<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------------- ----------------------
Commission file number: 000-21167
------------------------------
Chester Bancorp, Inc.
(Exact name of registrant as specified in its charter)
------------------------------
Delaware 37-1359570
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1112 State Street, Chester, Illinois 62233
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (618) 826-5038
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of outstanding shares of the registrant's Common Stock, par value
$.01 per share, was 1,290,946 on October 24, 2000.
================================================================================
<PAGE> 2
FORM 10-Q
Index
<TABLE>
<CAPTION>
Page
Number
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets.......................................................... 4
Consolidated Statements of Income.................................................... 5
Consolidated Statement of Stockholders' Equity....................................... 7
Consolidated Statements of Cash Flows................................................ 8
Consolidated Statements of Comprehensive Income...................................... 9
Notes to Consolidated Financial Statements........................................... 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................................ 12
Item 3. Quantitative and Qualitative Disclosures About Market Risks........................... 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................................... 22
Item 2. Changes in Securities................................................................. 22
Item 3. Defaults upon Senior Securities....................................................... 22
Item 4. Submission of Matters to a Vote
of Securities Holders................................................................ 22
Item 5. Other Information..................................................................... 22
Item 6. Exhibits and Reports on Form 8-K...................................................... 22
Signature........................................................................................ 23
Exhibit Index.................................................................................... 24
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
3
<PAGE> 4
CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 2000 and December 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
Assets 2000 1999
------ ---- ----
<S> <C> <C>
Cash $ 1,233,371 $ 1,245,259
Interest-bearing deposits 2,274,012 4,592,041
Federal funds sold 4,220,000 -
------------- ------------
Total cash and cash equivalents 7,727,383 5,837,300
Investment securities:
Available for sale, at fair value (cost of $4,806,009 and $5,003,271 at
September 30, 2000 and December 31, 1999, respectively) 4,831,242 4,961,045
Held to maturity, at cost (fair value of $34,595,334 and $34,977,915 at
September 30, 2000 and December 31, 1999, respectively) 35,344,010 36,193,546
Mortgage-backed securities:
Available for sale, at fair value (cost of $5,427,977 and $7,175,687 at
September 30, 2000 and December 31, 1999, respectively) 5,264,720 7,009,588
Held to maturity, at cost (fair value of $11,308,526 and $14,413,424 at
September 30, 2000 and December 31, 1999, respectively) 11,477,116 14,724,664
Loans receivable, net of allowance for loan loss ($599,316 at
September 30, 2000 and $605,347 at December 31, 1999, respectively) 47,906,917 48,277,319
Accrued interest receivable 991,193 1,151,180
Real estate acquired by foreclosure, net 145,289 186,288
Office property and equipment, net 1,449,893 1,524,196
Income taxes receivable 100,374 -
Deferred tax asset, net 171,797 198,513
Other assets 340,377 328,183
------------- ------------
$ 115,750,311 $120,391,822
============= ============
Liabilities and Stockholders' Equity
------------------------------------
Savings deposits $ 95,150,905 $ 90,752,941
Borrowed money - 7,807,000
Accrued interest payable 95,388 139,069
Advance payments by borrowers for taxes and insurance 675,604 376,431
Income taxes payable - 326,001
Accrued expenses and other liabilities 160,846 117,198
------------- ------------
Total liabilities 96,082,743 99,518,640
------------- ------------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 3,000,000 shares authorized, 2,182,125 shares
issued at September 30, 2000 and December 31, 1999 21,821 21,821
Additional paid-in capital 21,383,649 21,521,985
Retained earnings, substantially restricted 15,090,928 14,681,473
Accumulated other comprehensive loss (85,575) (129,165)
Unearned ESOP shares (1,496,820) (1,538,040)
Unearned restricted stock awards (268,835) (393,480)
Treasury stock, at cost: 891,179 and 792,572 shares at
September 30, 2000 and December 31, 1999, respectively (14,977,600) (13,291,412)
------------- ------------
Total stockholders' equity 19,667,568 20,873,182
------------- ------------
$ 115,750,311 $ 120,391,822
============= =============
</TABLE>
See accompanying notes to unaudited consolidated financial statements
4
<PAGE> 5
CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Three Months Ended September 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
------------------
September 30,
-------------
2000 1999
---- ----
<S> <C> <C>
Interest income:
Loans receivable $ 1,014,506 $ 988,210
Mortgage-backed securities 263,673 369,533
Investments 597,661 638,370
Interest-bearing deposits, federal funds sold and bankers' acceptances 39,699 62,796
----------- ---------
Total interest income 1,915,539 2,058,909
----------- ---------
Interest expense:
Savings deposits 1,031,163 1,008,472
Borrowed money - 132,922
----------- ---------
Total interest expense 1,031,163 1,141,394
----------- ---------
Net interest income 884,376 917,515
Provision for loan losses - -
----------- ---------
Net interest income after provision for loan losses 884,376 917,515
