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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_________________ to_________________
Commission file number: 000-21167
----------------------
Chester Bancorp, Inc.
(Exact name of registrant as specified in its charter)
------------------------
Delaware 37-1359570
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1112 State Street, Chester, Illinois 62233
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (618) 826-5038
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). YES [ ] NO [X]
The number of outstanding shares of the registrant's Common Stock, par value
$.01 per share, was 893,321 on May 12, 2003.
================================================================================
FORM 10-Q
Index
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets.......................................................... 4
Consolidated Statements of Income.................................................... 5
Consolidated Statement of Stockholders' Equity....................................... 6
Consolidated Statements of Cash Flows................................................ 7
Consolidated Statements of Comprehensive Income...................................... 9
Notes to Unaudited Consolidated Financial Statements................................. 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................................ 13
Item 3. Quantitative and Qualitative Disclosures About Market Risks........................... 20
Item 4. Controls and Procedures............................................................... 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................................... 21
Item 2. Changes in Securities................................................................. 21
Item 3. Defaults upon Senior Securities....................................................... 21
Item 4. Submission of Matters to a Vote
of Securities Holders................................................................ 21
Item 5. Other Information..................................................................... 21
Item 6. Exhibits and Reports on Form 8-K...................................................... 21
Signature........................................................................................ 22
Certifications................................................................................... 23
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
3
CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 2003 and December 31, 2002
(Unaudited)
March 31, December 31,
2003 2002
---- ----
Assets
Cash $ 1,612,029 $ 1,298,481
Interest-bearing deposits 7,285,006 18,676,709
Federal funds sold 4,040,000 9,975,000
------------- ------------
Total cash and cash equivalents 12,937,035 29,950,190
Certificates of deposit 594,000 -
Investment securities:
Available for sale, at fair value (cost of $900,000 at 897,750 899,863
March 31, 2003 and December 31, 2002, respectively)
Held to maturity, at cost (fair value of $48,432,831 and $38,524,739 at 49,962,962 37,551,853
March 31, 2003 and December 31, 2002, respectively)
Trading securities, at fair value 410,241 352,551
Nonmarketable securities 3,637,800 3,502,400
Mortgage-backed securities:
Held to maturity, at cost (fair value of $4,963,659 and $3,378,408 at 4,855,032 3,240,925
March 31, 2003 and December 31, 2002, respectively)
Loans receivable, net of allowance for loan loss ($572,237 and $575,234 at 33,965,493 35,633,544
March 31, 2003 and December 31, 2002, respectively)
Accrued interest receivable 483,358 756,248
Office property and equipment, net 1,371,913 1,404,783
Bank owned life insurance 2,410,037 -
Other assets 486,834 556,732
------------- ------------
$ 112,012,455 $113,849,089
============= ============
Liabilities and Stockholders' Equity
Liabilities:
Deposits
Non-interest bearing $ 5,244,060 $ 5,149,295
Interest bearing 87,811,379 89,698,414
FHLB advances 5,000,000 5,000,000
Accrued interest payable 49,425 53,204
Advance payments by borrowers for taxes and insurance 291,339 162,860
Accrued expenses and other liabilities 54,825 75,353
------------- ------------
Total liabilities 98,451,028 100,139,126
------------- ------------
Stockholders' equity:
Common stock, $.01 par value, 3,000,000 shares authorized, 2,182,125
shares issued 21,821 21,821
Additional paid-in capital 21,127,646 21,137,443
Retained earnings, partially restricted 16,197,602 16,221,066
Accumulated other comprehensive (loss) (1,395) (85)
Unearned ESOP (1,383,740) (1,392,620)
Treasury stock, at cost: 1,288,804 and 1,285,557 shares at
March 31, 2003 and December 31, 2002, respectively (22,400,507) (22,277,662)
------------- ------------
Total stockholders' equity 13,561,427 13,709,963
------------- ------------
$ 112,012,455 $113,849,089
============= ============
See accompanying notes to unaudited consolidated financial statements.
4
CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Three Months Ended March 31, 2003 and 2002
(Unaudited)
Three Months Ended
------------------
March 31,
---------
2003 2002
---- ----
Interest income:
Loans receivable $ 624,806 $ 761,205
Investment securities - taxable 403,659 440,126
Investment securities - tax exempt 78,516 95,932
Mortgage-backed securities 45,643 91,012
Interest-bearing deposits and federal funds sold 58,122 68,337
---------- ----------
Total interest income 1,210,746 1,456,612
---------- ----------
Interest expense:
Savings deposits 483,658 592,166
FHLB advances and other borrowings 60,000 60,000
---------- ----------
Total interest expense 543,658 652,166
---------- ----------
Net interest income 667,088 804,446
Provision for loan losses - -
---------- ----------
Net interest income after provision for loan losses 667,088 804,446
---------- ----------
Noninterest income:
Late charges, deposit account fees, and other fees 44,133 49,084
Unrealized (loss) on trading securities (60,220) -
Gain on sale of securities, net 22,656 11,422
Other 20,960 8,592
---------- ----------
Total noninterest income 27,529 69,098
---------- ----------
Noninterest expense:
Compensation and employee benefits 248,839 317,992
Occupancy 75,190 72,643
Data processing 35,948 40,256
Professional fees 54,936 50,567
Advertising 11,313 11,528
Federal deposit insurance premiums 4,216 4,458
Other 85,190 77,536
---------- ----------
Total noninterest expense 515,632 574,980
---------- ----------
Income before income tax expense 178,985 298,564
Income tax expense 56,757 51,550
---------- ----------
Net income $ 122,228 $ 247,014
========== ==========
Earnings per common share - basic $ .16 $ .30
========== ==========
Earnings per common share - diluted $ .15 $ .28
========== ==========
See accompanying notes to unaudited consolidated financial statements.
