<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 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 1,317,746 on August 4, 2000.
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<PAGE> 2
FORM 10-Q
Index
<TABLE>
<CAPTION>
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C> <C>
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........................... 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................................... 20
Item 2. Changes in Securities................................................................. 20
Item 3. Defaults upon Senior Securities....................................................... 20
Item 4. Submission of Matters to a Vote
of Securities Holders................................................................ 20
Item 5. Other Information.................................................................... 20
Item 6. Exhibits and Reports on Form 8-K..................................................... 20
Signature........................................................................................ 21
Exhibit Index.................................................................................... 22
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
3
<PAGE> 4
CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2000 and December 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
Assets 2000 1999
------ ---- ----
<S> <C> <C>
Cash $ 882,964 $ 1,245,259
Interest-bearing deposits 2,379,358 4,592,041
------------- -------------
Total cash and cash equivalents 3,262,322 5,837,300
Investment securities:
Available for sale, at fair value (cost of $4,781,362 and $5,003,271 at 4,747,612 4,961,045
June 30, 2000 and December 31, 1999, respectively)
Held to maturity, at cost (fair value of $34,152,362 and $34,977,915 at 35,345,581 36,193,546
June 30, 2000 and December 31, 1999, respectively)
Mortgage-backed securities:
Available for sale, at fair value (cost of $5,909,580 and $7,175,687 at 5,691,684 7,009,588
June 30, 2000 and December 31, 1999, respectively)
Held to maturity, at cost (fair value of $12,368,177 and $14,413,424 at 12,628,591 14,724,664
June 30, 2000 and December 31, 1999, respectively)
Loans receivable, net 48,055,986 48,277,319
Accrued interest receivable 1,072,455 1,151,180
Real estate acquired by foreclosure, net 184,149 186,288
Office property and equipment, net 1,475,109 1,524,196
Deferred tax asset, net 327,197 198,513
Other assets 335,518 328,183
------------- -------------
$ 113,126,204 $ 120,391,822
============= =============
Liabilities and Stockholders' Equity
------------------------------------
Savings deposits $ 92,111,859 $ 90,752,941
Borrowed money -- 7,807,000
Accrued interest payable 94,063 139,069
Advance payments by borrowers for taxes and insurance 698,335 376,431
Income taxes payable -- 326,001
Accrued expenses and other liabilities 106,738 117,198
------------- -------------
Total liabilities 93,010,995 99,518,640
------------- -------------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 3,000,000 shares authorized, 2,182,125 shares
issued at June 30, 2000 and December 31, 1999 21,821 21,821
Additional paid-in capital 21,374,391 21,521,985
Retained earnings, substantially restricted 14,960,480 14,681,473
Accumulated other comprehensive loss (156,021) (129,165)
Unearned ESOP shares (1,510,560) (1,538,040)
Unearned restricted stock awards (310,383) (393,480)
Treasury stock, at cost: 851,107 and 792,572 shares at
June 30, 2000 and December 31, 1999, respectively (14,264,519) (13,291,412)
------------- -------------
Total stockholders' equity 20,115,209 20,873,182
------------- -------------
$ 113,126,204 $ 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 June 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
------------------
June 30,
--------
2000 1999
---- ----
Interest income:
<S> <C> <C>
Loans receivable $ 999,955 $ 956,645
Mortgage-backed securities 293,826 395,799
Investments 615,131 633,714
Interest-bearing deposits, federal funds sold and bankers' acceptances 17,421 91,871
---------- ----------
Total interest income 1,926,333 2,078,029
---------- ----------
Interest expense:
Savings deposits 960,919 1,012,662
Borrowed money 37,723 163,588
---------- ----------
Total interest expense 998,642 1,176,250
---------- ----------
Net interest income 927,691 901,779
Provision for loan losses -- --
---------- ----------
Net interest income after provision for loan losses 927,691 901,779
---------- ----------
