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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the Fiscal Year Ended December 31, 1998
OR
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from to
------------- ------------------
Commission File Number: 000-21167
CHESTER BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 37-1359570
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1112 State Street, Chester, Illinois 62233
(Address of Principal Executive Offices)
(618) 826-5038
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days. YES [X] NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, computed by reference to the last sale price February 1,
1999, as reported by the Nasdaq National Market, was approximately $14,382,505.
As of February 1, 1999 there were 2,182,125 shares issued, of which
1,472,988 shares were outstanding, of the Registrant's Common Stock.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Stockholders for the year
ended December 31, 1998, are incorporated by reference in Part I and Part II.
Portions of the registrant's proxy statement for its April 2, 1999,
annual meeting of stockholders (the "1999 Proxy Statement") are incorporated by
reference in Part III.
PART I
ITEM 1. Business
This annual report on Form 10-K contains forward-looking statements regarding
the Company, its business, prospects and results of operations that involve
risks and uncertainties. The Company's actual results could differ materially
from the results that may be anticipated by such forward-looking statements and
discussed elsewhere herein. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed herein as well as
those discussed under the captions "Risk Factors" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" as well as those
discussed elsewhere throughout this annual report and on Form 10-K. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date of this report. The Company undertakes no obligation
to revise any forward-looking statements in order to reflect events or
circumstances that may subsequently arise. Readers are urged to carefully review
and consider the various disclosures made by the Company in this report and in
the Company's other reports filed with the Securities and Exchange Commission
that attempt to advise interested parties of the risks and factors that my
affect the Company's business, prospects and results of operations.
Chester Bancorp, Inc.
Chester Bancorp, Inc. (the "Company") is a Delaware corporation that
was organized in March 1996. The only significant assets of the Company are the
outstanding capital stock of Chester National Bank ("Chester National Bank") and
Chester National Bank of Missouri ("Chester National Bank of Missouri")
(collectively the "Banks"). The Company is regulated as a bank holding company
by the Federal Reserve System ("Federal Reserve").
The Company employs executive officers and a support staff if and as
the need arises. Such personnel are provided by the Banks and are not paid
separate remuneration for such services. The Company reimburses the Banks for
the use of their personnel. At December 31, 1998, the Company had total
consolidated assets of $142.8 million, total consolidated deposits of $99.4
million, and consolidated stockholders' equity of $21.7 million. The Company's
principal office is located at 1112 State Street, Chester, Illinois 62233 and
its telephone number is (618) 826-5038.
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Chester National Bank and Chester National Bank of Missouri
Chester National Bank and Chester National Bank of Missouri are
national banks headquartered in Chester, Illinois and Perryville, Missouri,
respectively. The predecessor entity to the Banks was originally chartered in
1919 as an Illinois-chartered mutual savings and loan association under the name
"Chester Building and Loan Association." In 1989, Chester Building and Loan
Association acquired Heritage Federal Savings and Loan Association ("Heritage
Federal") which at the time of acquisition had assets of approximately $50
million and offices in Sparta, Red Bud, and Pinckneyville, Illinois. In 1990,
Chester Building and Loan Association converted to a federal charter and adopted
the name "Chester Savings Bank, FSB." In 1996, Chester Savings Bank, FSB
converted from mutual to stock ownership and converted from a federal savings
bank into two national banks, Chester National Bank and Chester National Bank of
Missouri.
Chester National Bank conducts its business from its main office and
three full-service branches located in Pinckneyville, Sparta, and Red Bud,
Illinois. Chester National Bank's principal executive office is located at 1112
State Street, Chester, Illinois, and its telephone number at that address is
(618) 826-5038. Chester National Bank of Missouri conducts its business from its
main office in Perryville and one Loan Production Office in Cape Girardeau,
Missouri. Chester National Bank of Missouri's principal executive office is
located at 1010 N. Main, Perryville, Missouri 63775, and its telephone number at
that address is (573)-547-7611. The Banks' deposits are insured by the Federal
Deposit Insurance Corporation ("FDIC") and the Banks are regulated by the Office
of the Comptroller of the Currency ("OCC").
The Banks primarily engage in the business of attracting retail
deposits from the general public in the Banks' respective market areas and using
such funds together with borrowings and funds from other sources to primarily
originate mortgage loans secured by one- to four-family residential real estate.
The Banks also originate consumer loans, commercial real estate loans, land
loans, and multi-family loans. At December 31, 1998, the Banks' gross loan
portfolio totaled $48.7 million, of which 75.6% were one- to four-family
residential mortgage loans, 7.1% were consumer loans, 12.4% were commercial real
estate and multi-family loans, and 3.9% were commercial loans. In addition, the
Banks have maintained a significant portion of their assets in marketable
securities. The Banks' investment portfolios have been weighted toward United
States Treasury and agency securities. The portfolios also have included a
significant amount of tax exempt state and municipal securities. In addition,
the Banks have invested in mortgage-backed securities to supplement their
lending operations. Investment and mortgage-backed securities totaled $52.6
million and $21.9 million, respectively, at December 31, 1998.
Market Area/Local Economy
The Banks offer a range of retail banking services to residents of
their market areas. The Banks' market areas include Randolph, Jackson,
Williamson and Perry counties in Illinois as well as Perry and Cape Girardeau
counties in Missouri.
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The local market area is primarily rural and covers a fairly large
geographic area in southwestern Illinois and southeastern Missouri. The closest
major metropolitan area is the St. Louis area, approximately 60 miles to the
north. The largest town served is Carbondale, which has a population of
approximately 27,000, while the smallest town served, Red Bud, has a population
of approximately 3,000. Perryville, Missouri has a population of approximately
7,000.
The economy in southwestern Illinois is historically based in coal
mining and agriculture, although both industries have declined in recent
decades. The decline of mining employment has had a significant adverse impact
on the economy of the market area, particularly in Randolph and Perry counties,
Illinois. Loan demand in these counties has been limited as unemployment is high
and the population has been declining. The Perryville market is rural and small,
and economic stability is supported by its largest employer, Gilster-Mary Lee.
The economic environment in Perryville has generally been more favorable than
Randolph and Perry Counties, Illinois.
Lending Activities
GENERAL. The principal lending activity of the Banks is the origination
of conventional mortgage loans for the purpose of purchasing, constructing or
refinancing owner-occupied, one- to four-family residential property. To a
significantly lesser extent, the Banks also originate multi-family, commercial
real estate, land and consumer loans. The Banks' net loans receivable totaled
$48.2 million at December 31, 1998, representing 33.8% of total assets.
LOAN PORTFOLIO ANALYSIS. The following table sets forth the composition
of the Banks' consolidated loan portfolio by type of loan and type of security
as of the dates indicated. The Banks had no concentration of loans exceeding 10%
of total loans other than as set forth below.
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At December 31,
--------------------------------------------------------------------------
1998 1997 1996
----------- ----------- ------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Type of Loan:
Commercial loans: ................... $ 1,874 3.85% $ 2,527 4.15% $ 279 0.51%
Mortgage loans:
Conventional ...................... 37,600 77.28 47,438 77.89 44,064 79.62
FHA ............................... 133 0.27 162 0.27 251 0.45
Commercial ........................ 5,457 11.22 5,082 8.34 4,606 8.32
Construction ...................... 115 .24 1,002 1.65 197 0.36
-------- ------ -------- ------ -------- ------
Total mortgage loans ............ 43,305 89.01 53,684 88.15 49,118 88.75
-------- ------ -------- ------ -------- ------
Consumer loans:
Automobile ........................ 751 1.54 1,102 1.81 1,642 2.97
Home improvement .................. 981 2.02 1,402 2.30 1,334 2.41
Credit cards ...................... 805 1.65 999 1.64 982 1.77
Savings account ................... 352 0.72 418 0.69 513 0.93
Other ............................. 587 1.21 767 1.26 1,474 2.66
-------- ------ -------- ------ -------- ------
Total consumer loans ............ 3,476 7.14 4,688 7.70 5,945 10.74
-------- ------ -------- ------ -------- ------
Total loans ..................... 48,655 100.00% 60,899 100.00% 55,342 100.00%
====== ====== ======
Less:
Loans in process .................. 9 41 95
Deferred fees (costs) and discounts (12) (46) 21
Allowance for losses .............. 449 436 384
Loans receivable, net ......... $ 48,209 $ 60,468 $ 54,842
======== ======== ========
Type of Security:
Residential real estate:
One- to four-family ............... $ 36,798 75.63% $ 47,173 77.46% $ 42,808 77.36%
Multi-family ...................... 597 1.23 706 1.16 819 1.48
Commercial real estate .............. 5,457 11.22 5,082 8.34 4,606 8.32
Commercial loans .................... 1,874 3.85 2,527 4.15 279 0.50
Agriculture and land ................ 453 .93 723 1.19 885 1.60
Consumer loans ...................... 3,476 7.14 4,688 7.70 5,945 10.74
-------- ------ ------
Total loans ..................... 48,655 100.00% 60,899 100.00% 55,342 100.00%
====== ====== ======
Less:
Loans in process .................. 9 41 95
Deferred fees (costs) and discounts (12) (46) 21
Allowance for losses .............. 449 436 384
-------- -------- --------
Loans receivable, net ............. $ 48,209 $ 60,468 $ 54,842
======== ======== ========
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RESIDENTIAL REAL ESTATE LENDING. The primary lending activity of the
Banks is the origination of mortgage loans to enable borrowers to purchase or
refinance existing one- to four-family homes. Management believes that this
policy of focusing on one- to four-family residential mortgage loans located in
its market area has been successful in contributing to interest income while
keeping credit losses low. At December 31, 1998, $36.8 million, or 75.6% of the
Banks' gross consolidated loan portfolio, consisted of loans secured by one- to
four-family residential real estate. The average principal balance of the loans
in the Banks' one- to four-family portfolio was approximately $33,667 at
December 31, 1998. The Banks presently originate for retention in their
portfolio both adjustable rate mortgage ("ARM") loans with terms of up to 25
years and fixed-rate mortgage loans with terms of up to 20 years. Borrower
demand for ARM loans versus fixed-rate mortgage loans is a function of the level
of interest rates, the expectations of changes in the level of interest rates
and the difference between the initial interest rates and fees charged for each
type of loan. The relative amount of fixed-rate mortgage loans and ARM loans
that can be originated at any time is largely determined by the demand for each
in a competitive environment. At December 31, 1998, $11.5 million, or 23.7% of
the Banks' gross loans, were subject to periodic interest rate adjustments.
The loan fees charged, interest rates and other provisions of the
Banks' ARM loans are determined by the Banks based on their own pricing criteria
and competitive market conditions. The Banks originate one-year ARM loans
secured by owner-occupied residences whose interest rates and payments generally
are adjusted annually to a rate typically equal to 2.75% above the one-year or,
occasionally the three-year, constant maturity United States Treasury ("CMT")
index. The Banks occasionally offer ARM loans with initial rates below those
which would prevail under the foregoing terms, determined by the Banks based on
market factors and competitive rates for loans having similar features offered
by other lenders for such initial periods. At December 31, 1998, the initial
interest rate on ARM loans offered by the Banks ranged from 6.75% to 7.50% per
annum. The periodic interest rate cap (the maximum amount by which the interest
rate may be increased or decreased in a given period) on the Banks' ARM loans is
generally 2% per year and the lifetime interest rate cap is generally 6% over
the initial interest rate of the loan.
