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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2002
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 896,568 on November 6, 2002.
================================================================================
FORM 10-Q
Index
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets................................... 4
Consolidated Statements of Income............................. 5
Consolidated Statement of Stockholders' Equity................ 7
Consolidated Statements of Cash Flows......................... 8
Consolidated Statements of Comprehensive Income............... 10
Notes to Unaudited Consolidated Financial Statements.......... 11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................. 13
Item 3. Quantitative and Qualitative Disclosures About Market Risks.... 22
Item 4. Controls and Procedures....................................... 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 23
Item 2. Changes in Securities......................................... 23
Item 3. Defaults upon Senior Securities............................... 23
Item 4. Submission of Matters to a Vote
of Securities Holders......................................... 23
Item 5. Other Information............................................. 23
Item 6. Exhibits and Reports on Form 8-K.............................. 23
Signature............................................................... 24
Certifications.......................................................... 25
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
3
CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 2002 and December 31, 2001
(Unaudited)
September 30, December 31,
Assets 2002 2001
------ ---- ----
Cash $ 1,661,956 $ 851,602
Interest-bearing deposits 22,994,485 3,406,480
Federal funds sold 6,075,000 16,760,000
------------- ------------
Total cash and cash equivalents 30,731,441 21,018,082
Certificates of deposit 2,000,000 -
Investment securities:
Available for sale, at fair value (cost of $900,000 and $1,659,955 at 901,115 1,632,477
September 30, 2002 and December 31, 2001, respectively)
Held to maturity, at cost (fair value of $34,539,713 and $35,273,053 at 33,596,154 34,572,352
September 30, 2002 and December 31, 2001, respectively)
Nonmarketable securities 3,663,900 3,547,000
Mortgage-backed securities:
Available for sale, at fair value (cost of $0 and $500,338 at - 511,578
September 30, 2002 and December 31, 2001, respectively)
Held to maturity, at cost (fair value of $3,894,096 and $6,689,342 at 3,743,809 6,598,411
September 30, 2002 and December 31, 2001, respectively)
Loans receivable, net of allowance for loan loss ($576,710 and $590,590 at 35,384,545 41,097,027
September 30, 2002 and December 31, 2001, respectively)
Accrued interest receivable 551,750 778,175
Office property and equipment, net 1,442,135 1,527,507
Other assets 524,820 478,689
------------- ------------
$ 112,539,669 $111,761,298
============= ============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Deposits
Non-interest bearing $ 4,458,913 $ 5,022,030
Interest bearing 89,271,588 86,391,754
Borrowed money 5,000,000 5,000,000
Accrued interest payable 56,666 61,826
Advance payments by borrowers for taxes and insurance 99,537 183,378
Accrued expenses and other liabilities 160,293 154,510
------------- ------------
Total liabilities 99,046,997 96,813,498
------------- ------------
Stockholders' equity:
Common stock, $.01 par value, 3,000,000 shares authorized, 2,182,125 shares
issued at September 30, 2002 and December 31, 2001 21,821 21,821
Additional paid-in capital 21,141,721 21,268,104
Retained earnings, substantially restricted 15,993,001 15,737,450
Accumulated other comprehensive income (loss) 691 (10,068)
Unearned ESOP shares (1,386,900) (1,428,120)
Unearned restricted stock awards - (61,092)
Treasury stock, at cost: 1,285,557 and 1,204,155 shares at
September 30, 2002 and December 31, 2001, respectively (22,277,662) (20,580,295)
------------- ------------
Total stockholders' equity 13,492,672 14,947,800
------------- ------------
$ 112,539,669 $111,761,298
============= ============
See accompanying notes to unaudited consolidated financial statements.
4
CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Three Months Ended September 30, 2002 and 2001
(Unaudited)
Three Months Ended
------------------
September 30,
-------------
2002 2001
---- ----
Interest income:
Loans receivable $ 698,576 $ 898,502
Mortgage-backed securities 58,087 166,149
Investments 414,914 613,361
Interest-bearing deposits and federal funds sold 124,244 155,728
--------- ----------
Total interest income 1,295,821 1,833,740
--------- ----------
Interest expense:
Savings deposits 544,245 924,736
Borrowed money 61,333 61,333
--------- ----------
Total interest expense 605,578 986,069
--------- ----------
Net interest income 690,243 847,671
Provision for loan losses - -
--------- ----------
Net interest income after provision for loan losses 690,243 847,671
--------- ----------
Noninterest income:
Late charges and other fees 55,034 51,487
Gain on sale of investment securities, net - 49,665
Gain on sale of mortgage-backed securities, net - 9,280
Other 8,339 7,710
--------- ----------
Total noninterest income 63,373 118,142
--------- ----------
Noninterest expense:
Compensation and employee benefits 284,076 318,578
Occupancy 75,176 70,871
Data processing 33,079 36,004
Professional fees 49,248 54,289
Advertising 12,028 12,772
Federal deposit insurance premiums 3,852 4,576
Other 88,996 91,921
--------- ----------
Total noninterest expense 546,455 589,011
--------- ----------
Income before income tax expense 207,161 376,802
Income tax expense 46,058 109,771
--------- ----------
Net income $ 161,103 $ 267,031
========= ==========
Earnings per common share -- basic $ .20 $ .26
========= ==========
Earnings per common share -- diluted $ .18 $ .25
========= ==========
See accompanying notes to unaudited consolidated financial statements.
