<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from _______ to _______
Commission File Number 0-20160
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CoVest Bancshares, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 36-3820609
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
749 Lee Street, Des Plaines, Illinois 60016
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 294-6500
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
------------------- ---------------------
NONE NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
--------------------------------------------------
(Title of Class)
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 twelve months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such requirements
for the past 90 days.
YES X NO
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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As of March 5, 1998, the Registrant had issued and outstanding 4,403,803 shares
of the Registrant's Common Stock. In addition, it had also repurchased 41,765
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 March 5, 1998,
was $68,078,370*
DOCUMENTS INCORPORATED BY REFERENCE
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PART III of Form 10-K--Portions of the Proxy Statement for the 1998
Annual Meeting of Stockholders.
* Based on the closing price of the Registrant's Common Stock on March 5, 1998,
and reports of beneficial ownership filed by directors and executive officers
of Registrant and by beneficial owners of more than 5% of the outstanding shares
of Common Stock of Registrant; however, such determination of shares owned by
affiliates does not constitute an admission of affiliate status or beneficial
interest in shares of Registrant's Common Stock.
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CoVest Bancshares, Inc.
1997 ANNUAL REPORT ON FORM 10-K
Table of Contents
<TABLE>
<CAPTION>
Page
Number
------
PART I
<S> <C> <C>
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 32
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . 32
PART II
Item 5. Market for the Registrant's Common Stock and Related
Security Holder Matters. . . . . . . . . . . . . . . . . . . . . 33
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . 35
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . . . 37
Item 7A. Quantitative and Qualitative Disclosure About Market Risk . . . . 47
Item 8. Consolidated Financial Statements . . . . . . . . . . . . . . . . 50
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure . . . . . . . . . . . . . . . . . . . . 77
PART III
Item 10. Directors and Executive Officers of the Registrant. . . . . . . . 77
Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . . . . 77
Item 12. Security Ownership of Certain Beneficial Owners and Management. . 77
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Item 13. Certain Relationships and Related Transactions. . . . . . . . . . 77
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on 8-K . . . 78
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
</TABLE>
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PART I
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 including this statement for purposes of these safe harbor provisions.
Forward-looking statements, which are based on certain assumptions and describe
future plans, 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 the 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 or 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 1. BUSINESS
THE COMPANY
GENERAL
CoVest Bancshares, Inc., a Delaware corporation (the "Company"), is a bank
holding company registered under the Bank Holding Company Act, as amended (the
"BHCA"). The Company's operating subsidiary is CoVest Banc, National
Association, a national banking association (the "Bank"). The Bank's subsidiary
service corporation, CoVest Investments, Inc., an Illinois corporation ("CII"),
engages in the business of selling annuities, insurance products and complete
brokerage services. The Company was organized in 1992, in connection with the
Bank's conversion from the mutual to the stock form of organization (the
"Conversion") which was completed on June 30, 1992. As part of the Conversion,
the Company issued 3,220,000 shares of its common stock, $.01 par value per
share (the "Common Stock"), at a price of $10.00 per share. The Company's
Common Stock is quoted on the Nasdaq National Market System under the symbol
"COVB" (neither the original number of shares nor the price per share have been
adjusted for subsequent stock splits). Prior to August, 1997 the Company was a
savings and loan holding company registered under the Home Owners Loan Act, as
amended. The Company became a bank holding company effective August 1, 1997,
when the bank completed its conversion from a federal savings association to a
national bank. The Bank is the Company's only financial institution subsidiary
and was initially chartered as a federally chartered savings and loan
association in 1934. The Bank changed its name to "First Federal Bank" in
1990. Effective August, 1997, the Bank converted from a savings association
to a national bank and changed its name to "CoVest Banc, National
Association." All references to the Company include the Bank and its
subsidiary, CII, unless otherwise indicated, except that references to the
Company at or before June 30, 1992 refer to only the Bank and CII on a
consolidated basis.
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The Company and the Bank are subject to comprehensive regulation, examination
and supervision by the Board of Governors of the Federal Reserve System (the
"FRB"), the Office of the Comptroller of the Currency (the "OCC") and the
Federal Deposit Insurance Corporation (the "FDIC"). The Bank is a member of the
Federal Home Loan Bank System (the "FHLB") and its deposits are insured by the
Savings Association Insurance Fund ("SAIF") to the maximum extent permitted by
the FDIC. The Company engages in a general full service retail banking business
and offers a broad variety of commercial and consumer oriented products and
services to customers in its primary market area. The Company is principally
engaged in the business of attracting deposits from the general public and
originating commercial loans and to a lessor extent mortgage loans in its
primary market area. The Company also originates consumer loans and in
addition, invests in mortgage-backed and related securities, and marketable
equity securities. Finally, the Company offers, on an agency basis through CII,
annuities, insurance products and complete brokerage services to its customers.
The Company's income is derived from interest on loans, mortgage backed and
related securities and other securities, service charges and loan origination
fees, loan servicing fees and proceeds from the sale, through CII, of annuity
and insurance products. The Company's operations are materially affected by
general economic conditions, the monetary and fiscal policies of the federal
government and the policies of the various regulatory authorities, including the
OCC and the FRB. Its results of operations are largely dependent upon its net
interest income, which is the difference between the interest it receives on its
loan and securities portfolios and the interest it pays on its deposit accounts
and borrowed money.
The Company's corporate headquarters are located at 749 Lee Street, Des Plaines,
Illinois. The Company's telephone number is (847) 294-6500.
MARKET AREA
The Company's main office and a drive-up facility are located in downtown Des
Plaines, Illinois. Des Plaines is a mature suburban Chicago community which had
a population of approximately 53,200 in 1990. Des Plaines is located
approximately 20 miles from downtown Chicago and five miles north of Chicago's
O'Hare airport.
In March, 1994, the Company established its first branch office in Arlington
Heights, Illinois, through the acquisition from the Resolution Trust Corporation
of the deposits and office building of the Arlington Heights branch of the
former Irving Federal Bank, F.S.B. Arlington Heights is a suburban Chicago
community located approximately 10 miles northwest of Des Plaines. Based on the
1990 census, it had a population of approximately 75,500.
On March 2, 1995, the Company opened its third full-service office in
Schaumburg, Illinois. Schaumburg is a relatively young suburb, and has seen
rapid growth although this has slowed somewhat recently. It is located
approximately 16 miles southwest of Arlington Heights and approximately 22 miles
west of Des Plaines. Schaumburg had a population of 68,586 in 1990.
On February 11, 1998, the Company opened a Mortgage Center in McHenry, Illinois,
the county seat of McHenry County, located approximately 35 miles northwest of
Des Plaines. The CoVest Banc Mortgage Center is a full service facility that
will concentrate on mortgage loan origination and sales.
Des Plaines and parts of the surrounding contiguous communities such as Park
Ridge, Niles and Mount Prospect have historically constituted the Company's
primary market area. However, with the establishment of the two additional
offices by the Company, the market area has expanded into several other suburbs
such as Arlington Heights, Prospect Heights, Buffalo Grove, Schaumburg and
Hoffman Estates. These suburban areas are characterized by single-family
residences and apartment buildings. These demographics provide the
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6
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Company with diverse opportunities for commercial lending, which became a focus
of the Bank in 1996. In addition, many of the residents of the Company's
primary market area consist of professional or "white collar" workers who
commute into Chicago or engage in local retail trade, although a significant
number of residents in the farther outlying suburbs, such as Schaumburg, work in
that community at jobs in the service sector. The Company's success has been
due, in part, to its market area's growth, favorable population and income
demographics.
LENDING ACTIVITIES
General
SOURCES OF FUNDS
The Company faces strong competition both in originating loans and in attracting
deposits. Competition for commercial loans, commercial real estate,
construction and multi-family loans comes primarily from large commercial banks
and smaller community banks. Competition in originating real estate loans comes
primarily from mortgage bankers, other savings institutions and commercial
banks, all of which also make loans secured by real estate located in the
Company's primary market area. The Company competes for real estate loans
principally on the basis of the interest rates and loan fees it charges, the
types of loans it offers and the quality of services it provides to borrowers.
The competition for consumer loans comes primarily from commercial banks and
finance companies.
The principal lending activity of the Bank historically has been originating
first mortgage loans for its portfolio, secured by owner occupied one-to-four
family residential properties located in its primary market area. The Bank also
offers a wide selection of consumer loans. Beginning late in 1995, and
continuing into 1998, the Bank began a major balance sheet restructuring
project. The Bank is now a full-service commercial bank, offering commercial
loans, multi-family loans, commercial real estate loans, construction loans and
purchasing investment grade commercial leases. These types of lending will be
the major focus of the Bank going forward as it continues to function more as a
traditional commercial banking institution.
As part of the balance sheet restructuring project, in 1995 the Bank securitized
$116 million of fixed rate portfolio loans with the Federal Home Loan Mortgage
Corporation ("FHLMC.") These loans were then classified as securities
available-for-sale. In 1996, the Bank securitized $61 million of fixed rate and
balloon portfolio loans with FHLMC. These were used for liquidity needs and
management sold some of these securities in 1997, in order to originate higher
yielding commercial loans and commercial real estate loans. During 1997,
management securitized an additional $17.8 million of conforming loans of which
$10.1 million was held for securitization at December 31, 1996. Loans were
classified as securities available-for-sale at December 31, 1997. These were
used for liquidity needs and management sold some of these securities in 1997.
With the establishment of the Mortgage Center, the Bank will provide a full
array of first mortgage products for which it will act as a loan originator and
placer. It is anticipated that all loans will be sold on a serviced release
basis to mortgage buyers, for which the Bank will receive a fee and have no
additional rights.
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LOAN PORTFOLIO COMPOSITION
The following table outlines the composition of the Company's loan portfolio in
dollar amounts and in percentages as of the dates indicated:
<TABLE>
<CAPTION>
December 31,
------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial loans $ 5,504 1.44% $ 58 .02% $ - -% $ - -% $ - -%
Real estate loans
One-to-four family 235,425 61.76 251,831 74.21 275,570 83.04 297,682 85.16 219,836 88.49
Multi-family 4,604 1.21 995 0.29 177 0.06 226 0.06 259 0.10
Commercial real estate 56,220 14.75 20,705 6.11 2,200 0.66 - - - -
Construction 8,939 2.34 1,811 .53 - - - - - -
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans 305,188 80.06 275,342 81.14 277,947 83.76 297,908 85.22 220,095 88.59
Commercial leases 11,274 2.96 7,053 2.08 - - - - - -
Consumer loans
Automobile 22,781 5.98 21,802 6.42 18,618 5.61 17,192 4.93 11,686 4.70
Home equity/improvement 21,987 5.77 18,570 5.47 16,323 4.92 14,211 4.06 9,408 3.79
Credit cards 13,469 3.53 15,812 4.66 18,289 5.51 19,930 5.70 6,940 2.80
Other loans 1,008 0.26 716 0.21 677 0.20 323 0.09 291 0.12
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total consumer loans 59,245 15.54 56,900 16.76 53,907 16.24 51,656 14.78 28,325 11.41
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans 381,211 100.00% 339,353 100.00% 331,854 100.00% 349,564 100.00% 248,420 100.00%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Net deferred costs/fees 275 616 542 (1,084) (2,235)
-------- -------- -------- -------- --------
Total loans receivable $381,486 $339,969 $332,396 $348,480 $246,185
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
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The following table shows the composition of the Company's loan portfolio by
fixed and adjustable rate at the dates indicated:
<TABLE>
<CAPTION>
December 31,
------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed rate loans
Commercial loans $ 438 0.11% $ 58 0.02% $ - -% $ - -% $ - -%
Real estate loans
One-to-four family 137,314 36.02 157,430 46.39 215,556 64.96 270,536 77.39 207,291 83.44
Multi-family 576 0.15 995 0.29 177 0.06 226 0.06 259 0.11
Commercial real estate 15,863 4.16 20,304 5.98 2,200 0.66 - - - -
Construction 63 0.02 - - - - - - - -
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans 153,816 40.35 178,729 52.66 217,933 65.68 270,762 77.45 207,550 83.55
Commercial leases 11,274 2.96 7,053 2.08 - - - - - -
Consumer loans 29,424 7.72 26,160 7.71 22,449 6.76 22,867 6.54 18,294 7.36
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total fixed loans 194,952 51.14 212,000 62.47 240,382 72.44 293,629 83.99 225,844 90.91
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Adjustable-rate loans
Commercial loans 5,066 1.32 - - - - - - - -
Real estate loans
One-to-four family 98,111 25.74 94,401 27.82 60,014 18.08 27,146 7.77 12,545 5.05
Multi-family 4,028 1.06 - - - - - - - -
Commercial real estate 40,357 10.59 2,212 0.65 - - - - - -
Construction 8,876 2.33 - - - - - - - -
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans 151,372 39.72 96,613 28.47 60,014 18.08 27,146 7.77 12,545 5.05
Consumer loans 29,821 7.82 30,740 9.06 31,458 9.48 28,789 8.24 10,031 4.04
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total adjustable loans 186,259 48.86 127,353 37.53 91,472 27.56 55,935 16.01 22,576 9.09
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans 381,211 100.00% 339,353 100.00% 331,854 100.00% 349,564 100.00% 248,420 100.00%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Net deferred costs/fees 275 616 542 (1,084) (2,235)
-------- -------- -------- -------- --------
Total loans receivable $381,486 $339,969 $332,396 $348,480 $246,185
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
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The following schedule illustrates the contractual maturities of the
Company's loan portfolio at December 31, 1997. Mortgages which have
adjustable or floating interest rates are shown as maturing in the period
during which the contract is due. The schedule does not reflect the effects
of possible prepayments or enforcement of due-on-sale clauses:
<TABLE>
<CAPTION>
(Dollars in Thousands)
Comm. Loans,
Comm. Real Estate,
Construction,
One-to-Four Family Multi-Family Consumer
Residential Loans(1) and Leases Loans Total
-------------------- ---------- ----- -----
Coming due during Weighted Weighted Weighted Weighted
years ending Average Average Average Average
December 31, Amount Rate Amount Rate Amount Rate Amount Rate
------------ ------ ---- ------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998* $ 7,453 7.21% $16,884 8.92% $21,842 9.89% $ 46,179 9.11%
1999 8,617 7.44 6,019 7.79 6,990 8.07 21,626 7.74
2000 8,440 7.49 10,618 8.75 5,200 8.10 24,258 8.17
2001 to 2002 19,218 7.58 18,359 8.38 3,292 8.08 40,869 7.98
2003 to 2007 50,238 7.33 16,497 8.36 11,277 8.92 78,012 7.78
2008 to 2022 30,115 7.63 11,852 8.23 10,644 9.65 52,611 8.17
2023 and beyond 115,948 7.55 1,708 8.56 - - 117,656 7.56
-------- ---- ------- ---- ------- ---- -------- ----
Total $240,029 7.50% $81,937 8.47% $59,245 9.19% $381,211 7.97%
-------- ---- ------- ---- ------- ---- -------- ----
-------- ---- ------- ---- ------- ---- -------- ----
</TABLE>
(1) Includes demand loans, loans having no stated maturity, and overdraft
loans.
The aggregate amount of loans that the Bank is permitted to make to any one
borrower is generally limited to 15% of unimpaired capital and surplus (25%
if the security for such loan has a "readily ascertainable" value,). At
December 31, 1997, based on the above, the Bank's regulatory loan-to-one
borrower limit was $7.2 million. On the same date, the Bank's largest loan
was $5,873,000.
All of the Company's lending activities are conducted in accordance with its
written underwriting standards and its loan origination procedures. The
Company is an equal opportunity lender and each year offers its Affordable
Housing Program for families with a maximum household income of 115% of the
median income as published by the Federal Housing Finance Board. Decisions
on all loan approvals or denials are made on the basis of detailed
applications and property valuations (consistent with the Company's written
appraisal policy) prepared by independent appraisers. The loan applications
are designed primarily to determine the borrower's ability to repay and the
more significant items on the application are verified through use of credit
reports, financial statements, tax returns and/or third-party confirmations.
COMMERCIAL LENDING
Management of the Company has made a commitment to become a full service
community bank. In line with this commitment, the Company has increased its
originations of commercial real estate loans, multi-family loans, commercial
leases and commercial loans. Management intends to focus on this type of
lending in the future. The commercial real estate loans, multi-family loans
and commercial loans are collateralized by property within the Company's
market area. The commercial leases, which may extend beyond the Company's
market area, are usually investment grade leases.
The underwriting standards used by the Company for these types of loans
include a determination of the applicant's payment history, cash flow, value
of collateral, and credit worthiness of the business.
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These types of loans all carry a rate substantially higher than residential
mortgages, and also carry greater credit risk. Leases, of which 68% are
investment grade instruments, are not considered a substantial risk, and
therefore, no allowance for possible losses is being established specifically
for leases.
At December 31, 1997, the Company had $56,220,000 in commercial real estate
loans, $8,939,000 in construction loans, $5,504,000 in commercial loans, and
$4,604,000 in multi-family loans. The Allowance for Possible Loan Losses
account included $2,256,000 for these types of loans at December 31, 1997.
ONE-TO-FOUR FAMILY RESIDENTIAL REAL ESTATE LENDING
The cornerstone of the Company's lending program has historically been the
origination of one-to-four family permanent loans, to be held in its
portfolio, secured by mortgages on owner-occupied residences. In February,
1998, the Company established the CoVest Banc Mortgage Center. With the
creation of the Mortgage Center, the Company has the ability to originate
one-to-four family mortgages with competitive rates without the interest
rate exposure associated with originations for its own portfolio.
Additionally, the Mortgage Center will generate non-interest income from the
receipt of SRP's (service release premiums) from the sale of the originated
mortgages to secondary market investors. The Mortgage Center's investor
network of approximately thirty private or institutional investors will allow
the Company to offer Conventional, Jumbo, VA and B, C and D (sub-prime) loan
programs for first mortgages. The Mortgage Center will also have the ability
to originate and sell 125% equity loans and equity loans to borrowers with
credit problems, through investors.
The Company will continue to originate loans targeted at low and moderate
income home buyers through the Affordable Housing Program and the Community
Investment Program which will be retained in its portfolio.
At December 1997, the Company held as Mortgage Backed Securities ("MBS")
previously securitized with Federal Home Loan Mortgage Corporation $61
million of 15 and 30 year fixed-rate and balloon single family residential
mortgage loans. The Company, depending on liquidity needs, may sell a
portion of these securities in 1998. At December 31, 1997, $235.4 million of
the Company's loan portfolio consisted of permanent loans on one-to-four
family residences. At that date, the Company's largest outstanding
residential loan was $1,078,000. Substantially all of the residential loans
originated by the Company are secured by properties located in the Company's
primary market area. See "Origination, Purchases and Sales of Loans."
The Company continues to have fewer one-to-four family residential homes in
its portfolio and has seen the total drop from 88.49% of total loans on
December 31, 1993 to 61.76% of total loans on December 31, 1997.
The Company evaluates both the borrower's ability to make principal, interest
and escrow payments and the value of the property that will secure the loan.
The Company originates residential mortgage loans with loan-to-value ratios
of up to 95%. On any mortgage loan exceeding an 80% loan-to-value ratio at
the time of origination, the Company requires private mortgage insurance in
an amount intended to reduce the Company's exposure to 80% or less of the
appraised value of the underlying property.
The Company's residential mortgage loans customarily include due-on-sale
clauses, giving the Company the right to declare the loan immediately due and
payable in the event that, among other things, the borrower sells or
otherwise disposes of the property subject to the mortgage.
CONSUMER LENDING
Management believes that offering consumer loan products helps to expand and
create stronger ties to the Company's existing customer base. In addition,
because consumer loans generally have shorter terms to maturity and/or
adjustable rates and carry higher rates of interest than do residential
mortgage loans, they can be valuable asset/liability management tools.
Finally, management believes that consumer loans can diversify the portfolio.
Accordingly, the Company pursues consumer lending through marketing and
pricing initiatives.
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The Company currently originates substantially all of its consumer loans in
its primary market area. At December 31, 1997, the Company's consumer loans
totaled $59.2 million or 15.54% of the Company's loan portfolio.
The Company's second mortgage and home equity loans are underwritten using
the same standards as it uses for one-to-four family residential mortgage
loans. The Company's second mortgage loans and home equity lines of credit
are generally originated in amounts which, together with the amount of the
first mortgage, do not exceed 80% of the appraised value of the property
securing the loan. Home equity loans are revolving lines-of-credit, with the
interest rate floating at a stated margin over the prime rate. Second
mortgage loans are generally made for terms of up to ten years with fixed
interest rates. Other consumer loan terms vary according to the type of
collateral, length of contract and creditworthiness of the borrower. Lines
of credit extended through the Company's credit card programs are limited to
$20,000. During 1997, the average credit card line granted was $5,600.
During December 1997, the Company re-scored its credit card portfolio,
reviewed its charge-off experience and bankruptcy trends and concluded that
an additional provision was needed for the year ended December 31, 1997.
The Company offers a variety of secured consumer loans, including direct
automobile loans, second mortgage loans (including home improvement loans),
home equity loans, and loans secured by deposit accounts. In addition, the
Company offers unsecured consumer loans and credit cards. In 1997, while
limiting credit card lending, the Company continued to expand its consumer
loan portfolio by marketing automobile and home equity loans. Management
believes that these loans which carry a higher rate of interest, can enhance
the bottom line when offered in conjunction with a prudent credit risk policy
and collection program.
The underwriting standards employed by the Company for consumer loans include
a determination of the applicant's payment history on other debts and an
assessment of the borrower's ability to meet payments on the proposed loan
along with existing obligations. In addition to the creditworthiness of the
applicant, the underwriting process also includes a comparison of the value
of the security, if any, in relation to the proposed loan amount.
Consumer loans may entail greater risk than residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
depreciable assets such as automobiles. In such cases, any repossessed
collateral for defaulted consumer loans may not provide adequate sources of
repayment for the outstanding loan balances as a result of the greater
likelihood of damage, loss or depreciation. In addition, consumer loan
collections are dependent on the borrower's continuing financial stability,
and thus are more likely to be affected by adverse personal circumstances.