The Banks do not originate negative amortization loans. The terms and
conditions of the ARM loans offered by the Banks, including the index for
interest rates, may vary from time to time. The Banks believe that the
adjustment features of their ARM loans provide flexibility to meet competitive
conditions as to initial rate concessions while preserving the Banks' objectives
by limiting the duration of the initial rate concession.
The retention of ARM loans in the Banks' consolidated loan portfolio
helps reduce the Banks' exposure to changes in interest rates. There are,
however, unquantifiable credit risks resulting from the potential of increased
costs due to changed rates to be paid by the customer. It is possible that
during periods of rising interest rates the risk of default on ARM loans may
increase as a result of repricing and the increased costs to the borrower.
Furthermore, because the ARM loans originated by the Banks generally provide, as
a marketing incentive, for initial rates of interest below the rate which would
apply were the adjustment index used for pricing initially (discounting), these
loans are subject to increased risks of default or delinquency.
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Another consideration is that although ARM loans allow the Banks to increase the
sensitivity of their asset base to changes in the interest rates, the extent of
this interest sensitivity is limited by the periodic and lifetime interest rate
adjustment limits. Because of these considerations, the Banks have no assurance
that yields on ARM loans will be sufficient to offset increases in the Banks'
cost of funds.
While fixed-rate single-family residential real estate loans are
normally originated with five to seven year balloon payments or terms up to 20
years, such loans typically remain outstanding for substantially shorter
periods. This is because borrowers often prepay their loans in full upon sale of
the property pledged as security or upon refinancing the original loan. In
addition, substantially all mortgage loans in the Banks' consolidated loan
portfolio contain due-on-sale clauses providing that the Banks may declare the
unpaid amount due and payable upon the sale of the property securing the loan.
Typically, the Banks enforce these due-on-sale clauses to the extent permitted
by law and as business judgment dictates. Thus, average loan maturity is a
function of, among other factors, the level of purchase and sale activity in the
real estate market, prevailing interest rates and the interest rates payable on
outstanding loans.
The Banks generally require title insurance insuring the status of
their liens on all of the real estate secured loans. The Banks also require
earthquake, fire and extended coverage casualty insurance and, if appropriate,
flood insurance in an amount at least equal to the outstanding loan balance.
Appraisals are obtained on all properties and are conducted by
independent fee appraisers approved by the Board of Directors. The Banks'
lending policies generally limit the maximum loan-to-value ratio on mortgage
loans secured by owner-occupied properties to 80% of the lesser of the appraised
value or the purchase price, with the condition that the loan-to-value ratio may
be increased to 95% provided that private mortgage insurance coverage is
obtained for the amount in excess of 80%.
COMMERCIAL REAL ESTATE AND MULTI-FAMILY LENDING: Historically, the
Banks have engaged in limited amounts of commercial real estate and multi-family
lending. At December 31, 1998, commercial real estate loans aggregated $5.5
million, or 11.2% of the total consolidated loan portfolio and multi-family
loans aggregated $597,000 or 1.2% of the total consolidated loan portfolio. The
principal balance of such loans in the Banks' consolidated loan portfolio ranged
from approximately $2,200 to $800,000 at December 31, 1998. Substantially all of
these loans are secured by properties located in the Banks' market area. Such
properties include churches, a library, golf courses and professional offices.
Of this amount, approximately $384,000 or 0.8% were secured by churches.
Commercial real estate and multi-family loans are generally made for balloon
terms of 5 to 10 years with a maximum amortization of 20 years.
Commercial real estate and multi-family loans generally involve greater
risks than one- to four-family residential mortgage loans. Payments on loans
secured by such properties often depend on successful operation and management
of the properties. Repayment of such loans may be subject to a greater extent to
adverse conditions in the real estate market or the economy. The Banks seek to
minimize these risks in a variety of ways, including limiting
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the size of such loans, limiting the maximum loan-to-value ratio to 75% and
strictly scrutinizing the financial condition of the borrower, the quality of
the collateral and the management of the property securing the loan. All of the
properties securing the Banks' income property loans are inspected by the Banks'
lending personnel before the loan is made. The Banks also obtain appraisals on
each property in accordance with applicable regulations.
CONSTRUCTION LENDING. The Banks originate residential construction
loans to individuals to construct one- to four-family homes. The Banks generally
do not originate speculative construction loans (i.e., loans to builders to
construct homes for which there are no contracts for sale in place). At December
31, 1998, construction loans totaled $115,000, or .2% of the gross consolidated
loan portfolio.
Substantially all construction loans made to individuals provide for
the Banks to originate a permanent loan upon the completion of construction,
which is generally an ARM loan as described under "Residential Real Estate
Lending," above. The origination fee for construction loans is generally 1.0% of
the principal amount. Construction loans are generally made for terms of up to
six months.
Construction lending is generally considered to involve a higher level
of risk as compared to one- to four-family residential permanent lending because
of the inherent difficulty in estimating both a property's value at completion
of the project and the estimated cost of the project. The nature of these loans
is such that they are generally more difficult to evaluate and monitor. If the
estimate of value proves to be inaccurate, the Banks may be confronted at, or
prior to, the maturity of the loan, with a project whose value is insufficient
to assure full repayment.
AGRICULTURE AND LAND LENDING. The Banks originate loans secured by farm
residences and combinations of farm residences and farm real estate. The Banks
also originate loans for the acquisition of land upon which the purchaser can
then build. At December 31, 1998, the agriculture and land consolidated loan
portfolio totaled $453,000 or .9% of total loans, substantially all of which
were secured by properties located in the Banks' market area. Agriculture and
land loans are generally made for the same terms and at the same interest rates
as those offered on commercial real estate and multi-family loans, with a
loan-to-value ratio which is generally limited to 75%.
Loans secured by farm real estate generally involve greater risks than
one- to four-family residential mortgage loans. Payments on loans secured by
such properties may, in some instances be dependent on farm income from the
properties. To address this risk, the Banks historically have not considered
farm income when qualifying borrowers. In addition, such loans are more
difficult to evaluate. If the estimate of value proves to be inaccurate, the
Banks may be confronted with a property the value of which is insufficient to
assure full repayment in the event of default and foreclosure.
COMMERCIAL BUSINESS LENDING. The Banks became active in the origination
of small commercial business loans in order to diversify their credit risk and
increase the average yield and repricing speed of their interest-earning
assets. At December 31, 1998, the commercial business loans aggregated $1.9
million, or 3.9% of the total loan portfolio. The principal balance of such
loans in the Banks' loan portfolio ranged from approximately $2,000 to $340,000
at December 31, 1998. Substantially all of these loans were made with borrowers
located within the Banks' market area. Such loans are generally secured by
equipment, inventory, stock, and professional offices. Commercial business
loans are generally made for one year or less, with the rate tied to prime,
repricing accordingly.
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CONSUMER AND OTHER LOANS. The Banks offer a variety of secured or
guaranteed consumer loans, including automobile loans, home improvement loans,
unsecured loans and loans secured by savings deposits. Consumer loans are made
at fixed interest rates and for varying terms. At December 31, 1998 the Banks'
consumer loans totaled $3.5 million, or 7.1% of total loans. The Banks view
consumer lending as an important component of their business operations because
consumer loans generally have shorter terms and higher yields than one- to
four-family real estate loans, thus reducing exposure to changes in interest
rates. In addition, the Banks believe that offering consumer loans helps to
expand and create stronger ties to their customer base.
The largest category of consumer loans in the Banks' portfolio consists
of home improvement loans. At December 31, 1998, home improvement loans totaled
$981,000, or 2.0% of the Banks' total consolidated loan portfolio. The Banks'
home improvement loans are secured by the borrower's principal residence. The
maximum amount of a home improvement loan is generally 80% of the appraised
value of a borrower's real estate collateral less the amount of any prior
mortgages or related liabilities. With respect to substantially all home
improvement loans, the Banks hold the first mortgage on the borrower's
residence. Home improvement loans are approved with fixed interest rates which
are determined by the Banks based upon market conditions. Such loans may be
fully amortized over the life of the loan or have a balloon feature. The maximum
term for a home improvement loan is five years.
The Banks began offering proprietary VISA credit cards during 1993 and,
at December 31, 1998, there were 990 credit card accounts with a total balance
of $805,000. This program has been offered to residents of the Banks' primary
market area but card recipients need not otherwise be customers of the Banks.
The VISA card program currently provides an individual borrowing limit of $3,500
or less, a fixed rate of interest of 12.9% and a "rebate" feature. The Banks may
alter the general terms of this program as they seek to expand their credit card
program.
The third largest category of consumer loans in the Banks' portfolio
consists principally of direct loans secured by automobiles. The Banks generally
do not originate loans secured by recreational vehicles. At December 31, 1998,
consumer loans secured by automobiles totaled $751,000, or 1.5% of the Banks'
total consolidated loan portfolio. Automobile loans are offered with maturities
of up to 60 months for new automobiles and up to 48 months for used automobiles.
Loans secured by used automobiles will have maximum terms which vary depending
upon the age of the automobile and will be made based on amounts as set forth in
the NADA "bluebook."
The Banks had $99,000, or .2% of total loans in unsecured consumer
loans at December 31, 1998. These loans are made for a maximum of 30 months or
less with fixed rates of interest and are offered primarily to existing
customers of the Banks.
The Banks employ strict underwriting standards for consumer loans.
These procedures include an assessment of the applicant's payment history on
other debts and ability to meet existing obligations and payments on the
proposed loans. Although the applicant's
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creditworthiness is a primary consideration, the underwriting process also
includes a comparison of the value of the security, if any, to the proposed loan
amount. The Banks underwrite and originate substantially all of their consumer
loans internally which management believes limits exposure to audit risks
relating to loans underwritten or purchased from brokers or other outside
sources.
Consumer loans may entail greater risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured or secured
by assets that depreciate rapidly, such as automobiles. In the latter case,
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment for the outstanding loan and the remaining deficiency often
does not warrant further substantial collection efforts against the borrower. In
addition, consumer loan collections are dependent on the borrower's continuing
financial stability, and thus are more likely to be adversely affected by job
loss, divorce, illness or personal bankruptcy. Furthermore, the application of
various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans. Such
loans may also give rise to claims and defenses by the borrower against the
Banks as the holder of the loan, and a borrower may be able to assert claims and
defenses which it has against the seller of the underlying collateral.
MATURITY OF CONSOLIDATED LOAN PORTFOLIO. The following table sets forth
at December 31, 1998 certain information regarding the dollar amount of loans
maturing in the Banks' portfolio based on their contractual terms to maturity.
Demand loans (loans having no stated repayment schedule and no stated maturity)
and overdrafts are reported as due in one year or less. Loan balances do not
include undisbursed loan proceeds, unearned discounts, and allowance for loan
losses.
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During the Year After After After
Ending Decmber 31, 3 Years 5 Years 10 Years
------------------ Through Through Through Beyond
1999 2000 2001 5 Years 10 Years 15 Years 15 Years Total
---- ---- ---- ------- -------- -------- -------- -----
(In Thousands)
Commercial loans $ 1,466 $ 165 $ 6 $ 55 $ 63 $ - $ 119 $1,874
Real estate mortgage........ 106 99 689 5,697 10,956 8,943 11,243 37,733
Commercial real estate...... 636 308 318 869 1,782 893 651 5,457
Construction................ 115 - - - - - - 115
Home improvement............ 113 108 166 428 166 - - 981
Automobile.................. 101 203 211 236 - - - 751
Credit cards................ 805 - - - - - - 805
Other....................... 669 116 98 49 7 - - 939
------- ----- ------- ------- -------- ------- -------- --------
Total loans.............. $ 4,011 $ 999 $ 1,488 $ 7,334 $ 12,974 $ 9,836 $ 12,013 $ 48,655
======= ===== ======= ======= ======== ======= ======== ========
The following table sets forth the dollar amount of all loans due after
December 31, 1999 which have fixed interest rates and have floating or
adjustable interest rates.
