10-Q 1 c72866e10vq.txt FORM 10-Q 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)

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)

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)

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)

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)

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)

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

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:

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:

(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:

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.

(1) Tax exempt state and municipal securities are presented on a tax equivalent basis. 20

(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

CHESTER BANCORP INC 10-Q