-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HwqrRPtDVxkCp+LB3x2ZVyH/4tygwvgiFK3A2/CJGQoRJrbbmGtmoYLaDAKwUocd Mo4+hiZ1toiDy5nKVurlBg== 0000950124-99-002287.txt : 19990402 0000950124-99-002287.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950124-99-002287 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHESTER BANCORP INC CENTRAL INDEX KEY: 0001010838 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 371359570 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-21167 FILM NUMBER: 99583183 BUSINESS ADDRESS: STREET 1: 1112 STATE ST CITY: CHESTER STATE: IL ZIP: 62233 BUSINESS PHONE: 6188265038 MAIL ADDRESS: STREET 1: 1112 STATE ST CITY: CHESTER STATE: IL ZIP: 62233 10-K 1 FORM 10-K 1 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. 1 2 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. 2 3 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. 3 4 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. 4 5
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 ======== ======== ========
5 6 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. 6 7 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 7 8 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. 8 9 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 9 10 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. 10 11
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 11 12 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. 12 13 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 14 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% ====== ===== ====== ===== ===== =====
14 15 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% ------- -------- -------
15 16 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: 16 17
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 17 18 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. 18 19
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 19 20 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 21 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 21 22 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. 22 23
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. 23 24
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% ============================================================================
24 25
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 25 26 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. 26 27 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 =======
27 28 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. 28 29 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. 29 30
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. 30 31
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 31 32 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 32 33 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 33 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 34 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 35 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; 36 37 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 37 38 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. 38 39 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 39 40 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. 40 41 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. 41 42 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 42 43 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 43 44
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. 44 45 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 45 EX-13 2 EMPLOYEE STOCK OWNERSHIP PLAN & TRUST AGREEMENT 1 CHESTER BANCORP, INC. [CHESTER BANCORP. LOGO] 1998 Annual Report 2 TABLE OF CONTENTS - -------------------------------------------------------------------------------- Page ---- Message to Our Stockholders 1 Common Stock and Related Matters 2 Selected Consolidated Financial Information 3 Management's Discussion and Analysis 5 Independent Auditors' Report 16 Consolidated Financial Statements 17 Notes to Consolidated Financial Statements 22 Stockholder Information Inside Back Cover 3 MESSAGE TO OUR STOCKHOLDERS - -------------------------------------------------------------------------------- To Our Stockholders: Chester Bancorp, Inc. has completed its second full year as a public company. On October 4, 1996, Chester Savings Bank, F.S.B. converted from mutual to stock ownership and converted from a federal savings bank to two national banks, Chester National Bank and Chester National Bank of Missouri. Simultaneously with these conversions, the Company, Chester Bancorp, Inc., was formed as a holding company for the two banks and the Company completed the initial public offering of its common stock. The conversion from mutual ownership in a savings association to stock ownership in a bank holding company has enabled customers, community members and other investors to participate in the Bank's growth and success through an equity interest in the Company. The Banks continue to focus on maintaining profitability by increasing their lending base while maintaining safe and sound banking practices. Both Chester National Bank and Chester National Bank of Missouri are well positioned as strong local community banks in the markets they serve. The Banks' multiple locations, including main facilities in Chester, Illinois, and Perryville, Missouri, branch facilities in Sparta, Pinckneyville and Red Bud, Illinois, and a loan production office in Cape Girardeau, Missouri, enable the Banks to provide quality banking service to several local communities in the region. The Company is expanding in the Perryville market with the opening of a branch office in the new Bucheit building located on Route 51 in Perryville. The Company initially offered 2,182,125 shares of common stock to the public on October 4, 1996. The Company has reduced the number of outstanding shares of its common stock to 1,481,988 as of December 31, 1998, through various repurchases of the Company's capital stock. Beginning on April 4, 1997, the Company announced its initial repurchase plan to repurchase 5% of its then outstanding capital stock, with this repurchase plan being completed in 1997. On October 7, 1997, the Company announced a further plan to repurchase an additional 10% of its then outstanding shares, with this plan being completed during 1998. In addition, the Company has continued to repurchase shares from time to time, to the extent that such repurchases are then determined to be advisable by the Board of Directors and authorized by the appropriate regulatory authorities. The Company will continue this practice which is considered by the Board of Directors as a method of increasing value to the Company's stockholders. On behalf of the Board of Directors of Chester Bancorp, Inc. and the management and employees of Chester National Bank and Chester National Bank of Missouri, I extend our sincere appreciation to our stockholders and customers for your support during 1998. We look forward to an exciting and profitable 1999. Sincerely, Michael W. Welge Michael W. Welge Chairman of the Board, President and Chief Financial Officer 1 4 COMMON STOCK AND RELATED MATTERS - -------------------------------------------------------------------------------- The common stock of Chester Bancorp, Inc. is traded in the over-the-counter market and is listed for quotation in the Nasdaq National Market under the symbol "CNBA." The stock was issued on October 4, 1996 at $10.00 per share. As of December 31, 1998, there were 624 stockholders of record and 1,481,988 shares of common stock issued and outstanding. The following table sets forth the high and low closing prices as reported by Nasdaq National Market and dividends paid per share of common stock for the period indicated.
Dividends Quarter ended High Low paid - ----------------------------------------------------------------------------- December 31, 1996 $13.750 $12.625 $.05 March 31, 1997 $15.500 $13.125 $.06 June 30, 1997 $15.500 $14.000 $.06 September 30, 1997 $18.750 $14.750 $.06 December 31, 1997 $20.500 $15.375 $.07 March 31, 1998 $18.750 $17.125 $.07 June 30, 1998 $18.000 $16 .750 $.07 September 30, 1998 $18.000 $17.000 $.07 December 31, 1998 $17.250 $16.750 $.07
Payment of dividends on the common stock is subject to determination and declaration by the Board of Directors and will depend upon a number of factors, including capital requirements, regulatory limitations on the payment of dividends, Chester Bancorp's results of operations and financial condition, tax considerations, and general economic conditions. No assurance can be given that dividends will be declared or, if declared, what the amount of dividends will be, or whether such dividends, once declared, will continue. 2 5 SELECTED CONSOLIDATED FINANCIAL INFORMATION - --------------------------------------------------------------------------------
At December 31, ------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ SELECTED FINANCIAL CONDITION DATA: Total assets $ 142,796 $ 133,777 $ 145,843 $ 134,781 $ 141,755 Loans receivable, net 48,209 60,468 54,842 57,021 58,157 Mortgage-backed securities, net(1) 21,870 13,788 15,897 15,413 13,136 Investments, net(2) 68,218 54,689 69,842 57,605 64,410 Savings deposits(3) 99,435 95,362 102,247 106,718 129,712 Securities sold under agreements to repurchase(3) 10,880 8,380 11,340 15,000 -- Federal Home Loan Bank advances 10,000 -- -- -- Stockholders' equity 21,705 28,988 31,427 11,712 10,675
Year Ended December 31, ------------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS) 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ SELECTED OPERATING DATA: Interest income $ 9,077 $ 9,182 $ 9,307 $ 9,035 $ 8,696 Interest expense 5,122 4,647 5,300 5,474 5,089 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income 3,955 4,535 4,007 3,561 3,607 Provision for loan losses 17 98 33 161 69 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income after provision for loan losses 3,938 4,437 3,974 3,400 3,538 Loss on sale of certificates of deposit -- -- (54) -- -- Gain on sale of investment securities and mortgage-backed securities 33 16 42 98 -- Other noninterest income 207 203 180 140 114 Noninterest expense 2,514 2,835 3,338 2,338 2,374 - ------------------------------------------------------------------------------------------------------------------------------------ Income before income taxes 1,664 1,821 804 1,300 1,278 Income taxes 514 511 109 299 285 - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 1,150 $ 1,310 $ 695 $ 1,001 $ 993 ==================================================================================================================================== Earnings per share -- basic $ .75 $ .68 $ .19 N/A N/A ==================================================================================================================================== Earnings per share -- diluted $ .73 $ .67 $ .19 N/A N/A ====================================================================================================================================
3 6 SELECTED CONSOLIDATED FINANCIAL INFORMATION (CONTINUED) - --------------------------------------------------------------------------------
At or for the Year Ended December 31, ------------------------------------------------------ 1998 1997 1996 1995 1994 - -------------------------------------------------------------------------------------------------------- KEY OPERATING RATIOS(3): Performance Ratios: Return on average assets (net income divided by average assets) 0.82% 0.96% 0.49% 0.73% 0.69% Return on average equity (net income divided by average equity) 4.63 4.28 4.12 8.94 9.76 Interest rate spread (difference between average yield on interest-earning assets and average cost of interest-bearing liabilities)(4) 2.31 2.69 2.74 2.60 2.61 Net interest margin (net interest income as a percentage of average interest-earning assets)(4) 3.03 3.60 3.15 2.87 2.79 Noninterest expense to average assets 1.79 2.07 2.38(6) 1.70 1.66 Average interest-earning assets to average interest-bearing liabilities 118.91 125.71 110.41 106.48 104.91 Asset Quality: Allowance for loan losses to total loans at end of period .92 0.72 0.70 0.68 0.42 Ratio of allowance for loan losses to non-performing loans 287.41 1,159.97 485.74 244.79 64.65 Net charge offs to average outstanding loans during the period .01 0.08 0.07 0.03 0.05 Ratio of non-performing assets to total assets(5) .20 0.06 0.13 0.27 0.31 Capital Ratios: Average equity to average assets 17.74 22.39 12.00 8.15 7.12 Equity to assets at end of period 15.20 21.67 21.55 8.69 7.53
At December 31, ------------------------------------------------------ 1998 1997 1996 1995 1994 - -------------------------------------------------------------------------------------------------------- OTHER DATA: Number of: Real estate loans outstanding 1,127 1,317 1,466 1,484 1,542 Deposit accounts 9,970 10,391 12,632 12,282 12,742 Full-service offices 5 5 6 6 6 Loan production offices 1 1 1 1 --
- --------------- (1) Includes mortgage backed securities available for sale of $11.3 million, $1.6 million, $1.9 million, and $2.2 million at December 31, 1998, 1997, 1996, and 1995, respectively. (2) Includes investment securities, interest-bearing deposits, federal funds sold, and certificates of deposits. Includes securities available for sale of $12.5 million, $19.7 million, $12.5 million, and $7.1 million at December 31, 1998, 1997, 1996 and December 31, 1995, respectively. (3) During the year ended December 31, 1995, $15.0 million of certificates of deposit were converted into reverse repurchase agreements and, therefore, are not reflected in deposit totals. (4) Information is presented on a tax equivalent basis assuming a tax rate of 34%. (5) Non-performing assets include loans which are contractually past due 90 days or more, loans accounted for on a nonaccrual basis and real estate acquired through foreclosure. (6) Includes SAIF special assessment of $812,498. Non-interest expense to average assets excluding SAIF special assessment is 1.80%. 4 7 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 investments and mortgage-backed securities. To a lesser extent, the Company engages in various forms of consumer lending. The Company's profitability depends primarily on its net interest income, which is the difference between the interest income it earns on its loans, mortgage-backed securities and investment portfolio and its cost of funds, which consists mainly of interest paid on deposits, securities sold under agreements to repurchase and advances from the Federal Home Loan Bank (FHLB). Net interest income is affected by the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on these balances. When interest-earning assets approximate or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income. The Company's profitability is also affected by the level of provisions for loan losses, noninterest income and noninterest expense. Noninterest income consists primarily of gains and losses on the sale of investment securities, late charges on loans, and deposit account fees. Noninterest expense consists of salaries and benefits, occupancy related expenses, data processing expenses, deposit insurance premiums paid to the SAIF and other operating expenses. 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. On October 4, 1996, the Company, formerly known as Chester Savings Bank, FSB (the Bank), completed its conversion from a federal mutual savings bank to a federal capital stock savings bank and simultaneously formed Chester Bancorp, Inc., a Delaware corporation, to act as the holding company of the converted savings bank. Pursuant to the plan of conversion, the Bank converted to a national bank known as Chester National Bank, and a newly chartered bank subsidiary was formed by the Company known as Chester National Bank of Missouri. The stock conversion resulted in the sale and issuance of 2,181,125 shares of $ .01 par value common stock at a price of $10.00 per share. In conjunction with the conversion, the Company loaned $1,745,700 to the Company's employee stock ownership plan for the purchase of 174,570 shares of common stock in connection with the stock conversion. After reducing gross proceeds for conversion costs of $939,363 and $1,745,700 related to the sale of shares to the Company's employee stock ownership plan, net proceeds totaled $19,136,187. When used in this Annual Report the words or phrases "will likely result," "are expected to," "will continue," "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 result 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. BUSINESS STRATEGY The Company's current business strategy is to operate as a well capitalized, profitable and independent community bank dedicated to financing home ownership and consumer needs in its market area and to providing quality service to its customers. The Company has implemented this strategy by: (1) closely monitoring the needs of customers and providing quality service; (2) emphasizing consumer banking by originating residential mortgage loans and consumer loans, and by offering checking accounts and other financial services and products; (3) maintaining asset quality; (4) maintaining 5 8 significant investments in investment and mortgage-backed securities; (5) maintaining capital in excess of regulatory requirements; (6) increasing earnings; and, (7) managing interest rate risk by attempting to match asset and liability maturities and rates. FINANCIAL CONDITION Assets. The Company's total assets increased by $9.0 million, or 6.7%, to $142.8 million at December 31, 1998 from $133.8 million at December 31, 1997. The increase in the Company's asset size was reflective of increases in investment securities and mortgage-backed securities, offset by a decline in loans receivable. The funding for the increased asset size resulted from a $4.1 million increase in the level of savings deposits, a $2.5 million increase in securities sold under agreements to repurchase, and $10.0 million of FHLB advances received during the first quarter of 1998. Loans receivable decreased $12.3 million, or 20.3%, to $48.2 million at December 31, 1998 from $60.5 million at December 31, 1997. The primary reason for the decline in loans receivable relates to the significant level of prepayments experienced by the Company during 1998. Refinancing volume was high due to the low level of interest rates throughout 1998. In addition, new originations declined from $20.7 million in 1997 to $6.2 million in 1998. In 1997, management made a conscious effort to originate loans in the St. Louis residential lending market through various wholesale channels. The program generated $8 million of new loan volume in 1997. A similar program was not utilized in 1998. Also, local demand for mortgage loans has been limited the past few years because of significant competition in the Company's primary market area. In 1999, management will focus on: increasing commercial lending by participating in government guaranteed lending arrangements; expanding the Company's presence in the growing Perryville, Missouri area; and, renewed focus on consumer lending. Mortgage-backed securities at December 31, 1998 were $21.9 million compared to $13.8 million at December 31, 1997. Investment securities increased $7.7 million, or 17.1%, to $52.6 million at December 31, 1998 from $44.9 million at December 31, 1997. The excess funds received from the repayment of loans and the funds received from FHLB advances were primarily invested in U.S. government agency securities and mortgage-backed securities Certificates of deposit decreased $195,000, or 67.2%, to $95,000 at December 31, 1998 from $290,000 at December 31, 1997. Management began in 1995 to liquidate its certificate of deposit portfolio and has reinvested the proceeds from certificate of deposit sales and maturities into other types of investments with higher yields. Cash, interest-bearing deposits, federal funds sold, and bankers' acceptances, on a combined basis, increased $5.5 million, or 48.8%, to $16.8 million at December 31, 1998 from $11.3 million at December 31, 1997. The increase in interest-bearing deposits resulted primarily from the sale of $4.5 million of investment securities in the fourth quarter of 1998. Management is currently evaluating longer term investing opportunities for the proceeds from these sales. Liabilities. Savings deposits increased $4.1 million, or 4.3%, to $99.4 million at December 31, 1998 from $95.4 million at December 31, 1997. The increase in savings deposits reflects a $3.3 million increase in the level of deposits from 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. Securities sold under agreements to repurchase increased $2.5 million from $8.4 million at December 31, 1997 to $10.9 million at December 31, 1998. These agreements averaged $9.5 million during 1998 compared to a 1997 average balance of $6.9 million. At December 31, 1998, $10.3 million of the agreements are maintained with Gilster-Mary Lee. Over the last several years, the Company has maintained a deposit relationship with Gilster-Mary Lee, which at times has had as much as $25 million in funds on deposit, typically with short terms. At December 31, 1998 and 1997, the balance of funds on deposit with the Company was $24.3 million and $18.5 million, respectively, which included the securities sold under agreements to repurchase. Gilster-Mary Lee notified the Company at the time of the Bank's stock conversion of its intent to maintain smaller deposit balances with the institution in the future; however, this situation has not developed. A significant loss of funds from Gilster-Mary Lee could impair future earnings as there is no intent to replace the Gilster-Mary Lee savings deposits or securities sold under agreements to repurchase with other wholesale funds. At December 31, 1998, the Company maintained an adequate liquidity level to cover the withdrawal of such deposits and/or additional reduction of such borrowings. 6 9 Advances from the Federal Home Loan Bank (FHLB) were $10.0 million at December 31, 1998, whereas the Company had no FHLB advances at December 31, 1997. The advances have ten year terms at a fixed rate of interest. Management invested the funds from the advances into U.S. government agency securities with a one year maturity. RESULTS OF OPERATIONS The Company's operating results depend primarily on its level of net interest income, which is the difference between the interest income earned on its interest-earning assets (loans, mortgage-backed securities, investment securities, and interest-bearing deposits) and the interest expense paid on its interest-bearing liabilities (deposits and borrowings). Operating results are also significantly affected by provisions for losses on loans, noninterest income, and noninterest expense. Each of these factors is significantly affected not only by the Company's policies, but, to varying degrees, by general economic and competitive conditions and by policies of federal regulatory authorities. AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS/COST The following table sets forth certain information for the periods indicated regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities and average yields and costs. Yields and costs are derived by dividing income or expense by the average monthly balance of assets or liabilities, respectively, for the periods presented. Average balances are derived from month-end balances instead of daily balances, which management believes has not caused any material difference in the information presented.