----------- ---------
Noninterest income:
Late charges and other fees 35,973 30,753
Other 6,113 4,883
----------- ---------
Total noninterest income 42,086 35,636
----------- ---------
Noninterest expense:
Compensation and employee benefits 299,229 320,707
Occupancy 72,884 69,486
Data processing 34,090 37,025
Advertising 12,129 11,922
Federal deposit insurance premiums 5,086 14,400
Other 139,604 150,733
----------- ---------
Total noninterest expense 563,022 604,273
----------- ---------
Income before income tax expense 363,440 348,878
Income tax expense 105,750 107,527
----------- ---------
Net income $ 257,690 $ 241,351
=========== =========
Earnings per common share - basic $ .22 $ .19
=========== =========
Earnings per common share - diluted $ .22 $ .19
=========== =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE> 6
CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Nine Months Ended September 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
September 30,
-------------
2000 1999
---- ----
<S> <C> <C>
Interest income:
Loans receivable $ 3,017,817 $2,919,570
Mortgage-backed securities 878,557 1,115,602
Investments 1,811,691 1,876,921
Interest-bearing deposits, federal funds sold and bankers' acceptances 86,648 341,111
----------- ----------
Total interest income 5,794,713 6,253,204
----------- ----------
Interest expense:
Savings deposits 2,951,851 3,069,338
Borrowed money 98,568 475,863
----------- ----------
Total interest expense 3,050,419 3,545,201
----------- ----------
Net interest income 2,744,294 2,708,003
Provision for loan losses - -
----------- ----------
Net interest income after provision for loan losses 2,744,294 2,708,003
----------- ----------
Noninterest income:
Late charges and other fees 96,308 106,746
Loss on sale of investment securities, net (22,969) -
Gain on sale of mortgage-backed securities, net 1,139 -
Other 24,400 15,474
----------- ----------
Total noninterest income 98,878 122,220
----------- ----------
Noninterest expense:
Compensation and employee benefits 955,617 1,000,231
Occupancy 204,456 208,256
Data processing 113,856 113,579
Advertising 32,877 46,157
Federal deposit insurance premiums 15,198 43,502
Other 416,331 469,185
----------- ----------
Total noninterest expense 1,738,335 1,880,910
----------- ----------
Income before income tax expense 1,104,837 949,313
Income tax expense 310,934 294,238
----------- ----------
Net income $ 793,903 $ 655,075
=========== ==========
Earnings per common share - basic $ .66 $ .51
=========== ==========
Earnings per common share - diluted $ .65 $ .50
=========== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE> 7
CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Nine Months Ended September 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
Retained Accumulated
Common stock Additional earnings, other
------------ paid-in substantially comprehensive
Shares Amount capital restricted loss
------ ------ ------- ---------- ----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1999 2,182,125 $21,821 $ 21,521,985 $ 14,681,473 $ (129,165)
Net income -- -- -- 793,903 --
Purchase of treasury stock -- -- -- -- --
Issuance of treasury stock for restricted
stock awards -- -- (166,110) (10,382) --
Stock options exercised -- -- -- (5,728) --
Amortization of restricted stock awards -- -- -- -- --
Amortization of ESOP awards -- -- 27,774 -- --
Dividends on common stock
at $.31 per share -- -- -- (368,338) --
Change in accumulated other
comprehensive loss -- -- -- -- 43,590
--------- ------- ------------ ------------ ------------
Balance, September 30, 2000 2,182,125 $21,821 $ 21,383,649 $ 15,090,928 $ (85,575)
========= ======= ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Unearned Unamortized Treasury Stock Total
ESOP restricted -------------- Stockholders'
shares stock awards Shares Amount Equity
------ ------------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1999 $(1,538,040) $(393,480) 792,572 $(13,291,412) $ 20,873,182
Net income -- -- -- -- 793,903
Purchase of treasury stock -- -- 117,018 (1,960,052) (1,960,052)
Issuance of treasury stock for restricted
stock awards -- -- (11,865) 176,492 --
Stock options exercised -- -- (6,546) 97,372 91,644
Amortization of restricted stock awards -- 124,645 -- -- 124,645
Amortization of ESOP awards 41,220 -- -- -- 68,994
Dividends on common stock
at $.31 per share -- -- -- -- (368,338)
Change in accumulated other
comprehensive loss -- -- -- -- 43,590
----------- --------- ------- ------------ ------------
Balance, September 30, 2000 $(1,496,820) $(268,835) 891,179 $(14,977,600) $ 19,667,568
=========== ========= ======= ============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
7
<PAGE> 8
CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine months ended September 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
September 30, September 30,
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 793,903 $ 655,075
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization:
Office properties and equipment 112,717 112,143
Deferred fees, discounts, and premiums 12,447 (48,972)
Stock plans 285,283 205,891
Increase (decrease) in accrued interest receivable 159,986 (52,852)
Decrease in accrued interest payable (43,681) (48,309)
Increase (decrease) in income taxes, net (426,375) 44,055
Provision for losses on real estate acquired through foreclosure - 10,000
(Gain)loss on sale of investment securities, net 22,969 -
(Gain)loss on sale of mortgage-backed securities, net (1,139) -
(Gain)loss on sale of real estate owned, net (8,451) -
Dividend on FHLB Stock (28,500) -
Net change in other assets and other liabilities 31,456 (15,229)
----------- -----------
Net cash provided by operating activities 910,615 861,802
----------- -----------
Cash flows from investing activities:
Principal repayments on:
Loans receivable 7,864,024 10,985,125
Mortgage-backed securities 4,437,984 8,819,512