5
CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Three Months Ended March 31, 2003
(Unaudited)
Retained Accumulated
Common stock Additional earnings, other
---------------------- paid-in substantially comprehensive
Shares Amount capital restricted (loss)
--------- --------- ------------ ------------- -------------
Balance, December 31, 2002 2,182,125 $ 21,821 $ 21,137,443 $ 16,221,066 $ (85)
Net income - - - 122,228 -
Purchase of treasury stock - - - - -
Stock options exercised - - - (9,547) -
Amortization of restricted stock awards - - (19,555) - -
Amortization of ESOP awards - - 9,758 - -
Dividends on common stock
at $.18 per share - - - (136,145) -
Change in accumulated other
comprehensive loss - - - - (1,310)
--------- --------- ------------ ------------- ---------
Balance, March 31, 2003 2,182,125 $ 21,821 $ 21,127,646 $ 16,197,602 $ (1,395)
========= ========= ============ ============= =========
Treasury Stock Total
Unearned ------------------------ Stockholders'
ESOP Shares Amount equity
------------ --------- ------------ -------------
Balance, December 31, 2002 $ (1,392,620) 1,285,557 $(22,277,662) $ 13,709,963
Net income - - - 122,228
Purchase of treasury stock - 14,158 (285,146) (285,146)
Stock options exercised - (10,911) 162,301 152,754
Amortization of restricted stock awards - - - (19,555)
Amortization of ESOP awards 8,880 - - 18,638
Dividends on common stock
at $.18 per share - - - (136,145)
Change in accumulated other
comprehensive loss - - - (1,310)
------------ --------- ------------ ------------
Balance, March 31, 2003 $ (1,383,740) 1,288,804 $(22,400,507) $ 13,561,427
============ ========= ============ ============
See accompanying notes to unaudited consolidated financial statements.
6
CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three months ended March 31, 2003 and 2002
(Unaudited)
March 31, March 31,
2003 2002
---- ----
Cash flows from operating activities:
Net income $ 122,228 $ 247,014
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization:
Office properties and equipment 32,870 20,428
Deferred fees, discounts, and premiums (72,140) 19,474
Amortization of stock plans (917) 68,321
Provisions for deferred taxes - (7,583)
Increase in accrued interest receivable 272,890 32,051
Decrease in accrued interest payable (3,779) (8,784)
Purchase of trading securities (194,455) -
Proceeds from sale of trading securities 79,919 -
Unrealized loss on trading securities 60,220 -
(Gain) on sale of securities, net (22,656) (11,422)
FHLB stock dividends (85,800) (42,600)
Net change in other assets and other liabilities 40,137 (30,544)
------------ ------------
Net cash provided by operating activities 228,517 286,355
------------ ------------
Cash flows from investing activities:
Investment securities:
Available -for-sale:
Proceeds from sales - 1,667,527
Held-to-maturity:
Purchases (29,220,000) (11,285,000)
Proceeds from sales 1,519,282 -
Proceeds from maturities and paydowns 15,320,000 6,082,000
Mortgage-backed securities:
Available-for-sale:
Proceeds from sales - 435,101
Proceeds from maturities and paydowns - 69,383
Held-to-maturity:
Purchases (2,000,000) -
Proceeds from maturities and paydowns 446,897 1,393,530
Principal repayments on loans 2,897,548 3,827,848
Origination of loans (1,229,471) (1,030,556)
Purchase of certificates of deposit (594,000) (6,000,000)
Purchase of FHLB stock (49,600) -
Purchase of bank owned life insurance (2,400,000) -
------------ ------------
Net cash provided by investing activities (15,309,344) (4,840,167)
------------ ------------
Cash flows from financing activities:
Increase (decrease) in savings deposits (1,792,270) (258,760)
Proceeds from FHLB advances - -
Increase in advance payments by borrowers for taxes and insurance 128,479 141,930
Purchase of treasury stock (285,146) -
Exercise of stock options 152,754 24,444
Dividends paid (136,145) (125,656)
------------ ------------
Net cash (used in) financing activities (1,932,328) (218,042)
------------ ------------
Net decrease in cash and cash equivalents (17,013,155) (4,771,854)
Cash and cash equivalents, beginning of period 29,950,190 21,018,082
------------ -----------
Cash and cash equivalents, end of period $ 12,937,035 $ 16,246,228
============ ============
7
CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three months ended March 31, 2003 and 2002
(Continued)
March 31, March 31,
2003 2002
---- ----
Supplemental information:
Interest paid $ 547,437 $ 660,950
Income taxes paid 883 6,075
Noncash investing and financing activities:
Loans transferred to real estate acquired by foreclosure - 39,232
Interest credited to savings deposits 331,958 400,810
See accompanying notes to unaudited consolidated financial statements.
