10-Q 1 c58393e10-q.txt FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ---------------------- ---------------------- Commission file number: 000-21167 ------------------------------ Chester Bancorp, Inc. (Exact name of registrant as specified in its charter) ------------------------------ Delaware 37-1359570 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1112 State Street, Chester, Illinois 62233 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (618) 826-5038 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The number of outstanding shares of the registrant's Common Stock, par value $.01 per share, was 1,290,946 on October 24, 2000. ================================================================================ 2 FORM 10-Q Index

Page Number PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets.......................................................... 4 Consolidated Statements of Income.................................................... 5 Consolidated Statement of Stockholders' Equity....................................... 7 Consolidated Statements of Cash Flows................................................ 8 Consolidated Statements of Comprehensive Income...................................... 9 Notes to Consolidated Financial Statements........................................... 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................ 12 Item 3. Quantitative and Qualitative Disclosures About Market Risks........................... 1921 PART II. OTHER INFORMATION Item 1. Legal Proceedings..................................................................... 2022 Item 2. Changes in Securities................................................................. 2022 Item 3. Defaults upon Senior Securities....................................................... 2022 Item 4. Submission of Matters to a Vote of Securities Holders................................................................ 2022 Item 5. Other Information..................................................................... 2022 Item 6. Exhibits and Reports on Form 8-K...................................................... 2022 Signature........................................................................................ 2123 Exhibit Index.................................................................................... 2224

3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements 3 4 CHESTER BANCORP, INC. AND SUBSIDIARIES Consolidated Balance Sheets September 30, 2000 and December 31, 1999 (Unaudited)

~~June~~September 30, December 31, Assets 2000 1999 ------ ---- ---- Cash $ ~~882~~1,~~964~~233,371 $ 1,245,259 Interest-bearing deposits 2,~~379~~274,~~358~~012 4,592,041 Federal funds sold 4,220,000 - ------------- ------------- Total cash and cash equivalents 37,~~262~~727,~~322~~383 5,837,300 Investment securities: Available for sale, at fair value (cost of $4,~~781~~806,~~362~~009 and $5,003,271 at ~~4,747,612~~September ~~4,961,045 June~~ 30, 2000 and December 31, 1999, respectively) 4,831,242 4,961,045 Held to maturity, at cost (fair value of $34,~~152~~595,~~362~~334 and $34,977,915 at ~~35,345,581~~September ~~36,193,546 June~~ 30, 2000 and December 31, 1999, respectively) 35,344,010 36,193,546 Mortgage-backed securities: Available for sale, at fair value (cost of $5,~~909~~427,~~580~~977 and $7,175,687 at ~~5,691,684~~September ~~7,009,588 June~~ 30, 2000 and December 31, 1999, respectively) 5,264,720 7,009,588 Held to maturity, at cost (fair value of $1211,~~368~~308,~~177~~526 and $14,413,424 at 12September 30,~~628~~ 2000 and December 31,~~591~~ 1999, respectively) 11,477,116 14,724,664 ~~June~~Loans receivable, net of allowance for loan loss ($599,316 at September 30, 2000 and $605,347 at December 31, 1999, respectively) ~~Loans receivable~~47, ~~net 48~~906,~~055,986~~917 48,277,319 Accrued interest receivable 1991,~~072,455~~193 1,151,180 Real estate acquired by foreclosure, net ~~184~~145,~~149~~289 186,288 Office property and equipment, net 1,~~475~~449,~~109~~893 1,524,196 Income taxes receivable 100,374 - Deferred tax asset, net ~~327~~171,~~197~~797 198,513 Other assets ~~335~~340,~~518~~377 328,183 ------------- ------------- $ ~~113~~115,~~126~~750,~~204~~311 $ 120,391,822 ============= ============= Liabilities and Stockholders' Equity ------------------------------------ Savings deposits $ 9295,~~111~~150,~~859~~905 $ 90,752,941 Borrowed money -- 7,807,000 Accrued interest payable 9495,~~063~~388 139,069 Advance payments by borrowers for taxes and insurance ~~698~~675,~~335~~604 376,431 Income taxes payable -- 326,001 Accrued expenses and other liabilities ~~106~~160,~~738~~846 117,198 ------------- ------------- Total liabilities 9396,~~010~~082,~~995~~743 99,518,640 ------------- ------------- Commitments and contingencies Stockholders' equity: Common stock, $.01 par value, 3,000,000 shares authorized, 2,182,125 shares issued at ~~June~~September 30, 2000 and December 31, 1999 21,821 21,821 Additional paid-in capital 21,~~374~~383,~~391~~649 21,521,985 Retained earnings, substantially restricted 1415,~~960~~090,~~480~~928 14,681,473 Accumulated other comprehensive loss (~~156~~85,~~021~~575) (129,165) Unearned ESOP shares (1,~~510~~496,~~560~~820) (1,538,040) Unearned restricted stock awards (~~310~~268,~~383~~835) (393,480) Treasury stock, at cost: ~~851~~891,~~107~~179 and 792,572 shares at ~~June~~September 30, 2000 and December 31, 1999, respectively (14,~~264~~977,~~519~~600) (13,291,412) ------------- ------------- Total stockholders' equity 2019,~~115~~667,~~209~~568 20,873,182 ------------- ------------- $ ~~113~~115,~~126~~750,~~204~~311 $ 120,391,822 ============= =============

See accompanying notes to unaudited consolidated financial statements 4 5 CHESTER BANCORP, INC. AND SUBSIDIARIES Consolidated Statements of Income Three Months Ended September 30, 2000 and 1999 (Unaudited)

