon exercise of the option.
9
<PAGE> 12
FEDERAL INCOME TAX CONSEQUENCES OF INCENTIVE STOCK OPTIONS
An Incentive Stock Option holder who meets the eligibility requirements
of Section 422 of the Code will not realize income for Federal income tax
purposes, and the Corporation will not be entitled to a deduction, on either the
grant or the exercise of an Incentive Stock Option. If the Incentive Stock
Option holder does not dispose of the shares acquired within two years after the
date the Incentive Stock Option was granted to him or within one year after the
transfer of the shares to him, (i) any proceeds realized on a sale of such
shares in excess of the option price will be treated as long-term capital gain
and (ii) the Corporation will not be entitled to any deduction for Federal
income tax purposes with respect to such shares.
If an Incentive Stock Option holder disposes of shares during the
two-year or one-year periods referred to above (a "Disqualifying Disposition"),
the Incentive Stock Option holder will not be entitled to the favorable tax
treatment afforded to incentive stock options under the Code. Instead, the
Incentive Stock Option holder will realize ordinary income for Federal income
tax purposes in the year the Disqualifying Disposition is made, in an amount
equal to the excess, if any, of the fair market value of the shares of Common
Stock on the date of exercise over the exercise price.
An Incentive Stock Option holder generally will recognize long-term
capital gains or loss, as the case may be, if the Disqualifying Disposition is
made more than one year after the shares are transferred to the Incentive Stock
Option holder. The amount of any such gain or loss will be equal to the
difference between the amount realized on the Disqualifying Disposition and the
sum of (x) the exercise price and (y) the ordinary income realized by the
Incentive Stock Option holder as the result of the Disqualifying Disposition.
The Corporation will be allowed in the taxable year of a Disqualifying
Disposition a deduction in the same amount as the ordinary income recognized by
the Incentive Stock Option holder provided all necessary withholding
requirements are met.
Notwithstanding the foregoing, if the Disqualifying Disposition is made
in a transaction with respect to which a loss (if sustained) would be recognized
to the Incentive Stock Option holder, then the amount of ordinary income
required to be recognized upon the Disqualifying Disposition will not exceed the
amount by which the amount realized from the disposition exceeds the exercise
price. Generally, a loss may be recognized if the transaction is not a "wash"
sale, a gift or a sale between certain persons or entities classified under the
Code as "related persons."
ALTERNATIVE MINIMUM TAX
For purposes of computing the alternative minimum tax with respect to
shares acquired pursuant to the exercise of Incentive Stock Options, the
difference between the fair market value of the shares on the date of exercise
over the exercise price will be an item of tax preference in the year of
exercise if the shares are not subject to a Risk of Forfeiture; if the shares
are subject to a Risk of Forfeiture, the amount of the tax preference taken into
account in the year the Risk of Forfeiture ceased will be the excess of the fair
market value of the shares at the date they cease to be subject to a Risk of
Forfeiture over the exercise price. The basis of the shares for alternative
minimum tax purposes, generally, will be an amount equal to the exercise price,
increased by the amount of the tax preference taken into account in computing
the alternative minimum taxable income.
ADOPTION OF THE OPTION PLAN
Subject to approval by the Corporation's stockholders, the Board of
Directors adopted the Option Plan to encourage stock ownership by employees and
non-employee directors of the Corporation and its subsidiaries by issuing
options to purchase shares of the Corporation's Common Stock enabling such
directors, officers and employees to acquire or increase their proprietary
interest in the Corporation and thereby encourage them to remain in the employ
or remain directors of the Corporation and its subsidiaries. The Board of
Directors has determined that the Option Plan is desirable, cost effective and
produces incentives which will benefit the Corporation and its stockholders.