Noninterest income:
Late charges and other fees 30,083 35,610
Other 13,612 6,301
---------- ----------
Total noninterest income 43,695 41,911
---------- ----------
Noninterest expense:
Compensation and employee benefits 325,422 343,262
Occupancy 65,601 70,358
Data processing 36,793 39,329
Advertising 10,974 17,883
Federal deposit insurance premiums 4,702 14,555
Other 138,834 173,230
---------- ----------
Total noninterest expense 582,326 658,617
---------- ----------
Income before income tax expense 389,060 285,073
Income tax expense 105,168 89,050
---------- ----------
Net income $ 283,892 $ 196,023
========== ==========
Earnings per common share - basic $ .24 $ .15
========== ==========
Earnings per common share - diluted $ .23 $ .15
========== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE> 6
CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Six Months Ended June 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
----------------
June 30,
--------
2000 1999
---- ----
Interest income:
<S> <C> <C>
Loans receivable $ 2,003,310 $ 1,931,360
Mortgage-backed securities 614,885 746,069
Investments 1,214,030 1,238,551
Interest-bearing deposits, federal funds sold and bankers' acceptances 46,949 278,315
----------- -----------
Total interest income 3,879,174 4,194,295
----------- -----------
Interest expense:
Savings deposits 1,920,688 2,060,866
Borrowed money 98,568 342,941
----------- -----------
Total interest expense 2,019,256 2,403,807
----------- -----------
Net interest income 1,859,918 1,790,488
Provision for loan losses -- --
----------- -----------
Net interest income after provision for loan losses 1,859,918 1,790,488
----------- -----------
Noninterest income:
Late charges and other fees 60,334 75,993
Loss on sale of investment securities, net (22,969) --
Gain on sale of mortgage-backed securities, net 1,139 --
Other 18,287 10,591
----------- -----------
Total noninterest income 56,791 86,584
----------- -----------
Noninterest expense:
Compensation and employee benefits 656,387 679,524
Occupancy 131,571 138,770
Data processing 79,766 76,554
Advertising 20,748 34,235
Federal deposit insurance premiums 10,111 29,102
Other 276,728 318,452
----------- -----------
Total noninterest expense 1,175,311 1,276,637
----------- -----------
Income before income tax expense 741,398 600,435
Income tax expense 205,184 186,711
----------- -----------
Net income $ 536,214 $ 413,724
=========== ===========
Earnings per common share - basic $ .44 $ .32
=========== ===========
Earnings per common share - diluted $ .43 $ .31
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE> 7
CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Six Months Ended June 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
Retained Accumulated
Additional earnings, other
Common stock paid-in substantially comprehensive
--------------------- capital restricted loss
Shares Amount ------- ---------- ----
<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 - - - 536,214 -
Purchase of treasury stock - - - - -
Issuance of treasury stock for restricted - - (166,110) (10,382) -
stock awards
Stock options exercised - - - (5,729) -
Amortization of restricted stock awards - - - - -
Amortization of ESOP awards - - 18,516 - -
Dividends on common stock
at $.20 per share - - - (241,096) -
Change in accumulated other
comprehensive loss - - - - (26,856)
------------ ------------ ------------ ------------ ------------
Balance, June 30, 2000 2,182,125 $ 21,821 $ 21,374,391 $ 14,960,480 $ (156,021)
============ ============ ============ ============ ============
</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 - - - - 536,214
Purchase of treasury stock - - 76,946 (1,246,971) (1,246,971)
Issuance of treasury stock for restricted - - (11,865) 176,492 -
stock awards
Stock options exercised - - (6,546) 97,372 91,643
Amortization of restricted stock awards - 83,097 - - 83,097
Amortization of ESOP awards 27,480 - - - 45,996
Dividends on common stock
at $.20 per share - - - - (241,096)
Change in accumulated other
comprehensive loss - - - - (26,856)
------------ ------------ ------------ ------------ ------------
Balance, June 30, 2000 $ (1,510,560) $ (310,383) 851,107 $(14,264,519) $ 20,115,209
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
7
<PAGE> 8
CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six months ended June 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
June 30, June 30,
2000 1999
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net income $ 536,214 $ 413,724