8
CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended
March 31,
---------
2003 2002
---- ----
Net income $ 122,228 $ 247,014
Other comprehensive income, net of tax
Unrealized holding gain(loss) on
securities available for sale $ 10,645 $ 17,150
Less adjustment for realized gains
included in net income $ (11,955) $ (7,082)
--------- ---------
Total other comprehensive income(loss) $ (1,310) $ 10,068
--------- ---------
Comprehensive income $ 120,918 $ 257,082
========= =========
See accompanying notes to unaudited consolidated financial statements.
9
CHESTER BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(1) Basis of Presentation
The unaudited consolidated financial statements include the accounts of
Chester Bancorp, Inc. and its wholly owned subsidiaries, Chester National Bank
and Chester National Bank of Missouri. Significant intercompany accounts and
transactions have been eliminated in consolidation. The accompanying unaudited
consolidated financial statements were prepared in accordance with instructions
for Form 10-Q and, therefore, do not include all information and notes necessary
for a complete presentation of financial position, results of operations,
changes in stockholders' equity, and cash flows in conformity with accounting
principles generally accepted in the United States of America. However, all
adjustments (consisting only of normal recurring accruals) which, in the opinion
of management are necessary for a fair presentation of the unaudited
consolidated financial statements, have been included in the consolidated
financial statements as of March 31, 2003 and December 31, 2002 and for the
three months ended March 31, 2003 and 2002.
Operating results for the three months ended March 31, 2003 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2003.
The Company has not included disclosures regarding specific segments
since management makes operating decisions and assesses performance based on the
Company as a whole.
(2) Earnings Per Share (EPS)
Basic EPS is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
period. Shares acquired by the ESOP are held in trust but were not considered in
the weighted average shares outstanding until the shares were committed for
allocation. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the Company.
The computation of EPS for the three months ended March 31, 2003 and
2002 follows:
Three Months Ended
March 31,
---------
2003 2002
---- ----
Net income available to common stockholders $ 122,228 $ 247,014
========== ==========
Basic potential common shares:
Weighted average shares outstanding 896,218 977,783
Weighted average ESOP shares unallocated (138,018) (140,810)
---------- ----------
Basic average shares outstanding 758,200 836,973
---------- ----------
Diluted potential common shares:
Average stock option equivalents 73,253 60,186
---------- ----------
Diluted average shares outstanding 831,453 897,159
---------- ----------
Basic earnings per share $ 0.16 $ 0.30
========== ==========
Diluted earnings per share $ 0.15 $ 0.28
========== ==========
10
(3) Employee Stock Ownership Plan (ESOP)
During 1996, the Company established a tax-qualified ESOP. The plan
covers substantially all employees who have attained the age of 21 and completed
one year of service. In connection with the conversion to a stock corporation,
the ESOP purchased 174,570 shares of the Company's common stock at a
subscription price of $10.00 per share using funds loaned by the Company. All
shares are held in a suspense account for allocation among the participants as
the loan is repaid with level principal payments over the term of the loan. On
October 15, 2002, the Board of Directors approved an amendment to the ESOP which
extended the maturity of the loan to 40 years. Shares released from the suspense
account are allocated among the participants based upon their pro rata annual
compensation. The purchases of the shares by the ESOP were recorded by the
Company as unearned ESOP shares in a contra equity account. As ESOP shares are
committed to be released to compensate employees, the contra equity account is
reduced and the Company recognizes compensation expense equal to the fair value
of the shares committed to be released. Dividends on allocated ESOP shares are
recorded as a reduction of retained earnings; dividends on unallocated ESOP
shares are recorded as a reduction of debt. Compensation expense related to the
ESOP was $18,638 and $26,772 for the three months ended March 31, 2003 and 2002,
respectively.
The ESOP shares as of March 31, 2003 are as follows:
Allocated shares 35,308
Committed to be released shares 888
Unreleased shares 138,374
----------
Total ESOP shares 174,570
==========
Fair value of unreleased shares $2,905,854
==========
(4) Restricted Stock Awards
On April 4, 1997, the Company adopted the 1997 Management Recognition
and Development Plan. The plan provides that 82,921 common shares can be issued
to directors and employees in key management positions to encourage such
directors and key employees to remain with the Company. Interest in the plan for
each participant vests in five equal installments beginning April 4, 1998. The
adoption of the plan has been recorded in the consolidated financial statements
through a $1,160,894 credit to additional paid-in capital with a corresponding
charge to a contra equity account for restricted shares. The contra equity
account is amortized to compensation expense over the vesting period with
forfeitures accounted for in the period in which they occur. Compensation
expense was ($19,555) and $41,549 for the three months ended March 31, 2003 and
2002, respectively.