Moreover, the Board of Directors believes that the terms of the Option Plan are
consistent with the terms of similar stock compensation programs implemented by
other recently converted
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financial institutions in the Banks' peer group. THE OPTION PLAN MUST BE
APPROVED BY A MAJORITY OF THE OUTSTANDING SHARES OF COMMON STOCK OF THE
CORPORATION. THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ADOPTION OF THE
2000 STOCK OPTION PLAN ATTACHED AS EXHIBIT A.
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, 2000. 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 1999 Annual Report to Stockholders, including
consolidated financial statements, has been mailed to all stockholders of record
as of the close of business on February 25, 2000. Any stockholder who has not
received a copy of the Annual Report may obtain a copy by writing to the
Corporation. The Annual Report is not to be treated as part of the proxy
solicitation material or having been incorporated herein by reference.
A COPY OF THE CORPORATION'S FORM 10-K FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1999, AS FILED WITH THE SEC, WILL BE FURNISHED WITHOUT CHARGE TO
STOCKHOLDERS OF RECORD AS OF FEBRUARY 25, 2000, 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 2001 must be received by the Corporation no
later than October 21, 2000 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
March 10, 2000
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EXHIBIT A
CHESTER BANCORP, INC.
2000 STOCK OPTION PLAN
SECTION 1. PURPOSE. The purposes of the Chester Bancorp, Inc. 2000 Stock Option
Plan are to promote the interests of the Company, its affiliates, and its
stockholders by (i) attracting and retaining exceptional executive personnel and
other key employees and directors of the Company and its affiliates; (ii)
motivating such employees and Eligible Directors by means of performance-related
incentives to achieve longer-range performance goals; and (iii) enabling such
employees and Eligible Directors to participate in the long-term growth and
financial success of the Company.
SECTION 2. DEFINITIONS. As used in the Plan, the following terms shall have the
meanings set forth below:
"Affiliate" shall mean the Banks or any present or future corporation
that would be a "parent" or "subsidiary" corporation as defined in Sections
424(f) and (g), respectively, of the Code.
"Award" shall mean any grant of Options or Director Options.
"Award Agreement" shall mean any written agreement, contract, or other
instrument or document evidencing any Award, which may, but need not, be
executed or acknowledged by a Participant or Eligible Director.
"Banks" shall mean Chester National Bank and Chester National Bank of
Missouri.
"Board" shall mean the Board of Directors of the Company.
"Change in Control" shall mean an event deemed to occur if and when (a)
an offeror other than the Company purchases shares of the common stock of the
Company or the Bank pursuant to a tender or exchange offer for such shares, (b)
any person (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange
Act) is or becomes the beneficial owner, directly or indirectly, of securities
of the Company or the Bank representing twenty-five percent (25%) or more of the
combined voting power of the Company's or the Bank's then outstanding
securities, (c) the membership of the board of directors of the Company or the
Bank changes as the result of a contested election, such that individuals who
were directors at the beginning of any twenty-four month period (whether
commencing before or after the date of adoption of this Plan) do not constitute
a majority of the Board at the end of such period, or (d) shareholders of the
Company or the Bank approve a merger, consolidation, sale or disposition of all
or substantially all of the Company's or the Bank's assets, or a plan of partial
or complete liquidation. If any of the events enumerated in clauses (a) - (d)
occur, the Board shall determine the effective date of the change in control
resulting therefrom, for purposes of the Plan.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Committee" shall mean a committee of the Board consisting of at least
two nonemployee directors designated by the Board to administer the Plan. If a
separate committee is not designated by the Board, the Board shall serve as the
Committee for all purposes under the Plan.
"Company" shall mean Chester Bancorp, Inc., a Delaware corporation,
together with any successor thereto.
"Director Option" shall mean a Non-Qualified Stock Option granted to an
Eligible Director pursuant to
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Section 6(e).
"Disability" shall have the meaning set forth in Section 22(e)(3) of
the Code. For purposes of the Plan, all determinations as to whether a
Participant has become disabled shall be made by a majority of the Board upon
the basis of such evidence as it deems necessary or desirable, and shall be
final and binding on all interested persons.
"Effective Date" shall mean the date of shareholder approval of the
Plan.
"Eligible Director" shall mean, on any date, a person who is serving as
a member of the Board but shall not include a person who is an Employee.