Furthermore, the application of various federal and state laws, including
federal and state bankruptcy and insolvency laws, may limit the amount which
can be recovered on such loans. Although the level of delinquencies in the
Company's consumer loan portfolio has been manageable, there can be no
assurance that delinquencies will not increase in the future.
In 1997, the Company incurred $1,615,000 of consumer loan charge-offs, 94%
of which were related to credit cards, and made provisions of $2,250,000 to
the Allowance for Possible Loan Losses related to consumer loans. The
additional provision related partly to credit cards after it re-scored its
portfolio and reviewed its recent loan loss experience. During the year, the
Company was able to recover $ 96,000 on consumer loans previously charged off.
Management regularly conducts a review of its loan portfolio, write-off
experience and adequacy of allowance to maintain the allowance at a level
management feels is adequate.
MORTGAGE-BACKED AND RELATED SECURITIES
The Company has long purchased mortgage-backed and mortgage-related
securities to supplement loan production. Federal agency mortgage-backed
securities generally carry a yield approximately 50 to 100 basis points below
that of the corresponding type of residential loan, and the Company's other
mortgage related
- -------------------------------------------------------------------------------
12
<PAGE>
securities also carry lower yields; however, the Company believes they offer
greater flexibility in volatile interest rate markets. The Company has also
retained the servicing rights on all loans securitized with FHLMC. The
Company will evaluate mortgage-backed securities purchases in the future
based on its asset/liability objectives, market conditions and alternative
investment opportunities.
The Company also purchases mortgage-related securities consistent with its
asset/liability management objectives. The mortgage-related securities which
the Company owns are real estate mortgage investment conduits ("REMIC's"),
most of which carry a floating interest rate and have estimated average lives
from one to five years. Collateralized mortgage obligations are securities
derived by reallocating cash flows from mortgage pass-through securities or
from pools of mortgage loans held by a trust. No interest only, principal
only, or residual interest pools are included as part of the portfolio. At
December 31, 1997, the carrying value of other mortgage-related securities
was $646,000. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Asset/Liability Management".
The following schedule sets forth the contractual maturities of the Company's
mortgage-backed and related securities and carrying value as of December 31,
1997. All of such securities are considered available-for-sale and include
approximately $57 million that were formerly a part of the Company's loan
portfolio and were previously securitized with the FHLMC. Almost all of the
mortgage-backed and related securities are anticipated to be repaid in
advance of their contractual maturity as a result of projected mortgage loan
prepayments and are driven to a large extent by changes in the level of
interest rates.
<TABLE>
<CAPTION>
Due In
------------------------------------------
1 to 5 5 to 10 10 to 20 Over 20 Balance
Years Years Years Years Outstanding
----- ----- ----- ----- -----------
<S> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Mortgage-backed securities
Federal Home Loan Mortgage Corp. $3,754 $ 937 $14,918 $38,391 $ 58,000
Government National Mortgage Assoc. - - - 4,594 4,594
Federal National Mortgage Assoc. - - 2,551 54,962 57,513
------ ------ ------- ------- --------
$3,754 $ 937 $17,469 $97,947 $120,107
------ ------ ------- ------- --------
------ ------ ------- ------- --------
Other mortgage-related securities
Federal Home Loan Mortgage Corp. $ 646 $ - $ - $ - $ 646
------ ------ ------- ------- --------
------ ------ ------- ------- --------
</TABLE>
ORIGINATION, PURCHASES AND SALES OF LOANS
The Company originates real estate and other loans through internal loan
production personnel (including commissioned originators) located in the
Mortgage Center and the Company's offices. Walk-in customers and referrals
from real estate brokers, builders and commercial lenders in the area are
also important sources for loan originations.
In order to supplement loan origination during periods of unusual competition
or reduced loan demand and, in order to acquire additional adjustable rate
loans for asset/liability management purposes, the Company periodically
considers the purchase of mortgage-backed and related securities and/or
residential loans from third party lenders. In 1995, the Company purchased
$2 million of fixed rate and $21.2 million of floating rate mortgage-backed
securities, and in 1996, the Company purchased $13.9 million of fixed rate
and $87.5 million of floating rate mortgage-backed securities. In 1997, the
Company purchased $700,000 in floating
- -------------------------------------------------------------------------------
13
<PAGE>
rate mortgage backed securities and securitized $17.8 million of mortgage
loans which had been part of its one-to-four family residential loan
portfolio. Of this total, $9.1 million were 15 and 30 year fixed rate loans,
$4.7 million were 5 and 7 year balloons, and $4 million were 5/1, 7/1, and
10/1 Adjustable Rate Mortgage ("ARM") products. This securitzation helped
improve the Company's asset/liability management position.
In November, 1997, the Company entered into an arbitrage transaction,
purchasing $50.8 million in 3/1 FNMA ARM pools and funded the transaction by
borrowing $50 million from the FHLB of Chicago. The average spread on the
transaction is anticipated to be 72 basis points and is planned to be unwound
in late 1998.
The Company has securitized residential real estate loans from time to time.
When loans have been sold, the Company retains the responsibility for
servicing the loan. At December 31, 1996, and 1997, there were approximately
$178.5 million and $170.1 million, respectively, in the loan servicing
portfolio. At December 31, 1997, all loans were securitized with the FHLMC.
The Company held these loans as mortgage-backed securities on the balance
sheet. During 1998, management believes that the trend on securitizing loans
will be eliminated. With the exception of those originated for the Affordable
Housing Program and the Community Investment Program, the Mortgage Center
will provide all new residential mortgage funding and act only as a conduit,
providing only placement of residential mortgages. Some of these previously
securitized loans will be sold in 1998 to meet liquidity needs. Furthermore,
at December 31, 1997, the Company had no outstanding commitments to sell
mortgage-backed or mortgage-related securities.
- -------------------------------------------------------------------------------
14
<PAGE>
The following table shows the loan originations, purchases, sales, and
repayments of the Company for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
(Dollars in Thousands) ------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Originations of portfolio loans
Adjustable rate
Commercial loans $ 5,128 $ - $ -
Construction loans 16,170 - -
One-to-four family 34,386 44,648 41,909
Consumer loans 19,986 21,146 22,451
-------- -------- --------
Total adjustable rate 75,670 65,794 64,360
Fixed rate
Commercial loans - 63 -
One-to-four family 3,962 14,616 89,655
Commercial real estate 37,577 20,443 2,200
Multi-family 2,679 - -
Commercial leases 10,454 7,272 -
Consumer 15,096 18,978 18,036
-------- -------- --------
Total fixed rate 69,768 61,372 109,891
-------- -------- --------
Total loans originated 145,438 127,166 174,251
Purchases of mortgage-backed and related securities
Mortgage-backed securities and participation certificates 52,568 83,257 21,181
Mortgage-related securities - 18,126 2,027
-------- -------- --------
Total purchased 52,568 101,383 23,208
Sales and repayments of loans and mortgage-backed and
related securities
Sales of mortgage-backed securities 46,719 222,729 -
Principal repayments 101,910 87,029 84,557
-------- -------- --------
Total reductions 148,629 309,758 84,557
Increase (decrease) on other items (net) (2,894) (975) 1,767
-------- -------- --------
Net increase (decrease) in loans and mortgage-backed securities $ 46,483 $(82,184) $114,669
-------- -------- --------
-------- -------- --------
</TABLE>
- -------------------------------------------------------------------------------
15
<PAGE>
DELINQUENCY PROCEDURES
When a borrower fails to make a required payment on a loan, the Company
attempts to cause the delinquency to be cured by contacting the borrower. In
the case of residential loans subject to late charges, a late notice is sent
18 days after the due date, at which time a late charge is assessed. If the
delinquency is not cured by the 30th day, contact with the borrower is made
by phone or a second notice is mailed. Additional written and oral contacts
are made with the borrower between 30 and 60 days after the due date.
In the event a real estate loan payment is past due for 90 days or more,
management performs an in-depth review of the loan status, the condition of
the property and circumstances of the borrower. Based upon the results of
its review, management will decide whether to try to negotiate a repayment
program with the borrower, or initiate foreclosure proceedings.
Delinquent consumer loans are handled in a similar manner, except that
initial contact is made when the payment is ten days past due, personal
contact is made when the loan becomes more than twenty days past due, and the
loan is classified as a delinquent loan when it is past due for 30 days or
more. Certain consumer loans are placed on non-accrual status when
delinquent more than 90 days and deemed appropriate in the collection process.
The following table sets forth the Company's loan delinquencies by type, by
amount, and by percentage:
<TABLE>
<CAPTION>
Loans Delinquent For
------------------------------------------------------- Total
60 - 89 Days 90 Days and Over Delinquent Loans
-------------------------- -------------------------- ---------------------------
Percent Percent Percent
of of of
Loan Loan Loan
Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One-to-four
family 3 $111 0.05% 12 $1,137 0.48% 15 $1,248 0.53%
Consumer 52 316 0.53 44 167 0.28 96 483 0.81
--- ---- ---- --- ------ ---- --- ------ ----
Total 55 $427 0.14% 56 $1,304 0.44% 111 $1,731 0.59%
--- ---- ---- --- ------ ---- --- ------ ----
--- ---- ---- --- ------ ---- --- ------ ----
</TABLE>
CLASSIFICATION OF ASSETS
OCC policies require that each national bank classify its own assets on a
regular basis. In addition, in connection with examinations of national
banks, OCC examiners have authority to identify problem assets and, if
appropriate, require them to be classified. There are three classifications
for problem assets: Substandard, Doubtful and Loss. The regulations also
include a Special Mention category. Substandard assets have one or more
defined weaknesses and are characterized by the distinct possibility that the
institution will sustain some loss if the deficiencies are not corrected.
Doubtful assets have the weaknesses of Substandard assets, with the
additional characteristics that the weaknesses make collection or liquidation
in full on the basis of currently existing facts, conditions and values
questionable, and there is a high possibility of loss. An asset classified
as Loss is considered un-collectable and of such little value that
continuance as an asset of the institution is not warranted.
The Special Mention category consists of assets which do not currently expose
a financial institution to a sufficient degree of risk to warrant
classification, but do possess credit deficiencies or potential weaknesses
deserving management's close attention. Assets classified as Substandard or
Doubtful require the institution to establish prudent general allowances for
possible loan losses. If an asset or portion thereof is classified as Loss,
the institution must either establish specific allowances for loan losses in
the amount of 100% of the portion of the asset classified Loss, or charge off
such amount. If an institution does not agree with an examiner's
classification of an asset, it may appeal this determination to the Regional
Director of the OCC. In the above table, all loans delinquent 90 days or more
are classified according to the above rules. Certain
- -------------------------------------------------------------------------------
16
<PAGE>
loans delinquent less than 90 days are categorized as Special Mention. As a
result of management's review of its assets, at December 31, 1997, the
Company had categorized $1,137,000 of its assets as Special Mention,
$167,000, as Substandard, and none as Doubtful or Loss. The Company's
classified assets consist of the non-performing loans detailed below and
certain loans delinquent less than 90 days.
NON-PERFORMING ASSETS
Real estate loans are placed on non-accrual status when either principal or
interest is 90 days or more past due unless, in the judgment of management,
other factors are present to justify the accrual of interest. Interest
accrued and unpaid at the time a loan is placed on non-accrual status is
charged against interest income. Subsequent payments are either applied to
the outstanding principal balance or recorded as interest income, depending
on the assessment of the ultimate collectibility of the loan.
In accordance with Statement of Financial Accounting Standard No. 114 (SFAS
114), as amended by SFAS 118, loans which are considered to be impaired, are
reduced to the present value of expected future cash flows or to the fair
value of the related collateral, by allocating a portion of the allowance to
such loans. If these allocations cause the allowance for possible loan
losses to require an increase, such increase is reported as a provision for
possible loan losses charged to expense. Loans are evaluated for impairment
when payments are delinquent 90 days or more, or when management downgrades
the loan classification to doubtful.
The table below sets forth the amounts and categories of non-performing
assets in the Company's loan portfolio. Loans are placed on non-accrual
status when the collection of principal and/or interest becomes doubtful.
For all years presented, the Company has had no impaired loans or troubled
debt restructurings (which involve forgiving a portion of interest or
principal on any loans or making loans at a rate materially less than that of
market rates).
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans
One-to-four family $ - $ - $ 531 $ 176 $ 381
Consumer - 95 - - 38
------ ----- ----- ----- -----
Total - 95 531 176 419
Accruing loans delinquent 90 days or more
One-to-four family 1,137 599 - - -
Consumer 167 162 150 24 -
------ ----- ----- ----- -----
Total 1,304 761 150 24 -
------ ----- ----- ----- -----
Total non-performing loans $1,304 $ 856 $ 681 $ 200 $ 419
------ ----- ----- ----- -----
------ ----- ----- ----- -----
Total non-performing loans
to net loans 0.35% 0.25% 0.21% 0.06% 0.17%
------ ----- ----- ----- -----
------ ----- ----- ----- -----
Total non-performing loans
as percentage of assets 0.22% 0.16% 0.11% 0.04% 0.11%
------ ----- ----- ----- -----
------ ----- ----- ----- -----
</TABLE>
- -------------------------------------------------------------------------------
17
<PAGE>
Management has considered the Company's non-performing assets in establishing
its Allowance for Possible Losses on Loans. As of December 31, 1997, there
were no specific reserves on any of these assets.
As of December 31, 1997, there were no other loans not included on the table
or discussed above where known information about the possible credit problems
of borrowers caused management to have serious doubts as to the ability of
the borrower to comply with present loan repayment terms.
LOAN LOSS RESERVE ANALYSIS
The following table sets forth an analysis of the Company's allowance for
possible loan losses:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $1,424 $1,379 $1,520 $1,581 $1,539
Charge-offs
Consumer 1,615 1,497 903 474 118
Recoveries
Consumer 96 145 118 53 40
------ ------ ------ ------ ------
Net charge-offs 1,519 1,352 785 421 78
Additions charged to operations 4,072 1,397 644 360 120
------ ------ ------ ------ ------
Balance at end of period $3,977 $1,424 $1,379 $1,520 $1,581
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Ratio of net charge-offs during the
period to average loans outstanding
during the period 0.42% 0.39% 0.20% 0.15% 0.03%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Ratio of allowance to non-performing loans 3.05x 1.66x 2.02x 7.60x 3.77x
------ ------ ------ ------ ------
------ ------ ------ ------ ------
</TABLE>
Because some loans may not be repaid in full, an allowance for possible loan
losses is recorded. Increases to the allowance are recorded by a provision
for possible loan losses charged to expense. Estimating the risk of the loss
and the amount of loss on any loan is necessarily subjective. Accordingly,
the allowance is maintained by management at a level considered adequate to
cover possible losses that are currently anticipated based on past loss
experience, general economic conditions, information about specific borrower
situations including their financial position and collateral values, and
other factors and estimates which are subject to change over time. While
management may periodically allocate portions of the allowance for specific
problem loan situations, the entire allowance is available for any loan
charge-offs that occur. A loan is charged off against the allowance by
management as a loss when deemed uncollectible, although collection efforts
continue and future recoveries may occur.
- -------------------------------------------------------------------------------
18
<PAGE>
The distribution of the Company's allowance for possible losses on loans at
the dates indicated is summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------- -------------------- ------------------- -------------------- -------------------
Percent Percent Percent Percent Percent
of of of of of
Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans
for in Each for in Each for in Each for in Each for in Each
Possible Category Possible Category Possible Category Possible Category Possible Category
Losses to Losses to Losses to Losses to Losses to
on Total on Total on Total on Total on Total
Loans Loans Loans Loans Loans Loans Loans Loans Loans Loans
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One-to-four family loans $ 100 61.76% $ 250 74.21% $ 600 83.10% $1,100 85.22% $1,100 88.59%
Commercial and commercial
real estate 2,256 22.70 285 9.03 44 .66 - - - -
Consumer loans 1,621 15.54 889 16.76 735 16.24 420 14.78 481 11.41
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total $3,977 100.00% $1,424 100.00% $1,379 100.00% $1,520 100.00% $1,581 100.00%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
</TABLE>
Note: In 1997, 1996, and 1995, management made a decision to re-allocate
$150,000, $350,000, and $500,000 respectively, to the Allowance on Consumer
Loans from the Allowance on One-to-Four Family Loans, as no losses were
realized on this portfolio
Management regularly conducts a review of its loan portfolio, write-off
experience and adequacy of allowance to maintain the allowance at a level
management feels is adequate.
- -------------------------------------------------------------------------------
19
<PAGE>
INVESTMENT ACTIVITIES
As a part of its asset/liability management strategy, the Company invests in
high quality short- and medium-term investments, including interest-bearing
deposits and U.S. government and agency securities and, to a lesser extent,
municipal bonds and marketable equity securities.
The following table sets forth the composition of the Company's investment
portfolio at the dates indicated. All items in the table are included at fair
value:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------
1997 1996 1995
------------------ ----------------- -------------------
Fair % of Fair % of Fair % of
Value Total Value Total Value Total
-------- ------ -------- ------ -------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 11,013 6.71% $ 14,998 8.68% $ 5,995 2.35%
U.S. government agency 19,991 12.18 34,674 20.06 36,262 14.20
Marketable equity securities 408 0.25 3,741 2.16 3,970 1.55
Municipal bonds 4,428 2.70 140 .08 186 .07
Corporate bond - - 198 0.11 - -
FHLMC mortgage-backed
and related 58,000 35.33 86,761 50.19 152,767 59.81
GNMA mortgage-backed
and related 4,594 2.80 5,008 2.90 9,733 3.81
FNMA mortgage-backed
and related 57,513 35.03 17,533 10.14 27,056 10.59
CMO mortgage-related 646 0.39 2,633 1.52 14,614 5.73
-------- ------ -------- ------ -------- ------
Subtotal 156,593 95.39 165,686 95.84 250,583 98.11
FRB stock 469 .29 - - - -
FHLB stock 7,110 4.32 7,190 4.16 4,835 1.89
-------- ------ -------- ------ -------- ------
Total securities
and stock $164,172 100.00% $172,876 100.00% $255,418 100.00%
-------- ------ -------- ------ -------- ------
-------- ------ -------- ------ -------- ------
Average remaining life
of non-mortgage-backed
securities 2.45 years 6.16 years 6.89 years
</TABLE>
The composition and contractual maturities of the securities portfolio at
December 31, 1997, excluding Federal Reserve Bank (FRB) of Chicago, FHLB of
Chicago stock and equity securities, is indicated in the following table.
<TABLE>
<CAPTION>
Due In
--------------------------------------------
Less than 1 to 5 5 to 10 Over 10 Total
1 Year Years Years Years Securities
--------- ------- ------- ------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
U.S. Treasury $11,013 $ - $ - $ - $11,013
U.S. government agency - 19,991 - - 19,991
Municipal bonds 973 3,455 - - 4,428
------- ------- ------- ------- -------
Total securities $11,986 $23,446 $ - $ - $35,432
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Weighted average yield 6.18% 6.42% -% -% 6.33%
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
- -------------------------------------------------------------------------------
20
<PAGE>
SOURCES OF FUNDS
General
Deposit accounts have traditionally been the principal source of the Company's
funds for use in lending and for other general business purposes. In addition
to deposits, the Company derives funds from borrowings, loan repayments and cash
flows generated from operations. Scheduled loan payments are a relatively
stable source of funds, while loan prepayments and deposit flows are greatly
influenced by general interest rates, economic conditions, competition and the
restructuring occurring in the banking industry. Over the past two years, an
additional source of funds has been the securitization of loans which are then
classified as securities. The Bank has then sold some of the securities to meet
liquidity needs in the payment of deposit withdrawals or the funding of
commercial related loan growth. During 1998, additional securitizations are
not expected to occur.
The Company faces substantial competition in attracting deposits from other
savings institutions, commercial banks, securities firms, money market and
mutual funds, credit unions and other investment vehicles. The ability of the
Company to attract and retain deposits depends on its ability to provide an
investment opportunity that satisfies the requirements of investors as to rate
of return, liquidity, risk and other factors. The Company competes for these
deposits by offering a variety of deposit accounts at competitive rates,
convenient business hours and a customer oriented staff.
The primary source of borrowing has been the FHLB of Chicago. The Company has
regularly used this as an alternative source of funding. These funds usually
provide a cheaper source of borrowing on both a fixed rate and floating rate
basis. At December 31, 1997, the Company had outstanding borrowings of
$135,000,000 at the FHLB of Chicago. Two additional non-deposit sources of
funds which the Company has used during 1997 are the Treasury Tax and Loan
("T T & L") Option Account and the Retail Repurchase Agreement. The T T & L
Account enables the U. S. Treasury to keep tax dollars with the Company at a
floating interest rate, and the Retail Repurchase Agreement allows customers
to lend the Company money which is collateralized by a security that the Bank
owns.
DEPOSITS
The Company attracts both short-term and long-term deposits from the Company's
primary market area by offering a wide assortment of accounts and rates. The
Company offers checking accounts (both interest bearing and non-interest
bearing), Preferred and regular money market, savings accounts, fixed interest
rate certificates of deposits with varying maturities, and individual retirement
accounts.
Deposit account terms vary, according to the minimum balance required, the time
period the funds must remain on deposit and the interest rate, among other
factors. In March 1995, the Company offered for one day, a certificate
promotion in conjunction with the grand opening of its new Schaumburg location.
Approximately $69 million was deposited, at a rate of 7.80%. These certificates
matured in September 1996, and concurrently, the Company offered a new Preferred
Money Market product. The product has been successful, with a rate that is
competitive, but significantly lower than 7.80%, which helped the Company's net
interest margin to improve during the last quarter of 1996 and throughout 1997.
In setting rates, the Company regularly evaluates (i) its investment and lending
opportunities, (ii) its internal costs of funds, (iii) the rates offered by
competing institutions and (iv) its liquidity position. In order to decrease
the volatility of its deposits, the Company imposes penalties on early
withdrawal on its certificates of deposit. The Company does not have any
brokered deposits and has no present intention to accept or solicit such
deposits.
- -------------------------------------------------------------------------------
21
<PAGE>
The Company believes that non-certificate accounts can provide relatively low
cost funds and accordingly, the Company introduces promotions to attract new
checking accounts, and has begun offering new services to make these accounts
more desirable such as Telephone Access Banking and Debit Card, both of which
have been extensively utilized by the customers.