(5) Stock Option Plan
On April 4, 1997, the Company adopted the 1997 Stock Option Plan. The
plan provides for the granting of options for a maximum of 218,212 shares of
common stock to directors, key officers and employees. The options vest in five
equal installments beginning on the first anniversary of the grant date of the
options.
On April 4, 2000, the Company adopted the 2000 Stock Option Plan. The
plan provides for the granting of options for a maximum of 50,000 shares of
common stock to directors, key officers and employees. The options vest in five
equal installments beginning on the first anniversary of the grant date of the
options.
As permitted under accounting principles generally accepted in the
United States of America, grants of options under the plans are accounted for
under the recognition and measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations. Because
options granted under the plans had an exercise price equal to market value of
the underlying common stock on the date of the grant, no stock-based employee
compensation cost is included in determining net income. The following table
illustrates the effect on net income and earnings per share if the Company had
applied the fair
11
value recognition provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation, to stock-based employee compensation.
For purposes of pro forma disclosures the estimated fair value of the
stock options is amortized to expense over the vesting period. The pro forma
effects on net income for the quarter ended March 31, 2003 and 2002, based on
options granted from 1997 to 2001 are as follows:
March 31, March 31,
2003 2002
---- ----
Net income, as reported $ 122,228 $ 247,014
Deduct total stock-based compensation expense determined
under the fair value method for all awards, net of related
tax effects (8,619) (32,881)
--------- ---------
Pro forma net income $ 113,609 $ 214,133
========= =========
Earnings per shares:
Basic:
As reported $ 0.16 $ 0.30
Pro forma $ 0.15 $ 0.26
Diluted:
As reported $ 0.15 $ 0.28
Pro forma $ 0.14 $ 0.24
(6) Outstanding Commitments
The Company is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers in the way of commitments to extend credit. They involve, to varying
degrees, elements of credit risk in excess of the amount recognized in the
balance sheets.
The Company's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit is
represented by the contractual amount of those instruments. The Company uses the
same credit policies in making commitments and conditional obligations as they
do for on-balance-sheet instruments. The Company has not issued any standby
letters of credit. A summary of the Company's commitments is as follows:
Range of Rates
Variable Rate Fixed Rate Total on Fixed Rate
Commitments to extend credit Commitments Commitments Commitments Commitments
- -------------------------------------------------------------------------------------------------------
March 31, 2003 $ 865,678 $ 4,045,673 $ 4,911,351 5.00% - 12.9%
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Since many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. The Company evaluates each customer's creditworthiness on a
case-by-case basis. Credit card commitments are unsecured.
Substantially all of the Company's loans are to borrowers located in
Randolph, Jackson, Williamson and Perry counties in Illinois and Perry and Cape
Girardeau counties in Missouri.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The principal business of Chester Bancorp, Inc. and its
subsidiaries (the Company) consists of attracting deposits from the general
public and using these funds to originate mortgage loans secured by one-to
four-family residences and to invest in securities of the U. S. government,
mortgage-backed securities, and other securities. To a lesser extent, the
Company engages in various forms of consumer lending. The Company's
profitability depends primarily on its net interest income, which is the
difference between the interest income it earns on its loans, mortgage-backed
securities and investment portfolio and its cost of funds, which consists mainly
of interest paid on deposits, and FHLB advances.
The operations of the Company are significantly influenced by
general economic conditions and related monetary and fiscal policies of
financial institutions regulatory agencies. Deposit flows and the cost of funds
are influenced by interest rates on competing investments and general market
rates of interest. Lending activities are affected by the demand for financing
real estate and other types of loans, which in turn is affected by the interest
rates at which such financing may be offered and other factors affecting loan
demand and the availability of funds.
When used in this report the words or phrases "will likely
result," "are expected to," "is anticipated," "estimate," "project," or similar
expressions are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such statements
are subject to certain risks and uncertainties, including, among other things,
changes in economic conditions in the Company's market area, changes in policies
by regulatory agencies, fluctuations in interest rates, demand for loans in the
Company's market area and competition, that could cause actual results to differ
materially from the historical earnings and those presently anticipated or
projected. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made. The
Company wishes to advise readers that the factors listed above could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.
The Company does not undertake, and specifically declines any
obligation, to publicly release the results of any revisions which may be made
to any forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
FINANCIAL CONDITION
ASSETS. The Company's total assets decreased by $1.8 million,
or 1.6%, to $112.0 million at March 31, 2003 from $113.8 million at December 31,
2002. Although the deposit base remained stable during the first quarter, the
mix of interest earning assets was realigned in an effort to improve net
interest income.
Loans receivable deceased $1.7 million, or 4.7%, to $34.0
million at March 31, 2003 from $35.6 million at December 31, 2002. The decrease
in loans receivable resulted from a combined impact of decreased loan
origination volume and an increase in principal repayments on loans receivable.
During this period of record low interest rates and economic instability,
management has decided to continue to focus on originating high quality loans.