"Employee" shall mean an employee of the Company or any Affiliate.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Fair Market Value" shall be determined as follows:
(a) If the Shares are traded or quoted on the Nasdaq Stock Market
at the time of grant of the Award, then the Fair Market Value
shall be the average of the highest and lowest selling price
on such exchange on the date such Award is granted or, if
there were no sales on such date, then on the next prior
business day on which there was a sale.
(b) If the Shares are not traded or quoted on the Nasdaq Stock
Market, then the Fair Market Value shall be a value determined
by the Committee in good faith on such basis as it deems
appropriate.
"Incentive Stock Option" shall mean a right to purchase Shares from the
Company that is granted under Section 6 of the Plan and that is intended to meet
the requirements of Section 422 of the Code or any successor provision thereto.
"Non-Qualified Stock Option" shall mean a right to purchase Shares from
the Company that is granted under Section 6 of the Plan and that is not intended
to be an Incentive Stock Option.
"Option" shall mean an Incentive Stock Option or a Non-Qualified Stock
Option but shall not include a Director Option.
"Participant" shall mean any Employee or Eligible Director selected by
the Committee to receive an Award of Options or Director Options, as
appropriate.
"Person" shall mean any individual, corporation, partnership,
association, joint-stock company, trust, unincorporated organization, government
or political subdivision thereof or other entity.
"Plan" shall mean this Chester Bancorp, Inc. 1997 Stock Option Plan.
"Rule 16b-3" shall mean Rule 16b-3 as promulgated and interpreted by
the SEC under the Exchange Act, or any successor rule or regulation thereto as
in effect from time to time.
"SEC" shall mean the Securities and Exchange Commission or any
successor thereto and shall include the staff thereof.
"Shares" shall mean common shares of the Company, or such other
securities of the Company as may be designated by the Committee from time to
time.
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"Ten Percent Stockholder" shall mean any stockholder who, at the time
an Incentive Stock Option is granted to such stockholder, owns (within the
meaning of Section 424(d) of the Code) more than ten percent (10%) of the voting
power of all classes of stock of the Company.
"Termination for Cause" shall mean termination because of a
Participant's personal dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule, or regulation (other than traffic
violations or similar offenses) or material breach of any provision of any
employment agreement between the Company or the Banks and a Participant.
SECTION 3. ADMINISTRATION.
(a) The Plan shall be administered by the Committee. Subject to the
terms of the Plan and applicable law, and in addition to other express powers
and authorizations conferred on the Committee by the Plan, the Committee shall
have full power and authority to: (i) designate Participants; (ii) determine the
type or types of Awards to be granted to an eligible Employee; (iii) determine
the number of Shares to be covered by, or with respect to which payments,
rights, or other matters are to be calculated in connection with, Awards; (iv)
determine the terms and conditions of any Award; (v) determine whether, to what
extent, and under what circumstances Awards may be settled or exercised in cash,
Shares, other securities, other Awards or other property, or canceled,
forfeited, or suspended; (vi) determine whether, to what extent, and under what
circumstances cash, Shares, other securities, other Awards, other property, and
other amounts payable with respect to an Award shall be deferred either
automatically or at the election of the holder thereof or of the Committee;
(vii) interpret and administer the Plan and any instrument or agreement relating
to, or Award made under, the Plan; (viii) establish, amend, suspend, or waive
such rules and regulations and appoint such agents as it shall deem appropriate
for the proper administration of the Plan; and (ix) make any other determination
and take any other action that the Committee deems necessary or desirable for
the administration of the Plan.
(b) Unless otherwise expressly provided in the Plan, all designations,
determinations, interpretations, and other decisions under or with respect to
the Plan or any Award shall be within the sole discretion of the Committee, may
be made at any time and shall be final, conclusive, and binding upon all
Persons, including the Company, and Participant, any holder or beneficiary of
any Award, any shareholder and any Employee.
SECTION 4. SHARES AVAILABLE FOR AWARDS.