5
CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Nine Months Ended September 30, 2002 and 2001
(Unaudited)
Nine Months Ended
-----------------
September 30,
-------------
2002 2001
---- ----
Interest income:
Loans receivable $ 2,183,249 $ 2,820,619
Mortgage-backed securities 213,763 625,383
Investments 1,529,435 1,775,086
Interest-bearing deposits and federal funds sold 265,156 578,942
----------- ------------
Total interest income 4,191,603 5,800,030
----------- ------------
Interest expense:
Savings deposits 1,691,919 3,053,783
Borrowed money 182,000 172,000
----------- ------------
Total interest expense 1,873,919 3,225,783
----------- ------------
Net interest income 2,317,684 2,574,247
Provision for loan losses - -
----------- ------------
Net interest income after provision for loan losses 2,317,684 2,574,247
----------- ------------
Noninterest income:
Late charges and other fees 151,642 140,126
Gain on sale of investment securities, net 7,571 60,317
Gain on sale of mortgage-backed securities, net 3,851 17,898
Other 30,962 59,469
----------- ------------
Total noninterest income 194,026 277,810
----------- ------------
Noninterest expense:
Compensation and employee benefits 907,504 955,512
Occupancy 214,289 216,254
Data processing 109,373 109,836
Professional fees 149,304 156,232
Advertising 35,084 38,316
Federal deposit insurance premiums 12,253 14,191
Other 251,919 252,780
----------- ------------
Total noninterest expense 1,679,726 1,743,121
----------- ------------
Income before income tax expense 831,984 1,108,936
Income tax expense 183,232 315,312
----------- ------------
Net income $ 648,752 $ 793,624
=========== ============
Earnings per common share -- basic $ .79 $ .73
=========== ============
Earnings per common share -- diluted $ .73 $ .70
=========== ============
See accompanying notes to unaudited consolidated financial statements.
6
CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Nine Months Ended September 30, 2002
(Unaudited)
Retained Accumulated
Common stock Additional earnings, other Unearned
-------------- paid-in substantially comprehensive ESOP
Shares Amount capital restricted income (loss) shares
------ ------ ------- ---------- ------------- ------
Balance, December 31, 2001 2,182,125 $ 21,821 $ 21,268,104 $ 15,737,450 $ (10,068) $ (1,428,120)
Net income - - - 648,752 - -
Purchase of treasury stock - - - - - -
Treasury stock issued for MRP - - (166,516) (10,407) - -
Stock options exercised - - - (1,527) - -
Amortization of restricted stock awards - - - - - -
Amortization of ESOP awards - - 40,133 - - 41,220
Dividends on common stock
at $.47 per share - - - (381,267) - -
Change in accumulated other
comprehensive income - - - - 10,759 -
--------- --------- ------------ ------------ ---------- ------------
Balance, September 30, 2002 2,182,125 $ 21,821 $ 21,141,721 $ 15,993,001 $ 691 $ (1,386,900)
========= ========= ============ ============ ========== ============
Unearned Treasury Stock Total
restricted ---------------- Stockholders'
stock awards Shares Amount equity
------------ ------ ------ ------
Balance, December 31, 2001 $ (61,092) 1,204,155 $(20,580,295) $ 14,947,800
Net income - - - 648,752
Purchase of treasury stock - 95,042 (1,900,262) (1,900,262)
Treasury stock issued for MRP - (11,894) 176,923 -
Stock options exercised - (1,746) 25,972 24,445
Amortization of restricted stock awards 61,092 - - 61,092
Amortization of ESOP awards - - - 81,353
Dividends on common stock
at $.47 per share - - - (381,267)
Change in accumulated other
comprehensive income - - - 10,759
----------- --------- ------------ ------------
Balance, September 30, 2002 $ - 1,285,557 $(22,277,662) $ 13,492,672
=========== ========= ============ ============
See accompanying notes to unaudited consolidated financial statements.