Fixed Floating- or
Rates Adjustable-Rates
----- ----------------
(In Thousands)
Commercial loans $ 139 $ 269
Real estate mortgage............................. 29,234 7,343
Commercial real estate........................... 3,059 2,812
Construction..................................... - -
Home improvement................................. 868 -
Automobile....................................... 650 -
Credit cards..................................... - -
Other............................................ 270 -
-------- --------
Total......................................... $ 34,220 $ 10,424
======== ========
Scheduled contractual principal repayments of loans generally do not
reflect the actual life of such assets. The average life of loans ordinarily is
substantially less than their contractual terms because of prepayments. In
addition, due-on-sale clauses on loans generally give the Banks the right to
declare loans immediately due and payable in the event, among other things, that
the borrower sells the real property subject to the mortgage and the loan is not
repaid. The average life of mortgage loans tends to increase, however, when
current mortgage loan market rates are higher than rates on existing mortgage
loans and, conversely, decrease when rates on existing mortgage loans are higher
than current mortgage loan market rates.
LOAN SOLICITATION AND PROCESSING. Loan applicants come primarily from
walk-in customers including previous and present customers of the Banks and to a
lesser extent referrals by real estate agents. Upon receipt of a loan
application from a prospective borrower, a credit report and other data are
obtained to verify specific information relating to the loan applicant's
employment, income and credit standing. An appraisal of the real estate offered
as collateral
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generally is undertaken by a Board-approved independent fee appraiser who is
certified by the State of Illinois and the State of Missouri.
All mortgage loans must be approved by the Banks' Executive Committee.
Unsecured consumer loans up to $3,500 and secured consumer loans up to $20,000
may be approved by an individual loan officer. Amounts in excess of these limits
must be approved by the Executive Committee. Management of the Banks believes
its local decision-making capabilities and the accessibility of their senior
officers is an attractive quality to customers within their market area. The
Banks' loan approval process allows consumer loans to be approved in one to two
days and mortgage loans to be approved and closed in approximately two weeks.
LOAN ORIGINATIONS, SALES AND PURCHASES. During the years ended December
31, 1998, 1997 and 1996, the Banks' total loan originations were $10.2 million,
$20.7 million, and $11.0 million, respectively. While the Banks originate both
adjustable-rate and fixed-rate loans, their ability to generate each type of
loan depends upon relative customer demand for loans in their market.
Consistent with their asset/liability management strategy, the policy
of the Banks has been to retain in their portfolio nearly all of the loans that
they originate. Any loan sales are generally made without recourse to the Banks.
The Banks have processed loans through their Cape Girardeau loan
production office, however, such loans are funded by the purchaser of the loan
at closing and closed in the name of such purchaser. During the years ended
December 31, 1998, and 1997 the Cape Girardeau Loan Production Office processed
$6.2 million, and $911,800, respectively, of such loans for which the Bank
received fees of $51,000, and $19,000, respectively.
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The following table shows total loans originated and repaid during the periods
indicated. No loans were purchased or sold during the periods indicated.
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
(In Thousands)
Total loans at beginning
of period............................. $60,468 $54,842 $57,021
------- ------- -------
Loans originated:
Commercial loans 1,479 2,323 623
Single-family residential............. 4,232 12,389 5,284
Commercial real estate................ 2,556 1,957 0
Construction loans.................... 175 1,655 699
Agriculture and land.................. 102 202 191
Consumer.............................. 1,677 2,181 4,220
------- ------- -------
Total loans originated.............. 10,221 20,707 11,017
------ ------ ------
Loan principal repayments............... 22,291 15,085 13,249
Increase (decrease) in
other items, net...................... (189) 4 53
------ --- ----
Total loans at
end of period......................... $48,209 $60,468 $54,842
======= ======= =======
LOAN COMMITMENTS. The Banks issue, without fee, commitments for one- to
four-family residential mortgage loans conditioned upon the occurrence of
certain events. Such commitments are made in writing on specified terms and
conditions and at a specified interest rate and are honored for up to three
months from the date of loan approval. At December 31, 1998, the Banks had
outstanding commitments to originate residential loans of approximately
$902,000, all of which were at fixed rates. In addition, the Banks had
commitments to fund commercial loans and outstanding credit lines of
approximately $940,000 and $1,551,000, respectively, at December 31, 1998.
Commitments to extend credit may involve elements of interest rate risk in
excess of the amount recognized in the consolidated balance sheets. Interest
rate risk on commitments to extend credit results from the possibility that
interest rates may have moved unfavorably from the position of the Banks since
the time the commitment was made.
LOAN ORIGINATION AND OTHER FEES. The Banks, in some instances, receive
loan origination fees. Loan fees are a percentage of the principal amount of the
mortgage loan which are charged to the borrower for funding the loan. The amount
of fees charged by the Banks is generally up to 1.0% for mortgage loans and
construction loans. Current accounting standards require that origination fees
received (net of certain loan origination costs) for originating loans be
deferred and amortized into interest income over the contractual life of the
loan. Net deferred
13
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fees or costs associated with loans that are prepaid are recognized as income at
the time of prepayment. The Banks had $12,000 of net deferred loan costs at
December 31, 1998.
NON-PERFORMING ASSETS AND DELINQUENCIES. When a mortgage loan borrower
fails to make a required loan payment when due, the Banks institute collection
procedures. The first written notice is mailed to a delinquent borrower 10-15
days after the due date, followed by a second written notice mailed and a
telephone call approximately 15 days thereafter. On or about 60 days after the
due date, a certified letter is sent to the delinquent borrower. Foreclosure
procedures are instituted on or about 90 days after the due date if the
delinquency continues to that date.
Consumer loan collection procedures are substantially the same as those
for mortgage loans. In most cases, delinquencies are cured promptly; however,
if, by the 120th day of delinquency the delinquency has not been cured, the
Banks begin legal action to repossess the collateral. At the 120th day of
delinquency, the Bank charges off the full principal amount of the loan.
The Board of Directors is informed monthly as to the status of all
mortgage and consumer loans that are delinquent more than 30 days, the status on
all loans currently in foreclosure, and the status of all foreclosed and
repossessed property owned by the Banks.
The following table sets forth information regarding the Banks'
delinquent loans, excluding loans 90 days or more delinquent and accounted for
on a non-accrual basis.
At December 31,
------------------------------------------------------------------------------
1998 1997 1996
------------------------------------------------------------------------------
Percentage Percentage Percentage
Principal of Gross Principal of Gross Principal of Gross
Balance Loans Balance Loans Balance Loans
--------- -------- -------- --------- --------- ----------
(Dollars in Thousands)
Loans delinquent for:
30 - 59 days............... $ 412 .85% $ 963 1.58% $ 757 1.37%
60 - 89 days............... 709 1.46 423 .70 186 .34
--- ---- --- --- --- ---
$1,121 2.31% $1,386 2.28% $ 943 1.71%
====== ===== ====== ===== ===== =====
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The following table sets forth information with respect to the Banks'
non-performing assets at the dates indicated. The Banks have no restructured
loans within the meaning of SFAS No. 15 at any of the dates indicated.
At December 31,
---------------------------------------
1998 1997 1996
----------- ----------- ----------
(Dollars in Thousands)
Non-performing loans:
Loans accounted for on a non-accrual basis:
Real Estate:
Residential ............................... $150 $ 27 $ 11
Commercial ................................ -- -- 14
Consumer .................................... 6 10 54
------- -------- -------
Total ..................................... 156 37 79
------- -------- -------
Accruing loans which are contractually past due
90 days or more:
Residential real estate ....................... -- -- --
Consumer ...................................... -- -- --
------- -------- -------
Total ..................................... -- -- --
------- -------- -------
Total non-performing loans ................ 156 37 79
Real estate acquired by
foreclosure, net ............................ 128 38 117
------- -------- -------
Total non-performing assets ................... $284 $ 75 $196
====== ======== =======
Total non-performing loans to
net loans ................................... 0.32% 0.06% 0.14%
------- -------- -------
Total allowance for loan losses
to non-performing loans ..................... 287.41% 1159.97% 485.74%
------- -------- -------
Total non-performing assets to
total assets ................................ .20% .06% .13%
------- -------- -------
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At December 31, 1998, Management of the Banks was unaware of any
material loans not disclosed in the above table but where known information
about possible credit problems of the borrowers caused management to have
serious doubts as to the ability of such borrowers to comply with their loan
repayment terms at that date and which may result in future inclusion in the
non-performing assets category.
REAL ESTATE ACQUIRED BY FORECLOSURE. The Banks had $128,000 in real
estate acquired by foreclosure at December 31, 1998, which consisted of five
separate pieces of property.
ASSET CLASSIFICATION. The Banks are subject to various regulations
regarding problem assets of banks. The regulations require that each insured
institution review and classify their assets on a regular basis. In addition, in
connection with examinations of insured institutions, examiners have the
authority to identify problem assets and, if appropriate, require them to be
classified. There are three classifications for problem assets: substandard,
doubtful and loss. Substandard assets have one or more defined weaknesses and
are characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified as loss is considered uncollectible and
of such little value that continuance as an asset of the institution is not
warranted. If an asset or portion thereof is classified as loss, the insured
institution establishes specific allowances for loan losses for the full amount
of the portion of the asset classified as loss. All or a portion of general loan
loss allowances established to cover possible losses related to specific
valuation allowances for loan losses generally do not qualify as regulatory
capital. Assets that do not currently expose the insured institution to
sufficient risk to warrant classification in one of the aforementioned
categories but possess weaknesses are designated "special mention" and monitored
by the Banks.
The aggregate amounts of the Banks' classified assets including assets
designated special mention and general and specific loss allowances at the dates
indicated, were as follows:
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At December 31,
1998 1997 1996
---- ---- ----
(In Thousands)
Loss............................................... $ -- $ -- $ 8
Doubtful........................................... 56 -- 15
Substandard ....................................... 507 373 184
Special mention.................................... 7 7 --
---- ---- ----
Total............................................ $570 $380 $207
==== ==== ====
$449 $436 $376
General loss allowances............................
Specific loss allowances........................... -- -- 8
---- ---- ----
Total loss allowances............................ $449 $436 $384
==== ==== ====
ALLOWANCE FOR LOAN LOSSES. The Banks have established a systematic
methodology for determining provisions for loan losses. The methodology is set
forth in a formal policy and considers the need for an overall general valuation
allowance as well as specific allowances for individual loans.
In originating loans, the Banks recognize that losses will be
experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term of
the loan, general economic conditions and, in the case of a secured loan, the
quality of the security for the loan. The Banks increase their allowance for
loan losses by charging provisions for loan losses against the Banks' income.
The allowance for loan losses is maintained to cover losses inherent in
the loan portfolio. Management reviews the adequacy of the allowance at least
quarterly based on management's assessment of numerous factors, including, but
not necessarily limited to, general economic conditions, consolidated loan
portfolio composition, prior loss experience, and independent appraisals. In
addition to the allowance for estimated losses on identified problem loans, an
overall unallocated allowance is established to provide for unidentified credit
losses. In estimating such losses, management considers various risk factors
including geographic location, loan collateral, and payment history. Specific
valuation allowances are established to absorb losses on loans for which full
collectibility may not be reasonably assured. The amount of the allowance is
based on the estimated value of the collateral securing the loan and other
analyses pertinent to each situation.