(a) SHARES AVAILABLE. Subject to adjustment as provided in Section
4(b), the number of Shares with respect to which Options and Director Options
may be granted under the Plan shall be 50,000. If, after the effective date of
the Plan, any Shares covered by an Option or Director Option granted under the
Plan, or to which such an Option or Director Option relates, are forfeited, or
if an Option or Director Option otherwise terminates or is canceled without the
delivery of Shares, then the Shares covered by such Option or Director Option,
or to which such Option or Director Option relates, or the number of Shares
otherwise counted against the aggregate number of Shares with respect to which
Options and Director Options may be granted, to the extent of any such
settlement, forfeiture, termination or cancellation, shall again be, or shall
become, Shares with respect to which Options and Director Options may be
granted. In the event that any Option or Director Option is exercised through
the delivery of Shares, the number of Shares available for Awards under the plan
shall be increased by the number of Shares surrendered.
(b) ADJUSTMENTS. In the event that any dividend or other distribution
(whether in the form of cash, Shares, other securities, or other property),
recapitalization, stock split, reverse stock split, reorganization, merger,
consolidation, split-up, spin-off, combination, repurchase, or exchange of
Shares or other securities of the Company, issuance of warrants or other rights
to purchase Shares or other securities of the Company, or other similar
corporate transaction or event affects the Shares such that an adjustment is
necessary in order to prevent dilution or enlargement of the benefits or
potential benefits intended to be made available under the Plan, then the
Committee shall proportionately adjust any or all (as necessary) of (i) the
number of Shares or other securities of
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the Company (or number and kind of other securities or property) with respect to
which Awards may be granted, including an Award pursuant to Section 6(e), (ii)
the number of Shares or other securities of the Company (or number and kind of
other securities or property) subject to outstanding Awards, and (iii) the grant
or exercise price with respect to any Award; provided, in each case, that with
respect to Awards of Incentive Stock Option no such adjustment shall be
authorized to the extent that such authority would cause the Plan to violate
Section 422(b)(1) of the Code, as from time to time amended.
(c) SOURCES OF SHARES. Any Shares delivered pursuant to an Option or
Director Option may consist, in whole or in part, of authorized and unissued
Shares or of treasury Shares.
SECTION 5. ELIGIBILITY. An Employee, including any officer or
employee-director of the Company shall be eligible to be designated a
Participant. Each Eligible Director shall be eligible to receive Director
Options in accordance with Section 6(e) hereof.
SECTION 6. OPTIONS AND DIRECTOR OPTIONS.
(a) GRANT. Subject to the provisions of the Plan, the Committee shall
have sole and complete authority to determine the Employees to whom Options
shall be granted, the number of Shares to be covered by each Option, the option
price therefor and the conditions and limitations applicable to the exercise of
the option. The Committee shall have the authority to grant Incentive Stock
Options, or to grant Non-Qualified Stock Options, or to grant both types of
options. In such case of Incentive Stock Options, the terms and conditions of
such grants shall be subject to and comply with such rules as may be prescribed
by Section 422 of the Code, as from time to time amended, and any regulations
implementing such statute, including without limitation, the requirements of
Code Section 422(d), which limits the aggregate fair market value of Shares of
which Incentive Stock Options are exercisable for the first time to $100,000 per
calendar year. Each provision of the Plan and of each written option agreement
relating to an Option designated an Incentive Stock Option shall be construed so
that such Option qualifies as an Incentive Stock Option, and any provision that
cannot be so construed shall be disregarded.
(b) EXERCISE PRICE. The Committee shall establish the exercise price at
the time each Option or Director Option is granted, which price shall not be
less than one hundred percent (100%) of the per Share Fair Market Value on the
date of grant. Notwithstanding any provision contained herein, in the case of an
Incentive Stock Option, the exercise price at the time such Incentive Stock
Option is granted to any Employee who, at the time of such grant, is a Ten
Percent Stockholder, shall not be less than one hundred ten percent (110%) of
the per Share Fair Market Value on the date of grant.