Proceeds from the maturity of investment securities available for sale 500,000 7,235,000
Proceeds from the maturity of investment securities held to maturity 3,565,000 95,555,670
Proceeds from the sale of investment securities available for sale 1,202,031 229,437
Proceeds from the sale of mortgage-backed securities available for sale 538,389 -
Cash invested in:
Loans receivable (7,451,984) (12,006,683)
Mortgage-backed securities held to maturity - (10,882,216)
Investment securities held to maturity (2,700,000) (94,410,532)
Investment securities available for sale (1,499,309) (400,000)
Proceeds from sale of real estate acquired by foreclosure - 127,850
Purchase of office properties and equipment (38,414) (70,916)
----------- -----------
Net cash provided by investing activities 6,417,721 5,182,247
----------- -----------
Cash flows from financing activities:
Increase (decrease) in savings deposits 4,397,964 (3,608,630)
Increase (decrease) in securities sold under agreements to repurchase - 10,880,389)
Repayments of FHLB advances (5,000,000) -
Repayments of federal funds purchased (2,807,000) -
Increase (decrease) in advance payments by borrowers for taxes and insurance 299,173 (58,305)
Purchase of treasury stock (1,960,052) (1,391,606)
Dividends paid (368,338) (307,628)
----------- -----------
Net cash provided by (used in) financing activities (5,438,253) (16,246,558)
----------- -----------
Net increase (decrease) in cash and cash equivalents 1,890,083 (10,202,509)
Cash and cash equivalents, beginning of period 5,837,300 16,796,839
----------- -----------
Cash and cash equivalents, end of period $ 7,727,383 $ 6,594,330
=========== ===========
Supplemental information:
Interest paid $ 3,094,100 $ 3,593,510
Income taxes paid $ 749,924 $ 272,321
Noncash investing and financing activities:
Loans transferred to real estate acquired by foreclosure $ 45,776 $ 388,596
Interest credited to savings deposits $ 2,073,206 $ 2,016.533
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
8
<PAGE> 9
CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 257,690 $ 241,351 $ 793,903 $ 655,075
Other comprehensive income, net of tax
Unrealized holding gain (loss) on
securities available for sale $ 70,446 $ (25,572) $ 57,125 $(187,988)
Less adjustment for realized gains
included in net income $ -- $ -- $ (13,535) $ --
--------- --------- --------- ---------
Total other comprehensive income $ 70,446 $ (25,572) $ 43,590 $(187,988)
--------- --------- --------- ---------
Comprehensive income $ 328,136 $ 215,779 $ 837,493 $ 467,087
========= ========= ========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
9
<PAGE> 10
CHESTER BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
Nine Months Ended September 30, 2000 and 1999
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements were
prepared in accordance with instructions for Form 10-Q and, therefore, do not
include all information and notes necessary for a complete presentation of
financial position, results of operations, changes in stockholders' equity, and
cash flows in conformity with generally accepted accounting principles. However,
all adjustments (consisting only of normal recurring accruals) which, in the
opinion of management are necessary for a fair presentation of the unaudited
consolidated financial statements, have been included in the consolidated
financial statements as of September 30, 2000, and for the three and nine months
ended September 30, 2000 and 1999.
Operating results for the nine months ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000.
The Company has not included disclosures regarding specific segments
since management makes operating decisions and assesses performance based on the
Company as a whole.
(2) Earnings Per Share (EPS)
Basic 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 Company.
The computation of EPS for the three and nine months ended September
30, 2000 and 1999 follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic EPS:
Net income $ 257,690 $ 241,351 $ 793,903 $ 655,075
========== ========== ========== ==========
Average common shares outstanding 1,163,606 1,268,212 1,197,794 1,279,227
========== ========== ========== ==========
Basic EPS $ 0.22 $ 0.19 $ 0.66 $ 0.51
========== ========== ========== ==========
Diluted EPS:
Net income $ 257,690 $ 241,351 $ 793,903 $ 655,075
========== ========== ========== ==========
Average common shares outstanding 1,163,606 1,268,212 1,197,794 1,279,227
Dilutive potential due to stock options 32,118 31,356 31,763 31,582
---------- ---------- ---------- ----------
Average number of common shares
and dilutive potential common
shares outstanding 1,195,724 1,299,568 1,229,557 1,310,809
========== ========== ========== ==========
Diluted EPS $ 0.22 $ .19 $ 0.65 $ 0.50
========== ========== ========== ==========
</TABLE>
10
<PAGE> 11
(3) Employee Stock Ownership Plan (ESOP)
During 1996, the Company established a tax-qualified ESOP. The plan
covers substantially all employees who have attained the age of 21 and completed
one year of service. In connection with the conversion to a stock corporation,
the ESOP purchased 174,570 shares of the Company's common stock at a
subscription price of $10.00 per share using funds loaned by the Company. All
shares are held in a suspense account for allocation among the participants as
the loan is repaid with level principal payments over 30 years. Shares released
from the suspense account are allocated among the participants based upon their
pro rata annual compensation. The purchases of the shares by the ESOP were
recorded by the Company as unearned ESOP shares in a contra equity account. As
ESOP shares are committed to be released to compensate employees, the contra
equity account is reduced and the Company recognizes compensation expense equal
to the fair 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 $68,994 and $69,217 for the nine months ended
September 30, 2000 and 1999, respectively.
