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
September 30, 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 November 9, 1998, the Registrant had issued and outstanding 4,403,803
shares of the Registrant's Common Stock. In addition, it had also
repurchased 161,288 shares that were being held as treasury stock.
The aggregate market value of the voting stock held by non-affiliates
of the Registrant as of November 9,1998, was $46,500,000.
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..................17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................30
Item 2. Changes in Securities..................30
Item 3. Defaults upon Senior Securities........30
Item 4. Submission of Matters to a Vote
of Security Holders..................30
Item 5. Other Information......................30
Item 6. Exhibits and Reports of Form 8-K.......30
Form 10-Q Signatures.............................31
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) SEPT. 30, DEC. 31,
(Dollars in thousands except 1998 1997
per share amounts) --------- ---------
ASSETS
- ------
CASH AND CASH EQUIVALENTS $ 6,598 $ 5,670
INTEREST BEARING DEPOSITS AT BANKS 1,892 17,800
INVESTMENTS:
Securities Available-for-Sale 26,584 31,412
Mortgage-Backed and Related
Securities Available-for-Sale 92,274 120,753
Tax Exempt Securities
Available-for-Sale 10,207 4,428
Federal Home Loan Bank Stock and
FRB Stock 10,731 7,579
--------- ---------
TOTAL INVESTMENTS 139,796 164,172
LOANS RECEIVABLE:
Commercial Real Estate Loans 61,089 55,843
Multi-Family Loans 38,296 4,604
Construction Loans 34,350 8,939
Commercial Loans 8,048 5,504
Commercial Leases 40,680 11,274
Mortgage Loans 172,252 236,077
Consumer Loans 58,720 59,245
Mortgage Loans held for Sale 4,882 -0-
--------- ---------
TOTAL LOANS RECEIVABLE 418,317 381,486
Allowance for Possible Loan Loss ( 4,783) ( 3,977)
--------- ---------
LOANS RECEIVABLE, NET 413,534 377,509
ACCRUED INTEREST RECEIVABLE 3,253 3,487
PREMISES AND EQUIPMENT 11,346 10,767
OTHER REAL ESTATE OWNED 72 -0-
OTHER ASSETS 4,038 3,317
--------- ---------
TOTAL ASSETS $580,529 $582,722
========= =========
Page 4
SEPT.30, DEC. 31,
1998 1997
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
LIABILITIES:
Deposits:
Non-Interest Bearing $ 11,154 $ 14,112
Interest Bearing Checking 20,505 21,153
Money Market Accounts 83,243 57,158
Savings Accounts 53,681 59,562
Certificates of Deposit 177,827 219,767
-------- --------
346,410 371,752
Short-Term Borrowings and Securities
Sold U/A to Repurchase 55,571 76,956
Long-Term Advances from Federal
Home Loan Bank 120,000 75,000
Advances from Borrowers for
Taxes and Insurance 4,092 2,914
Accrued Expenses and Other Liabilities 7,685 7,806
--------- ---------
TOTAL LIABILITIES 533,758 534,428
STOCKHOLDERS' EQUITY:
Common Stock, par value $.01 per share;
7,500,000 authorized shares; 4,403,803
and 4,365,761 shares issued at
9/30/98 and 12/31/97 respectively 44 44
Additional Paid-in Capital 19,113 19,365
Retained Earnings 30,253 28,410
Treasury Stock, 132,600 shares; and
0 shares, held at cost 9/30/98
and 12/31/97 respectively (2,336) -0-
ESOP Loan ( 334) ( 511)
Unearned Stock Award ( 73) ( 73)
Accumulated Other Comprehensive
Income 104 1,059
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 46,771 48,294
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 580,529 $ 582,722
========= =========
Page 5
<TABLE>
<CAPTION>
COVEST BANCSHARES INC.