(c) EXERCISE. Each Option shall be exercisable at such times and
subject to such terms and conditions as the Committee may, in its sole
discretion, specify in the applicable Award Agreement or thereafter; provided,
in the case of an Incentive Stock Option, a Participant may not exercise such
Option as an Incentive Stock Option after the earlier of (i) the date which is
ten (10) years (five (5) years in the case of a Participant who is a Ten Percent
Stockholder) after the date on which such Incentive Stock Option is granted, or
(ii) the date which is three (3) months (twelve (12) months in the case of a
Participant who becomes Disabled, or who dies) after the date on which he ceases
to be an employee of the Company or an Affiliate, and provided, further, that no
Award of Options under the Plan shall vest more rapidly than ratably over a
five-year period whereby twenty percent (20%) of the Award shall vest on each of
the first through the fifth anniversaries of the date of grant so long as the
Participant remains employed by the Company or an Affiliate; provided, further,
that an Award of Options shall be one hundred (100) percent vested upon a
Participant's death or Disability. In the event of an Employee's Termination for
Cause, his Options shall be canceled on the date he ceases to be an Employee.
The Committee may impose such conditions with respect to the exercise of
Options, including without limitation, any relating to the application of
federal or state securities laws, as it may deem necessary or advisable. The
Committee shall have the right to accelerate the exercisability of any Option or
outstanding Options in its discretion.
(d) PAYMENT. No Shares shall be delivered pursuant to any exercise of
an Option or Director Option until payment in full of the option price therefor
is received by the Company. Such payment may be made in cash
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or its equivalent, or, if and to the extent permitted by the Committee, by
exchanging Shares owned by the optionee (which are not the subject of any pledge
or other security interest), or by a combination of the foregoing, provided that
the combined value of all cash and cash equivalents and the Fair Market Value of
any such Shares so tendered to the Company as of the date of such tender is at
least equal to such option price.
(e) DIRECTOR OPTIONS. Subject to the provisions of the Plan, the
Committee shall have sole and complete authority to determine the Eligible
Directors to whom Director Options shall be granted, the number of shares to be
covered by each Director Option and the conditions and limitations applicable to
the exercise of each Director Option. Each Award of Director Options shall vest
ratably over a five (5) year period whereby twenty percent (20%) of the Award
shall vest on each of the first through the fifth anniversaries of the date of
grant so long as the Eligible Director continues to serve as a member of the
Board or is designated a Director Emeritus; provided, however, that the Award
shall be one hundred (100) percent vested in the event of the Eligible
Director's death or Disability. A Director Option shall be exercisable until the
earlier to occur of the following two dates (i) the tenth anniversary of the
date of grant of such Director Option or (ii) one (1) year (two (2) years in the
case of an Eligible Director who becomes Disabled) after the date the Eligible
Director ceases to be a member of the Board, except that (A) if the Eligible
Director ceases to be a member of the Board upon Termination for Cause, his
Director Option shall be canceled on the date he ceases to be a member of the
Board and (B) if the Eligible Director dies, his Director Option may be
exercised by his estate, descendants and beneficiaries and until the tenth
anniversary of the date of grant. An Eligible Director may pay the exercise
price of a Director Option in the manner described in Section 6(d).
(f) EFFECT OF A CHANGE IN CONTROL. In the event of a Change in Control,
all then outstanding Options and Director Options, shall (to the extent
authorized or not prohibited by applicable law or regulations) become one
hundred percent (100%) vested and exercisable as of the effective date of the
Change in Control. If, in connection with or as a consequence of a Change in
Control, the Company or the Bank is merged into or consolidated with another
corporation, or if the Company or the Bank sells or otherwise disposes of
substantially all of its assets to another corporation, then unless provisions
are made in connection with such transaction for the continuance of the Plan
and/or the assumption or substitution of then outstanding Options and Director
Options with new options covering the stock of the successor corporation, or
parent or subsidiary thereof, with appropriate adjustments as to the number and
kind of shares and prices, such Options or Director Options shall be canceled as
of the effective date of the merger, consolidation, or sale and the Participant
or Eligible Director shall be paid in cash an amount equal to the difference
between the Fair Market Value of the Shares subject to the Options or Director
Options as of the effective date of the such corporate event and the exercise
price of the Options or Director Options, as appropriate.