Management has also decided not to aggressively compete on rate terms with other
lenders in the Banks' market area. As a result, the Company has experienced some
constriction in the loan portfolio.
Mortgage-backed securities at March 31, 2003 were $4.9 million
compared to $3.2 million at December 31, 2002, an increase of $1.6 million or
49.8%. Investment securities, including nonmarketable equity securities and
trading securities, decreased $12.6 million, or 29.8%, to $54.9 million at March
31,
13
2003, from $42.3 million at December 31, 2002. As a function of management's
plan to re-align the mix of interest earning assets, proceeds from maturities,
calls and sales of investment securities and mortgage-backed securities, along
with principal repayments on loans and mortgage-backed securities, were
re-invested in short-term, callable investment securities and short-term
interest-bearing deposits.
Cash and cash equivalents and certificates of deposits
decreased $16.4 million, or 54.8%, to $13.5 million at March 31, 2003 from $30.0
million at December 31, 2002, as a direct result of the re-alignment of interest
earning assets. In addition, excess deposits in interest bearing accounts and
federal funds sold were invested in higher yielding certificates of deposits and
short-term, callable investment securities.
LIABILITIES. Savings deposits decreased $1.8 million, or 1.9%,
during the three months ended March 31, 2003. Borrowed money was $5.0 million at
March 31, 2003 and December 31, 2002.
Over the last several years, the Company has maintained a
deposit relationship with Gilster-Mary Lee Corporation, (Gilster-Mary Lee), a
food manufacturing and packaging company headquartered in Chester, Illinois. The
Chairman of the Board of the Company is also the Executive Vice President,
Treasurer and Secretary of Gilster-Mary Lee. That relationship has provided as
much as $25 million in funds on deposit, typically with short terms. At March
31, 2003 and December 31, 2002, the balance of funds on deposit with the Company
was $27.2 million, and $27.7 million, respectively.
RESULTS OF OPERATIONS
The Company's operating results depend primarily on its level
of net interest income, which is the difference between the interest income
earned on its interest-earning assets (loans, mortgage-backed securities,
investment securities, certificates of deposit and interest-bearing deposits)
and the interest expense paid on its interest-bearing liabilities (deposits and
borrowings). Operating results are also significantly affected by provisions for
loan losses, noninterest income, and noninterest expense. Each of these factors
is significantly affected not only by the Company's policies, but, to varying
degrees, by general economic and competitive conditions and by policies of
federal regulatory authorities.
NET INCOME. The Company's net income for the three months
ended March 31, 2003 was $122,000 compared to $247,000 for the three months
ended March 31, 2002. The $125,000 decrease in net income for the three months
ended March 31, 2003 was the result of a decline in all significant areas of
income and related expenses.
NET INTEREST INCOME. Net interest income totaled $667,000 for
the three months ended March 31, 2003 compared to $804,000 for the three months
ended March 31, 2002. The $137,000, or 17.1%, decrease in net interest income
was the result of a decrease in the ratio of average interest-earning assets to
average interest-bearing liabilities of 107.4% for the three months ended March
31, 2003 compared to 111.9% for the three months ended March 31, 2002. The
decrease was further impacted by a decrease in the Company's interest rate
spread to 2.49% for the three months ended March 31, 2003 from 2.89% for the
three months ended March 31, 2002.
INTEREST INCOME. Interest income on loans receivable decreased
$136,000, or 17.9%, for the three months ended March 31, 2003. The decrease in
interest income on loans receivable was the result of a $4.6 million, or 11.7%,
decrease in the average balance of loans receivable, coupled with a decline in
the average yield on loans receivable to 7.18% for the three months ended March
31, 2003 from 7.72% for the three months ended March 31, 2002.
Interest income on mortgage-backed securities decreased
$45,000, or 49.8%, for the three months ended March 31, 2003. The decrease in
interest income on mortgage-backed securities for the three months ended March
31, 2003 was the result of a $3.1 million, or 50.3%, decrease in the average
balance of mortgage-backed securities. Management invested the funds received
from the repayments of mortgage-backed securities into short-term,
interest-bearing deposits.
14
Interest earned on investment securities was $482,000 for the
three months ended March 31, 2003, compared to $536,000 for the three months
ended March 31, 2002. The $54,000, or 10.1% decrease in interest income on
investment securities was the result of a decrease in the average tax equivalent
yield on investment securities to 4.46% for the three months ended March 31,
2003 from 5.67% for the three months ended March 31, 2002.
Interest income on interest-bearing deposits decreased
$10,000, or 14.9%, during the three months ended March 31, 2003. The decrease
primarily resulted from a decrease in the average yield on interest-bearing
deposits to 1.06% for the three months ended March 31, 2003 from 1.39% for the
three months ended March 31, 2002, positively offset by a $2.2 million, or
11.4%, increase in the average balance of interest-bearing deposits.
INTEREST EXPENSE. Interest expense on savings deposits
decreased $108,000, or 18.3%, to $484,000 for the three months ended March 31,
2003 from $592,000 for the three months ended March 31, 2002. The decrease in
interest expense was the result of a decrease in the average cost of deposits to
2.07% for the three months ended March 31, 2003 from 2.64% for the three months
ended March 31, 2002.