Three Months Ended ------------------ ~~June~~September 30, ------------- 2000 1999 ---- ---- Interest income: Loans receivable $ ~~999~~1,~~955~~014,506 $ ~~956~~988,~~645~~210 Mortgage-backed securities ~~293~~263,~~826~~673 ~~395~~369,~~799~~533 Investments ~~615~~597,~~131~~661 ~~633~~638,~~714~~370 Interest-bearing deposits, federal funds sold and bankers' acceptances 1739,~~421~~699 9162,~~871~~796 ----------- ---------- Total interest income 1,~~926~~915,~~333~~539 2,~~078~~058,~~029~~909 ----------- ---------- Interest expense: Savings deposits ~~960~~1,~~919~~031,163 1,~~012~~008,~~662~~472 Borrowed money ~~37,723~~- ~~163~~132,~~588~~922 ----------- ---------- Total interest expense ~~998~~1,~~642~~031,163 1,~~176~~141,~~250~~394 ----------- ---------- Net interest income ~~927~~884,~~691~~376 ~~901~~917,~~779~~515 Provision for loan losses -- -- ----------- ---------- Net interest income after provision for loan losses ~~927~~884,~~691~~376 ~~901~~917,~~779~~515 ----------- ---------- Noninterest income: Late charges and other fees 3035,~~083~~973 3530,~~610~~753 Other 136,~~612~~113 64,~~301~~883 ----------- ---------- Total noninterest income 4342,~~695~~086 4135,~~911~~636 ----------- ---------- Noninterest expense: Compensation and employee benefits ~~325~~299,~~422~~229 ~~343~~320,~~262~~707 Occupancy 6572,~~601~~884 7069,~~358~~486 Data processing 3634,~~793~~090 3937,~~329~~025 Advertising 1012,~~974~~129 1711,~~883~~922 Federal deposit insurance premiums 45,~~702~~086 14,~~555~~400 Other ~~138~~139,~~834~~604 ~~173~~150,~~230~~733 ----------- ---------- Total noninterest expense ~~582~~563,~~326~~022 ~~658~~604,~~617~~273 ----------- ---------- Income before income tax expense ~~389~~363,~~060~~440 ~~285~~348,~~073~~878 Income tax expense 105,~~168~~750 89107,~~050~~527 ----------- ---------- Net income $ ~~283~~257,~~892~~690 $ ~~196~~241,~~023~~351 =========== ========== Earnings per common share - basic $ .2422 $ .1519 =========== ========== Earnings per common share - diluted $ .2322 $ .1519 =========== ==========

See accompanying notes to unaudited consolidated financial statements. 5 6 CHESTER BANCORP, INC. AND SUBSIDIARIES Consolidated Statements of Income Nine Months Ended September 30, 2000 and 1999 (Unaudited)

~~Six~~Nine Months Ended ----------------- ~~June~~September 30, ------------- 2000 1999 ---- ---- Interest income: Loans receivable $ 23,~~003~~017,~~310~~817 $ 12,~~931~~919,~~360~~570 Mortgage-backed securities ~~614~~878,~~885~~557 ~~746~~1,~~069~~115,602 Investments 1,~~214~~811,~~030~~691 1,~~238~~876,~~551~~921 Interest-bearing deposits, federal funds sold and bankers' acceptances 4686,~~949~~648 ~~278~~341,~~315~~111 ----------- ----------- Total interest income 35,~~879~~794,~~174~~713 46,~~194~~253,~~295~~204 ----------- ----------- Interest expense: Savings deposits 12,~~920~~951,~~688~~851 23,~~060~~069,~~866~~338 Borrowed money 98,568 ~~342~~475,~~941~~863 ----------- ----------- Total interest expense 23,~~019~~050,~~256~~419 23,~~403~~545,~~807~~201 ----------- ----------- Net interest income 12,~~859~~744,~~918~~294 12,~~790~~708,~~488~~003 Provision for loan losses -- -- ----------- ----------- Net interest income after provision for loan losses 12,~~859~~744,~~918~~294 12,~~790~~708,~~488~~003 ----------- ----------- Noninterest income: Late charges and other fees 6096,~~334~~308 75106,~~993~~746 Loss on sale of investment securities, net (22,969) -- Gain on sale of mortgage-backed securities, net 1,139 -- Other 1824,~~287~~400 1015,~~591~~474 ----------- ----------- Total noninterest income 5698,~~791~~878 86122,~~584~~220 ----------- ----------- Noninterest expense: Compensation and employee benefits ~~656~~955,~~387~~617 ~~679~~1,~~524~~000,231 Occupancy ~~131~~204,~~571~~456 ~~138~~208,~~770~~256 Data processing 79113,~~766~~856 76113,~~554~~579 Advertising 2032,~~748~~877 3446,~~235~~157 Federal deposit insurance premiums 1015,~~111~~198 2943,~~102~~502 Other ~~276~~416,~~728~~331 ~~318~~469,~~452~~185 ----------- ----------- Total noninterest expense 1,~~175~~738,~~311~~335 1,~~276~~880,~~637~~910 ----------- ----------- Income before income tax expense ~~741~~1,~~398~~104,837 ~~600~~949,~~435~~313 Income tax expense ~~205~~310,~~184~~934 ~~186~~294,~~711~~238 ----------- ----------- Net income $ ~~536~~793,~~214~~903 $ ~~413~~655,~~724~~075 =========== =========== Earnings per common share - basic $ .4466 $ .3251 =========== =========== Earnings per common share - diluted $ .4365 $ .3150 =========== ===========

See accompanying notes to unaudited consolidated financial statements. 6 7 CHESTER BANCORP, INC. AND SUBSIDIARIES Consolidated Statement of Stockholders' Equity Nine Months Ended September 30, 2000 (Unaudited)

