UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended Commission File Number
March 31, 1998 0-20160
-----------------------------
COVEST BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-3820609
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or Number)
organization)
749 Lee Street, Des Plaines, Illinois 60016
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (847) 294-6500
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 -----
As of May 12, 1998, the Registrant had issued and outstanding 4,403,803
shares of the Registrant's Common Stock. In addition, it had also
repurchased 47,970 shares which were being held as treasury stock.
The aggregate market value of the voting stock held by non-affiliates
of the Registrant as of May 12, 1998, was $68,427,874.
<PAGE>2
COVEST BANCSHARES, INC.
Table of Contents
PART I. FINANCIAL INFORMATION (UNAUDITED) PAGE NO.
Item 1. Financial Statements....................3
Item 2. Management's Discussion and
Analysis of Financial Condition and
Results of Operations..................13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................24
Item 2. Changes in Securities..................24
Item 3. Defaults upon Senior Securities........24
Item 4. Submission of Matters to a Vote
of Security Holders...................24
Item 5. Other Information......................24
Item 6. Exhibits and Reports of Form 8-K.......25
Form 10-Q Signatures.............................25
<PAGE>3
PART 1. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
see notes to condensed consolidated financial statements
(unaudited)
COVEST BANCSHARES INC.
CONSOLIDATED STATEMENTS OF CONDITION
(Unaudited) MAR. 31, DEC. 31,
(Dollars in thousands except 1998 1997
per share amounts) --------- ---------
ASSETS
- ------
CASH AND CASH EQUIVALENTS $ 7,026 $ 23,470
INVESTMENTS:
Securities Available-for-Sale 41,271 35,840
Mortgage-Backed Securities and
Related Securities Available-
for-Sale 111,495 120,753
Federal Home Loan Bank Stock and
FRB Stock 8,829 7,579
--------- ---------
TOTAL INVESTMENTS 161,596 164,172
LOANS RECEIVABLE:
Mortgage Loans 217,024 236,077
Commercial Real Estate Loans 85,060 69,386
Commercial Loans and Leases 32,287 16,778
Consumer Loans 58,161 59,245
Mortgage Loans held for Sale 3,989 -0-
--------- ---------
TOTAL LOANS RECEIVABLE 396,522 381,486
Allowance for Possible Loan Loss ( 4,161) ( 3,977)
--------- ---------
LOANS RECEIVABLE, NET 392,361 377,509
ACCRUED INTEREST RECEIVABLE 3,625 3,487
PREMISES AND EQUIPMENT 11,089 10,767
OTHER REAL ESTATE OWNED 280 -0-
OTHER ASSETS 3,080 3,317
--------- ---------
TOTAL ASSETS $579,057 $582,722
========== =========
<PAGE>4
MAR. 31, DEC. 31,
1998 1997
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
LIABILITIES:
Deposits:
Non-Interest Bearing $ 9,762 $ 14,112
NOW and Money Market Accounts 92,746 78,311
Savings Accounts 57,333 59,562
Certificates of Deposit 196,103 219,767
-------- --------
355,944 371,752
Short-Term Borrowings and Securities
Sold U/A to Repurchase 65,553 76,956
Long-Term Advances from Federal
Home Loan Bank 100,000 75,000
Advances from Borrowers for
Taxes and Insurance 2,353 2,914
Accrued Expenses and Other Liabilities 7,203 7,806
--------- ---------
TOTAL LIABILITIES 531,053 534,428
STOCKHOLDERS' EQUITY:
Common Stock, par value $.01 per share;
7,500,000 authorized shares; 4,403,803
and 4,365,761 shares issued at
3/31/98 and 12/31/97 respectively 44 44
Additional Paid-in Capital 19,520 19,365
Retained Earnings 29,071 28,410
Treasury Stock, 53,205 shares; and 0
shares, held at cost
3/31/98 and 12/31/97 respectively ( 905) -0-
ESOP Loan ( 476) ( 511)
Unearned Stock Award ( 73) ( 73)
Accumulated Other Comprehensive
Income 823 1,059
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 48,004 48,294
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 579,057 $582,722
========= =========
<PAGE>5
COVEST BANCSHARES INC.