Interest expense on borrowed money remained constant at
$60,000 for the three months ended March 31, 2003 and 2002, respectively. The
average balance on borrowed money was $5.0 million for both the three month
periods ended March 31, 2003 and 2002.
CRITICAL ACCOUNTING POLICIES. The preparation of financial
statements in conformity with accounting standards generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenues and expenses
and the related disclosures of contingent assets and liabilities. Actual results
could differ from those estimates under different assumptions and conditions.
The Company believes that is has one critical accounting policy, allowance for
loan losses, that is subject to estimates and judgments used in the preparation
of its consolidated financial statements.
PROVISION FOR LOAN LOSSES. The allowance for loan losses is
established through a provision for loan losses charged to expense based on
management's evaluation of the risk inherent in its loan portfolio and the
general economy. Such evaluation considers numerous factors including general
economic conditions, loan portfolio composition, prior loss experience, the
estimated fair value of the underlying collateral, and other factors that
warrant recognition in providing for an adequate loan loss allowance.
During the quarters ended March 31, 2003 and 2002, the
provision for loan losses was zero as no significant problem loans were
identified and the allowance for loan losses was deemed by management to be
adequate.
The Company's allowance for loan losses was $572,000, or 1.7%,
of loans outstanding at March 31, 2003 compared to $575,000, or 1.6%, of loans
outstanding at December 31, 2002. The Company's level of net loans charged-off
during the three months ended March 31, 2003 was $3,000, which represents a
minimal percentage of average loans outstanding. Based on current levels of the
allowance for loan losses in relation to loans receivable and delinquent loans,
management's continued effort to favorably resolve problem loan situations, and
the low level of charge-offs in recent years, management believes the allowance
is adequate at March 31, 2003. At March 31, 2003, loans 90 days or more
delinquent totaled $85,000, or .25% of net loans receivable, compared to
$54,000, or .15% of net loans receivable at December 31, 2002, and $83,000, or
..22% of net loans receivable at March 31, 2002.
The breakdown of general loss allowances and specific loss
allowances is made for regulatory accounting purposes only. General loan loss
allowances are added back to capital to the extent permitted in computing
risk-based capital. Both general and specific loss allowances are charged to
expense. The financial statements of the Company are prepared in accordance with
accounting principles generally accepted in the United States of America (GAAP)
and, accordingly, provisions for loan losses are based on
15
management's assessment of the factors set forth above. The Company regularly
reviews its loan portfolio, including problem loans, to determine whether any
loans are impaired, require classification and/or the establishment of
appropriate reserves. Management believes it has established its existing
allowance for loan losses in accordance with GAAP, however, future additions may
be necessary if economic conditions or other circumstances differ substantially
from the assumptions used in making the initial determination.
NONINTEREST INCOME. Noninterest income was $28,000 for the
three months ended March 31, 2003, compared to $69,000 for the three months
ended March 31, 2002. During the three months ended March 31, 2003, the Company
realized a $23,000 net gain on the sale of investment securities, compared to a
$11,000 net gain realized on the sale of investment securities during the
comparable three month period ended March 31, 2002. The Company had an
unrealized loss on trading securities of $60,000 for the three months ended
March 31, 2003, whereas the Company had no unrealized loss or gain for the
comparable three months ended March 31, 2002. During the three months ended
March 31, 2003, the Company had a $12,000 increase in other noninterest income.
The majority of the increase was due to the Company investing $2.4 million into
single premium Bank Owned Life Insurance ("BOLI"). The purpose of this
transaction was to finance the Company's existing medical insurance benefit
liabilities. BOLI provides a long-term asset to offset long-term benefit
liabilities, while generating competitive investment yields with superior credit
quality. BOLI generates positive economic returns. Increases to cash value are
tax-deferred and death benefit proceeds received by the Company are income tax
free. The Company discloses the cash surrender value "asset" as a separate line
item and the increase in the cash value will be recorded within the "other"
noninterest income category monthly.
NONINTEREST EXPENSE. Noninterest expense decreased $59,000, or
10.3%, for the three months ended March 31, 2003. The decrease in noninterest
expense for the three months ended March 31, 2003 resulted from a $69,000
decrease in compensation expense and a $4,000 decrease in data processing fees,
partially offset by a $4,000 increase in professional fees and a $8,000 increase
in other expense. The decrease in compensation expense for the three months
ended March 31, 2003 was primarily the result of the Management Retention Plan
(MRP). The MRP expense was ($19,555) for the three months ending March 31, 2003
compared to $42,000 for the comparable three months ended March 31, 2002.
Compensation expense was further decreased by a one-time benefit of $11,000 from
the Company's group insurance carrier. The insurance carrier converted from a
mutual to stock institution, which resulted in members receiving proceeds from
the stock distribution during January and February, 2003.