At December 31, 1998, the Banks had an allowance for loan losses of
$449,000. Management believes that the amount maintained in the allowance will
be adequate to absorb losses inherent in the consolidated portfolio. Although
management believes that it uses information available to make such
determinations, future adjustments to the allowance for loan
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losses may be necessary and results of operations could be significantly and
adversely affected if circumstances differ substantially from the assumptions
used in making the determinations.
While the Banks believe the existing allowance for loan losses is
adequate, there can be no assurance that regulators, in reviewing the Banks'
loan portfolio, will not request the Banks to increase significantly their
allowance for loan losses. In addition, because future events affecting
borrowers and collateral cannot be predicted with certainty, there can be no
assurance that substantial increase will not be necessary should the quality of
any loans deteriorate as a result of the factors discussed above. Any material
increase in the allowance for loan losses may adversely affect the Banks'
financial condition and results of operations.
The following table sets forth an analysis of the Banks' allowances for
loan losses for the periods indicated.
Year Ended December 31,
----------------------------------------
1998 1997 1996
-------- --------- --------
(Dollars in Thousands)
Allowance at beginning of period $ 436 $ 384 $ 390
Provision for loan losses ...... 17 98 33
Recoveries ..................... 24 21 3
Charge-offs:
Residential real estate ...... (9) (6) --
Commercial real estate ....... -- (8) --
Consumer ..................... (19) (53) (42)
----- ----- -----
Total charge-offs .......... (28) (67) (42)
----- ----- -----
Allowance at end of period ... $ 449 $ 436 $ 384
===== ===== =====
Ratio of allowance to total
loans outstanding at 0.92% 0.72% 0.70%
the end of the period......... ===== ===== =====
Ratio of net charge-offs to
average loans outstanding 0.01% 0.08% 0.07%
during the period ............ ===== ===== =====
The following table sets forth the breakdown of the allowance for loan
losses by loan category for the periods indicated. The portion of the allowance
to each loan category does not necessarily represent the total available for
losses within that category since the total allowance applies to the entire loan
portfolio. The allocation of the allowance to each category is not necessarily
indicative of future losses and does not restrict the use of the allowance to
absorb losses in any other category.
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At December 31,
---------------------------------------------------------------------------------------------------------
1998 1997 1996
---------------------------------------------------------------------------------------------------------
As a % % of As a % % of As a % % of
of Out- Loans in of Out- Loans in of Out- Loans in
standing Category standing Category standing Category
Loans in to Total Loans in to Total Loans in to Total
Amount Category Loans Amount Category Loans Amount Category Loans
------ -------- ----- ------ -------- ----- ------ -------- -----
(Dollars in Thousands)
Real estate - mortgage:
Residential ........ $278 .74% 76.9% $250 .52% 78.6% $236 .54% 78.9%
Commercial ......... 80 1.47 11.2 68 1.34 8.3 69 1.50 8.3
Commercial .......... 47 2.51 3.9 61 2.41 1.2 8 2.87 .5
Agriculture and .... 5 1.10 0.9 5 .69 1.2 5 .56 1.6
land
Consumer ............ 39 1.12 7.1 52 1.11 7.7 66 1.11 10.7
---- ----- ---- ----- ---- -----
Total allowance for
loan losses ...... $449 100.0% $436 100.0% $384 100.0%
==== ===== ==== ===== ==== =====
INVESTMENT ACTIVITIES
GENERAL. The Banks' policies generally limit investments to U.S.
Government and agency securities, certificates of deposit in other financial
institutions and municipal bonds, and mortgage-backed securities. All of the
Banks' investment securities are subject to market risk insofar as increase in
market rates of interest may cause a decrease in their market value. Investment
decisions are made by the Company's Chairman, President and Chief Financial
Officer Michael W. Welge and reported at the monthly Board of Directors'
meetings.
At December 31, 1998, the Banks' investment portfolio and
mortgage-backed security portfolio totaled $90.1 million and consisted
principally of United States Government and agency obligations, mortgage-backed
securities, certificates of deposit in other financial institutions, municipal
obligations, equity securities, interest-bearing deposits, Federal Home Loan
Bank ("FHLB") Stock, and Federal Reserve Bank ("FRB") Stock. At December 31,
1998, the Banks' investment portfolio did not contain any securities of a single
issuer (other than the United States Government and agencies thereof) which had
an aggregate book value in excess of 10% of the Banks' equity at that date.
As of December 31, 1998, the held to maturity investment portfolio of
the Banks contained securities with an amortized cost of $40.1 million and a
fair value of $40.3 million and consisted of United States agency obligations,
municipal and state obligations and mortgage-backed bonds. At December 31, 1998,
the Banks' investment securities available for sale portfolio consisted of U.S.
Government obligations, mortgage-backed bonds, equity securities, stock in the
FHLB, and stock in the FRB with an amortized cost of $12.5 million and a fair
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value of $12.5 million. At December 31, 1998, the Banks held no securities that
were classified as trading securities.
INVESTMENT STRATEGY. Historically, the Banks have maintained a
substantial proportion of their assets in investments and mortgage-related
securities. The objectives of these investments are to: (i) provide sufficient
liquidity to fund the operational needs of the Banks, (ii) provide a stable base
of income with minimal credit risk, (iii) invest those deposit funds in excess
of the mortgage and consumer lending volumes available to the Banks in their
market area, (iv) invest the deposit and reverse repurchase agreement funds
attributable to Gilster-Mary Lee, and (v) generally assist in managing the
interest rate risk of the Banks. The Banks invest in U.S. Government and U.S.
Government agency securities, securities of U.S. Government-sponsored
enterprises (e.g., Federal National Mortgage Association ("FNMA"), and Federal
Home Loan Mortgage Corporation ("FHLMC")), tax-exempt securities of states and
municipalities, short-term interest-bearing deposits and federally insured
certificates of deposits in other financial institutions, FHLB-Chicago stock,
and mortgage-related securities (including mortgage-backed securities and
collateralized mortgage obligations). The foregoing securities serve different
functions within the context of the Banks' investment practices.
U.S. Government agency, Government-sponsored enterprise, and tax-exempt
state and municipal securities and short-term interest-bearing deposits and
federally insured certificates of deposits in other financial institutions
function as an income base and non-lending investment vehicle for the Banks.
Management views the foregoing investments generally as substitutes of each
other, and the relative proportion of them in the portfolio depends on the
relative yields of each as compared to their perceived credit risks and interest
rate sensitivities. As these investments mature, the Banks seek to reinvest the
proceeds in those investments that, at that time, provide an attractive
trade-off among the foregoing factors. With respect to the tax-exempt state and
municipal securities portfolio, the Banks also seek to invest so as to meet
specific community needs in their primary market area and to take advantage of
the federal and, on some securities, state tax exemption for the interest
thereon. As a general rule, the Banks limit their tax-exempt investments to
those having a rating by a nationally recognized statistical rating organization
of "AA" or better or those unrated securities issued by entities within their
market area. Generally, the Banks also limit the maturities of all of the
foregoing securities to five years or less.
MORTGAGE-BACKED SECURITIES. The Banks purchase mortgage-backed
securities primarily to supplement their lending activities and, to a lesser
extent, to: (1) generate positive interest rate spreads on large principal
balances with minimal administrative expense; (ii) lower the credit risk of the
Banks as a result of the guarantees provided by FHLMC, FMNA, and GNMA; (iii)
enable the Banks to use mortgage-backed securities as collateral for financing;
and (iv) increase the Banks' liquidity.
The Banks have invested primarily in federal agency securities,
principally FNMA, FHLMC and GNMA. The Banks also invest in collateralized
mortgage obligations ("CMOs") that have fixed interest rates. At December 31,
1998, net mortgage-backed and related securities totaled $21.9 million, or 15.3%
of total assets. At December 31, 1998, 5.0% of
20
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the mortgage-backed and mortgage related securities were adjustable-rate and
95.0% were fixed rate. The mortgage-backed securities portfolio had coupon rates
ranging from 5.00% to 7.50% and had a weighted average yield of 6.14% at
December 31, 1998. The estimated fair value of the Banks' mortgage-backed
securities at December 31, 1998 was $21.9 million.
Mortgage-backed securities (which also are known as mortgage
participate certificates or pass-through certificates) typically represent a
participation interest in a pool of single-family or multi-family mortgages. The
principal and interest payments on these mortgages are passed from the mortgage
originators, through intermediaries (generally United States Government agencies
and government sponsored enterprises) that pool and resell the participation
interests in the form of securities, to investors such as the Banks. Such United
States Government agencies and government sponsored enterprises, which guarantee
the payment of principal and interest to investors, primarily include the FHLMC,
FNMA and the GNMA. Mortgage-backed securities typically are issued with stated
principal amounts, and the securities are backed by pools of mortgages that have
loans with interest rates that fall within a specific range and have varying
maturities. Mortgage-backed securities generally yield less than the loans that
underlie such securities because of the cost of payment guarantees and credit
enhancements. In addition, mortgage-backed securities are usually more liquid
than individual mortgage loans and may be used to collateralize certain
liabilities and obligations of the Banks. These types of securities also permit
the Banks to optimize their regulatory capital because they have a low risk
weighting.
CMOs generally have similar characteristics as derivative financial
instruments because they are created by redirecting the cash flows from the pool
of mortgages or mortgage-backed securities underlying these securities to create
two or more classes (or tranches) with different maturity or risk
characteristics designed to meet a variety of investor needs and preferences.
Management believes these securities may represent attractive alternatives
relative to other investments due to the wide variety of maturity, repayment and
interest rate options available. The Banks held investment grade CMOs with a net
carrying value of $10.6 million at December 31, 1998. CMOs may be sponsored by
private issuers, such as mortgage bankers or money center banks, or by United
States Government agencies and government sponsored entities. At December 31,
1998, the Banks did not own any privately issued CMOs.
Derivatives also include "off balance sheet" financial products whose
value is dependent on the value of an underlying financial asset, such as a
stock, bond, foreign currency, or a reference rate or index. Such derivatives
include "forwards," "futures," "options" or "swaps." The Banks have not invested
in, and currently do not intend to invest in, these "off balance sheet"
derivative instruments, although the Banks' investment policies do not prohibit
such investments. The Banks evaluate their mortgage-related securities portfolio
quarterly for compliance with applicable regulatory requirements, including
testing for identification of high risk investments. At December 31, 1998, the
Banks did not have any derivatives or high risk securities.
Of the Banks' $21.9 million mortgage-backed securities portfolio at
December 31, 1998, $12.7 million with a weighted average yield of 6.18% had
contractual maturities within ten
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years and $9.2 million with a weighted average yield of 6.07% had contractual
maturities over ten years. However, the actual maturity of a mortgage-backed
security may be less than its stated maturity due to prepayments of the
underlying mortgages. Prepayments that are faster than anticipated may shorten
the life of the security and may result in a loss of any premiums paid and
thereby reduce the net yield on such securities. Although prepayments of
underlying mortgages depend on many factors, including the type of mortgages,
the coupon rate, the age of mortgages, the geographical location of the
underlying real estate collateralizing the mortgages and general levels of
market interest rates, the difference between the interest rates on the
underlying mortgages and the prevailing mortgage interest rates generally is the
most significant determinant of the rate of prepayments. During periods of
declining mortgage interest rates, if the coupon rate of the underlying
mortgages exceeds the prevailing market interest rates offered for mortgage
loans, refinancing generally increases and accelerates the prepayment of the
underlying mortgages and the related security. Under such circumstances, the
Banks may be subject to reinvestment risk because, to the extent that the Banks'
mortgage-backed securities amortize or prepay faster than anticipated, the Banks
may not be able to reinvest the proceeds of such repayments and prepayments at a
comparable rate. In contrast to mortgage-backed securities in which cash flow is
received (and hence, prepayment risk is shared) pro rata by all securities
holders, the cash flow from the mortgages or mortgage-backed securities
underlying CMOs are segmented and paid in accordance with a predetermined
priority to investors holding various tranches of such securities or
obligations. A particular tranche of CMOs may therefore carry prepayment risk
that differs from that of both the underlying collateral and other tranches.