The following table sets forth the deposit flows experienced by the Company
during the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Deposit balance at January 1 $ 402,090 $ 454,656 $ 409,640
Deposits 594,060 646,685 651,760
Withdrawals (641,008) (721,083) (627,748)
Interest credited 16,610 21,832 21,004
--------- --------- ---------
Deposit balance at December 31 $ 371,752 $ 402,090 $ 454,656
--------- --------- ---------
--------- --------- ---------
Net increase (decrease) $ (30,338) $ (52,566) $ 45,016
--------- --------- ---------
--------- --------- ---------
Percent increase (decrease) (7.55)% (11.56)% 10.99%
--------- --------- ---------
--------- --------- ---------
</TABLE>
- -------------------------------------------------------------------------------
22
<PAGE>
The following table sets forth the dollar amount of deposits in the various
types of deposit programs offered by the Company for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------
1997 1996 1995
----------------- ----------------- -----------------
% of % of % of
Amount Total Amount Total Amount Total
-------- ------ -------- ------ -------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Checking accounts $ 35,265 9.49% $ 30,556 7.60% $ 28,845 6.34%
Money market accounts 57,158 15.37 39,446 9.81 11,302 2.49
Saving accounts 59,562 16.02 66,218 16.47 69,202 15.22
-------- ------ -------- ------ -------- ------
Total non-certificates 151,985 40.88 136,220 33.88 109,349 24.05
Certificates of deposit(1)
0.00 - 2.99% 27 .01 185 .05 902 .20
3.00 - 3.99% 18 .01 172 .04 676 .15
4.00 - 4.99% 5,663 1.52 24,138 6.00 20,403 4.49
5.00 - 5.99% 149,140 40.12 138,641 34.48 97,816 21.51
6.00 - 6.99% 43,665 11.75 69,172 17.20 112,094 24.65
7.00 - 7.99% 14,379 3.86 27,056 6.73 111,782 24.59
8.00 - 8.99% 3,218 .87 5,418 1.35 1,586 .35
9.00 - 9.99% 3,657 .98 1,088 .27 48 .01
-------- ------ -------- ------ -------- ------
Total certificates 219,767 59.12 265,870 66.12 345,307 75.95
-------- ------ -------- ------ -------- ------
Total deposits $371,752 100.00% $402,090 100.00% $454,656 100.00%
-------- ------ -------- ------ -------- ------
-------- ------ -------- ------ -------- ------
</TABLE>
(1) Certificates of deposit include approximately $8,370,000, $15,786,000,
and $17,262,000 at December 31, 1997, 1996, and 1995, respectively, which
bear interest at increasing rates over the life of the deposit term. These
certificates are included in the table at their current rate, while the
Company records interest expense on these certificates on a level-yield
basis over the contractual deposit term.
- -------------------------------------------------------------------------------
23
<PAGE>
The following table shows rate and maturity information for the Company's
certificates of deposit as of December 31, 1997. Approximately $8.4 million of
the Company's certificates of deposit bear interest at increasing rates over the
life of their contractual maturity term. The Company records interest expense
on these certificates on a level-yield basis over their contractual maturity
term. The table below details the scheduled maturities of certificates of
deposit as follows:
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002 Thereafter Total
-------- ------- ------- ------ ------ ---------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
0.00 - 2.99% $ 27 $ - $ - $ - $ - $ - $ 27
3.00 - 3.99% 18 - - - - - 18
4.00 - 4.99% 3,080 2,090 71 315 103 4 5,663
5.00 - 5.99% 130,380 9,984 6,889 1,244 599 44 149,140
6.00 - 6.99% 13,739 6,867 19,384 942 2,733 - 43,665
7.00 - 7.99% 6,852 687 3,862 2 2,976 - 14,379
8.00 - 8.99% 3,218 - - - - - 3,218
9.00 - 9.99% 3,536 108 13 - - - 3,657
-------- ------- ------- ------ ------ --- --------
$160,850 $19,736 $30,219 $2,503 $6,411 $48 $219,767
-------- ------- ------- ------ ------ --- --------
-------- ------- ------- ------ ------ --- --------
</TABLE>
The following table indicates the amount of the Company's certificates of
deposit by time remaining until maturity as of December 31, 1997.
<TABLE>
<CAPTION>
Maturity
--------------------------------------
3 Months 3 to 6 6 to 12 Over 12
or Less Months Months Months Total
-------- ------- ------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Certificates of deposit less than $100,000 $63,074 $33,727 $41,701 $46,228 $184,730
Certificates of deposit of $100,000 or more(1) 9,873 6,456 6,019 12,689 35,037
------- ------- ------- ------- --------
Total certificates of deposit $72,947 $40,183 $47,720 $58,917 $219,767
------- ------- ------- ------- --------
------- ------- ------- ------- --------
</TABLE>
(1) Includes "Jumbo" certificates of $9,860,000.
"Jumbo" certificates are a deposit product for deposits of over $100,000 which
carry a rate and term negotiated between the Bank and the depositor at the time
of issuance. Not all certificates of deposit with balances in excess of
$100,000 are "Jumbos".
For additional information regarding the composition of the Company's deposits,
see Note 7 of the "Notes to the Consolidated Financial Statements".
- -------------------------------------------------------------------------------
24
<PAGE>
BORROWINGS
The Company's other available sources of funds include advances from the FHLB of
Chicago and collateralized borrowings. As a member of the FHLB of Chicago, the
Company is required to own capital stock in the FHLB of Chicago and is
authorized to apply for advances from the FHLB of Chicago. Each FHLB credit
program has its own interest rate, which may be fixed or variable, and range of
maturities. The FHLB of Chicago may prescribe the acceptable uses for these
advances, as well as limitations on the size of the advances and repayment
provisions. The Company had $135 million of FHLB advances outstanding at
December 31, 1997, secured by residential mortgage loans and a $25 million FNMA
mortgage backed security. Additional information regarding borrowings can be
obtained in Note 8 of the "Notes to the Consolidated Financial Statements".
The following table sets forth the maximum month-end balance, average balance,
and weighted average rates of borrowings for the periods indicated:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Maximum month-end balances
FHLB advances $ 135,000 $ 135,600 $ 89,500
Securities sold under repurchase agreement 14,292 16,162 462
Other 10,000 11,187 10,358
Average balances
FHLB advances 71,956 89,630 46,033
Securities sold under repurchase agreement 12,781 11,683 142
Other 3,497 6,630 1,612
Weighted average rates
FHLB advances 5.99% 5.89% 6.25%
Securities sold under repurchase agreement 5.22 5.25 5.70
Other 5.30 5.40 5.83
</TABLE>
- -------------------------------------------------------------------------------
25
<PAGE>
SUPERVISION AND REGULATION
GENERAL
Financial institutions and their holding companies are extensively regulated
under federal and state law. As a result, the growth and earnings performance
of the Company can be affected not only by management decisions and general
economic conditions, but also by the requirements of applicable state and
federal statutes and regulations and policies of the OCC, the FRB, the FDIC, the
Internal Revenue Service and state taxing authorities, and the Securities and
Exchange Commission (the "SEC"). The effect of such statutes, regulations and
policies can be significant, and cannot be predicted with a high degree of
certainty.
Federal and state laws and regulations generally applicable to financial
institutions, such as the Company and its subsidiaries, regulate, among other
things, the scope of business, investments, reserves against deposits, capital
levels relative to operations, the nature and amount of collateral for loans,
the establishment of branches, mergers, consolidations and dividends. The system
of supervision and regulation applicable to the Company and its subsidiaries
establishes a comprehensive framework for their respective operations and is
intended primarily for the protection of the FDIC's deposit insurance funds and
the depositors, rather than the shareholders, of financial institutions.
The following references to material statutes and regulations affecting the
Company and its subsidiaries are brief summaries thereof and do not purport to
be complete, and are qualified in their entirety by reference to such statutes
and regulations. Any change in applicable law or regulations may have a
material effect on the business of the Company and its subsidiaries.
RECENT REGULATORY DEVELOPMENTS
PENDING LEGISLATION
Legislation is pending in the Congress that would allow bank holding companies
to engage in a wider range of non-banking activities, including greater
authority to engage in securities and insurance activities. The expanded powers
generally would be available to a bank holding company only if the bank holding
company and its bank subsidiaries remain well-capitalized and well-managed.
Additionally, the pending legislation would eliminate the federal thrift charter
and merge the FDIC's Bank Insurance Fund ("BIF") and Savings Association
Insurance Fund ("SAIF"). At this time, the Company is unable to predict whether
the proposed legislation will be enacted and, therefore, is unable to predict
the impact such legislation may have on the operations of the Company and the
Bank.
THE COMPANY
GENERAL
The Company, as the sole shareholder of the Bank, is a bank holding company. As
a bank holding company, the Company is registered with, and is subject to
regulation by, the FRB under the BHCA. In accordance with FRB policy, the
Company is expected to act as a source of financial strength to the Bank and to
commit resources to support the Bank in circumstances where the Company might
not do so absent such policy. Under the BHCA, the Company is subject to
periodic examination by the FRB and is required to file the FRB periodic reports
of its operations and such additional information as the FRB may require.
INVESTMENTS AND ACTIVITIES
Under the BHCA, a bank holding company must obtain FRB approval before: (i)
acquiring, directly or indirectly, ownership or control of any voting shares of
another bank or bank holding company if, after such acquisition, it would own or
control more than 5% of such shares (unless it already owns or controls the
- -------------------------------------------------------------------------------
26
<PAGE>
majority or such shares); (ii) acquiring all or substantially all of the assets
of another bank; or (iii) merging or consolidating with another bank holding
company. Subject to certain conditions (including certain deposit concentration
limits established by the BHCA), the FRB may allow a bank holding company to
acquire banks located in any state of the United States without regard to
whether the acquisition is prohibited by the law of the state in which the
target bank is located. In approving interstate acquisitions, however, the FRB
is required to give effect to applicable state law limitations on the aggregate
amount of deposits that may be held by the acquiring bank holding company and
its insured depository institution affiliates in the state in which the target
bank is located (provided that those limits do not discriminate against
out-of-state depository institutions or their holding companies) or which
require that the target bank have been in existence for a minimum period of
time (not to exceed five years) before being acquired by an out-of-state bank
holding company.
The BHCA also prohibits, with certain exceptions, the Company from acquiring
direct or indirect ownership or control of more than 5% of the voting shares of
any company which is not a bank and from engaging in any business other than
that of banking, managing and controlling banks or furnishing services to banks
and their subsidiaries. The principal exception to this prohibition allows bank
holding companies to engage in, and to own shares of companies engaged in,
certain businesses found by the FRB to be "so closely related to banking... as
to be a proper incident thereto." Under current regulations of the FRB, the
Company and its non-bank subsidiaries are permitted to engage in, among other
activities, such banking-related businesses as the operation of a thrift, sales
and consumer finance, equipment leasing, the operation of a computer service
bureau, including software development, and mortgage banking and brokerage. The
BHCA generally does not place territorial restrictions on the domestic
activities of non-bank subsidiaries of bank holding companies.
Federal law also prohibits acquisition of "control" of a bank, such as the Bank,
or bank holding company, such as the Company, without prior notice to certain
federal bank regulators. "Control" is defined in certain cases as acquisition
of 10% of the outstanding shares of a bank or bank holding company.
CAPITAL REQUIREMENTS
Bank holding companies are required to maintain minimum levels of capital in
accordance with FRB capital adequacy guidelines. If capital falls below minimum
guideline levels, a bank holding company, among other things, may be denied
approval to acquire or establish additional banks or non-bank businesses.
The FRB's capital guidelines establish the following minimum regulatory capital
requirements for bank holding companies: a risk-based requirement expressed as a
percentage of total risk weighted assets, and a leverage requirement expressed
as percentage of total assets. The risk-based requirement consists of a minimum
ratio of total capital to total risk-weighted assets of 8%, at least one-half of
which must be Tier 1 capital. The leverage requirement consists of a minimum
ratio of Tier 1 capital to total assets of 3% for the most highly rated
companies, with minimum requirements of 4% to 5% for all others. For purposes
of these capital standards, Tier 1 capital consists primarily of permanent
stockholders' equity less intangible assets (other than certain mortgage
servicing rights and purchased credit card relationships) and total capital
means Tier 1 capital plus certain other debt and equity instruments which do not
qualify as Tier 1 capital and a portion of the company's allowance for loan and
lease losses.
The risk-based and leverage standards described above are minimum requirements,
and higher capital levels will be required if warranted by the particular
circumstances or risk profiles of individual banking organizations. For
example, the FRB's capital guidelines contemplate that additional capital may be
required to take adequate account of, among other things, interest rate risk, or
the risks posed by concentrations of credit, nontraditional activities or
securities trading activities. Further, any banking organization experiencing
or anticipating significant growth would be expected to maintain capital ratios,
including tangible capital positions (i.e., Tier 1 capital less all intangible
assets), well above the minimum levels.
- -------------------------------------------------------------------------------
27
<PAGE>
As of December 31, 1997, the Company had regulatory capital, calculated on a
consolidated basis, in excess of the FRB's minimum requirements, with a
risk-based capital ratio of 15.42% and a leverage ratio of 7.7%.
DIVIDENDS
The FRB has issued a policy statement with regard to the payment of cash
dividends by bank holding companies. In the policy statement, the FRB expressed
its view that a bank holding company should not pay cash dividends which exceed
its net income or which can only be funded in ways that weaken the bank holding
company's financial health, such as by borrowing. Additionally, the FRB
possesses enforcement powers over bank holding companies and their non-bank
subsidiaries to prevent or remedy actions that represent unsafe or unsound
practices or violations of applicable statutes and regulations. Among these
powers is the ability to proscribe the payment of dividends by banks and bank
holding companies. In addition to the restrictions on dividends that may be
imposed by the FRB, the General Corporation Law (the "DGCL") allows the Company
to pay dividends only out of its surplus (as defined and computed in accordance
with the provisions of the DGCL), or if the Company has no such surplus, out of
its net profits for the fiscal year in which the dividend is declared and/or the
preceding fiscal year.
FEDERAL SECURITIES REGULATION
The Company's common stock is registered with the SEC under the Securities Act
of 1933, as amended, and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Consequently, the Company is subject to the information, proxy
solicitation, insider trading and other restrictions and requirements of the SEC
under the Exchange Act.
THE BANK
GENERAL
The Bank is a national bank, chartered by the OCC under the National Bank Act.
The deposit accounts of the Bank are insured by the SAIF of the FDIC, and the
Bank is a member of the Federal Reserve System. As a SAIF-insured national
bank, the Bank is subject to the examination, supervision, reporting and
enforcement requirements of the OCC, as the chartering authority for national
banks, and the FDIC, as administrator of the SAIF. The Bank is also a member of
the Federal Home Loan Bank System, which provides a central credit facility
primarily for member institutions.
DEPOSIT INSURANCE
As an FDIC-insured institution, the Bank is required to pay deposit insurance
premium assessments to the FDIC. The FDIC has adopted a risk-based assessment
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their respective
levels of capital and results of supervisory evaluations. Institutions
classified as well-capitalized (as defined by the FDIC) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (as defined by the FDIC) and considered of substantial supervisory
concern pay the highest premium. Risk classification of all insured
institutions is made by the FDIC for each semi-annual assessment period.
During the year ended December 31, 1997, SAIF assessments ranged from 0% of
deposits to 0.27% of deposits. For the semi-annual assessment period beginning
January 1, 1998, SAIF assessment rates will continue to range from 0% of
deposits to 0.27% of deposits.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution has
engaged or is engaging in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, order, or any condition imposed in writing by, or written agreement
with, the FDIC. The FDIC may also suspend deposit insurance temporarily during
the hearing process for a permanent termination of insurance of the institution
if
- -------------------------------------------------------------------------------
28
<PAGE>
the institution has no tangible capital. Management of the Company is not
aware of any activity, or condition that could result in termination of the
deposit insurance of the Bank.
FICO ASSESSMENTS
Since 1987, a portion of the deposit insurance assessments paid by SAIF members
has been used to cover interest payments due on the outstanding obligations of
the FICO, the entity created to finance the recapitalization of the Federal
Savings and Loan Insurance Corporation, the SAIF's predecessor insurance
fund. Pursuant to federal legislation enacted September 30, 1996, commencing
January 1, 1997 both SAIF members and BIF members became subject to
assessments to cover the interest payments on outstanding FICO obligations.
Such FICO assessments are in addition to amounts assessed by the FDIC for
deposit insurance. Until January 1, 2000, the FICO assessments made against
BIF members may not exceed 20% of the amount of the FICO assessments made
against SAIF members. Between January 1, 2000 and the maturity of the
outstanding FICO obligations in 2019, BIF members and SAIF members will share
the cost of the interest on the FICO bonds on a pro rata basis. During the
year ended December 31, 1997, the FICO assessment rate for SAIF members was
approximately 0.063% of deposits while the FICO assessment rate for BIF members
was approximately 0.013% of deposits. During the year ended December 31, 1997,
the Bank paid FICO assessments totaling $202,608.
OCC ASSESSMENTS
All national banks are required to pay supervisory fees to the OCC to fund the
operations of the OCC. The amount of such supervisory fees is based upon each
institution's total assets, including consolidated subsidiaries as reported to
the OCC.
CAPITAL REQUIREMENTS
The OCC has established the following minimum capital standards for national
banks, such as the Bank: a leverage requirement consisting of a minimum ratio of
Tier 1 capital to total assets of 3% for the most highly-rated banks with
minimum requirements of 4% to 5% for all others, and a risk-based capital
requirement consisting of a minimum ratio of total capital to total
risk-weighted assets of 8%, at least one-half of which must be Tier 1
capital. For purposes of these capital standards, Tier 1 capital and total
capital consist of substantially the same components as Tier 1 capital and
total capital under the FRB's capital guidelines for bank holding companies
(see "--The Company--Capital Requirements").
The capital requirements described above are minimum requirements. Higher
capital levels will be required if warranted by the particular circumstances or
risk profiles of individual institutions. For example, the regulations of the
OCC provide that additional capital may be required to take adequate account of,
among other things, interest rate risk or the risks posed by concentrations of
credit, nontraditional activities or securities trading activities.
During the year ended December 31, 1997, the Bank was not required by the OCC to
increase its capital to an amount in excess of the minimum regulatory
requirements. As of December 31, 1997, the Bank exceeded its minimum regulatory
capital requirements with a leverage ratio of 7.6% and a risk-based capital
ratio of 14.0%.
Federal law provides the federal banking regulators, with broad power to take
prompt corrective action to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "well-capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Depending upon the capital category to which an institution
is assigned, the regulators' corrective powers include: requiring the
submission of a capital restoration plan; placing limits on asset growth and
restrictions on activities; requiring the submission of a capital restoration
plan; placing limits on asset growth and restrictions on activities; requiring
the institution to issue additional capital stock (including additional voting
stock) or to be acquired; restricting transactions with affiliates; restricting
the interest rate the institution may pay on deposits; ordering a new
- -------------------------------------------------------------------------------
29
<PAGE>
election of directors of the institution; requiring that senior executive
officers or directors be dismissed; prohibiting the institution from
accepting deposits from correspondent banks; requiring the institution to
divest certain subsidiaries; prohibiting the payment of principal or interest
on subordinated debt; and ultimately, appointing a receiver for the
institution.
DIVIDENDS
The National Bank Act imposes limitations on the amount of dividends that may be
paid by a national bank, such as the Bank. Generally, a national bank may pay
dividends out of its undivided profits, in such amounts and at such times as the
bank's board of directors deems prudent. Without prior OCC approval, however, a
national bank may not pay dividends in any calendar year which, in the
aggregate, exceed the bank's year-to-date net income plus the bank's adjusted
retained net income for the two preceding years.
The payment of dividends by any financial institution or its holding company is
affected by the requirement to maintain adequate capital pursuant to applicable
capital adequacy guidelines and regulations, and a financial institution
generally is prohibited from paying any dividends if, following payment thereof,
the institution would be undercapitalized. As described above, the Bank
exceeded its minimum capital requirements under applicable guidelines as of
December 31, 1997. Further, the Bank may not pay dividends in an amount which
would reduce its capital below the amount required for the liquidation account
established in connection with the Bank's conversion from the mutual to the
stock form of ownership in 1992. As of December 31, 1997 approximately $20
million was available to be paid as dividends to the Company by the Bank.
Notwithstanding the availability of funds for dividends, however, the OCC may
prohibit the payment of any dividends by the Bank if the OCC determines such
payment would constitute an unsafe or unsound practice.
INSIDER TRANSACTIONS
The Bank is subject to certain restrictions imposed by the Federal Reserve Act
on extensions of credit to the Company and its subsidiaries, on investments in
the stock or other securities of the Company and its subsidiaries and the
acceptance of the stock or other securities of the Company or its subsidiaries
as collateral for loans. Certain limitations and reporting requirements are
also placed on extensions of credit by the Bank to its directors and officers,
to directors and officers of the Company and its subsidiaries, to principal
stockholders of the Company, and to "related interests" of such directors,
officers and principal stockholders. In addition, federal law and regulations
may affect the terms upon which any person becoming a director or officer of the
Company or one of its subsidiaries or a principal stockholder of the Company may
obtain credit from banks with which the Bank maintains a correspondent
relationship.
SAFETY AND SOUNDNESS STANDARDS
The federal banking agencies have adopted guidelines which establish operational
and managerial standards to promote the safety and soundness of federally
insured depository institutions. The guidelines set forth standards for
internal controls, information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth,
compensation, fees and benefits, asset quality and earnings. In general, the
guidelines prescribe the goals to be achieved in each area, and each institution
will be responsible for establishing its own procedures to achieve those goals.
If an institution fails to comply with any of the standards set forth in the
guidelines, the institution's primary federal regulator may require the
institution to submit a plan for achieving and maintaining compliance. The
preamble to the guidelines states that the agencies expect to require a
compliance plan from an institution whose failure to meet one or more of the
guidelines is of such severity that it could threaten the safety and soundness
of the institution. Failure to submit an acceptable plan, or failure to comply
with a plan that has been accepted by the appropriate federal regulator, would
constitute grounds for further enforcement action.
- -------------------------------------------------------------------------------
30
<PAGE>
BRANCHING AUTHORITY
National banks headquarters in Illinois, such as the Bank, have the same
branching rights in Illinois as banks chartered under Illinois law. Illinois
law grants Illinois-chartered banks the authority to establish branches anywhere
in the State of Illinois, subject to receipt of all required regulatory
approvals.