CONSOLIDATED STATEMENTS OF INCOME THREE MONTHS ENDED
(Unaudited) MAR. 31, MAR. 31,
(Dollars in thousands) 1998 1997
--------- ---------
INTEREST INCOME
Loans Receivable $ 7,566 $ 6,638
Mortgage-Backed and Related Securities 1,924 1,936
Securities 664 959
Other Interest and Dividend Income 293 145
--------- ---------
Total Interest Income 10,447 9,678
INTEREST EXPENSE
Deposits 4,144 4,740
Advances from Federal Home Loan Bank 2,166 908
Other Borrowed Money 93 208
--------- ---------
Total Interest Expense 6,403 5,856
NET INTEREST INCOME 4,044 3,822
Provision for Possible Loan Losses 399 351
NET INTEREST INCOME AFTER PROVISION --------- ---------
FOR POSSIBLE LOAN LOSSES 3,645 3,471
NON-INTEREST INCOME
Loan Charges and Servicing Fees 531 267
Deposit Related Charges and Fees 219 178
Gain on Sale of Securities 256 563
Insurance and Annuity Commissions 141 15
Other 39 48
--------- ---------
TOTAL NON-INTEREST INCOME 1,186 1,071
NON-INTEREST EXPENSE
Compensation and Benefits 1,667 1,218
Occupancy and Equipment 500 395
Federal Insurance Premium 60 7
Data Processing 306 206
Advertising 87 43
Other Real estate Owned 6 -0-
Other 666 644
--------- ---------
TOTAL NON-INTEREST EXPENSE 3,292 2,513
--------- ---------
INCOME BEFORE TAXES 1,539 2,029
Income Tax Provision (530) ( 712)
--------- ---------
NET INCOME $ 1,009 $ 1,317
========= =========
<PAGE>6
COVEST BANCSHARES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED
(Unaudited) MAR. 31, MAR. 31,
(Dollars in thousands) 1998 1997
--------- ---------
OPERATING ACTIVITIES
Net Income $ 1,009 $ 1,317
Adjustments to Reconcile Net Income to
Cash Provided by Operating Activities
Depreciation and Amortization of
Premises and Equipment 262 181
Provision for Possible Loan Losses 399 351
Net Gain on Sale of Securities ( 256) ( 563)
Change In:
Prepaid Expenses and Other Assets 237 7
Accrued Interest Receivable ( 138) ( 937)
Accrued Expenses and Other Liabilities ( 291) 677
--------- ---------
NET CASH FROM OPERATING ACTIVITIES 1,222 1,033
CASH FLOWS FROM INVESTING ACTIVITIES
Loan Originations, Net of Principal
Payments ( 15,531) ( 9,480)
Principal Payments on Mortgage-Backed
and Related Securities 8,938 2,860
Purchases of Mortgage-Backed and
Related Securities ( 9,746) -0-
Purchases of Securities ( 21,175) ( 9,977)
Proceeds from Sales and Maturities
of Securities 25,831 2,157
Purchase of Federal Home Loan Bank
and Federal Reserve Bank Stock ( 1,250) -0-
Purchase of Office Properties and
Equipment ( 584) ( 97)
--------- ---------
NET CASH FROM INVESTING ACTIVITIES ( 13,517) (14,537)
<PAGE>7
THREE MONTHS ENDED
MAR. 31, MAR. 31,
1998 1997
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase (Decrease) in NOW Accounts,
Money Markets, Savings and
Certificates of Deposit (15,808) 4,708
Net Borrowings of Federal
Home Loan Bank Advances 25,000 -0-
Proceeds (Repayments) from Other
Borrowings (11,403) 7,997
Net Change in Mortgage Escrow Funds ( 561) ( 1,541)
Purchase of Common Stock Net of
Proceeds from Exercise of Stock Options ( 1,064) ( 510)
Payment Received on Loan to ESOP 35 33
Dividend Paid, Net of Dividend
Reinvestment Program ( 348) ( 302)
--------- ---------
NET CASH FROM FINANCING ACTIVITIES ( 4,149) 10,385
--------- ---------
NET DECREASE IN CASH AND
CASH EQUIVALENTS ( 16,444) ( 3,119)
CASH AND CASH EQUIVALENTS, BEGINNING 23,470 12,837
--------- ---------
CASH AND CASH EQUIVALENTS, ENDING $ 7,026 $ 9,718
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest Paid $ 6,311 $ 5,681
Income Taxes Paid -0- -0-
<PAGE>8
<TABLE>
<CAPTION>
COVEST BANCSHARES INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
(Dollars in thousands)
Three months ended March 31, 1997 and 1998
ACCUMULATED
ADDITIONAL UNEARNED OTHER
COMMON PAID-IN RETAINED TREASURY ESOP STOCK COMPREHENSIVE
STOCK CAPITAL EARNINGS STOCK LOAN AWARD INCOME TOTAL
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 34 $22,155 $33,990 ($5,838) ($ 858) ($ 73) $ 534 $49,944
Net Income 1,317 1,317
Change in Unrealized Gain on Securities
Available-for-sale (626) (626)
--------
Comprehensive Income 691
--------
Cash Dividends ($.0667 per share) ( 303) ( 303)
Purchase of Treasury Stock (1,371) (1,371)
Principal payment on ESOP Loan 33 33
Treasury Stock Reissued in Conjunction
with Stock Option Exercises (200) 560 360
- -----------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1997 $34 $22,155 $34,804 ($ 6,649) ($ 825) ($ 73) ($ 92) $49,354
========================================================================================================================
Balance at December 31, 1997 $44 $19,365 $28,410 $ - ($ 511) ($ 73) $ 1,059 $48,294
Net Income 1,009 1,009
Change in Unrealized Loss on Securities
Available-for-Sale ( 236) ( 236)
--------
Comprehensive Income 773
--------
Cash Dividends ($.08 per share) ( 348) ( 348)
Purchase of Treasury Stock (1,447) (1,447)
Principal Payment on ESOP Loan 35 35
Treasury Stock Reissued in Conjunction
with Stock Option Exercises ( 159) 542 383
Tax Benefits related to
Employee Stock Option Plans 314 314
- ------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1998 $44 $19,520 $29,071 ($ 905) ($ 476) ($ 73) $ 823 $48,004
========================================================================================================================
</TABLE>
<PAGE>9
<TABLE>
<CAPTION>
COVEST BANCSHARES INC.