The following table sets forth the composition of the Banks'
mortgage-backed securities portfolio at the dates indicated.
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At December 31,
--------------------------------------------------------------------------------
1998 1997 1996
--------------------------------------------------------------------------------
Carrying Percent of Carrying Percent of Carrying Percent of
Value Portfolio Value Portfolio Value Portfolio
----- --------- ----- --------- ----- ---------
(In Thousands)
Mortgage-backed securities:
Available for sale (at
fair value):
GNMA ............................... $ 1,878 8.59% $ 395 2.87% $ 450 2.83%
FNMA ............................... 3,870 17.69 1,247 9.04 1,449 9.12
FHLMC............................... 5,527 25.27 -- -- -- --
------- ------ ------- ------ ------- ------
Total mortgage-backed
securities available for sale ... 11,275 51.55 1,642 11.91 1,899 11.95
------- ------ ------- ------ ------- ------
Held to maturity (at amortized cost):
GNMA ............................... -- -- 1,170 8.49 1,335 8.40
FNMA ............................... -- -- 101 0.73 124 0.78
FHLMC .............................. -- -- 3,483 25.26 4,200 26.42
Collateralized mortgage obligations 10,595 48.45 7,392 53.61 8,339 52.45
------- ------ ------- ------ ------- ------
Total mortgage-backed
securities held to maturity .... 10,595 48.45 12,146 88.09 13,998 88.05
------- ------ ------- ------ ------- ------
Total mortgage-backed securities ...... $21,870 100.00% $13,788 100.00% $15,897 100.00%
======= ====== ======= ====== ======= ======
The following table shows purchases, sales and repayments of
mortgage-backed securities during the periods indicated.
Year Ended December 31,
---------------------------------------------------
1998 1997 1996
---------------------------------------------------
(In Thousands)
Mortgage-backed securities, net,
at beginning of period .............. $ 13,788 $ 15,897 $ 15,413
Purchases ............................. 17,125 3,331 2,981
Sales ................................. (250) -- --
Repayments ............................ (8,919) (5,513) (2,519)
Increase (decrease) in other items, net 126 73 22
-------- -------- --------
Mortgage-backed securities, net,
at end of period .................... $ 21,870 $ 13,788 $ 15,897
======== ======== ========
The following tables set forth the composition of the Banks' investment
portfolio at the dates indicated.
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At December 31,
----------------------------------------------------------------------------
1998 1997 1996
----------------------- ------------------------ ------------------------
Carrying Percent of Carrying Percent of Carrying Percent of
Value Portfolio Value Portfolio Value Portfolio
--------- ----------- --------- --------- --------- ---------
(Dollars in Thousands)
Investment securities:
Available for sale (at fair value)-
Securities of U.S. government ......... $ 3,014 4.4% $17,509 32.0% $11,475 16.4%
Securities of U.S. agencies ........... 6,994 10.3 -- -- -- --
------- ------- ------- ------- ------- --------
Total investment securities
available for sale .................. 10,008 14.7 17,509 32.0 11,475 16.4
------- ------- ------- ------- ------- --------
Held to maturity ( at amortized cost):
Securities of U.S. agencies ........... 33,962 49.8 14,942 27.3 14,512 20.8
Mortgage-backed bonds ................. 1,258 1.8 2,634 4.8 10,912 15.6
Securities of states and municipalities 4,896 7.2 7,657 14.0 10,830 15.5
------- ------- ------- ------- ------- --------
Total investment securities held to
maturity ........................... 40,116 58.8 25,233 46.1 36,254 51.9
------- ------- ------- ------- ------- --------
Total investment securities ......... 50,124 73.5 42,742 78.1 47,729 68.3
Interest-bearing deposits .................. 8,709 12.8 3,063 5.6 4,192 6.0
Federal funds sold ......................... 5,788 8.5 6,395 11.7 16,000 22.9
Certificates of deposit .................... 95 .1 290 .6 888 1.3
Bankers acceptances ........................ 994 1.4 -- -- -- --
Equity securities .......................... 1,302 1.9 1,172 2.2 --
FHLB stock ................................. 801 1.2 622 1.1 622 0.9
FRB stocks ................................. 405 .6 405 .7 411 0.6
============================================================================
Total investments ................... $68,218 100.0% $54,689 100.0% $69,842 100.0%
============================================================================
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At December 31, 1998
-----------------------------------------------------------------------------------
More than More than
One Year or Less One to Five Years Five to Ten Years More than Ten Years
---------------- ----------------- ----------------- -------------------
Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- ----- ----- -----
(Dollars in Thousands)
Investment securities:
Available for sale (at fair value)-
Securities of U.S. government...... $ 3,014 5.85% $ -- --% $ -- --% $ -- --%
Securities of U.S. agencies ....... -- -- 6,994 6.06% -- --% -- --%
Held to maturity (at amortized cost):
Securities of U.S. agencies ........ 33,962 5.09% -- --% -- --% -- --%
Mortgage-backed bonds .............. 1,258 4.91% -- --% -- --% -- --%
Securities of states and
municipalities(1) ................. 1,169 6.25% 1,973 7.16% 1,754 8.19% -- --%
------- ----- ------- ----
Total investment securities .... $39,403 $8,967 $1,754 $--
======= ====== ====== ====
(1) Tax exempt state and municipal securities are presented on a tax equivalent
basis.
U.S. GOVERNMENT AND AGENCY OBLIGATIONS. The Banks' portfolio of United
States Government and agency obligations had a fair value of $43.9 million
($43.9 million at amortized cost) at December 31, 1998. The portfolio consisted
of short to medium-term (up to ten years) securities, of which $10.0 million (at
amortized cost) of U.S. Government obligations were held in the Banks' available
for sale portfolio.
MUNICIPAL BONDS. The Banks' municipal bond portfolio, which at December
31, 1998, totaled $5.1 million at estimated fair value ($4.9 million at
amortized cost), was comprised primarily of general obligation bonds (i.e.,
backed by the general credit of the issuer) and revenue bonds (i.e., backed only
by revenues from the specific project being financed) issued by various housing
authorities and public hospital, water and sanitation districts in various
states. At December 31, 1998, general obligation bonds and revenue bonds totaled
$3.0 million and $1.9 million, respectively. The bonds are purchased with
laddered maturities of up to four years with an average principal amount of
approximately $250,000. Most of the municipal bonds are rated by a nationally
recognized statistical rating organization (e.g., Moody's or Standard and
Poor's) and the unrated bonds have been purchased principally from local
authorities. At December 31, 1998, the Banks' municipal bond portfolio was
comprised of 49 bonds, the average principal amount of which was $100,000. At
such date the weighted average life of the portfolio was approximately 3.8 years
and had an weighted average coupon rate of 5.18%. At that date, the largest
security in the portfolio was a revenue bond issued by a local government, with
an amortized cost of $1.0 million and a fair value of $1.1 million. Because
interest earned on municipal bonds is exempt from federal, and, in certain
cases, state and local income taxes, the municipal bond portfolio has
contributed to an effective income tax rate for the Banks below the federal tax
rate and one that the Banks believe is below their peers.
CERTIFICATES OF DEPOSIT. The Banks have invested in certificates of
deposit at other banks with maturities of six months to five years and at
December 31, 1998 had $95,000 million of such deposits. In order to obtain FDIC
insurance coverage, these deposits are placed
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at various financial institutions throughout the United States by a broker in
amounts less than $100,000.
GOVERNMENT SPONSORED ENTERPRISE SECURITIES. At December 31, 1998, the
Banks' investment portfolio included securities issued by the FNMA and the
FHLMC. At December 31, 1998, such bonds had an aggregate amortized cost of $3.5
million and a fair value of $3.5 million, an average life of approximately 2.3
years, and an average coupon rate of 5.70%.
DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS
GENERAL. Deposits, repurchase agreements and loan repayments are the
major sources of the Banks' funds for lending and other investment purposes.
Scheduled loan repayments are a relatively stable source of funds, while deposit
inflows and outflows and loan prepayments are influenced significantly by
general interest rates and money market conditions. Borrowings through the
FHLB-Chicago or reverse repurchase agreements may be used on a short-term basis
to compensate for reductions in the availability of funds from other sources. At
December 31, 1998, the Banks had $10.0 million borrowings from the FHLB-Chicago.
At December 31, 1998, the Banks had $10.9 million outstanding in reverse
repurchase agreements.
DEPOSIT ACCOUNTS. Substantially all of the Banks' depositors are
residents of the State of Illinois or Missouri. Deposits are attracted from
within the Banks' market area through the offering of a broad selection of
deposit instruments, including NOW accounts, money market deposit accounts,
regular savings accounts, certificates of deposit and retirement savings plans.
Deposit account terms vary, according to the minimum balance required, the time
periods the funds must remain on deposit and the interest rate, among other
factors. In determining the terms of their deposit accounts, the Banks consider
current market interest rates, profitability to the Banks, matching deposit and
loan products and their customer preferences and concerns. The Banks review
their deposit mix and pricing weekly.
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The following table sets forth certain information concerning the
Banks' time deposits and other interest-bearing deposits at December 31, 1998.
Weighted Percentage
Average Original Minimum Balance of Total
Interest Rate Term Category Amount (in thousands) Deposits
-------------- ---- -------- ------- -------------- --------
--% None Non-interest bearing checking $ 100 $ 748 0.75%
1.93 None NOW accounts 100 8,419 8.47
3.35 None Money market demand 2,500 16,282 16.37
2.74 None Statement savings 30 8,534 8.58
Certificates of Deposit
3.50 91-day Fixed-term, fixed-rate 500 205 0.21
4.40 4 months Fixed-term, fixed-rate 5,000 282 0.28
4.45 6 months Fixed-term, fixed-rate 500 6,886 6.93
4.46 6 months Fixed-term, fixed-rate 50,000 412 .41
5.25 7 months Fixed-term, fixed-rate 5,000 2,864 2.88
4.94 1 year Fixed-term, fixed-rate 500 10,671 10.73
5.04 18 months Fixed-term, fixed-rate 500 2,561 2.58
5.73 30 months Fixed-term, fixed-rate 100 8,505 8.55
5.49 30 months Fixed-term, fixed-rate 500 25,136 25.28
5.49 4 years Fixed-term, fixed-rate 500 396 0.40
7.75 6 years Fixed-term, fixed-rate 500 21 0.02
4.97 Various Fixed-term, fixed-rate 100,000 7,513 7.56
-------- ------
$ 99,435 100.0%
======== =====
The following table indicates the amount of the Banks' certificates of
deposit of $100,000 or more by time remaining until maturity as of December 31,
1998.
Certificates
Maturity Period of Deposit
- --------------------------------------------------- --------------
(In Thousands)
Three months or less............................... $ 6,800
Over three through six months...................... 300
Over six through 12 months......................... 1,215
Over 12 months..................................... 1,757
-------
Total......................................... $10,072
=======
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DEPOSIT FLOW
The following table sets forth the balances of savings deposits in the
various types of savings accounts offered by the Banks at the dates indicated.