The ESOP shares as of September 30, 2000 are as follows:
<TABLE>
<S> <C>
Allocated shares 20,766
Committed to be released shares 4,122
Unreleased shares 149,682
------------
Total ESOP shares 174,570
============
Fair value of unreleased shares $2,516,529
============
</TABLE>
(4) Restricted Stock Awards
On April 4, 1997, the Company adopted the 1997 Management Recognition
and Development Plan. The plan provides that 82,921 common 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 has been 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 restricted shares. The contra equity
account is amortized to compensation expense over the vesting period.
Compensation expense was $124,645 for both the nine months ended September 30,
2000 and 1999.
(5) Pending Adoptions
In September 2000, Statement on Financial Accounting Standards No. 140
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" was issued to replace Statement of Financial Accounting No. 125
which was issued in June 1996. Statement No. 125 addressed issues related to
transfers of financial assets in which the transferor has some continuing
involvement with the transferred assets or with the transferee. Statement No.
140 resolves implementation issues which arose as a result of Statement No. 125,
but carries forward most of Statement No. 125's provisions. Statement No. 140 is
effective for transfers occurring after March 31, 2001 and for disclosures
relating to securitization transactions and collateral for fiscal years ending
after December 15, 2000. Management does not believe the adoption of Statement
No. 140 will have a significant impact on its financial statements.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The principal business of Chester Bancorp, Inc. and its
subsidiaries (the Company) consists of attracting deposits from the general
public and using these funds to originate mortgage loans secured by one-to
four-family residences and to invest in securities of the U. S. government,
mortgage-backed securities, and other 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 FHLB advances.
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.
When used in this report the words or phrases "will likely
result," "are expected to," "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 results 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.
FINANCIAL CONDITION
ASSETS. The Company's total assets decreased by $4.6 million,
or 3.9%, to $115.8 million at September 30, 2000 from $120.4 million at December
31, 1999. The decrease in the Company's asset size was attributable to a
decrease in investment securities and mortgage-backed securities which was
attributable to the $7.8 million decrease in borrowed money during the nine
months ended September 30, 2000.
Loans receivable deceased $370,000, or .8%, to $47.9 million
at September 30, 2000 from $48.3 million at December 31, 1999. The slight
decrease in loans receivable resulted from a decrease in loan origination volume
of $4.6 million during the nine months ended September 30, 2000. This decrease
was offset by a reduction in principal repayments on loans receivable of $3.1
million for the nine months ended September 30, 2000. The reduction in
repayments is primarily due to the increasing interest rate environment that has
been experienced during the nine months of 2000.
Mortgage-backed securities at September 30, 2000 were $16.7
million compared to $21.7 million at December 31, 1999. Investment securities
decreased $1.0 million, or 2.4%, to $40.2 million at
12
<PAGE> 13
September 30, 2000, from $41.2 million at December 31, 1999. During the nine
months ended September 30, 2000, management used funds to purchase additional
shares of treasury stock and fund the repayment of borrowed money with the
proceeds from the maturity of investment securities and mortgage-backed
securities.
Cash, interest-bearing deposits and federal funds sold, on a
combined basis, increased $1.9 million, or 32.4%, to $7.7 million at September
30, 2000 from $5.8 million at December 31, 1999. During the nine months ended
September 30, 2000, management used funds to purchase additional shares of
treasury stock and fund the decline in borrowed money. Management invested the
funds from increased savings deposits into short-term interest-bearing deposits.
LIABILITIES. Savings deposits increased $4.4 million, or 4.8%
during the nine months ended September 30, 2000. The increase in savings
deposits was primarily due to management's decision to be more competitive in
the rates offered on certificates of deposits during the three months ended
September 30, 2000. At September 30, 2000 there was no borrowed money compared
to $7.8 million at December 31, 1999. The $7.8 million, or 100.0% decrease was
the result of a $5.0 million decrease in FHLB advances and a $2.8 million
decrease in federal funds purchased. There were no securities sold under
agreements to repurchase at September 30, 2000 and December 31, 1999,
respectively.
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. That relationship has provided as
much as $25 million in funds on deposit, typically with short terms. At
September 30, 2000 and December 31, 1999, the balance of funds on deposit with
the Company was $21.2 million, and $14.8 million, respectively.
RESULTS OF OPERATIONS
The Company's operating results depend primarily on its level
of net interest income, which is the difference between the interest income
earned on its interest-earning assets (loans, mortgage-backed securities,
investment securities, and interest-bearing deposits) and the interest expense
paid on its interest-bearing liabilities (deposits and borrowings). Operating
results are also significantly affected by provisions for losses on loans,
noninterest income, and noninterest expense. Each of these factors is
significantly affected not only by the Company's policies, but, to varying
degrees, by general economic and competitive conditions and by policies of
federal regulatory authorities.