SECTION 7. AMENDMENT AND TERMINATION.
(a) AMENDMENTS TO THE PLAN. The Board may amend, alter, suspend,
discontinue, or terminate the Plan or any portion thereof at any time; provided
that no such amendment, alteration, suspension, discontinuation or termination
shall be made without shareholder approval if such approval is necessary to
comply with any tax or regulatory requirement
(b) AMENDMENTS TO AWARDS. Except as provided under Section 3, the
Committee may waive any conditions or rights under, amend any terms of, or
alter, suspend, discontinue, cancel or terminate, any Award theretofore granted,
prospectively or retroactively; provided that any such waiver, amendment,
alteration, suspension, discontinuance, cancellation or termination that would
impair the rights of any Participant or any holder or beneficiary of any Award
theretofore granted shall not to that extent be effective without the consent of
the affected Participant, holder or beneficiary.
(c) CANCELLATION. Any provision of this Plan or any Award Agreement to
the contrary notwithstanding, the Committee may cause any Award of Options
granted hereunder to be canceled in consideration of the granting to the holder
of an alternative Award of Options having a Fair Market Value equal to the Fair
Market Value of such canceled Award.
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SECTION 8. GENERAL PROVISIONS.
(a) Nontransferability.
(i) Each Award, and each right under any Award, shall be
exercisable only by the Participant during his or her lifetime, or, if
permissible under applicable law, by the Participant's guardian or legal
representative or a transferee receiving such Award pursuant to a domestic
relations order, or Section 8(a)(ii) as determined by the Committee.
(ii) No Award may be assigned, alienated, pledged, attached,
sold or otherwise transferred or encumbered by a Participant otherwise than by
will or by the laws of descent and distribution or pursuant to a domestic
relations order, and any such purported assignment, alienation, pledge,
attachment, sale, transfer or encumbrance shall be void and unenforceable
against the Company; provided, however, that the designation of a beneficiary
shall not constitute an assignment, alienation, pledge, attachment, sale,
transfer or encumbrance. Notwithstanding the preceding sentence, the Committee
shall have discretionary authority to permit the transfer of any Non-Qualified
Stock Option to members of a Participant's immediate family, including trusts
for the benefit of such family members and partnerships in which such family
members are the only partners; provided, however, that a transferred
Non-Qualified Stock Option may be exercised by the transferee on any date only
to the extent that the Participant would have been entitled to exercise the
Non-Qualified Stock Option on such date had the Non-Qualified Stock Option not
been transferred. Any transferred Non-Qualified Stock Option shall remain
subject to the terms and conditions of the Participant's Award Agreement.
(b) NO RIGHTS TO AWARDS. No Employee, Participant or other Person shall
have any claim to be granted any Award, and there is no obligation for
uniformity of treatment of Employees, Participants, or holders or beneficiaries
of Awards. The terms and conditions of Awards need not be the same with respect
to each recipient.
(c) SHARE CERTIFICATES. All Shares or other securities of the Company
delivered under the Plan pursuant to any Award or the exercise thereof shall be
subject to such stop transfer orders and other restrictions as the Committee may
deem advisable under the Plan or the rules, regulations, and other requirements
of the SEC, any stock exchange or national securities association upon which
such Shares or other securities are then listed, and any applicable Federal or
state laws, and the Committee may cause a legend or legends to be put on any
certificates representing such Shares or other securities to make appropriate
reference to such restrictions.
(d) DELEGATION. Subject to the terms of the Plan and applicable law,
the Committee may delegate to one or more officers or managers of the Company,
or to a committee of such officers or managers, the authority, subject to such
terms and limitations as the Committee shall determine, to grant Awards to, or
to cancel, modify or waive rights with respect to, or to alter, discontinue,
suspend, or terminate Awards held by, Employees who are not officers or
directors of the Company for purposed of Section 16 of the Exchange Act, or any
successor section thereto, or who are otherwise not subject to such Section.