INCOME TAX EXPENSE. Income tax expense for the three months
ended March 31, 2003 was $57,000 compared to $52,000 for the three months ended
March 31, 2002. The Company's effective tax rate for the three months ended
March 31, 2003 was 31.7%, compared to 17.3% for the three months ended March 31,
2002. The effective tax rate for each period was below the statutory rate of 34%
due to the Company's investment in tax-exempt securities. The Company recorded
an adjustment of $26,000 to income tax expense during the first quarter 2002.
This adjustment was the result of a reevaluation of estimated tax expense in
conjunction with the year-end tax return. Before the effect of this transaction,
the effective tax rate for the three month period ending March 31, 2002 would
have been 26.0%.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds consist of deposits,
federal funds purchased, FHLB advances, repayments and prepayments of loans and
mortgage-backed securities, maturities of investments and interest-bearing
deposits, and funds provided from operations. While scheduled repayments of
loans and mortgage-backed securities and maturities of investment securities are
predictable sources of funds, deposit flows and loan prepayments are greatly
influenced by general interest rates, economic conditions and competition. The
Company manages the pricing of its deposits to maintain a steady deposit base.
The Company uses its liquidity resources principally to fund existing and future
loan commitments, to fund maturing certificates of deposit and deposit
withdrawals, to invest in other interest-bearing assets, to maintain
16
liquidity, and to meet operating expenses. Management believes that loan
repayments and other sources of funds will be adequate to meet the Company's
liquidity needs for the remainder of 2003.
A major portion of the Company's liquidity consists of cash
and cash equivalents, which include investments in highly liquid, short-term
deposits. The level of these assets is dependent on the Company's operating,
investing, lending and financing activities during any given period. At March
31, 2003, cash and cash equivalents, including certificates of deposits, totaled
$13.5 million.
The primary investing activities of the Company include
origination of loans and purchase of mortgage-backed securities and investment
securities. During the three months ended March 31, 2003, purchases of
investment securities and mortgaged-backed securities totaled $31.2 million
while loan originations totaled $1.2 million. These investments were funded
primarily from loan and mortgage-backed security repayments of $3.3 million and
investment securities and sales, calls and maturities of $16.8 million.
Liquidity management is both a daily and long-term function of
business management. If the Company requires funds beyond its ability to
generate them internally, the Company believes that it could borrow by
purchasing federal funds or borrow funds from the Federal Home Loan Bank (FHLB).
At March 31, 2003, the Company had $5.0 million in outstanding advances from the
FHLB.
At March 31, 2003, the Company exceeded all of its regulatory
capital requirements. The Company and the Company's subsidiary banks actual and
required capital amounts and ratios as of March 31, 2003 are as follows:
For capital
Actual adequacy purposes
-------------------------------------------------
(Dollars in thousands) Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------------------------
Total capital
(to risk-weighted assets):
Company $ 14,080 34.0% 3,313 8.00%
Chester National Bank $ 10,087 27.6% 2,924 8.00%
Chester National Bank of Missouri $ 2,752 59.1% 373 8.00%
Tier 1 capital
(to risk-weighted assets):
Company $ 13,564 32.8% 1,656 4.00%
Chester National Bank $ 9,630 26.3% 1,462 4.00%
Chester National Bank of Missouri $ 2,693 57.8% 186 4.00%
Tier 1 capital
(to average assets):
Company $ 13,564 12.0% 4,507 4.00%
Chester National Bank $ 9,630 9.4% 4,079 4.00%
Chester National Bank of Missouri $ 2,693 28.7% 376 4.00%
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related data
presented herein have been prepared in accordance with accounting principles
generally accepted in the United States of America, which require the
measurement of financial position and results of operations in terms of
historical dollars without considering changes in the relative purchasing power
of money over time because of inflation. Unlike most industrial companies,
virtually all of the assets and liabilities of the Company are monetary in
nature. As a result, interest rates have a more significant impact on the
Company's performance than the effects of general levels of inflation. Interest
rates do not necessarily move in the same direction or in the same magnitude as
the prices of goods and services.
17
NONPERFORMING ASSETS
The following table sets forth information with respect to the Company's
nonperforming assets at the dates indicated.