AVERAGE BALANCE SHEET
(Unaudited)
(Dollars in thousands)
The following table sets forth certain information related to the Company's
average balance sheet. It reflects the average yield on assets and average
cost of liabilities for the periods indicated, as derived by dividing income
or expense by the average daily balance of assets or liabilities,
respectively, for the periods indicated.
<S>
THREE MONTHS ENDED
----------------------------------------------------------------------------------------
MARCH 31, 1998 MARCH 31, 1997
----------------------------------------- ---------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
----------------------------------------- ---------------------------------------
INTEREST-EARNING ASSETS: <C> <C> <C> <C> <C> <C>
Mortgage Loans $229,305 $4,168 7.27% $252,894 $ 4,706 7.44%
Commercial Loans and Leases 21,654 410 7.57 8,330 144 6.91
Commercial Real Estate 77,650 1,641 8.45 23,265 479 8.22
Consumer Loans 58,469 1,347 9.19 57,601 1,309 9.09
Mortgage-Backed and
Related Securities 112,814 1,924 6.82 110,465 1,936 7.01
Investment Securities 39,446 613 6.22 59,476 964 6.48
Other Investments 25,101 344 5.48 10,249 140 5.46
----------------------------------------- ---------------------------------------
Total Interest-Earning Assets $564,439 $10,447 7.40% $522,280 $ 9,678 7.41%
Non-Interest Earning Assets 23,765 18,920
----------------------------------------- ---------------------------------------
TOTAL ASSETS $588,204 $541,200
========================================= =======================================
INTEREST-BEARING LIABILITIES:
Interest-Bearing Checking $ 22,071 $ 75 1.36% $ 21,551 $ 95 1.76%
Savings 58,352 360 2.47 65,296 403 2.47
Money Market 62,401 757 4.85 44,905 527 4.69
Certificates of Deposit 200,489 2,819 5.62 253,322 3,584 5.66
Jumbo CD's 9,335 133 5.69 9,447 131 5.55
FHLB Advances 156,111 2,166 5.55 61,378 908 5.91
Other Borrowed Funds 7,532 93 4.99 15,988 208 5.23
----------------------------------------- ---------------------------------------
Total Interest-Bearing
Liabilities $516,291 $6,403 4.96% $471,887 $ 5,856 4.96%
Non-Interest Bearing
Deposits 12,596 10,029
Other Liabilities 11,623 9,425
----------------------------------------- ---------------------------------------
TOTAL LIABILITIES $540,510 $491,341
----------------------------------------- ---------------------------------------
Stockholders' Equity 47,694 49,859
----------------------------------------- ---------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $588,204 $541,200
========================================= =======================================
NET INTEREST INCOME $4,044 $ 3,822
----------------------------------------- ---------------------------------------
NET INTEREST RATE SPREAD (1) 2.44% 2.45%
----------------------------------------- ---------------------------------------
NET INTEREST MARGIN (2) 2.87% 2.93%
----------------------------------------- ---------------------------------------
(1) Interest Rate Spread is calculated by subtracting the average cost of
interest-bearing liabilities from the average rate on interest-earning
assets.
(2) Net Interest Margin is calculated by dividing net interest income by
average interest-earning assets.
</TABLE>
<PAGE>10
COVEST BANCSHARES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Regulation S-X. Accordingly, they do not include all
the information and footnotes required by generally accepted accounting
principles for complete financial statements.
The results of operations and other data for the quarter ended
March 31, 1998 are not necessarily indicative of results that
may be expected for the entire year ended December 31, 1998.
In the opinion of management, the unaudited condensed consolidated
financial statements contain all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the
financial condition of CoVest Bancshares, Inc. (the "Company"),
including its wholly owned subsidiary, CoVest Banc (the
"Bank"), as of March 31, 1998 and December 31, 1997, the results of
the Company's operations for the three months ended March 31, 1998
and 1997, its cash flows for the three months ended March 31, 1998
and 1997, its changes in stockholders' equity for the three months
ended March 31, 1998 and 1997, and its average balance sheet for the
three months ended March 31, 1998 and 1997.
Certain amounts in prior condensed consolidated financial statements
have been reclassified to conform with the March, 1998 presentation.