Effective June 1, 1997 (or earlier if expressly authorized by applicable state
law), the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Riegle-Neal Act") allows banks to establish interstate branch networks
through acquisitions of other banks, subject to certain conditions, including
certain limitations on the aggregate amount of deposits that may be held by the
surviving bank and all of its insured depository institution affiliates. The
establishment of de novo interstate branches or the acquisition of individual
branches of a bank in another state (rather than the acquisition of an
out-of-state bank in its entirety) is allowed by the Riegle-Neal Act only if
specifically authorized by state law. The legislation allows individual
states to "opt-out" of certain provisions of the Riegle-Neal Act by enacting
appropriate legislation prior to June 1, 1997. Illinois has enacted
legislation permitting interstate mergers beginning on June 1, 1997, subject
to certain conditions, including a prohibition against interstate mergers
unless any Illinois bank involved has been in existence and continuous
operation for more than five years.
FEDERAL RESERVE SYSTEM
FRB regulations, as presently in effect, require depository institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts), as follows: for transaction
accounts aggregating $47.8 million or less, the reserve requirement in 3% of
total transaction accounts; and for transactions accounts aggregating in excess
of $47.8 million, the reserve requirement is $1,434,000 plus 10% of the
aggregate amount of total transaction accounts in excess of $47.8 million. The
first $4.7 million of otherwise reservable balances are exempted from the
reserve requirements. These reserve requirements are subject to annual
adjustment by the FRB. The Bank is in compliance with the foregoing
requirements.
EMPLOYEES
At December 31, 1997, the Company had a total of 119 full-time employees and 39
part-time employees. None of the Company's employees are represented by any
collective bargaining group.
- -------------------------------------------------------------------------------
31
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company, each of whom is currently an executive
officer of the Bank, are identified below. The executive officers of the
Company are elected annually by the Company's Board of Directors. The Bank has
entered into change of control agreements with the executive officers named
below.
<TABLE>
<CAPTION>
Position With
Name Holding Company Position with Bank
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Larry G. Gillie President and Chief Executive President and Chief
Officer Executive Officer
R. Kennedy Alger Executive Vice-President Executive Vice President and
Senior Lending Officer
Paul A. Larsen Senior Vice-President, Treasurer Senior Vice President,
Chief Financial Officer, and Treasurer, Chief Financial
Corporate Secretary Officer and Corporate Sec'y
Allen J. Bishop Senior Vice-President Senior Vice President, Marketing
Lawrence J. Schmidt Senior Vice-President Senior Vice President, Administrative
Joseph H. Tillotson Senior Vice-President Senior Vice President, Retail Banking
Vernon J. Wiggenhauser Senior Vice-President Senior Vice President, Operations
</TABLE>
Larry G. Gillie, age 57, became the Company's President and Chief Executive
Officer on March 1, 1994. Until that time, he had been the Company's
Executive Vice President since its formation. He also became the President
and Chief Executive Officer of the Bank on March 1, 1994, after having served
as the Executive Vice President of the Bank since January 17, 1990. Mr.
Gillie joined the Bank in 1987. Prior to joining the Bank, Mr. Gillie was the
President of Northbrook Bank, Northbrook, Illinois, from 1979 to 1986.
R. Kennedy Alger, age 51, joined the Company and the Bank in August 1997, as
Executive Vice-President and Senior Loan Officer. Mr. Alger has over 28
years of Commercial Banking experience, serving as either a Senior Loan
Officer or Community Bank President for the last 20 years.
Paul A. Larsen, age 48, joined the Company in March 1995 as Senior
Vice-President, Chief Financial Officer and Treasurer, and serves in a
similar capacity for the Bank. Mr. Larsen has over 25 years of financial
management and treasury operations experience within the Commercial Banking
environment.
Allen J. Bishop, age 50, was named Senior Vice-President of the Company and
the Bank in March 1995. He joined the Bank in August 1992 as Marketing
Manager. Mr. Bishop has over 23 years experience in bank marketing and
advertising.
Lawrence J. Schmidt, age 45, joined the Company and the Bank in November 1995
as Senior Vice-President, Administrative Manager. Mr. Schmidt has 20 years
experience in a commercial bank environment, with emphasis on commercial
lending, loan review and strategic planning.
Joseph H. Tillotson, age 53, was named a Senior Vice-President of the Company
and the Bank in March 1995. He joined the Bank in March 1993 as Lending
Manager. Since June 1997, Mr. Tillotson has been
- -------------------------------------------------------------------------------
32
<PAGE>
managing all of Retail Banking. Mr. Tillotson has over 27 years of lending
and operations experience in banking.
Vernon J. Wiggenhauser, age 54, joined the Company and the Bank in June 1997
as Senior Vice-President of Bank Operations. Mr. Wiggenhauser has 26 years
experience in Commercial Banking operations and financial control
administration.
ITEM 2. PROPERTIES
The Company owns the building and land for its headquarters which is located
at 749 Lee Street, Des Plaines, Illinois, and which opened in 1954. At
December 31, 1997, this property had 19,575 square feet and a net book value
of approximately $2.8 million. The Company also owns the land for its
employee parking lot located at 761 Graceland Street, Des Plaines, Illinois.
In March, 1994, the Company acquired the Arlington Heights branch of the
former Irving Federal Bank, F.S.B. from the Resolution Trust Corporation.
The building contains approximately 14,260 square feet. At December 31,
1997, the net book value of the land and the building was approximately $2.6
million.
In March of 1995, the Company opened its new branch office in Schaumburg,
Illinois. The office has approximately 9,800 square feet of space and is
situated on a 1.6 acre parcel. At December 31, 1997 the net book value of
the land and the building was approximately $2.8 million.
On February 12, 1998, the Company entered into a lease arrangement for 2,100
square feet at 1771 North Richmond Road, McHenry, Illinois. The term of the
lease is five years with two additional five year options. The location
houses the Mortgage Center.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved as plaintiff or defendant in various legal actions
arising in the normal course of its business. While the ultimate outcome of
these various legal proceedings cannot be predicted with certainty, it is the
opinion of management that the resolution of these legal actions should not
have a material effect on the Company's consolidated financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the solicitation
of proxies or otherwise, during the quarter ended December 31, 1997.
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33
<PAGE>
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SECURITY HOLDER MATTERS
As of March 6, 1998, there were approximately 640 holders of record of CoVest
Bancshares, Inc. Common Stock, and an estimated 1,700 holders of its stock in
"street name."
The Common Stock of CoVest Bancshares, Inc. is traded on the National
Association of Securities Dealers Automated Quotation (Nasdaq) National
Market System under the symbol COVB.
The table below shows the reported high and low sales prices and dividends
(split adjusted) during the periods indicated. The Common Stock began
trading on June 30, 1992.
<TABLE>
<CAPTION>
1997 Dividend High Low 1996 Dividend High Low
<S> <C> <C> <C> <C> <C> <C> <C>
1st Qtr. $.0667 $12.17 $11.17 1st Qtr. $.0444 $ 9.78 $ 9.33
2nd Qtr. $.0667 $12.67 $11.33 2nd Qtr. $.0667 $11.75 $ 9.61
3rd Qtr. $.0667 $16.17 $12.25 3rd Qtr. $.0667 $11.67 $10.83
4th Qtr. $.08 $18.00 $16.00 4th Qtr. $.0667 $11.67 $11.00
Year end closing price = $16.50 Year end closing price = $11.50
</TABLE>
The Annual Meeting of Stockholders of CoVest Bancshares, Inc. will be held at
10:00 a.m. on Tuesday, April 28, 1998 at the following location:
Casa Royale
783 Lee Street
Des Plaines, Illinois 60016
Stockholders are welcome to attend.
Investor information is available without charge by writing to Larry G.
Gillie, President, or Paul A. Larsen, Senior Vice President and Treasurer, at
the corporate office:
CoVest Bancshares, Inc.
749 Lee Street
Des Plaines, Illinois 60016
(847) 294-6500
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34
<PAGE>
The following companies make a market in COVB Common Stock:
Stifel Nicolaus & Co., Inc Howe Barnes Investments, Inc.
ABN AMRO Chicago Corporation Herzog, Heine, Geduld, Inc.
Chicago Capital, Inc.
The dividend reinvestment and stock purchase plan offers stockholders an
opportunity to automatically make full or partial dividend reinvestments and
make optional cash purchases between $25 and $5,000 each quarter, with no
commission charges.
Inquiries regarding stock transfer, registration, lost certificates or
changes in name and address should be directed to the stock transfer agent
and registrar by writing:
Harris Trust and Savings Bank
Shareholder Communications Team
P.O. Box A 3504
Chicago, Illinois 60690-3504
(312) 360-5201
Corporate Office: CoVest Bancshares, Inc.
749 Lee Street
Des Plaines, Illinois 60016
(847) 294-6500
Corporate Counsel: Barack, Ferrazzano, Kirschbaum, Perlman & Nagelberg
333 W. Wacker Drive Suite 2700
Chicago, Illinois 60606
Independent Auditor: Crowe, Chizek and Company LLP
One Mid America Plaza Suite 800
Oak Brook, Illinois 60522
Internet address: http://www.covestbanc.com
CoVest Banc Offices:
749 Lee Street
Des Plaines, Illinois 60016
(847) 294-6500
770 W. Dundee Road
Arlington Heights, Illinois 60004
(847) 577-8100
2601 W. Schaumburg Road
Schaumburg, Illinois 60194
(847) 798-2800
1771 N. Richmond Rd.
McHenry, Illinois 60050
(800) 995-6750
- -------------------------------------------------------------------------------
35
<PAGE>
Item 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
December 31, 1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Selected financial condition data
Total assets $582,722 $541,169 $622,500 $523,213 $394,122
Loans receivable (net) 377,509 338,545 331,017 346,960 244,604
Total investments 164,172 172,876 255,418 152,471 138,235
Non-earning assets 17,571 16,911 18,716 17,006 8,479
Deposits 371,752 402,090 454,656 409,640 327,127
Other borrowings 151,956 78,690 97,835 47,000 -
Non-interest bearing liabilities 10,720 10,445 12,332 9,726 6,836
Stockholders' equity(1) 48,294 49,944 57,678 56,847 60,159
Selected operations data
Total interest income 39,364 42,377 40,854 30,749 28,739
Total interest expense 23,914 29,241 26,727 16,314 13,754
Net interest income 15,450 13,136 14,127 14,435 14,985
Provision for possible loan losses 4,072 1,397 644 360 120
-------- -------- -------- -------- --------
Net interest income after provision 11,378 11,739 13,483 14,075 14,865
Total non-interest income 3,672 4,241 1,217 1,020 569
Special SAIF assessment - 3,033 - - -
Total non-interest expense 11,305 10,818 10,722 9,490 7,928
-------- -------- -------- -------- --------
Income before income tax expense 3,745 2,129 3,978 5,605 7,506
Income tax expense 1,135 540 1,367 1,985 2,514
-------- -------- -------- -------- --------
Net income $ 2,610 $ 1,589 $ 2,611 $ 3,620 $ 4,992
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
(1) Under applicable provision of the Internal Revenue Code, the Company
deducted for tax purposes loan loss provisions which exceeded its financial
statement loan loss provisions. Accordingly, retained earnings at December
31, 1997 included approximately $9.3 million for which no liability for
federal taxes has been recorded.
- -------------------------------------------------------------------------------
36
<PAGE>
SELECTED FINANCIAL RATIOS AND OTHER DATA
<TABLE>
<CAPTION>
Year Ended December 31; 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Performance ratios:
Return on assets (ratio of net income to
average total assets) 0.48% 0.26% 0.46% 0.80% 1.29%
Interest rate spread information
Average during year 2.42 1.72 2.08 2.78 3.25
End of year 2.52 2.41 1.86 2.63 2.33
Interest margin 2.94 2.22 2.59 3.28 3.98
Ratio of operating expenses to average
total assets 2.08 2.29 1.90 2.10 2.05
Ratio of net interest income to non-interest
expenses 1.37x 0.95x 1.32x 1.52x 1.89x
Basic earnings per share $0.61 $0.34 $0.51 $0.67 $0.83
Diluted earnings per share 0.58 0.32 0.50 0.65 0.80
Return on stockholders' equity (ratio of
net income to average equity) 5.40% 2.94% 4.67% 6.13% 8.12%
Dividend payout ratio 47.70 82.22 40.30 37.93 91.74
Asset quality ratios:
Non-performing assets to total assets at
end of year 0.22 0.16 0.11 0.04 0.11
Allowance for possible loan losses to
non-performing loans 3.05x 1.66x 2.02x 7.60x 3.77x
Capital ratios:
Stockholders' equity to total assets at
end of year 8.29% 9.23% 9.27% 10.86% 15.26%
Average stockholders' equity to
average assets 8.88 8.92 9.92 13.05 15.95
Ratio of average interest-earning assets to
average interest-bearing liabilities 1.12x 1.10x 1.11x 1.14x 1.20x
Other data
Facilities
Number of full-service offices 3 3 3 2 1
Number of mortgage centers 1 0 0 0 0
</TABLE>
- -------------------------------------------------------------------------------
37
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL OVERVIEW
The Company's assets increased 8% to $582.7 million as of December 31, 1997,
from $ 541.2 million at December 31, 1996. Management of the Company has
undertaken a restructuring of the balance sheet from that of a traditional
thrift to that of a full service commercial bank. Commercial type lending
increased by $55.6 million during 1997. Commercial real estate loans
increased by $35.5 million, followed by increases of $7.1 million in
construction lending, $5.4 million in commercial lending, $4.2 million in
commercial leases and $3.6 million in multi-family lending.
For the year ended December 31, 1997, the Company earned $2.6 million, an
increase from 1996. This increase occurred even after the Company recorded a
$2.4 million provision for loan losses in the fourth quarter of 1997. In
keeping with the restructuring of the balance sheet and the recent conversion
of CoVest Banc from a thrift to a commercial bank, the Company reevaluated
its methodology in providing for possible loan losses. Changes in loan
portfolio mix, rescoring of the credit card loan portfolio, and the recent
levels of loan loss experience were the driving considerations behind the
decision.
STOCK REPURCHASE PROGRAM AND DIVIDENDS
On December 1, 1997, the Company effected a three-for-two stock split. This
is the second stock split declared in the last two years. The regular
dividend rate of $.08 per share post-split was paid to stockholders during
the fourth quarter of 1997. The Company paid regular quarterly dividends
during 1997, with the first three quarters being $.0667 post-split. The
Company has also announced an $.08 per share dividend payable March 31, 1998,
to shareholders of record on March 16, 1998.
The Company announced its 10th stock repurchase plan on January 27, 1997 for
100,000 shares pre-split. This was completed on June 12, 1997. On June 24,
1997, the Company announced its 11th stock repurchase plan, which enabled the
Company to repurchase up to 100,000 pre-split shares in the open market or
through privately negotiated transactions. That repurchase plan was also
completed. The 12th stock repurchase plan was announced on October 28, 1997,
and enables the Company to repurchase up to 150,000 post-split shares in the
open market or through privately negotiated transactions. As of December 31,
1997, 42,075 post-split shares had been repurchased.
GENERAL
On June 30, 1992, the Bank converted from a federally chartered mutual
savings bank to a federally chartered stock savings bank. The Bank issued
all of its common stock to the Company, and concurrently, the Company issued
3,220,000 shares of Common Stock at $10 per share, pre-split, all pursuant to
a plan of conversion (the 'Conversion'). As part of the Conversion, proceeds
were used to purchase the stock of the Bank. In August, 1997 the Bank was
converted to a national bank.
The Company's business activities currently consists of ownership of the
Bank, and investments in other debt and equity securities. The Bank's
principal business activities consist of attracting deposits from the public
and investing these deposits, together with funds generated from operations
and borrowings, primarily in loans secured by mortgages on one-to-four family
residences, consumer loans, commercial real estate and commercial loans,
securities and mortgage-backed securities. 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
mortgage-backed securities and other securities portfolios, and the interest
paid on deposits and borrowed funds. The Bank's operating results are also
affected, to a lesser
- -------------------------------------------------------------------------------
38
<PAGE>
extent, by loan commitment fees, deposit related charges 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.
The Company's basic mission is to continue to serve its local communities by
offering profitable financial services. In seeking to accomplish this
mission, management is committed to (i) maintaining tangible capital in
excess of regulatory requirements, (ii) maintaining high asset quality, (iii)
maximizing interest rate spread, and (iv) managing exposure to interest rate
risk.
The following information for the Company is presented on a consolidated
basis. Except as the context otherwise requires, references to the "company"
refer to the Company, the Bank, and the Bank's subsidiary, CoVest
Investments, Inc. The discussion and analysis that follows should be read in
conjunction with the financial statements, notes, and tables presented
herein. The information provided below has been rounded in order to simplify
presentation. However, ratios and percentages are calculated using the
detailed financial information.
BUSINESS STRATEGY
The key components of management's strategy are as follows:
BALANCE SHEET STRUCTURE AND INTEREST RATE RISK MANAGEMENT
Management of the Company has undertaken a restructuring of the balance sheet
from that of a traditional thrift to that of a full service commercial bank.
As part of this effort, in December 1995, management securitized with FHLMC,
the conforming portfolio of 15 and 30 year fixed rate single family
residential mortgage loans totaling approximately $116 million. This was
completed at a time when the slope of the yield curve was relatively flat.
The addition of long term fixed rate loans at this time would add to the risk
associated with rising rates. The Company had 73% of its balance sheet
invested in fixed rate assets, many of which had long term maturities.
In 1996, the Company sold over $93 million of these securitized 15 and 30
year fixed rate mortgage-backed securities and replaced most of those fixed
rate assets with shorter term floating rate instruments. In the process of
completing this restructuring, the Company generated net gains of over $2.6
million, or approximately $1.5 million after related taxes. In December of
1996, the Company securitized another $61 million in fixed rate long-term
mortgages and seven to ten year balloon mortgages, again with the FHLMC.
These securities were classified as available-for-sale mortgage backed
securities. Some of these were sold in 1997 to reduce interest rate risk and
provide additional funding for commercial related loans. Finally, in 1997,
the Company securitized $17.8 million, the residential fixed rate mortgages
that were not scheduled to reprice in the next five years. In 1998, the
Company opened its first mortgage center. This mortgage center is located in
McHenry, Illinois, and will house mortgage loan sales and production
function. This group will concentrate on mortgage loan originations and
sales. It is anticipated that all loans will be sold on a service release
basis to mortgage buyers for which the Company will receive a fee and have no
additional rights.
These changes will allow the Company to concentrate on filling the void left
by the consolidation of competing financial institutions in its marketplace
and to serve, "on a timely basis", those commercial lending customers who may
need a commercial loan, a commercial real estate loan, a construction loan or
multi-family loan. The Company's ability to serve this market helped to
expand the commercial related portfolio by $55.6 million during 1997. Most
of this increase came in commercial real estate loans which increased by
$35.5 million, followed by increases of $7.1 million in construction lending,
$5.4 million in commercial lending, $4.2 million in commercial leases and
$3.6 million in multi-family lending.
- -------------------------------------------------------------------------------
39
<PAGE>
Changing the Bank's name in June, 1997 from First Federal Bank to CoVest
Banc and changing the Bank's charter affiliation in August, 1997 from a
thrift to a national bank helped attract customers who may not have
previously associated with First Federal Bank because of the perception that
we were a savings and loan whose core business revolved around first
mortgages to the retail sector.
Total deposits decreased 8% to $371.8 million from $ 402.1 million at
December 31, 1996. The deposit base of the organization is also undergoing a
transformation. In 1996, the Company offered a Preferred Money Market
account with a competitive rate tied to the weekly 91-day treasury bill
auction. The marketplace responded positively as the growth in this deposit
type alone increased by 57% over the ending balance in 1996.
The Company continues to strive to build the volume of non-interest bearing
checking accounts coupled with a "direct deposit" function. This transaction
account is another core account of a community bank. From the Company's
perspective it also helps improve non-interest income and will help to
improve the net interest margin. The Company offers promotions to attract
new checking accounts and provides additional services to make these accounts
more desirable. These services include telephone banking and a Debit Card
that can be used as a credit card or at automated teller machines for the
withdrawal or deposit of money.
Certificates of deposit have declined from $265.9 million at December 31,
1996 to $219.8 on December 31, 1997. This decline may be attributed, in
part, to the transfer of funds to more attractive Preferred Money Market
Accounts.
In setting rates, the Company regularly evaluates (i) its investment and
lending opportunities, (ii) its internal cost of funds, (iii) the rates being
offered by competing institutions and (iv) its liquidity position. In order
to decrease the volatility of its deposits, the Company imposes penalties on
early withdrawal on its certificates of deposit. The Company does not have
any brokered deposits and does not intend to accept or solicit such deposits
at the current time. The decline in overall deposits has been augmented by
additional borrowings at the Federal Home Loan Bank of Chicago ("FHLB") where
funds can be competitively purchased in the wholesale market in large dollar
amounts. Fifty million of these additional borrowings are for an arbitrage.
The arbitrage was begun in late November 1997, using the FHLB borrowings that
mature in late 1998 to fund two large mortgage backed security pools and is
projected to have an average spread of 72 basis points.
At December 31, 1997, total non-performing assets amounted to $ 1.3 million,
or 0.35% of net loans receivable compared to $ 856,000, or 0.25% of net loans
receivable at December 31, 1996.
At December 31, 1997, the allowance for loan losses amounted to almost $4
million, or 305% of non-performing loans as compared to a 166% coverage at
December 31, 1996.
Stockholders' equity in CoVest Bancshares, Inc. totaled $48 million at
December 31, 1997. The number of common shares outstanding was 4,365,761 and
the book value per common share outstanding was $11.06 as of December 31,
1997. Approximately 108,000 shares remained to be repurchased under the
current stock repurchase program.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND
DECEMBER 31, 1996
GENERAL
Net income for the year ended December 31, 1997 was $2,610,000 compared to
$1,589,000 for the year ended December 31, 1996, an increase of 64%. During
1996, the one-time special assessment of $3,033,000, pre-tax, was incurred
to recapitalize SAIF. This non-recurring charge was offset by net gains on
the sales of securities of approximately $2.6 million, or $1.5 million, after
related taxes. Without the effect of these non-recurring items, net income
for 1996 would have been $3,465,000.