7
CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine months ended September 30, 2002 and 2001
(Unaudited)
September 30, September 30,
2002 2001
---- ----
Cash flows from operating activities:
Net income $ 648,752 $ 793,624
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization:
Office properties and equipment 107,828 115,807
Deferred fees, discounts, and premiums 28,000 (55,461)
Stock plans 166,890 207,119
Provisions for deferred taxes (7,583) 9,397
Increase in accrued interest receivable 226,425 393,876
Decrease in accrued interest payable (5,160) (108,371)
Increase in income taxes, net 24,364 58,240
(Gain) on sale of investment securities and nonmarketable securities, net (7,571) (60,317)
(Gain) on sale of mortgage-backed securities, net (3,851) (17,898)
Dividend on FHLB Stock (116,900) (52,300)
Net change in other assets and other liabilities (69,055) 2,616
------------ ------------
Net cash provided by operating activities 992,139 1,286,332
------------ ------------
Cash flows from investing activities:
Investment securities:
Available-for-sale:
Purchases (900,000) (4,246,486)
Proceeds from sales 1,667,527 4,883,553
Proceeds from calls and maturities -- 1,000,000
Held-to-maturity:
Purchases (29,535,000) (25,335,000)
Proceeds from maturities and paydowns 30,500,000 32,620,144
Nonmarketable equity securities:
Proceeds from sales -- 1,045,750
Mortgage-backed securities:
Available-for-sale:
Proceeds from sales 435,101 1,887,752
Proceeds from maturities and paydowns 69,383 820,692
Held-to-maturity:
Purchases -- (1,497,672)
Proceeds from maturities and paydowns 2,834,834 3,888,724
Principal repayments on loans 9,414,910 9,752,510
Origination of loans (3,738,989) (6,297,520)
Purchase of certificates of deposit (12,000,000) --
Proceeds from the maturity of certificates of deposit 10,000,000 1,000,000
Proceeds from sales of real estate acquired through foreclosure 44,563 126,322
Purchase of FHLB stock -- (2,000,000)
Purchase of office properties and equipment (22,456) (228,733)
------------ ------------
Net cash provided by investing activities 8,769,873 17,420,036
------------ ------------
Cash flows from financing activities:
Increase (decrease) in savings deposits 2,316,717 (5,158,001)
Proceeds from FHLB advances -- 5,000,000
Increase (decrease) in advance payments by borrowers for taxes and insurance (83,841) 107,080
Purchase of treasury stock (1,900,262) (5,665,233)
Dividends paid (381,267) (403,825)
------------ ------------
Net cash (used in) financing activities (48,653) (6,119,979)
------------ ------------
Net increase in cash and cash equivalents 9,713,359 12,586,389
Cash and cash equivalents, beginning of period 21,018,082 11,688,354
------------ ------------
Cash and cash equivalents, end of period $ 30,731,441 $ 24,274,743
============ ============
See accompanying notes to unaudited consolidated financial statements.
8
CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine months ended September 30, 2002 and 2001
(Continued)
September 30, September 30,
2002 2001
---- ----
Supplemental information:
Interest paid $ 1,879,079 $ 3,334,154
Income taxes paid $ 186,105 $ 280,100
Noncash investing and financing activities:
Loans transferred to real estate acquired by foreclosure $ 39,232 $ 165,876
Interest credited to savings deposits $ 1,224,163 $ 2,030,858
See accompanying notes to unaudited consolidated financial statements.
9
CHESTER BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
Net income $ 161,103 $ 267,031 $ 648,752 $ 793,624
Other comprehensive income, net of tax
Unrealized holding gain(loss) on
securities available for sale $ (567) $ (24,314) $ 3,677 $ 17,563
Less adjustment for realized gains
included in net income $ -- $ 36,546 $ 7,082 $ 48,493
--------- --------- --------- ---------
Total other comprehensive income(loss) $ (567) $ 12,232 $ 10,759 $ 66,056
--------- --------- --------- ---------
Comprehensive income $ 160,536 $ 279,263 $ 659,511 $ 859,680
========= ========= ========= =========
See accompanying notes to unaudited consolidated financial statements.
10
CHESTER BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(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 accounting principles generally accepted in the
United States of America. However, all adjustments (consisting only of normal
recurring accruals) which, in the opinion of management are necessary for a fair
presentation of the unaudited consolidated financial statements, have been
included in the consolidated financial statements as of September 30, 2002 and
December 31, 2001 and for the three and nine months ended September 30, 2002 and
2001.
Operating results for the three months ended September 30, 2002 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2002.
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, 2002 and 2001 follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
Basic EPS:
Net income $ 161,103 $ 267,031 $ 648,752 $ 793,624
========== =========== ========== ===========
Average common shares outstanding 819,290 1,020,906 818,326 1,092,612
========== =========== ========== ===========
Basic EPS $ 0.20 $ 0.26 $ .79 $ .73
========== =========== ========== ===========
Diluted EPS:
Net income $ 161,103 $ 267,031 $ 648,752 $ 793,624
========== =========== ========== ===========
Average common shares outstanding 819,290 1,020,906 818,326 1,092,612
Dilutive potential due to stock plans 72,574 56,545 65,227 38,486
---------- ----------- ---------- -----------
Average number of common shares
and dilutive potential common
shares outstanding 891,864 1,077,451 883,553 1,131,098
========== =========== ========== ===========
Diluted EPS $ 0.18 $ .25 $ .73 $ .70
========== =========== ========== ===========
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 the term of the loan. On
October 15, 2002, the Board of Directors approved an amendment to the ESOP which
extended the maturity of the loan to 40 years. Shares released from the suspense
account are allocated among the participants based upon their pro rata annual
compensation. The purchases of the shares by the ESOP were recorded by the
Company as unearned ESOP shares in a contra equity account. As ESOP shares are
committed to be released to compensate employees, the contra equity account is
reduced and the Company recognizes compensation expense equal to the fair value
of the shares committed to be released. Dividends on allocated ESOP shares are
recorded as a reduction of retained earnings; dividends on unallocated ESOP
shares are recorded as a reduction of debt. Compensation expense related to the
ESOP was $81,353 and $70,251 for the nine months ended September 30, 2002 and
2001, respectively.