CONSOLIDATED STATEMENTS OF INCOME THREE MONTHS ENDED NINE MONTHS ENDED
(Unaudited) SEPT.30, SEPT.30, SEPT.30, SEPT.30,
(Dollars in thousands) 1998 1997 1998 1997
--------- --------- --------- ---------
INTEREST INCOME <C> <C> <C> <C>
Loans Receivable $ 8,377 $ 7,133 $23,823 $20,772
Mortgage-Backed and Related Securities 1,470 1,623 4,870 5,254
Securities and Dividend Income 628 689 1,996 2,573
Other Interest Income 49 160 434 606
--------- --------- --------- ---------
Total Interest Income 10,524 9,605 31,123 29,205
INTEREST EXPENSE
Deposits 3,863 4,716 11,894 14,315
Advances from Federal Home Loan Bank 2,373 823 6,718 2,635
Other Borrowed Money 113 194 320 705
--------- --------- --------- ---------
Total Interest Expense 6,349 5,733 18,932 17,655
NET INTEREST INCOME 4,175 3,872 12,191 11,550
Provision for Possible Loan Losses 399 430 1,567 1,183
NET INTEREST INCOME AFTER PROVISION --------- --------- -------- ---------
FOR POSSIBLE LOAN LOSSES 3,776 3,442 10,624 10,367
Page 6
NON-INTEREST INCOME
Loan Charges and Servicing Fees 626 252 1,210 778
Loan Service Release Fees 276 -0- 971 -0-
Deposit Related Charges and Fees 258 229 724 621
Gain on Sale of Securities 81 316 800 1,190
Insurance and Annuity Commissions 47 12 258 50
Other 34 100 124 173
--------- --------- --------- ---------
TOTAL NON-INTEREST INCOME 1,322 909 4,087 2,812
NON-INTEREST EXPENSE
Compensation and Benefits 1,964 1,343 5,260 3,789
Commissions and Incentives 181 39 487 92
Occupancy and Equipment 510 388 1,506 1,131
Federal Insurance Premium 54 65 171 138
Data Processing 263 222 838 643
Advertising 82 130 279 472
Other Real estate Owned ( 9) -0- (45) -0-
Other 694 562 1,839 1,793
--------- --------- --------- ----------
TOTAL NON-INTEREST EXPENSE 3,739 2,749 10,335 8,058
--------- --------- --------- ----------
INCOME BEFORE TAXES 1,359 1,602 4,376 5,121
Income Tax Provision 460 562 1,495 1,776
--------- --------- --------- ----------
NET INCOME $ 899 $ 1,040 $ 2,881 $ 3,345
========= ========= ========= ==========
</TABLE>
Page 7
COVEST BANCSHARES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED
(Unaudited) SEPT. 30, SEPT. 30,
(Dollars in thousands) 1998 1997
--------- ---------
OPERATING ACTIVITIES
Net Income $ 2,881 $ 3,345
Adjustments to Reconcile Net Income to
Cash Provided by Operating Activities
Depreciation and Amortization of
Premises and Equipment 737 739
Provision for Possible Loan Losses (1,567) 1,183
Net Gain on Sale of Securities ( 800) ( 1,190)
Change In:
Prepaid Expenses and Other Assets ( 721) ( 44)
Accrued Interest Receivable 234 ( 177)
Accrued Expenses and Other Liabilities 223 709
--------- ---------
NET CASH FROM OPERATING ACTIVITIES 987 4,565
CASH FLOWS FROM INVESTING ACTIVITIES
Loan Originations, Net of Principal
Payments ( 34,530) (39,691)
Principal Payments on Mortgage-Backed
and Related Securities 30,651 6,146
Purchases of Mortgage-Backed and
Related Securities ( 40,363) ( 754)
Purchases of Securities ( 45,688) ( 9,995)
Proceeds from Sales and Maturities
of Securities 82,893 56,443
Purchase of Federal Home Loan Bank
and Federal Reserve Bank Stock ( 3,152) 3,101
Purchase of Office Properties and
Equipment ( 1,316) ( 733)
--------- ---------
NET CASH FROM INVESTING ACTIVITIES ( 11,505) 14,517
Page 8
NINE MONTHS ENDED
SEPT. 30, SEPT. 30,
1998 1997
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Decrease in NOW Accounts,
Money Markets, Savings and
Certificates of Deposit (25,342) ( 15,622)
Net Borrowings of Federal
Home Loan Bank Advances 45,000 -0-
Proceeds (Repayments) from Other
Borrowings (21,385) 3,751
Net Change in Mortgage Escrow Funds 1,178 ( 2,324)
Purchase of Common Stock Net of
Proceeds from Exercise of Stock Options ( 3,052) ( 3,306)
Payment Received on Loan to ESOP 177 173
Dividend Paid, Net of Dividend
Reinvestment Program ( 1,038) ( 896)
--------- ---------
NET CASH FROM FINANCING ACTIVITIES ( 4,462) ( 18,224)
--------- ---------
NET DECREASE IN CASH AND
CASH EQUIVALENTS ( 14,980) 858
CASH AND CASH EQUIVALENTS, BEGINNING 23,470 12,837
--------- ---------
CASH AND CASH EQUIVALENTS, ENDING $ 8,490 $ 13,695
========= =========
<TABLE>
<CAPTION>
COVEST BANCSHARES INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
(Dollars in thousands)
Nine months ended September 30, 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 $49,944
Net Income 3,345 3,345
Change in Unrealized Gain on Securities
Available-for-sale 199 199
--------
Comprehensive Income 3,544
--------
Cash Dividends ($.20 per share) ( 896) ( 896)
Purchase of Treasury Stock (3,989) (3,989)
Principal payment on ESOP Loan 173 173
Treasury Stock Reissued in Conjunction
with Stock Option Exercises 25 (578) 1,236 683
Tax Benefits related to Employee
Stock Plans 270 270
Shares Issued in Conjunction with
a Three for Two Stock Split 10 (3,304) (5,297) 8,591
- -----------------------------------------------------------------------------------------------------------------------
Balance at Sept 30, 1997 $44 $19,146 $30,564 $ -0- ($ 685) ($ 73) $ 733 $49,729
========================================================================================================================
Page 9
Balance at December 31, 1997 $44 $19,365 $28,410 $ - ($ 511) ($ 73) $ 1,059 $48,294
Net Income 2,881 2,881
Change in Unrealized Gain on Securities
Available-for-Sale ( 955) ( 955)
--------
Comprehensive Income 1,926
--------
Cash Dividends ($.24 per share) ( 1,038) (1,038)
Purchase of Treasury Stock (4,067) (4,067)
Principal Payment on ESOP Loan 177 177
Treasury Stock Reissued in Conjunction
with Stock Option Exercises ( 716) 1,731 1,015
Tax Benefits related to
Employee Stock Option Plans 464 464
- ------------------------------------------------------------------------------------------------------------------------
Balance at Sept 30, 1998 $44 $19,113 $30,253 ($ 2,336) ($ 334) ($ 73) $ 104 $46,771
=======================================================================================================================
</TABLE>
Page 10
<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.