At December 31,
------------------------------------------------------------------------------------------
1998 1997 1996
-------------------------------- ------------------------------- --------------------
Percent Percent Percent
of Increase of Increase of
Amount Total (Decrease) Amount Total (Decrease) Amount Total
------ ----- ---------- ------ ----- ---------- ------ -----
(Dollars in Thousands)
Non-interest-bearing checking ... $ 748 0.75% 316 $ 432 $ 0.45% $ (132) $ 564 0.55%
NOW checking .................... 8,419 8.47 765 7,654 8.03 (1,032) 8,686 8.50
Statement savings................ 8,534 8.58 (151) 8,685 9.11 (1,437) 10,142 9.92
Money market demand ............. 16,282 16.37 664 15,618 16.38 (1,066) 16,684 16.32
Fixed-rate certificates which
mature in the year ending(1)(2):
Within 1 year ................ 39,939 40.17 (6,505) 46,444 48.70 7,771 38,673 37.82
After 1 year, but
within 2 years ............... 15,361 15.45 4,048 11,313 11.86 (9,577) 20,890 20.43
After 2 years, but
within 5 years ............... 10,152 10.21 4,936 5,216 5.47 (1,392) 6,608 6.46
---------------------------------------------------------------------------------------------
Total ...................... $ 99,435 100.00%$ 4,073 $ 95,362 100.00%$ (4,471) $102,247 100.00%
============================================================================================
(1) At December 31, 1998 and at December 31, 1997, and 1996, jumbo certificates
amounted to $10.0 million, $7.0 million and $7.1 million, respectively.
(2) IRA accounts included in certificate balances are $8.5 million, $8.9
million and, $8.6 million at December 31, 1998 and December 31, 1997 and
1996, respectively.
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TIME DEPOSITS BY RATES
The following table sets forth the time deposits in the Banks
classified by rates at the dates indicated.
At December 31,
------------------------------------------------
1998 1997 1996
------------------------------------------------
(In Thousands)
2.00 - 2.99%............................. $ 40 $ 17 $ --
3.00 - 4.99%............................. 12,861 9,740 15,528
5.00 - 6.99%............................. 52,513 53,180 50,581
7.00 - 8.99%............................. 38 36 62
------- ------- --------
Total................................ $65,452 $62,973 $ 66,171
======= ======= ========
The following table sets forth the amount and maturities of time
deposits at December 31, 1998.
Amount Due
--------------------------------------------------------------
Percent
Over Over Over of Total
Less than 1-2 2-3 3-4 Certificate
One Year Years Years Years Total Accounts
-------- ----- ----- ----- ----- --------
2.00 - 2.99%...... $ 40 $ -- $ -- $ -- $ 40 .1%
3.00 - 4.99%...... 12,861 -- -- -- 12,861 19.6
5.00 - 6.99%...... 27,028 15,345 10,108 32 52,513 80.2
7.00 - 8.99%...... 10 16 -- 12 38 .1
------- ------- ------- ------- ------- ------
Total ....... $39,939 $15,361 $10,108 $ 44 $65,452 100.0%
=============================================================================== ======
The following table sets forth the average balances and interest rates
based on monthly balances for transaction accounts and certificates of deposit
for the periods indicated.
Year Ended December 31,
------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------ ---------------------------- --------------------------
Interest- Interest- Interest-
Bearing Certifi- Bearing Certifi- Bearing Certifi-
Demand cates of Demand cates of Demand cates of
Deposits Deposits Deposits Deposits Deposits Deposit
-------- -------- -------- -------- -------- -------
Average Balance ... $ 33,101 $ 62,392 $ 32,986 $ 64,566 $ 40,889 $ 66,015
Average Rate ...... 2.84% 5.26% 2.78% 5.24% 2.80% 5.17%
The following table sets forth the savings activities of the Banks for
the periods indicated.
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Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
(In Thousands)
Beginning Balance ........ $ 95,362 $ 102,247 $ 106,718
Net increase (decrease) .. 1,899 (9,747) (7,569)
before interest credited
Interest credited ........ 2,174 2,862 3,098
--------- --------- ---------
Net increase (decrease) in
savings deposits ....... 4,073 (6,885) (4,471)
--------- --------- ---------
Ending Balance ........... $ 99,435 $ 95,362 $ 102,247
========= ========= =========
BORROWINGS
The Banks have the ability to use advances from the FHLB-Chicago to
supplement their supply of lendable funds and to meet deposit withdrawal
requirements. The FHLB-Chicago functions as a central reserve bank providing
credit for savings and loan associations and certain other member financial
institutions. As a member of the FHLB-Chicago, the Banks are required to own
capital stock in the FHLB-Chicago and are authorized to apply for advances on
the security of such stock and certain of their mortgage loans and other assets
(principally securities which are obligations of, or guaranteed by, the U.S.
Government) provided certain creditworthiness standards have been met. Advances
are made pursuant to several different credit programs. Each credit program has
its own interest rate and range of maturities. Depending on the program,
limitations on the amount of advances are based on the financial condition of
the member institution and the adequacy of collateral pledged to secure the
credit. At December 31, 1998, the Banks had $10.0 million of fixed-term advances
from the FHLB, with a weighted average interest rate of 4.76%, due in 2008.
During the years ended December 31, 1997 and 1996, the Banks had no borrowings
from the FHLB-Chicago.
The Banks also use reverse repurchase agreements due generally within
one year as a source of funds. At December 31, 1998, reverse repurchase
agreements totaled $10.9 million with a weighted average interest rate of 4.59%
secured by a pledge of certain investment and mortgage-backed securities with an
amortized cost of $11.0 million and a fair value of $11.0 million. At December
31, 1998, $10.3 million of the agreements are maintained with Gilster-Mary Lee.
The following tables set forth certain information regarding short-term
borrowings by the Banks at the dates and for the periods indicated.
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At December 31,
--------------------------------------------
1998 1997 1996
---- ---- ----
Weighted average rate paid on
securities sold under agreements
to repurchase............................. 4.59% 5.30% 4.93%
At or For the Year
Ended December 31,
-----------------------------------------------------
1998 1997 1996
-----------------------------------------------------
(Dollars in Thousands)
Maximum amount of securities sold
under agreements to repurchase
at any month end............................. $10,880 $8,380 $18,340
Approximate average securities sold
under agreements to repurchase
outstanding................................... $9,523 $6,915 $15,057
Approximate weighted average rate
paid on securities sold under
agreements to repurchase(1)................... 5.00% 5.02% 4.93%
(1) Computed using the weighted rates of each individual transaction.
INTEREST RATE RISK MANAGEMENT
Interest rate sensitivity is closely monitored through the Company's
asset-liability management procedures. At the end of this section is a table
reflecting the Company's interest rate gap (rate sensitive assets minus rate
sensitive liabilities) analysis at December 31, 1998, individually and
cumulatively, through various time periods.
At December 31, 1998, the static gap analyses indicated substantial
liability sensitivity over a one-year time period. Generally, such a position
indicates that an overall rise in interest rates would result in an unfavorable
impact on the Company's net interest margin, as liabilities would reprice more
quickly than assets. Conversely, the net interest margin would be expected to
improve with an overall decline in interest rates. As savings, NOW and money
market accounts are subject to withdrawal on demand, they are presented in the
analysis as immediately repriceable. Based on the Company's experience, pricing
such deposits is not expected to change in direct correlation with changes in
the general level of short-term interest rates. Accordingly, management believes
that gradual increase in the general level of interest rates will not have a
material effect on the Company's net interest income.
The asset/liability management process, which involves structuring the
consolidated balance sheet to allow approximately equal amounts of assets and
liabilities to reprice at the same time, is a process essential to minimize the
effect of fluctuating interest rates
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on net interest income. The following table reflects the Company's interest rate
gap (rate-sensitive assets minus rate-sensitive liabilities) analysis as of
December 31, 1998, individually and cumulatively, through various time periods.
Loans scheduled to reprice are reported in the earliest possible repricing
interval for this analysis.
Remaining Maturity if Fixed Rate,
Earliest Possible Repricing Interval if Floating Rate
More than
three More than
Three months one year
months through through More than
or less one year five years five years Total
------- -------- ----------- ----------- --------
(Dollars in Thousands)
INTEREST-EARNING ASSETS:
Loans receivable, net $ 7,532 $ 10,714 $ 13,206 $ 16,757 $ 48,209
Investment and mortgage-
backed securities 38,648 5,076 22,934 7,845 74,503
Other interest-earning assets 15,586 -- -- -- 15,586
-------- -------- --------- --------- ---------
Total interest-earning assets 61,766 15,790 36,140 24,602 138,298
-------- -------- --------- --------- ---------
INTEREST-BEARING LIABILITIES:
Savings, NOW, and money
market accounts $ 33,983 $ -- $ -- $ -- $ 33,983
Certificates of deposit 17,651 22,390 25,411 -- 65,452
Reverse repurchase agreements 10,880 -- -- -- 10,880
FHLB advances -- -- -- 10,000 10,000
-------- -------- --------- --------- ---------
Total interest-bearing liabilities 62,514 22,390 25,411 10,000 120,315
-------- -------- --------- --------- ---------
Interest sensitivity gap $ (748) $ (6,600) $ 10,729 $ 14,602 $ 17,983
======== ======== ======== ======== ========
Cumulative interest-sensitivity
gap $ (748) $ (7,348) $ 3,381 $ 17,983
======== ======== ======== ========
Ratio of cumulative gap to
to total assets (.52%) (5.15%) 2.37% 12.59%
======== ======== ======== =======
As indicated in the preceding table, the Company operates on a
short-term basis similar to most financial institutions, as its liabilities,
with savings and NOW accounts included, could reprice more quickly than its
assets. However, the process of asset/liability management in a financial
institution is subject to economic events not easily predicted.
COMPETITION
In the face of significant competition by financial and non-bank
entities over the last few years, the Banks have had limited success in
increasing their retail deposit base, excluding the historical benefit of the
large corporate relationship with Gilster-Mary Lee and the
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Heritage Federal acquisition. The Banks compete for deposits and loans with a
number of financial institutions in a four contiguous county market area that
has approximately 135,000 people. In three of the counties served, the Banks'
market share is low and average branch size is below average. A number of the
competing financial institutions are larger than the Banks and are subsidiaries
of larger regional bank holding companies. The Banks also face competition, to
an unquantifiable extent, from money market mutual funds and local and regional
securities firms.
PERSONNEL
As of December 31, 1998, the Banks had 29 full-time employees and seven
part time employees, none of whom were represented by a collective bargaining
unit. The Banks believe their relationships with their employees is good.
YEAR 2000 ISSUES
Over the next year, many companies, including financial institutions
such as the Company, will face potentially serious issues associated with the
inability of existing data processing hardware and software to appropriately
recognize calendar dates beginning in the year 2000. Many computer programs that
can only distinquish the final two digits of the year entered may read entries
for the year 2000 as the year 1900 and compute payment, interest or delinquency
based on the wrong date or are expected to be unable to compute payment,
interest or delinquency. In 1997, the Company began the process of identifying
the many software applications and hardware devices expected to be impacted by
this issue. The Company outsources its principal data processing activities to a
thrid party, and purchased most of its software applications from third party
vendors. The Company believes that its vendors are actively addressing the
problems associated with the "Year 2000" issue. The Company has completed the
assessment phase of its program and is currently in the testing phase of
determining Year 2000 readiness.