(2) Nature of Operations
CoVest Bancshares, Inc. formerly known as FirstFed Bancshares, Inc.
(the "Company") is a bank holding company organized under the laws of
the state of Delaware. During 1997, the Company converted its bank
subsidiary, First Federal Bank, to a national bank charter and
concurrently changed the name to CoVest Banc, National Association
(the "Bank"). The Company provides a full line of financial services
to customers within nine counties in northeast Illinois from its four
locations. The Bank opened a mortgage loan center in McHenry,
Illinois in mid-February.
<PAGE>11
A reconciliation of the numerators and denominators for earnings per
common share dilution computations for the period ended March 31, 1998
and 1997 were presented below: (dollars and shares in thousands)
Period Ended March 31
---------------------
1998 1997
Earnings per share:
Net Income $1,009 $1,317
Weighted average common
shares outstanding 4,238 4,367
----- -----
Earnings per share $ .24 $ .30
===== ====
Earnings per share assuming dilution:
Net Income $1,009 $1,317
==== ====
Weighted average common
shares outstanding 4,238 4,367
Add: dilutive effect of assumed
exercises, incentive stock
options and management
retention plan 276 230
---- ----
Weighted average common and
diluted potential common
shares outstanding 4,514 4,597
==== ====
Diluted earnings per share $ .22 .29
==== ====
(3) Stock Repurchase Program
On October 27, 1997, the Company's Board of Directors approved a Stock
Repurchase Program, the Company's twelfth, which enabled the Company
to repurchase up to 150,000 (post-splits) shares of its outstanding
stock. On May 12, 1998, the buyback was completed at an average price
of $16.74.
<PAGE>12
On May 12, 1998 the Company's Board of Directors announced a new Stock
Repurchase Program, the Company's thirteenth, enabling the company to
repurchase up to 100,000 shares of its outstanding stock. These
purchases will be made in the open market and/or through privately
negotiated transactions. The stock will be used for the issuance
of shares in connection with the exercises of previously granted
stock options.
(4) Stock Dividend and Cash Dividend
On December 1, 1997, the second three-for-two stock split, payable in
the form of a one-for-two stock dividend occurred. All amounts have
been restated to show the effect of this stock dividend. The regular
quarterly dividend for the fourth quarter of 1997 and first quarter of
1998 was paid at $.08 per share post-split.
(5) Regulatory Capital Requirements
Pursuant to the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA"), as implemented by regulations
promulgated by the Office of Comptroller of Currency (the "OCC"),
National banks must meet three separate minimum capital requirements.
The following table summarizes, as of March 31, 1998, the Bank's
capital requirements under FIRREA and its actual capital ratios. As
of March 31, 1998, the Bank exceeded all current minimum regulatory
capital requirements.
BANK ONLY
----------------------------------------------------
Actual Regulatory Excess Above
Capital Capital Req. Capital Req.
Amount % Amount % Amount %
------- ------ ------- ----- ------- -----
(Dollars in Thousands)
Total Capital to
Risk Weighted
Assets $46,173 16.51% $22,641 8.00% $23,532 8.51%
Tier I Capital to
Risk Weighted
Assets 42,012 15.02 11,321 4.00 30,691 11.02
Tier I Capital to
Average Assets 42,012 7.14 23,528 4.00 18,483 3.14
<PAGE>13
(6) Safe Harbor Statement
This report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. The
company intends such forward-looking statements to be covered by the
safe harbor provisions for forward-looking statements contained in the
Private Securities Reform Act of 1995, and is included in this
statement for purposes of these safe harbor provisions. Forward-
looking statements, strategies and expectations of the Company, are
generally identifiable by use of the words "believe", "expect",
"intend", "anticipate", "estimate", "project" or similar expressions.
The company's ability to predict results or the actual effect of
future plans or strategies is inherently uncertain. Factors which
could have a material adverse affect on the operations and future
prospects of the Company and its subsidiaries include, but are not
limited to, changes in: interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the
U.S. Government, including policies of the U.S. Treasury and the
Federal Reserve Board, the quality of composition of the loan or
investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in the Company's market
area and accounting principles, policies and guidelines. These
risks and uncertainties should be considered in evaluating forward-
looking statements and undue reliance should not be placed on such
statements. Further information concerning the Company and its
business, including additional factors that could materially affect
the Company's financial results, is included in the Company's filings
with the Securities and Exchange Commission.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
- --------
The Company's business activities currently consist of ownership of
the Bank, and investments in other equity securities. The Bank's
principal business consists of attracting deposits from the public and
investing these deposits, together with funds generated from
operations, primarily in commercial loans, leases and commercial real
estate, and consumer loans. It is management's intention that
commercial loans will become an increasingly larger portion of the
total loan portfolio as the balance sheet is restructured to become
<PAGE>14
more like that of a community bank. The Bank's deposit accounts are
insured to the maximum allowable by the Federal Deposit Insurance
Corporation (the "FDIC").