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization:
Office properties and equipment 74,906 71,576
Deferred fees, discounts, and premiums (1,160) (87,748)
Stock plans 220,736 129,299
Decrease in accrued interest receivable 78,724 (328,498)
Increase (decrease) in accrued interest payable (45,006) (62,997)
Increase (decrease) in income taxes, net (438,225) 38,090
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) -
Dividend on FHLB Stock (13,900) -
Net change in other assets and other liabilities (17,793) (40,932)
------------ ------------
Net cash provided by operating activities 416,326 142,514
------------ ------------
Cash flows from investing activities:
Principal repayments on:
Loans receivable 5,694,121 7,625,394
Mortgage-backed securities 2,814,268 6,129,930
Proceeds from the maturity of investment securities available for sale 500,000 5,735,000
Proceeds from the maturity of investment securities held to maturity 3,565,000 88,175,670
Proceeds from the sale of investment securities available for sale 1,202,031 147,187
Proceeds from the sale of mortgage-backed securities available for sale 538,389 -
Cash invested in:
Loans receivable (5,482,631) (6,707,454)
Mortgage-backed securities held to maturity - (10,882,216)
Investment securities held to maturity (2,700,000) (90,343,634)
Investment securities available for sale (1,489,262) --
Proceeds from sale of real estate acquired by foreclosure 6,844 132,398
Purchase of office properties and equipment (25,819) (59,166)
------------ ------------
Net cash provided by investing activities 4,622,941 (46,891)
------------ ------------
Cash flows from financing activities:
Increase (decrease) in savings deposits 1,358,918 (3,805,022)
Increase (decrease) in securities sold under agreements to repurchase - (6,880,389)
Repayments of FHLB advances (5,000,000) -
Repayments of federal funds purchased (2,807,000) -
Increase in advance payments by borrowers for taxes and insurance 321,904 357,271
Purchase of treasury stock (1,246,971) (1,147,525)
Dividends paid (241,096) (193,437)
------------ ------------
Net cash provided by (used in) financing activities (7,614,245) (11,669,102)
------------ ------------
Net increase (decrease) in cash and cash equivalents (2,574,978) (11,573,479)
Cash and cash equivalents, beginning of period 5,837,300 16,796,839
------------ ------------
Cash and cash equivalents, end of period $ 3,262,322 $ 5,223,360
============ ============
Supplemental information:
Interest paid $ 2,064,262 $ 2,466,804
Income taxes paid $ 656,024 $ 148,621
============ ============
Noncash investing and financing activities:
Loans transferred to real estate acquired by foreclosure $ 45,776 $ 388,596
Interest credited to savings deposits $ 1,309,492 $ 1,314.472
============ ============
</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 Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 283,892 $ 196,023 $ 536,214 $ 413,724
Other comprehensive income, net of tax
Unrealized holding gain (loss) on
securities available for sale $ (4,971) $ (45,771) $ (13,321) $(162,416)
Less adjustment for realized gains
included in net income $ - $ - $ (13,535) $ -
--------- --------- --------- ---------
Total other comprehensive income $ (4,971) $ (45,771) $ (26,856) $(162,416)
--------- --------- --------- ---------
Comprehensive income $ 278,921 $ 150,252 $ 509,358 $(251,308)
========= ========= ========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
9
<PAGE> 10
CHESTER BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Six Months Ended June 30, 2000 and 1999
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements were
prepared in accordance with instructions for Form 10-Q and, therefore, do not
include all information and notes necessary for a complete presentation of
financial position, results of operations, changes in stockholders' equity, and
cash flows in conformity with generally accepted accounting principles. However,
all adjustments (consisting only of normal recurring accruals) which, in the
opinion of management are necessary for a fair presentation of the unaudited
consolidated financial statements, have been included in the consolidated
financial statements as of June 30, 2000, and for the three and six months ended
June 30, 2000 and 1999.
Operating results for the six months ended June 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 excludes dilution and is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the Company.