NET INCOME. The Company's net income for the three and nine
months ended September 30, 2000 was $258,000 and $794,000, respectively,
compared to $241,000 and $655,000 for the three and nine months ended September
30, 1999, respectively. The $16,000 and $139,000 increase in net income for the
three and nine months ended September 30, 2000, respectively, was positively
impacted by a decline in noninterest income and was negatively impacted by a
decrease in net interest income and noninterest income.
NET INTEREST INCOME. Net interest income totaled $884,000 for
the three months ended September 30, 2000 compared to $918,000 for the three
months ended September 30, 1999. The $33,000, or 3.6%, decrease in net interest
income was the result of an increase in the average yield on interest-bearing
liabilities to 4.47% for the three months ended September 30, 2000 from 4.27%
for the three months ended September 30, 1999, positively offset by a 45 basis
point increase in the average yield on interest-earning assets for the three
months ended September 30, 2000.
Net interest income totaled $2.74 million for the nine months
ended September 30, 2000 compared to $2.71 million for the nine months ended
September 30, 1999. The $36,000, or 1.3%, increase in net interest income was
the result of an increase in the ratio of average interest-earning assets to
average interest-bearing liabilities of 118.5% for the nine months ended
September 30, 2000 compared to 115.7% for the nine months ended September 30,
1999.
13
<PAGE> 14
INTEREST INCOME. Interest income on loans receivable increased
$26,000, or 2.7%, for the three months ended September 30, 2000. The increase in
interest income on loans receivable was primarily the result of an increase in
the average yield on loans receivable for the three months ended September 30,
2000 of 8.44% from 8.24% for the three months ended September 30, 1999.
Interest income on loans receivable increased $98,000, or
3.4%, for the nine months ended September 30, 2000. The increase in interest
income on loans receivable was the result of a $1.0 million, or 2.1%, increase
in the average balance of loans receivable for the nine months ended September
30, 2000. The average yield on loans receivable was 8.35% and 8.25% for the nine
months ended September 30, 2000 and September 30, 1999, respectively.
Interest income on mortgage-backed securities decreased
$106,000 and $237,000 for the three and nine months ended September 30, 2000,
respectively. The decrease in both instances resulted from a decrease in the
average balance of mortgage-backed securities, partially offset by an increase
in the average yield on mortgage-backed securities. For the three and nine
months ended September 30, 2000, the average balance of mortgage-backed
securities decreased $7.6 million, or 30.3% and $6.3 million, or 24.7%,
respectively. The decrease in the average balance on mortgage-backed securities
was due to the purchase of treasury stock and the decline in borrowed money.
Interest earned on investment securities was $598,000 for the
three months ended September 30, 2000, compared to $638,000 for the three months
ended September 30, 1999. The $41,000, or 6.4% decrease in interest income on
investment securities was the result of a decrease in the average balance of
investment securities of $5.0 million, or 11.1%, positively offset by an
increase in the average yield on investment securities to 6.38% for the three
months ended September 30, 2000 from 5.93% for the three months ended September
30, 1999. The decrease in the average balance on investment securities was due
to the decline in borrowed money.
Interest earned on investment securities was $1.8 million for
the nine months ended September 30, 2000, compared to $1.9 million for the three
months ended September 30, 1999. The $65,000, or 3.5% decrease was the result of
a decrease in the average balance of investment securities of $5.0 million, or
11.0%, positively offset by a 64 basis point increase in the average yield on
investment securities for the nine months ended September 30, 2000.
Interest income on interest-bearing deposits decreased
$23,000, or 36.7%, and $254,000, or 74.6%, during the three and nine months
ended September 30, 2000, respectively. The decrease in both instances primarily
resulted from a decrease in the average balance of interest-bearing deposits.
For the three and nine months ended September 30, 2000, the average balance of
interest-bearing deposits decreased $2.5 million, or 43.4%, and $7.6 million, or
74.2%, respectively. The decrease in the average balance on interest-bearing
deposits was due to the decline in borrowed money.
INTEREST EXPENSE. Interest expense on savings deposits was
$1.0 million and $3.0 million for the three and nine months ended September 30,
2000 compared to $1.0 million and $3.1 million for the three and nine months
ended September 30, 1999. The average balance of deposits decreased $3.8
million, or 4.0%, and $6.5 million, or 6.6%, for the three and nine months ended
September 30, 2000, respectively. The decrease in the average balance of
deposits reflects a $9.3 million decrease in savings deposits from the sale of
the Company's Pinckneyville, Illinois branch, which occurred in November, 1999,
positively offset by a $4.4 million increase in savings deposits during the nine
months ended September 30, 2000.
Interest expense on borrowed money decreased $133,000 and
$377,000 for the three and nine months ended September 30, 2000. The decrease in
interest expense on borrowed money was attributable to the decline in borrowed
money. The proceeds of maturing investment securities, the principal repayment
on mortgage-backed securities and the increased funds in savings deposits were
used for the repayment of borrowed money.
14
<PAGE> 15
There was no interest expense on securities sold under
agreements to repurchase during the three and nine months ended September 30,
2000, whereas interest expense on securities sold under agreements to repurchase
was $10,000 and $113,000 for the three and nine months ended September 30, 1999.