The Bank's results of operations are dependent primarily on net
interest income, which is the difference between the interest earned
on its loans, and securities portfolios, and the interest paid on
deposits and borrowed funds. The Bank's operating results are also
affected, to a lesser extent, by loan commitment and servicing fees,
customer service charges, fees from annuity and insurance products,
and other income. Operating expenses of the Bank include employee
compensation and benefits, equipment and occupancy costs, federal
deposit insurance premiums and other administrative expenses.
The Bank's results of operations are further affected by economic
and competitive conditions, particularly changes in market interest
rates. Results are also affected by monetary and fiscal policies of
federal agencies, and actions of regulatory authorities.
FINANCIAL CONDITION
- -------------------
Total consolidated assets of the Company decreased by $3.6 million
from $582.7 million at December 31, 1997, to $579.1 million at
March 31, 1998.
The composition of the loan portfolio continues to change as
commercial loans, commercial real estate, construction, and leases
increased by $31 million, or 36%, from year-end 1997. These loans and
leases now represent almost 30% of total loans receivable, up from 23%
at year-end 1997, and up from less than 10% at March 31, 1997.
Management expects the composition of commercial loans, commercial
real estate, construction, and leases to become a larger percentage
of the overall loan portfolio and assets mix, as $43 million of
approved and accepted commitments were outstanding as of March 31,
1998. Total loans increased by $15 million during the first quarter of
1998.
During the first quarter of 1998, residential mortgage loans decreased
by $19 million as borrowers took advantage of lower rates and
refinanced their mortgages, many through the Company's new mortgage
center. Almost $4 million of loans originated by the mortgage center
were held for sale at the end of the first quarter, 1998. The market
value of these loans approximated their book value at March 31, 1998.
Located in McHenry, Illinois, the mortgage center opened on February
<PAGE>15
12, 1998, and makes residential mortgages that are sold on a service
released basis to the secondary market.
At March 31, 1998, the allowance for possible loan losses amounted to
almost $4.2 million. This represented coverage of 1.05% of total
loans as of March 31, 1998, and is approximately the same coverage
which existed at year-end 1997.
Securities available-for-sale increased by $5.5 million as various
municipal bonds and short-term governments were added to the
portfolio. All of these mature under five years.
Mortgage-backed and other mortgage-related securities decreased $9.3
million or 7.7% from December 31, 1997. The proceeds from the sales
of, and paydowns on, mortgage-backed securities were used to fund
additional commercial real estate and commercial leases.
Deposits decreased to $356 million at March 31, 1998, from $371.8
million at December 31, 1997. Most of this decrease centers on the
Bank's prior reliance on certificates of deposit which, as a
percentage of deposits, have decreased to 55% as of March 31, 1998,
from 59% as of December 31, 1997. The only deposit account to show
growth was in the Bank's Preferred Money Market account. This account
is indexed to the 91 day U.S. Treasury Bill rate and reflects the
weekly change that occurs as a result of the auction in the bond
market.
Stockholders' equity totaled $48 million at March 31, 1998. At
quarter-end, the number of common shares outstanding was 4,350,598 and
the book value per common share outstanding was $11.03. This compares
to December 31, 1997, when the number of common shares outstanding was
4,365,761 and the book value per common share outstanding was $11.06.
At May 11, 1998, approximately 6,000 shares remain to be repurchased
under the current stock repurchase program.
At March 31, 1998, total non-performing assets amounted to $1.4
million, or 0.25% of total assets compared to $1.3 million, or 0.22%
of total assets at December 31, 1997. Management believes the
reserves for possible loan losses to be adequate. There were no
commercial real estate, multi-family, construction, or commercial
loans and leases non-performing as of March 31, 1998. Furthermore,
76% of non-performing loans were single family mortgages.
The following table sets forth the amounts and categories of non-
performing loans and assets.
<PAGE>16
March 31, 1998 Dec. 31, 1997
------------- -------------
(Dollars in Thousands)
Non-performing loans:
Mortgage Loans $ 876 $ 1,137
Commercial Real Estate Loans -0- -0-
Commercial Loans & Leases -0- -0-
Consumer 273 167
------------- -------------
Total non-performing loans $ 1,149 $ 1,304
Other real estate owned $ 280 $ -0-
Other repossessed assets -0- -0-
------------- -------------
Total non-performing assets $ 1,429 $ 1,304
Total non-performing loans as
a percentage of net loans .29% .35%
Total non-performing assets as
a percentage of total assets .25% .22%
LIQUIDITY
- ---------
The Company's primary sources of funds are deposits, principal and
interest payments on loans and mortgage-backed securities, and funds
provided by other operations. While scheduled loan and mortgage-
backed securities repayments and maturities of short-term investments
are a relatively predictable source of funds, deposit flows and loan
prepayments are greatly influenced by general interest rates, economic
conditions, competition and the restructuring occurring in the banking
industry.
The Company's cash flows are a result of three principal activities:
operating activities, investing activities and financing activities.