THREE MONTHS ENDED
----------------------------------------------------------------------------------------
SEPT 30, 1998 SEPT 30, 1997
----------------------------------------- ---------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
INTEREST-EARNING ASSETS: ----------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial Real Estate $64,855 $1,349 8.32% $32,219 $692 8.59%
Multi-Family Loans 32,322 620 7.67 -0- -0- -0-
Construction Loans 29,240 723 9.89 11,171 254 9.09
Commercial Loans 6,460 145 8.98 1,576 39 9.90
Commercial Leases 38,209 626 6.55 8,945 151 6.75
Mortgage Loans 188,123 3,542 7.53 246,027 4,584 7.45
Consumer Loans 58,800 1,372 9.33 59,443 1,413 9.51
Investment Securities 44,955 683 6.08 45,506 759 6.67
Mortgage-Backed and
Related Securities 95,363 1,470 6.17 92,048 1,623 7.05
Other Investments 3,492 49 5.61 6,431 90 5.60
----------------------------------------- ---------------------------------------
Total Interest-Earning Assets $561,819 $10,579 7.53% $503,366 $ 9,605 7.63%
Non-Interest Earning Assets 21,725 15,737
----------------------------------------- ---------------------------------------
TOTAL ASSETS $583,544 $519,103
========================================= =======================================
Page 11
INTEREST-BEARING LIABILITIES:
Interest-Bearing Checking $ 21,676 $ 62 1.14% $ 22,065 $ 99 1.79%
Savings 54,695 345 2.52 62,580 395 2.52
Money Market 81,612 985 4.83 52,082 636 4.88
Certificates of Deposit 166,855 2,329 5.58 236,850 3,462 5.85
Jumbo CD's 10,082 142 5.63 9,020 124 5.50
FHLB Advances 174,113 2,434 5.59 53,580 823 6.14
Other Borrowed Funds 4,053 52 5.13 14,281 194 5.43
----------------------------------------- ---------------------------------------
Total Interest-Bearing
Liabilities $513,086 $6,349 4.95% $450,458 $ 5,733 5.09%
Non-Interest Bearing
Deposits 10,817 11,845
Other Liabilities 12,640 10,934
----------------------------------------- ---------------------------------------
TOTAL LIABILITIES $536,543 $473,237
----------------------------------------- ---------------------------------------
Stockholders' Equity 47,001 45,866
----------------------------------------- ---------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $583,544 $519,103
========================================= =======================================
NET INTEREST INCOME $ 4,230 $ 3,872
----------------------------------------- ---------------------------------------
NET INTEREST RATE SPREAD (1) 2.58% 2.54%
----------------------------------------- ---------------------------------------
NET INTEREST MARGIN (2) 3.01% 3.08%
----------------------------------------- ---------------------------------------
(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 12
<TABLE>
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.
NINE MONTHS ENDED
----------------------------------------------------------------------------------------
SEPT 30, 1998 SEPT 30, 1997
----------------------------------------- ---------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
INTEREST-EARNING ASSETS: ----------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial Real Estate $61,494 $3,849 8.35% $26,571 $1,667 8.36%
Multi-Family Loans 19,458 1,136 7.78 -0- -0- -0-
Construction Loans 18,615 1,355 9.71 6,495 441 9.05
Commercial Loans 6,482 450 9.26 630 46 9.74
Commercial Leases 29,388 1,457 6.61 8,371 423 6.74
Mortgage Loans 208,413 11,494 7.35 252,490 14,120 7.46
Consumer Loans 58,396 4,082 9.32 58,267 4,075 9.32
Investment Securities 46,076 2,131 6.17 58,167 2,859 6.55
Mortgage-Backed and
Related Securities 99,804 4,870 6.51 99,438 5,254 7.04
Other Investments 11,077 434 5.22 8,171 320 5.22
----------------------------------------- ---------------------------------------
Total Interest-Earning Assets $559,203 $31,258 7.45% $518,600 $29,205 7.51%
Non-Interest Earning Assets 22,501 17,981
----------------------------------------- ---------------------------------------
TOTAL ASSETS $581,704 $536,581
========================================= =======================================
INTEREST-BEARING LIABILITIES:
Interest-Bearing Checking $ 22,058 $ 209 1.26% $ 21,765 $ 291 1.78%
Savings 56,492 1,057 2.49 64,072 1,199 2.50
Money Market 72,790 2,645 4.84 49,367 1,783 4.82
Certificates of Deposit 180,698 7,572 5.59 246,298 10,637 5.76
Jumbo CD's 9,735 412 5.64 9,693 405 5.57
FHLB Advances 162,302 6,779 5.57 59,393 2,635 5.92
Other Borrowed Funds 6,635 258 5.18 16,495 705 5.70
----------------------------------------- ---------------------------------------
Total Interest-Bearing
Liabilities $510,710 $18,932 4.94% $467,083 $17,655 5.04%
Non-Interest Bearing
Deposits 11,332 10,950
Other Liabilities 11,933 11,699
----------------------------------------- ---------------------------------------
TOTAL LIABILITIES $533,975 $489,732
----------------------------------------- ---------------------------------------
Stockholders' Equity 47,729 46,839
----------------------------------------- ---------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $581,704 $536,581
========================================= =======================================
NET INTEREST INCOME $12,326 $11,550
----------------------------------------- ---------------------------------------
NET INTEREST RATE SPREAD (1) 2.51% 2.47%
----------------------------------------- ---------------------------------------
NET INTEREST MARGIN (2) 2.94% 2.97%
----------------------------------------- ---------------------------------------
(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 13
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 and nine months
ended September 30, 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 NA (the "Bank"),
as of September 30, 1998, and December 31, 1997, the results of
the Company's operations for the three and nine months ended September 30,
1998 and 1997, its cash flows for the nine months ended September 30, 1998
and 1997, its changes in stockholders' equity for the nine months
ended September 30, 1998 and 1997, and its average balance sheet for the
three and nine months ended September 30, 1998 and 1997.
