10-Q 1 c62134e10-q.txt FORM 10-Q 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 March 31, 2001 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 1,279,684 on May 1, 2001. ================================================================================ 2 FORM 10-Q Index

3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements 3 4 CHESTER BANCORP, INC. AND SUBSIDIARIES Consolidated Balance Sheets March 31, 2001 and December 31, 2000 (Unaudited)

See accompanying notes to unaudited consolidated financial statements 4 5 CHESTER BANCORP, INC. AND SUBSIDIARIES Consolidated Statements of Income Three Months Ended March 31, 2001 and 2000 (Unaudited)

See accompanying notes to unaudited consolidated financial statements. 5 6 CHESTER BANCORP, INC. AND SUBSIDIARIES Consolidated Statement of Stockholders' Equity Three Months Ended March 31, 2001 (Unaudited)

See accompanying notes to unaudited consolidated financial statements. 6 7 CHESTER BANCORP, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Three months ended March 31, 2001 and 2000 (Unaudited)

See accompanying notes to unaudited consolidated financial statements. 7 8 CHESTER BANCORP, INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income (Unaudited)

See accompanying notes to unaudited consolidated financial statements. 8 9 CHESTER BANCORP, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements Three Months Ended March 31, 2001 and 2000 (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 March 31, 2001 and for the three months ended March 31, 2001. Operating results for the three months ended March 31, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. 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 months ended March 31, 2001 and 2000 follows:

9 10 (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 $23,007 and $22,998 for the three months ended March 31, 2001 and 2000, respectively. The ESOP shares as of March 31, 2001 are as follows: Allocated shares 26,262 Committed to be released shares 1,374 Unreleased shares 146,934 ------------ Total ESOP shares 174,570 ============ Fair value of unreleased shares $ 2,442,778 ============