- -------------------------------------------------------------------------------
40
<PAGE>
In the fourth quarter of 1997, the Company reevaluated its methodology in
providing for possible loan losses. The Company evaluated its loan mix,
rescored its credit card portfolio, assessed its recent loan loss experience,
and decided to provide an extra $2.4 million in loan loss provision during
the quarter. This resulted in a net loss for the three months ended December
31, 1997 of $735,000, compared to net income of $605,000 for the comparable
period in 1996.
Returns on average assets and average equity during 1997 were 0.48% and
5.40%, respectively, compared to 0.26% and 2.94% in 1996.
CoVest Bancshares, Inc. had earnings of 61 cents per share (basic) for the
full year of 1997. This compares with 34 cents per share (basic) for the
comparable period in 1996.
INTEREST INCOME
Interest income for 1997 decreased by over $3 million from 1996. The balance
sheet averaged $67 million less in average earning assets when compared to
1996. Mortgage backed securities showed the largest decrease in interest
income as the volume declined by $66.3 million. The volume of securities
also decreased by over $10 million. Some of this decrease was offset by the
average increase in volume for loans of $7.7 million. The overall yield on
earning assets increased 34 basis points, from 7.15% in 1996 to 7.49% in 1997.
INTEREST EXPENSE
The interest expense for the same periods declined from $29.2 million in 1996
to $23.9 million in 1997. This $5.3 million decline in funding costs
resulted from a decrease in volume of over $67 million and reduced interest
costs of 36 basis points.
Overall this resulted in net interest income increasing by over 17% or $2.3
million. The interest rate spread and margin averaged 2.42% and 2.94%,
respectively, during 1997, a 70 and 72 basis point increase from 1.72% and
2.22%, respectively, during 1996. This represented increases of 41% in
interest rate spread and 32% in net interest margin growth. In the current
interest rate environment, management expects margins to increase from the
1997 levels as the loan composition of commercial and commercial real estate
loans become a larger percentage of the overall loan portfolio and asset mix.
PROVISION FOR POSSIBLE LOAN LOSSES
The provision for possible loan losses increased from $1,397,000 for 1996 to
$4,072,000 in 1997. This increase of almost $2.7 million was the result of
the Company's decision to provide an extra $2.4 million in loan loss
provision during the fourth quarter of 1997, after evaluating its loan mix,
rescoring its credit card portfolio, and reviewing its recent loan loss
experience. Nationally, as well as in the Bank's portfolio, credit losses
from bankruptcy continue to increase, many having no prior evidence of
delinquency. In 1997, bankruptcies accounted for over $624,000 in losses
alone. Current bankruptcy laws continue to hurt providers of credit cards.
The commercial related loan portfolio that represents commercial, commercial
real estate, construction and multi-family lending increased in total volume
by almost $52 million during 1997, or almost 220% in one year.
NON-INTEREST INCOME
Non-interest income, excluding gains from sales of securities and a
non-recurring death benefit of $187,000, increased 32%, or almost $548,000
from 1996. An increase in loan charges and servicing fees of $311,000 and
deposit related charges and fees of $257,000 led the way. With the addition
of the mortgage center it is anticipated that all loans will be sold on a
service released basis to mortgage buyers for which the Bank will receive a
commission.
- -------------------------------------------------------------------------------
41
<PAGE>
NON-INTEREST EXPENSE
Other operating expenses increased by only 4.5% or $487,000, excluding the
special 1996 FDIC assessment. The largest increase came in salaries and
benefits that jumped $563,000 or 11.6%. Additional staff has been added to
serve both the commercial and retail customer in providing prompt loan and
deposit related request responses. Advertising expenses increased by over
92% during 1997, as the Company heralded the new name of CoVest and its
entrance into commercial banking. Finally, data processing expenses
increased as the Company converted its main frame operations during the
third and fourth quarters of 1997, in order to offer new deposit and loan
related products and serve more transaction deposit accounts. These expenses
were offset by a decrease in federal deposit insurance premium expenses of
$859,000. In 1998, operating expenses related to the new mortgage center
operation will be incurred, and sales commission expenses will increase as
production volume grows.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND
DECEMBER 31, 1995
GENERAL
Net income for the year ended December 31, 1996, was $1,589,000 compared to
$2,611,000 for the year ended December 31, 1995, a decrease of $1,022,000
or 39.1 %. This decrease included the one-time special assessment to
re-capitalize the SAIF, in the amount of $3,033,000, pre-tax. This
non-recurring charge was offset by net gains on the sales of securities of
approximately $2.5 million, or $1.5 million, after related taxes.
During 1995, two non-recurring items were recorded. They were $271,000 for
the estimated unfunded liability of the Defined Benefit Plan, and $124,000
for compensation to former officers, less related taxes.
Without the effect of these non-recurring items, net income for 1996 would
have been $3,465,000, compared to $2,852,000 for 1995, an increase of
$615,000 or 21.6%. This increase can be attributed to gains on sales of
securities and increases in other non-interest income of $3,025,000, offset
by a decrease in net interest income of $990,000, an increase in the
provision for possible loan losses of $753,000, an increase in non-interest
expense of $464,000, and increase in taxes of $206,000, (prior to the tax
effect on the non-recurring items.)
INTEREST INCOME
Interest income increased by $1,523,000 or 3.7% to $42,377,000 for the year
ended December 31, 1996 as compared to $40,854,000 for the year ended
December 31, 1995, even though the yield on average earning assets decreased
34 basis points to 7.15% for 1996, as compared to a 7.49% yield for 1995.
Contributing to the decrease in yield was the restructuring of the balance
sheet, which resulted in a greater amount of adjustable rate mortgage-backed
securities as compared to last year. Management began to convert those
securities to higher yielding loans. During 1996, the Company started
operating a new Commercial Lending Department in an attempt to have those
types of loans become an increasing portion of the total loan portfolio.
INTEREST EXPENSE
Interest expense increased by $2,514,000 or 9.4 % to $29,241,000 for the
year ended December 31, 1996 as compared to $26,727,000 for the year ended
December 31, 1995. This increase was attributed primarily to an increase in
the average amount of borrowed money, from $47,800,000 for 1995, to
$107,900,000 for 1996. The cost of total interest-bearing liabilities
remained constant, at 5.43% for 1996 and 1995.
- -------------------------------------------------------------------------------
42
<PAGE>
The following table illustrates the decrease in costs of average
interest-bearing liabilities the Company experienced for each quarter of
1996. During September 1996, the maturity of $69 million in certificates of
deposit took place.
<TABLE>
<CAPTION>
FOR THE INDICATED
QUARTER OF 1996
1st 2nd 3rd 4th
----- ----- ----- -----
<S> <C> <C> <C> <C>
Cost of Average Interest-Bearing
Liabilities 5.56% 5.50% 5.45% 5.11%
</TABLE>
PROVISION FOR POSSIBLE LOAN LOSSES
The provision for possible loan losses totaled $1,397,000 for the year ended
December 31, 1996, compared to $644,000 for the year ended December 31, 1995.
Of this $753,000, or 116.9% increase, $242,000 was related to new commercial
real estate loans, for which the Company established a provision for possible
losses at the time the loans are recorded. The balance of this increase
resulted from a decision by management to increase the loan loss allowance in
light of higher write-off experience on credit cards. The Company, and the
banking industry as a whole, began to see more credit card charge-offs
resulting from personal bankruptcies. For the year ended December 31, 1996,
42% of all of the charge-offs experienced by the Company were related to
personal bankruptcies. Management regularly conducts a review of its loan
portfolio, write-off experience and adequacy of allowance.
NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES
Net interest income after provision for possible loan losses decreased by
$1,743,000 or 12.9% to $11,739,000 for the year ended December 31, 1996 as
compared to $13,483,000 for the year ended December 31, 1995. The average
net interest rate spread for 1996 was 1.72%, compared to 2.06% for 1995.
NON-INTEREST INCOME
Non-interest income increased by $474,000 or 38.9% to $1,690,000 for the year
ended December 31, 1996 as compared to $1,217,000 for the year ended December
31, 1995, prior to net gains on the sale of securities in 1996 of $2,551,000.
The year ended December 31, 1995 produced a net loss on the sale of
securities of $53,000. Most of the balance of the increase in non-interest
income was attributable to recognition of loan servicing fees, which
increased $335,000 or 76.3%. Deposit related fees and charges also increased
$96,000 or 19.5%, as there has been a general increase in fees charged for
various Bank services.
NON-INTEREST EXPENSE
Non-interest expense was $13,852,000 for 1996, compared to $10,722,000 for
1995, an increase of $3,131,000 or 29.2%. In 1995, there were two
non-recurring items recorded. They were $271,000 for the estimated unfunded
liability of the Defined Benefit Plan, and $124,000 for compensation to
former officers, less related taxes. During 1996, a non-recurring expense was
recorded for $30,000, representing the final unfunded liability as a result
of the termination of the Defined Benefit Plan. The final determination was
higher than anticipated due to a decrease in interest rates between the
termination announcement date of January 5, 1995, and the date the final
distribution was made on May 29, 1996. Also recorded in 1996, was $3,033,000
for the one-time assessment to re-capitalize the SAIF insurance fund, at 65.7
basis points. Without giving consideration to these items, non-interest
expense increased $344,000 or 3.3%, from $10,327,000 for 1995, to $10,671,000
for 1996. Most of this increase was attributed to the operation of the
Schaumburg location, opened in March of 1995.
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43
<PAGE>
NET INTEREST INCOME ANALYSIS
The following table presents, for the periods indicated, the total dollar
amount of interest income from average interest-earning assets and the
resultant yields, as well as interest expense on average interest-bearing
liabilities, expressed both in dollars and rates.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------- ----------------------------- ------------------------------
Average Interest Average Interest Average Interest
Annual Earned/ Yield/ Annual Earned/ Yield/ Annual Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
------- ---- ---- ------- ---- ---- ------- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Loans receivable $357,467 $28,186 7.89% $349,790 $27,238 7.79% $395,159 $31,145 7.88%
Mortgage-backed
and related securities 99,891 7,018 7.03 166,106 10,135 6.10 74,252 4,827 6.50
Securities 58,150 3,723 6.40 68,163 4,443 6.52 67,311 4,305 6.40
Other investments 10,321 437 4.23 8,806 561 6.37 8,582 577 6.73
-------- ------- ----- -------- ------- ----- -------- -------- ----
Total interest-
earning assets 525,829 39,364 7.49 592,865 42,377 7.15 545,304 40,854 7.49
Non-interest
earning assets 18,713 12,241 18,293
-------- -------- --------
Total assets $544,542 $605,106 $563,597
-------- -------- --------
-------- -------- --------
Interest-bearing liabilities
Savings account $ 62,297 $ 1,574 2.53% $ 68,666 $ 1,717 2.50% $ 70,795 $ 1,771 2.50%
NOW account 21,798 390 1.79 21,889 391 1.79 23,897 414 1.73
Money Market 50,372 2,439 4.84 19,515 804 4.12 11,188 332 2.97
Certificates 248,676 14,347 5.77 320,735 19,990 6.23 338,728 21,193 6.26
FHLB advances 71,956 4,308 5.99 89,630 5,368 5.99 46,033 2,915 6.33
Other borrowed money 16,278 856 5.26 18,313 971 5.30 1,754 102 5.82
-------- ------- ----- -------- ------- ----- -------- -------- ----
Total interest-bearing
liabilities 471,377 23,914 5.07 538,748 29,241 5.43 492,395 26,727 5.43
Other liabilities 24,824 12,367 15,302
-------- -------- --------
Total liabilities 496,201 551,115 507,697
Stockholders' equity 48,341 53,991 55,900
-------- -------- --------
Total liabilities and
stockholders' equity $544,542 $605,106 $563,597
-------- -------- --------
-------- -------- --------
Net interest income $ 15,450 $ 13,136 $ 14,127
Net interest rate spread 2.42% 1.72% 2.06%
Net earning assets $ 54,452 $ 54,117 $ 52,909
Net yield on average
interest-earning assets 2.94% 2.22% 2.59%
Average interest-earning
assets to average
interest-bearing
liabilities 1.12x 1.10x 1.11x
</TABLE>
- -------------------------------------------------------------------------------
44
<PAGE>
WEIGHTED AVERAGE YIELD ANALYSIS
The following table sets forth the weighted average yields on the Company's
interest-earning assets, the weighted average interest rates on
interest-bearing liabilities, and the interest rate spread between the
weighted average yields and rates at the dates indicated:
<TABLE>
<CAPTION>
December 31, 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Weighted average yield on
Loans receivable 8.03% 7.68% 7.65%
Mortgage-backed and mortgage-related securities 6.90 6.98 6.95
Securities 6.42 6.62 6.29
Other investments and FHLB stock 5.93 6.50 4.92
Combined weighted average yield on interest-earning assets 7.59 7.46 7.33
Weighted average rates paid on
Savings accounts 2.51 2.50 2.50
NOW accounts 1.80 1.79 1.79
Money market accounts 4.97 4.57 2.70
Certificates 5.73 5.83 6.41
FHLB advances 5.72 5.91 5.95
Other borrowed money 5.28 5.28 5.52
Combined weighted average rate paid on interest-bear liabilities 5.07 5.05 5.47
Net interest rate spread 2.52 2.41 1.86
</TABLE>
- -------------------------------------------------------------------------------
45
<PAGE>
VOLUME/RATE ANALYSIS
The following schedule presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets
and interest-bearing liabilities. It distinguishes between the increase
related to higher outstanding balances and that due to changes in interest
rates. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to: (1) changes
in volume (i.e., changes in volume multiplied by old rate) and (2) changes in
rate (i.e., changes in rate multiplied by old volume). For purposes of this
table, changes attributable to both rate and volume which cannot be
segregated have been allocated proportionately to both changes.
<TABLE>
<CAPTION>
1997 vs. 1996 1996 vs. 1995
Increase (Decrease) Due To: Increase (Decrease) Due To:
----------------------------------- -----------------------------------
Total Total
Increase Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Loans receivable $ 865 $ 83 $ 948 $(3,542) $(365) $(3,907)
Mortgage-backed and
related securities (4,039) 922 (3,117) 5,587 (278) 5,309
Securities and other
investments (788) (56) (844) 98 23 121
------- ------- ------- ------- ----- -------
Total interest-earning
assets (3,962) 949 (3,013) 2,143 (620) 1,523
------- ------- ------- ------- ----- -------
Interest-bearing liabilities
NOW accounts (1) - (1) (38) 15 (23)
Savings accounts (143) - (143) (54) - (54)
Money markets 1,271 364 1,635 310 162 472
Certificates (4,530) (1,113) (5,643) (1,111) (92) (1,203)
FHLB advances (1,032) (28) (1,060) 2,648 (195) 2,453
Other borrowed money (100) (15) (115) 877 (8) 869
------- ------- ------- ------- ----- -------
Total interest-bearing
liabilities (4,535) (792) (5,327) 2,632 (118) 2,514
------- ------- ------- ------- ----- -------
Net change in interest
income $ 573 $ 1,741 $ 2,314 $ (489) $(502) $ (991)
------- ------- ------- ------- ----- -------
------- ------- ------- ------- ----- -------
</TABLE>
- -------------------------------------------------------------------------------
46
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
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 received in operating activities, primarily interest on loans and
investments, less interest paid on deposits and borrowed funds, was $7.6
million for the year ended December 31, 1997. Net cash used in investing
activities was $33.4 million for the year ended December 31, 1997. Security
sales and maturities generated $21.3 million while principal payments on
mortgage-backed and related securities amounted to $37.7 million. Purchases
of investment securities and mortgage-backed securities were $99.7 million,
and loan origination's, net of principal payments, were $60.5 million for the
year. Net cash provided by financial activities amounted to $36.5 million
for the year ended December 31, 1997, and was accounted for mostly by the net
increase in borrowings.
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 December 31, 1997, the Company had commitments to originate loans totaling
$11.5 million, and its customers had approved but unused lines of credit
totaling $78.3 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.
CAPITAL RESOURCES
At December 31, 1997, the Bank had total capital to risk-weighted assets of
$46.4 million. This is approximately $15.9 million above the amount required
to be "well capitalized." Tier 1 capital to risk-weighted assets was $42.6
million. This is approximately $24.3 million or 8% above the required
ratio of 6%. Tier 1 capital to average assets was $42.6 million. This is
approximately $14.7 million or 2.6% above the required ratio of 5%. For
additional information, see Note 11 of the "Notes to the Consolidated
Financial Statements".
IMPACT OF NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 130 (SFAS No. 130), REPORTING
COMPREHENSIVE INCOME, will become effective during 1998 and requires that all
components of comprehensive income be presented in a separate statement.
Management does not anticipate that SFAS No. 130 will have a significant impact
on the Company's results of operations or capital.
Statement of Financial Accounting Standards No. 131 (SFAS No. 131), DISCLOSURES
ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, will also become
effective during 1998. SFAS No. 131 establishes standards for the way public
companies report information about its operating segments and requires that
these standards be adhered to for interim reporting as well. SFAS No. 131
requires companies to provide more descriptive disclosures about its
operating segments including the way in which the segment was determined, the
products and services provided by the segment, and the profit or loss
generated by the segment. Management does not anticipate that SFAS No. 131
will have a significant impact on the Company's results of operations or
capital.
- -------------------------------------------------------------------------------
47
<PAGE>
YEAR 2000 COMPLIANCE
A critical issue facing the financial institution industry is concerns over
computer systems' ability to process year-date data beyond the year 1999.
Except in recently developed year 2000 compliant programs, computer
programmers consistently have abbreviated dates by eliminating the first two
digits of a year, with the assumption that these two digits would always be
"19". Unless corrected, this situation is expected to cause widespread
problems on January 1, 2000, when computer systems may recognize this date as
January 1, 1900, and process data incorrectly or stop processing altogether.
This issue could affect a variety of the Company's systems from its data
processing system which records loan and deposit information to other
ancillary systems such as alarms and locking devices. 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. Nevertheless, if not properly addressed, these issues could
result in interruptions in the Company's business and have a material adverse
effect on the Company's results of operations.
Item 7A. 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. Management has an
Asset/Liability Committee, consisting of senior officers, which meets monthly to
review the Bank's interest rate risk position and make recommendations for
adjusting such position. In addition, the Board reviews the Bank's position
on a monthly basis, including simulations of the effect on the Bank's capital
of various interest rate scenarios.
In managing its asset/liability mix, the Bank may place greater or less emphasis
on maximizing net interest margin than on better matching the interest rate
sensitivity of its assets and liabilities in an effort to improve its capital,
depending on the relationship between long and short-term interest rates, market
conditions, and consumer preferences. Management believes that the increased
net income resulting from a mismatch in the maturity of its assets and
liability portfolios can, during periods of declining or stable interest
rates, provide high enough returns to justify the increased exposure to
sudden and unexpected increases in interest rates which can result from such
a mismatch. As a result, the Bank may be somewhat more exposed to rapid
increases in interest rates than some other institutions which concentrate
principally on matching the duration of their assets and liabilities.
The business of the Company and the composition of its balance sheet consists
of investments in interest-earning assets (primarily loans and
mortgage-backed securities) which are primarily funded by interest-bearing
liabilities (deposits and borrowings). Such financial instruments have
varying levels of sensitivity to changes in market interest rates resulting
in market risk. Other than loans which are originated and held for sale, all
of the financial instruments of the Company are for other than trading purposes.
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 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
- -------------------------------------------------------------------------------
48
<PAGE>
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 (see
"Business--Factors Affecting Earnings--Asset and Liability Management" for a
further discussion of rate sensitive assets, rate sensitive liabilities and
net interest spread).
SIGNIFICANT ASSUMPTIONS UTILIZED IN MANAGING INTEREST RATE RISK
Managing the Company's exposure to interest rate risk involves significant
assumptions about the prepayments of loans or early withdrawal of deposits
and the relationship of various interest rate indices of certain financial
instruments.
A substantial portion of the Company's loans and mortgage-backed securities
are residential mortgage loans which permit the borrower to prepay the
principal balance of the loan prior to maturity ("prepayments") without
penalty. A loans propensity for prepayment is dependent upon a number of
factors, including, the current interest rate and interest rate index (if
any) on the loan, the financial ability of the borrower to refinance, the
economic benefit to be obtained from refinancing, availability of refinancing
at attractive terms, as well as economic and other factors in specific
geographic areas which affect the sales and price levels of residential
property. In a changing interest rate environment, prepayments may increase
or decrease on fixed-and adjustable-rate loans depending on the current
relative levels and expectations of future short- and long-term interest
rates. Prepayments on ARM loans generally increase when long-term interest
rates fall or are at historically low levels relative to short-term interest
rates making Fixed-rate loans more desirable.
Securities, other than those with early call provisions, generally repay
pursuant to specific terms until maturity. While savings and checking
deposits generally may be withdrawn upon the customer's request without prior
notice, a continuing relationship with customers resulting in future deposits
and withdrawals is generally predictable resulting in a dependable and
uninterruptible source of funds. Time deposits generally have early
withdrawal penalties, while term FHLB Advances have prepayment penalties,
which discourage customer withdrawal of time deposits and prepayment of FHLB
Advances prior to maturity.
The Company's ARM loans are primarily indexed to the One Year Constant
Maturity Treasury Index. When such loans and mortgage-backed securities are
funded by interest-bearing liabilities which are determined by other indices,
primarily deposits and FHLB Advances, a changing interest rate environment
may result in different levels of change in the different indices leading to
disproportionate changes in the value of, and the net earnings generated
from, the Company's financial instruments. Each index is unique and is
influenced by different external factors, therefore, the historical
relationships in various indices may not necessarily be indicative of the
actual change which may result in a changing interest rate environment.
INTEREST RATE RISK MEASUREMENT
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.
- -------------------------------------------------------------------------------
49
<PAGE>
The following table presents the Bank's current exposure to hypothetical changes
in interest rates as of December 31, 1997
<TABLE>
<CAPTION>
Percent Change in
Change in Interest Rates Percent Change in MV of Portfolio
(basis points) Net Interest Income Equity
------------------------ ------------------- -----------------
<S> <C> <C>
+200 (9%) (16%)
100 (4) (8)
0 0 0
(100) 4 10
(200) 7 (20)
</TABLE>
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.