(e) WITHHOLDING. A Participant shall be required to pay to the Company
and the Company is hereby authorized to withhold from any Award, from any
payment due or transfer made under any Award or from any compensation or other
amount owing to a Participant the amount of any applicable withholding taxes in
respect of an Award, its exercise, or any payment or transfer under an Award and
to take such other action as may be necessary in the opinion of the Company to
satisfy all obligations for the payment of such taxes, including, but not
limited to, the withholding of the issuance of Shares to be issued upon the
exercise of any Option or Director Option until the Participant reimburses the
Company for any amount required to be withheld.
(f) AWARD AGREEMENTS. Each Award hereunder shall be evidenced by an
Award Agreement which shall be delivered to the Participant and shall specify
the terms and conditions of the Award and any rules applicable thereto.
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(g) NO LIMIT ON OTHER COMPENSATION ARRANGEMENTS. Nothing contained in
the Plan shall prevent the Company or any Affiliate from adopting or continuing
in effect other compensation arrangements, which may, but need not, provide for
the grant of options, restricted stock, Shares and other types of Awards
provided for hereunder (subject to shareholder approval if such approval is
required), and such arrangements may be either generally applicable or
applicable only in specific cases.
(h) NO RIGHT TO EMPLOYMENT. The grant of an Award shall not be
construed as giving a Participant the right to be retained in the employ of the
Company or an Affiliate. Further, the Company may at any time dismiss a
Participant from employment, free from any liability or any claim under the
Plan, unless otherwise expressly provide in the Plan or in any Award Agreement.
(i) NO RIGHTS AS STOCKHOLDER. Subject to the provisions of the
applicable Award, no Participant or holder or beneficiary of any Award shall
have any rights as a stockholder with respect to any Shares to be distributed
under the Plan until he or she has become the holder of such Shares.
(j) GOVERNING LAW. The validity, construction, and effect of the Plan
and any rules and regulations relating to the Plan and any Award Agreement shall
be determined in accordance with the laws of the State of Illinois, without
giving effect to the choice of law principles thereof.
(k) SEVERABILITY. If any provisions of the Plan or any Award is or
becomes or is deemed to be invalid, illegal, or unenforceable in any
jurisdiction or as to any Person or Award, or would disqualify the Plan or any
Award under any law deemed applicable by the Committee, such provision shall be
construed or deemed amended to conform to the applicable laws, or if it cannot
be construed or deemed amended without, in the determination of the Committee,
materially altering the intent of the Plan or the Award, such provision shall be
stricken as to such jurisdiction, Person or Award and the remainder of the Plan
and any such Award shall remain in full force and effect.
(l) OTHER LAWS. The Committee may refuse to issue or transfer any
Shares or other consideration under an Award if, acting in its sole discretion,
it determines that the issuance or transfer of such Shares or such other
consideration might violate any applicable law or regulation or entitle the
Company to recovery under Section 16(b) of the Exchange Act, and any payment
tendered to the Company by a Participant, other holder or beneficiary in
connection with the exercise of such Award shall be promptly refunded to the
relevant Participant, holder or beneficiary. Without limiting the generality of
the foregoing, no Award granted hereunder shall be construed as an offer to sell
securities of the Company, and no such offer shall be outstanding, unless and
until the Committee in its sole discretion has determined that any such offer,
if made, would be in compliance with all applicable requirements of the U.S.
federal securities laws.
(m) NO TRUST OR FUND CREATED. Neither the Plan nor any Award shall
create or be construed to create a trust or separate fund of any kind or a
fiduciary relationship between the Company and a Participant or any other
Person. To the extent that any Person acquires a right to receive payments from
the Company pursuant to an Award, such rights shall be no greater than the right
of any unsecured general creditor of the Company.
(n) RULE 16b-3 COMPLIANCE. With respect to persons subject to Section
16 of the Exchange Act, transactions under this Plan are intended to comply with
all applicable terms and conditions of Rule 16b-3 and any successor provisions.
To the extent that any provision of the Plan or action by the Committee fails to
so comply, it shall be deemed null and void, to the extent permitted by law and
deemed advisable by the Committee.