The ESOP shares as of September 30, 2002 are as follows:
Allocated shares 32,558
Committed to be released shares 4,122
Unreleased shares 137,890
----------
Total ESOP shares 174,570
==========
Fair value of unreleased shares $2,930,163
==========
(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 and was
fully amortized in the second quarter of 2002. Compensation expense was $61,092
and $124,646 for the nine months ended September 30, 2002 and 2001,
respectively.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The principal business of Chester Bancorp, Inc. and its
subsidiaries (the Company) consists of attracting deposits from the general
public and using these funds to originate mortgage loans secured by one-to
four-family residences and to invest in securities of the U. S. government,
mortgage-backed securities, and other securities. To a lesser extent, the
Company engages in various forms of consumer lending. The Company's
profitability depends primarily on its net interest income, which is the
difference between the interest income it earns on its loans, mortgage-backed
securities and investment portfolio and its cost of funds, which consists mainly
of interest paid on deposits, and FHLB advances.
The operations of the Company are significantly influenced by
general economic conditions and related monetary and fiscal policies of
financial institutions regulatory agencies. Deposit flows and the cost of funds
are influenced by interest rates on competing investments and general market
rates of interest. Lending activities are affected by the demand for financing
real estate and other types of loans, which in turn is affected by the interest
rates at which such financing may be offered and other factors affecting loan
demand and the availability of funds.
When used in this report the words or phrases "will likely
result," "are expected to," "is anticipated," "estimate," "project," or similar
expressions are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such statements
are subject to certain risks and uncertainties, including, among other things,
changes in economic conditions in the Company's market area, changes in policies
by regulatory agencies, fluctuations in interest rates, demand for loans in the
Company's market area and competition, that could cause actual results to differ
materially from the historical earnings and those presently anticipated or
projected. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made. The
Company wishes to advise readers that the factors listed above could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.
The Company does not undertake, and specifically declines any
obligation, to publicly release the results of any revisions which may be made
to any forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
FINANCIAL CONDITION
ASSETS. The Company's total assets increased by $778,000, or
..7%, to $112.5 million at September 30, 2002 from $111.8 million at December 31,
2001. The increase in the Company's asset size was mainly attributable to an
increase in cash and cash equivalents of $9.7 million, which resulted from an
increase in savings deposits of $2.3 million and, partially offset by the
purchase of treasury stock of $1.9 million during the nine months ended
September 30, 2002. The increase in cash and cash equivalents was offset by
decreases in loans receivable, investment securities and mortgage-backed
securities.
Loans receivable deceased $5.7 million, or 13.9%, to $35.4
million at September 30, 2002 from $41.1 million at December 31, 2001. The
decrease in loans receivable resulted from a combined impact of decreased loan
origination volume and an increase in principal repayments on loans receivable.
During this period of record low interest rates and economic instability,
management has decided to continue to focus on originating high quality loans.
Management has also decided not to aggressively compete on rate terms with other
lenders in the Banks' market area. As a result, the Company has experienced some
constriction in the loan portfolio.
13
Mortgage-backed securities at September 30, 2002 were $3.7
million compared to $7.1 million at December 31, 2001, a decrease of $3.4
million or 47.3%. Investment securities, including nonmarketable equity
securities, decreased $1.6 million, or 4.0%, to $38.2 million at September 30,
2002, from $39.8 million at December 31, 2001. As a function of management's
plan to re-align the mix of interest earning assets, proceeds from maturities,
calls and sales of investment securities and mortgage-backed securities, along
with principal repayments on loans and mortgage-backed securities, were
re-invested in short-term, callable investment securities and short-term
interest-bearing deposits.
Cash and cash equivalents and certificates of deposits
increased $11.7 million, or 55.7%, to $32.7 million at September 30, 2002 from
$21.0 million at December 31, 2001. As a direct result of the re-alignment of
interest earning assets. In addition, excess deposits in interest bearing
accounts and federal funds sold were invested in higher yielding certificates of
deposit.
LIABILITIES. Savings deposits increased $2.3 million, or 2.3%,
during the nine months ended September 30, 2002. Borrowed money was $5.0 million
at September 30, 2002 and December 31, 2001.