Interest expense on FHLB advances was $31,000 for the nine
months ended September 30, 2000, compared to $123,000 and $363,000 for the three
and nine months ended September 30, 1999. The decrease in interest expense on
FHLB advances was the result of a $10.0, or 100.0%, and $9.2 million, or 92.0%,
decrease in the average balance of FHLB advances for the three and nine months
ended September 30, 30, 2000, respectively.
Interest expense on federal funds purchased was $56,000 for
the nine months ended September 30, 2000, whereas there was no interest expense
on federal funds purchased during the three and nine months ended September 30,
1999.
PROVISION FOR LOAN LOSSES. The allowance for loan losses is
established through a provision for loan losses charged to expense based on
management's evaluation of the risk inherent in its loan portfolio and the
general economy. Such evaluation considers numerous factors including general
economic conditions, loan portfolio composition, prior loss experience, the
estimated fair value of the underlying collateral, and other factors that
warrant recognition in providing for an adequate loan loss allowance.
During the quarters ended September 30, 2000 and 1999, the
provision for loan losses was zero as no significant problem loans were
identified and the allowance for loan losses was deemed by management to be
adequate.
The Company's allowance for loan losses was $599,000, or 1.2%,
of loans outstanding at September 30, 2000, compared to $605,000, or 1.3%, of
loans outstanding at December 31, 1999. The Company's level of net loans
charged-off during the nine months ended September 30, 2000 was $6,000, which
represented .01% of average loans outstanding. Based on current levels in the
allowance for loan losses in relation to loans receivable and delinquent loans,
management's continued effort to favorably resolve problem loan situations, and
the low level of charge-offs in recent years, management believes the allowance
is adequate at September 30, 2000. At September 30, 2000, loans 90 days or more
delinquent totaled $151,000, or .31% of net loans receivable, compared to
$87,000, or .18% of net loans receivable at December 31, 1999, and $100,000, or
.20% of net loans receivable at September 30, 1999.
The breakdown of general loss allowances and specific loss
allowances is made for regulatory accounting purposes only. General loan loss
allowances are added back to capital to the extent permitted in computing
risk-based capital. Both general and specific loss allowances are charged to
expense. The financial statements of the Company are prepared in accordance with
generally accepted accounting principles (GAAP) and, accordingly, provisions for
loan losses are based on management's assessment of the factors set forth above.
The Company regularly reviews its loan portfolio, including problem loans, to
determine whether any loans are impaired, require classification and/or the
establishment of appropriate reserves. Management believes it has established
its existing allowance for loan losses in accordance with GAAP, however, future
additions may be necessary if economic conditions or other circumstances differ
substantially from the assumptions used in making the initial determination.
NONINTEREST INCOME. Noninterest income was $42,000 and $99,000
for the three and nine months ended September 30, 2000, respectively, compared
to $36,000 and $122,000 for the three and nine months ended September 30, 1999.
The decrease in noninterest income for the nine months ended September 30, 2000
was mainly attributable to a $22,000 net loss realized on the sale of available
for sale investment securities and mortgage-backed securities.
NONINTEREST EXPENSE. Noninterest expense decreased $41,000, or
6.8%, for the three months ended September 30, 2000. The decrease in noninterest
expense for the three months ended September 30, 2000 resulted from a $21,000
decrease in compensation expense, a $9,000 decrease in federal insurance
15
<PAGE> 16
premiums and a $11,000 decrease in other expense. These fluctuations are the
result of normal operating procedures. The decrease in federal insurance
premiums reflects the adjustment made in accordance with the terms of the
assessment imposed by Congress in 1996. In addition to the assessment the
Federal Deposit Insurance Corporation ("FDIC") collects for federal deposit
insurance, they also collect a separate assessment on behalf of the Financing
Corporation ("FICO"). Prior to January 1, 2000, deposits insured by the Bank
Insurance Fund ("BIF") were assessed by FICO at one-fifth the rate applicable to
deposits by the Savings Association Insurance Fund ("SAIF"). When Congress
imposed this rate differential in 1996, it also provided that the differential
would terminate at the end of 1999 calender year. Accordingly, the assessments
paid for the period starting January 1, 2000, were assessed at the same FICO
rate for both BIF and SAIF insured deposits. As a result, the Company's SAIF
FICO assessment was lower.
Noninterest expense decreased $143,000, or 7.6%, for the nine
months ended September 30, 2000. The decrease in noninterest expense for the six
months ended June 30, 2000 resulted from a $45,000 decrease in compensation
expense, a $13,000 decrease in advertising expense, a $28,000 decrease in
federal insurance premiums and a $53,000 decrease in other expense. These
fluctuations are the result of normal operating procedures.
INCOME TAX EXPENSE. Income tax expense for the three and nine
months ended September 30, 2000 was $106,000 and $311,000, compared to income
tax expense of $108,000 and $294,000 for the three and nine months ended
September 30, 1999. The Company's effective tax rate for the three and nine
months ended September 30, 2000 was 29.1% and 28.1% respectively, compared to
30.8% and 31.0% for the three and nine months ended September 30, 1999. The
effective tax rate for each period was below the statutory rate of 34% due to
the Company's investment in tax exempt securities.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds consist of deposits,
securities sold under agreements to repurchase, federal funds purchased, FHLB
advances, repayments and prepayments of loans and mortgage-backed securities,
maturities of investments and interest-bearing deposits, and funds provided from
operations. While scheduled repayments of loans and mortgage-backed securities
and maturities of investment securities are predictable sources of funds,
deposit flows and loan prepayments are greatly influenced by general interest
rates, economic conditions and competition. The Company manages the pricing of
its deposits to maintain a steady deposit base. The Company uses its liquidity
resources principally to fund existing and future loan commitments, to fund
maturing certificates of deposit and deposit withdrawals, to invest in other
interest-bearing assets, to maintain liquidity, and to meet operating expenses.