(o) HEADINGS. Heading are given to the Sections and subsections of the
Plan solely as a convenience to facilitate reference. Such headings shall not be
deemed in any way material or relevant to the construction or interpretation of
the Plan or any provision thereof.
(p) NO IMPACT ON BENEFITS. Unless specifically provided under any other
benefit plan of the Company or its Affiliates, Awards shall not be treated as
compensation for purposes of calculating an Employee's
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or Eligible Director's rights under such benefit plans.
(q) INDEMNIFICATION. Each person who is or shall have been a member of
the Committee or of the Board shall be indemnified and held harmless by the
Company against and from any loss, cost, liability, or expense that may be
imposed upon or reasonably incurred by him in connection with or resulting from
any claim, action, suit, or proceeding to which he may be made a party or in
which he may be involved by reason of any action taken or failure to act under
the Plan and against and from any and all amounts paid by him in settlement
thereof, with the Company's approval, or paid by him in satisfaction of any
judgment in any such action, suit, or proceeding against him, provided he shall
give the Company an opportunity, at its own expense, to handle and defend the
same before he undertakes to handle and defend it on his own behalf. The
foregoing right of indemnification shall not be exclusive and shall be
independent of any other rights of indemnification to which such persons may be
entitled under the Company's articles of incorporation or bylaws, by contract,
as a matter of law, or otherwise.
SECTION 9. TERM OF THE PLAN.
(a) EFFECTIVE DATE. The Plan shall become effective only upon approval
by a majority of the Company's stockholders at an annual or special meeting of
stockholders of the Company held not less than six (6) months after the date of
adoption of the Plan by the Board.
(b) EXPIRATION DATE. The Plan shall terminate on and no Award shall be
granted under the Plan after the tenth anniversary of the Effective Date. Unless
otherwise expressly provided in the Plan or in an applicable Award Agreement,
any Award granted hereunder may, and the authority of the Board or the Committee
to amend, alter, adjust, suspend, discontinue, or terminate any such Award or to
waive any conditions or rights under any such Award shall, continue after the
tenth anniversary of the Effective Date.
A-8
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<S><C>
[X] PLEASE MARK VOTES REVOCABLE PROXY
AS IN THIS EXAMPLE CHESTER BANCORP, INC.
WITH- FOR ALL
ANNUAL MEETING OF STOCKHOLDERS FOR HOLD EXCEPT
APRIL 7, 2000 1. The election as directors of the [ ] [ ] [ ]
nominees listed (except as marked
to the contrary below):
The undersigned hereby appoints the official Proxy
Committee of the Board of Directors of Chester Bancorp, Inc. JOHN R. BECK, M.D JAMES C. MCDONALD THOMAS E. WELCH, JR.
("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 INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL
entitled to vote at the Annual Meeting of Stockholders, to be NOMINEE, MARK "FOR ALL EXCEPT" AND WRITE THAT NOMINEE'S NAME
held at the American Legion Hall, 500 E. Opdyke St., IN THE SPACE PROVIDED BELOW.
Chester, Illinois on Friday, April 7, 2000 at 10:00 a.m.,
local time, and at any and all adjournments thereof, as follows: --------------------------------------------------------------
FOR AGAINST ABSTAIN
2. The approval of the Chester Bancorp, [ ] [ ] [ ]
Inc. 2000 Stock Option Plan the
3. In their discretion, upon such other matters as may
properly come before the meeting.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
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 PERSONS 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.
---------------------------
Please be sure to sign and date | Date |
this Proxy in the box below. | |
- -------------------------------------------------------------------
|
|
|
- --Stockholder sign above------------Co-holder (if any) sign above--
+ +
/\ DETACH ABOVE CARD, DATE, SIGN, AND MAIL IN POSTAGE-PRE PAID ENVELOPE PROVIDED. /\
CHESTER BANCORP, INC.
- ------------------------------------------------------------------------------------------------------------------------------------
Should the above signed 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 above signed 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 March 10, 2000 and the Annual Report to Stockholders.
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.
- ------------------------------------------------------------------------------------------------------------------------------------
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