Net cash provided by operating activities, primarily net income, was
$1.2 million for the three months ended March 31, 1998. Net cash used
in investing activities was $13.5 million for the three months ended
March 31, 1998. Net cash used in financing activities amounted to
$4.2 million for the three months ended March 31, 1998.
The Company uses its liquidity to meet its ongoing commitments to
fund maturing certificates of deposit and deposit withdrawals, repay
borrowings, fund existing and continuing loan commitments, and pay
<PAGE>17
operating expenses. At March 31, 1998, the Company had commitments to
originate loans and undisbursed loan balances totaling $43 million,
and its customers had approved but unused lines of credit totaling
$62.6 million. The Company considers its liquidity and capital
resources to be adequate to meet its foreseeable short and long-term
needs. The Company expects to be able to fund or refinance, on a
timely basis, its material commitments and long-term liabilities.
SELECTED RATIOS
- ---------------
(unaudited) THREE MONTHS ENDED
MARCH 31, MARCH 31,
1998 1997
--------------------
Annualized Return on Avg. Equity 8.46% 10.73%
Annualized Return on Avg. Assets 0.69% 0.96%
Book Value per Share $11.03 $10.91
Closing Market Price per Share $17.25 $11.83
Earnings per Primary Share:
Basic $ .24 $ .30
Diluted .22 .29
Interest Margin 2.87% 2.93%
Ratio of Operating Expense to
Average Total Assets,
Annualized 2.24% 1.86%
Ratio of Net Interest Income to
Non-Interest Expense,
Annualized 1.23x 1.52X
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND
1997
- ----------------------------------------------------------------------
GENERAL. Net income for the three months ended March 31, 1998 totaled
$1,009,000, or $0.24 (basic) and $0.22 (diluted) earnings per share, a
decrease of 23% from the $1,317,000, or $0.30 (basic) and $0.29
(diluted) earnings per share for the like quarter in 1997.
<PAGE>18
NET INTEREST INCOME. Net interest income increased by $222,000, or
6%, for the first quarter of 1998 compared to the first quarter of
1997. The Company's net interest margin decreased 6 basis points, or
2%, to 2.87% for the first quarter of 1998 from 2.93% for the first
quarter of 1997. The interest rate spread averaged 2.44% for 1998 and
2.45% during the first quarter of 1997. The volume of earning assets
increased by $42.2 million between the two periods while the average
yield remained constant at approximately 7.40%. The net interest
margin for the fourth quarter of 1997 was 2.91% and the net interest
spread was 2.42%. The Bank entered into an arbitrage transaction
during the second half of the fourth quarter of 1997, using Federal
Home Loan Bank borrowings which mature in late 1998 to fund two large
mortgage backed security pools. This arbitrage accounted for $50
million in increased volume during the first quarter of 1998 and has
an average spread of 72 basis points.
The cost of interest bearing liabilities remained constant between the
two periods at 4.96%. The composition of the liabilities changed as
money market accounts continue to be a larger percentage of the Bank's
deposit funding source replacing the shrinking pool of certificates of
deposit. As detailed above, $50 million of the increase in Federal
Home Loan Bank borrowings are to fund mortgage-backed securities.
PROVISION FOR POSSIBLE LOAN LOSSES. The provision for possible loan
losses was increased by $48,000, or 14%, to $399,000 for the first
quarter of 1998. The Company, and the banking industry as a whole,
has seen more credit card charge-offs resulting from personal
bankruptcies. For the quarter ended March 31, 1998, 71% of all of the
Company's charge-offs were attributable to personal bankruptcy
filings. Based upon most recent experience of other credit card
lenders, losses are expected to continue at this level in the near
term. Management regularly conducts a review of its loan portfolio,
write-off experiences and adequacy of allowance, and believes the
allowance to be adequate.
<PAGE>19
LOAN LOSS ALLOWANCE ANALYSIS. The following table sets forth an
analysis of the Company's allowance for possible loan losses for the
periods indicated.
Three Months Ended
March 31, March 31,
1998 1997
--------- ---------
(Dollars in Thousands)
Balance at beginning of period $ 3,977 $ 1,424
Charge-offs:
Mortgage Loans $ 38 $ -0-
Commercial Real Estate Loans -0- -0-
Commercial Loans and Leases -0- -0-
Consumer 233 276
-------- --------
Total 271 276
-------- --------
Recoveries:
Mortgage Loans $ -0- $ -0-
Commercial Real Estate Loans -0- -0-
Commercial Loans & Leases -0- -0-
Consumer 56 14
-------- --------
Total 56 14
-------- --------
Net charge-offs 215 262
Additions charged to
operations 399 351
-------- ---------
Balance at end of period $ 4,161 $1,513
Ratio of net charge-offs during
the period to average loans
outstanding during the period 0.06% 0.08%
Ratio of allowance for possible
loan losses to non- performing loans 3.62x 1.16x
<PAGE>20
NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES. Net
interest income after provision for possible loan losses increased
by $174,000 or 5% to $3,645,000 for the three month period ended
March 31, 1998, as compared to $3,471,000 for the three month period
ended March 31, 1997.