Retained Accumulated Common stock Additional earnings, other ~~Common stock paid~~-~~in substantially comprehensive~~ ----------- paid-in substantially comprehensive Shares Amount capital restricted loss ------ ------ ~~capital restricted loss Shares Amount~~ ------- ---------- ---- Balance, December 31, 1999 2,182,125 $ 21,821 $ 21,521,985 $ 14,681,473 $ (129,165) Net income -- -- -- ~~536~~793,~~214~~903 -- Purchase of treasury stock -- -- -- -- -- Issuance of treasury stock for restricted stock awards -- -- (166,110) (10,382) -- ~~stock awards~~ Stock options exercised -- -- -- (5,~~729~~728) -- Amortization of restricted stock awards -- -- -- -- -- Amortization of ESOP awards -- -- 1827,~~516~~774 -- -- Dividends on common stock at $.2031 per share -- -- -- (~~241~~368,~~096~~338) -- Change in accumulated other comprehensive loss -- -- -- -- ~~(26~~43,~~856)~~590 ---------~~---~~ -------~~-----~~ ------------ ------------ ------------ Balance, ~~June~~September 30, 2000 2,182,125 $ 21,821 $ 21,~~374~~383,~~391~~649 $ 1415,~~960~~090,~~480~~928 $ (~~156~~85,~~021~~575) =========~~===~~ =======~~=====~~ ============ ============ ============

Unearned Unamortized Treasury Stock Total ESOP restricted --------------~~---------~~ Stockholders' shares stock awards Shares Amount ~~equity~~Equity ------ ------------ ------ ------ ------ Balance, December 31, 1999 $ (1,538,040) $ (393,480) 792,572 $(13,291,412) $ 20,873,182 Net income -- -- -- -- ~~536~~793,~~214~~903 Purchase of treasury stock -- -- 76117,~~946~~018 (1,~~246~~960,~~971~~052) (1,~~246~~960,~~971~~052) Issuance of treasury stock for restricted stock awards -- -- (11,865) 176,492 -- ~~stock awards~~ Stock options exercised -- -- (6,546) 97,372 91,~~643~~644 Amortization of restricted stock awards -- 83124,~~097~~645 -- -- 83124,~~097~~645 Amortization of ESOP awards 2741,~~480~~220 -- -- -- 4568,~~996~~994 Dividends on common stock at $.2031 per share -- -- -- -- (~~241~~368,~~096~~338) Change in accumulated other comprehensive loss -- -- -- -- ~~(26~~43,~~856)~~590 ------------ ---------~~---~~ -------~~-----~~ ------------ ------------ Balance, ~~June~~September 30, 2000 $ (1,~~510~~496,~~560~~820) $ (~~310~~268,~~383~~835) ~~851~~891,~~107~~179 $(14,~~264~~977,~~519~~600) $ 2019,~~115~~667,~~209~~568 ============ =========~~===~~ =======~~=====~~ ============ ============

See accompanying notes to unaudited consolidated financial statements. 7 8 CHESTER BANCORP, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Nine months ended September 30, 2000 and 1999 (Unaudited)

~~June~~September 30, ~~June~~September 30, 2000 1999 ---- ---- Cash flows from operating activities: Net income $ ~~536~~793,~~214~~903 $ ~~413~~655,~~724~~075 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization: Office properties and equipment 74112,~~906~~717 71112,~~576~~143 Deferred fees, discounts, and premiums (112,~~160)~~447 (8748,~~748~~972) Stock plans ~~220~~285,~~736~~283 ~~129~~205,~~299~~891 ~~Decrease~~Increase (decrease) in accrued interest receivable 78159,~~724~~986 (~~328~~52,~~498~~852) ~~Increase~~Decrease ~~(decrease)~~ in accrued interest payable (4543,~~006~~681) (6248,~~997~~309) Increase (decrease) in income taxes, net (~~438~~426,~~225~~375) 3844,~~090~~055 Provision for losses on real estate acquired through foreclosure - 10,000 (Gain)loss on sale of investment securities, net 22,969 - (Gain)loss on sale of mortgage-backed securities, net (1,139) - (Gain)loss on sale of real estate owned, net (8,451) - Dividend on FHLB Stock (1328,~~900~~500) - Net change in other assets and other liabilities ~~(17~~31,~~793)~~456 (4015,~~932~~229) ------------ ------------ Net cash provided by operating activities ~~416~~910,~~326~~615 ~~142~~861,~~514~~802 ------------ ------------ Cash flows from investing activities: Principal repayments on: Loans receivable 57,~~694~~864,~~121~~024 710,~~625~~985,~~394~~125 Mortgage-backed securities 24,~~814~~437,~~268~~984 68,~~129~~819,~~930~~512 Proceeds from the maturity of investment securities available for sale 500,000 57,~~735~~235,000 Proceeds from the maturity of investment securities held to maturity 3,565,000 8895,~~175~~555,670 Proceeds from the sale of investment securities available for sale 1,202,031 ~~147~~229,~~187~~437 Proceeds from the sale of mortgage-backed securities available for sale 538,389 - Cash invested in: Loans receivable (57,~~482~~451,~~631~~984) (612,~~707~~006,~~454~~683) Mortgage-backed securities held to maturity - (10,882,216) Investment securities held to maturity (2,700,000) (9094,~~343~~410,~~634~~532) Investment securities available for sale (1,~~489~~499,~~262~~309) --(400,000) Proceeds from sale of real estate acquired by foreclosure ~~6,844~~- ~~132~~127,~~398~~850 Purchase of office properties and equipment (2538,~~819~~414) (5970,~~166~~916) ------------ ------------ Net cash provided by investing activities 46,~~622~~417,~~941~~721 ~~(46~~5,~~891)~~182,247 ------------ ------------ Cash flows from financing activities: Increase (decrease) in savings deposits 14,~~358~~397,~~918~~964 (3,~~805~~608,~~022~~630) Increase (decrease) in securities sold under agreements to repurchase - (610,880,389) Repayments of FHLB advances (5,000,000) - Repayments of federal funds purchased (2,807,000) - Increase (decrease) in advance payments by borrowers for taxes and insurance ~~321~~299,~~904~~173 ~~357~~(58,~~271~~305) Purchase of treasury stock (1,~~246~~960,~~971~~052) (1,~~147~~391,~~525~~606) Dividends paid (~~241~~368,~~096~~338) (~~193~~307,~~437~~628) ------------ ------------ Net cash provided by (used in) financing activities (75,~~614~~438,~~245~~253) (1116,~~669~~246,~~102~~558) ------------ ------------ Net increase (decrease) in cash and cash equivalents (21,~~574~~890,~~978)~~083 (1110,~~573~~202,~~479~~509) Cash and cash equivalents, beginning of period 5,837,300 16,796,839 ------------ ------------ Cash and cash equivalents, end of period $ 37,~~262~~727,~~322~~383 $ 56,~~223~~594,~~360~~330 ============ ============ Supplemental information: Interest paid $ 23,~~064~~094,~~262~~100 $ 23,~~466~~593,~~804~~510 Income taxes paid $ ~~656~~749,~~024~~924 $ ~~148~~272,~~621~~321 ~~============ ============~~ Noncash investing and financing activities: Loans transferred to real estate acquired by foreclosure $ 45,776 $ 388,596 Interest credited to savings deposits $ 12,~~309~~073,~~492~~206 $ 12,~~314~~016.~~472 ============ ============~~533