The computation of EPS for the three and six months ended June 30, 2000
and 1999 follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic EPS:
Net income $ 283,892 $ 196,023 $ 536,214 $ 413,724
========== ========== ========== ==========
Average common shares outstanding 1,192,742 1,284,515 1,219,687 1,289,193
========== ========== ========== ==========
Basic EPS $ 0.24 $ 0.15 $ 0.44 $ 0.32
========== ========== ========== ==========
Diluted EPS:
Net income $ 283,892 $ 196,023 $ 536,214 $ 413,724
========== ========== ========== ==========
Average common shares outstanding 1,192,742 1,284,515 1,219,687 1,289,193
Dilutive potential due to stock options 33,297 32,375 33,189 32,679
---------- ---------- ---------- ----------
Average number of common shares
and dilutive potential common
shares outstanding 1,226,039 1,316,890 1,252,876 1,321,872
========== ========== ========== ==========
Diluted EPS $ 0.23 $ .15 $ 0.43 $ 0.31
========== ========== ========== ==========
</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 $45,996 and $46,202 for the six months ended
June 30, 2000 and 1999, respectively.
The ESOP shares as of June 30, 2000 are as follows:
<TABLE>
<S> <C>
Allocated shares 20,766
Committed to be released shares 2,748
Unreleased shares 151,056
------------
Total ESOP shares 174,570
============
Fair value of unreleased shares $2,511,306
============
</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 $83,097 for both the six months ended June 30, 2000 and
1999.
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 $7.3 million, or
6.0%, to $113.1 million at June 30, 2000 from $120.4 million at December 31,
1999. The decrease in the Company's asset size was attributable to a decrease in
interest bearing deposits and investment securities which was attributable to
the $7.8 million decrease in borrowed money during the six months ended June 30,
2000.
Loans receivable deceased $221,000, or .5%, to $48.1 million at
June 30, 2000 from $48.3 million at December 31, 1999. The decrease in loans
receivable resulted from a decrease in loan origination volume of $1.2 million,
positively offset by a reduction in principal repayments on loans receivable of
$1.8 million. The reduction in repayments is primarily due to the increasing
interest rate environment that has been experienced during the last half of 1999
and first half of 2000.
Mortgage-backed securities at June 30, 2000 were $18.3 million
compared to $21.7 million at December 31, 1999. Investment securities decreased
$1.1 million, or 2.6%, to $40.1 million at June 30, 2000, from $41.2 million at
December 31, 1999. During the six months ended June 30, 2000, management used
12
<PAGE> 13
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, decreased $2.6 million, or 44.1%, to $3.3 million at June 30,
2000 from $5.8 million at December 31, 1999. During the six months ended June
30, 2000, management used funds to purchase additional shares of treasury stock
and fund the decline in borrowed money.
LIABILITIES. Savings deposits increased $1.4 million, or 1.5%
during the six months ended June 30, 2000. At June 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 FHLB advances and a
$2.8 million decrease in federal funds purchased. There were no securities sold
under agreements to repurchase at June 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. Over the last several years, the
Company has maintained a deposit relationship with Gilster-Mary Lee, which at
times has had as much as $25 million in funds on deposit, typically with short
terms. At June 30, 2000 and December 31, 1999, the balance of funds on deposit
with the Company was $17.8 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 six months
ended June 30, 2000 was $283,892 and $536,214, respectively, compared to
$196,023 and $413,724 for the three and six months ended June 30, 1999,
respectively. The $88,000 and $122,000 increase in net income for the three and
six months ended June 30, 2000, respectively, was positively impacted by an
increase in net interest income, combined with a decline in noninterest expense.
NET INTEREST INCOME. Net interest income totaled $928,000 for the
three months ended June 30, 2000 compared to $902,000 for the three months ended
June 30, 1999. The $26,000, or 2.9%, 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 118.4% for the three months ended June 30, 2000
compared to 116.0% for the three months ended June 30, 1999. The increase was
positively impacted by a 69 basis point increase in the average yield on
interest-earning assets for the three months ended June 30, 2000.
Net interest income totaled $1.9 million for the six months ended
June 30, 2000 compared to $1.8 million for the six months ended June 30, 1999.
The $69,000, or 3.9%, 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 118.6% for the six months ended June 30, 2000
compared to 115.8% for the six months ended June 30, 1999.