NON-INTEREST INCOME. Non interest income excluding security gains
increased $422,000, or 83%, from the comparable quarter last year.
Loan charges, sales and servicing fees increased by $264,000 to
$531,000, deposit related charges and fees increased by $41,000 to
$219,000, and income from sales of annuities and securities by CoVest
Investments increased by $126,000 to $141,000. Realized gains of
$256,000 on sales of securities were also recorded. This is a
decrease of $307,000 in net gains on security sales from the
comparable quarter in 1997.
NON-INTEREST EXPENSE. Non-interest expense increased $779,000, or 31%
for the first quarter of 1998 from the comparable quarter in 1997.
Over 57%, or $449,000, is related to compensation, commissions and
employee benefits resulting from the increase in the number of
personnel. Additionally, other operating expense increases included
$105,000 in occupancy expenses, a $53,000 increase in Federal Deposit
Insurance Premium, a $100,000 increase in data processing expenses and
a $44,000 increase in advertising. The data processing expense
included $75,000 related to testing computer hardware and software to
be Year 2000 compliant.
INCOME TAX EXPENSE. Income tax expense decreased $182,000 to $530,000
for the quarter ended March 31, 1998, compared to $712,000 for the
same period in 1997, primarily due to the decrease in income.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. In an
attempt to manage the Bank's exposure to changes in interest rates,
management closely monitors the Bank's interest rate risk.
Interest rate risk results when the maturity or repricing intervals
and interest rate indices of the interest-earning assets, interest-
bearing liabilities, and off-balance sheet financial instruments are
different, creating a risk that changes in the level of market
interest rates will result in disproportionate changes in the value
of, and the net earnings generated from, the Company's interest-
earning assets, interest-bearing liabilities, and off-balance sheet
financial instruments. The Company's exposure to interest rate risk is
managed primarily through the Company's strategy of selecting the
types and terms of interest-earning assets and interest-bearing
<PAGE>21
liabilities which generate favorable earnings, while limiting the
potential negative effects of changes in market interest rates.
Since the Company's primary source of interest-bearing liabilities is
customer deposits, the Company's ability to manage the types and terms
of such deposits may be somewhat limited by customer preferences in
the market areas in which the Company operates. Borrowings, which
include FHLB Advances, short-term borrowings, and long-term
borrowings, are generally structured with specific terms which in
management's judgment, when aggregated with the terms for outstanding
deposits and matched with interest-earning assets, mitigate the
Company's exposure to interest rate risk. The rates, terms and
interest rate indices of the Company's interest-earning assets result
primarily from the Company's strategy of investing in loans and
securities (a substantial portion of which have adjustable-rate
terms) which permit the Company to limit its exposure to interest rate
risk, together with credit risk, while at the same time achieving a
positive interest rate spread from the difference between the income
earned on interest-earning assets and the cost of interest-bearing
liabilities.
In addition to periodic gap reports comparing the sensitivity of
interest-earning assets and interest-bearing liabilities to changes in
interest rates, management utilizes a monthly report ("model")
prepared by the Bank which measures the Bank's exposure to interest
rate risk. The model calculates the present value of assets,
liabilities, off-balance sheet financial instruments, and equity at
current interest rates, and at hypothetical higher and lower interest
rates at one percent intervals. The present value of each major
category of financial instrument is calculated by the model using
estimated cash flows based on weighted average contractual rates and
terms at discount rates representing the estimated current market
interest rate for similar financial instruments. The resulting
present value of longer term fixed-rate financial instruments are more
sensitive to change in a higher or lower market interest rate
scenario, while adjustable-rate financial instruments largely reflect
only a change in present value representing the difference between the
contractual and discounted rates until the next interest rate
repricing date.
<PAGE>22
The following table presents the Bank's current exposure to
hypothetical changes in interest rates as of March 31, 1998:
Percent Change in
Change in Interest Rates Percent Change in MV of Portfolio
(basis points) Net Interest Income Equity
------------------------ ------------------- -----------------
+200 (8%) (20%)
100 (4) (11 )
0 0 0
-100 3 10
-200 6 19
Certain shortcomings are inherent in the method of analysis presented
in the foregoing table. For example, although certain assets and
liabilities may have similar maturities or periods to repricing, they
may react in different degrees to changes in market interest rates.
Also, the interest rates on certain types of assets and liabilities
may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as adjustable-rate mortgage loans,
have features that restrict changes in interest rates on a short-term
basis and over the life of the loan. Further, in the event of a
change in interest rates, prepayment and early withdrawal levels could
deviate significantly from those assumed in calculating the tables.
Finally, the ability of many borrowers to service their debt may
decrease in the event of a significant interest rate increase.