1998 1997 ------------------------------------------- ----------------------------- At Average December 31, Average Yield/ Average (DOLLARS IN THOUSANDS) 1998 Balance Interest Cost Balance Interest - ---------------------------------------------------------------------------------------------------------------------------------- INTEREST-EARNING ASSETS: Loans receivable, net(1) 8.30% $ 52,893 $ 4,496 8.50% $ 58,127 $ 5,040 Investments, net(2)(6) 5.96 47,607 2,735 5.74 46,873 2,753 Mortgage-backed securities, net 6.14 18,670 1,145 6.13 16,453 1,050 Interest-bearing deposit 5.55 16,128 839 5.20 9,868 538 ----------------------------- ----------------------------- Total interest-earning assets 6.76 135,298 9,215 6.81 131,321 9,381 ------------ ------------------------- ----------- Non-interest-earning assets 4,796 5,454 --------------- --------------- Total assets $ 140,094 $ 136,775 =============== =============== INTEREST-BEARING LIABILITIES: Deposits 4.36 $ 95,493 4,223 4.42 $ 97,552 4,300 FHLB advances 4.76 8,767 423 4.82 -- -- Securities sold under agreements to repurchase 4.59 9,523 476 5.00 6,915 347 ----------------------------- ----------------------------- Total interest-bearing liabilities 4.41 113,783 5,122 4.50 104,467 4,647 ------------ ------------------------- ----------- Non-interest-bearing liabilities 1,458 1,690 --------------- --------------- Total liabilities 115,241 106,157 Stockholders' equity 24,853 30,618 --------------- --------------- Total liabilities and stockholders' equity $ 140,094 $ 136,775 =============== =============== Net interest income $ 4,093 $ 4,734 =========== =========== Interest rate spread(4)(6) 2.35% 2.31% ==== =========== Net interest margin(5) N/A 3.03% === =========== Ratio of average interest-earning assets to average interest-bearing liabilities 118.91% ===========
1997 1996 ---------- ------------------------------------------- Average Average Yield/ Average Yield/ (DOLLARS IN THOUSANDS) Cost Balance Interest Cost - ------------------------------------------------------------------------------------------------------------- INTEREST-EARNING ASSETS: Loans receivable, net(1) 8.67% $ 55,758 $ 4,867 8.73% Investments, net(2)(6) 5.87 48,262 2,785 5.77 Mortgage-backed securities, net 6.38 16,408 1,083 6.60 Interest-bearing deposit 5.45 14,227 807 5.67 ----------------------------- Total interest-earning assets 7.14 134,655 9,542 7.09 ---------- ------------------------- Non-interest-earning assets 5,824 --------------- Total assets $ 140,479 =============== INTEREST-BEARING LIABILITIES: Deposits 4.41 $ 106,904 4,557 4.26 FHLB advances -- -- -- -- Securities sold under agreements to repurchase 5.02 15,057 743 4.93 ----------------------------- Total interest-bearing liabilities 4.45 121,961 5,300 4.35 ---------- ------------------------- Non-interest-bearing liabilities 1,662 --------------- Total liabilities 123,623 Stockholders' equity 16,856 --------------- Total liabilities and stockholders' equity $ 140,479 =============== Net interest income $ 4,242 =========== Interest rate spread(4)(6) 2.69% 2.74% ========== =========== Net interest margin(5) 3.60% 3.15% ========== =========== Ratio of average interest-earning assets to average interest-bearing liabilities 125.71% 110.41% ========== ===========
- --------------- (1) Average balance includes non-accrual loans. (2) Includes FHLB stock, FRB stock and investment securities. (3) Includes interest-bearing deposits, federal funds sold, bankers' acceptances, and certificates of deposit. (4) Represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. (5) Represents net interest income as a percentage of average interest-earning assets. 7 10 (6) Information is presented on a tax-equivalent basis assuming a tax rate of 34%. The tax-equivalent adjustments were approximately $138,000, $199,000 and $235,000 for the years ended December 31, 1998, 1997 and 1996, respectively. RATE/VOLUME ANALYSIS The following table sets forth the effects of changing volumes and rates on net interest income of the Company. Information is provided with respect to (i) effects on interest income and expense attributable to changes in volume (changes in volume when multiplied by prior rate); (ii) effects on interest income and expense attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) changes in rate/volume (change in rate multiplied by change in volume). Information is presented on a tax equivalent basis assuming a tax rate of 34% for all years presented.
1998 Compared to 1997 1997 Compared to 1996 ------------------------------------ ------------------------------------ Total Total Rate/ Increase Rate/ Increase (Dollars in thousands) Volume Rate Volume (Decrease) Volume Rate Volume (Decrease) - -------------------------------------------------------------------------------------------------------- INTEREST-EARNING ASSETS: Loans receivable, net(1) $(454) $ (99) $ 9 $(544) $ 207 $ (34) $ 0 $ 173 Investments, net(2) 43 (61) 0 (18) (80) 48 0 (32) Mortgage-backed securities, net 142 (41) (6) 95 3 (36) 0 (33) Interest-bearing deposits(3) 341 (25) (15) 301 (247) (31) 9 (269) - -------------------------------------------------------------------------------------------------------- Total net change in income on interest- earning assets 72 (226) (12) (166) (117) (53) 9 (161) - -------------------------------------------------------------------------------------------------------- Interest-bearing liabilities: Deposits (91) 10 4 (77) (398) 160 (19) (257) FHLB advances 440 -- (17) 423 -- -- -- -- Securities sold under agreements to repurchase 131 (2) 0 129 (401) 13 (8) (396) - -------------------------------------------------------------------------------------------------------- Total net change in expense on interest- bearing liabilities 480 8 (13) 475 (799) 173 (27) (653) - -------------------------------------------------------------------------------------------------------- Net change in net interest income $(408) $(234) $ 1 $(641) $ 682 $(226) $ 36 $ 492 ========================================================================================================
1996 Compared to 1995 ------------------------------------------- Total Rate/ Increase (Dollars in thousands) Volume Rate Volume (Decrease) - ----------------------------------------------------------------------- INTEREST-EARNING ASSETS: Loans receivable, net(1) $138 $ (23) 1 $(160) Investments, net(2) 304 65 10 379 Mortgage-backed securities, net 196 (57) (11) 128 Interest-bearing deposits(3) (195) 163 (35) (67) - ----------------------------------------------------------------------- Total net change in income on interest- earning assets 167 148 (35) 280 - ----------------------------------------------------------------------- Interest-bearing liabilities: Deposits (589) (156) 23 (722) FHLB advances -- -- -- -- Securities sold under agreements to repurchase 585 (9) (27) 549 - ----------------------------------------------------------------------- Total net change in expense on interest- bearing liabilities (4) (165) (4) (173) - ----------------------------------------------------------------------- Net change in net interest income $171 $ 313 $(31) $ 453 =======================================================================
(1) Average balance includes nonaccrual loans. (2) Includes FHLB stock, FRB stock and investment securities. (3) Includes interest-bearing deposits, federal funds sold, bankers' acceptances and certificates of deposit. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31,1998 AND 1997 Net Income. The Company's net income for 1998 was $1.1 million compared to $1.3 million for 1997. The lower net income level in 1998 reflects a $580,000 decline in net interest income which was partially offset by a $320,000 decrease in noninterest expense. The decline in net interest income resulted from a decrease in the Company's interest rate spread. Net income in 1997 was negatively impacted by the accelerated vesting of restricted stock awards due to the death of one of the Company's directors. The expense recorded by the Company in 1997 for the vesting of restricted stock awards related to the deceased director totaled $305,000. Net Interest Income. Net interest income decreased $580,000, or 12.8%, to $4.0 million for 1998 from $4.5 million for 1997. This decrease was the result of a decline in the Company's interest rate spread from 2.69% for 1997 to 2.31% for 1998. The decrease in the Company's interest rate spread was mainly attributable to a decline in the average yield for each component of interest-earning assets. This decline is reflective of the lower interest rate environment experienced during 1998 and a change in the asset mix that has occurred over the past year. For 1997, average loans comprised 44% of total earning assets, whereas for 1998 average loans comprised only 39% of total earning assets. Net interest income was also impacted by a decline in the ratio of average interest-earning assets to average interest-bearing liabilities from 125.71% in 1997 to 118.91% in 1998. The reduction in the ratio was primarily attributable to management's continued planned use of funds to repurchase the Company's common stock. 8 11 Interest Income. Interest income on loans receivable totaled $4.5 million for 1998 compared to $5.0 million for 1997. The $543,000, or 10.8%, decrease in interest income on loans receivable resulted from a $5.2 million, or 9.0%, decrease in the average balance of loans receivable. The impact of decreased volume was further impacted by a decline in the average yield on loans receivable from 8.67% in 1997 to 8.50% in 1998. The decrease in the average balance resulted from significant loan prepayments coupled with a significant reduction in origination volume. Interest income on mortgage-backed securities increased $95,000, or 9.0%, to $1.15 million for 1998 from $1.05 million for 1997. The increase in interest income on mortgage-backed securities resulted from a $2.2 million, or 13.5%, increase in the average balance of mortgage-backed securities. The impact of an increased average balance was partially offset by a decline in the average yield on mortgage-backed securities from 6.38% in 1997 to 6.13% in 1998. The increase in the average balance resulted primarily from a greater emphasis on mortgage-backed securities as a means of investing excess funds resulting from significant loan repayments. Interest earned on investment securities was $2.6 million for both 1998 and 1997. The impact of the $734,000, or 1.6%, increase in the average balance of investment securities was offset by a decrease in the average yield. During 1998, management increased the Company's investment in held to maturity securities and reduced the level of investments available-for-sale. At December 31, 1998, investment securities held to maturity comprised 76% of the investment portfolio, while at December 31, 1997 investment securities held to maturity were 56% of the investment portfolio. In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which requires all derivative instruments to be recorded on the balance sheet at estimated fair value. Among other things, the Statement provides that on the date of initial application, an entity may transfer any held-to-maturity security into the available-for-sale category. The Company adopted this Statement on October 1, 1998. Although the Company did not have any derivative instruments to record, management reconsidered their ability and intent to hold certain debt securities to maturity and transferred $11,064,440 and $10,510,911 of investment securities and mortgage-backed securities classified as held to maturity, respectively, to available for sale on October 1, 1998. Interest income on interest-bearing deposits increased $301,000, or 56.1%, during 1998. The increase in interest income on interest-bearing deposits resulted from an increase in the average balance of interest-bearing deposits of $6.3 million, or 63.4%, for 1998. The increase in the average balance was due to the increased availability of funds that resulted from significant loan repayments. The increase in interest income on interest-bearing deposits was partially offset by a decrease in the average yield on interest-bearing deposits from 5.45% in 1997 to 5.20% in 1998. Interest Expense. Interest expense increased $475,000, or 10.2%, during 1998. Interest expense on savings deposits decreased $77,000, or 1.8%, to $4.2 million for 1998 from $4.3 million for 1997. This decrease resulted primarily from the $2.1 million, or 2.1%, reduction in the average balance of deposits from $97.6 million for 1997 to $95.5 million for 1998. The decrease in interest expense on deposits was not significantly impacted by the slight increase in the average cost of deposits. The decline in average deposits was mainly impacted by management's decision to continue to compete less aggressively on savings rates and a full year's impact from the closing of the Company's Carbondale, Illinois branch location on June 30, 1997. Interest expense on reverse repurchase agreements increased $129,000, or 37.2%, to $476,000 for 1998 from $347,000 for 1997, This increase resulted primarily from the $2.6 million, or 37.7%, increase in the average balance of securities sold under agreements to repurchase from $6.9 million for 1997 to $9.5 million for 1998. The increase in the average balance of securities sold under agreements to repurchase was attributable to Gilster-Mary Lee increasing the level of funds maintained with the Company. Interest expense on FHLB advances was $423,000 for 1998 compared to no expense in 1997. The Company borrowed $10.0 million from the FHLB in February 1998 and invested the funds in a U.S. government agency security with a one-year maturity. The Company had no FHLB advances outstanding during 1997. The average balance and the average cost on FHLB advances for 1998 was $8.8 million and 4.82% respectively. Provision for Loan Losses. The allowance for loan losses is established through a provision for loan losses 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. 9 12 During 1998, the Company's provision for loan losses was $17,000 compared to $98,000 in 1997. Management decreased the provision in 1998 due to the reduction in the loan portfolio experienced in 1998. The Company's allowance for loan losses was $449,000, or .92%, of loans outstanding at December 31, 1998, compared to $436,000, or .72%, of loans outstanding at December 31, 1997. The Company's level of net loans charged-off during the year ended December 31, 1998 was $4,000, which represented .01% of average loans receivable outstanding. This percentage of charge-offs decreased from the .08% level of charge-offs experienced in 1997. Based on current levels in the allowance for loan losses in relation to loans receivable and delinquent loans, management's continued effort to favorably resolve problem loan situations, and the low level of charge-offs in recent years, management believes the allowance is adequate at December 31, 1998. The financial statements of the Company are prepared in accordance with generally accepted accounting principles (GAAP) and, accordingly, provisions for loan losses are based on management's assessment of the factors set forth above. The Company regularly reviews its loan portfolio, including problem loans, to determine whether any loans are impaired, require classification and/or the establishment of appropriate reserves. Management believes it has established its existing allowance for loan losses in accordance with GAAP; however, future additions may be necessary if economic conditions or other circumstances differ substantially from the assumptions used in making the initial determination. Noninterest Income. Noninterest income was $240,000 for 1998 compared $219,000 for 1997. The $21,000, or 9.4%, increase resulted primarily from an increase in gains recognized from sales of investment securities and mortgage-backed securities. As noted previously, the Company transferred $11,064,440 and $10,510,911 of investment securities and mortgage-backed securities, respectively, classified as held to maturity to available for sale on October 1, 1998. During the fourth quarter, management sold $4.5 million of the investment securities transferred and $250,000 of the mortgage-backed securities transferred which resulted in a combined net gain on sale of $33,000. During 1998, late charges, deposit account fees and other fees increased $55,000 as a result of the Company's Cape Girardeu loan office selling all of its loan production to other financial institutions for a fee. Management expects this activity to continue in 1999. The $50,000 decline in other noninterest income was primarily the result of fiscal 1997 including a settlement payment for On-Line Financial stock. Noninterest Expense. Noninterest expense decreased $320,000, or 11.3%, for 1998. The decrease in noninterest expense resulted primarily from a $279,000 decrease in compensation and employee benefits coupled with a $94,000 decline in occupancy expense. Compensation and employee benefits decreased $279,000, or 18.3%, in 1998 due to the 1997 restricted stock award amortization including $305,000 related to the accelerated vesting of restricted stock awards due to the death of one of the Company's directors. The impact of this was partially offset by a full year's amortization of restricted stock awards in 1998 for the other participants in the plan compared to nine months of amortization in 1997 due to the establishment of the plan in April 1997. Compensation expense also benefited from the termination of the Director Emeritus Retirement Plan in June 1998. As a result of this termination, the deferred compensation accrual related to this plan was reduced by $60,000 during the second quarter of 1998. Occupancy expense decreased $94,000, or 25.6%, in 1998 due primarily to the write-off in 1997 of leasehold improvements associated with the Carbondale, Illinois branch location which was closed on June 30, 1997. Income Tax Expense. Income tax expense for 1998 was $514,000 compared to $511,000 for 1997. The Company's effective tax rate for 1998 and 1997 was 30.9% and 28.1%, respectively. The effective tax rate for each year was below the statutory federal rate of 34% due to the Company's investment in tax exempt securities. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 Net Income. The Company's net income for 1997 was $1.3 million compared to $695,000 for 1996. The lower net income level in 1996 was the result of the one-time special assessment imposed by the Federal Deposit Insurance Corporation (FDIC) on SAIF-assessable deposits in 1996. The special assessment for the Company totaled $812,000 and was paid during the quarter ended December 31, 1996. The actual reduction of net income for 1996 was $617,000, after considering the tax deductibility of the special assessment. Without considering the impact of the one-time special assessment, net income for 1996 would have been $1.3 million. Net income in 1997 was negatively impacted by the accelerated vesting of restricted 10 13 stock awards due to the death of one of the Company's directors. The expense recorded by the Company for the vesting of restricted stock awards totaled $305,000. Net Interest Income. Net interest income increased $528,000, or 13.2%, to $4.5 million for 1997 from $4.0 million for 1996. This increase was the result of an increase in the Company's net interest margin from 3.15% for 1996 to 3.60% for 1997. The improvement in the Company's net interest margin was mainly attributable to the increase in the ratio of average interest-earning assets to average interest-bearing liabilities from 110.41% in 1996 to 125.71% in 1997. The improvement in the ratio was primarily attributable to a full year's impact from the investment of $19.1 million of net proceeds received from the issuance of common stock on October 4, 1996. Interest Income. Interest income on loans receivable totaled $5.0 million for 1997 compared to $4.9 million for 1996. The $173,000, or 3.6%, increase in interest income on loans receivable resulted primarily from a $2.4 million, or 4.2%, increase in the average balance of loans receivable. The impact of increased volume was partially offset by a decline in the average yield on loans receivable from 8.73% in 1996 to 8.67% in 1997. The increase in the average balance resulted from management's focus on the St. Louis residential lending market and a renewed emphasis on commercial business lending. Interest income on mortgage-backed securities decreased $33,000, or 3.1%, to $1.05 million for 1997 from $1.08 million for 1996. The decrease in interest income on mortgaged-backed securities resulted from a decline in the average yield from 6.60% in 1996 to 6.38% in 1997. The $16.5 million average balance of mortgaged-backed securities in 1997 was consistent with the 1996 average balance. Interest earned on investment securities was $2.6 million for both 1997 and 1996. The impact of the $1.4 million, or 2.9%, decrease in the average balance of investment securities was offset by an increase in the average yield. During 1997, management increased the Company's investment in available-for-sale securities and reduced the level of investments held to maturity. At December 31, 1997, investment securities available for sale comprised 44% of the investment portfolio, while at December 31, 1996 investment securities available for sale were only 26% of the investment portfolio. The increased level of available-for-sale securities resulted from a significant reduction in overnight deposits and the need to maintain a more liquid investment portfolio. Interest income on interest-bearing deposits decreased $270,000, or 33.4%, during 1997. The decline in interest income on interest-bearing deposits resulted from a decrease in the average balance of interest-bearing deposits of $4.4 million, or 30.6%, for 1997. The decline in the average balance was due to: the investment of overnight deposits into higher yielding investments (e.g., loans receivable); the use of overnight deposits to partially fund savings withdrawals and maturing reverse repurchase agreements; and a full year's impact related to the reinvestment of proceeds from certificate of deposit maturities and sales that occurred in 1996 into other investments. The decrease in interest income