(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 $41,549 for both the three months ended March 31, 2001 and 2000. (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. 10 11 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 increased by $6.9 million, or 5.8%, to $124.4 million at March 31, 2001 from $117.6 million at December 31, 2000. The increase in the Company's asset size was attributable to an increase in federal funds sold which was primarily funded by the $5.0 million of FHLB advances received during the quarter ended March 31, 2001. Loans receivable deceased $1.1 million, or 2.3%, to $46.2 million at March 31, 2001 from $47.3 million at December 31, 2000. The decrease in loans receivable resulted from a combined impact of decreased loan origination volume of $758,000, and an increase in principal repayments on loans receivable. Mortgage-backed securities were $15.6 at March 31, 2001 and December 31, 2000. Investment securities decreased $7.3 million, or 18.9%, to $31.5 million at March 31, 2001, from $38.8 million at December 31, 2000. The proceeds of maturing investment securities, calls and sales, the principal repayment on mortgage-backed securities were invested into short-term interest-bearing deposits. 11 12 Cash, interest-bearing deposits and federal funds sold, on a combined basis, increased $16.7 million, or 143.1%, to $28.4 million at March 31, 2001 from $11.7 million at December 31, 2000. The proceeds of maturing investment securities, calls and sales, the principal repayment on mortgage-backed securities and the increased funds in savings deposit were invested into short-term, interest-bearing deposits. LIABILITIES. Deposits increased $1.7 million, or 1.8% during the three months ended March 31, 2001. Borrowed money increased $5.0 million as a result of new borrowings from the FHLB during the three months ended March 31, 2001. 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 March 31, 2001 and December 31, 2000, the balance of funds on deposit with the Company was $22.4 million, and $24.1 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 loan losses, 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 months ended March 31, 2001 was $247,000 compared to $252,000 for the three months ended March 31, 2000. The $6,000 decrease in net income for the three months ended March 31, 2001 was the result of a decline in net interest income, positively offset by an increase in noninterest income combined with a decline in noninterest expense. NET INTEREST INCOME. Net interest income totaled $862,000 for the three months ended March 31, 2001 compared to $932,000 for the three months ended March 31, 2000. The $70,000, or 7.5%, decrease in net interest income was the result of an increase in the average yield on interest-bearing liabilities to 4.58% for the three months ended March 31, 2001 from 4.27% for the three months ended March 31, 2000. The interest rate spread for the three months ended March 31, 2001 decreased to 2.43% from 2.77% for the comparable 2000 period. INTEREST INCOME. Interest income on loans receivable decreased $15,000, or 1.5%, for the three months ended March 31, 2001. The decrease in interest income on loans receivable was the result of a $1.4 million, or 2.9%, decrease in the average balance of loans receivable, positively offset by a 12 basis point increase on the average yield on loans receivable for the three months ended March 31, 2001. Interest income on mortgage-backed securities decreased $74,000 for the three months ended March 31, 2001. The decrease 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 months ended March 31, 2001, the average balance of mortgage-backed securities decreased $5.1 million, or 24.3%. Management invested the funds received from the repayments of mortgage-backed securities into short-term, interest-bearing deposits. Interest earned on investment securities was $574,000 for the three months ended March 31, 2001, compared to $599,000 for the three months ended March 31, 2000. The $25,000, or 4.2% decrease in interest income on investment securities was the result of a decrease in the average balance of investment securities of $3.3 million, or 8.2%, positively offset by an increase in the average yield on investment securities 12 13 to 6.55% for the three months ended March 31, 2001 from 6.27% for the three months ended March 31, 2000. The decrease in the average balance on investment securities was due to managements decision to invest funds from maturities, call and sales into short-term, interest-bearing deposits while longer term investment opportunities were evaluated. Interest income on interest-bearing deposits increased $182,000, or 618.0%, during the three months ended March 31, 2001. The increase primarily resulted from an increase in the average balance of interest-bearing deposits of $14.2 million, or 483.3%, combined with a 86 basis point increase in the average yield on interest-bearing deposits for the three months ended March 31, 2001. The increase in the average balance on interest-bearing deposits resulted primarily from management's decision to invest excess funds into short-term, interest-bearing deposits while longer term investment opportunities were evaluated. INTEREST EXPENSE. Interest expense on savings deposits increased $150,000, or 15.6%, to $1.1 million for the three months ended March 31, 2001 from $960,000 for the three months ended March 31, 2000. The average balance of deposits increased $5.7 million, or 6.3%, combined with an increase in the average cost of deposits to 4.58% for the three months ended March 31, 2001 from 4.20% for the three months ended March 31, 2000. Interest expense on borrowed money decreased $11,000 for the three months ended March 31, 2001. The decrease in interest expense on borrowed money was attributable to the decline the average balance in borrowed money for the comparable three month periods ending March 31, 2001 and 2000, respectively. Interest expense on FHLB advances was $50,000 for the three months ended March 31, 2001, compared to $31,000 for the three months ended March 31, 2000. The increase in interest expense on FHLB advances was the result of a $1.7, or 73.0%, increase in the average balance of FHLB advances for the three months ended March 31, 2001. There was no interest expense on federal funds purchased during the three months ended March 31, 2001, whereas interest expense on federal funds purchased was $30,000 for the three months ended March 31, 2000. The decrease in interest expense on federal funds purchased was the result of a $1.9 million, or 100.0%, decrease in the average balance of federal funds purchased for the three months ended March 31, 2001. 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 March 31, 2001 and 2000, 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 $598,000, or 1.3%, of loans outstanding at March 31, 2001 and December 31, 2000. The Company's level of net loans charged-off during the three months ended March 31, 2001 was zero. 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 March 31, 2001. At March 31, 2001, loans 90 days or more delinquent totaled $264,000, or .57% of net loans receivable, compared to $130,000, or .27% of net loans receivable at December 31, 2000, and $84,000, or .17% of net loans receivable at March 31, 2000. The breakdown of general loss allowances and specific loss allowances is made for regulatory 13 14 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 $61,000 for the three months ended March 31, 2001 compared to $13,000 for the three months ended March 31, 2000. The increase in noninterest income for the three months ended March 31, 2001 was mainly attributable to a $11,000 net gain realized on the sale of available for sale investment securities and a $11,000 increase in fee income. NONINTEREST EXPENSE. Noninterest expense decreased $16,000, or 2.7%, for the three months ended March 31, 2001. The decrease in noninterest expense for the three months ended March 31, 2001 resulted from a $12,000 decrease in compensation expense and a $10,000 decrease in other expense, partially offset by an $8,000 increase in occupancy expense. Each of these fluctuations are the result of normal operating procedures. INCOME TAX EXPENSE. Income tax expense for the three months ended March 31, 2001was $99,000 compared to $100,000 for the three months ended March 31, 2000. The Company's effective tax rate for the three months ended March 31, 2001 was 28.7% compared to 28.4% for the three months ended March 31, 2000. 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 2001. 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 March 31, 2001, cash and cash equivalents totaled $28.4 million. The primary investing activities of the Company include origination of loans and purchase of mortgage-backed securities and investment securities. During the three months ended March 31, 2001, purchases of investment securities and mortgaged-backed securities totaled $12.2 million while loan originations totaled $2.2 million. These investments were funded primarily from loan and mortgage-backed security repayments of $4.5 million and investment securities sales, calls and maturities of $18.6 million. 14 15 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 March 31, 2001, the Company had $5.0 million in outstanding advances from the FHLB. March 31, 2001, 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 March 31, 2001 are as follows:

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. 15 16 NONPERFORMING ASSETS The following table sets forth information with respect to the Company's nonperforming assets at the dates indicated.

16 17 Chester Bancorp, Inc., and Subsidiaries Three Months Ended March 31,

(1) Tax exempt state and municipal securities are presented on a tax equivalent basis. 17 18 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, 2000. 18 19 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 9, 2001, the Company solicited proxies for the annual meeting of stockholders of the Company held on April 6, 2001. The meeting involved the election of two directors. The directors up for election were elected by the vote of 1,125,593 shares for Allen Verseman and 1,125,797 shares for Carl Welge out of 1,129,522 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 None B. Reports on Form 8-K None 19 20 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: May 8, 2001 20

CHESTER BANCORP INC 10-Q