Over the last several years, the Company has maintained a
deposit relationship with Gilster-Mary Lee Corporation, (Gilster-Mary Lee), a
food manufacturing and packaging company headquartered in Chester, Illinois. The
Chairman of the Board of the Company is also the Executive Vice President,
Treasurer and Secretary of Gilster-Mary Lee. That relationship has provided as
much as $25 million in funds on deposit, typically with short terms. At
September 30, 2002 and December 31, 2001, the balance of funds on deposit with
the Company was $26.5 million, and $21.8 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, certificates of deposit and interest-bearing deposits)
and the interest expense paid on its interest-bearing liabilities (deposits and
borrowings). Operating results are also significantly affected by provisions for
loan losses, noninterest income, and noninterest expense. Each of these factors
is significantly affected not only by the Company's policies, but, to varying
degrees, by general economic and competitive conditions and by policies of
federal regulatory authorities.
NET INCOME. The Company's net income for the three and nine
months ended September 30, 2002 was $161,000 and $649,000, respectively,
compared to $267,000 and $794,000 for the three and nine months ended September
30, 2001, respectively. The $106,000 and $145,000 decrease in net income for the
three and nine months ended September 30, 2002, respectively, was the result of
a decline in all significant areas of income and related expenses.
NET INTEREST INCOME. Net interest income totaled $690,000 for
the three months ended September 30, 2002 compared to $848,000 for the three
months ended September 30, 2001. The $157,000, or 18.6%, decrease in net
interest income was the result of a decrease in the ratio of average
interest-earning assets to average interest-bearing liabilities of 111.3% for
the three months ended September 30, 2002 compared to 113.8% for the three
months ended September 30, 2001. The decrease was further impacted by a decrease
in the Company's interest rate spread to 2.45% for the three months ended
September 30, 2002 from 2.57% for the three months ended September 30, 2001.
Net interest income totaled $2.3 million for the nine months
ended September 30, 2002 compared to $2.6 million for the nine months ended
September 30, 2001. The $257,000, or 10.0%, decrease in net interest income was
the result of a decrease in the ratio of average interest-earning assets to
average interest-bearing liabilities of 112.9% for the nine months ended
September 30, 2002 compared to 115.1% for the nine months ended September 30,
2001. The decrease was positively offset by an increase in the Company's
interest rate spread to 2.72% for the nine months ended September 30, 2002 from
2.50% for the nine months ended September 30, 2001.
14
INTEREST INCOME. Interest income on loans receivable decreased
$200,000, or 22.3%, for the three months ended September 30, 2002. The decrease
in interest income on loans receivable was the result of a $8.0 million, or
17.9%, decrease in the average balance of loans receivable, coupled with a
decline in the average yield on loans receivable to 7.66% for the three months
ended September 30, 2002 from 8.09% for the three months ended September 30,
2001.
Interest income on loans receivable decreased $637,000, or
22.6%, for the nine months ended September 30, 2002. The decrease in interest
income on loans receivable was the result of a $8.0 million, or 17.4%, decrease
in the average balance of loans receivable for the nine months ended September
30, 2002. The average yield on loans receivable was 7.70% and 8.22% for the nine
months ended September 30, 2002 and September 30, 2001, respectively.
Interest income on mortgage-backed securities decreased
$108,000, or 65.0%, for the quarter and decreased $412,000, or 65.8%, for the
nine months ended September 30, 2002. The decrease in interest income on
mortgage-backed securities for the three months ended September 30, 2002 was the
result of a $7.5 million, or 64.6%, decrease in the average balance of
mortgage-backed securities. The decrease in interest income on mortgage-backed
securities for the nine months ended September 30, 2002 was the result of a
$8.7, or 63.3%, decrease in the average balance of mortgage-backed securities,
combined with a decrease in the average yield to 5.64% for the nine months ended
September 30, 2002 from 6.03% for the nine months ended September 30, 2001.
Management invested the funds received from the repayments of mortgage-backed
securities into short-term, interest-bearing deposits.
Interest earned on investment securities was $415,000 for the
three months ended September 30, 2002, compared to $613,000 for the three months
ended September 30, 2001. The $198,000, or 32.4% decrease in interest income on
investment securities was the result of a decrease in the average tax equivalent
yield on investment securities to 5.20% for the three months ended September 30,
2002 from 6.41% for the three months ended September 30, 2001, coupled with a
decrease in the average balance of investment securities of $6.2 million, or
15.3% for the three months ended September 30, 2002.
Interest earned on investment securities was $1.5 million for
the nine months ended September 30, 2002 compared to $1.8 million for the nine
months ended September 30, 2001. The $246,000, or 13.8% decrease on investment
securities was the result of a 105 basis point decline in the average tax
equivalent yield on investment securities, positively offset by a $1.2 million,
or 3.1%, increase in the average balance of investment securities for the nine
months ended September 30, 2002.