on interest-bearing deposits was also impacted by a decrease in the average yield on interest-bearing deposits from 5.67% in 1996 to 5.45% in 1997. Interest Expense. Interest expense decreased $653,000, or 12.3%, during 1997. Interest expense on savings deposits decreased $257,000, or 5.6%, to $4.3 million for 1997 from $4.6 million for 1996. This decrease resulted primarily from the $9.4 million, or 8.7%, reduction in the average balance of deposits from $106.9 million for 1996 to $97.6 million for 1997. The decrease in interest expense on deposits was partially offset by an increase in the average cost of deposits from 4.26% in 1996 to 4.41% in 1997. The decline in average deposits was mainly impacted by three factors: (1) management's decision to continue to compete less aggressively on savings rates; (2) the closing of the Company's Carbondale, Illinois branch location on June 30, 1997; and (3) the reduction of funds held in savings accounts which were used by depositors to purchase stock subscriptions which were sold in accordance with the Bank's stock conversion in October 1996. Interest expense on reverse repurchase agreements decreased $396,000, or 53.3%, to $347,000 for 1997 from $743,000 for 1996. This decrease resulted primarily from the $8.1 million, or 54.1%, reduction in the average balance of reverse repurchase agreements from $15.1 million for 1996 to $6.9 million for 1997. Provision for Loan Losses. The allowance for loan losses is established through a provision for loan losses based on management's evaluation of the risk inherent in its loan portfolio and the general economy. Such evaluation considers numerous factors including 11 14 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 1997, the Company's provision for loan losses was $98,000 compared to $33,000 in 1996. Management increased the provision in 1997 to compensate for the growth in the loan portfolio experienced in 1997 and to maintain the loan loss allowance at a consistent level with 1996. The Company's allowance for loan losses was $436,000, or .72%, of loans outstanding at December 31, 1997, compared to $384,000, or .70%, of loans outstanding at December 31, 1996. The Company's level of net loans charged-off during the year ended December 31, 1997 was $46,000, which represented .08% of average loans receivable. This percentage of charge-offs increased slightly from the level of charge-offs experienced in 1996. Noninterest Income. Noninterest income was $219,000 for 1997 compared to $168,000 for 1996. The $51,000, or 30.6%, increase resulted primarily from the impact of the $54,000 loss on sale of certificates of deposit in 1996. The $4.5 million of proceeds from the sale of certificates of deposit during 1996 resulted from management's decision to liquidate the certificate of deposit portfolio with one of its brokers. There were no certificates of deposit sold in 1997. During 1997, late charges and other fees increased $19,000 as a result of a $2.00 increase in the monthly service charge on demand deposit accounts. In addition, the gain on sale of investment securities declined $26,000 in 1997 due to a reduction in the level of investment securities sold. During 1997, proceeds from the sale of investment securities available for sale totaled $4.0 million, while 1996 proceeds from the sale of investment securities available for sale totaled $19.0 million. Noninterest expense. Noninterest expense decreased $503,000, or 15.1%, for 1997. In 1996, noninterest expense included the one-time special assessment by the FDIC on SAIF-assessable deposits. The special assessment for the Company totaled $812,000 and was paid during the quarter ended December 31, 1996. The remainder of the fluctuation in noninterest expense resulted from a $175,000 increase in compensation and employee benefits, an $81,000 increase in occupancy expense, a $164,000 reduction in federal insurance premiums, and a $184,000 increase in other noninterest expense. Compensation and employee benefits increased $175,000, or 13.0%, in 1997 due to a full year's impact of the Company's ESOP and the partial year's impact of the restricted stock award plan which was initiated in April 1997. Compensation expense related to the ESOP increased $74,000 in 1997, while restricted stock award amortization during the year totaled $435,000. The restricted stock award amortization included $305,000 related to the accelerated vesting of restricted stock awards due to the death of one of the Company's directors. These increases to compensation were partially offset by the impact of the amendment made to the Company's retirement plan for members of the Board of Directors who reach director emeritus status. In the amendment, the benefit period and the annual benefit multiple covered by the plan were reduced from 10 years and $500, respectively, to 5 years and $300, respectively. As a result of this amendment, the deferred compensation accrual related to this plan was reduced by $99,000 during the fourth quarter of 1997. Occupancy expense increased $81,000, or 28.1%, in 1997 due to the write-off of leasehold improvements associated with the Carbondale, Illinois branch location which was closed on June 30, 1997. Federal insurance premiums declined $164,000, or 70.6%, during 1997 due to a decline in rates charged by the FDIC on SAIF assessable deposits. As a result of the Deposit Insurance Funds Act of 1996 and the resultant recapitalization of the SAIF, the annual assessment rate on SAIF deposits decreased on January 1, 1997 from .23% to .0648%. The increase in noninterest expense of $184,000 resulted from a $158,000 increase in professional fees and assorted costs associated with being a public company. Included in this expense amount are professional fees related to the establishment of the Company's new benefit plans, costs associated with the administrative responsibilities of maintaining stockholder records, incremental costs related to required public reporting of financial information, and a general increase in professional fees due to the additional public reporting responsibilities. Noninterest expense was also impacted by an increase in losses from the sale of foreclosed real estate of $22,000. Income Tax Expense. Income tax expense for 1997 was $511,000 compared to $109,000 for 1996. The Company's effective tax rate for 1997 and 1996 was 28.1% and 13.5%, respectively. The effective tax rate for each year was below the statutory federal rate of 34% due to the Company's significant investment in tax exempt securities. 12 15 ASSET/LIABILITY MANAGEMENT The principal operating objective of the Company is the achievement of a positive interest rate spread that can be sustained during fluctuations in prevailing interest rates. Since the Company's principal interest-earning assets have substantially longer terms to maturity than its primary source of funds, i.e., deposit liabilities, increases in general interest rates will generally result in an increase in the Company's cost of funds before the yield on its asset portfolio adjusts upward. The Company has generally sought to reduce its exposure to adverse changes in interest rates by attempting to achieve a closer match between the periods in which their interest-bearing liabilities and interest-earning assets can be expected to reprice through the origination of adjustable-rate mortgages and investment in loans and securities with shorter terms. The term "interest rate sensitivity" refers to those assets and liabilities which mature and reprice periodically in response to fluctuations in market rates and yields. Many banks have historically operated in a mismatched position with interest-sensitive liabilities greatly exceeding interest-sensitive assets in the short-term time periods. As noted above, one of the principal goals of the Company's asset/liability program is to more closely match the interest rate sensitivity characteristics of the asset and liability portfolios. In order to increase the interest rate sensitivity of its assets, the Company has originated adjustable rate residential mortgage loans and maintained a consistent level of short- and intermediate-term investment securities and interest-bearing deposits. At December 31, 1998, the Company had $11.5 million of adjustable rate mortgages, $56.8 million of investment securities, mortgage-backed securities and interest-bearing deposits maturing within one year, and $12.3 million of investment securities and mortgage-backed securities maturing within one to five years. In addition, at December 31, 1998, the Company had $3.5 million of consumer loans which typically have maturities of five years or less. In managing its future interest rate sensitivity, the Company intends to continue to stress the origination of adjustable rate mortgages and loans with shorter maturities, the maintenance of a consistent level of short- and intermediate-term securities, and pricing strategies that will extend the term of deposit liabilities. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of funds consist of deposits, securities sold under agreements to repurchase, repayments and prepayments of loans and mortgage-backed securities, maturities of investments and interest-bearing deposits, and funds provided from operations. While scheduled repayments of loans and mortgage-backed securities and maturities of investment securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. The Company manages the pricing of its deposits to maintain a steady deposit base. The Company uses its liquidity resources principally to fund existing and future loan commitments, to fund maturing certificates of deposit and deposit withdrawals, to invest in other interest-bearing assets, to maintain liquidity, and to meet operating expenses. Management anticipates that loan repayments and other sources of funds will be adequate to meet and exceed the Company's liquidity needs for 1999. 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 December 31, 1998, cash and cash equivalents totaled $16.8 million. The primary investing activities of the Company include origination of loans and purchase of mortgage-backed securities and investment securities. During the year ended December 31, 1998, purchases of investment securities and mortgage-backed securities totaled $109.3 million and $17.1 million, respectively, while loan originations totaled $6.2 million. These investments were funded primarily from loan and mortgage-backed security repayments of $27.2 million, investment security sales and maturities of $102.3 million, and FHLB advances of $10.0 million. In April 1997, the Company announced its initial repurchase plan to repurchase 5% of its then outstanding common stock. Since that time the Company has continued to repurchase shares when it was determined to be advisable by the Board of Directors and authorized by the appropriate regulatory authorities. As of December 31, 1998, the Company had repurchased approximately 734,000, or 33.6%, of its common shares. Management expects to continue to repurchase common shares when it is viewed as a method of increasing value to the Company's stockholders, 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 additional funds from the Federal Home Loan Bank (FHLB). At December 31, 1998, the Company had $10.0 million of long-term advances from the FHLB. At December 31, 1998, the Company exceeded all of its regulatory capital requirements. 13 16 IMPACT OF INFLATION AND CHANGING PRICES The consolidated financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and results of operations in terms of historical dollars without considering changes in the relative purchasing power of money over time because of inflation. Unlike most industrial companies, virtually all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a more significant impact on the Company's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS Reporting Comprehensive Income In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general purpose financial statements. SFAS No. 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements, and requires an enterprise to (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. The Company adopted the provisions of SFAS No. 130 as of December 31, 1998, and now reports comprehensive income on a separate statement. Application of SFAS No. 130 did not impact amounts previously reported for net income or affect the comparability of previously issued financial statements. Disclosures About Segments of an Enterprise and Related Information In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," which requires business segments to be reported based on the way management organizes segments within the Company for making operating decisions and assessing performance. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. The Company has not included disclosures regarding specific segments since management makes operating decisions and assesses performance based on the Company as a whole. Accounting for Derivative Instruments and Hedging Activities In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which requires all derivative instruments to be recorded on the balance sheet at estimated fair value. Changes in the fair value of derivative instruments are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The Statement also provides that on the date of initial application, an entity may transfer any held-to-maturity security into the available-for-sale category. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. The Company adopted this Statement on October 1, 1998. Although the Company does not have any derivative instruments to record, management reconsidered their ability and intent to hold certain debt securities to maturity and transferred $11,064,440 and $10,510,911 of investment securities and mortgage-backed securities, respectively, to available for sale on October 1, 1998. As a result of the transfers: a market valuation account was established for the available-for-sale debt securities of $215,565 to increase the recorded balance of such securities to their fair value; a deferred tax liability of $81,915 was recorded to reflect the tax effect of the market valuation account; and the net increase resulting from the market valuation adjustment of $133,650 was recorded as a transition adjustment in the Consolidated Statements of Comprehensive Income. 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 distinguish 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 third party, and purchases most of its software applications from third party vendors. The Company believes that its vendors are actively addressing the problems 14 17 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 costs 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 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 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 early 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. 15 18 INDEPENDENT AUDITORS' REPORT - -------------------------------------------------------------------------------- The Board of Directors Chester Bancorp, Inc. Chester, Illinois: We have audited the accompanying consolidated balance sheets of Chester Bancorp, Inc. and subsidiaries (the Company) as of December 31, 1998 and 1997, and the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Chester Bancorp Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. KPMG LLP St. Louis, Missouri January 22, 1999 16 19 CHESTER BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - --------------------------------------------------------------------------------
DECEMBER 31, 1998 AND 1997 1998 1997 - ------------------------------------------------------------------------------------------ ASSETS Cash $ 1,305,850 $ 1,833,006 Interest-bearing deposits 8,708,822 3,063,057 Federal funds sold 5,788,000 6,395,000 Bankers' acceptances 994,167 -- - ------------------------------------------------------------------------------------------ Total cash and cash equivalents 16,796,839 11,291,063 Certificates of deposit 95,000 290,000 Investment securities: Available for sale, at fair value (cost of $12,467,687 and $19,674,051 at December 31, 1998 and 1997, respectively) 12,515,769 19,708,063 Held to maturity, at cost (fair value of $40,277,481 and $25,413,098 at December 31, 1998 and 1997, respectively) 40,116,367 25,232,519 Mortgage-backed securities: Available for sale, at fair value (cost of $11,170,541 and $1,623,616 at December 31, 1998 and 1997, respectively) 11,275,061 1,641,949 Held to maturity, at cost (fair value of $10,619,540 and $12,179,290 at December 31, 1998 and 1997, respectively) 10,595,289 12,145,702 Loans receivable, net 48,208,662 60,467,735 Accrued interest receivable 909,953 887,375 Real estate acquired by foreclosure, net 127,613 38,233 Office properties and equipment, net 1,684,381 1,766,748 Income taxes receivable 155,261 -- Deferred tax asset, net -- 16,818 Other assets 316,062 290,444 - ------------------------------------------------------------------------------------------ $142,796,257 $133,776,649 ========================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Savings deposits $99,434,579 $95,362,100 Borrowed money 20,880,389 8,380,389 Accrued interest payable 215,420 158,899 Advance payments by borrowers for taxes and insurance 419,552 439,274 Income taxes payable -- 288,891 Deferred tax liability, net 44,174 -- Accrued expenses and other liabilities 97,055 158,778 - ------------------------------------------------------------------------------------------ Total liabilities 121,091,169 104,788,331 - ------------------------------------------------------------------------------------------ Commitments and contingencies Stockholders' equity: Common stock, $.01 par value, 3,000,000 shares authorized, 2,182,125 shares issued at December 31, 1998 and 1997 21,821 21,821 Additional paid-in capital 21,650,837 21,766,390 Retained earnings, substantially restricted 13,803,400 13,088,331 Accumulated other comprehensive income 93,610 32,454 Unearned ESOP shares (1,592,980) (1,647,920) Unamortized restricted stock awards (559,674) (725,868) Treasury stock, at cost: 700,137 and 229,079 shares at December 31, 1998 and 1997, respectively (11,711,926) (3,546,890) - ------------------------------------------------------------------------------------------ Total stockholders' equity 21,705,088 28,988,318 - ------------------------------------------------------------------------------------------ $142,796,257 $133,776,649 ==========================================================================================
See accompanying notes to consolidated financial statements. 17 20 CHESTER BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME - --------------------------------------------------------------------------------
THREE YEARS ENDED DECEMBER 31, 1998 1998 1997 1996 - --------------------------------------------------------------------------------------------------- Interest income: Loans receivable $4,496,309 $5,039,655 $4,866,508 Mortgage-backed securities 1,145,034 1,050,249 1,083,420 Investments 2,596,529 2,554,389 2,549,847 Interest-bearing deposits, federal funds sold, and bankers' acceptance 839,157 537,704 807,444 - --------------------------------------------------------------------------------------------------- Total interest income 9,077,029 9,181,997 9,307,219 - --------------------------------------------------------------------------------------------------- Interest expense: Savings deposits 4,223,085 4,299,985 4,557,361 Borrowed money 898,580 346,946 742,910 - --------------------------------------------------------------------------------------------------- Total interest expense 5,121,665 4,646,931 5,300,271 - --------------------------------------------------------------------------------------------------- Net interest income 3,955,364 4,535,066 4,006,948 Provision for loan losses 16,800 97,800 32,885 - --------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 3,938,564 4,437,266 3,974,063 - --------------------------------------------------------------------------------------------------- Noninterest income: Late charges, deposit account fees, and other fees 188,691 134,078 115,423 Loss on sale of certificates of deposit -- -- (53,714) Gain on sale of investment securities, net 30,318 16,256 42,093 Gain on sale of mortgage-backed securities, net 2,352 -- -- Other 18,448 68,779 63,914 - --------------------------------------------------------------------------------------------------- Total noninterest income 239,809 219,113 167,716 - --------------------------------------------------------------------------------------------------- Noninterest expense: Compensation and employee benefits 1,241,287 1,520,102 1,344,793 Occupancy 274,119 368,562 287,726 Data processing 157,330 174,781 153,507 Advertising 65,570 64,067 52,298 Federal deposit insurance premiums 57,813 68,399 232,579 SAIF special assessment -- -- 812,498 Other 718,189 638,657 454,520 - --------------------------------------------------------------------------------------------------- Total noninterest expense 2,514,308 2,834,568 3,337,921 - --------------------------------------------------------------------------------------------------- Income before income tax expense 1,664,065 1,821,811 803,858 Income tax expense 514,338 511,445 108,716 - --------------------------------------------------------------------------------------------------- Net income $1,149,727 $1,310,366 $ 695,142 =================================================================================================== Earnings per common share -- basic $ .75 $ .68 $ .19 Earnings per common share -- diluted $ .73 $ .67 $ .19 ===================================================================================================
See accompanying notes to consolidated financial statements. 18 21 CHESTER BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - --------------------------------------------------------------------------------