INTEREST INCOME. Interest income on loans receivable increased
$43,000, or 4.5%, for the three months ended June 30, 2000. The increase in
interest income on loans receivable was the result of a $1.7 million, or 3.7%,
increase in the average balance of loans receivable. The average yield on loans
receivable was 8.34% and 8.27% for the three months ended June 30, 2000 and June
30, 1999, respectively.
13
<PAGE> 14
Interest income on loans receivable increased $72,000, or 3.7%,
for the six months ended June 30, 2000. The increase in interest income on loans
receivable was the result of a $1.4 million, or 3.0%, increase in the average
balance of loans receivable for the six months ended June 30, 2000. The average
yield on loans receivable was 8.31% and 8.25% for the six months ended June 30,
2000 and June 30, 1999, respectively.
Interest income on mortgage-backed securities decreased $102,000
and $131,000 for the three and six months ended June 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 six months ended June 30, 2000,
the average balance of mortgage-backed securities decreased $8.3 million, or
30.3% and $5.6 million, or 21.9%, respectively.
Interest earned on investment securities was $615,000 for the
three months ended June 30, 2000, compared to $634,000 for the three months
ended June 30, 1999. The $19,000, or 2.9% decrease in interest income on
investment securities was the result of a decrease in the average balance of
investment securities of $6.6 million, or 14.2%, positively offset by an
increase in the average yield on investment securities of 6.54% for the three
months ended June 30, 2000 from 5.65% for the three months ended June 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 $1.2 million for both
the six month period ended June 30, 2000, and the six month period ended June
30, 1999. Interest income on investment securities remained constant due to a 78
basis point increase in the average yield on investment securities, offset by a
$5.3 million, or 11.6%, decrease in the average balance of investment securities
for the six months ended June 30, 2000.
Interest income on interest-bearing deposits decreased $74,000, or
81.0%, and decreased $231,000, or 83.1%, during the three and six months ended
June 30, 2000, respectively. The decrease in both instances resulted from a
decrease in the average balance of interest-bearing deposits, coupled with a
decline in the average yield on interest-bearing deposits for the three and six
months ended June 30, 2000. For the three and six months ended June 30, 2000,
the average balance of interest-bearing deposits decreased $6.7 million, or
79.0%, and $10.3 million, or 81.1%, respectively. The decline in the average
yield on interest-bearing deposits decreased 29 basis points and 48 basis points
for the three and six months ended June 30, 2000, 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
$961,000 and $1.9 million for the three and six months ended June 30, 2000
compared to $1.0 million and $2.1 million for the three and six months ended
June 30, 1999. The average balance of deposits decreased $7.3 million, or 7.5%,
and $7.8 million, or 8.0%, for the three and six months ended June 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.
Interest expense on borrowed money decreased $126,000 and $244,000
for the three and six months ended June 30, 2000.
Interest expense on securities sold under agreements to repurchase
was $43,000 and $104,000 for the three and six months ended June 30, 1999,
whereas there was no interest expense on securities sold under agreements to
repurchase during the three and six month period ended June 30, 2000.
Interest expense on FHLB advances was $31,000 for the six months
ended June 30, 2000, compared to $120,000 and $239,000 for the three and six
months ended June 30, 1999. The decrease in interest expense on FHLB advances
was the result of a $10.0, or 100.0%, and $8.8 million, or 87.9%, decrease in
the average balance of FHLB advances for the three and six months ended June 30,
2000, respectively.
Interest expense on federal funds purchased was $26,000 and
$56,000 for the three and six
14
<PAGE> 15
months ended June 30, 2000, whereas there was no interest expense on federal
funds purchased during the three and six months ended June 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 June 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 $608,000, or 1.3%, of
loans outstanding at June 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 six months ended June 30, 2000 was $3,000, 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
June 30, 2000.
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 $44,000 and $57,000 for
the three and six months ended June 30, 2000, respectively, compared to $42,000
and $87,000 for the three and six months ended June 30, 1999. The decrease in
noninterest income for the three and six months ended June 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, combined with a $6,000 and
$16,000 decrease in other fee income, respectively.