Certain amounts in prior condensed consolidated financial statements
have been reclassified to conform with the September 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 three
full service locations. The Bank opened a mortgage loan center in
McHenry, Illinois in mid-February, 1998, and a second center in Aurora,
Illinois in July 1998. These two centers are limited to mortgage loan
operations.
A reconciliation of the numerators and denominators for earnings per
common share dilution computations for the three months ended September
30, 1998 and 1997 are presented below: (in thousands except per share
data)
Page 14
Three Months Ended Sept 30,
---------------------------
1998 1997
---- ----
Earnings per share:
Net Income $ 899 $1,040
Weighted average common
shares outstanding 4,172 4,264
----- -----
Earnings per share $ .22 $ .24
===== =====
Earnings per share assuming dilution:
Net Income $ 899 $1,040
===== =====
Weighted average common
shares outstanding 4,172 4,264
Add: dilutive effect of assumed
exercises, incentive stock
options and management
retention plan 282 300
----- -----
Weighted average common and
dilutive potential common
shares outstanding 4,454 4,564
===== =====
Diluted earnings per share $ .20 $ .23
===== =====
A reconciliation of the numerators and denominators for earnings per
common share dilution computations for the nine months ended September
30, 1998 and 1997 are presented below: (in thousands except per share
data)
Nine Months Ended Sept 30,
--------------------------
1998 1997
---- ----
Earnings per share:
Net Income $2,881 $3,345
Weighted average common
shares outstanding 4,213 4,315
----- -----
Earnings per share $ .68 $ .77
===== =====
Earnings per share assuming dilution:
Net Income $2,881 $3,345
===== =====
Weighted average common
shares outstanding 4,213 4,315
Add: dilutive effect of assume
exercises, incentive stock
options and management
retention plan 325 228
----- -----
Weighted average common and
dilutive potential common
shares outstanding 4,538 4,543
===== =====
Diluted earnings per share $ .63 $ .74
===== =====
Page 15
(3) Stock Repurchase Program
On August 7, 1998, the Company completed its thirteenth Repurchase
Plan. On August 24, 1998, the Company approved the fourteenth Stock
Repurchase Plan 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, a three-for-two stock split, payable as 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 the first three quarters of 1998 were
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 the Comptroller of Currency (the "OCC"), national banks
must meet three separate minimum capital requirements. The following
table summarizes, as of September 30, 1998, the Bank's capital
requirements under FIRREA and its actual capital ratios. As of
September 30, 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 $47,421 12.82% $29,589 8.00% $17,832 4.82%
Tier I Capital to
Risk Weighted
Assets 42,797 11.57 14,795 4.00 28,002 7.57
Tier I Capital to
Average Assets 42,797 7.37 23,213 4.00 19,584 3.37
Page 16
(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.
Page 17
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, commercial real estate loans, multi-
family loans, construction loans, commercial leases 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 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 income produced by the mortgage centers, 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, commissions and
incentives, 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 $2.2 million from
$582.7 million at December 31, 1997, to $580.5 million at September 30,
1998.
During the third quarter the Company funded over $31 million of commercial
loans, commercial real estate loans, construction loans, and commercial
leases. On a year-to-date basis, the Company had funded over $96
million in new commercial related loans. The composition of the loan
portfolio continues to change as commercial real estate loans
represented 15%, multi-family loans represented 9%, construction loans
represented 8%, commercial loans represented 2%, and commercial leases
represented 10% at September 30, 1998. These loans now represent 44%
of total loans receivable, up from 23% at year-end 1997, and up from
less than 18% at September 30, 1997. With $23 million of approved and
accepted commitments outstanding as of September 30, 1998, which should
be funded in the next 90 days, management expects the composition of
commercial real estate, multi-family loans, construction loans, and
commercial loans to continue to grow and become a larger percentage of
the overall loan portfolio and assets mix.
Page 18
During the first nine months of 1998, residential mortgage loans
decreased by $64 million as borrowers took advantage of lower rates and
refinanced their mortgages. The CoVest Banc mortgage centers in McHenry
and Aurora, Illinois processed many of the refinanced mortgages that
are then sold on a service released basis to the investor market. The
mortgage center had almost $5 million of loans held for sale at
September 30, 1998. The cost of those loans approximated market value
at September 30, 1998.
At September 30, 1998, the allowance for possible loan losses amounted
to over $4.7 million. This represented coverage of 1.14% of total
loans as of September 30, 1998, and is greater than the 1.04% coverage
that existed at year-end 1997.