THREE YEARS ENDED DECEMBER 31, 1998 1998 1997 1996 - -------------------------------------------------------------------------------------------------- Net income $1,149,727 $1,310,366 $695,142 Other comprehensive income, net of tax: Unrealized holding gain (loss) on securities available for sale (52,239) 57,032 (24,514) Transition adjustment from transfer of securities to available for sale on October 1, 1998 133,650 -- -- Less adjustment for realized gains included in net income (net of tax of $12,415, $6,177, and $15,995 for 1998, 1997, and 1996, respectively) (20,255) (10,079) (26,098) - -------------------------------------------------------------------------------------------------- Total other comprehensive income 61,156 46,953 (50,612) - -------------------------------------------------------------------------------------------------- Comprehensive income $1,210,883 $1,357,319 $644,530 ==================================================================================================
See accompanying notes to consolidated financial statements. 19 22 CHESTER BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - --------------------------------------------------------------------------------
Retained Accumulated Common stock Additional earnings, other Unearned Unamortized Three years ended ------------------------ paid-in substantially comprehensive ESOP restricted December 31, 1998 Shares Amount capital restricted income shares stock awards - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1995 -- $ -- $ -- $11,676,334 $ 36,113 $ -- $ -- Net income -- -- -- 695,142 -- -- ---- Net proceeds from sale of common stock 2,182,125 21,821 20,860,066 -- -- (1,745,700) -- Dividends on common stock at $.05 per share -- -- -- (100,378) -- -- -- Amortization of ESOP awards -- -- 5,092 -- -- 29,100 -- Change in accumulated other comprehensive income -- -- -- -- (50,612) -- -- - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1996 2,182,125 21,821 20,865,158 12,271,098 (14,499) (1,716,600) -- Net income -- -- -- 1,310,366 -- -- -- Issuance of restricted stock awards -- -- 1,160,894 -- -- -- (1,160,894) Purchase of treasury stock -- -- -- -- -- -- -- Issuance of treasury stock for restricted stock awards -- -- (305,494) (16,366) -- -- -- Amortization of restricted stock awards -- -- -- -- -- -- 435,026 Amortization of ESOP awards -- -- 39,492 -- -- 68,680 -- Tax benefit from stock related compensation -- -- 6,340 -- -- -- -- Dividends on common stock at $.25 per share -- -- -- (476,767) -- -- -- Change in accumulated other comprehensive income -- -- -- -- 46,953 -- -- - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1997 2,182,125 21,821 21,766,390 13,088,331 32,454 (1,647,920) (725,868) Net income -- -- -- 1,149,727 -- -- -- Purchase of treasury stock -- -- -- -- -- -- -- Issuance of treasury stock for restricted stock awards -- -- (170,996) (9,161) -- -- -- Amortization of restricted stock awards -- -- -- -- -- -- 166,194 Amortization of ESOP awards -- -- 40,656 -- -- 54,940 -- Tax benefit from stock related compensation -- -- 14,787 -- -- -- -- Dividends on common stock at $.28 per share -- -- -- (425,497) -- -- -- Change in accumulated other comprehensive income -- -- -- -- 61,156 -- -- - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1998 2,182,125 $ 21,821 $21,650,837 $13,803,400 $ 93,610 $(1,592,980) $ (559,674) ===================================================================================================================================
Treasury stock Total Three years ended ------------------------ stockholders' December 31, 1998 Shares Amount equity - ------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1995 -- $ -- $11,712,447 Net income -- -- 695,142 Net proceeds from sale of common stock -- -- 19,136,187 Dividends on common stock at $.05 per share -- -- (100,378) Amortization of ESOP awards -- -- 34,192 Change in accumulated other comprehensive income -- -- (50,612) - ------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1996 -- -- 31,426,978 Net income -- -- 1,310,366 Issuance of restricted stock awards -- -- -- Purchase of treasury stock 250,900 (3,868,750) (3,868,750) Issuance of treasury stock for restricted stock awards (21,821) 321,860 -- Amortization of restricted stock awards -- -- 435,026 Amortization of ESOP awards -- -- 108,172 Tax benefit from stock related compensation -- -- 6,340 Dividends on common stock at $.25 per share -- -- (476,767) Change in accumulated other comprehensive income -- -- 46,953 - ------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1997 229,079 (3,546,890) 28,988,318 Net income -- -- 1,149,727 Purchase of treasury stock 483,272 (8,345,193) (8,345,193) Issuance of treasury stock for restricted stock awards (12,214) 180,157 -- Amortization of restricted stock awards -- -- 166,194 Amortization of ESOP awards -- -- 95,596 Tax benefit from stock related compensation -- -- 14,787 Dividends on common stock at $.28 per share -- -- (425,497) Change in accumulated other comprehensive income -- -- 61,156 - ------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1998 700,137 $(11,711,926) $21,705,088 =========================================================================
See accompanying notes to consolidated financial statements. 20 23 CHESTER BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - --------------------------------------------------------------------------------
THREE YEARS ENDED DECEMBER 31, 1998 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 1,149,727 $ 1,310,366 $ 695,142 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization: Office properties and equipment 140,073 130,554 123,311 Deferred fees, discounts, and premiums (648,052) (665,837) (163,643) Stock plans 261,790 543,198 34,192 Increase in accrued interest receivable (22,578) (23,683) (227,100) Increase (decrease) in accrued interest payable 56,521 46,276 (343,375) Increase (decrease) in income taxes, net (407,474) 291,479 (154,492) Loss on sale of certificates of deposit -- -- 53,714 Gain on sale of investment securities, net (30,318) (16,256) (42,093) Gain on sale of mortgage-backed securities, net (2,352) -- -- Provision for loan losses 16,800 97,800 32,885 Net change in other assets and other liabilities (87,341) (36,440) 3,133 - ---------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 426,796 1,677,457 11,674 - ---------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Principal repayments on: Loans receivable 18,288,784 15,084,638 13,249,189 Mortgage-backed securities 8,919,266 5,513,055 2,519,007 Investment securities 104,682 88,001 157,329 Proceeds from the maturity of certificates of deposit 195,000 693,000 4,335,000 Proceeds from the sale of certificates of deposit -- -- 4,484,286 Proceeds from the maturity of investment securities available for sale 14,000,000 5,500,000 3,500,000 Proceeds from the maturity of investment securities held to maturity 83,805,890 102,527,000 70,490,000 Proceeds from the sale of investment securities available for sale 4,527,500 4,006,250 19,011,640 Proceeds from the sale of mortgage-backed securities 249,779 -- -- Proceeds from redemption of Federal Reserve Bank stock -- 6,000 -- Cash invested in: Loans receivable (6,219,094) (20,706,983) (11,017,164) Mortgage-backed securities held to maturity (17,124,741) (3,331,285) (2,981,406) Investment securities available for sale (147,187) (16,624,424) (27,473,733) Investment securities held to maturity (109,114,765) (91,009,152) (74,975,877) Certificates of deposit -- (95,000) -- FHLB stock (178,700) -- (17,700) Federal Reserve Bank stock -- -- (411,000) Proceeds from sales of real estate acquired through foreclosure 48,205 73,002 20,000 Purchase of office properties and equipment (57,706) (29,505) (229,560) - ---------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities (2,703,087) 1,694,597 660,011 - ---------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Increase (decrease) in savings deposits 4,072,479 (6,884,750) (4,470,999) Increase (decrease) in securities sold under agreements to repurchase 2,500,000 (2,959,611) (3,660,000) Proceeds from FHLB advances 10,000,000 -- -- Decrease in advance payments by borrowers for taxes and insurance (19,722) (8,392) (125,343) Proceeds from issuance of common stock, net -- -- 19,136,187 Purchase of treasury stock (8,345,193) (3,868,750) -- Dividends paid (425,497) (476,767) (100,378) - ---------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 7,782,067 (14,198,270) 10,779,467 - ---------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 5,505,776 (10,826,216) 11,451,152 Cash and cash equivalents, beginning of year 11,291,063 22,117,279 10,666,127 - ---------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of year $ 16,796,839 $11,291,063 $22,117,279 ========================================================================================================== Supplemental information: Interest paid $ 5,065,144 4,600,655 $ 5,643,646 Income taxes paid 603,609 195,357 231,000 ========================================================================================================== Noncash investing and financing activities: Loans transferred to real estate acquired by foreclosure $ 136,577 24,534 $ 93,651 Interest credited to savings deposits 2,173,699 2,861,760 3,098,000 Securities transferred to available for sale 21,575,351 -- -- ==========================================================================================================
See accompanying notes to consolidated financial statements. 21 24 CHESTER BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 - -------------------------------------------------------------------------------- (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Following are the significant accounting policies which Chester Bancorp, Inc. and subsidiaries (the Company) follow in preparing and presenting their consolidated financial statements: Reorganization to a Stock Corporation On October 4, 1996, Chester Savings Bank, FSB (the Bank) converted from a federal mutual savings bank to a federal capital stock savings bank and simultaneously formed the Company, a Delaware corporation, to act as the holding company of the converted savings bank. Pursuant to the plan, the Bank converted to a national bank known as Chester National Bank, and a newly chartered bank subsidiary was formed by the Company known as Chester National Bank of Missouri (collectively referred to as the Banks). The stock conversion resulted in the sale and issuance of 2,182,125 shares of $.01 par value common stock at a price of $10.00 per share. After reducing gross proceeds for conversion costs of $939,363, net proceeds totaled $20,881,887. The stock of the Banks will be held by the Company. In conjunction with the conversion, the Company loaned $1,745,700 to the Banks' employee stock ownership plan for the purchase of 174,570 shares in the stock conversion. Prior to the stock conversion, the Company had not issued any stock, had no assets or liabilities, and had not engaged in any business activities other than of an organizational nature. Accordingly, operating activities prior to October 4, 1996 reflect the operations of the Bank only. Business The Company provides a full range of financial services to individual and corporate customers through its home office in Chester, Illinois, and its three banking offices in neighboring cities in Southern Illinois and one banking office in Perryville, Missouri. The Company is subject to competition from other financial institutions in the area, is subject to the regulations of certain federal agencies, and undergoes periodic examinations by those regulatory authorities. In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures About Segments of an Enterprise and Related Information, which requires business segments to be reported based on the way management organizes segments within the Company for making operating decisions and assessing performance. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. The Company has not included disclosures regarding specific segments since management makes operating decisions and assesses performance based on the Company as a whole. Basis of Presentation The consolidated financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the year. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the valuation of real estate acquired by foreclosure or in satisfaction of loans. In connection with the determination of the allowance for losses on loans, management obtains independent appraisals for significant properties. Fair Value of Financial Instruments SFAS No. 107, Disclosures About Fair Value of Financial Instruments, requires that the estimated fair value of the Company's financial instruments be disclosed. Fair value estimates of financial instruments are made at a specific point in time, based on relevant market information and information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings or a significant portion of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, some fair value estimates are subjective in nature and involve uncertainties and matters of significant 22 25 CHESTER BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 (CONTINUED) - -------------------------------------------------------------------------------- (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Fair Value of Financial Instruments (Continued) judgment. Changes in assumptions could significantly affect these estimates. Fair value estimates are presented for existing on-balance-sheet and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates. Principles of Consolidation The consolidated financial statements include the accounts of Chester Bancorp, Inc. and its wholly-owned subsidiaries, Chester National Bank and Chester National Bank of Missouri. All significant intercompany accounts and transactions have been eliminated in consolidation. Consolidated Statements of Comprehensive Income In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income, which establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general purpose financial statements. SFAS No. 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements, and requires an enterprise to (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a balance sheet. The Company adopted the provisions of SFAS No. 130 as of December 31, 1998 and now reports comprehensive income on a separate statement. Application of SFAS No. 130 did not impact amounts previously reported for net income or affect the comparability of previously issued financial statements. Consolidated Statements of Cash Flows For purposes of the consolidated statements of cash flows, the Company considers all interest-bearing deposits and bankers' acceptances with original maturities of three months or less and federal funds sold to be cash equivalents. Investment Securities and Mortgage-Backed Securities The Company classifies its debt securities as either: available for sale or held to maturity. Held-to-maturity securities are those securities in which the Company has the ability and intent to hold until maturity. All other securities not included in held to maturity are classified as available for sale. Available-for-sale securities are recorded at fair value. Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization of premiums or discounts. Unrealized gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and reported as other comprehensive income. A decline in the market value of any security below cost that is deemed to be "other than temporary" results in a charge to earnings and the establishment of a new cost basis for the security. Premiums and discounts are amortized over the lives of the respective securities as an adjustment to yield using the interest method. Dividend and interest income are recognized when earned. Realized gains and losses are included in earnings and are derived using the specific-identification method for determining the cost of securities sold. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which requires all derivative instruments to be recorded on the balance sheet at estimated fair value. Changes in the fair value of derivative instruments are recorded each period in current earnings or other comprehensive income, depending on 23 26 CHESTER BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 (CONTINUED) - -------------------------------------------------------------------------------- (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Investment Securities and Mortgage-Backed Securities (Continued) whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The Statement also provides that on the date of initial application, an entity may transfer any held-to-maturity security into the available-for-sale category. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999, with earlier application permitted. The Company adopted this Statement on October 1, 1998. Although the Company does not have any derivative instruments to record, management reconsidered their ability and intent to hold certain debt securities to maturity and transferred $11,064,440 and $10,510,911 of investment securities and mortgage-backed securities, respectively, to available for sale on October 1, 1998. As a result of the transfers, a market valuation account was established for the available-for-sale debt securities of $215,565 to increase the recorded balance of such securities to their fair value, a deferred tax liability of $81,915 was recorded to reflect the tax effect of the market valuation account, and the net increase resulting from the market valuation adjustment of $133,650 was recorded as a transition adjustment in the statement of comprehensive income. Loans Receivable and Related Fees Loans receivable are carried at cost, as management has determined the Company has the ability to hold them to maturity and because it is management's intention to hold loans receivable for the foreseeable future. Interest is credited to income as earned; however, interest receivable is accrued only if deemed collectible. Loan fees and the related incremental direct costs of originating loans are deferred and are amortized over the lives of the related loans using the interest method. The allowance for loan losses is maintained at an amount considered adequate to provide for potential losses. The provision for loan losses is based on periodic analysis of the loan portfolio by management. In this regard, management considers numerous factors, including, but not necessarily limited to, general economic conditions, 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. Management believes that the allowance for losses on loans is adequate. While management uses available information to recognize such losses, future additions to the allowance may be necessary based upon changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for losses. Such agencies may require the Company to recognize additions to the allowance based upon their judgment about information available to them at the time of their examination. A loan is considered impaired when it is probable the Company will be unable to collect all amounts due -- both principal and interest -- according to the contractual terms of the loan agreement. When measuring impairment, the expected future cash flows of an impaired loan are discounted at the loan's effective interest rate. Alternatively, impairment can be measured by reference to an observable market price, if one exists, or the fair value of the collateral for a collateral-dependent loan. Regardless of the historical measurement method used, the Company measures impairment based on the fair value of the collateral when it determines foreclosure is probable. Additionally, impairment of loans for which terms have been modified in a troubled-debt restructuring is measured by discounting the total expected future cash flows at the loan's effective rate of interest as stated in the original loan agreement. The Company applies the recognition criteria for impaired loans to multi-family residential loans, commercial real estate loans, agriculture loans, and restructured loans. Smaller balance, homogeneous loans, including one-to-four family residential loans and consumer loans, are collectively evaluated for impairment. Interest income on impaired loans is recognized on a cash basis. 24 27 CHESTER BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 (CONTINUED) - -------------------------------------------------------------------------------- (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Real Estate Acquired by Foreclosure Real estate acquired by foreclosure is initially recorded on an individual property basis at estimated fair value, less cost to sell, on the date of foreclosure, thus establishing a new cost basis. Subsequent to foreclosure, real estate is periodically evaluated by management and a valuation allowance is established if the estimated fair value, less cost to sell, of the property declines. Subsequent increases in fair value are recorded through a reversal of the valuation allowance, but not below zero. Costs incurred in maintaining the properties are charged to expense. Profit on sales of real estate owned is recognized when title has passed, minimum down payment requirements have been met, the terms of any notes received by the Company are such to satisfy continuing payment requirements, and the Company is relieved of any requirement for continued involvement in the real estate. Otherwise, recognition of profit is deferred until such criteria are met. Office Properties and Equipment Office properties and equipment are stated at cost less accumulated depreciation. Depreciation is charged to expense using the straight-line method based on the estimated useful lives of the related assets. Estimated lives are 10 to 35 years for buildings and improvements and 3 to 15 years for furniture and equipment. Securities Sold Under Agreements to Repurchase The Company enters into sales of securities under repurchase agreements (the agreements). The agreements are treated as financings, and the obligation to repurchase securities sold is reflected as a liability in the consolidated balance sheets. Income Taxes The Company files a consolidated federal income tax return. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Stock Option Plan The Company accounts for its stock option plan in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. The Company has also adopted SFAS 123, Accounting for Stock-Based Compensation, which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS 123 allows entities to apply the provisions of APB Opinion No. 25 and provide pro forma net income and earnings per share for employee stock option grants made in 1996 and future years as if the fair-value-based method defined in SFAS 123 had been applied. The Company has elected to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS 123. 25 28 CHESTER BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 (CONTINUED) - -------------------------------------------------------------------------------- (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Earnings Per Share Effective December 31, 1997, the Company adopted SFAS No. 128, Earnings Per Share (SFAS 128). SFAS 128 supersedes APB Opinion No. 15, Earnings Per Share (APB 15) and specifies the computation, presentation, and disclosure requirements for earnings per share (EPS) for entities with publicly held common stock or potential common stock. It replaces the presentation of primary EPS with a presentation of basic EPS and fully diluted EPS with diluted EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. (See note 2.) Basic EPS, unlike primary EPS, excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. The Company completed its initial public stock offering on October 4, 1996. Earnings per share for 1996 have been computed based upon net income for the period from October 1, 1996 to December 31, 1996 totaling $382,298. The average number of common shares outstanding was 2,011,920. The Company had no potentially dilutive securities during 1996. Reclassifications Certain reclassifications of 1997 and 1996 amounts have been made to conform with the 1998 financial statement presentation. (2) EARNINGS PER SHARE The computation of EPS at December 31, 1998, 1997, and 1996 follows:
(in thousands, except per share amounts) 1998 1997 1996 - ------------------------------------------------------------------------------------------ Basic EPS: Net income $1,149,727 $1,310,366 $ 382,298 ========================================================================================== Average common shares outstanding 1,535,617 1,925,475 2,011,920 ========================================================================================== Basic EPS $ .75 $ .68 $ .19 ========================================================================================== Diluted EPS: Net income $1,149,727 $1,310,366 $ 382,298 ========================================================================================== Average common shares outstanding 1,535,617 1,925,475 2,011,920 Dilutive potential due to stock options 39,033 16,983 -- - ------------------------------------------------------------------------------------------ Average number of common shares and dilutive potential common shares outstanding 1,574,650 1,942,458 2,011,920 ========================================================================================== Diluted EPS $ .73 $ .67 $ .19 ==========================================================================================
Nonvested common shares related to the restricted stock awards granted in 1997 were not included in the computation of diluted EPS because to do so would have been antidilutive for 1998 and 1997. 26 29 CHESTER BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 (CONTINUED) - -------------------------------------------------------------------------------- (3) INVESTMENT SECURITIES The amortized cost and fair value of investment securities classified as available for sale at December 31, 1998 and 1997 follows:
December 31, 1998 --------------------------------------------------- Gross Gross Amortized unrealized unrealized Fair cost gains losses value - -------------------------------------------------------------------------------------------- Securities of U.S. government $ 2,999,419 $14,643 $ -- $ 3,014,062 Securities of U.S. government agencies 6,960,631 33,439 -- 6,994,070 Equity securities 1,301,937 -- -- 1,301,937 Stock in Federal Home Loan Bank 800,700 -- -- 800,700 Stock in Federal Reserve Bank 405,000 -- -- 405,000 - -------------------------------------------------------------------------------------------- $12,467,687 $48,082 $ -- $12,515,769 ============================================================================================
December 31, 1997 --------------------------------------------------- Gross Gross Amortized unrealized unrealized Fair cost gains losses value - -------------------------------------------------------------------------------------------- Securities of U.S. government $17,492,301 $21,061 $(4,299) $17,509,063 Equity securities 1,154,750 17,250 -- 1,172,000 Stock in Federal Home Loan Bank 622,000 -- -- 622,000 Stock in Federal Reserve Bank 405,000 -- -- 405,000 - -------------------------------------------------------------------------------------------- $19,674,051 $38,311 $(4,299) $19,708,063 ============================================================================================
Gross realized gains, gross realized losses, and gross proceeds on sales of investment securities classified as available for sale follows:
1998 1997 1996 - ------------------------------------------------------------------------------------------ Gross realized gains $ 30,318 $ 16,256 $ 42,093 Gross realized losses -- -- -- - ------------------------------------------------------------------------------------------ Net realized gain $ 30,318 $ 16,256 $ 42,093 ========================================================================================== Gross proceeds $4,527,500 $4,006,250 $19,011,640 ==========================================================================================
The amortized cost and fair value of investment securities classified as available for sale at December 31, 1998, by contractual maturity, follows:
Amortized Fair cost value - --------------------------------------------------------------------------------------- Within one year $2,999,419 $3,014,062 Between one and five years 6,960,631 6,994,070 - --------------------------------------------------------------------------------------- 9,960,050 10,008,132 No stated maturity 2,507,637 2,507,637 - --------------------------------------------------------------------------------------- $12,467,687 $12,515,769 =======================================================================================
27 30 CHESTER BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 (CONTINUED) - -------------------------------------------------------------------------------- (3) INVESTMENT SECURITIES (CONTINUED) The amortized cost and fair value of investment securities classified as held to maturity at December 31, 1998 and 1997 follows:
December 31, 1998 --------------------------------------------------- Gross Gross Amortized unrealized unrealized Fair cost gains losses value - -------------------------------------------------------------------------------------------- Securities of U.S. government agencies $33,962,412 $ 4,152 $(48,424) $33,918,140 Mortgage-backed bonds 1,257,603 -- (1,946) 1,255,657 Securities of states and municipalities 4,896,352 207,332 -- 5,103,684 - -------------------------------------------------------------------------------------------- $40,116,367 $211,484 $(50,370) $40,277,481 ============================================================================================
December 31, 1997 --------------------------------------------------- Gross Gross Amortized unrealized unrealized Fair cost gains losses value - -------------------------------------------------------------------------------------------- Securities of U.S. government agencies $14,942,096 $ 938 $(18,484) $14,924,550 Mortgage-backed bonds 2,633,827 -- (2,446) 2,631,381 Securities of states and municipalities 7,656,596 201,606 (1,035) 7,857,167 - -------------------------------------------------------------------------------------------- $25,232,519 $202,544 $(21,965) $25,413,098 ============================================================================================
The amortized cost and fair value of investment securities classified as held to maturity at December 31, 1998, by contractual maturity, follows:
Amortized Fair cost value - --------------------------------------------------------------------------------------- Within one year $36,388,882 $36,350,362 Between one and five years 1,973,485 2,026,813 Between five and ten years 1,754,000 1,900,306 - --------------------------------------------------------------------------------------- $40,116,367 $40,277,481 =======================================================================================
28 31 CHESTER BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 (CONTINUED) - -------------------------------------------------------------------------------- (4) MORTGAGE-BACKED SECURITIES The amortized cost and fair value of mortgage-backed securities classified as available for sale at December 31, 1998 and 1997 follows:
December 31, 1998 ------------------------------------------------------ Gross Gross Amortized unrealized unrealized Fair cost gains losses value - -------------------------------------------------------------------------------------------------- GNMA $ 1,838,636 $ 39,691 $ -- $ 1,878,327 FNMA 3,842,777 26,760 -- 3,869,537 FHLMC 5,489,128 40,708 (2,639) 5,527,197 - -------------------------------------------------------------------------------------------------- $11,170,541 $107,159 $(2,639) $11,275,061 ==================================================================================================
December 31, 1997 ------------------------------------------------------ Gross Gross Amortized unrealized unrealized Fair cost gains losses value - -------------------------------------------------------------------------------------------------- GNMA $ 381,199 $14,142 $ -- $ 395,341 FNMA 1,242,417 7,380 (3,189) 1,246,608 - -------------------------------------------------------------------------------------------------- $1,623,616 $21,522 $(3,189) $1,641,949 ==================================================================================================
Gross realized gains, gross realized losses, and gross proceeds on sales of investment securities classified as available for sale for the year ended December 31, 1998 follows:
Gross realized gains $ 4,262 Gross realized losses (1,910) - ------------------------------------------------------------------------ Net realized gains $ 2,352 ======================================================================== Gross proceeds $249,779 ========================================================================
There were no sales of mortgage-backed securities during the years ended December 31, 1997 or 1996. The amortized cost and fair value of mortgage-backed securities classified as available for sale at December 31, 1998, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities due to scheduled repayments and because borrowers may have the right to prepay obligations with or without prepayment penalties. The following table does not take into consideration the effects of scheduled repayments or the effects of possible prepayments:
Amortized Fair cost value - ------------------------------------------------------------------------------------------ Within one year $ 1,753,848 $ 1,771,951 Between one and five years 3,340,125 3,371,211 Between five and ten years 4,060,533 4,079,062 After ten years 2,016,035 2,052,837 - ------------------------------------------------------------------------------------------ $11,170,541 $11,275,061 ==========================================================================================
29 32 CHESTER BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 (CONTINUED) - -------------------------------------------------------------------------------- (4) MORTGAGE-BACKED SECURITIES (CONTINUED) The amortized cost and fair value of mortgage-backed securities classified as held to maturity at December 31, 1998 and 1997 follows:
December 31, 1998 --------------------------------------------------- Gross Gross Amortized unrealized unrealized Fair cost gains losses value - --------------------------------------------------------------------------------------------- Collateralized mortgage obligations $10,595,289 $35,495 $(11,244) $10,619,540 =============================================================================================
December 31, 1997 --------------------------------------------------- Gross Gross Amortized unrealized unrealized Fair cost gains losses value - --------------------------------------------------------------------------------------------- GNMA $ 1,170,128 $44,250 $ -- $ 1,214,378 FNMA 100,809 3,272 (601) 103,480 FHLMC 3,483,117 19,184 (1,920) 3,500,381 Collateralized mortgage obligations 7,391,648 3,172 (33,769) 7,361,051 - --------------------------------------------------------------------------------------------- $12,145,702 $69,878 $(36,290) $12,179,290 =============================================================================================
The amortized cost and fair value of mortgage-backed securities classified as held to maturity at December 31, 1998, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities due to scheduled repayments and because borrowers may have the right to prepay obligations with or without prepayment penalties. The following table does not take into consideration the effects of scheduled repayments or the effects of possible prepayments:
Amortized Fair cost value - ----------------------------------------------------------------------------------------- Within one year $ 34,855 $ 34,733 Between five and ten years 3,459,561 3,461,087 After ten years 7,100,873 7,123,720 - ----------------------------------------------------------------------------------------- $10,595,289 $10,619,540 =========================================================================================
30 33 CHESTER BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 (CONTINUED) - -------------------------------------------------------------------------------- (5) LOANS RECEIVABLE, NET A comparative summary of loans receivable follows:
1998 1997 - --------------------------------------------------------------------------------------- Loans secured by real estate: Residential: 1-4 family $36,797,825 $47,173,434 Multifamily 597,123 705,899 - --------------------------------------------------------------------------------------- Total residential 37,394,948 47,879,333 Agriculture and land 453,190 722,571 Commercial 5,456,639 5,082,556 - --------------------------------------------------------------------------------------- Total loans secured by real estate 43,304,777 53,684,460 - --------------------------------------------------------------------------------------- Commercial loans 1,874,055 2,526,630 Consumer loans: Automobile loans 751,440 1,101,681 Home improvement 980,669 1,401,613 Credit cards 804,673 999,336 Loans secured by deposits 352,286 418,346 Other 586,935 767,283 - --------------------------------------------------------------------------------------- Total consumer loans 3,476,003 4,688,259 - --------------------------------------------------------------------------------------- Total loans 48,654,835 60,899,349 - --------------------------------------------------------------------------------------- Less: Loans in process 8,731 41,675 Unearned discount, net -- 3,967 Deferred loan fees, net (11,201) (50,166) Allowance for losses 448,643 436,138 - --------------------------------------------------------------------------------------- 446,173 431,614 - --------------------------------------------------------------------------------------- Loans receivable, net $48,208,662 $60,467,735 =======================================================================================
The weighted average interest rate on loans was 8.30% and 8.52% at December 31, 1998 and 1997, respectively. A summary of activity in the allowance for losses for the years ended December 31, 1998, 1997, and 1996 follows:
1998 1997 1996 - ------------------------------------------------------------------------------------------------------------- Balance, beginning of year $ 436,138 $ 384,141 $ 389,714 Provision charged to expense 16,800 97,800 32,885 Charge-offs (27,896) (67,360) (42,073) Recoveries 23,601 21,557 3,615 - ------------------------------------------------------------------------------------------------------------- Balance, end of year $ 448,643 $ 436,138 $ 384,141 =============================================================================================================
31 34 CHESTER BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 (CONTINUED) - -------------------------------------------------------------------------------- (5) LOANS RECEIVABLE, NET (CONTINUED) A summary of loans receivable contractually in arrears three months or more is as follows:
1998 1997 - ------------------------------------------------------------------------------------------------------- Residential real estate loans $ 149,916 $ 27,303 Consumer loans 6,185 10,296 - ------------------------------------------------------------------------------------------------------- $ 156,101 $ 37,599 ======================================================================================================= Percent of loans receivable .32% .06% ======================================================================================================= Number of loans 10 7 =======================================================================================================
There were no impaired loans at December 31, 1998 and 1997. The average balance of impaired loans during the year ended December 31, 1997 was $2,105. (6) ACCRUED INTEREST RECEIVABLE A comparative summary of accrued interest receivable follows:
1998 1997 - -------------------------------------------------------------------------------------------------------- Loans receivable $ 322,250 $ 401,411 Mortgage-backed securities 109,069 64,265 Investment securities 478,634 397,538 Interest-bearing deposits -- 24,161 - -------------------------------------------------------------------------------------------------------- $ 909,953 $ 887,375 ========================================================================================================
(7) OFFICE PROPERTIES AND EQUIPMENT, NET A comparative summary of office properties and equipment follows:
1998 1997 - -------------------------------------------------------------------------------------------------------- Land $ 190,434 $ 190,434 Office buildings and improvements 2,344,278 2,344,278 Furniture, fixtures and equipment 1,268,323 1,210,617 - -------------------------------------------------------------------------------------------------------- 3,803,035 3,745,329 Less accumulated depreciation 2,118,654 1,978,581 - -------------------------------------------------------------------------------------------------------- $ 1,684,381 $ 1,766,748 ========================================================================================================
Depreciation expense for the years ended December 31, 1998, 1997, and 1996 amounted to $140,073, $130,554, and $123,311, respectively. 32 35 CHESTER BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 (CONTINUED) - -------------------------------------------------------------------------------- (8) DEPOSITS A comparative summary of deposits follows:
1998 1997 ----------------------- ----------------------- Stated Percent Percent rate Amount to total Amount to total - ------------------------------------------------------------------------------------------------------- Demand deposits: NOW accounts 0-2.00% $ 9,166,456 9.2% $ 8,086,304 8.5% Money market demand 0-3.90 16,282,063 16.4 15,617,440 16.4 Passbook 2.50-2.75 8,534,011 8.6 8,685,305 9.1 - ------------------------------------------------------------------------------------------------------- 33,982,530 34.2 32,389,049 34.0 - ------------------------------------------------------------------------------------------------------- Certificates of deposit: Less than 3.00 40,000 -- 16,716 -- 3.00-4.99 12,861,591 13.0 9,740,260 10.2 5.00-6.99 52,512,504 52.8 53,179,693 55.8 7.00-8.99 37,954 -- 36,382 -- - ------------------------------------------------------------------------------------------------------- 65,452,049 65.8 62,973,051 66.0 - ------------------------------------------------------------------------------------------------------- $99,434,579 100.0% $95,362,100 100.0% =======================================================================================================
The weighted average interest rate on deposits was 4.36% and 4.43% at December 31, 1998 and 1997, respectively. A summary of the maturities of certificates of deposit at December 31, 1998 and 1997 follows:
1998 1997 ---------------------- ---------------------- Amount Percent Amount Percent - -------------------------------------------------------------------------------------------------- Within one year $39,938,882 61.0% $46,444,432 73.8% Second year 15,360,805 23.5 11,312,839 18.0 Third year 10,107,933 15.4 5,114,846 8.1 Fourth year 32,173 .1 89,569 .1 Thereafter 12,256 -- 11,365 -- - -------------------------------------------------------------------------------------------------- $65,452,049 100.0% $62,973,051 100.0% ==================================================================================================
Interest expense on savings deposits, by type, for the years ended December 31, 1998, 1997, and 1996 is summarized as follows:
1998 1997 1996 - ------------------------------------------------------------------------------------------------ Passbook $ 243,252 $ 260,560 $ 367,827 NOW accounts 151,666 161,671 174,069 Money market demand 546,682 494,391 603,283 Certificates of deposit 3,281,485 3,383,363 3,412,182 - ------------------------------------------------------------------------------------------------ $4,223,085 $4,299,985 $4,557,361 ================================================================================================