Interest income on interest-bearing deposits decreased
$31,000, or 20.2%, during the three months ended September 30, 2002. The
decrease primarily resulted from a decrease in the average yield on
interest-bearing deposits to 1.54% for the three months ended September 30, 2002
from 3.08% for the three months ended September 30, 2001, positively offset by a
$12.0 million, or 59.8%, increase in the average balance of interest-bearing
deposits.
Interest income on interest-bearing deposits decreased
$314,000, or 54.2%, during the nine months ended September 30, 2002. The
decrease was the result of a decrease in the average yield on interest-bearing
deposits to 1.45% for the nine months ended September 30, 2002 from 4.04% for
the nine months ended September 30, 2001, partially offset by an increase in the
average balance of interest-bearing deposits of $5.3 million.
INTEREST EXPENSE. Interest expense on savings deposits
decreased $380,000, or 41.1%, to $544,000 for the three months ended September
30, 2002 from $925,000 for the three months ended September 30, 2001. The
decrease in interest expense was the result of a $6.4 million, or 6.6%, decrease
in the average balance of deposits, combined with a decrease in the average cost
of deposits to 2.38% for the three months ended September 30, 2002 from 3.78%
for the three months ended September 30, 2001.
Interest expense on savings deposits decreased $1.4 million,
or 44.6%, to $1.7 million for the
15
nine months ended September 30, 2002 from $3.1 million for the nine months ended
September 30, 2001. The decrease in interest expense on savings deposits was the
result of a $7.3 million, or 7.5%, decrease in the average balance of deposits.
The average cost of deposits decreased between the two periods with an average
rate of 2.51% for the nine months ended September 30, 2002 compared to 4.19% for
the nine months ended September 30, 2001.
Interest expense on borrowed money remained constant at
$61,000 for the three months ended September 30, 2002 and 2001, respectively.
The average balance on borrowed money was $5.0 million for both the three month
periods ended September 30, 2002 and 2001.
Interest expense on borrowed money increased $10,000, or 5.8%,
to $182,000 for the nine months ended September 30, 2002 from $172,000 for the
nine months ended September 30, 2001. The increase in interest expense on
borrowed money was the result of a $275,000, or 5.8%, increase in the average
balance of borrowed money.
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, 2002 and 2001, 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 $577,000, or 1.6%,
of loans outstanding at September 30, 2002 compared to $591,000, or 1.4%, of
loans outstanding at December 31, 2001. The Company's level of net loans
charged-off during the nine months ended September 30, 2002 was $14,000, which
represents a minimal percentage of average loans outstanding. Based on current
levels of the allowance for loan losses in relation to loans receivable and
delinquent loans, management's continued effort to favorably resolve problem
loan situations, and the low level of charge-offs in recent years, management
believes the allowance is adequate at September 30, 2002. At September 30, 2002,
loans 90 days or more delinquent totaled $61,000, or .17% of net loans
receivable, compared to $129,000, or .31% of net loans receivable at December
31, 2001, and $109,000, or .25% of net loans receivable at September 30, 2001.
The breakdown of general loss allowances and specific loss
allowances is made for regulatory accounting purposes only. General loan loss
allowances are added back to capital to the extent permitted in computing
risk-based capital. Both general and specific loss allowances are charged to
expense. The financial statements of the Company are prepared in accordance with
accounting principles generally accepted in the United States of America (GAAP)
and, accordingly, provisions for loan losses are based on 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 $63,000 for the
three months ended September 30, 2002, compared to $118,000 for the three months
ended September 30, 2001. The Company did not realize any net gains during the
three months ended September 30, 2002, compared to a realized net gain on the
sale of available for sale investment securities and mortgage-backed securities
of $59,000 during the comparable three month period ending September 30, 2001.
Noninterest income was $194,000 for the nine months ended
September 30, 2002, compared to $278,000 for the nine months ended September 30,
2002. The decrease was attributable to a $29,000
16
decrease in other income, positively offset by a $12,000 increase in fee income.
During the nine months ended September 30, 2002, the Company realized $11,000
net gain on the sale of available for sale investment securities and
mortgage-backed securities compared to a $78,000 net gain realized on the sale
of investment securities and mortgage-backed securities during the comparable
nine month period ended September 30, 2001.
NONINTEREST EXPENSE. Noninterest expense decreased $43,000, or
7.2%, for the three months ended September 30, 2002. The decrease in noninterest
expense for the three months ended September 30, 2002 resulted from a $35,000
decrease in compensation expense and a $5,000 decrease in professional fees,
partially offset by a $4,000 increase in occupancy expense. The decrease in
compensation expense for the three months ended September 30, 2002 was the
result of the Management Retention Plan (MRP) being fully amortized during the
second quarter ended June 30, 2002. The MRP expense was $42,000 for the three
months ending September 30, 2001 compared to zero for the comparable three
months ended September 30, 2002.