See accompanying notes to unaudited consolidated financial statements. 8 9 CHESTER BANCORP, INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income (Unaudited)

Three Months Ended ~~Six~~Nine Months Ended ~~June~~September 30, ~~June~~September 30, ------------- ------------- 2000 1999 2000 1999 ---- ---- ---- ---- Net income $ ~~283~~257,~~892~~690 $ ~~196~~241,~~023~~351 $ ~~536~~793,~~214~~903 $ ~~413~~655,~~724~~075 Other comprehensive income, net of tax Unrealized holding gain (loss) on securities available for sale $ (470,~~971)~~446 $ (4525,~~771~~572) $ ~~(13~~57,~~321)~~125 $(~~162~~187,~~416~~988) Less adjustment for realized gains included in net income $ -- $ -- $ (13,535) $ -- --------- --------- --------- --------- Total other comprehensive income $ (470,~~971)~~446 $ (4525,~~771~~572) $ ~~(26~~43,~~856)~~590 $(~~162~~187,~~416~~988) --------- --------- --------- --------- Comprehensive income $ ~~278~~328,~~921~~136 $ ~~150~~215,~~252~~779 $ ~~509~~837,~~358~~493 $~~(251~~ 467,~~308)~~087 ========= ========= ========= =========

See accompanying notes to unaudited consolidated financial statements. 9 10 CHESTER BANCORP, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements Nine Months Ended September 30, 2000 and 1999 (1) Basis of Presentation The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all information and notes necessary for a complete presentation of financial position, results of operations, changes in stockholders' equity, and cash flows in conformity with generally accepted accounting principles. However, all adjustments (consisting only of normal recurring accruals) which, in the opinion of management are necessary for a fair presentation of the unaudited consolidated financial statements, have been included in the consolidated financial statements as of September 30, 2000, and for the three and nine months ended September 30, 2000 and 1999. Operating results for the nine months ended September 30, 2000 are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. The Company has not included disclosures regarding specific segments since management makes operating decisions and assesses performance based on the Company as a whole. (2) Earnings Per Share (EPS) Basic EPS is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. The computation of EPS for the three and nine months ended September 30, 2000 and 1999 follows:

Three Months Ended ~~Six~~Nine Months Ended ~~June~~September 30, ~~June~~September 30, 2000 1999 2000 1999 ---- ---- ---- ---- Basic EPS: Net income $ ~~283~~257,~~892~~690 $ ~~196~~241,~~023~~351 $ ~~536~~793,~~214~~903 $ ~~413~~655,~~724~~075 ========== ========== ========== ========== Average common shares outstanding 1,~~192~~163,~~742~~606 1,~~284~~268,~~515~~212 1,~~219~~197,~~687~~794 1,~~289~~279,~~193~~227 ========== ========== ========== ========== Basic EPS $ 0.2422 $ 0.1519 $ 0.4466 $ 0.3251 ========== ========== ========== ========== Diluted EPS: Net income $ ~~283~~257,~~892~~690 $ ~~196~~241,~~023~~351 $ ~~536~~793,~~214~~903 $ ~~413~~655,~~724~~075 ========== ========== ========== ========== Average common shares outstanding 1,~~192~~163,~~742~~606 1,~~284~~268,~~515~~212 1,~~219~~197,~~687~~794 1,~~289~~279,~~193~~227 Dilutive potential due to stock options 3332,~~297~~118 3231,~~375~~356 3331,~~189~~763 3231,~~679~~582 ---------- ---------- ---------- ---------- Average number of common shares and dilutive potential common shares outstanding 1,~~226~~195,~~039~~724 1,~~316~~299,~~890~~568 1,~~252~~229,~~876~~557 1,~~321~~310,~~872~~809 ========== ========== ========== ========== Diluted EPS $ 0.2322 $ .1519 $ 0.4365 $ 0.3150 ========== ========== ========== ==========