Certificates of deposit of $100,000 or more totaled $10,071,981 and $6,970,489 at December 31, 1998 and 1997, respectively. Investment securities and mortgage-backed securities with a carrying value of approximately $4.1 million and $7.5 million at December 31, 1998 and 1997, respectively, were pledged to secure certain certificates of deposit in excess of insurance of accounts limitations. 33 36 CHESTER BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 (CONTINUED) - -------------------------------------------------------------------------------- (8) DEPOSITS (CONTINUED) A corporation affiliated with the Chairman of the Board of the Company had savings deposits of approximately $14.0 million and $10.7 million with the Company at December 31, 1998 and 1997, respectively. (9) BORROWED MONEY A comparative summary of the borrowed money at December 31, 1998 and 1997 follows:
1998 1997 ---------------------- --------------------- Weighted Weighted average average interest interest Amount rate Amount rate - ------------------------------------------------------------------------------------------ Securities sold under agreements to repurchase $10,880,389 4.59% $8,380,389 5.30% Fixed-term advances from FHLB due in 2008 10,000,000 4.76 -- -- - ------------------------------------------------------------------------------------------ $20,880,389 4.67% $8,380,389 5.30% ==========================================================================================
Securities sold under agreements to repurchase (repurchase agreements) are treated as financings, and the obligations to repurchase securities sold are reflected as a liability. The repurchase agreements mature within one year. All of the repurchase agreements were to repurchase identical securities. The investment securities and mortgage-backed securities underlying the repurchase agreements were delivered to a designated safekeeping agent. These investment securities and mortgage-backed securities had an amortized cost and fair value of $10,987,000 and $10,964,000, respectively at December 31, 1998 and $8,367,000 and $8,348,000, respectively, at December 31, 1997. The repurchase agreements averaged approximately $9,523,000, $6,915,000, and $15,057,000 during 1998, 1997, and 1996, respectively. The maximum amount outstanding at any month-end during 1998, 1997, and 1996 was $10,880,000, $8,380,000, and $18,340,000, respectively. Interest expense on the repurchase agreements was $475,463, $346,946, and $742,910 for the years ended December 31, 1998, 1997, and 1996, respectively. At December 31, 1998 and 1997, $10,340,000 and $7,840,000, respectively, of the repurchase agreements were with a corporation affiliated with the Chairman of the Board of the Company. Interest expense on fixed-term advances from the FHLB was $423,117 for the year ended December 31, 1998. There were no fixed-term advances from the FHLB outstanding during the years ended December 31, 1997 and 1996. Advances from the FHLB of Chicago are secured by a blanket lien of qualifying first mortgage loans equivalent to 165% of outstanding borrowings. As of December 31, 1998, the Company's available credit from the FHLB cannot exceed the lesser of 35% of total assets ($50.0 million), or 60% of one-to-four family residential mortgages not more than 90 days delinquent ($22.0 million). (10) INCOME TAXES The composition of income tax expense for the years ended December 31, 1998, 1997, and 1996 is as follows:
1998 1997 1996 - ------------------------------------------------------------------------------------------------- Current: Federal $468,345 $527,218 $ 220,436 State 24,228 6,030 (11,531) Deferred 21,765 (21,803) (100,189) - ------------------------------------------------------------------------------------------------- $514,338 $511,445 $ 108,716 =================================================================================================
34 37 CHESTER BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 (CONTINUED) - -------------------------------------------------------------------------------- (10) INCOME TAXES (CONTINUED) The reasons for the difference between expected federal income tax expense computed at the federal statutory rate of 34% and the actual amount are as follows:
1998 1997 1996 ------------------ ------------------- ------------------- Amount Percent Amount Percent Amount Percent - ------------------------------------------------------------------------------------------------------------ Computed "expected" income tax expense $565,782 34.0% $ 619,416 34.0% $ 273,312 34.0% Items affecting federal income tax rate: Amortization of ESOP awards 13,823 .8 13,427 .8 1,731 .2 State income taxes, net of federal benefit 15,990 1.0 3,980 .2 (7,610) (1.0) Tax-exempt interest (91,405) (5.5) (131,179) (7.2) (155,157) (19.3) Other 10,148 .6 5,801 .3 (3,560) (.4) - ------------------------------------------------------------------------------------------------------------ $514,338 30.9% $ 511,445 28.1% $ 108,716 13.5% ============================================================================================================
The components of deferred tax assets and deferred tax liabilities at December 31, 1998 and 1997 are summarized as follows:
1998 1997 - -------------------------------------------------------------------------------------- Deferred tax assets: General loan loss allowance $ 161,781 $ 156,486 Deferred compensation -- 21,213 Restricted stock awards 48,320 50,181 Other 2,695 22,500 - -------------------------------------------------------------------------------------- Total deferred tax assets 212,796 250,380 - -------------------------------------------------------------------------------------- Deferred tax liabilities: Available-for-sale securities market valuation (59,118) (19,891) Excess of tax bad debt reserves over base year (104,464) (104,464) Tax depreciation in excess of that recorded for book purposes (58,553) (54,675) FHLB stock dividends (25,993) (25,993) Other (8,842) (28,539) - -------------------------------------------------------------------------------------- Total deferred tax liabilities (256,970) (233,562) - -------------------------------------------------------------------------------------- Net deferred tax asset (liability) $ (44,174) $ 16,818 ======================================================================================
If certain conditions were met, the Bank, in determining taxable income, was allowed a special bad debt deduction based on specified experience formulas or on a percentage of taxable income before such deduction. The special bad deduction accorded thrift institutions was covered under Section 593 of the Internal Revenue Code. On August 20, 1996, the Small Business Job Protection Act of 1996 (the Act) was signed into law. This Act included the repeal of Section 593 effective for tax years beginning after December 31, 1995. The repeal of the thrift reserve method generally requires thrift institutions to recapture into income the portion of bad debt reserves that exceed the base year reserve. The recapture will generally be taken into income ratably over six tax years. However, if the Company met a residential loan requirement for the tax years beginning in 1996 and 1997, recapture of the reserve could be deferred until the tax year beginning in 1998. At December 31, 1998, the Company had bad debts deducted for tax purposes in excess of the base year reserve of approximately $270,000. The Company has recognized a deferred income tax liability for this amount. Certain events covered by IRC Section 593(e), which was not repealed, will trigger a recapture of the base year reserve. The base year reserve of thrift institutions would be recaptured if a thrift ceases to qualify as a bank for federal 35 38 CHESTER BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 (CONTINUED) - -------------------------------------------------------------------------------- (10) INCOME TAXES (CONTINUED) income tax purposes. The base year reserves of thrift institutions also remain subject to income tax penalty provisions which, in general, require recapture upon certain stock redemptions of, and excess distributions to, stockholders. At December 31, 1998, retained earnings included approximately $2.1 million of base year reserves for which no deferred federal income tax liability has been recognized. (11) REGULATORY MATTERS The Company and the Banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory -- and possibly additional discretionary -- actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Banks must meet specific capital guidelines that involve quantitative measures of the Company and the Banks' assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's and the Banks' capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulations to ensure capital adequacy require the Company and the Banks to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 1998, the Company and the Banks meet all capital adequacy requirements to which they are subject. As of March 31, 1997, the most recent notification from regulatory agencies categorized the Banks as well capitalized under the regulatory framework for prompt correction action. To be categorized as well capitalized, the Banks must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios of 10%, 6%, and 5%, respectively. There are no conditions or events since that notification that management believes have changed the Banks' category. 36 39 CHESTER BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 (CONTINUED) - -------------------------------------------------------------------------------- (11) REGULATORY MATTERS (CONTINUED) The Company's and the Banks' actual and required capital amounts and ratios as of December 31, 1998 and 1997 are as follows:
December 31, 1998 ----------------------------------- Capital Actual requirements ---------------- --------------- (Dollars in thousands) Amount Ratio Amount Ratio - ----------------------------------------------------------------------------------------- Total capital (to risk-weighted assets): Company $22,060 42.7% $4,136 8.00% Chester National Bank 17,565 40.0 3,550 8.00 Chester National Bank of Missouri 3,290 49.7 530 8.00 Tier I capital (to risk-weighted assets): Company $21,611 41.8% $2,068 4.00% Chester National Bank 17,197 38.7 1,775 4.00 Chester National Bank of Missouri 3,209 48.5 265 4.00 Tier I capital (to average assets): Company $21,611 14.9% $4,346 3.00% Chester National Bank 17,197 13.2 3,918 3.00 Chester National Bank of Missouri 3,209 25.6 375 3.00 December 31, 1997 ----------------------------------- Capital Actual requirements ---------------- --------------- (Dollars in thousands) Amount Ratio Amount Ratio - ----------------------------------------------------------------------------------------- Total capital to risk-weighted assets): Company $29,392 59.1% $3,976 8.00% Chester National Bank 24,357 57.8 3,368 8.00 Chester National Bank of Missouri 3,162 46.4 546 8.00 Tier I capital (to risk-weighted assets): Company $28,956 58.3% $1,988 4.00% Chester National Bank 23,992 57.0 1,684 4.00 Chester National Bank of Missouri 3,091 45.3 273 4.00 Tier I capital (to average assets): Company $28,956 21.3% $4,086 3.00% Chester National Bank 23,992 20.1 3,587 3.00 Chester National Bank of Missouri 3,091 24.1 384 3.00
37 40 CHESTER BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 (CONTINUED) - -------------------------------------------------------------------------------- (12) PENSION PLAN Substantially all employees are included in a trusteed defined benefit pension plan. The benefits contemplated by the plan are funded through payments to the Financial Institutions Retirement Fund, which operates as an industry-wide plan and does not report relative plan assets and actuarial liabilities of the individual participating associations. The cost of funding is charged to current operations. There is no unfunded liability for past service. Expense for the years ended December 31, 1998, 1997, and 1996 was $2,438, $6,395, and $38,726, respectively. (13) EMPLOYEE STOCK OWNERSHIP PLAN 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. In January 1997, the Company loan was restructured to be repaid with level principal payments over 25 years. In January 1998, the Company loan was restructured again and is now being repaid with level principal payments over 30 years. All shares are held in a suspense account for allocation among the participants as the loan is repaid. 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 market 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 $95,596, $108,172, and $34,192 for the years ended December 31, 1998, 1997, and 1996, respectively. The ESOP shares as of December 31, 1998 and 1997 are as follows:
1998 1997 - ---------------------------------------------------------------------------------------- Allocated shares 15,272 9,778 Committed to be released shares -- -- Unreleased shares 159,298 164,792 - ---------------------------------------------------------------------------------------- Total ESOP shares 174,570 174,570 ======================================================================================== Fair value of unreleased shares $2,678,198 $2,925,058 ========================================================================================
(14) DIRECTOR EMERITUS RETIREMENT PLAN On January 18, 1996, the Company adopted a retirement plan for directors who reached director emeritus status. Eligibility for director emeritus status was achieved when a director reached age 81 or upon retirement, if the director has served as a director for 15 years or more. Originally, a director emeritus, upon the later of the first anniversary of designation as a director emeritus, or the date on which the director emeritus attained age 65, was to receive, on an annual basis for a period of 10 years following designation as a director emeritus, an amount equal to $500 multiplied by the number of full years of service as a director of the Company or any predecessor institution that was previously merged with the Company. In an amendment to the plan dated December 9, 1997, the benefit period was changed from 10 years to five years and the annual benefit multiple was changed from $500 to $300. Vesting for past service as a director occurred on December 31, 1996. In June 1998, the Company terminated the director emeritus retirement plan and eliminated the corresponding deferred compensation accrual of $59,700. Expense related to the plan was $17,393 and $207,324 for the years ended December 31, 1997 and 1996, respectively. 38 41 CHESTER BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 (CONTINUED) - -------------------------------------------------------------------------------- (15) RESTRICTED STOCK AWARDS On April 4, 1997, the Company adopted the 1997 Management Recognition and Development Plan. The plan provides that common stock totaling 82,921 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 in 1997 was 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 the restricted shares. The contra equity account will be amortized to compensation expense over the period of vesting. Compensation expense was $166,194 and $435,026 for the years ended December 31, 1998 and 1997, respectively. Included in the 1997 amount was $305,494 related to full vesting of one participant's interest upon his death in 1997. (16) STOCK OPTION PLAN On April 4, 1997, the Company adopted the 1997 Stock Option Plan which provided for the granting of options for a maximum of 218,212 shares of common stock to directors, key officers, and employees. Interest in the plan for each participant vests in five equal installments beginning April 4, 1998. On April 4, 1997 and December 8, 1998, 200,754 and 17,458 shares were granted at a price per share of $14.00 and $17.00, respectively. Activity within the plan is summarized as follows:
Number of shares Price - ------------------------------------------------------------------------------------- Balance at December 31, 1997 200,754 $14.00 Granted 17,458 17.00 Exercised -- -- Cancelled -- -- - ------------------------------------------------------------------------------------- Balance at December 31, 1998 218,212 $14.24 =====================================================================================
The Company applies APB opinion No. 25 in accounting for stock options and, accordingly, no compensation cost has been recognized in the consolidated financial statements. Had the Company determined compensation cost for stock options granted in 1998 and 1997 based on the fair value at the grant date under SFAS No. 123, the Company's net income in 1998 and 1997 would have been reduced to the pro forma amount indicated below:
1998 1997 - -------------------------------------------------------------------------------------------- Net income: As reported $1,149,727 $1,310,366 Pro forma 915,125 1,155,050 ============================================================================================ Earnings per share -- basic: As reported $ .75 $ .68 Pro forma .60 .60 ============================================================================================ Earnings per share -- diluted: As reported $ .73 $ .67 Pro forma .58 .59 ============================================================================================
The per share fair value of stock options granted in 1998 and 1997 were estimated on the date of grant at $5.60 and $5.80, respectively, using the Black-Scholes option-pricing model. The following assumptions were used to determine the 39 42 CHESTER BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 (CONTINUED) - -------------------------------------------------------------------------------- (16) STOCK OPTION PLAN (CONTINUED) per share fair value of the stock options granted in 1998: dividend yield of .14%; risk-free interest rate of 6.00%; expected volatility of 4.2%; and an estimated life of 7 years. The following assumptions were used to determine the per share fair value of the stock options in 1997: dividend yield of .14%; risk-free interest rate of 6.00%; expected volatility of 24.9%; and an estimated life of 7 years. (17) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK 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. These financial instruments include commitments to extend credit and financial guarantees. 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 and financial guarantees written is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. 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. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since certain 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. The amount of collateral obtained if deemed necessary by the Company upon extension of credit is based on management's credit evaluation of the counterparty. At December 31, 1998, the Company had outstanding commitments to originate residential loans of approximately $902,000, all of which were at fixed rates. In addition, the Company 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 Company since the time the commitment was made. (18) LITIGATION The Company is involved in various litigation arising in the ordinary course of business. In the opinion of management, at the present time, disposition of the suits and claims will not have a material effect on the financial position of the Company. (19) LIQUIDATION ACCOUNT At the time of conversion to a stock corporation, the Bank established a liquidation account for the benefit of eligible savings account holders who continue to maintain their savings accounts with the Bank after conversion. In the event of a complete liquidation of the Bank (and only in such event), eligible savings account holders who continue to maintain their accounts with the Bank shall be entitled to receive a distribution from the liquidation account after payment to all creditors but before any liquidation distribution with respect to common stock. The initial liquidation account was established at approximately $11.9 million. This account is proportionately reduced for any subsequent reduction in the eligible holders' deposit accounts. The creation and maintenance of the liquidation account will not restrict the use or application of any of the capital accounts of the Company, except that the Company may not declare or pay a cash dividend on, or repurchase any of, its capital stock, if the effect of such dividend or repurchase would be to cause the Company's net worth to be reduced below the aggregate amount then required for the liquidation account, or the amount required by federal or state law. 40 43 CHESTER BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 (CONTINUED) - -------------------------------------------------------------------------------- (20) FAIR VALUES OF FINANCIAL INSTRUMENTS The estimated fair values of the Company's interest-earning assets and interest-bearing liabilities at December 31, 1998 and 1997 are as follows:
December 31, 1998 December 31, 1997 ------------------------- ------------------------- Carrying Estimated Carrying Estimated value fair value value fair value - ------------------------------------------------------------------------------------------ Interest-earning assets: Cash and cash equivalents $16,796,839 $16,796,839 $11,291,063 $11,291,063 Certificates of deposit 95,000 95,000 290,000 290,000 Investment securities 52,632,136 52,793,250 44,940,582 45,121,161 Mortgage-backed securities 21,870,350 21,894,601 13,787,651 13,821,239 Loans receivable 48,208,662 49,154,000 60,467,735 61,124,000 - ------------------------------------------------------------------------------------------ $139,602,987 $140,733,690 $130,777,031 $131,647,463 ========================================================================================== Interest-bearing liabilities: Deposits: Checking, money market demand, and passbooks $33,982,530 $33,982,530 $32,389,049 $32,389,049 Certificates of deposit 65,452,049 65,201,000 62,973,051 62,934,000 Securities sold under agreements to repurchase 10,880,389 10,880,389 8,380,389 8,380,389 Fixed-term advances from FHLB 10,000,000 10,000,000 -- -- - ------------------------------------------------------------------------------------------ $120,314,968 $120,063,919 $103,742,489 $103,703,438 ==========================================================================================