- -------------------------------------------------------------------------------
50
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
CoVest Bancshares, Inc.
Des Plaines, Illinois
We have audited the accompanying consolidated statements of financial
condition of CoVest Bancshares, Inc. (formerly FirstFed Bancshares, Inc.) as
of December 31, 1997 and 1996, and the related consolidated statements of
income, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CoVest
Bancshares, Inc. as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting
principles.
Crowe, Chizek and Company LLP
Oak Brook, Illinois
February 27, 1998
<PAGE>
COVEST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1997 and 1996
(In thousands, except share data)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Cash and cash equivalents
Cash on hand and in banks $ 5,670 $ 1,616
Interest-bearing deposits in other financial institutions 17,800 11,221
-------- --------
23,470 12,837
Securities
Securities available-for-sale 35,840 53,751
Mortgage-backed and related securities available-for-sale 120,753 111,935
Federal Home Loan Bank stock and Federal Reserve stock 7,579 7,190
-------- --------
164,172 172,876
Loans receivable, net
Loans receivable 381,486 339,969
Less allowance for possible loan losses 3,977 1,424
-------- --------
377,509 338,545
Accrued interest receivable 3,487 3,608
Premises and equipment 10,767 9,859
Other assets 3,317 3,444
-------- --------
$582,722 $541,169
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest-bearing $ 14,112 $ 8,834
NOW and money market accounts 78,311 61,168
Savings accounts 59,562 66,218
Certificates of deposit 219,767 265,870
-------- --------
371,752 402,090
Short-term borrowings 76,956 53,690
Long-term borrowings from Federal Home Loan Bank 75,000 25,000
Advances from borrowers for taxes and insurance 2,914 3,724
Accrued expenses and other liabilities 7,806 6,721
-------- --------
534,428 491,225
Stockholders' equity
Preferred stock - par value $.01 per share; 100,000 authorized shares;
no shares outstanding at December 31, 1997 and 1996 - -
Common stock - par value $.01 per share; 7,500,000 authorized shares;
4,365,761 and 5,109,924 shares issued at December 31, 1997 and 1996,
respectively 44 34
Additional paid-in capital 19,365 22,155
Retained earnings 28,410 33,990
Treasury stock, 1997 - 0 shares; 1996 - 686,600 shares, at cost - (5,838)
Unearned stock awards (73) (73)
Unearned ESOP shares (511) (858)
Unrealized gain on securities available-for-sale 1,059 534
-------- --------
48,294 49,944
-------- --------
$582,722 $541,169
-------- --------
-------- --------
</TABLE>
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
51
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1997, 1996, and 1995
(In thousands, except share and per share data)
<TABLE>
<CAPTION> 1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Interest income
Loans receivable $28,186 $27,237 $31,145
Mortgage-backed and related securities 7,018 10,135 4,827
Securities 3,207 4,148 4,026
Other interest and dividend income 953 857 856
------- ------- -------
39,364 42,377 40,854
Interest expense
Deposits 18,750 22,902 23,710
Advances from Federal Home Loan Bank 4,308 5,368 2,915
Other borrowed funds 856 971 102
------- ------- -------
23,914 29,241 26,727
------- ------- -------
NET INTEREST INCOME 15,450 13,136 14,127
Provision for possible loan losses 4,072 1,397 644
------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES 11,378 11,739 13,483
Noninterest income
Loan charges and servicing fees 1,085 774 439
Deposit related charges and fees 842 585 490
Gain (loss) on sale of securities 1,247 2,551 (53)
Other 498 331 341
------- ------- -------
Total noninterest income 3,672 4,241 1,217
Noninterest expense
Compensation and benefits 5,410 4,847 5,189
Occupancy and equipment 1,740 1,468 1,402
Federal deposit insurance premium 203 1,062 1,003
Special SAIF assessment - 3,033 -
Data processing 1,000 798 714
Advertising 640 334 452
Other 2,312 2,309 1,962
------- ------- -------
Total noninterest expense 11,305 13,851 10,722
------- ------- -------
INCOME BEFORE INCOME TAXES 3,745 2,129 3,978
Income tax provision 1,135 540 1,367
------- ------- -------
NET INCOME $ 2,610 $ 1,589 $ 2,611
------- ------- -------
Earnings per common share
Basic $ .61 $ .34 $ .51
------- ------- -------
------- ------- -------
Diluted $ .58 $ .32 $ .50
------- ------- -------
------- ------- -------
</TABLE>
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
52
<PAGE>
COVEST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1997, 1996, and 1995
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Unrealized
Gain
(Loss) on Total
Additional Unearned Unearned Securities Stock-
Common Paid-In Retained Treasury ESOP Stock Available- holders'
Stock Capital Earnings Stock Shares Awards for-Sale Equity
------ ---------- -------- -------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $28 $26,851 $38,051 $(5,197) $(1,630) $(129) $(1,127) $56,847
Net income - - 2,611 - - - - 2,611
Cash dividend ($.18 per share) - - (975) - - - - (975)
Issuance of stock in
connection with DRIP - 3 - 73 - - - 76
Exercise of stock options - 161 - - - - - 161
Issuance of stock in connection
with exercise of stock options - (3) (314) 696 - - - 379
Purchase of stock - - - (4,969) - - - (4,969)
Release of unearned ESOP shares - - - - 432 - - 432
Stock award earned - - - - - 32 - 32
Tax benefits related to
employee stock plans - 217 - - - - - 217
Effect of transfer of securities
from held-to-maturity to
available-for-sale on December 19,
1995, net of income taxes of $147 - - - - - - 232 232
Increase in fair value of
securities available-for-sale,
net of income taxes of $1,534 - - - - - - 2,634 2,634
--- ------- ------- ------- ------- ----- ------- -------
Balance at December 31, 1995 28 27,229 39,373 (9,397) (1,198) (97) 1,739 57,677
Net income - - 1,589 - - - - 1,589
Cash dividend ($.25 per share) - - (1,221) - - - - (1,221)
Issuance of stock in connection
with exercise of stock options - - (542) 1,030 - - - 488
Purchase of stock - - - (8,053) - - - (8,053)
Issuance of stock in connection
with three-for-two stock split 6 (5,379) (5,209) 10,582 - - - -
- -------------------------------------------------------------------------------
(CONTINUED)
54
<PAGE>
COVEST BANCSHARES, INC.
Release of unearned ESOP shares - - - - 340 - - 340
Stock award earned - - - - - 24 - 24
Tax benefits related to
employee stock plans - 305 - - - - - 305
Decrease in fair value
of securities available-
for-sale, net of income
taxes of $734 - - - - - - (1,205) (1,205)
--- ------- ------- ------- ------- ----- ------- -------
Balance at December 31, 1996 34 22,155 33,990 (5,838) (858) (73) 534 49,944
</TABLE>
- -------------------------------------------------------------------------------
(CONTINUED)
55
<PAGE>
COVEST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1997, 1996, and 1995
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Unrealized
Gain
(Loss) on Total
Additional Unearned Unearned Securities Stock-
Common Paid-In Retained Treasury ESOP Stock Available- holders'
Stock Capital Earnings Stock Shares Awards for-Sale Equity
------ ---------- -------- -------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $34 $22,155 $33,990 $(5,838) $(858) $(73) $ 534 $49,944
Net income - - 2,610 - - - - 2,610
Cash dividend ($.28 per share) - - (1,245) - - - - (1,245)
Issuance of stock in connection
with exercise of stock options - - (882) 1,783 - - - 901
Purchase of stock - - - (5,302) - - - (5,302)
Issuance of stock in connection
with three-for-two stock split 10 (3,304) (6,063) 9,357 - - - -
Release of unearned ESOP shares - - - - 347 - - 347
Tax benefits related to
employee stock plans - 514 - - - - - 514
Increase in fair value of
securities available-for-sale,
net of income taxes of $332 - - - - - - 525 525
--- ------- ------- ------- ----- ---- ------ -------
Balance at December 31, 1997 $44 $19,365 $28,410 $ - $(511) $(73) $1,059 $48,294
--- ------- ------- ------- ----- ---- ------ -------
--- ------- ------- ------- ----- ---- ------ -------
</TABLE>
- -------------------------------------------------------------------------------
(CONTINUED)
56
<PAGE>
COVEST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1996, and 1995
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,610 $ 1,589 $ 2,611
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation 864 683 603
Amortization of intangible assets 206 206 206
Deferred income taxes 927 343 703
Deferred loan origination fees (341) 74 (911)
Provision for possible loan losses 4,072 1,397 644
Net (gain) loss on sales of securities (1,247) (2,551) 53
ESOP expense 347 340 432
Stock award earned - 24 32
Change in
Prepaid expenses and other assets 127 (503) 452
Accrued interest receivable 120 (147) (141)
Accrued expenses and other liabilities (102) 503 (46)
-------- --------- --------
Net cash provided by operating activities 7,583 1,958 4,638
CASH FLOWS FROM INVESTING ACTIVITIES
Net loan principal originations (60,477) (70,074) (99,082)
Purchase of securities and securities held-to-maturity - - (18,389)
Purchase of securities available-for-sale (99,662) (171,309) (53,163)
Proceeds from sales of securities available-for-sale 69,897 242,622 4,217
Proceeds from maturities of securities held-to-maturity - - 42,980
Proceeds from maturities of securities available-for-sale 21,258 38,537 32,500
Proceeds from repayment of securities available-for-sale 37,673 36,822 11,085
Purchase of Federal Home Loan Bank stock and Federal
Reserve Bank stock (389) (2,355) (2,047)
Purchase of office properties and equipment (1,722) (282) (1,588)
-------- --------- --------
Net cash provided by (used in) investing activities (33,422) 73,961 (83,487)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits (30,338) (52,566) 45,016
Net increase (decrease) in mortgage escrow funds (810) (1,771) 748
Short-term borrowings, net 23,266 (16,745) 30,635
Proceeds from long-term borrowings 50,000 - 25,000
Repayments of long-term borrowings - (2,400) (4,800)
Proceeds from exercise of stock options, net of treasury
shares issued 901 488 540
Purchase of treasury stock (5,302) (8,053) (4,969)
Cash dividends paid, net of dividend reinvestments (1,245) (1,233) (898)
-------- --------- --------
Net cash provided by (used in) financing activities 36,472 (82,280) 91,272
-------- --------- --------
-------- --------- --------
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
57
<PAGE>
COVEST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1996, and 1995
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995
------- -------- --------
<S> <C> <C> <C>
Net increase (decrease) in cash and cash equivalents $10,633 $(6,361) $ 12,423
Cash and cash equivalents at beginning of year 12,837 19,198 6,775
------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $23,470 $12,837 $ 19,198
------- ------- --------
------- ------- --------
Supplemental disclosures of cash flow information
Cash paid for
Interest $23,900 $29,364 $ 26,269
Income taxes 1,100 641 865
Transfer of investment securities to securities
available-for-sale $ - $ - $ 64,640
------- ------- --------
Securitization of portfolio loans 17,782 61,030 115,635
------- ------- --------
------- ------- --------
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
58
<PAGE>
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands of dollars)
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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,
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 locations.
BASIS OF PRESENTATION: The accompanying consolidated financial statements for
the years ended December 31, 1997, 1996, and 1995 include the accounts of CoVest
Bancshares, Inc., CoVest Banc, and the Bank's wholly-owned subsidiary, CoVest
Investments, Inc. On July 31, 1997, the Bank converted from a federal stock
savings bank to a national bank. Since the transaction is an internal
reorganization, the historical cost basis of accounting is continued for the
Bank. All significant intercompany transactions and balances are eliminated in
consolidation.
The preparation of financial statements in conformity with generally accepted
accounting principles and with general practices within the banking industry
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
income and expenses during the reporting period. Actual results could differ
from these estimates.
SECURITIES: Securities are classified as available-for-sale since the Company
may decide to sell those securities in response to changes in market interest
rates, liquidity needs, changes in yields or alternative investments, and for
other reasons. These securities are carried at fair value with unrealized gains
and losses charged or credited, net of income taxes, to a valuation allowance
included as a separate component of stockholders' equity. Realized gains and
losses on disposition are based on the net proceeds and the adjusted carrying
amounts of the securities sold, using the specific identification method.
Interest income, adjusted for amortization of premium and accretion of
discounts, is included in earnings.
LOANS AND LOAN INCOME: Loans are stated at the principal amount outstanding,
net of unearned income and the allowance for possible loan losses.
Interest on loans is accrued over the term of the loans based upon the principal
balance outstanding. Where serious doubt exists as to the collectibility of a
loan, the accrual of interest is discontinued.
The Company defers loan fees, net of certain direct loan origination costs. The
net amount deferred is reported in the statements of financial condition as part
of loans and is recognized as interest income over the term of the loan or its
repricing period using the level-yield method.
The accrual of interest income is discontinued on a loan when principal or
interest is ninety days or more past due, unless the loan is well secured and in
the process of collection. When a loan is placed on nonaccrual status, interest
previously accrued but not collected in the current period is reversed against
current period interest income. Interest accrued in prior years but not
collected is charged against the allowance for possible loan losses.
- -------------------------------------------------------------------------------
(Continued)
59
<PAGE>
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands of dollars)
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
When a loan is sold or securitized, a separate asset is recognized for the
mortgage servicing rights. This asset is amortized over the life of the
underlying loans. Loans held for securitization are carried at the lower of
cost or estimated market value in the aggregate.
ALLOWANCE FOR POSSIBLE LOAN LOSSES: Because some loans may not be repaid in
full, an allowance for possible loan losses is recorded. Increases to the
allowance are recorded by a provision for possible loan losses charged to
expense. Estimating the risk of the loss and the amount of loss on any loan is
necessarily subjective. Accordingly, the allowance is maintained by management
at a level considered adequate to cover possible losses that are currently
anticipated based on past loss experience, general economic conditions,
information about specific borrower situations including their financial
position and collateral values, and other factors and estimates which are
subject to change over time. While management may periodically allocate
portions of the allowance for specific problem loan situations, the entire
allowance is available for any loan charge-offs that occur. A loan is
charged-off against the allowance by management as a loss when deemed
uncollectible, although collection efforts continue and future recoveries may
occur.
Loans which are considered to be impaired are reduced to the present value of
expected future cash flows or to the fair value of the related collateral by
allocating a portion of the allowance to such loans. If these allocations cause
the allowance for possible loan losses to require an increase, such increase is
reported as a provision for possible loan losses charged to expense. Loans are
evaluated for impairment when payments are delinquent 90 days or more or when
management downgrades the loan classification to doubtful.
Smaller balance homogeneous loans are defined as residential first mortgage
loans secured by one-to-four-family residences, residential construction loans,
and consumer loans and are evaluated collectively for impairment. Commercial
loans, commercial real estate loans, construction loans, and multi-family loans
are evaluated individually for impairment. Normal loan evaluation procedures,
as described in the second preceding paragraph, are used to identify loans which
must be evaluated for impairment. In general, loans classified as doubtful or
loss are considered impaired while loans classified as substandard are
individually evaluated for impairment.
Depending on the relative size of the credit relationship, late or insufficient
payments of 30 to 90 days will cause management to reevaluate the credit under
its normal loan evaluation procedures. While the factors which identify a
credit for consideration for measurement of impairment, or nonaccrual, are
similar, the measurement considerations differ. A loan is impaired when the
economic value estimated to be received is less than the value implied in the
original credit agreement. A loan is placed in nonaccrual when payments are
more than 90 days past due unless the loan is adequately collateralized and in
the process of collection.
PREMISES AND EQUIPMENT: Bank premises and equipment are stated at cost, less
accumulated depreciation and amortization. Provisions for depreciation and
amortization, included in operating expenses, are computed on the straight-line
method over the estimated useful lives of the assets. The cost of maintenance
and repairs is charged to income as incurred while significant repairs are
capitalized.
- -------------------------------------------------------------------------------
(Continued)
60
<PAGE>
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands of dollars)
- -------------------------------------------------------------------------------
INTANGIBLE ASSETS: Goodwill and core deposit intangibles of $3,040,000 are being
amortized over 10-15 years, using the straight-line method. The unamortized
premium balances of $2,160,000 and $2,366,000 are included in other assets in
the December 31, 1997 and 1996 statements of financial condition, respectively.
- -------------------------------------------------------------------------------
(Continued)
61
<PAGE>
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(TABLE AMOUNTS IN THOUSANDS OF DOLLARS)
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
INCOME TAXES: The provision for income taxes is based on an asset and
liability approach. The asset and liability approach requires the
recognition of deferred tax liabilities and assets for the expected future
tax consequences of temporary differences between the carrying amounts and
the tax bases of assets and liabilities.
EARNINGS PER SHARE: Basic earnings per share is based on weighted average
common shares outstanding. Diluted earnings per share further assumes the
issuance of any potentially dilutive common shares. The accounting standard
for computing earnings per share was revised for 1997, and all earnings per
share previously reported are restated to follow the new standard. Earnings
per share are restated for all subsequent stock dividends and splits.
STATEMENT OF CASH FLOWS: For the purpose of this statement, cash and cash
equivalents is defined to include cash on hand, demand balances, and
interest-bearing deposits with financial institutions with original
maturities of three months or less. The Company reports net cash flows for
customer loan transactions, deposit transactions, and short-term borrowings.
DIVIDEND RESTRICTION: Banking regulations require the maintenance of certain
capital levels and may limit the amount of dividends which may be paid by the
Bank to the holding company or by the holding company to shareholders.
RECLASSIFICATIONS: Certain items in the financial statements as of and for
the years ended December 31, 1996 and 1995 have been reclassified, with no
effect on net income, to conform with the current year presentation.
NOTE 2 - STOCK SPLIT
On December 1, 1997, the Company's Board of Directors authorized a
three-for-two stock split effected in the form of a one-for-two stock
dividend. All share and per share amounts included in the financial
statements have been restated to reflect the stock split.
NOTE 3 - EARNINGS PER SHARE
A reconciliation of the numerators and denominators for earnings per common
share dilution computations for the years ended December 31, 1997, 1996, and
1995 is presented below.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Earnings per share
Net income $2,610 $1,589 $2,611
Weighted average common shares outstanding 4,285 4,738 5,096
------ ------ ------
Earnings per share $ .61 $ .34 $ .51
------ ------ ------
------ ------ ------
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
62
<PAGE>
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(TABLE AMOUNTS IN THOUSANDS OF DOLLARS)
- -------------------------------------------------------------------------------
NOTE 3 - EARNINGS PER SHARE (Continued)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Earnings per share assuming dilution
Net income $2,610 $1,589 $2,611
------ ------ ------
------ ------ ------
Weighted average common shares outstanding 4,285 4,738 5,096
Add: dilutive effect of assumed exercises
Incentive stock options and management
retention plan 199 197 152
------ ------ ------
Weighted average common and dilutive
potential common shares outstanding 4,484 4,935 5,248
------ ------ ------
------ ------ ------
Diluted earnings per share $ .58 $ .32 $ .50
------ ------ ------
------ ------ ------
</TABLE>
NOTE 4 - SECURITIES
The amortized cost and fair value of securities available-for-sale are as
follows:
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Securities available-for-sale
U.S. Treasury $ 10,976 $ 37 $ - $ 11,013
U.S. government agencies 19,994 28 (31) 19,991
Marketable equity securities 327 81 - 408
States and political subdivisions 4,428 4 (4) 4,428
-------- ------ ---- --------
35,725 150 (35) 35,840
Mortgage-backed securities
Federal Home Loan Mortgage Corporation 56,756 1,244 - 58,000
Government National Mortgage Association 4,405 189 - 4,594
Federal National Mortgage Association 57,335 178 - 57,513
Collateralized mortgage obligations 644 2 - 646
-------- ------ ---- --------
119,140 1,613 - 120,753
Federal Home Loan Bank stock 7,110 - - 7,110
Federal Reserve Bank stock 469 - - 469
-------- ------ ---- --------
$162,444 $1,763 $(35) $164,172
-------- ------ ---- --------
-------- ------ ---- --------
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
63
<PAGE>
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(TABLE AMOUNTS IN THOUSANDS OF DOLLARS)
- -------------------------------------------------------------------------------
NOTE 4 - SECURITIES (Continued)
<TABLE>
<CAPTION>
December 31, 1996
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Securities available-for-sale
- -----------------------------
U.S. Treasury $ 14,903 $ 95 $ - $ 14,998
U.S. government agencies 34,772 42 (140) 34,674
Marketable equity securities 3,181 560 - 3,741
States and political subdivisions 139 1 - 140
Other 198 - - 198
-------- ------ ----- --------
53,193 698 (140) 53,751
Mortgage-backed securities
Federal Home Loan Mortgage Corporation 86,634 331 (204) 86,761
Government National Mortgage Association 4,909 99 - 5,008
Federal National Mortgage Association 17,439 137 (43) 17,533
Collateralized mortgage obligations 2,639 - (6) 2,633
-------- ------ ----- --------
111,621 567 (253) 111,935
Federal Home Loan Bank stock 7,190 - - 7,190
-------- ------ ----- --------
$172,004 $1,265 $(393) $172,876
-------- ------ ----- --------
-------- ------ ----- --------
</TABLE>
Proceeds from sales of securities available-for-sale in 1997, 1996, and 1995
and gross realized gains and losses are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Proceeds from sales $69,897 $242,622 $4,217
Gross realized gains 1,422 3,285 17
Gross realized losses (175) (734) (70)
</TABLE>
The carrying value of mortgage-backed and related securities are net of
unamortized premiums of $1,079,000 and $130,000 and unaccreted discounts of
$233,000 and $122,000 at December 31, 1997 and 1996, respectively.
At December 31, 1997 and 1996, respectively, $53,366,000 and $36,494,000 of
securities were pledged to secure deposits and borrowings.