Securities available-for-sale decreased by $5 million. Some were
replaced by municipal bonds and FHLB stock. All new security
purchases mature within five years.
Mortgage-backed and other mortgage-related securities decreased $28.6
million or 23.7% from December 31, 1997. The proceeds from the sales
of, and paydowns on, mortgage-backed securities were used to fund
additional commercial related loans.
Deposits decreased to $346.4 million at September 30, 1998, from $371.8
million at December 31, 1997. Most of this decrease centers on the
Bank's prior reliance on certificates of deposit that, as a percentage
of deposits, have decreased to 51% as of September 30, 1998, from 59%
as of December 31, 1997. The only deposit type to show growth was the
Bank's Preferred Money Market account. This product has grown by over
$26 million, or 46%, and 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.
Borrowed funds have increased by $24 million from year-end 1997. These
funds have been centered in borrowings from the Federal Home Loan Bank
("FHLB"). The Bank has taken advantage of offerings by the FHLB when
funds were available at rates under the levels being offered for retail
deposits.
Stockholders' equity in CoVest Bancshares, Inc. totaled $46.8 million
at September 30, 1998. At the end of the third quarter, the number of
common shares outstanding was 4,271,203 and the book value per common
share outstanding was $10.95. The Company repurchased 72,835 shares
during the third quarter at an average price of $17.10. 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.
The Company announced its most recent stock repurchase plan on August
25, 1998.
Page 19
At September 30, 1998, total non-performing assets amounted to
$1,555,000, or 0.27% of total assets compared to $1,306,000, or 0.22%
of total assets at December 31, 1997. Management believes the reserves
for possible loan losses to be adequate.
The following table sets forth the amounts and categories of non-
performing loans and assets.
Sept. 30, 1998 Dec. 31, 1997
------------- -------------
(Dollars in Thousands)
Non-performing loans:
Mortgage Loans $ 1,054 $ 1,137
Commercial Real Estate Loans -0- -0-
Multi-family Loans -0- -0-
Construction Loans -0- -0-
Commercial Loans 162 -0-
Commercial Leases -0- -0-
Consumer 267 167
------------- -------------
Total non-performing loans $ 1,483 $ 1,304
Other real estate owned $ 72 $ -0-
Other repossessed assets $ -0- $ -0-
------------- -------------
Total non-performing assets $ 1,555 $ 1,304
Total non-performing loans as
a percentage of net loans .36% .35%
Total non-performing assets as
a percentage of total assets .27% .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, especially from residential mortgages 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 was $987,000 for the nine
months ended September 30, 1998. Net cash used in investing activities
was $11.5 million for the nine months ended September 30, 1998. Net
cash used in financing activities amounted to $4.3 million for the nine
months ended September 30, 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
operating expenses. At September 30, 1998, the Company had commitments
to originate loans and undisbursed loan balances totaling $59 million,
and its customers had approved but unused lines of credit totaling $66
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.
Page 20
SELECTED RATIOS
- ---------------
(unaudited) THREE MONTHS ENDED NINE MONTHS ENDED
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
1998 1997 1998 1997
-------------------- -------------------
Annualized Return on Avg. Equity 7.65% 9.07% 8.05% 9.52%
Annualized Return on Avg. Assets 0.62% 0.80% 0.66% 0.83%
Book Value per Share $10.95 $11.39 $10.95 $11.39
Closing Market Price per Share $14.125 $16.17 $14.125 $16.17
Earnings per Primary Share:
Basic $ .22 $ .24 $ .68 $ .77
Diluted $ .20 $ .23 $ .63 $ .74
Net Interest Margin 3.01% 3.08% 2.94% 2.97%
Ratio of Operating Expense to
Average Total Assets,
Annualized 2.56% 2.12% 2.37% 2.00%
Ratio of Net Interest Income to
Non-Interest Expense,
Annualized 1.12x 1.41X 1.18x 1.43x
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30,1998 AND
1997
- ----------------------------------------------------------------------
GENERAL. Net income for the three months ended September 30, 1998
totaled $899,000, or $0.22 (basic) and $0.20 (diluted) earnings per
share, versus $1,040,000, or $0.24 (basic) and $0.23 (diluted) earnings
per share for the third quarter in 1997. Excluding $186,000 in after
tax non-recurring expenses related to the departure of the chief
executive officer, net income for the third quarter of 1998 would have
been $1,085,000.
NET INTEREST INCOME. The Company's net interest income totaled
$4,175,000 for the three months ended September 30, 1998, compared to
$3,872,000 for the third quarter of 1997. The Company's net interest
margin decreased 7 basis points, to 3.01% for the third quarter of
1998 from 3.08% for the third quarter of 1997. The interest rate
spread averaged 2.58% for 1998 and 2.54% during the third quarter of
1997. The volume of earning assets increased by $64.6 million between
the two periods while the average yield decreased by 10 basis points
from 7.63% to 7.53%.
The cost of interest bearing liabilities decreased by 14 basis points
from 5.09% to 4.95%. The composition of the liabilities
changed as money market accounts continue to be a larger percentage of
the Bank's core deposit funding source replacing the shrinking pool of
certificates of deposit.
Page 21
PROVISION FOR POSSIBLE LOAN LOSSES. The provision for possible loan
losses was $399,000 for the third quarter of 1998 versus $430,000 for
the like period in 1997. The reserve for possible loan losses
stood at 1.14% of total loans as of September 30, 1998. The Company,
and the financial industry as a whole, experienced significant credit
card charge-offs and 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.