Noninterest expense decreased $63,000, or 3.6%, for the nine
months ended September 30, 2002. The decrease in noninterest expense for the
nine months ended September 30, 2002 resulted from a $48,000 decrease in
compensation expense, a $3,000 decrease in advertising expense and a $7,000
decrease in professional fees. The decrease in compensation expense was the
result of the MRP being fully amortized during the second quarter ended June 30,
2002. Compensation expense for the MRP was $61,092 and $124,646 for the nine
months ended September 30, 2002 and 2001, respectively.
INCOME TAX EXPENSE. Income tax expense for the three and nine
months ended September 30, 2002 was $46,000 and $183,000 compared to $110,000
and $315,000 for the three and nine months ended September 30, 2001. The
Company's effective tax rate for the three and nine months ended September 30,
2002 was 22.2% and 22.0%, respectively, compared to 29.1% and 28.4% for the
three and nine months ended September 30, 2001. The effective tax rate for each
period was below the statutory rate of 34% due to the Company's investment in
tax-exempt securities. The Company recorded an adjustment of $26,000 to income
tax expense during the first quarter 2002. This adjustment was the result of a
reevaluation of estimated tax expense in conjunction with the year-end tax
return. Before the effect of this transaction, the effective tax rate for the
nine month period ending September 30, 2002 would have been 25.2%.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds consist of deposits,
federal funds purchased, FHLB advances, repayments and prepayments of loans and
mortgage-backed securities, maturities of investments and interest-bearing
deposits, and funds provided from operations. While scheduled repayments of
loans and mortgage-backed securities and maturities of investment securities are
predictable sources of funds, deposit flows and loan prepayments are greatly
influenced by general interest rates, economic conditions and competition. The
Company manages the pricing of its deposits to maintain a steady deposit base.
The Company uses its liquidity resources principally to fund existing and future
loan commitments, to fund maturing certificates of deposit and deposit
withdrawals, to invest in other interest-bearing assets, to maintain 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 2002.
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, 2002, cash and cash equivalents, including certificates of
deposits, totaled $32.7 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, 2002, purchases of
investment securities and mortgaged-backed securities totaled $30.4 million
while loan originations totaled $3.7 million. These investments were funded
primarily from loan and mortgage-backed
17
security repayments of $12.8 million and investment securities and sales, calls
and maturities of $32.2 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, 2002, the Company had $5.0 million in outstanding advances from
the FHLB.
At September 30, 2002, 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 June 30, 2002 are as
follows:
For capital
Actual adequacy purposes
--------------------------------------------------------------
(Dollars in thousands) Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------------------------------------
Total capital
(to risk-weighted assets):
Company $14,001 34.4% 3,260 8.00%
Chester National Bank $ 9,686 26.5% 2,926 8.00%
Chester National Bank of Missouri $ 2,689 65.9% 326 8.00%
Tier 1 capital
(to risk-weighted assets):
Company $13,492 33.1% 1,630 4.00%
Chester National Bank $ 9,229 25.2% 1,463 4.00%
Chester National Bank of Missouri $ 2,637 64.6% 163 4.00%
Tier 1 capital
(to average assets):
Company $13,492 12.2% 4,434 4.00%
Chester National Bank $ 9,229 9.2% 4,013 4.00%
Chester National Bank of Missouri $ 2,637 25.8% 409 4.00%
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related data
presented herein have been prepared in accordance with accounting principles
generally accepted in the United States of America, which require the
measurement of financial position and results of operations in terms of
historical dollars without considering changes in the relative purchasing power
of money over time because of inflation. Unlike most industrial companies,
virtually all of the assets and liabilities of the Company are monetary in
nature. As a result, interest rates have a more significant impact on the
Company's performance than the effects of general levels of inflation. Interest
rates do not necessarily move in the same direction or in the same magnitude as
the prices of goods and services.
18
NONPERFORMING ASSETS
The following table sets forth information with respect to the Company's
nonperforming assets at the dates indicated.