The amortized cost and fair value of securities available-for-sale at
December 31, 1997, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
- -------------------------------------------------------------------------------
(Continued)
64
<PAGE>
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(TABLE AMOUNTS IN THOUSANDS OF DOLLARS)
- -------------------------------------------------------------------------------
NOTE 4 - SECURITIES (Continued)
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
---- -----
<S> <C> <C>
Securities available-for-sale
- -----------------------------
Due in one year or less $ 11,950 $ 11,986
Due after one year through five years 23,448 23,446
Mortgage-backed securities 118,496 120,107
Collateralized mortgage obligations 644 646
Federal Home Loan Bank stock 7,110 7,110
Federal Reserve Bank stock 469 469
Marketable equity securities 327 408
-------- --------
$162,444 $164,172
-------- --------
-------- --------
</TABLE>
NOTE 5 - LOANS RECEIVABLE
Loans receivable at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Mortgage loans
Secured by one-to-four-family residences $235,425 $251,831
Net deferred loan origination costs 652 647
-------- --------
Total mortgage loans 236,077 252,478
Commercial loans
Commercial real estate 56,220 20,705
Multi-family loans 4,604 995
Construction 8,939 1,811
Commercial loans 5,504 58
Commercial leases 11,274 7,053
-------- --------
86,541 30,622
Net deferred loan origination fees (377) (31)
-------- --------
Total commercial loans 86,164 30,591
Consumer and other loans
Automobile 22,781 21,802
Credit card 13,469 15,812
Home equity and improvement 21,987 18,570
Other 1,008 716
-------- --------
59,245 56,900
-------- --------
$381,486 $339,969
-------- --------
-------- --------
</TABLE>
Included in first mortgage loans secured by one-to-four-family residences at
December 31, 1996 are $10,100,000 of loans held for securitization.
- -------------------------------------------------------------------------------
(Continued)
65
<PAGE>
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(TABLE AMOUNTS IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
NOTE 5 - LOANS RECEIVABLE (Continued)
Loans serviced for the Federal Home Loan Mortgage Corporation (the "FHLMC")
approximated $170,113,000, $178,548,000, and $133,433,000 at December 31, 1997,
1996, and 1995, respectively.
The Bank had lending transactions with directors and executive officers of the
Company which totaled approximately $840,000 and $821,000 at December 31, 1997
and 1996, respectively.
The Company did not have any loans which were impaired either at or during the
years ended December 31, 1997 and 1996.
Activity in the allowance for possible loan losses is summarized as follows for
the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- ------
<S> <C> <C> <C>
Balance at beginning of year $ 1,424 $ 1,379 $1,520
Provision 4,072 1,397 644
Recoveries 96 145 118
Loans charged-off (1,615) (1,497) (903)
------- ------- ------
Net charge-offs (1,519) (1,352) (785)
------- ------- ------
Balance at end of year $ 3,977 $ 1,424 $1,379
------- ------- ------
------- ------- ------
</TABLE>
NOTE 6 - PREMISES AND EQUIPMENT
Premises and equipment at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Cost
Land $ 1,656 $ 1,656
Buildings 8,805 8,776
Furniture, fixtures, and equipment 4,256 2,799
Construction in progress 266 -
------- -------
14,983 13,231
Less accumulated depreciation and amortization 4,216 3,372
------- -------
$10,767 $ 9,859
------- -------
------- -------
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
66
<PAGE>
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(TABLE AMOUNTS IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
NOTE 7 - DEPOSITS
Certificates of deposit accounts individually exceeding $100,000 totaled
$35,037,000 and $28,741,000 at December 31, 1997 and 1996, respectively. At
December 31, 1997, stated maturities of all certificates of deposit were:
<TABLE>
<CAPTION>
<S> <C>
1998 $160,850
1999 19,736
2000 30,219
2001 2,503
2002 and after 6,459
--------
$219,767
--------
--------
</TABLE>
Certificates of deposit included approximately $8,370,000 and $15,786,000 at
December 31, 1997 and 1996, respectively, which bear interest at increasing
rates over the life of the deposit term. The Bank records interest expense on
these deposits on a level-yield basis over the contractual deposit term.
NOTE 8 - BORROWINGS
Borrowings at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------------------ -------------------
Weighted Weighted
Average Average
Rate Amount Rate Amount
-------- ------- -------- --------
<S> <C> <C> <C> <C>
SHORT-TERM BORROWINGS
Advances from the Federal Home Loan Bank due
1997 $ - 5.72% $37,400
1998 5.74% 60,000 - -
Securities sold under repurchase agreements 5.28 12,947 5.26 12,792
Other borrowings 5.27 4,009 5.15 3,498
------- -------
$76,956 $53,690
------- -------
------- -------
LONG-TERM BORROWINGS
Advances from Federal Home Loan Bank due
2000 6.19% $25,000 6.19% $25,000
2002 5.35 50,000 - -
------- -------
$75,000 $25,000
------- -------
------- -------
</TABLE>
The Bank maintains a collateral pledge agreement dated February 1, 1993 covering
secured advances whereby the Bank has agreed to at all times keep on hand, free
of all other pledges, liens, and encumbrances, first mortgages on improved
residential property (not more than 90 days
- --------------------------------------------------------------------------------
(Continued)
67
<PAGE>
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(TABLE AMOUNTS IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
delinquent) aggregating no less than 167% of the outstanding secured advances
from the Federal Home Loan Bank.
- --------------------------------------------------------------------------------
(Continued)
68
<PAGE>
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(TABLE AMOUNTS IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
NOTE 8 - BORROWINGS (Continued)
Securities sold under repurchase agreements either carry a fixed rate for the
term of the agreement, and generally mature within 90 to 180 days from the
transaction date, or reprice weekly. Physical control is maintained over the
collateral pledged in the agreements. One repurchase agreement is with the
state of Illinois, in the amount of $10,000,000. This agreement matures on
January 20, 1998, and the total amount at risk would be $1,178,000 at
December 31, 1997.
Other borrowings consisted of a Treasury tax and loan option which allows the
Company to accept U.S. Treasury deposits of excess funds along with deposits of
customer taxes. The other borrowing has an interest rate which adjusts weekly.
This borrowing is collateralized by a pledge of various securities, with an
amortized cost of $4,994,000 and $12,408,000 and a fair value of $4,988,000 and
$12,506,000 at December 31, 1997 and 1996, respectively.
NOTE 9 - INCOME TAXES
The income tax provision for the years ended December 31 is summarized as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ --------
<S> <C> <C> <C>
Current
Federal $1,875 $ 338 $ 807
State 187 (141) (143)
Deferred (927) 343 703
------ ----- ------
$1,135 $ 540 $1,367
------ ----- ------
------ ----- ------
</TABLE>
Total income tax expense differed from the amounts computed by applying the
U.S. federal income tax rate of 34% to income before income taxes as a result
of the following:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ -------
<S> <C> <C> <C>
Expected income tax expense at federal tax rate $1,273 $ 724 $1,352
State income tax, net of federal tax benefit (12) (114) 21
Increase in cash surrender value of director life insurance (82) (56) -
Other (44) (14) (6)
------ ----- ------
$1,135 $ 540 $1,367
------ ----- ------
------ ----- ------
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
69
<PAGE>
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(TABLE AMOUNTS IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
NOTE 9 - INCOME TAXES (Continued)
The deferred tax liabilities, included in other liabilities in the accompanying
statement of financial condition, consisted of the following at December 31,
1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Gross deferred tax assets
Bad debt deduction $ 337 $ -
Deferred compensation and employee benefits 776 748
Other - 14
------- -------
1,113 762
Gross deferred tax liabilities
Unrealized gain on securities available-for-sale (669) (338)
Depreciation (453) (417)
FHLB stock dividends (176) (176)
Bad debt deduction - (652)
Deferred loan fees (595) (609)
Other (54) -
------- -------
(1,947) (2,192)
------- -------
Net deferred tax liability $ (834) $(1,430)
------- -------
------- -------
</TABLE>
The deferred tax asset for the unrealized loss on marketable equity securities
is offset by a valuation allowance of an equal amount.
Prior to 1996, the Bank qualified under provisions of the Internal Revenue Code
which permitted it to deduct from taxable income a provision for bad debts which
differs from the provision charged to income in the financial statements.
Retained earnings at December 31, 1997 and 1996 include approximately $9,264,000
representing the bad debt deduction accumulated prior to 1987, for which no
deferred income tax liability has been recorded.
NOTE 10 - COMMITMENTS, CONTINGENT LIABILITIES, AND CONCENTRATIONS
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers and
to reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit and previously approved unused
lines of credit. Those instruments involve, to varying degrees, elements of
credit and interest-rate risk in excess of the amount recognized in the
statement of financial condition.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
previously approved unused lines of credit is represented by the contractual
amount of those instruments.
- --------------------------------------------------------------------------------
(Continued)
70
<PAGE>
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Table amounts in thousands of dollars)
- -------------------------------------------------------------------------------
NOTE 10 - COMMITMENTS, CONTINGENT LIABILITIES, AND CONCENTRATIONS (Continued)
The Company uses the same credit policies in making commitments and
conditional obligations as it does for loans recorded in the statement of
financial condition.
At December 31, 1997 and 1996, these financial instruments are summarized as
follows:
<TABLE>
<CAPTION>
Amount
------
1997 1996
---- ----
<S> <C> <C>
Off-balance-sheet financial instruments whose contract amounts
represent credit risk
Commitments to extend credit
Fixed rate $ 3,734 $ 16,476
Variable rate 7,732 2,174
Unused lines of credit 78,340 64,528
Credit enhancements 6,500 -
</TABLE>
The fixed rate commitments have rates ranging from 8.25% to 9.50% and 6.25%
to 8.125% at December 31, 1997 and 1996, respectively. Since certain
commitments to make loans and fund lines of credit and loans in process
expire without being used, the above amounts do not necessarily represent
future cash commitments. No losses are anticipated as a result of these
transactions.
The Company's principal loan customers are located in northeast Illinois and
most loans are secured by specific collateral including residential and
commercial real estate.
During 1997, the Company has entered into a credit enhancement agreement with
a local municipality to guarantee the repayment of an aggregate of $6.5
million of municipal revenue bonds which are secured by a first mortgage on
real estate. In the event of default on the bonds, the Company's maximum
liability is the amount of the credit guaranty.
NOTE 11 - CAPITAL REQUIREMENTS
The Company is subject to regulatory capital requirements administered by
federal banking agencies. Capital adequacy guidelines and prompt corrective
action regulations involve quantitative measures of assets, liabilities, and
certain off-balance-sheet items calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to
qualitative judgments by regulators about components, risk weightings, and
other factors, and the regulators can lower classifications in certain cases.
Failure to meet various capital requirements can initiate regulatory action
that could have a direct material effect on the financial statements.
The prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized, although
these terms are not used to represent overall financial condition. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans of capital restoration are required.
- -------------------------------------------------------------------------------
(Continued)
71
<PAGE>
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Table amounts in thousands of dollars)
- -------------------------------------------------------------------------------
NOTE 11 - CAPITAL REQUIREMENTS (Continued)
At December 31, 1997, the Bank's regulators categorized the Bank as well
capitalized. Actual capital levels (in millions) and minimum required levels
were:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purpose Action Provisions
------ ---------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total capital
(to risk-weighted assets)
Company $47.1 15.4% $24.5 8.0% $30.6 10.0%
Bank 46.4 15.2 24.4 8.0 30.5 10.0
Tier 1 capital
(to risk-weighted assets)
Company 43.3 14.2 12.2 4.0 18.4 6.0
Bank 42.6 14.0 12.2 4.0 18.3 6.0
Tier 1 capital
(to average assets)
Company 43.3 7.7 22.5 4.0 28.1 5.0
Bank 42.6 7.6 22.3 4.0 27.9 5.0
</TABLE>
On June 30, 1992, the Bank converted from a federal mutual savings and loan
association to a federal stock savings bank with the concurrent formation of
a holding company. At the time of conversion, the Bank established a
liquidation account for the benefit of eligible account holders as of March
31, 1991 who continue to maintain their accounts at the Bank after the
conversion. The liquidation account will be reduced annually to the extent
that eligible account holders have reduced their qualifying deposits.
Subsequent increases will not restore an eligible account holder's interest
in the liquidation account. In the event of a complete liquidation, each
eligible account holder will be entitled to receive a distribution from the
liquidation account in an amount proportionate to the current adjusted
qualifying balances for accounts then held before any distribution may be
made with respect to the Bank's capital stock.
NOTE 12 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Corporations are required to disclose fair value information about their
financial instruments. The fair value of financial instruments is defined as
the amount at which the instruments could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation
sale. The methods and assumptions used to determine fair values for each
class of financial instruments are presented below.
The estimated fair value for cash on hand and in banks; interest-bearing
deposits in other financial institutions; Federal Home Loan Bank stock; Federal
Reserve stock; accrued interest receivable; NOW, money market, and passbook
savings deposits; short-term borrowings; advances by borrowers for taxes and
insurance; and accrued interest payable are considered to approximate their
carrying values. The estimated fair value for securities available-for-sale is
based on quoted market values for the individual securities or for equivalent
securities. The estimated fair value for loans is based on estimates of the
rate the Company would charge for similar loans at December 31, 1997
- -------------------------------------------------------------------------------
(Continued)
72
<PAGE>
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Table amounts in thousands of dollars)
- -------------------------------------------------------------------------------
NOTE 12 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
and 1996, applied for the time period until estimated repayment. The
estimated fair value of certificates of deposit is based on estimates of the
rate the Company would pay on such deposits at December 31, 1997 and 1996,
applied for the time period until maturity. The estimated fair value of
Federal Home Loan Bank advances and other borrowings is based on the estimate
of the rate the Company would pay for such
- -------------------------------------------------------------------------------
(Continued)
73
<PAGE>
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Table amounts in thousands of dollars)
- -------------------------------------------------------------------------------
NOTE 12 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
borrowings at December 31, 1997 and 1996 for a time period until maturity.
Loan commitments are not included in the table below as their estimated fair
value is immaterial.
<TABLE>
<CAPTION>
At December 31,
---------------
1 9 9 7 1 9 9 6
------- -------
Approximate Estimated Approximate Estimated
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
<S> <C> <C> <C> <C>
Financial instrument assets
- ---------------------------
Cash on hand and in banks $ 5,670 $ 5,670 $ 1,616 $ 1,616
Interest-bearing deposits in other
financial institutions 17,800 17,800 11,221 11,221
Securities available-for-sale 164,172 164,172 172,876 172,876
Loans receivable, net 377,509 377,862 338,545 335,948
Accrued interest receivable 3,487 3,487 3,608 3,608
Financial instrument liabilities
- --------------------------------
NOW, money market, and passbook savings (151,985) (151,985) (136,220) (136,220)
Certificates of deposits (219,767) (220,336) (265,870) (268,565)
Short-term borrowings (76,956) (76,956) (53,690) (53,690)
Long-term borrowings (75,000) (75,000) (25,000) (25,000)
Advances by borrowers for taxes and insurance (2,914) (2,914) (3,724) (3,724)
Accrued interest payable (957) (957) (943) (943)
</TABLE>
Other assets and liabilities of the Company that are not defined as financial
instruments, such as property and equipment, are not included in the above
disclosures. Also not included are nonfinancial instruments typically not
recognized in financial statements such as loan servicing rights, customer
goodwill, and similar items.
While the above estimates are based on management's judgment of the most
appropriate factors, there is no assurance that were the Company to have
disposed of these items on December 31, 1997 and 1996, the fair values would
have been achieved, because the market value may differ depending on the
circumstances. The estimated fair values at December 31, 1997 and 1996
should not necessarily be considered to apply at subsequent dates.
NOTE 13 - EMPLOYEE BENEFIT PLANS
In 1996, the Company terminated its defined benefit pension plan which
covered substantially all employees and distributed all proceeds to the
participants. In 1995, an estimated curtailment expense for the termination
was recorded in the amount of $271,000, and in 1996, an additional expense of
$30,000 was recorded when the final determination was made.
- -------------------------------------------------------------------------------
(Continued)
74
<PAGE>
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Table amounts in thousands of dollars)
- -------------------------------------------------------------------------------
NOTE 13 - EMPLOYEE BENEFIT PLANS (Continued)
The Bank has a defined contribution plan covering all of its eligible
employees. Employees are eligible to participate in the plan after attainment
of age 21 and completion of one year of service. The Company provides
matching funds under the Company's 401(k) plan. The Company matches an
amount equal to the employee's contribution, up to a maximum of 2.5% of
annual compensation. The expense recorded in 1997 and 1996 was $65,000 and
$61,000, respectively.
The Company's Board of Directors has adopted a stock option and incentive
plan that was ratified by the stockholders. Under the stock option plan,
stock options, stock appreciation rights, and restricted stock awards, up to
an aggregate of 724,500 shares at the market price of the Company's common
stock on the date of grant, were available to be granted to the directors,
officers, and employees of the Company or the Bank. During 1995, the stock
option plan was amended to increase to 1,287,000 the aggregate shares
available.
In 1996, the Board of Directors adopted the 1996 Stock Option and Incentive
Plan, whereby an additional 246,000 stock options could be granted. In 1997,
this plan was amended to increase the aggregate shares available to 621,000.
During 1997, options for 409,500 shares had been granted at $11.21 to $17.67
per share and are fully vested after six years. During 1996, options for
211,500 shares had been granted at $9.45 to $11.33 per share and are fully
vested after completing six years of service.
Statement of Financial Accounting Standards No. 123 requires pro forma
disclosures for companies that do not adopt its fair value accounting method
for stock-based employee compensation. Accordingly, the following pro forma
information presents net income and earnings per share had the fair value
method been used to measure compensation cost for stock option plans.
Compensation cost actually recognized for stock options was $0 for 1997 and
1996.
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net income as reported $2,610 $1,589
Pro forma net income 2,243 1,363
Basic earnings per share as reported .61 .34
Pro forma basic earnings per share .52 .29
Diluted earnings per share as reported .58 .32
Pro forma diluted earnings per share .50 .28
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
75
<PAGE>
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Table amounts in thousands of dollars)
- -------------------------------------------------------------------------------
NOTE 13 - EMPLOYEE BENEFIT PLANS (Continued)
The activity in the stock option plans for 1997 and 1996 is summarized as
follows:
<TABLE>
<CAPTION>
Weighted
Number Average
of Exercise
Options Price
------- -----
<S> <C> <C>
Outstanding at January 1, 1996 1,007,955 $ 6.68
Granted 211,500 10.71
Exercised (109,845) (4.45)
Forfeited (36,000) (8.55)
---------
Outstanding at December 31, 1996 1,073,610 7.65
Granted 409,500 14.52
Exercised (158,242) (5.70)
Forfeited (60,750) (8.86)
---------
Outstanding at December 31, 1997 1,264,118 9.91
---------
---------
</TABLE>
Options exercisable at year end are as follows:
<TABLE>
<CAPTION>
Weighted
Number Average
of Exercise
Options Price
------- -----
<S> <C> <C>
December 31, 1996 373,860 $ 4.67
December 31, 1997 431,618 6.47
</TABLE>
For options granted during the year, the weighted average fair values at
grant date are as follows:
<TABLE>
<CAPTION>
Number of Exercise Fair
Options Price Value
------- ----- -----
<S> <C> <C> <C>
1996 211,500 $10.71 $2.41
1997 409,500 14.52 4.89
</TABLE>
The fair value of options granted during 1997 and 1996 is estimated using the
following weighted average information: risk-free interest rate of 6.5%,
expected life of 6 years, expected volatility of stock price of 11.624% and
14.72%, and expected dividends of 2.5% per year.
- -------------------------------------------------------------------------------
(Continued)
76
<PAGE>
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
(TABLE AMOUNTS IN THOUSANDS OF DOLLARS)
- -------------------------------------------------------------------------------
NOTE 13 - EMPLOYEE BENEFIT PLANS (Continued)
At year end, options outstanding were as follows:
<TABLE>
<S> <C>
Number of options 1,264,118
Range of exercise price $4.45 - $17.67
Weighted average exercise price $9.91
Weighted average remaining option life 6 years
For options now exercisable
Number 431,618
Weighted average exercise price $6.47
</TABLE>
The Bank has established a Bank Incentive Plan ("BIP") in order to provide
persons in key management positions with an ownership interest in the Company.
Under the BIP, 182,176 shares have been awarded to key personnel. The stock
granted under the BIP was restricted as to certain rights at the time of
issuance. These restrictions were removed over a period of five years. During
1997 and 1996, 0 and 17,757 shares vested. The market value of the shares,
determined at the date of grant, are charged to expense over the vesting period.
In 1993, the Company began to provide certain postretirement health care
benefits for eligible employees. Employees may become eligible based on the
number of years of service and if they reach normal retirement age while working
for the Company. In addition, the Company maintains a retirement plan for
directors which provides retirement benefits based upon the total number of
years of service and average monthly fees received during the last three years
of service as a director. Retirement benefits are payable upon retirement, as
defined under the Plan, and are payable for ten years. In addition to the
monthly retirement benefit, upon attainment of age 65, each director and their
spouse is provided lifetime medical and dental coverage as a supplement to
Medicare.
In accordance with Statement of Financial Accounting Standards No. 106,
"Employers Accounting for Postretirement Benefits Other Than Pensions", the
Company has elected to amortize the accumulated postretirement benefit
obligation (APBO) over 20 years. At December 31, 1997 and 1996, respectively,
the APBO was $973,000 and $706,000, and the postretirement benefit costs for
each of the years ended December 31, 1997, 1996, and 1995 was $106,000,
$124,000, $108,000, respectively. The annual rate of increase in the per capita
cost of covered health care is assumed to be 11.5% for five years and 5.5%
thereafter. The other related disclosures are not considered significant to the
financial statements.
The Company and most of its outside directors have entered into various deferred
compensation agreements. These agreements provide for guaranteed payments for a
specified period (ranging from 60 to 180 months) after a specified age is
attained (ranging from age 60 to age 72). The liability for each covered
director is being accrued over the vesting period. Expense of $11,000, $62,000,
and $152,000 has been included in compensation and benefits in the accompanying
consolidated statements of income for the years ended December 31, 1997, 1996,
and 1995, respectively.
The Company is the beneficiary of life insurance policies on the directors with
an aggregate face value of approximately $2,700,000 and $2,800,000 at
December 31, 1997 and 1996,
- -------------------------------------------------------------------------------
(CONTINUED)
77
<PAGE>
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
(TABLE AMOUNTS IN THOUSANDS OF DOLLARS)
- -------------------------------------------------------------------------------
respectively. In addition, the policies had aggregate cash surrender values
of approximately $548,000 and $308,000 at December 31, 1997 and 1996,
respectively. During 1997, the Company received net insurance proceeds of
$187,000 due to the death of a director.