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
Sept. 30, Sept. 30,
1998 1997
--------- ---------
(Dollars in Thousands)
Balance at beginning of period $ 4,632 $ 1,489
Charge-offs:
Mortgage Loans $ -0- $ -0-
Commercial Real Estate Loans -0- -0-
Multi-Family Loans -0- -0-
Construction Loans -0- -0-
Commercial Loans -0- -0-
Commercial Leases -0- -0-
Consumer 281 429
-------- --------
Total 281 429
-------- --------
Recoveries:
Mortgage Loans $ -0- $ -0-
Commercial Real Estate Loans -0- -0-
Multi-family Loans -0- -0-
Construction Loans -0- -0-
Commercial Loans -0- -0-
Commercial Leases -0- -0-
Consumer 33 42
-------- --------
Total 33 42
-------- --------
Net charge-offs 248 387
Additions charged to
operations 399 430
-------- ---------
Balance at end of period $ 4,783 $1,532
======== =========
Page 22
Ratio of net charge-offs during
the period to average loans
outstanding during the period 0.07% 0.12%
Ratio of allowance for possible
loan losses to non- performing loans 3.23x 1.33x
NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES. Net
interest income after provision for possible loan losses increased by
$334,000 or 10% to $3,776,000 for the three month period ended
September 30, 1998, as compared to $3,442,000 for the three month
period ended September 30, 1997.
NON-INTEREST INCOME. Non-interest income excluding security gains
increased $648,000, or 109%, from the comparable quarter last year.
Loan charges and servicing fees increased by 248%, or $374,000 to
$626,000. The Bank collected some commercial real estate prepayment
fees as a result of the general decline in interest rates. The Bank
also collected $276,000 in loan service release fees primarily from the
activity being generated by the mortgage centers. Deposit related fees
increased by $29,000 to $258,000, and income from sales of annuities
and securities by CoVest Investments increased by $35,000 to $47,000.
Realized gains of $81,000 on sales of securities were also recorded.
This was a decrease of $235,000 in net gains on security sales from the
comparable quarter in 1997.
NON-INTEREST EXPENSE. Non-interest expense increased $990,000, or 36%,
for the third quarter of 1998 from the comparable quarter in 1997. Over
$310,000 of this increase related to the recognition of salary, the
engagement of a search firm, and legal expenses due to the departure of
the Company's former chief executive officer. Commissions and employee sales
incentives, mostly attributed to the mortgage centers, grew to $181,000
from $39,000 in the third quarter of 1997. Other operating expense
increases include $112,000 for occupancy costs at the mortgage centers
and remodeling of the Des Plaines facility, and a $41,000 increase in
data processing expenses. These increases were offset by a $48,000
decrease in advertising in 1998 from 1997. A substantial portion of the
1997 advertising expenses related to the Bank's name change.
INCOME TAX EXPENSE. Income tax expense decreased $102,000 to $460,000
for the quarter ended September 30, 1998, compared to $562,000 for the
same period in 1997.
Page 23
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30,1998 AND
1997
- ----------------------------------------------------------------------
GENERAL. For the first nine months of 1998, the Company earned
$2,881,000 versus $3,345,000 for the same period in 1997, a decrease of
14%. This represented $0.68 (basic) and $0.63 (diluted) versus $0.77
(basic) and $0.74 (diluted) for the first nine months of 1997.
NET INTEREST INCOME. The Company's net interest income totaled
$12,191,000 for the nine months ended September 30, 1998, compared to
$11,550,000 for the first nine months of 1997. The Company's net
interest margin decreased 3 basis points, to 2.94% for the nine month
period of 1998 from 2.97% for the like period in 1997. The interest
rate spread averaged 2.51% for 1998 and 2.47% during the first nine
months of 1997. The volume of earning assets increased by $45 million
between the two periods while the average yield decreased by 6 basis
points from 7.51% to 7.45%.
The cost of interest bearing liabilities decreased by 10 basis points
from 5.04% to 4.94%. 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.
PROVISION FOR POSSIBLE LOAN LOSSES. The provision for possible loan
losses was $1,567,000 for the nine month period of 1998 versus
$1,183,000 for the like period in 1997. This increased the reserve for
possible loan losses to 1.14% of total loans as of September 30, 1998.
The Company and the banking industry as a whole have experienced
significant credit card charge-offs and 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 24
LOAN LOSS ALLOWANCE ANALYSIS. The following table sets forth an
analysis of the Company's allowance for possible loan losses for the
periods indicated.
Nine Months Ended
Sept. 30, Sept. 30,
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-
Multi-family Loans -0- -0-
Construction Loans -0- -0-
Commercial Loans -0- -0-
Commercial Leases -0- -0-
Consumer 840 1,147
-------- --------
Total 878 1,147
-------- --------
Recoveries:
Mortgage Loans $ -0- $ -0-
Commercial Real Estate Loans -0- -0-
Multi-family Loans -0- -0-
Construction Loans -0- -0-
Commercial Loans -0- -0-
Commercial Leases -0- -0-
Consumer 117 72
-------- --------
Total 117 72
-------- --------
Net charge-offs 761 1,075
Additions charged to
operations 1,567 1,183
-------- ---------
Balance at end of period $ 4,783 $1,532
======== =========
Ratio of net charge-offs during
the period to average loans
outstanding during the period 0.19% 0.30%
Ratio of allowance for possible
loan losses to non-performing loans 3.23x 1.33x
Page 25
NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES. Net
interest income after provision for possible loan losses decreased by
$257,000 or 2% to $10,624,000 for the nine month period ended
September 30, 1998, as compared to $10,367,000 for the nine month
period ended September 30, 1997.