At March 31, At December 31,
------------ ---------------
2003 2002
---- ----
(Dollars in Thousands)
------------------------------------
Non-performing loans:
Loans accounted for on a non-accrual basis:
Real estate
Residential real estate $ 79 $ 46
Commercial -- --
Consumer 6 8
-------- ---------
Total 85 54
-------- ---------
Accruing loans which are contractually past due 90 days or more:
Residential real estate -- --
Commercial -- --
Consumer -- --
-------- ---------
Total -- --
-------- ---------
Total non-performing loans 85 54
Real estate acquired by foreclosure, net 20 20
-------- ---------
Total non-performing assets $ 105 $ 74
======== =========
Total non-performing loans to net loans 0.25% 0.15%
======== =========
Total allowance for loan losses to
non-performing loans 670.94% 1,072.50%
======== =========
Total non-performing assets to total assets 0.09% 0.06%
======== =========
18
Chester Bancorp, Inc., and Subsidiaries
Three Months Ended March 31,
- -----------------------------------------------------------------------------------------------------
2003
-----------------------------------------------------------
Average
Average Yield/
Balance Interest Cost
-------------------- ---------------- ----------------
(Dollars in thousands)
Interest-earning assets:
Loans receivable, net $ 34,810 $ 625 7.18%
Investments, net (1) 46,110 514 4.46%
Mortgage-backed securities, net 3,109 46 5.92%
Interest-bearing deposits 21,862 58 1.06%
-------------------- ---------------- ----------------
Total interest-earning assets 105,891 1,243 4.70%
---------------- ----------------
Noninterest-earning assets 5,471
--------------------
Total assets $ 111,362
====================
Interest-bearing liabilities:
Deposits $ 93,585 484 2.07%
Federal funds purchased 0 0 0.00%
Other borrowings 0 0 0.00%
FHLB advances 5,000 60 4.80%
-------------------- ---------------- ----------------
Total interest-bearing liabilities 98,585 544 2.21%
---------------- ----------------
Noninterest-bearing liabilities 564
--------------------
Total liabilities 99,149
Retained earnings 12,213
--------------------
Total liabilities and retained
earnings $ 111,362
====================
Net interest income $ 699
================
Interest rate spread 2.49%
================
Net interest margin 2.64%
================
Ratio of average interest-earning
assets
To average interest-bearing
liabilities 107.41%
================
Chester Bancorp, Inc., and Subsidiaries
Three Months Ended March 31,
- -----------------------------------------------------------------------------------------------------
2002
-----------------------------------------------------------
Average
Average Yield/
Balance Interest Cost
-------------------- ---------------- ----------------
(Dollars in thousands)
Interest-earning assets:
Loans receivable, net $ 39,427 $ 761 7.72%
Investments, net (1) 40,576 575 5.67%
Mortgage-backed securities, net 6,256 91 5.82%
Interest-bearing deposits 19,628 68 1.39%
-------------------- ---------------- ----------------
Total interest-earning assets 105,887 1,495 5.65%
---------------- ----------------
Noninterest-earning assets 4,762
--------------------
Total assets $ 110,649
====================
Interest-bearing liabilities:
Deposits $ 89,659 592 2.64%
Federal funds purchased 0 0 0.00%
Other borrowings 0 0 0.00%
FHLB advances 5,000 60 4.80%
-------------------- ---------------- ----------------
Total interest-bearing liabilities 94,659 652 2.76%
---------------- ----------------
Noninterest-bearing liabilities 967
--------------------
Total liabilities 95,626
Retained earnings 15,023
--------------------
Total liabilities and retained
earnings $ 110,649
====================
Net interest income $ 843
================
Interest rate spread 2.89%
================
Net interest margin 3.18%
================
Ratio of average interest-earning
assets
To average interest-bearing
liabilities 111.86%
================
(1) Tax exempt state and municipal securities are presented on a tax equivalent
basis.
19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
There has been no material change to the market risk position of the
Company from the end of the last fiscal year on December 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the
participation of the Company's management, including the Chief Executive Officer
(CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and
operation of the Company's disclosure controls and procedures within 90 days
before the filing date of this quarterly report. Based on that evaluation, the
Company's management, including the CEO and CFO, concluded that the Company's
disclosure controls and procedures were effective. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls subsequent to their evaluation.
20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Neither the Company nor the Banks are a party to any material legal
proceedings at this time. From time to time, the Banks are involved in
various claims and legal actions arising in the ordinary course of
business.
Item 2. Changes in Securities.
None
Item 3. Defaults upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
On March 7, 2003, the Company solicited proxies for the annual meting
of stockholders of the Company held on April 11, 2003. The only matter submitted
to, and approved by, stockholders is listed below, as is a tabulation of voting
(1) The following persons nominated as Directors were re-elected:
John R. Beck MD For 741,034 Against 0 Abstain 3,600
James C. McDonald For 741,034 Against 0 Abstain 3,600
Other directors continuing in office are as follows: Michael W. Welge, Edward K.
Collins, Thomas E. Welch, Jr. and Carl Welge.
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits
EXHIBIT NO. DESCRIPTION
- ----------- -----------
99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
B. Reports on Form 8-K
None
21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report on Form 10-Q to be signed on its
behalf by the undersigned, thereunto duly authorized.
Chester Bancorp, Inc.
By: /s/ Michael W. Welge
------------------------------------------
Michael W. Welge
Chairman of the Board, President and Chief
Financial Officer
By: /s/ Edward K. Collins
------------------------------------------
Edward K. Collins
Chief Executive Officer
Dated: May 12, 2003
22
CERTIFICATIONS
Certification of Principal Executive Officer
I, Edward K. Collins, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Chester Bancorp,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures of a date within 90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
May 12, 2003 /s/ Edward K. Collins
---------------------
Edward K. Collins
Chief Executive Officer
(Principal Executive Officer)
23
CERTIFICATIONS
Certification of Principal Executive Officer
I, Michael W. Welge, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Chester, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures of a date within 90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
May 12, 2003 /s/ Michael W. Welge
--------------------------
Michael W. Welge
Chairman of the Board, President and
Chief Financial Officer
(Principal Financial Officer)
24