10 11 (3) Employee Stock Ownership Plan (ESOP) During 1996, the Company established a tax-qualified ESOP. The plan covers substantially all employees who have attained the age of 21 and completed one year of service. In connection with the conversion to a stock corporation, the ESOP purchased 174,570 shares of the Company's common stock at a subscription price of $10.00 per share using funds loaned by the Company. All shares are held in a suspense account for allocation among the participants as the loan is repaid with level principal payments over 30 years. Shares released from the suspense account are allocated among the participants based upon their pro rata annual compensation. The purchases of the shares by the ESOP were recorded by the Company as unearned ESOP shares in a contra equity account. As ESOP shares are committed to be released to compensate employees, the contra equity account is reduced and the Company recognizes compensation expense equal to the fair value of the shares committed to be released. Dividends on allocated ESOP shares are recorded as a reduction of retained earnings; dividends on unallocated ESOP shares are recorded as a reduction of debt. Compensation expense related to the ESOP was $68,994 and $69,217 for the nine months ended September 30, 2000 and 1999, respectively. The ESOP shares as of September 30, 2000 are as follows: Allocated shares 20,766 Committed to be released shares 4,122 Unreleased shares 149,682 ------------ Total ESOP shares 174,570 ============ Fair value of unreleased shares $2,516,529 ============