NON-INTEREST INCOME. Non-interest income excluding security gains
increased $1,665,000, or 103%, from the comparable period last year.
Loan charges and servicing fees increased by 56%, or $432,000 to
$1,210,000. The Bank collected some commercial real estate prepayment
fees as a result of the general decline in interest rates. The Bank
also collected $971,000 in loan service release fees primarily from the
activity being generated by the mortgage centers which began operation
in February, 1998. Deposit related fees increased by $103,000 to
$724,000, and income from sales of annuities and securities by CoVest
Investments increased by $208,000 to $258,000. Realized gains of
$800,000 on sales of securities were also recorded. This was a decrease
of $390,000 in net gains on security sales from the nine months in
1997.
NON-INTEREST EXPENSE. Non-interest expense increased $2,277,000, or
28%, for the first nine months of 1998 from the comparable period in
1997. Over $310,000 of this increase related to the recognition of
salary, the engagement of a search firm, and legal expenses due to the
departure of the Company's former chief executive officer. Compensation and
benefits increased by $1,471,000, due to the introduction of a commercial
lending function during the third and fourth quarters of 1997.
Commissions and employee sales incentives, mostly attributed to the
mortgage centers, were $487,000 versus $92,000 in the comparable
period of 1997. Other operating expense increases included $375,000 for
occupancy costs at the mortgage centers and remodeling of the Des
Plaines facility, and a $195,000 increase in data processing expenses.
The data processing expense included $75,000 accrued for testing
computer hardware and software to be Year 2000 compliant. These
increases were offset by a $193,000 decrease in advertising in 1998
from 1997 as a substantial portion of the 1997 advertising expenses
related to the Bank's name change.
INCOME TAX EXPENSE. Income tax expense decreased $281,000 to
$1,495,000 for the nine month period ended September 30, 1998, compared
to $1,776,000 for the same period in 1997.
Page 26
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 and
which results 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 liabilities that
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.) This permits the Company to limit its exposure
to interest rate risk and 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") that
measures the Bank's exposure to interest rate risk. This model,
prepared by the Bank, 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.
The following table presents the Bank's current exposure to
hypothetical changes in interest rates as of September 30, 1998:
Percent Change in
Change in Interest Rates Percent Change in MV of Portfolio
(basis points) Net Interest Income Equity
------------------------ ------------------- -----------------
+200 (15%) (29%)
100 ( 7%) (15%)
0 0 0
-100 7% 15%
-200 15% 32%
Page 27
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.
RECENT REGULATORY DEVELOPMENTS
- -----------------------------------------------------------
Year 2000
The Year 2000 has posed a unique set of challenges in those industries
reliant on information technology. As a result of methods employed by
early programmers, many software applications and operational programs
may be unable to distinguish the Year 2000 from the Year 1900. If not
effectively addressed, this problem could result in the production
of inaccurate data, or, in the worst cases, the inability of the systems
to continue to funcion altogether. In 1997, the Company started the process
of identifying the hardware and software issues required to be addressed
to assure Year 2000 compliance. The Company began by assessing the issues
related to the Year 2000 and the potential for those issues to adversely
affect the company's operations and those of its subsidiaries.
Since that time, the Company has established a Year 2000 management
committee to deal with this issue. The management committee meets with
and utilizes various representatives from key areas throughout the
organization to aid in analysis and testing. It is the mission of this
committee to identify areas subject to complications related to the
Year 2000 and to initiate remedial measures designed to eliminate any
adverse effects on the Company's operations. The committee has identified
all mission-critical software and hardware that may be adversely
affected by the Year 2000 and has required vendors to represent that the
systems and products provided are and will be Year 2000 compliant.
The federal banking regulators recently issued guidelines establishing
minimum safety and soundness standards for achieving Year 2000
compliance. The guidelines, which took effect October 15, 1998, and
apply to all FDIC-insured depository institutions, establish standards
for developing and managing Year 2000 project plans, testing
Page 28
remediation efforts and planning for contingencies. The guidelines are
based upon guidance previously issued by the agencies under the
auspices of the Federal Financial Institutions Examination Council (the
"FFIEC"), but are not intended to replace or supplant the FFIEC
guidance that will continue to apply to all federally insured
depository institutions.
The guidelines were issued under section 39 of the Federal Deposit
Insurance Act, as amended (the "FDIA"), which requires the federal
banking regulators to establish standards for the safe and sound
operation of federally insured depository institutions. Under section
39 of the FDIA, if an institution fails to meet any of the standards
established in the guidelines, the institution's primary federal
regulator may require the institution to submit a plan for achieving
compliance. If an institution fails to submit an acceptable compliance
plan, or fails in any material respect to implement a compliance plan
that has been accepted by its primary federal regulator, the regulator
is required to issue an order directing the institution to cure the
deficiency. Such an order is enforceable in court in the same manner
as a cease and desist order. Until the deficiency cited in the
regulator's order is cured, the regulator may restrict the
institution's rate of growth, require the institution to increase its
capital, restrict the rates the institution pays on deposits or require
the institution to take any action the regulator deems appropriate
under the circumstances. In addition to the enforcement procedures
established in section 39 of the FDIA, noncompliance with the standards
established by the guidelines may also be grounds for other enforcement
action by the federal banking regulators, including cease and desist
orders and civil money penalty assessments.