At September 30, At December 31,
---------------- ---------------
2002 2001
---- ----
(Dollars in Thousands)
-------------------------------------
Non-performing loans:
Loans accounted for on a non-accrual basis:
Real estate
Residential real estate $ 53 $124
Commercial -- --
Consumer 8 5
------ ------
Total 61 129
------ ------
Accruing loans which are contractually past due 90 days or more:
Residential real estate -- --
Commercial -- --
Consumer -- --
------ ------
Total -- --
------ ------
Total non-performing loans 61 129
Real estate acquired by foreclosure, net 20 20
------ ------
Total non-performing assets $ 81 $148
====== ======
Total non-performing loans to net loans 0.17% 0.31%
====== ======
Total allowance for loan losses to
non-performing loans 940.68% 458.69%
====== ======
Total non-performing assets to total assets 0.07% 0.13%
====== ======
19
Chester Bancorp, Inc., and Subsidiaries
Three Months Ended September 30,
- ------------------------------------------------------------------------------------------------------------------------------------
2002 2001
------------------------------------------ ---------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
----------- --------- ---------- ------------ --------- --------
(Dollars in thousands)
Interest-earning assets:
Loans receivable, net $ 36,485 $ 699 7.66% $ 44,461 $ 899 8.09%
Investments, net (1) 34,514 449 5.20% 40,735 653 6.41%
Mortgage-backed securities, net 4,123 58 5.63% 11,663 166 5.69%
Interest-bearing deposits 32,200 124 1.54% 20,152 155 3.08%
----------- --------- ---------- ------------ --------- --------
Total interest-earning assets 107,322 1,330 4.96% 117,011 1,873 6.40%
----------------------- ----------------------
Noninterest-earning assets 4,360 4,673
----------- ------------
Total assets $ 111,682 $ 121,684
=========== ============
Interest-bearing liabilities:
Deposits $ 91,412 544 2.38% $ 97,820 925 3.78%
Federal funds purchased 0 0 0.00% 0 0 0.00%
Other borrowings 0 0 0.00% 0 0 0.00%
FHLB advances 5,000 61 4.88% 5,000 61 4.88%
----------- --------- ---------- ------------ --------- --------
Total interest-bearing liabilities 96,412 605 2.51% 102,820 986 3.84%
----------------------- ----------------------
Noninterest-bearing liabilities 1,433 1,492
----------- ------------
Total liabilities 97,845 104,312
Retained earnings 13,837 17,372
----------- ------------
Total liabilities and retained
earnings $ 111,682 $ 121,684
=========== ============
Net interest income $ 725 $ 887
========= =========
Interest rate spread 2.45% 2.57%
========== ========
Net interest margin 2.70% 3.03%
========== ========
Ratio of average interest-earning assets
to average interest-bearing liabilities 111.32% 113.80%
========== ========
(1) Tax exempt state and municipal securities are presented on a tax equivalent
basis.
20
Chester Bancorp, Inc., and Subsidiaries
Nine Months Ended September 30,
- ------------------------------------------------------------------------------------------------------------------------------------
2002 2001
------------------------------------------ ---------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
----------- --------- ---------- ------------ --------- --------
(Dollars in thousands)
Interest-earning assets:
Loans receivable, net $ 37,825 $ 2,183 7.70% $ 45,778 $ 2,821 8.22%
Investments, net (1) 39,869 1,639 5.48% 38,670 1,894 6.53%
Mortgage-backed securities, net 5,061 214 5.64% 13,809 625 6.03%
Interest-bearing deposits 24,421 265 1.45% 19,157 579 4.04%
----------- --------- ---------- ------------ --------- --------
Total interest-earning assets 107,176 4,301 5.35% 117,414 5,919 6.72%
----------------------- ----------------------
Noninterest-earning assets 4,258 4,718
----------- ------------
Total assets $ 111,434 $ 122,132
=========== ============
Interest-bearing liabilities:
Deposits $ 89,960 1,692 2.51% $ 97,251 3,054 4.19%
Federal funds purchased 0 0 0.00% 0 0 0.00%
Other borrowings 0 0 0.00% 0 0 0.00%
FHLB advances 5,000 182 4.85% 4,725 172 4.85%
----------- --------- ---------- ------------ --------- --------
Total interest-bearing liabilities 94,960 1,874 2.63% 101,976 3,226 4.22%
----------------------- ----------------------
Noninterest-bearing liabilities 1,259 1,476
----------- ------------
Total liabilities 96,219 103,452
Retained earnings 15,215 18,680
----------- ------------
Total liabilities and retained
earnings $ 111,434 $ 122,132
=========== ============
Net interest income $ 2,427 $ 2,693
========= =========
Interest rate spread 2.72% 2.50%
========== ========
Net interest margin 3.02% 3.06%
========== ========
Ratio of average interest-earning assets
to average interest-bearing liabilities 112.86% 115.14%
========== ========
(1) Tax exempt state and municipal securities are presented on a tax equivalent
basis.
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, 2001.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the
participation of the Company's management, including the Chief Executive Officer
(CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and
operation of the Company's disclosure controls and procedures within 90 days
before the filing date of this quarterly report. Based on that evaluation, the
Company's management, including the CEO and CFO, concluded that the Company's
disclosure controls and procedures were effective. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls subsequent to their evaluation.
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
EXHIBIT NO. DESCRIPTION
99.1 Certification of Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
B. Reports on Form 8-K
None
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
By: /s/ Edward K. Collins
-----------------------------------------
Edward K. Collins
Chief Executive Officer
Dated: November 14, 2002
24
CERTIFICATIONS
Certification of Principal Executive Officer
I, Edward K. Collins, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Chester Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures of a date within 90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
November 14, 2002 /s/ Edward K. Collins
---------------------
Edward K. Collins
Chief Executive Officer
Principal Executive Officer)
25
CERTIFICATIONS
Certification of Principal Executive Officer
I, Michael W. Welge, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Chester, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures of a date within 90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
November 14, 2002 /s/ Michael W. Welge
---------------------------
Michael W. Welge
Chairman of the Board, President and
Chief Financial Officer
(Principal Financial Officer)
26