(4) Restricted Stock Awards On April 4, 1997, the Company adopted the 1997 Management Recognition and Development Plan. The plan provides that 82,921 common shares can be issued to directors and employees in key management positions to encourage such directors and key employees to remain with the Company. Interest in the plan for each participant vests in five equal installments beginning April 4, 1998. The adoption of the plan has been recorded in the consolidated financial statements through a $1,160,894 credit to additional paid-in capital with a corresponding charge to a contra equity account for restricted shares. The contra equity account is amortized to compensation expense over the vesting period. Compensation expense was $124,645 for both the nine months ended September 30, 2000 and 1999. (5) Pending Adoptions In September 2000, Statement on Financial Accounting Standards No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" was issued to replace Statement of Financial Accounting No. 125 which was issued in June 1996. Statement No. 125 addressed issues related to transfers of financial assets in which the transferor has some continuing involvement with the transferred assets or with the transferee. Statement No. 140 resolves implementation issues which arose as a result of Statement No. 125, but carries forward most of Statement No. 125's provisions. Statement No. 140 is effective for transfers occurring after March 31, 2001 and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. Management does not believe the adoption of Statement No. 140 will have a significant impact on its financial statements. 11 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The principal business of Chester Bancorp, Inc. and its subsidiaries (the Company) consists of attracting deposits from the general public and using these funds to originate mortgage loans secured by one-to four-family residences and to invest in securities of the U. S. government, mortgage-backed securities, and other securities. To a lesser extent, the Company engages in various forms of consumer lending. The Company's profitability depends primarily on its net interest income, which is the difference between the interest income it earns on its loans, mortgage-backed securities and investment portfolio and its cost of funds, which consists mainly of interest paid on deposits, securities sold under agreements to repurchase, federal funds purchased and FHLB advances. The operations of the Company are significantly influenced by general economic conditions and related monetary and fiscal policies of financial institutions regulatory agencies. Deposit flows and the cost of funds are influenced by interest rates on competing investments and general market rates of interest. Lending activities are affected by the demand for financing real estate and other types of loans, which in turn is affected by the interest rates at which such financing may be offered and other factors affecting loan demand and the availability of funds. When used in this report the words or phrases "will likely result," "are expected to," "is anticipated," "estimate," "project," or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties, including, among other things, changes in economic conditions in the Company's market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company's market area and competition, that could cause actual results to differ materially from the historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise readers that the factors listed above could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Company does not undertake, and specifically declines any obligation, to publicly release the results of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. FINANCIAL CONDITION ASSETS. The Company's total assets decreased by $4.6 million, or 3.9%, to $115.8 million at September 30, 2000 from $120.4 million at December 31, 1999. The decrease in the Company's asset size was attributable to a decrease in investment securities and mortgage-backed securities which was attributable to the $7.8 million decrease in borrowed money during the nine months ended September 30, 2000. Loans receivable deceased $370,000, or .8%, to $47.9 million at September 30, 2000 from $48.3 million at December 31, 1999. The slight decrease in loans receivable resulted from a decrease in loan origination volume of $4.6 million during the nine months ended September 30, 2000. This decrease was offset by a reduction in principal repayments on loans receivable of $3.1 million for the nine months ended September 30, 2000. The reduction in repayments is primarily due to the increasing interest rate environment that has been experienced during the nine months of 2000. Mortgage-backed securities at September 30, 2000 were $16.7 million compared to $21.7 million at December 31, 1999. Investment securities decreased $1.0 million, or 2.4%, to $40.2 million at 12 13 September 30, 2000, from $41.2 million at December 31, 1999. During the nine months ended September 30, 2000, management used funds to purchase additional shares of treasury stock and fund the repayment of borrowed money with the proceeds from the maturity of investment securities and mortgage-backed securities. Cash, interest-bearing deposits and federal funds sold, on a combined basis, increased $1.9 million, or 32.4%, to $7.7 million at September 30, 2000 from $5.8 million at December 31, 1999. During the nine months ended September 30, 2000, management used funds to purchase additional shares of treasury stock and fund the decline in borrowed money. Management invested the funds from increased savings deposits into short-term interest-bearing deposits. LIABILITIES. Savings deposits increased $4.4 million, or 4.8% during the nine months ended September 30, 2000. The increase in savings deposits was primarily due to management's decision to be more competitive in the rates offered on certificates of deposits during the three months ended September 30, 2000. At September 30, 2000 there was no borrowed money compared to $7.8 million at December 31, 1999. The $7.8 million, or 100.0% decrease was the result of a $5.0 million decrease in FHLB advances and a $2.8 million decrease in federal funds purchased. There were no securities sold under agreements to repurchase at September 30, 2000 and December 31, 1999, respectively. Over the last several years, the Company has maintained a deposit relationship with Gilster-Mary Lee Corporation, (Gilster-Mary Lee), a food manufacturing and packaging company headquartered in Chester, Illinois. The Chairman of the Board of the Company is also the Executive Vice President, Treasurer and Secretary of Gilster-Mary Lee. That relationship has provided as much as $25 million in funds on deposit, typically with short terms. At September 30, 2000 and December 31, 1999, the balance of funds on deposit with the Company was $21.2 million, and $14.8 million, respectively. RESULTS OF OPERATIONS The Company's operating results depend primarily on its level of net interest income, which is the difference between the interest income earned on its interest-earning assets (loans, mortgage-backed securities, investment securities, and interest-bearing deposits) and the interest expense paid on its interest-bearing liabilities (deposits and borrowings). Operating results are also significantly affected by provisions for losses on loans, noninterest income, and noninterest expense. Each of these factors is significantly affected not only by the Company's policies, but, to varying degrees, by general economic and competitive conditions and by policies of federal regulatory authorities. NET INCOME. The Company's net income for the three and nine months ended September 30, 2000 was $258,000 and $794,000, respectively, compared to $241,000 and $655,000 for the three and nine months ended September 30, 1999, respectively. The $16,000 and $139,000 increase in net income for the three and nine months ended September 30, 2000, respectively, was positively impacted by a decline in noninterest income and was negatively impacted by a decrease in net interest income and noninterest income. NET INTEREST INCOME. Net interest income totaled $884,000 for the three months ended September 30, 2000 compared to $918,000 for the three months ended September 30, 1999. The $33,000, or 3.6%, decrease in net interest income was the result of an increase in the average yield on interest-bearing liabilities to 4.47% for the three months ended September 30, 2000 from 4.27% for the three months ended September 30, 1999, positively offset by a 45 basis point increase in the average yield on interest-earning assets for the three months ended September 30, 2000. Net interest income totaled $2.74 million for the nine months ended September 30, 2000 compared to $2.71 million for the nine months ended September 30, 1999. The $36,000, or 1.3%, increase in net interest income was the result of an increase in the ratio of average interest-earning assets to average interest-bearing liabilities of 118.5% for the nine months ended September 30, 2000 compared to 115.7% for the nine months ended September 30, 1999. 13 14 INTEREST INCOME. Interest income on loans receivable increased $26,000, or 2.7%, for the three months ended September 30, 2000. The increase in interest income on loans receivable was primarily the result of an increase in the average yield on loans receivable for the three months ended September 30, 2000 of 8.44% from 8.24% for the three months ended September 30, 1999. Interest income on loans receivable increased $98,000, or 3.4%, for the nine months ended September 30, 2000. The increase in interest income on loans receivable was the result of a $1.0 million, or 2.1%, increase in the average balance of loans receivable for the nine months ended September 30, 2000. The average yield on loans receivable was 8.35% and 8.25% for the nine months ended September 30, 2000 and September 30, 1999, respectively. Interest income on mortgage-backed securities decreased $106,000 and $237,000 for the three and nine months ended September 30, 2000, respectively. The decrease in both instances resulted from a decrease in the average balance of mortgage-backed securities, partially offset by an increase in the average yield on mortgage-backed securities. For the three and nine months ended September 30, 2000, the average balance of mortgage-backed securities decreased $7.6 million, or 30.3% and $6.3 million, or 24.7%, respectively. The decrease in the average balance on mortgage-backed securities was due to the purchase of treasury stock and the decline in borrowed money. Interest earned on investment securities was $598,000 for the three months ended September 30, 2000, compared to $638,000 for the three months ended September 30, 1999. The $41,000, or 6.4% decrease in interest income on investment securities was the result of a decrease in the average balance of investment securities of $5.0 million, or 11.1%, positively offset by an increase in the average