In addition, the previous table does not necessarily indicate the
impact of general interest rate movements on the Company's net
interest income because the repricing of certain categories of assets
and liabilities are subject to competitive and other pressures beyond
the Company's control. As a result, certain assets and liabilities
indicated as maturing or otherwise repricing within a stated period
may in fact mature or reprice at different times and at different
volumes.
<PAGE>23
RECENT REGULATORY DEVELOPMENTS
- -----------------------------------------------------------
Year 2000
The federal banking regulators have issued several statements
providing guidance to financial institutions on the steps the
regulators expect financial institutions to take to become Year 2000
compliant. Each of the federal banking regulators is also examining
the financial institutions under its jurisdiction to assess each
institution's compliance with the outstanding guidance. If an
institution's progress in addressing the Year 2000 problem is deemed
by its primary federal regulator to be less than satisfactory, the
institution will be required to enter into a memorandum of
understanding with the regulator which will, among other things,
require the institution to promptly develop and submit an acceptable
plan for becoming Year 2000 compliant and to provide periodic reports
describing the institution's progress in implementing the plan.
Failure to satisfactorily address the Year 2000 problem may also
expose a financial institution to other forms of enforcement action
that its primary federal regulator deems appropriate to address the
deficiencies in the institution's Year 2000 remediation program.
Management has considered this issue internally and receives periodic
correspondence from its data processor regarding their plans to be
year 2000 compliant. Management does not anticipate that the Company
will incur material operating expenses to be required to invest
heavily in computer system improvements to be year 2000 compliant, but
did provide $75,000 during the first quarter of 1998 to test computer
hardware and software. An unknown element at this time is the impact
of the year 2000 on the Company's borrowing customers and their
ability to repay. The company has initiated a program to communicate
with key bank customers to ensure they are properly prepared for the
year 2000 and will not suffer serious adverse consequences.
Nevertheless, if not properly addressed, these issue could result in
interruptions in the company's business and have a material adverse
effect on the Company's results of operations.
<PAGE>24
NEW ACCOUNTING STANDARDS
Effective for fiscal years beginning after December 15, 1997, under a
new accounting standard (SFAS 130), comprehensive income is now
reported for all periods. Comprehensive income includes both net
income and other comprehensive income. Other comprehensive income
includes the change in unrealized gains and losses on securities
available-for-sale. Comprehensive income has been disclosed in the
consolidated statements of changes in stockholders' equity.
Effective for fiscal years beginning after December 15, 1997, a new
accounting standard (SFAS 131), establishes standards for the way that
public enterprises report information about operating segments in
annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial
reports issued to shareholders. This standard will have no impact on
the Corporation.
PART II - OTHER INFORMATION
COVEST BANCSHARES, INC.
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which
the Company or any of its subsidiaries is a party other
than ordinary routine litigation incidental to their
respective businesses.
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
<PAGE>25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
A report on Form 8-K was filed on January 26, 1998
to report under Item 5 the Company earnings for the
fourth quarter of 1997 and calendar year 1997.
A report on Form 8-K was filed on February 25, 1998 to
report under Item 5 that the Company announced
the issuance of a regular quarterly dividend.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
COVEST BANCSHARES, INC.
Date: MAY 14, 1998 By:\S\
----------------- ---------------------------
Larry G. Gillie
President and
Chief Executive Officer
By:\S\
---------------------------
Paul A. Larsen
Senior Vice President,
Treasurer and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Financial Statements at March 31, 1998, and is qualified
in its entirety by reference to the December 31, 1997 Consolidated Financial
Statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 6,822
<INT-BEARING-DEPOSITS> 204
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 161,596
<INVESTMENTS-CARRYING> 135,465
<INVESTMENTS-MARKET> 161,596
<LOANS> 396,522
<ALLOWANCE> 4,161
<TOTAL-ASSETS> 579,057
<DEPOSITS> 355,944
<SHORT-TERM> 65,553
<LIABILITIES-OTHER> 9,556
<LONG-TERM> 100,000
0
0
<COMMON> 44
<OTHER-SE> 47,960
<TOTAL-LIABILITIES-AND-EQUITY> 579,057
<INTEREST-LOAN> 7,566
<INTEREST-INVEST> 2,588
<INTEREST-OTHER> 293
<INTEREST-TOTAL> 10,447
<INTEREST-DEPOSIT> 4,144
<INTEREST-EXPENSE> 6,403
<INTEREST-INCOME-NET> 4,044
<LOAN-LOSSES> 399
<SECURITIES-GAINS> 256
<EXPENSE-OTHER> 3,291
<INCOME-PRETAX> 1,539
<INCOME-PRE-EXTRAORDINARY> 1,539
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,009
<EPS-PRIMARY> .24
<EPS-DILUTED> .22
<YIELD-ACTUAL> 7.40
<LOANS-NON> 0
<LOANS-PAST> 1,149
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,977
<CHARGE-OFFS> 271
<RECOVERIES> 56
<ALLOWANCE-CLOSE> 4,161
<ALLOWANCE-DOMESTIC> 4,161
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