Management believes that loan repayments and other sources of funds will be
adequate to meet the Company's liquidity needs for the remainder of 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
September 30, 2000, cash and cash equivalents totaled $7.7 million.
The primary investing activities of the Company include
origination of loans and purchase of mortgage-backed securities and investment
securities. During the nine months ended September 30, 2000, purchases of
investment securities totaled $4.2 million while loan originations totaled $7.5
million. These investments were funded primarily from loan and mortgage-backed
security repayments of $12.3 million and investment securities sales and
maturities of $5.8 million.
Liquidity management is both a daily and long-term function of
business management. If the Company requires funds beyond its ability to
generate them internally, the Company believes that it could borrow by
purchasing federal funds or borrow funds from the Federal Home Loan Bank (FHLB).
At September 30, 2000, the Company had no borrowed money.
16
<PAGE> 17
At September 30, 2000, the Company exceeded all of its
regulatory capital requirements. The Company and the Company's subsidiary banks
actual and required capital amounts and ratios as of September 30, 2000 are as
follows:
<TABLE>
<CAPTION>
Actual Capital Requirements
------------------------- ---------------------------
(Dollars in thousands) Amount Ratio Amount Ratio
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total capital (to risk-weighted assets):
Company $20,330 42.7% 3,811 8.00%
Chester National Bank $15,939 39.0% 3,269 8.00%
Chester National Bank of Missouri 3,442 55.2% 498 8.00%
Tier 1 capital (to risk-weighted assets):
Company $19,754 41.5% 1,906 4.00%
Chester National Bank $15,441 37.8% 1,635 4.00%
Chester National Bank of Missouri 3,364 54.0% 249 4.00%
Tier 1 capital (to average assets):
Company $19,754 17.3% 3,423 3.00%
Chester National Bank $15,441 15.1% 3,061 3.00%
Chester National Bank of Missouri 3,364 31.0% 326 3.00%
</TABLE>
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.
17
<PAGE> 18
NONPERFORMING ASSETS
The following table sets forth information with respect to the Company's
nonperforming assets at the dates indicated.
<TABLE>
<CAPTION>
At September 30, At December 31,
---------------- ---------------
2000 1999
---- ----
(Dollars in Thousands)
-------------------------------------------------------
<S> <C> <C>
Non-performing loans:
Loans accounted for on a non-accrual basis:
Real estate
Residential real estate $124 $ 86
Commercial -- --
Consumer 27 1
------ -----
Total 151 87
------ -----
Accruing loans which are contractually past due 90 days or more:
Residential real estate -- --
Commercial -- --
Consumer -- --
------ -----
Total -- --
------ -----
Total non-performing loans 151 87
Real estate acquired by foreclosure, net 145 186
------ -----
Total non-performing assets $296 $273
====== =====
Total non-performing loans to net loans 0.31% 0.18%
============ ===========
Total allowance for loan losses to
non-performing loans 398.12% 698.60%
============ ===========
Total non-performing assets to total assets 0.26% 0.23%
============ ===========
</TABLE>
18
<PAGE> 19
Chester Bancorp, Inc., and Subsidiaries
Three Months Ended September 30,
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
2000
----------------------------------------------------------------
Average
Average Yield/
Balance Interest Cost
-------------------- ------------------ ---------------------
(Dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable, net $ 48,083 $ 1,014 8.44%
Investments, net (1) 40,119 640 6.38%
Mortgage-backed securities, net 17,573 264 6.01%
Interest-bearing deposits 3,194 40 5.01%
-------------------- ------------------ ---------------------
Total interest-earning assets 108,969 1,958 7.19%
------------------ ---------------------
Noninterest-earning assets 4,947
--------------------
Total assets $ 113,916
====================
Interest-bearing liabilities:
Deposits $ 92,263 1,031 4.47%
Securities under agreements.. 0 0 0.00%
Federal funds purchased 0 0 0.00%
Other borrowings (ESOP Ln) 0 0 0.00%
FHLB advances 0 0 0.00%
-------------------- ------------------ ---------------------
Total interest-bearing liabilities 92,263 1,031 4.47%
------------------ ---------------------
Noninterest-bearing liabilities 1,753
--------------------
Total liabilities 94,016
Retained earnings 19,900
--------------------
Total liabilities and retained
earnings $ 113,916
====================
Net interest income $ 927
==================
Interest rate spread 2.72%
=====================
Net interest margin 3.40%
=====================
Ratio of average interest-earning
assets to average interest-bearing liabilities 118.11%
=====================
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
1999
----------------------------------------------------------------
Average
Average Yield/
Balance Interest Cost
-------------------- ------------------ ---------------------
(Dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable, net $ 47,988 $ 988 8.24%
Investments, net (1) 45,103 669 5.93%
Mortgage-backed securities, net 25,215 370 5.87%
Interest-bearing deposits 5,647 63 4.46%
-------------------- ------------------ ---------------------
Total interest-earning assets 123,953 2,090 6.74%
------------------ ---------------------
Noninterest-earning assets 5,769
--------------------
Total assets $ 129,722
====================
Interest-bearing liabilities:
Deposits $ 96,112 1,009 4.20%
Securities under agreements.. 870 10 4.60%
Federal funds purchased 0 0 0.00%
Other borrowings (ESOP Ln) 0 0 0.00%
FHLB advances 10,000 123 4.92%
-------------------- ------------------ ---------------------
Total interest-bearing liabilities 106,982 1,142 4.27%
------------------ ---------------------
Noninterest-bearing liabilities 2,075
--------------------
Total liabilities 109,057
Retained earnings 20,665
--------------------
Total liabilities and retained
earnings $ 129,722
====================
Net interest income $ 948
==================
Interest rate spread 2.47%
=====================
Net interest margin 3.06%
=====================
Ratio of average interest-earning
assets to average interest-bearing liabilities 115.86%
=====================
</TABLE>
(1) Tax exempt state and municipal securities are presented on a tax
equivalent basis.