NONINTEREST EXPENSE. Noninterest expense decreased $76,000, or
11.6%, for the three months ended June 30, 2000. The decrease in noninterest
expense for the three months ended June 30, 2000 resulted from a $18,000
decrease in compensation expense, a $7,000 decrease in advertising expense, a
$10,000 decrease in federal insurance premiums and a $34,000 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 $101,000, or 7.9%, for the six
months ended June 30, 2000. The decrease in noninterest expense for the six
months ended June 30, 2000 resulted from a $23,000 decrease
15
<PAGE> 16
in compensation expense, a $13,000 decrease in advertising expense, a $19,000
decrease in federal insurance premiums and a $42,000 decrease in other expense,
partially offset by a $3,000 increase in data processing expense. These
fluctuations are the result of normal operating procedures.
INCOME TAX EXPENSE. Income tax expense for the three and six
months ended June 30, 2000 was $105,000 and $89,000, compared to income tax
expense of $205,000 and $187,000 for the three months ended June 30, 1999. The
Company's effective tax rate for the three and six months ended June 30, 2000
was 27.0% and 31.2% respectively, compared to 27.7% and 31.1% for the three and
six months ended June 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 June 30,
2000, cash and cash equivalents totaled $3.3 million.
The primary investing activities of the Company include
origination of loans and purchase of mortgage-backed securities and investment
securities. During the six months ended June 30, 2000, purchases of investment
securities totaled $4.2 million while loan originations totaled $5.5 million.
These investments were funded primarily from loan and mortgage-backed security
repayments of $8.5 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 June 30, 2000, the Company had no borrowed money.
16
<PAGE> 17
At June 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 June 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 $20,832 44.2% 3,767 8.00%
Chester National Bank $16,431 40.3% 3,262 8.00%
Chester National Bank of Missouri 3,395 58.9% 461 8.00%
Tier 1 capital
(to risk-weighted assets):
Company $20,271 43.0% 1,884 4.00%
Chester National Bank $15,943 39.1% 1,631 4.00%
Chester National Bank of Missouri 3,322 57.6% 231 4.00%
Tier 1 capital
(to average assets):
Company $20,271 17.7% 3,431 3.00%
Chester National Bank $15,943 15.5% 3,077 3.00%
Chester National Bank of Missouri 3,322 31.3% 318 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 June 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 $ 26 $ 86
Commercial -- --
Consumer 5 1
------- --------
Total 31 87
------- --------
Accruing loans which are contractually past due 90 days or
more:
Residential real estate -- --
Commercial -- --
Consumer -- --
------- --------
Total -- --
------- --------
Total non-performing loans 31 87
Real estate acquired by foreclosure, net 184 186
------- --------
Total non-performing assets $ 215 $ 273
======= ========
Total non-performing loans to net loans 0.07% 0.18%
======= ========
Total allowance for loan losses to
non-performing loans 1927.15% 698.60%
======= ========
Total non-performing assets to total assets 0.19% 0.23%
======= ========
</TABLE>
18
<PAGE> 19
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.
19
<PAGE> 20
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.
On March 10, 2000, the Company solicited proxies for the annual meeting
of stockholders of the Company held on April 7, 2000. The meeting
involved the election of three directors and the adoption of the 2000
Stock Option Plan. The directors up for election were elected by the
vote of 1,067,993 shares for John R. Beck, M.D., 1,067,993 for Thomas
E. Welch, Jr. and 1,067,868 shares for James C. McDonald out of
1,071,193 shares present at the meeting, either in person or by proxy.
The 2000 Stock Option Plan was approved by the vote of 1,053,493 shares
out of 1,064,593 shares present at the meeting, either in person or by
proxy.
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits
See Exhibit Index
B. Reports on Form 8-K
None
20
<PAGE> 21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned, thereunto duly authorized.
Chester Bancorp, Inc.
By: /s/ Michael W. Welge
-------------------------------------------
Michael W. Welge
Chairman of the Board, President and Chief
Financial Officer
(Duly Authorized Officer)
Dated: August 9, 2000
21
<PAGE> 22
EXHIBIT INDEX
Exhibit No. Description
----------- -------------------------------------
27.1 Financial Data Schedule
22