The following methods and assumptions were used to estimate the fair value of each class of financial instrument listed above: Cash and Cash Equivalents Cash and cash equivalents consist of cash, interest-bearing deposits and bankers' acceptances with maturities of three months or less, and federal funds sold. The carrying value is considered a reasonable estimate of fair value of these financial instruments due to their short-term nature. Certificates of Deposit The carrying value is considered a reasonable estimate of fair value of the financial instrument due to original maturities not exceeding one year. Investment and Mortgage-Backed Securities Fair values are based on quoted market prices or dealer quotes. Loans Receivable Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type, such as residential real estate, commercial real estate, and consumer loans. Each loan category is further segmented into fixed and adjustable rate interest terms and by performing and nonperforming categories. The fair value of loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. The estimate of maturity 41 44 CHESTER BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 (CONTINUED) - -------------------------------------------------------------------------------- (20) FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED) Loans Receivable (Continued) is based on the Company's historical experience, with repayments for each loan classification modified, as required, by an estimate of the effect of current economic and lending conditions. Stock in Federal Home Loan Bank and Federal Reserve Bank Stock in Federal Home Loan Bank and stock in Federal Reserve Bank are valued at cost, which represents redemption value. Deposits The fair value of deposits with no stated maturity, such as checking, money market demand, and passbook, is equal to the amount payable on demand at December 31, 1998. The fair value of certificates of deposit, all of which have stated maturities, is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. Securities Sold Under Agreements to Repurchase The carrying value is considered a reasonable estimate of fair value of this financial instrument due to original maturities not exceeding one year. Fixed-term Advances From FHLB The fair value of FHLB advances is based on the discounted value of contractual cash flows. The discount rate is estimated using rates currently available to the Company for similar terms to maturity. (21) REGULATORY DEVELOPMENTS On September 30, 1996, the Deposit Insurance Funds Act of 1996 (DIFA) was signed into law. DIFA authorized the FDIC to impose a one-time special assessment on SAIF-assessable deposits of depository institutions. This special assessment, which was based on SAIF-assessable deposits at March 31, 1995, was intended to recapitalize the SAIF. The one-time special assessment for the Company totaled $812,498. The actual reduction of net income was approximately $504,000, after considering the tax deductibility of the special assessment. 42 45 CHESTER BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 (CONTINUED) - -------------------------------------------------------------------------------- (22) PARENT COMPANY FINANCIAL INFORMATION The following are condensed balance sheets as of December 31, 1998 and 1997 and condensed statements of income and cash flows for the years ended December 31, 1998, 1997, and 1996 for Chester Bancorp, Inc. (parent company only): CONDENSED BALANCE SHEETS
(in thousands) 1998 1997 - ------------------------------------------------------------------------------- Assets: Cash $ 49 $ 58 Investment securities 1,566 1,801 Investment in subsidiaries 20,514 27,105 Other assets 71 52 - ------------------------------------------------------------------------------- $22,200 $29,016 =============================================================================== Liabilities and stockholders' equity: Other liabilities $ 495 $ 28 Stockholders' equity 21,705 28,988 - ------------------------------------------------------------------------------- $22,200 $29,016 ===============================================================================
CONDENSED STATEMENTS OF INCOME
(in thousands) 1998 1997 1996 - ---------------------------------------------------------------------------------------- Interest income $ 53 $ 218 $ 66 Interest expense 18 14 -- - ---------------------------------------------------------------------------------------- 35 204 66 Operating expenses 295 435 12 - ---------------------------------------------------------------------------------------- Income (loss) before income tax expense (benefit) and equity in undistributed earnings of subsidiaries (260) (231) 54 Income tax expense (benefit) (84) (108) 22 - ---------------------------------------------------------------------------------------- Income (loss) before equity in undistributed earnings of subsidiaries (176) (123) 32 Equity in undistributed earnings of subsidiaries 1,326 1,433 663 - ---------------------------------------------------------------------------------------- Net income $1,150 $ 1,310 $ 695 ========================================================================================
43 46 CHESTER BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 (CONTINUED) - -------------------------------------------------------------------------------- (22) PARENT COMPANY FINANCIAL INFORMATION (CONTINUED) CONDENSED STATEMENTS OF CASH FLOWS
(in thousands) 1998 1997 1996 - ----------------------------------------------------------------------------------------- Operating activities: Net income $ 1,150 $ 1,310 $ 695 Equity in undistributed earnings of subsidiaries (1,326) (1,433) (663) Other, net 710 575 22 - ----------------------------------------------------------------------------------------- Net cash provided by operating activities 534 452 54 - ----------------------------------------------------------------------------------------- Investing activities: Capital contributions to subsidiaries -- -- (13,337) Decrease (increase) in investment securities 235 3,687 (5,488) - ----------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities 235 3,687 (18,825) - ----------------------------------------------------------------------------------------- Financing activities: Proceeds from issuance of stock -- -- 19,136 Dividends received from subsidiaries 7,992 -- -- Purchase of treasury stock (8,345) (3,869) -- Dividends paid (425) (477) (100) - ----------------------------------------------------------------------------------------- Net cash (used in) provided by financing activities (778) (4,346) 19,036 - ----------------------------------------------------------------------------------------- Net change in cash and cash equivalents (9) (207) 265 Cash and cash equivalents at beginning of year 58 265 -- - ----------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 49 $ 58 $ 265 =========================================================================================
44 47 CHESTER BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 (CONTINUED) - -------------------------------------------------------------------------------- (23) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) Selected quarterly financial data for the year ended December 31, 1998 is as follows:
Quarter ended ------------------------------------------------------ (thousands of dollars, March 31, June 30, September 30, December 31, except per share data) 1998 1998 1998 1998 - ----------------------------------------------------------------------------------------------- Total interest income $2,305 $2,288 $2,259 $2,225 Total interest expense 1,214 1,282 1,288 1,338 - ----------------------------------------------------------------------------------------------- Net interest income 1,091 1,006 971 887 Provision for loan losses 12 5 -- -- - ----------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 1,079 1,001 971 887 Noninterest income 55 50 53 82 Noninterest expense 678 578 642 616 - ----------------------------------------------------------------------------------------------- Income before income tax expense 456 473 382 353 Income tax expense 135 146 116 117 - ----------------------------------------------------------------------------------------------- Net income $ 321 $ 327 $ 266 $ 236 =============================================================================================== Earnings per share-- basic $ .18 $ .21 $ .18 $ .18 =============================================================================================== Earnings per share-- diluted $ .18 $ .20 $ .17 $ .18 ===============================================================================================
Selected quarterly financial data for the year ended December 31, 1997 is as follows:
Quarter ended ------------------------------------------------------ (thousands of dollars, March 31, June 30, September 30, December 31, except per share data) 1997 1997 1997 1997 - ----------------------------------------------------------------------------------------------- Total interest income $2,304 $2,344 $2,272 $2,262 Total interest expense 1,173 1,179 1,154 1,141 - ----------------------------------------------------------------------------------------------- Net interest income 1,131 1,165 1,118 1,121 Provision for loan losses 15 15 29 39 - ----------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 1,116 1,150 1,089 1,082 Noninterest income 65 64 54 36 Noninterest expense 669 680 967 518 - ----------------------------------------------------------------------------------------------- Income before income tax expense 512 534 176 600 Income tax expense 145 157 19 191 - ----------------------------------------------------------------------------------------------- Net income $ 367 $ 377 $ 157 $ 409 =============================================================================================== Earnings per share-- basic $ .18 $ .19 $ .08 $ .23 =============================================================================================== Earnings per share-- diluted $ .18 $ .19 $ .08 $ .22 ===============================================================================================
45 48 STOCKHOLDER INFORMATION - -------------------------------------------------------------------------------- BOARD OF DIRECTORS TRANSFER AGENT Michael W. Welge, Chairman Registrar and Transfer Company John R. Beck, M.D. 10 Commerce Drive Edward K. Collins Cranford, NJ 07016 James C. McDonald (800) 368-5948 Allen R. Verseman Thomas E. Welch, Jr. GENERAL INQUIRIES AND REPORTS Carl H. Welge A copy of the Company's 1998 Annual Report to CORPORATE HEADQUARTERS the Securities and Exchange Commission, Form 10-K, may be obtained without charge by written 1112 State Street request of shareholders to: Chester, IL 62233 Michael W. Welge, President (618) 826-5038 Chester Bancorp, Inc. 1112 State Street ANNUAL MEETING Chester, IL 62233 Friday, April 2, 1999 10:00 A.M. OFFICERS American Legion Hall 500 E. Opdyke St. Michael W. Welge Chester, IL 62233 President and Chief Financial Officer Edward K. Collins STOCK LISTING Secretary and Treasurer Nasdaq National Market Symbol: CNBA FDIC DISCLAIMER This Annual Report has not been GENERAL COUNSEL reviewed, or confirmed for accuracy or relevance, by the FDIC. Bryan Cave LLP One Metropolitan Square Suite 3600 St. Louis, MO 63102-2750 INDEPENDENT AUDITORS KPMG Peat Marwick LLP 10 South Broadway St. Louis, MO 63102 49 [CHESTER BANCORP, INC. LOGO] CHESTER BANCORP, INC. 1112 State Street - Chester, Illinois 62233 - Telephone (618) 826-5038 EX-27 3 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF CHESTER BANCORP, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1998 DEC-31-1998 1,305 9,703 5,788 0 23,790 50,712 50,897 48,209 449 142,796 99,435 20,880 776 0 0 0 22 21,683 142,796 5,641 2,597 839 9,077 4,223 5,122 3,955 17 33 2,514 1,664 0 0 0 1,150 .75 .73 0 0 0 0 0 0 0 0 0 0 0 0
EX-99 4 PROXY STATEMENT FOR 1999 ANNUAL MEETING 1 February 24, 1999 Dear Stockholder: You are cordially invited to attend the Annual Meeting of Stockholders of Chester Bancorp, Inc. to be held at the American Legion Hall located at 500 E. Opdyke St., Chester, Illinois, on Friday, April 2, 1999, at 10:00 a.m., local time. The Notice of the Annual Meeting of Stockholders and Proxy Statement appearing on the following pages describe the formal business to be transacted at the meeting. During the meeting, we will also report on the operations of the Corporation. IT IS IMPORTANT THAT YOUR SHARES ARE REPRESENTED AT THIS MEETING, WHETHER OR NOT YOU ATTEND THE MEETING IN PERSON AND REGARDLESS OF THE NUMBER OF SHARES YOU OWN. TO MAKE SURE YOUR SHARES ARE REPRESENTED, WE URGE YOU TO COMPLETE AND MAIL THE ENCLOSED PROXY CARD. IF YOU ATTEND THE MEETING, YOU MAY VOTE IN PERSON EVEN IF YOU HAVE PREVIOUSLY MAILED A PROXY CARD. We look forward to seeing you at the meeting. Sincerely, /s/ Michael W. Welge Michael W. Welge Chairman of the Board, President and Chief Financial Officer 2 CHESTER BANCORP, INC. 1112 STATE STREET CHESTER, ILLINOIS 62233 (618) 826-5038 NOTICE OF ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON APRIL 2, 1999 NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Chester Bancorp, Inc. ("Corporation") will be held at the American Legion Hall located at 500 E. Opdyke St., Chester, Illinois, on Friday, April 2, 1999, at 10:00 a.m., local time, for the following purposes: (1) To elect two directors to serve for three year terms; and (2) To consider and act upon such other matters as may properly come before the meeting or any adjournments thereof. NOTE: The Board of Directors is not aware of any other business to come before the meeting. Any action may be taken on the foregoing proposals at the meeting on the date specified above or on any date or dates to which, by original or later adjournment, the meeting may be adjourned. Stockholders of record at the close of business on February 17, 1999 are entitled to notice of and to vote at the meeting and any adjournments or postponements thereof. You are requested to complete and sign the enclosed form of proxy, which is solicited by the Board of Directors, and to mail it promptly in the enclosed envelope. The proxy will not be used if you attend the meeting and vote in person. BY ORDER OF THE BOARD OF DIRECTORS EDWARD K. COLLINS SECRETARY Chester, Illinois February 24, 1999 IMPORTANT: THE PROMPT RETURN OF PROXIES WILL SAVE THE CORPORATION THE EXPENSE OF FURTHER REQUESTS FOR PROXIES IN ORDER TO ENSURE A QUORUM. A SELF-ADDRESSED ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES. 3 PROXY STATEMENT OF CHESTER BANCORP, INC. 1112 STATE STREET CHESTER, ILLINOIS 62233 ANNUAL MEETING OF STOCKHOLDERS APRIL 2, 1999 This Proxy Statement is furnished in connection with the solicitation of proxies by the Board of Directors of Chester Bancorp, Inc. ("Corporation"), the holding company for Chester National Bank and Chester National Bank of Missouri (together the "Banks"), to be used at the Annual Meeting of Stockholders of the Corporation ("Annual Meeting"). The Annual Meeting will be held at the American Legion Hall located at 500 E. Opdyke St., Chester, Illinois on Friday, April 2, 1999, at 10:00 a.m., local time. This Proxy Statement and the enclosed proxy card are being mailed to stockholders on or about February 24, 1999. VOTING AND PROXY PROCEDURE Stockholders of record as of the close of business on February 17, 1999 are entitled to one vote for each share of common stock ("Common Stock") of the Corporation then held. As of February 17, 1999, the Corporation had 1,458,488 shares of Common Stock issued and outstanding. The presence, in person or by proxy, of at least a majority of the total number of outstanding shares of Common Stock entitled to vote is necessary to constitute a quorum at the Annual Meeting. Abstentions will be counted as shares present and entitled to vote at the Annual Meeting for purposes of determining the existence of a quorum. Broker non-votes will not be considered shares present and will not be included in determining whether a quorum is present. The Board of Directors solicits proxies so that each stockholder has the opportunity to vote on the proposals to be considered at the Annual Meeting. When a proxy card is returned properly signed and dated, the shares represented thereby will be voted in accordance with the instructions on the proxy card. Where no instructions are indicated, proxies will be voted FOR the nominees for directors set forth below. If a stockholder attends the Annual Meeting, he or she may vote by ballot. If a stockholder does not return a signed proxy card or does not attend the Annual Meeting and vote in person, his or her shares will not be voted. Stockholders who execute proxies retain the right to revoke them at any time. Proxies may be revoked by written notice delivered in person or mailed to the Secretary of the Corporation or by filing a later proxy prior to a vote being taken on a particular proposal at the Annual Meeting. Attendance at the Annual Meeting will not automatically revoke a proxy, but a stockholder in attendance may request a ballot and vote in person, thereby revoking a prior granted proxy. The two directors to be elected at the Annual Meeting will be elected by a plurality of the votes cast by stockholders present in person or by proxy and entitled to vote. Stockholders are not permitted to cumulate their votes for the election of directors. With respect to the election of directors, votes may be cast for or withheld from each nominee. Votes that are withheld and broker non-votes will have no effect on the outcome of the election because directors will be elected by a plurality of votes cast. 4 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Persons and groups who beneficially own in excess of 5% of the Corporation's Common Stock are required to file certain reports disclosing such ownership pursuant to the Securities Exchange Act of 1934, as amended ("Exchange Act"). Based on such reports, the following table sets forth, as of February 1, 1999, certain information as to those persons who were beneficial owners of more than 5% of the outstanding shares of Common Stock. Management knows of no persons other than those set forth below who beneficially owned more than 5% of the outstanding shares of Common Stock at February 1, 1999. The following table also sets forth, as of February 1, 1999, information as to the shares of Common Stock beneficially owned by each director, by the named executive officers of the Corporation, and by all executive officers and directors of the Corporation as a group.
Number of Shares Percent of Shares Name Beneficially Owned (1)(2) Outstanding - ---- ------------------ ----------------- DIRECTORS AND BENEFICIAL OWNERS OF MORE THAN 5% Chester National Bank Employee Stock Ownership Plan and Trust 1112 State Street Chester, Illinois 62233 173,770(3) 11.91% Gilster-Mary Lee Corporation Employee Profit Sharing Plan 115,800 7.81% 1037 State Street Chester, Illinois 62233 Michael W. Welge 235,179 (3)(4) 16.03% Allen R. Verseman 54,031(5) 3.70% John R. Beck, M.D. 53,054 3.63% James C. McDonald 23,030 1.58% Thomas E. Welch, Jr. 18,984(3) 1.30% Carl H. Welge 15,554 1.06% NAMED EXECUTIVE OFFICERS(6) Edward K. Collins 29,421 (3) 2.00% All Executive Officers and Directors as a Group (7 persons) 429,253 29.30%
- --------------- (1) In accordance with Rule 13d-3 under the Exchange Act, a person is deemed to be the beneficial owner, for purposes of this table, of any shares of Common Stock if he or she has voting or investment power with respect to such security. The table includes shares owned by spouses, other immediate family members in trust, shares held in retirement accounts or funds for the benefit of the named individuals, and other forms of ownership, over which shares the persons named in the table may possess voting and/or investment power. (2) Includes the following shares which such persons have within 60 days after February 1, 1999, the right to acquire upon exercise of employee stock options or director non-qualified stock options: 8,728 shares for each of Mr. M. Welge and Mr. Collins; 2,182 shares for each of Mr. Beck, Mr. Verseman, Mr. McDonald, Mr. Welch and Mr. C. Welge. (3) Shares held in accounts under the Corporation's ESOP, as to which the holders have voting power but not investment power, are included as follows: Mr. Collins, 1,447 shares, Mr. Welch, 1,104 shares and Mr. M. Welge, 687 shares. (4) Includes 75,664 shares over which Mr. M. Welge has sole voting and investment power, 150,100 shares over which Mr. M. Welge has shared investment and voting power, options to acquire 8,728 shares and 687 shares held in the ESOP. (5) Includes 50,349 shares over which Mr. Verseman has sole voting and investment power and 1,500 shares over which Mr. Verseman has shared investment and voting power. (6) Under SEC regulations, the term "named executive officer" is defined to include the chief executive officer, regardless of compensation level, and the four most highly compensated executive officers, other than the chief executive officer, whose total annual salary and bonus for the last completed fiscal year exceeded $100,000. Edward K. Collins was the Corporation's only "named executive officer" for the fiscal year ended December 31, 1998. He is also a director of the Corporation. 2 5 PROPOSAL I -- ELECTION OF DIRECTORS The Corporation's Board of Directors consists of seven members and is divided into three classes with three-year staggered terms, with approximately one-third of the directors elected each year. Two directors will be elected at the Annual Meeting to serve for a three year period, or until their respective successors have been elected and qualified. The nominees for election this year are Michael W. Welge and Edward K. Collins. The nominees are current members of the Boards of Directors of the Corporation and the Banks. It is intended that the proxies solicited by the Board of Directors will be voted for the election of the above named nominees. If any nominee is unable to serve, the shares represented by all valid proxies will be voted for the election of such substitute as the Board of Directors may recommend or the Board of Directors may adopt a resolution to amend the Bylaws and reduce the size of the Board. At this time the Board of Directors knows of no reason why any nominee might be unavailable to serve. THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF MESSRS. WELGE AND COLLINS. The following table sets forth certain information regarding the nominees for election at the Annual Meeting, as well as information regarding those directors continuing in office after the Annual Meeting.