The Company has spent approximately $7,500 to-date in Year 2000
computer upgrades and does not expect that the remaining out-of-pocket cost of
its Year 2000 compliance effort will be material to its financial condition. The
most significant cost associated with the Company's Year 2000 program has been
the effort put forth by current employees. The internal cost incurred by Company
employees are not maintained separately by the Company.
The major applications which pose the greatest Year 2000 risk to the
Company if implementation of its readiness program is not successful are the
Company's data services systems supported by third party vendors, loan customers
inability to meet contractual payment obligations in the event the Year 2000
problem has a significant impact on their business, and failure of items
processing equipment which renders customers bank statements and banking
transactions. The potential problems which could result from the inability of
these applications to correctly process the Year 2000 are the inaccurate
calculation of interest income and expense, service delivery interruptions to
the Company's banking customers, credit losses resulting from the Company's loan
customers inability to make contractual credit obligations, interrupted
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34
financial data gathering, and poor customer relations resulting from inaccurate
or delayed transaction processing.
The Company intends on completing all Year 2000 remediation and testing
activities by mid 1999. Although the Company has initiated Year 2000
communications with key vendors, service providers and other parties material to
the Company's operations and is monitoring the progress of such third parties in
their Year 2000 compliance efforts, such third parties nonetheless represent a
risk that cannot be assessed with precision or controlled with certainty. For
that reason, the Company has developed a contingency plan to address
alternatives in the event that Year 2000 failures of automatic systems and
equipment occur.
REGULATION OF THE BANKS
The Banks are national banks subject to regulation, supervision and
examination by the OCC. In addition, the Banks' deposits are insured by the FDIC
up to the maximum amount permitted by law, and are therefore subject to
regulation, supervision and examination by the FDIC. See "1998 Annual Report -
Note 11 Regulatory Matters."
The Company and the Banks are legal entities separate and distinct.
Various legal limitations restrict the Banks from lending or otherwise supplying
funds to the Company (an "affiliate"), generally limiting such transactions with
the affiliate to 10% of each bank's capital and surplus, and limiting all such
transactions to 20% of each bank's capital and surplus. Such transactions,
including extensions of credit, sales of securities or assets and provision of
services, also must be on terms and conditions consistent with safe and sound
banking practices, including credit standards, that are substantially the same
or at least as favorable to each bank as those prevailing at the time for
transactions with unaffiliated companies.
Federal banking laws and regulations govern all areas of the operation
of the Banks, including reserves, loans, mortgages, capital, issuance of
securities, payment of dividends and establishment of branches. Federal bank
regulatory agencies also have the general authority to limit the dividends paid
by insured banks and bank holding companies if such payments should be deemed to
constitute an unsafe and unsound practice. The respective primary federal
regulators of the Company and the Banks have authority to impose penalties,
initiate civil and administrative actions and take other steps intended to
prevent the Banks from engaging in unsafe or unsound practices.
Federally insured banks are subject, with certain exceptions, to
certain restrictions or extensions of credit to their parent holding companies
or other affiliates, on investments in the stock or other securities of
affiliates and on the taking of such stock or securities as collateral from any
borrower. In addition, such banks are prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit or the providing of any
property or service.
Banks are also subject to the provisions of the Community Reinvestment
Act of 1977, which requires the appropriate federal bank regulatory agency, in
connection with its regular
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35
examination of a bank, to assess the bank's record in meeting the credit needs
of the community serviced by the bank, including low and moderate income
neighborhoods. The regulatory agency's assessment of the bank's record is made
available to the public. Further, such assessment is required of any bank which
has applied, among other things, to establish a new branch office that will
accept deposits, relocate an existing office or merge or consolidate with, or
acquire the assets or assume the liabilities of, a federally regulated financial
institution.
Dividends from the Banks will constitute the major source of funds for
dividends to be paid by the Company. The amount of dividends payable by the
Banks to the Company will depend upon the Banks' earnings and capital position,
and is limited by federal and state laws, regulations and policies.
As national banks, the Banks may not pay dividends from their paid-in
surplus. All dividends must be paid out of undivided profits then on hand, after
deducting expenses, including reserves for losses and bad debts. In addition, a
national bank is prohibited from declaring a dividend on its shares of common
stock until its surplus equals its stated capital, unless there has been
transferred to surplus no less than one-tenth of the bank's net profits of the
preceding two consecutive half-year periods (in the case of an annual dividend).
The approval of the OCC is required if the total of all dividends declared by a
national bank in any calendar year exceeds the total of its net profits for that
year combined with its retained net profits for the proceeding two years, less
any required transfers to surplus.
The OCC has the authority to prohibit any bank from engaging in an
unsafe or unsound practice in conducting its business. The payment of dividends,
depending upon the financial condition of the bank, could be deemed to
constitute such an unsafe or unsound practice. The Federal Reserve and the OCC
have indicated their view that it generally would be an unsafe and unsound
practice to pay dividends except out of current operating earnings. Moreover,
the Federal Reserve has indicated that bank holding companies should serve as a
source of managerial and financial strength to their subsidiary banks.
Accordingly, the Federal Reserve has stated that a bank holding company should
not maintain a level of cash dividends to its shareholders that places undue
pressure on the capital of its bank subsidiaries, or that can be funded only
through additional borrowings or other arrangements that may undermine the bank
holding company's ability to serve as a source of strength.
The amount of dividends actually paid during any one period are
strongly affected by the Banks' management policy of maintaining a strong
capital position. Federal law further provides that no insured depository
institution may make any capital distribution (which would include a cash
dividend) if, after making the distribution, the institution would not satisfy
one or more of its minimum capital requirements. Moreover, the federal bank
regulatory agencies also have the general authority to limit the dividends paid
by insured banks if such payments should be deemed to constitute an unsafe and
unsound practice.
BANK HOLDING COMPANY REGULATION
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36
GENERAL. Bank holding companies are subject to comprehensive regulation
by the Federal Reserve under the Bank Holding Company Act ("BHCA") and the
regulations of the Federal Reserve. As a bank holding company, the Company is
required to file with the Federal Reserve annual reports and such additional
information as the Federal Reserve may require and is subject to regular
examinations by the Federal Reserve. The Federal Reserve also has extensive
enforcement authority over bank holding companies, including, among other
things, the ability to assess civil money penalties, to issue cease and desist
or removal orders, and to require that a Company divest subsidiaries (including
its bank subsidiaries). In general, enforcement actions may be initiated for
violations of law and regulations and unsafe or unsound practices.
Under the BHCA, a bank holding company must obtain Federal Reserve
approval before: (1) acquiring, directly or indirectly, ownership or control of
any voting shares of another bank or bank holding company if, after such
acquisition, it would own or control more than 5% of such shares (unless it
already owns or controls the majority of such shares); (2) acquiring all or
substantially all of the assets of another bank or bank holding company; or (3)
merging or consolidating with another bank holding company.
Any direct or indirect acquisition by a bank holding company or its
subsidiaries of more than 5% of the voting shares of, or substantially all of
the assets of, any bank located outside of the state in which the operations of
the bank holding company's banking subsidiaries are "principally conducted", may
not be approved by the Federal Reserve unless the laws of the state in which the
bank to be acquired is located specifically authorize such an acquisition. The
term "principally conducted" generally means the state in which the total
deposits of all banking subsidiaries is the largest. The Company's business is
"principally conducted" in the State of Illinois. Most states have authorized
interstate bank acquisitions by out-of-state bank holding companies on either a
regional or a national basis, and most such statues require the home state of
the acquiring bank holding company to have enacted a reciprocal statue. Illinois
law permits bank holding companies located outside Illinois to acquire bank or
bank holding companies located in Illinois subject to the requirements that the
laws of the state in which the acquiring bank holding company is located permit
bank holding companies located in Illinois to acquire banks or bank holding
companies in the acquiror's state and that the laws of the state in which the
acquiror is located are not unduly restrictive when compared to those imposed by
the laws of Illinois.
The BHCA also prohibits a bank holding company, with certain
exceptions, from acquiring direct or indirect ownership or control of more than
5% of the voting shares of any company which is not a bank or bank holding
company, or from engaging directly or indirectly in activities other than those
of banking, managing or controlling banks, or providing services for its
subsidiaries. The principal exceptions to these prohibitions involve certain
non-bank activities which, by statue or by Federal Reserve regulation or order,
have been identified as activities closely related to the business of banking or
managing or controlling banks. The list of activities permitted by the Federal
Reserve includes, among other things, operating a savings institution, mortgage
company, finance company, credit card company or factoring company, performing
certain data processing operations; providing certain investment and financial
advice;
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underwriting and acting as an insurance agent for certain types of
credit-related insurance; leasing property on a full-payout, non-operating
basis; selling money orders, travelers' checks and United States Savings Bonds;
real estate and personal property appraising; providing tax planning and
preparation services; and, subject to certain limitations, providing securities
brokerage services for customers. The Company has no present plans to engage in
any of these activities.
DIVIDENDS. The Federal Reserve has issued a policy statement on the
payment of cash dividends by bank holding companies, which expresses the Federal
Reserve's view that a bank holding company should pay cash dividends only to the
extent that the company's net income for the past year is sufficient to cover
both the cash dividends and a rate of earning retention that is consistent with
the company's capital needs, asset quality and overall financial condition. The
Federal Reserve also indicated that it would be inappropriate for a company
experiencing serious financial problems to borrow funds to pay dividends.
Furthermore, under the prompt corrective action regulations adopted by the
Federal Reserve pursuant to FDICIA, the Federal Reserve may prohibit a bank
holding company from paying any dividends if the Company's bank subsidiary is
classified as "undercapitalized."
Bank holding companies are required to give the Federal Reserve prior
written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, is equal to 10% or more of their consolidated
net worth. The Federal Reserve may disapprove such a purchase or redemption if
it determines that the proposal would constitute an unsafe or unsound practice
or would violate any law, regulation, Federal Reserve order, or any condition
imposed by, or written agreement with, the Federal Reserve.
CAPITAL REQUIREMENTS.The Federal Reserve has established capital
requirements for bank holding companies that generally parallel the capital
requirements for national banks under the OCC's regulations. The Federal Reserve
regulations provide that capital standards will generally be applied on a bank
only (rather than a consolidated) basis in the case of a bank holding company
with less than $150 million in total consolidated assets.
FEDERAL SECURITIES LAWS
The common stock of the Company is registered with the Securities
Exchange Commission (the "SEC") and is subject to the disclosure, proxy
solicitation, insider trading restrictions and other requirements of the federal
securities laws. Shares of the Common Stock purchased by persons who are not
affiliates of the Company may be resold without registration. Shares purchased
by an affiliate of the Company may comply with the resale restrictions of Rule
144 under the Securities Act. If the Company meets the current public
information requirements of Rule 144 under the Securities Act, each affiliate of
the Company who complies with the other conditions of Rule 144 (including those
that require the affiliate's sale to be aggregated with those of certain other
persons) would be able to sell in the public market, without registration, a
number of shares not to exceed, in any three-month period, the greater of (i) 1%
of the
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outstanding shares of the Company or (ii) the average weekly volume of
trading in such shares during the preceding four calendar weeks. Provision may
be made in the future by the Company to permit affiliates to have their shares
registered for sale under the Securities Act under certain circumstances. There
are currently no demand registration rights outstanding. However, in the event
the Company, at some future time, determines to issue additional shares from its
authorized but unissued shares, the Company might offer registration rights to
certain of its affiliates who want to sell their shares.