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. This number could vary based upon the results of testing and
other factors. The Company is committed to a plan for achieving compliance,
focusing not only on its own data processing systems, but also on its loan
customers. The management committee has taken steps to educate and assist
its customers with identifying their Year 2000 compliance problems. In
addition, the management committee has proposed policy and procedure changes
to help identify potential risks to the Company and to gain an understanding
of how customers are managing the risks associated with the Year 2000.
The Company is assessing the impact, if any, the Year 2000 will have on its
credit risk and loan underwriting. In connection with potential credit
risk related to the Year 2000 issue, the Company has contacted its large
commercial loan customers regarding their level of preparedness
for the Year 2000. This same analysis has been performed for large
depositors and funds providers. 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 29
It is not possible at this time to quantify the estimated future costs due
to possible business distruption caused by vendors, suppliers, customers,
or even the possible loss of electric power or phone services; however,
such costs could be substantial.
The Company is developing contingency plans for various Year 2000 problems
and continues to revise these plans based on testing results and vendor
notifications.
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 stockholders. This standard will have no impact on
the Company.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 standardizes the
accounting for derivative instruments, including certain derivative
instruments embedded in other contracts. Under the standard, entities
are required to carry all derivative instruments in the statement of
financial position as fair value. The accounting for changes in the
fair value (i.e. gains or losses) of a derivative instrument depends on
whether it has been designated and qualifies as part of a hedging
relationship and, if so, on the reason for holding it. If certain
conditions are met, entities may elect to designate a derivative
instrument as a hedge of exposures to changes in fair value, cash
flows, or foreign currencies. If the hedged exposure is a fair value
exposure, the gain or loss on the derivative instrument is recognized
in earnings in the period of change together with the offsetting loss
or gain on the hedged item attributable to the risk being hedged. If
the hedged exposure is a cash flow exposure, the effective portion of
the gain or loss on the derivative instrument is reported initially as
a component of other comprehensive income (outside earnings) and
subsequently reclassified into earnings when the forecasted transaction
affects earnings. Any amounts excluded from the assessment of hedge
effectiveness as well as the ineffective portion of the gain or loss is
reported in earnings immediately. Accounting for foreign currency
hedges is similar to accounting for fair value and cash flow hedges.
If the derivative instrument is not designated as a hedge, the gain or
loss is recognized in earnings in the period of change. This Statement
will have no effect on the Company.
Page 30
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
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 July 15, 1998, to
report under Item 5 net income for the six months ended
June 30, 1998.
A report on Form 8-K was filed on August 7, 1998, to
report under Item 5 the completion of the Company's 13th
Stock Repurchase Plan.
A report on Form 8-K was filed on August 25,1998, to
report under Item 5 announcing the departure of
Larry G. Gillie as President and Chief Executive Officer
of the Bank and the appointment of R. Kennedy Alger as
Interim President.
A report on Form 8-K was filed on August 25,1998, to
report under Item 5 that the Board of Directors had
declared a regular quarterly dividend and announced
the approval of the fourteenth Stock Repurchase Plan.
Page 31
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: By:/S/ R. Kennedy Alger
----------------- ---------------------------
R. Kennedy Alger
Executive Vice President
Date: By:/s/ Paul A. Larsen
----------------- ---------------------------
Paul A. Larsen
Senior Vice President,
Treasurer and
Chief Financial Officer
Page
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Financial Statements at September 30, 1998, and is
qualified in its entirety by reference to the December 31, 1997
Consolidated Financial Statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 6,598
<INT-BEARING-DEPOSITS> 1,892
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 139,796
<INVESTMENTS-CARRYING> 139,626
<INVESTMENTS-MARKET> 139,796
<LOANS> 418,317
<ALLOWANCE> 4,783
<TOTAL-ASSETS> 580,529
<DEPOSITS> 346,410
<SHORT-TERM> 55,571
<LIABILITIES-OTHER> 11,777
<LONG-TERM> 120,000
0
0
<COMMON> 44
<OTHER-SE> 46,727
<TOTAL-LIABILITIES-AND-EQUITY> 580,529
<INTEREST-LOAN> 23,823
<INTEREST-INVEST> 6,866
<INTEREST-OTHER> 434
<INTEREST-TOTAL> 31,123
<INTEREST-DEPOSIT> 11,894
<INTEREST-EXPENSE> 18,932
<INTEREST-INCOME-NET> 12,191
<LOAN-LOSSES> 1,567
<SECURITIES-GAINS> 800
<EXPENSE-OTHER> 10,335
<INCOME-PRETAX> 4,376
<INCOME-PRE-EXTRAORDINARY> 4,376
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,881
<EPS-PRIMARY> .68
<EPS-DILUTED> .63
<YIELD-ACTUAL> 7.45
<LOANS-NON> 0
<LOANS-PAST> 1,483
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,977
<CHARGE-OFFS> 878
<RECOVERIES> 117
<ALLOWANCE-CLOSE> 4,783
<ALLOWANCE-DOMESTIC> 4,783
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