19
<PAGE> 20
Chester Bancorp, Inc. and Subsidiaries
Nine Months Ended September 30,
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
2000
-----------------------------------------------------------
Average
Average Yield/
Balance Interest Cost
------------------- ---------------- --------------------
(Dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable, net $ 48,183 $ 3,018 8.35%
Investments, net (1) 40,495 1,938 6.38%
Mortgage-backed securities, net 19,254 879 6.09%
Interest-bearing deposits 2,663 87 4.36%
------------------- ---------------- --------------------
Total interest-earning assets 110,595 5,922 7.14%
----------------
Noninterest-earning assets 5,171
-------------------
Total assets $ 115,766
-------------------
Interest-bearing liabilities:
Deposits $ 91,195 2,952 4.32%
Securities under agreements. . . 0 0 0.00%
Federal funds purchased 1,181 56 6.32%
Other borrowings (ESOP Ln) 174 12 9.20%
FHLB Advances 803 31 5.15%
------------------- ---------------- --------------------
Total interest-bearing liabilities 93,353 3,051 4.36%
----------------
Noninterest-bearing liabilities 1,815
-------------------
Total liabilities 95,168
Retained earnings 20,598
-------------------
Total liabilities and retained
earnings $ 115,766
===================
Net interest income $ 2,871
================
Interest rate spread 2.78%
====================
Net interest margin 3.46%
====================
Ratio of average interest-earning
assets to average interest-bearing liabilities 118.47%
====================
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
1999
-----------------------------------------------------------
Average
Average Yield/
Balance Interest Cost
------------------- ----------------- -------------------
(Dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable, net $ 47,207 $ 2,920 8.25%
Investments, net (1) 45,510 1,959 5.74%
Mortgage-backed securities, net 25,564 1,116 5.82%
Interest-bearing deposits 10,303 341 4.41%
------------------- ----------------- -------------------
Total interest-earning assets 128,584 6,336 6.57%
-----------------
Noninterest-earning assets 5,374
-------------------
Total assets $ 133,958
-------------------
Interest-bearing liabilities:
Deposits $ 97,691 3,069 4.19%
Securities under agreements. . . 3,460 113 4.35%
Federal funds purchased 0 0 0.00%
Other borrowings (ESOP Ln) 0 0 0.00%
FHLB Advances 10,000 363 4.84%
------------------- ----------------- ------------------
Total interest-bearing liabilities 111,151 3,545 4.25%
-----------------
Noninterest-bearing liabilities 2,093
-------------------
Total liabilities 113,244
Retained earnings 20,714
-------------------
Total liabilities and retained
earnings $ 133,958
===================
Net interest income $ 2,791
=================
Interest rate spread 2.32%
==================
Net interest margin 2.89%
==================
Ratio of average interest-earning
assets to average interest-bearing liabilities 115.68%
==================
</TABLE>
(1) Tax exempt state and municipal securities are presented on a tax
equivalent basis.
20
<PAGE> 21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
There has been no material change to the market risk position of the
Company from the end of the last fiscal year on December 31, 1999.
21
<PAGE> 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Neither the Company nor the Banks are a party to any material legal
proceedings at this time. From time to time, the Banks are involved in
various claims and legal actions arising in the ordinary course of
business.
Item 2. Changes in Securities.
None
Item 3. Defaults upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits
See Exhibit Index
B. Reports on Form 8-K
On August 22, 2000, Form 8-K was filed to report a change in auditors.
22
<PAGE> 23
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned, thereunto duly authorized.
Chester Bancorp, Inc.
By: /s/ Michael W. Welge
--------------------------------------
Michael W. Welge
Chairman of the Board, President and Chief
Financial Officer
(Duly Authorized Officer)
Dated: November 9, 2000
23
<PAGE> 24
EXHIBIT INDEX
Exhibit No. Description
27.1 Financial Data Schedule
24