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ITEM 2. Properties
The following table sets forth the Banks' offices, as well as certain
additional information relating to the offices, as of December 31, 1998.
Year Building Land Building
Location County Opened Owned/Leased Owned/Leased Square Footage Deposits
- -------- ------ ------ ------------ ------------ -------------- --------
Chester National Bank
Main Office
1112 State Street Randolph 1919 Owned Owned 10,345 $54,159
Chester, Illinois 62233
Chester National Bank
Branch Offices
101 South Main Perry 1989(1) Owned Owned 1,950 9,442
Pinckneyville, Illinois
62274
165 West Broadway Randolph 1989(1) Owned Owned 11,142 23,413
Sparta, Illinois 62286
1414 South Main Randolph 1989(1) Owned Owned 1,032 5,652
Red Bud, Illinois 62278
Chester National Bank
of Missouri Main Office
1010 North Main Perry 1990 Owned Owned 3,900 6,768
Perryville, Missouri
63775
Chester National Bank
of Missouri Loan
Production Office
125 South Broadview Cape 1995 Leased(2) Leased 720 N/A
Plaza, Suite #1 Girardeau
Cape Girardeau,
Missouri 63703
- ---------------
(1) Acquired in connection with the acquisition of Heritage Federal in 1989.
(2) Lease expires in June, 1999 with an option to renew.
ITEM 3. Legal Proceedings
Periodically, there have been various claims and lawsuits involving the Banks,
such as claims to enforce liens, condemnation proceedings on properties in which
the Banks hold security interests, claims involving the making and servicing of
real property loans and other issues incident to the Banks' business. The Banks
are not parties to any pending legal proceedings that
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management believes would have a material adverse effect on the financial
condition or operations of the Banks.
ITEM 4. Submission of Matters to a Vote of the Security Holders
During the fourth quarter of the fiscal year covered by this report, the Company
did not submit any matters to the vote of security holders through the
solicitation of proxies or otherwise.
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
The section of Annual Report to the Stockholders for the fiscal year ended
December 31, 1998, entitled "Common Stock and Related Matters" is hereby
incorporated by reference. No other sections of such Annual Report are
incorporated herein by this reference.
ITEM 6. Selected Financial Data.
The section of the Annual Report to the Stockholders for the fiscal year ended
December 31, 1998, entitled "Selected Consolidated Financial Information" is
hereby incorporated by reference. No other sections of such Annual Report are
incorporated herein by this reference.
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The section of the Annual Report to the Stockholders for the fiscal year ended
December 31, 1998, entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" is hereby incorporated by reference. No
other sections of such Annual Report are incorporated herein by this reference.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risks.
The Company's principal financial objective is to achieve long-term
profitability while reducing its exposure to fluctuating market interest rates.
The Company has sought to reduce the exposure of its earnings to changes in
market interest rates by attempting to manage the mismatch between asset and
liability maturities and interest rates. The principal element in achieving this
objective is to increase the interest-rate sensitivity of the Company's
interest-earning assets by originating adjustable rate residential mortgage
loans and shorter term consumer loans and maintaining a consistent level of
short- and intermediate-term investment securities and interest-bearing
deposits.
The Company does not maintain a trading account for any class of financial
instrument nor does it engage in hedging activities or purchase high-risk
derivative instruments. Furthermore, the Company is not subject to foreign
currency exchange rate risk or commodity price risk.
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Interest rate risk is the risk of loss in value due to changes in interest
rates. Management monitors and considers methods of managing interest rate risk
by monitoring changes in net portfolio value ("NPV") and its interest rate GAP
position (See "Interest Rate Risk Management" for the interest rate gap
analysis). The Company attempts to manage the various components of its balance
sheet to minimize the impact of sudden and sustained changes in interest rates
on net interest income.
In order to reduce the exposure to interest rate risk, the Company has developed
strategies to manage its liquidity, shorten the effective maturities of certain
interest-earning assets, and increase the effective maturities of certain
interest-bearing liabilities. The Company has focused on: (i) residential
lending of ARMs, which generally reprice within one to three years; (ii)
non-residential lending of adjustable or floating rate and/or short- term loans;
(iii) investment activities of short- and medium-term securities; (iv)
maintaining and increasing its passbook and transaction deposit accounts, which
are considered to be relatively resistant to changes in interest rates; and (v)
utilizing long-term borrowings to adjust the term to repricing of its
liabilities.
Interest rate sensitivity analysis is used to measure the Company's interest
rate risk by computing estimated changes in NPV of its cash flows from assets,
liabilities and off-balance sheet items in the event of an increase or decrease
of 100 basis points of assumed changes in market interest rates. NPV is equal to
the market value of assets minus the market value of liabilities, with
adjustments made for off-balance sheet items. The following table sets forth as
of December 31, 1998 the estimated changes in NPV based on the indicated
interest rate environments. NPV is calculated by an outside consulting firm
based on the net present value of estimated cash flows utilizing market
prepayment assumptions and market rates of interest. No effect has been given to
any steps that management of the Company may take to counter the effects of
interest rate movements presented in the table.
Change in
Interest Rates Net Portfolio Value
in Basis Points -------------------
(Rate Shock) Amount $ Change % Change
-----------------------------------------------------------------------------
(Dollars in Thousands)
300 18,561 (3,366) (15.35%)
200 19,610 (2,317) (10.57%)
100 20,730 (1,197) (5.46%)
Static 21,927 -- --
(100) 23,211 1,284 5.86%
(200) 24,591 2,664 12.15%
(300) 26,077 4,150 18.93%
The Company's asset and liability structure results in a decrease in NPV in a
rising interest rate scenario and an increase in NPV in a declining interest
rate scenario. During periods of rising rates, the value of monetary assets
declines. Conversely, during periods of falling rates, the value of monetary
assets increases. However, the level of change in value of specific assets and
liabilities due to changes in rates is not the same in a rising rate environment
as in a falling rate environment.
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As with any method of measuring interest rate risk, certain shortcomings are
inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
other types may lag behind changes in market rates. Additionally, certain
assets, such as substantially all of the Company's ARM loans, have features that
restrict changes in interest rates on a short-term basis and over the life of
the asset. Further, in the event of a change in interest rates, expected rates
of prepayments on loans and early withdrawals from certificates could likely
deviate significantly from those assumed in calculating the table. Therefore,
the data presented in the foregoing table should not be relied upon as
indicative of actual results.
ITEM 8. Financial Statements and Supplementary Data.
The sections of the Annual Report to the Stockholders for the fiscal year ended
December 31, 1998, entitled "Chester Bancorp, Inc. and Subsidiaries Consolidated
Balance Sheets," "Chester Bancorp, Inc. and Subsidiaries Consolidated Statements
of Income," "Chester Bancorp, Inc. and Subsidiaries Consolidated Statements of
Stockholders' Equity," "Chester Bancorp, Inc. and Subsidiaries Consolidated
Statements of Cash Flows," "Chester Bancorp, Inc. and Subsidiaries Notes to
Consolidated Financial Statements December 31, 1998 and 1997" are hereby
incorporated by reference. No other sections of such Annual Report are
incorporated herein by this reference.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
ITEM 10. Directors and Executive Officers of the Registrant.
The sections of the 1999 Proxy Statement, entitled "Proposal I - Election of
Directors," and "Compliance with Section 16(a) of the Exchange Act," as well as
the "Employment Agreements" portion of the section entitled "Executive
Compensation," are hereby incorporated by reference. No other sections of such
Proxy Statement are incorporated herein by this reference.
ITEM 11. Executive Compensation.
The section of the 1999 Proxy Statement, entitled "Executive Compensation," is
hereby incorporated by reference. No other sections of such Proxy Statement are
incorporated herein by this reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
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The section of the 1999 Proxy Statement, entitled "Security Ownership of Certain
Beneficial Owners and Management," is hereby incorporated by reference. No other
sections of such Proxy Statement are incorporated herein by this reference.
ITEM 13. Certain Relationships and Related Transactions.
The section of the 1999 Proxy Statement, entitled "Transactions with
Management," is hereby incorporated by reference. No other sections of such
Proxy Statement are incorporated herein by this reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(1) Financial Statements
The following information appearing in the Company's Annual Report to
Stockholders for the Fiscal Year Ended December 31, 1998 is incorporated by
reference as Exhibit 13 to this Annual Report on Form 10-K. No other sections of
such Annual Report are incorporated herein by this reference.
Annual Report Sections:
Independent Auditors' Report:
Chester Bancorp, Inc. and Subsidiaries Consolidated Balance Sheets for the
Years Ended December 31, 1998, 1997, and 1996.
Chester Bancorp, Inc. and Subsidiaries Consolidated Statements of Income for
the Years Ended December 31, 1998, 1997, and 1996.
Chester Bancorp, Inc. and Subsidiaries Consolidated Statements of Comprehensive
Income for the Years Ended December 31, 1998, 1997, 1996.
Chester Bancorp, Inc. and Subsidiaries Consolidated Statements of Stockholders'
Equity for the Years Ended December 31, 1998, 1997, and 1996.
Chester Bancorp, Inc. and Subsidiaries Consolidated Statements of Cash Flows
for the Years Ended December 31, 1998, 1997, and 1996.
Chester Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial
Statements December 31, 1998 and 1997.
(a)(2) Financial Statement Schedules. Not applicable.
(a)(3) Exhibits
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Regulation S-K Document Reference to Prior
Exhibit Number Filing or Exhibit Number
Attached Hereto
2 Plan of Conversion of Chester Savings Bank, FSB (1)
3.1 Certificate of Incorporation of Chester Bancorp, Inc. (1)
3.2 Bylaws of Chester Bancorp. (1)
10.1 Employment Agreement with Michael W. Welge* (2)
10.2 Employment Agreement with Edward K. Collins* (2)
10.3 Stock Option Plan* (1)
10.4 Management Recognition and Development Plan* (1)
10.5 Employee Stock Ownership Plan and Trust Agreement* (1)
13 Annual Report to Stockholders for Fiscal Year Ended December 31, 13
1998.
21 Subsidiaries of Chester Bancorp, Inc. (1)
27 Financial Data Schedule 27
99 Proxy Statement for the 1999 Annual meeting of the Stockholders 99
of Chester Bancorp, Inc.
(1) Documents incorporated by reference to the Company's Registration Statement
on Form S-1 filed with the SEC on August 12, 1996, (No. 333-2470) at the
corresponding exhibit. All such previously filed documents are hereby
incorporated by reference in accordance with Item 601 of Regulation S-K.
(2) Documents incorporated by reference to the Company's Form 10-K for the year
ended December 31, 1997 (File No. 000-21167) filed on March 20, 1998, at the
corresponding exhibit. All such previously filed documents are hereby
incorporated by reference in accordance with Item 601 of Regulations S-K.
* These agreements are management contracts or compensation plans or
arrangements required to be filed as exhibits to this Form 10-K.
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the last quarter of the
period covered by this report.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Chester Bancorp, Inc.
March ____, 1999 By__________________________
Michael W. Welge,
Chairman of the Board, President,
Chief Financial Officer, and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
March ____, 1999 By__________________________
Edward K. Collins,
Treasurer, Secretary, and Director
March ____, 1999 By__________________________
Allen R. Verseman,
Director
March ____, 1999 By__________________________
Carl H. Welge,
Director
March ____, 1999 By__________________________
Thomas E. Welch, Jr.
Director
March ____, 1999 By__________________________
John R. Beck, M.D.
Director
March ____, 1999 By__________________________
James C. McDonald,
Director
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