yield on investment securities to 6.38% for the three months ended September 30, 2000 from 5.93% for the three months ended September 30, 1999. The decrease in the average balance on investment securities was due to the decline in borrowed money. Interest earned on investment securities was $1.8 million for the nine months ended September 30, 2000, compared to $1.9 million for the three months ended September 30, 1999. The $65,000, or 3.5% decrease was the result of a decrease in the average balance of investment securities of $5.0 million, or 11.0%, positively offset by a 64 basis point increase in the average yield on investment securities for the nine months ended September 30, 2000. Interest income on interest-bearing deposits decreased $23,000, or 36.7%, and $254,000, or 74.6%, during the three and nine months ended September 30, 2000, respectively. The decrease in both instances primarily resulted from a decrease in the average balance of interest-bearing deposits. For the three and nine months ended September 30, 2000, the average balance of interest-bearing deposits decreased $2.5 million, or 43.4%, and $7.6 million, or 74.2%, respectively. The decrease in the average balance on interest-bearing deposits was due to the decline in borrowed money. INTEREST EXPENSE. Interest expense on savings deposits was $1.0 million and $3.0 million for the three and nine months ended September 30, 2000 compared to $1.0 million and $3.1 million for the three and nine months ended September 30, 1999. The average balance of deposits decreased $3.8 million, or 4.0%, and $6.5 million, or 6.6%, for the three and nine months ended September 30, 2000, respectively. The decrease in the average balance of deposits reflects a $9.3 million decrease in savings deposits from the sale of the Company's Pinckneyville, Illinois branch, which occurred in November, 1999, positively offset by a $4.4 million increase in savings deposits during the nine months ended September 30, 2000. Interest expense on borrowed money decreased $133,000 and $377,000 for the three and nine months ended September 30, 2000. The decrease in interest expense on borrowed money was attributable to the decline in borrowed money. The proceeds of maturing investment securities, the principal repayment on mortgage-backed securities and the increased funds in savings deposits were used for the repayment of borrowed money. 14 15 There was no interest expense on securities sold under agreements to repurchase during the three and nine months ended September 30, 2000, whereas interest expense on securities sold under agreements to repurchase was $10,000 and $113,000 for the three and nine months ended September 30, 1999. Interest expense on FHLB advances was $31,000 for the nine months ended September 30, 2000, compared to $123,000 and $363,000 for the three and nine months ended September 30, 1999. The decrease in interest expense on FHLB advances was the result of a $10.0, or 100.0%, and $9.2 million, or 92.0%, decrease in the average balance of FHLB advances for the three and nine months ended September 30, 30, 2000, respectively. Interest expense on federal funds purchased was $56,000 for the nine months ended September 30, 2000, whereas there was no interest expense on federal funds purchased during the three and nine months ended September 30, 1999. PROVISION FOR LOAN LOSSES. The allowance for loan losses is established through a provision for loan losses charged to expense based on management's evaluation of the risk inherent in its loan portfolio and the general economy. Such evaluation considers numerous factors including general economic conditions, loan portfolio composition, prior loss experience, the estimated fair value of the underlying collateral, and other factors that warrant recognition in providing for an adequate loan loss allowance. During the quarters ended September 30, 2000 and 1999, the provision for loan losses was zero as no significant problem loans were identified and the allowance for loan losses was deemed by management to be adequate. The Company's allowance for loan losses was $599,000, or 1.2%, of loans outstanding at September 30, 2000, compared to $605,000, or 1.3%, of loans outstanding at December 31, 1999. The Company's level of net loans charged-off during the nine months ended September 30, 2000 was $6,000, which represented .01% of average loans outstanding. Based on current levels in the allowance for loan losses in relation to loans receivable and delinquent loans, management's continued effort to favorably resolve problem loan situations, and the low level of charge-offs in recent years, management believes the allowance is adequate at September 30, 2000. At September 30, 2000, loans 90 days or more delinquent totaled $151,000, or .31% of net loans receivable, compared to $87,000, or .18% of net loans receivable at December 31, 1999, and $100,000, or .20% of net loans receivable at September 30, 1999. The breakdown of general loss allowances and specific loss allowances is made for regulatory accounting purposes only. General loan loss allowances are added back to capital to the extent permitted in computing risk-based capital. Both general and specific loss allowances are charged to expense. The financial statements of the Company are prepared in accordance with generally accepted accounting principles (GAAP) and, accordingly, provisions for loan losses are based on management's assessment of the factors set forth above. The Company regularly reviews its loan portfolio, including problem loans, to determine whether any loans are impaired, require classification and/or the establishment of appropriate reserves. Management believes it has established its existing allowance for loan losses in accordance with GAAP, however, future additions may be necessary if economic conditions or other circumstances differ substantially from the assumptions used in making the initial determination. NONINTEREST INCOME. Noninterest income was $42,000 and $99,000 for the three and nine months ended September 30, 2000, respectively, compared to $36,000 and $122,000 for the three and nine months ended September 30, 1999. The decrease in noninterest income for the nine months ended September 30, 2000 was mainly attributable to a $22,000 net loss realized on the sale of available for sale investment securities and mortgage-backed securities. NONINTEREST EXPENSE. Noninterest expense decreased $41,000, or 6.8%, for the three months ended September 30, 2000. The decrease in noninterest expense for the three months ended September 30, 2000 resulted from a $21,000 decrease in compensation expense, a $9,000 decrease in federal insurance 15 16 premiums and a $11,000 decrease in other expense. These fluctuations are the result of normal operating procedures. The decrease in federal insurance premiums reflects the adjustment made in accordance with the terms of the assessment imposed by Congress in 1996. In addition to the assessment the Federal Deposit Insurance Corporation ("FDIC") collects for federal deposit insurance, they also collect a separate assessment on behalf of the Financing Corporation ("FICO"). Prior to January 1, 2000, deposits insured by the Bank Insurance Fund ("BIF") were assessed by FICO at one-fifth the rate applicable to deposits by the Savings Association Insurance Fund ("SAIF"). When Congress imposed this rate differential in 1996, it also provided that the differential would terminate at the end of 1999 calender year. Accordingly, the assessments paid for the period starting January 1, 2000, were assessed at the same FICO rate for both BIF and SAIF insured deposits. As a result, the Company's SAIF FICO assessment was lower. Noninterest expense decreased $143,000, or 7.6%, for the nine months ended September 30, 2000. The decrease in noninterest expense for the six months ended June 30, 2000 resulted from a $45,000 decrease in compensation expense, a $13,000 decrease in advertising expense, a $28,000 decrease in federal insurance premiums and a $53,000 decrease in other expense. These fluctuations are the result of normal operating procedures. INCOME TAX EXPENSE. Income tax expense for the three and nine months ended September 30, 2000 was $106,000 and $311,000, compared to income tax expense of $108,000 and $294,000 for the three and nine months ended September 30, 1999. The Company's effective tax rate for the three and nine months ended September 30, 2000 was 29.1% and 28.1% respectively, compared to 30.8% and 31.0% for the three and nine months ended September 30, 1999. The effective tax rate for each period was below the statutory rate of 34% due to the Company's investment in tax exempt securities. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of funds consist of deposits, securities sold under agreements to repurchase, federal funds purchased, FHLB advances, repayments and prepayments of loans and mortgage-backed securities, maturities of investments and interest-bearing deposits, and funds provided from operations. While scheduled repayments of loans and mortgage-backed securities and maturities of investment securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. The Company manages the pricing of its deposits to maintain a steady deposit base. The Company uses its liquidity resources principally to fund existing and future loan commitments, to fund maturing certificates of deposit and deposit withdrawals, to invest in other interest-bearing assets, to maintain liquidity, and to meet operating expenses. Management believes that loan repayments and other sources of funds will be adequate to meet the Company's liquidity needs for the remainder of 2000. A major portion of the Company's liquidity consists of cash and cash equivalents, which include investments in highly liquid, short-term deposits. The level of these assets is dependent on the Company's operating, investing, lending and financing activities during any given period. At September 30, 2000, cash and cash equivalents totaled $7.7 million. The primary investing activities of the Company include origination of loans and purchase of mortgage-backed securities and investment securities. During the nine months ended September 30, 2000, purchases of investment securities totaled $4.2 million while loan originations totaled $7.5 million. These investments were funded primarily from loan and mortgage-backed security repayments of $12.3 million and investment securities sales and maturities of $5.8 million. Liquidity management is both a daily and long-term function of business management. If the Company requires funds beyond its ability to generate them internally, the Company believes that it could borrow by purchasing federal funds or borrow funds from the Federal Home Loan Bank (FHLB). At September 30, 2000, the Company had no borrowed money. 16 17 At September 30, 2000, the Company exceeded all of its regulatory capital requirements. The Company and the Company's subsidiary banks actual and required capital amounts and ratios as of September 30, 2000 are as follows:

Actual Capital Requirements ------------------------- --------------------------- (Dollars in thousands) Amount Ratio Amount Ratio ------------------------------------------------------------------------------------------------------------------ Total capital (to risk-weighted assets): Company $20,~~832~~330 4442.27% 3,~~767~~811 8.00% Chester National Bank $1615,~~431~~939 4039.30% 3,~~262~~269 8.00% Chester National Bank of Missouri 3,~~395~~442 5855.92% ~~461~~498 8.00% Tier 1 capital (to risk-weighted assets): Company $2019,~~271~~754 4341.05% 1,~~884~~906 4.00% Chester National Bank $15,~~943~~441 3937.18% 1,~~631~~635 4.00% Chester National Bank of Missouri 3,~~322~~364 5754.60% ~~231~~249 4.00% Tier 1 capital (to average assets): Company $2019,~~271~~754 17.73% 3,~~431~~423 3.00% Chester National Bank $15,~~943~~441 15.51% 3,~~077~~061 3.00% Chester National Bank of Missouri 3,~~322~~364 31.30% ~~318~~326 3.00%

IMPACT OF INFLATION AND CHANGING PRICES The consolidated financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and results of operations in terms of historical dollars without considering changes in the relative purchasing power of money over time because of inflation. Unlike most industrial companies, virtually all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a more significant impact on the Company's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. 17 18 NONPERFORMING ASSETS The following table sets forth information with respect to the Company's nonperforming assets at the dates indicated.

At ~~June~~September 30, At December 31, ---------------- --------------- 2000 1999 ---- ---- (Dollars in Thousands) ------------------------------------------------------- Non-performing loans: Loans accounted for on a non-accrual basis: Real estate Residential real estate $124 26 $ 86 Commercial -- -- Consumer 527 1 ------- -----~~---~~ Total 31151 87 ------- -----~~---~~ Accruing loans which are contractually past due 90 days or more: Residential real estate -- -- Commercial -- -- Consumer -- -- ------- -----~~---~~ Total -- -- ------- -----~~---~~ Total non-performing loans 31151 87 Real estate acquired by foreclosure, net ~~184~~145 186 ------- -----~~---~~ Total non-performing assets $296 ~~215~~ $ 273 ======= =====~~===~~ Total non-performing loans to net loans 0.0731% 0.18% ============ =========== Total allowance for loan losses to non-performing loans ~~1927~~398.1512% 698.60% ============ =========== Total non-performing assets to total assets 0.1926% 0.23% ============ ===========

18 19 Chester Bancorp, Inc., and Subsidiaries Three Months Ended September 30,

(1) Tax exempt state and municipal securities are presented on a tax equivalent basis. 19 20 Chester Bancorp, Inc. and Subsidiaries Nine Months Ended September 30,

(1) Tax exempt state and municipal securities are presented on a tax equivalent basis. 20 21 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS There has been no material change to the market risk position of the Company from the end of the last fiscal year on December 31, 1999. 21 22 PART II. OTHER INFORMATION Item 1. Legal Proceedings. Neither the Company nor the Banks are a party to any material legal proceedings at this time. From time to time, the Banks are involved in various claims and legal actions arising in the ordinary course of business. Item 2. Changes in Securities. None Item 3. Defaults upon Senior Securities. None Item 4. Submission of Matters to a Vote of Security Holders. None Item 5. Other Information. None Item 6. Exhibits and Reports on Form 8-K. A. Exhibits See Exhibit Index B. Reports on Form 8-K On August 22, 2000, Form 8-K was filed to report a change in auditors. 22 23 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized. Chester Bancorp, Inc. By: /s/ Michael W. Welge -------------------------------------- Michael W. Welge Chairman of the Board, President and Chief Financial Officer (Duly Authorized Officer) Dated: November 9, 2000 23 24 EXHIBIT INDEX Exhibit No. Description 27.1 Financial Data Schedule 24

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