Year First Elected Term to Name Age(1) Director(2) Expire(3) ---- --- -------- ------ BOARD NOMINEES Michael W. Welge(4) 58 1980 2002 Edward K. Collins 54 1996 2002 DIRECTORS CONTINUING IN OFFICE Carl H. Welge(4) 55 1980 2001 Allen R. Verseman 64 1992 2001 Thomas E. Welch, Jr. 59 1990 2000 John R. Beck, M.D. 64 1989 2000 James C. McDonald 69 1990 2000
_________________ (1) As of December 31, 1998. (2) Includes prior service on the Board of Directors of Chester Savings Bank. (3) Assuming the individual is re-elected. (4) Michael W. Welge and Carl H. Welge are second cousins. The present principal occupation and other business experience during the last five years of each nominee for election and each director continuing in office is set forth below: Michael W. Welge is Chairman of the Board of Directors, President and Chief Financial Officer. He has responsibility for various management functions, including financial management and investment portfolio management, determination of all employee compensation and employment decisions. Mr. Welge has been employed for the past 37 years at Gilster-Mary Lee Corporation where he currently serves as its Executive Vice President, Secretary and Treasurer. He has been active in civic affairs and is a past President of both the Chester Chamber of 3 6 Commerce and the Chester School Board. For the past 18 years Mr. Welge has served as an Alderman of the City Council of Chester. Mr. Welge has also been the President and a director of several local corporations and clubs. Edward K. Collins is Treasurer and Secretary of the Corporation and has been Executive Vice President and Chief Executive Officer of Chester National Bank since January 1995. He is responsible for Chester National Bank's supervisions and performance of operations and lending. Prior to his employment at Chester National Bank, Mr. Collins was Executive Vice President and Senior Loan Officer of Union Bank of Illinois from August 1991 to December 1994 and was President, Chief Executive Officer and a Director of First National Bank & Trust, Syracuse, Nebraska, from August 1988 to August 1991. Mr. Collins is a member of the Board of Directors of the Chester Chamber of Commerce. Carl H. Welge has been employed for nine years at Gilster-Mary Lee Corporation and currently serves as Accounts Receivable Supervisor. He is a member of the Memorial Hospital Board of Directors and a member of the Friends of Chester Public Library. John R. Beck, M.D. is a self-employed physician. He is a member of the Hospital staff of Memorial Hospital, Chester, Illinois, and a director of Home Health Care. James C. McDonald has been employed for 46 years at the U.S. Postal Service. He is a Trustee of the Presbyterian Church, Sparta, Illinois, and is a member of the Sparta Building Commission and the Sparta Senior Citizen Board. Thomas E. Welch, Jr. has been employed as an officer of Chester National Bank since 1990 when Heritage Federal was acquired by Chester National Bank. Mr. Welch is the Senior Vice President and Compliance Officer for Chester National Bank and manages the Sparta branch. Allen R. Verseman has been employed for 30 years at Gilster-Mary Lee Corporation and currently serves as Plant Superintendent. MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS The Boards of Directors of the Corporation and the Banks conduct their business through meetings of the Boards and through their committees. During the fiscal year ended December 31, 1998, the Board of Directors of the Corporation held 12 meetings, the Board of Directors of Chester National Bank held 12 meetings, and the Board of Directors of Chester National Bank of Missouri held 12 meetings. No director of the Corporation or the Banks attended fewer than 75% of the total meetings of the Boards and committees on which such person served during this period. Each year an Audit Committee is appointed, and consists of the entire Board of Directors with the exception of those Directors that are employees of the Banks. The purpose of this Committee is to review financial data of the Banks and retain the Banks' independent auditor. During the fiscal year ended December 31, 1998, the Audit Committee met 12 times. The Executive Committee consists of Directors M. Welge, and Collins, the Secretary and two rotating Directors. The Executive Committee meets weekly, and the committee has full authority of the Board of Directors in order to conduct business in a timely manner. The Executive Committee also functions as the Banks' Loan Committee and Asset Liability Committee. All actions of the Executive Committee are subsequently ratified by the full Board of Directors. The Executive Committee met 52 times during the fiscal year ended December 31, 1998. The Board of Directors of the Corporation acts as a nominating committee for selecting the nominees for election as directors. During the fiscal year ended December 31, 1998, the Board of Directors met once in its capacity as nominating committee to select nominees for election at the Annual Meeting. 4 7 DIRECTORS' COMPENSATION DIRECTORS' COMPENSATION BOARD AND COMMITTEE FEES. Directors received a fee of $750 per month during the year ended December 31, 1998, with no additional fees paid for committee meetings, except for the rotating Directors who serve on the Executive Committee who receive $50 per meeting attended. Director's fees totaled $66,600 for the year ended December 31, 1998. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE
Annual Compensation --------------------------------------------------------- Name and Other Annual Position Year Salary($) Bonus($) Compensation($)(1) ---- --------- -------- --------------- Edward K. Collins 1998 $ 80,000 -- $ -- Treasurer and Secretary of the Corporation 1997 $ 80,000 -- $ -- and Executive Vice President, Chief Executive 1996 $ 80,000 Officer and Director of Chester National Bank
____________________ (1) Does not include perquisites which, in the aggregate, did not exceed the lesser of $50,000 or 10% of salary and bonus. EMPLOYMENT AGREEMENTS Effective October 4, 1996, the Corporation and the Banks entered into a three-year employment agreement with Mr. Collins. Under the agreement, the initial salary level for Mr. Collins is $80,000, which amount will be paid by Chester National Bank and may be increased at the discretion of the Board of Directors or an authorized committee of the Board. On each anniversary of the commencement date of the agreement, the term of the agreement may be extended for an additional year. The current term of the agreement has been extended to January 1, 2002. The agreement is terminable by the Employers at any time or upon the occurrence of certain events specified by federal regulations. The employment agreement provides for severance payments and other benefits in the event of involuntary termination of employment in connection with any change in control of the Employers. Severance payments also will be provided on a similar basis in connection with a voluntary termination of employment where, subsequent to a change in control, Mr. Collins is assigned duties inconsistent with his position, duties, responsibilities and status immediately prior to such change in control. The term "change in control" is defined in the agreement as having occurred when, among other things, (a) a person other than the Corporation purchases shares of Common Stock pursuant to a tender or exchange offer for such shares, (b) any person (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act) is or becomes the beneficial owner, directly or indirectly, of securities of the Corporation representing 25% or more of the combined voting power of the Corporation's then outstanding securities, (c) the membership of the Board of Directors changes as the result of a contested election, or (d) stockholders of the Corporation approve a merger, consolidation, sale or disposition of all or substantially all of the Corporation's assets, or a plan of partial or complete liquidation. The severance payments from the Employers will equal 2.99 times Mr. Collins' average annual compensation during the five-year period preceding the change in control. Such amount will be paid in a lump sum within 10 business days following the termination of employment. Assuming that a change in control had occurred at December 31, 1998, Mr. Collins would be entitled to severance payments of $237,750. Section 280G of the Internal Revenue 5 8 Code of 1986, as amended ("Code"), states that severance payments that equal or exceed three times the base compensation of the individual are deemed to be "excess parachute payments" if they are contingent upon a change in control. Individuals receiving excess parachute payments are subject to a 20% excise tax on the amount of such excess payments, and the Employers would not be entitled to deduct the amount of such excess payments. The agreement restricts Mr. Collins' right to compete against the Employers for a period of one year from the date of termination of the agreement if he voluntarily terminates his employment, except in the event of a change in control. The Board of Directors of the Corporation or the Banks may, from time to time, also extend employment agreements to other senior executive officers. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The entire Board of Directors of the Corporation acts as the Compensation Committee (the "Committee"). The Committee determines the compensation for Mr. Collins and the other executive officers of the Corporation. The Committee met once in 1998. Notwithstanding anything to the contrary set forth in any of the Corporation's previous filings under the Securities Act of 1933, as amended, or the Exchange Act that might incorporate future filings, including this Proxy Statement, in whole or in part, the following Report of the Compensation Committee and Performance Graph shall not be incorporated by reference into any such filings. REPORT OF THE COMPENSATION COMMITTEE Under the rules established by the SEC, the Corporation is required to provide certain data and information in regard to the compensation and benefits provided to the Corporation's Chief Executive Officer and other executives officers of the Corporation. The disclosure requirements for the Chief Executive Officer and other executive officers include the use of tables and a report explaining the rationale and considerations that led to the fundamental executive compensation decisions affecting those individuals. Insofar as no separate compensation is currently payable by the Corporation, the Committee, acting on behalf of Chester National Bank, has prepared the following report for inclusion in this proxy statement. The Committee's duties are to administer policies that govern executive compensation for the Corporation. The Committee evaluates executive performances, compensation policies and salaries and makes determinations concerning the compensation of each named executive officer and other executive officers. The Committee establishes the compensation levels for the coming year. The executive compensation policy of the Corporation is designed to establish an appropriate relationship between executive pay and the Corporation's annual and long-term performance, long-term growth objectives, and the Corporation's ability to attract and retain qualified executive officers. The principles underlying the program are: (i) to attract and retain key executives who are vital to the long-term success of the Corporation and are of the highest caliber; (ii) to provide levels of compensation competitive with those offered throughout the financial industry, and (iii) to motivate executives to enhance long-term stockholder value by building their ownership in the Corporation. The Committee also considers a variety of subjective and objective factors in determining the compensation package for individual executives including: (i) the performance of the Corporation with emphasis on annual and long-term performance, (ii) the responsibilities assigned to each executive, and (iii) the performance by each executive of assigned responsibilities as measured by the progress of the Corporation during the year. Although the Committee did not establish executive compensation levels on the basis of whether specific financial goals had been achieved by the Corporation, the Committee considered the overall profitability of the Corporation when making their decisions. The Committee believes that management compensation levels, as a whole, appropriately reflect the application of the Corporation's executive compensation policy and the progress of the Corporation. During the year ended December 31, 1997, the base compensation for Edward K. Collins was $80,000, which did not represent an increase from the previous year. 6 9 CHESTER BANCORP, INC. [TOTAL RETURN PERFORMANCE GRAPH]
PERIOD ENDING -------------------------------------------------------- INDEX 10/8/96 12/31/96 6/30/97 12/31/97 6/30/98 12/31/98 - ------------------------------------------------------------------------------- Chester Bancorp, Inc. 100.00 101.82 116.35 140.88 136.54 134.66 S&P 500 100.00 106.15 128.02 141.57 166.65 182.03 SNL Bank Index 100.00 110.88 133.59 168.03 187.15 181.76
SNL Securities LC Charlottesville, VA (804)977-1600 10 PERFORMANCE GRAPH Set forth hereunder is a performance graph comparing (a) the total return of the Corporation's common stock for the period beginning October 4, 1996 (the date on which the Corporation's common stock commenced trading on the Nasdaq National Market) through December 31, 1998, (b) the cumulative total return on stocks included in the S&P 500 Index over such period, and (c) the cumulative total return on stock included in the SNL Bank Index over such period. The cumulative total return on the Corporation's common stock was computed assuming the reinvestment of cash dividends. 7 11 COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Section 16(a) of the Exchange Act requires the Corporation's executive officers and directors, and persons who own more than 10% of any registered class of the Corporation's equity securities, to file reports of ownership and changes in ownership with the SEC. Executive officers, directors and greater than 10% stockholders are required by regulation to furnish the Corporation with copies of all Section 16(a) forms they file. Based solely on its review of the copies of such forms it has received and written representations provided to the Corporation by the above referenced persons, the Corporation believes that, during the 1997 fiscal year, all filing requirements applicable to its reporting officers, directors and greater than 10% stockholders were properly and timely complied with. TRANSACTIONS WITH MANAGEMENT Current law requires that all loans or extensions of credit to executive officers and directors must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and does not involve more than the normal risk of repayment or present other unfavorable features. The Banks are prohibited from making any new loans or extensions of credit to the Banks' executive officers and directors at different rates or terms than those offered to the general public, and has adopted a policy to this effect. The aggregate amount of loans by the Banks to its executive officers and directors was $205,832 at December 31, 1998. AUDITORS The Board of Directors has appointed KPMG Peat Marwick LLP, independent public accountants, to serve as the Corporation's auditors for the fiscal year ending December 31, 1999. A representative of KPMG Peat Marwick LLP is expected to be present at the Annual Meeting to respond to appropriate questions from stockholders and will have the opportunity to make a statement if he or she so desires. OTHER MATTERS The Board of Directors is not aware of any business to come before the Annual Meeting other than those matters described above in this Proxy Statement. However, if any other matters should properly come before the Annual Meeting, it is intended that proxies in the accompanying form will be voted in respect thereof in accordance with the judgment of the person or persons voting the proxies. MISCELLANEOUS The cost of solicitation of proxies will be borne by the Corporation. The Corporation will reimburse brokerage firms and other custodians, nominees and fiduciaries for reasonable expenses incurred by them in sending proxy materials to the beneficial owners of the Common Stock. In addition to solicitations by mail, directors, officers and regular employees of the Corporation may solicit proxies personally or by telecopier or telephone without additional compensation. The Corporation's 1998 Annual Report to Stockholders, including consolidated financial statements, has been mailed to all stockholders of record as of the close of business on February 17, 1999. Any stockholder who has not 8 12 received a copy of the Annual Report may obtain a copy by writing to the Corporation. The Annual Report is not to be treated as part of the proxy solicitation material or having been incorporated herein by reference. A COPY OF THE CORPORATION'S FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998, AS FILED WITH THE SEC, WILL BE FURNISHED WITHOUT CHARGE TO STOCKHOLDERS OF RECORD AS OF FEBRUARY 17, 1999, UPON WRITTEN REQUEST TO MICHAEL W. WELGE, PRESIDENT, CHESTER BANCORP, INC., 1112 STATE STREET, CHESTER, ILLINOIS 62233. STOCKHOLDER PROPOSALS Proposals of stockholders intended to be presented at the Corporation's annual meeting to be held in April 2000 must be received by the Corporation no later than October 21, 1999 to be considered for inclusion in the proxy solicitation materials and form of proxy relating to such meeting. Any such proposals shall be subject to the requirements of the proxy solicitation rules adopted under the Exchange Act. BY ORDER OF THE BOARD OF DIRECTORS EDWARD K. COLLINS SECRETARY Chester, Illinois February 24, 1999 9 13 THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS Should the undersigned be present and elect to vote at the Annual Meeting or at any adjournment thereof and after notification to the Secretary of the Corporation at the Annual Meeting of the stockholder's decision to terminate this proxy, then the power of said attorneys and proxies shall be deemed terminated and of no further force and effect. The undersigned acknowledges receipt from the Corporation prior to the execution of this proxy of the Notice of Annual Meeting of Stockholders, a Proxy Statement for the Annual Meeting, dated February 24, 1999 and the Annual Report to Stockholders. Dated: _______________, 1999 - --------------------------- --------------------------- PRINT NAME OF STOCKHOLDER PRINT NAME OF STOCKHOLDER - --------------------------- --------------------------- SIGNATURE OF STOCKHOLDER SIGNATURE OF STOCKHOLDER Please sign exactly as your name appears on the enclosed card. When signing as attorney, executor, administrator, trustee or guardian, please give your full title. If shares are held jointly, each holder should sign. PLEASE COMPLETE, DATE, SIGN AND MAIL THIS PROXY PROMPTLY IN THE ENCLOSED POSTAGE-PREPAID ENVELOPE. 14 REVOCABLE PROXY CHESTER BANCORP, INC. ANNUAL MEETING OF STOCKHOLDERS APRIL 2, 1999 The undersigned hereby appoints the official Proxy Committee of the Board of Directors of Chester Bancorp, Inc. ("Corporation") with full powers of substitution to act as attorneys and proxies for the undersigned, to vote all shares of Common Stock of the Corporation which the undersigned is entitled to vote at the Annual Meeting of Stockholders, to be held at the American Legion Hall, 500 E. Opdyke St., Chester, Illinois, on Friday, April 2, 1999, at 10:00 a.m., local time, and at any and all adjournments thereof, as follows: VOTE 1. The election as director of the nominees FOR WITHHELD listed below (except as marked to the [ ] [ ] contrary below). Michael W. Welge Edward K. Collins INSTRUCTIONS: TO WITHHOLD YOUR VOTE FOR ANY INDIVIDUAL NOMINEE, WRITE THE NOMINEE'S NAME(S) ON THE LINE BELOW. _______________ 2. In their discretion, upon such other matters as may properly come before the meeting. The Board of Directors recommends a vote "FOR" the listed propositions. THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE SPECIFIED THIS PROXY WILL BE VOTED FOR THE PROPOSITIONS STATED. IF ANY OTHER BUSINESS IS PRESENTED AT SUCH MEETING, THIS PROXY WILL BE VOTED BY THE BOARD OF DIRECTORS IN ITS BEST JUDGMENT. AT THE PRESENT TIME, THE BOARD OF DIRECTORS KNOWS OF NO OTHER BUSINESS TO BE PRESENTED AT THE ANNUAL MEETING. THIS PROXY ALSO CONFERS DISCRETIONARY AUTHORITY ON THE BOARD OF DIRECTORS TO VOTE WITH RESPECT TO THE ELECTION OF ANY PERSON AS DIRECTOR WHERE THE NOMINEES ARE UNABLE TO SERVE OR FOR GOOD CAUSE WILL NOT SERVE AND MATTERS INCIDENT TO THE CONDUCT OF THE ANNUAL MEETING. -----END PRIVACY-ENHANCED MESSAGE-----