- -------------------------------------------------------------------------------
(CONTINUED)
78
<PAGE>
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
(TABLE AMOUNTS IN THOUSANDS OF DOLLARS)
- -------------------------------------------------------------------------------
NOTE 13 - EMPLOYEE BENEFIT PLANS (Continued)
The Company's Board of Directors adopted an ESOP for the benefit of all
employees of the Bank. On June 30, 1992, in conjunction with the Bank's mutual
to stock conversion, the ESOP acquired 579,600 shares of Company stock, at $4.45
per share for a total of $2,576,000. To fund the acquisition of Company stock,
the ESOP borrowed $2,576,000 from the Company. The balance of this loan was
$511,000 and $858,000 at December 31, 1997 and 1996, respectively, and is
reflected as a reduction of stockholders' equity. The Company makes annual
contributions to the ESOP equal to the ESOP's debt service. All dividends
received by the ESOP are used to pay debt service. The ESOP shares are pledged
as collateral for its debt. As the debt is repaid, shares are released from
collateral and allocated to active employees, based on the proportion of debt
service paid in the year. Debt of the ESOP is recorded as debt and the shares
pledged as collateral are reported as unearned ESOP shares in the statement of
financial condition. The Company recognizes compensation expense equal to the
amount of cash contributed to the ESOP. ESOP contributions were $267,000,
$290,000, and $303,000 for 1997, 1996, and 1995, respectively. The ESOP shares
as of December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Allocated shares 281,712 243,192
Committed to be released 51,782 69,537
Suspense shares 110,593 194,129
------- -------
Total ESOP shares 444,087 506,858
------- -------
------- -------
</TABLE>
NOTE 14 - PARENT COMPANY ONLY FINANCIAL STATEMENTS
Presented below are the condensed balance sheets, condensed statements of
income, and condensed statements of cash flows for CoVest Bancshares, Inc.
CONDENSED BALANCE SHEETS
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
ASSETS
Cash in banks $ 1,930 $ 891
Securities 408 3,939
Investment in Bank 45,842 44,638
Other assets 552 532
------- -------
$48,732 $50,000
------- -------
------- -------
</TABLE>
- -------------------------------------------------------------------------------
(CONTINUED)
79
<PAGE>
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
(TABLE AMOUNTS IN THOUSANDS OF DOLLARS)
- -------------------------------------------------------------------------------
NOTE 14 - PARENT COMPANY ONLY FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 438 $ 56
Stockholders' equity
Common stock 44 34
Additional paid in capital 19,365 22,155
Retained earnings 28,410 33,990
Treasury stock, at cost - (5,838)
Unearned stock awards (73) (73)
Unearned ESOP shares (511) (858)
Unrealized gain on securities available-for-sale 50 343
Unrealized gain on securities available-for-sale
of subsidiary Bank 1,009 191
------- -------
48,294 49,944
------- -------
$48,732 $50,000
------- -------
------- -------
</TABLE>
CONDENSED STATEMENTS OF INCOME
Years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------ ------- -------
<S> <C> <C> <C>
Operating income
Interest on investments $ 33 $ 44 $ 44
Dividends received from subsidiary 2,000 10,000 5,000
Gain on sale of securities 1,148 5 11
Other 53 95 98
------ ------- -------
Total operating income 3,234 10,144 5,153
Operating expenses 829 245 270
------ ------- -------
INCOME BEFORE EQUITY IN UNDISTRIBUTED EARNINGS
OF SUBSIDIARY 2,405 9,899 4,883
EQUITY (EXCESS) IN UNDISTRIBUTED EARNINGS OF SUBSIDIARY 205 (8,310) (2,272)
------ ------- -------
NET INCOME $2,610 $ 1,589 $ 2,611
------ ------- -------
------ ------- -------
</TABLE>
- -------------------------------------------------------------------------------
(CONTINUED)
80
<PAGE>
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
(TABLE AMOUNTS IN THOUSANDS OF DOLLARS)
- -------------------------------------------------------------------------------
NOTE 14 - PARENT COMPANY ONLY FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,610 $ 1,589 $ 2,611
Adjustments to reconcile net income to net cash
provided by operating activities
Equity (excess) in undistributed earnings of subsidiary (205) 8,310 2,271
Net gain on sales of securities (1,148) (5) (11)
Change in
Other assets (20) (1) 177
Other liabilities 1,098 (40) 129
------- ------- -------
Net cash provided by operating activities 2,335 9,853 5,177
INVESTING ACTIVITIES
Purchase of securities (100) (2,853) (2,299)
Proceeds from sale of securities 4,103 134 489
Proceeds from maturity of securities - - 2,000
------- ------- -------
Net cash provided by (used in) investing activities 4,003 (2,719) 190
FINANCING ACTIVITIES
Proceeds from exercise of stock options,
net of treasury shares issued 901 488 540
Payment received on loan to ESOP 347 340 432
Purchase of treasury stock (5,302) (8,053) (4,969)
Cash dividend paid, net of dividend reinvestments (1,245) (1,233) (898)
------- ------- -------
Net cash used in financing activities (5,299) (8,458) (4,895)
------- ------- -------
Net increase (decrease) in cash and cash equivalents 1,039 (1,324) 472
Cash and cash equivalents at beginning of year 891 2,215 1,743
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,930 $ 891 $ 2,215
------- ------- -------
------- ------- -------
</TABLE>
- -------------------------------------------------------------------------------
(CONTINUED)
81
<PAGE>
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
- -------------------------------------------------------------------------------
NOTE 15 - QUARTERLY RESULTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended 1997
-------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Interest income $ 9,678 $ 9,922 $ 9,605 $ 10,159
Interest expense 5,856 6,067 5,733 6,258
-------- -------- -------- --------
NET INTEREST INCOME 3,822 3,855 3,872 3,901
Provision for possible loan losses 351 402 430 2,889
Other income 1,071 832 909 860
Other expense 2,513 2,796 2,748 3,248
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 2,029 1,489 1,603 (1,376)
Income taxes 712 502 562 (641)
-------- -------- -------- --------
NET INCOME $ 1,317 $ 987 $ 1,041 $ (735)
-------- -------- -------- --------
-------- -------- -------- --------
EARNINGS PER COMMON SHARE
Basic $ .30 $ .23 $ .24 $ (.17)
Diluted .29 .22 .23 (.17)
<CAPTION>
Three Months Ended 1996
-------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Interest income $ 10,683 $ 10,502 $ 11,034 $ 10,158
Interest expense 7,584 7,500 7,697 6,460
-------- -------- -------- --------
NET INTEREST INCOME 3,099 3,002 3,337 3,698
Provision for possible loan losses 190 342 300 565
Other income 2,886 379 526 450
Special SAIF assessment - - 3,033 -
Other expense 2,716 2,691 2,540 2,872
-------- -------- -------- --------
- -------------------------------------------------------------------------------
(Continued)
82
<PAGE>
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
INCOME BEFORE INCOME TAXES 3,079 348 (2,010) 711
Income taxes 1,121 65 (753) 106
-------- -------- -------- --------
NET INCOME $ 1,958 $ 283 $ (1,257) $ 605
-------- -------- -------- --------
-------- -------- -------- --------
EARNINGS PER COMMON SHARE
Basic $ .40 $ .06 $ (.27) $ .13
Diluted .39 .06 (.27) .12
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
83
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors of the Registrant is incorporated herein by
reference from the Company's definitive Proxy Statement for the 1997 Annual
Meeting of Stockholders. Information concerning the executive officers of the
Registrant is discussed in Item 1 of this Report, "Business--Executive
Officers of the Company."
Section 16(a) of the Securities Exchange Act of 1934 requires that the
Company's executive officers and directors and persons who own more than 10%
of the Company Common Stock file reports of ownership and changes in
ownership with the Securities and Exchange Commission and with the exchange
on which the Company's shares of Company Common Stock are traded. Such
persons are also required to furnish the Company with copies of all Section
16(a) forms they file. Based solely on the Company's review of the copies of
such forms furnished to the Company and, if appropriate, representations made
to the Company by any such reporting person concerning whether a Form 5 was
required to be filed for the 1995 fiscal year, the Company is not aware that
any of its directors and executive officers or 10% stockholders failed to
comply with the filing requirements of Section 16(a) during the period
commencing January 1, 1997 through December 31, 1997.
Item 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein by
reference from the Company's definitive Proxy Statement for the 1997 Annual
Meeting of Stockholders, except for information contained under the heading
"Compensation Committee Report on Executive Compensation" and "Performance
Graph."
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the Company's definitive
Proxy Statement for the 1997 Annual Meeting of Stockholders.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and transactions is incorporated
herein by reference from the Company's definitive Proxy Statement for the
1997 Annual Meeting of Stockholders.
- -------------------------------------------------------------------------------
84
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
A report on Form 8-K was filed on October 16, 1997 to report under Item 5,
Other Events, that the Company issued a press release pertaining to net
income for the quarter ended September 30, 1997.
A report on Form 8-K was filed on October 28, 1997 to report under Item 5,
Other Events, that the Company announced a three-for-two stock split.
A report on Form 8-K was filed on November 25, 1997 to report under Item 5,
Other Events, that the Company announced a regular quarterly dividend.
A report on Form 8-K was filed on December 31, 1997 to report under Item 5,
Other Events, that its subsidiary, CoVest Banc would increase its Provision
For Possible Loan Losses during the fourth quarter of 1997 to a total of
approximately $4,100,000 which would result in a loss for the fourth
quarter, 1997.
- -------------------------------------------------------------------------------
85
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Larry G. Gillie By: /s/ Paul A. Larsen
---------------------------- -------------------------------
Larry G. Gillie, Paul A. Larsen,
President and Senior Vice-President,
Chief Executive Officer Treasurer and Chief Financial
Officer
Date: March 6, 1998 Date: March 6, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ Donald J. Cameron By: /s/ Larry G. Gillie
---------------------------------- -------------------------------
Donald J. Cameron, Larry G. Gillie, President,
Chairman of the Board Chief Executive Officer
and Director
Date: March 6, 1998 Date: March 6, 1998
By: /s/ George T. Drost By: /s/ John A. Flink
------------------------------- ---------------------------------
George T. Drost, Director John A. Flink, Director
Date: March 6, 1998 Date: March 6, 1998
By: /s/ David M. Miller By: /s/ Gerald T. Niedert
----------------------------- ---------------------------------
David M. Miller, Director Gerald T. Niedert, Director
Date: March 6, 1998 Date: March 6, 1998
By: /s/ David B. Speer By: /s/ Frank A. Svoboda
------------------------------- ----------------------------------
David B. Speer, Director Frank A. Svoboda, Jr., Director
Date: March 6, 1998 Date: March 6, 1998
By: /s/ Thomas TenHoeve
----------------------------------
Thomas TenHoeve, Director
Date: March 6, 1998
- -------------------------------------------------------------------------------
86
<PAGE>
COVEST BANCSHARES, INC.
Exhibit Index
To
Annual Report of Form 10-K
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION INCORPORATED HEREIN BY FILED SEQUENTIAL
NO. REFERENCE TO HEREWITH PAGE NO.
<S> <C> <C> <C> <C>
3.1 Certificate of Exhibit 3.1 to the
Incorporation of CoVest Registration Statement on
Bancshares, Inc. Form S-1 filed with the
Commission by CoVest
Bancshares, Inc. on April 1,
1992, as amended (SEC File
No. 33-46909)
3.2 Amendment to Certificate X
of Incorporation of CoVest
Bancshares, Inc.
3.3 Bylaws of CoVest Exhibit 3.2 to the
Bancshares, Inc. Registration Statement of
Form S-1 filed with the
Commission by CoVest
Bancshares, Inc. on April 1,
1992, as amended (SEC File
No. 33-46909)
4.1 Specimen Stock Certificate X
of CoVest Bancshares,
Inc.
10.1 Stock Option and Incentive Exhibit 10.1 to the
Plan Registration Statement of
Form S-1 filed with the
Commission by CoVest
Bancshares, Inc. on April 1,
1992, as amended (SEC File
No. 33-46909)
<PAGE>
10.2 Employment Agreement Exhibit 10.2 to the 1995 10-K
for Larry G. Gillie dated filed with the Commission
February 26, 1996 by CoVest Bancshares, Inc.
on March 28, 1996
(Commission File No. 0-20160)
10.3 Form of Change of X
Control Agreement for
Paul A. Larsen
Allen J. Bishop
Joseph H. Tillotson
Lawrence J. Schmidt
Vernon J. Wiggenhauser
10.4 Form of Change of X
Control Agreement for
R. Kennedy Alger
10.5 Bank Incentive Plan and Exhibit 10.4 to the
Trusts Registration Statement of
Form S-1 filed with the
Commission by CoVest
Bancshares, Inc. on April 1,
1992, as amended (SEC File
No. 33-46909)
10.6 Employee Stock Exhibit 10.5 to the
Ownership Plan Registration Statement of
Form S-1 filed with the
Commission by CoVest
Bancshares, Inc. on April 1,
1992, as amended (SEC File
No. 33-46909)
10.7 Profit Sharing/401(k) Plan Exhibit 10.1 and 10.2 to the
and Trust Agreement March 31, 1995 10-Q, filed
with the Commisssion by
CoVest Bancshares, Inc. on
May 11, 1995 (Commission
File No. 0-20160)
10.8 Amendment 1995-1 to Exhibit 10.1 to the June 30,
CoVest Bancshares, Inc. 1995 10-Q, filed with the
1992 Stock Option and Commission by CoVest
Incentive Plan Bancshares, Inc. on August 8,
1995 (Commission File
2
<PAGE>
No. 0-20160)
10.9 Amendment 1997-1 to X
CoVest Bancshares, Inc.
1992 Stock Option and
Incentive Plan
10.10 1996 Stock Option and X
Incentive Plan
10.11 Amendment 1997-1 to X
1996 Stock Option and
Incentive Plan
10.12 Data Processing Contract X
with M & I
21.1 Subsidiaries of the X
Registrant
23.1 Consent of Crowe Chizek X
99.1 Proxy Statement and proxy Schedule 14A filed with the
(except such portions Commission on March 24,
incorporated by reference 1998.
into this Form 10-K, such
materials shall not be
deemed to be "filed" with
the Commission)
</TABLE>
3
<PAGE>
CERTIFICATE OF AMENDMENT OF
CERTIFICATE OF INCORPORATION
OF
FIRSTFED BANCSHARES, INC.
It is hereby certified that:
1. The name of the corporation (hereinafter called the "CORPORATION")
is FirstFed Bancshares, Inc.
2. The Certificate of Incorporation of the Corporation is hereby
amended by the following resolutions which was duly adopted and approved by
the Stockholders of the Corporation, in accordance with the provisions of
Section 211(b) of the General Corporation Law, as amended, of the State of
Delaware (notice having been given thereof):
RESOLVED, that the Certificate of Incorporation be and it hereby is
amended so that Article First is eliminated and the following Article
First is added thereto:
"FIRST: The name of the Corporation is: COVEST BANCSHARES, INC."
FURTHER RESOLVED, that the Certificate of Incorporation be and it hereby is
amended so that Article Fourth A. is eliminated and the following Article
Fourth A. is added thereto:
"FOURTH:
A. The total number of shares of all classes of stock which the
Corporation shall have the authority to issue is eight million, five
hundred thousand (8,500,000) consisting of:
1. one million (1,000,000) shares of Preferred Stock, par value one
cent ($.01) per share; and
2. seven million, five hundred thousand (7,500,000) shares of Common
Stock, par value one cent ($.01) per share.
3. The amendment of the Certificate of Incorporation herein certified
has been duly adopted in accordance with the provisions of Sections 222 and
242 of the General Corporation Law of the State of Delaware.
4. The Certificate of Amendment to the Certificate of Incorporation
shall become effective on June 2, 1997.
Dated as of the 23rd day of April, 1997.
---------------------------------------
Paul A. Larsen, Secretary
<PAGE>
[Letterhead]
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFICATE IS TRANSFERABLE IN THE CITY OF CHICAGO OR
IN THE CITY OF NEW YORK
NUMBER SHARES
- ------ ------
CU SEE REVERSE FOR CERTAIN DEFINITIONS
CUSIP 223032 10 3
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, PAR VALUE $.01
PER SHARE, OF
COVEST BANCSHARES, INC.
(the "Corporation"), a Delaware corporation. The shares represented by this
certificate are transferable only on the stock transfer books of the
Corporation by the holder of record hereof, or by his duly authorized
attorney or legal representative, upon the surrender of this certificate
properly endorsed. This certificate is not valid unless countersigned
and registered by the Corporation's transfer agent and registrar.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be
executed by the facsimile signatures of its duly authorized officers and has
caused a facsimile of its corporate seal to be hereunto affixed.
Dated: COUNTERSIGNED AND REGISTERED:
HARRIS TRUST AND SAVINGS BANK
(CHICAGO)
TRANSFER AGENT AND REGISTRAR
[SEAL]
BY
AUTHORIZED SIGNATURE
/s/ Paul A. Larsen /s/ Larry G. Gillie
SECRETARY PRESIDENT
CERTIFICATE OF STOCK
<PAGE>
COVEST BANCSHARES, INC.
The shares represented by this certificate are issued subject to all the
provisions of the certificate of incorporation and bylaws of CoVest
Bancshares, Inc. (the "Corporation") as from time to time amended (copies of
which are on file at the principal offices of the Corporation).
The Corporation's certificate of incorporation provides that no "person"
(as defined in the certificate of incorporation) who "beneficially owns" (as
defined in the certificate of incorporation) in excess of 10% of the
outstanding shares of the Corporation shall be entitled to vote any shares
held in excess of such limit. This provision of the certificate of
incorporation shall not apply to an acquisition of securities of the
Corporation by an employee stock purchase plan or other employee benefit plan
of the Corporation or any of its subsidiaries.
The Corporation's certificate of incorporation also includes a provision
the general effect of which is to require the affirmative vote of the holders
of 80% of the outstanding voting shares of the Corporation to approve certain
business combinations (as defined in the certificate of incorporation)
between the Corporation and a 10% or more stockholder. However, only the
affirmative vote of a majority of the outstanding shares or such vote as is
otherwise required by law (rather than the 80% voting requirement) is
applicable to the particular transaction if it is approved by a majority of
the "disinterested directors" (as defined in the certificate of
incorporation) or, alternatively, the transaction satisfies certain minimum
price and procedural requirements.
The Corporation will furnish to any stockholder upon request and without
charge a full statement of the powers, designations, preferences and relative
participating, optional or other special rights of each authorized class of
stock or series thereof and the qualifications, limitations or restrictions
of such preferences and/or rights, to the extent that the same have been
fixed, and of the authority of the board of directors to designate the same
with respect to other series. Such request may be made to the Corporation or
to its transfer agent and registrar.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM -- as tenants in common ILLINOIS TRANS MINOR LAW -- .............Custodian...........
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of under Illinois Transfers to Minors Law
survivorship and not as tenants
in common UNIF TRF MIN ACT -- ............Custodian (until age...........)
(Cust)
............... under Uniform Transfers
(Minor)
to Minors Act..........................
(State)
</TABLE>
ADDITIONAL ABBREVIATIONS MAY ALSO BE USED THOUGH NOT IN THE ABOVE LIST.
FOR VALUE RECEIVED, ____________________hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ------------------------------------------
- ------------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares
- --------------------------------------------------------------------------
of the Common Stock represented by the within certificate, and do
hereby irrevocably constitute and appoint
Attorney
- ------------------------------------------------------------------------
to transfer the said shares on the books of the within named Corporation
with full power of substitution in the premises.
Dated
---------------------------
AFFIX MEDALLION SIGNATURE
GUARANTEED IMPRINT BELOW X
--------------------------------------
(SIGNATURE)
X
--------------------------------------
(SIGNATURE)
---------------------------------------
ABOVE SIGNATURE(S) TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER.
THE SIGNATURE(S) MUST BE GUARANTEED BY
AN ELIGIBLE GUARANTOR INSTITUTION SUCH
AS A SECURITIES BROKER/DEALER,
COMMERCIAL BANK & TRUST COMPANY,
SAVINGS AND LOAN ASSOCIATION OR A
CREDIT UNION PARTICIPATING IN A
MEDALLION PROGRAM APPROVED BY THE
SECURITIES TRANSFER ASSOCIATION, INC.
<PAGE>
CHANGE OF CONTROL AGREEMENT
This Change of Control Agreement (this "Agreement"), is made and entered
into as of the ______ day of ________________, 1996, (the "Effective Date") by
and between FIRSTFED BANCSHARES, INC., a Delaware corporation (the "Employer"),
and __________________________ (the "Executive").
RECITALS
A. The Executive is currently serving as the _______________________ of
First Federal Bank for Savings (the "Bank").
B. The Employer owns all of the issued and outstanding capital stock of
the Bank.
C. The Employer desires to continue to employ the Executive as an officer
of the Employer and the Executive is willing to continue such employment.
D. In addition, the Employer recognizes that circumstances may arise in
which a change of control of the Employer through acquisition or otherwise may
occur thereby causing uncertainty of employment without regard to the competence
or past contributions of the Executive, which uncertainty may result in the loss
of valuable services of the Executive, and the Employer and the Executive wish
to provide reasonable security to the Executive against changes in the
employment relationship in the event of any such change of control.
NOW, THEREFORE, in consideration of the premises and of the covenants and
agreements hereinafter contained, it is covenanted and agreed by and between the
parties hereto as follows:
AGREEMENTS
1. TERM AND TERMINATION.
(a) BASIC TERM. The term of this Agreement shall be for one (1) year
commencing as of the Effective Date, and shall, upon the favorable review of the
performance of the Executive by the Board of Directors of the Employer,
automatically extend for one (1) additional year commencing on each anniversary
of the Effective Date. This Agreement may be terminated by either party
effective as of the last day of the then current one (1) year period by written
notice to that effect delivered to the other not less than ninety (90) days
prior to the anniversary of such Effective Date.
(b) TERMINATION UPON CHANGE OF CONTROL.
(i) In the event of a Change in Control (as defined below) of
the Employer and the termination of the Executive's employment under either
A or B below, the Executive shall be entitled to a lump sum payment equal
to his annual base salary at the time of such termination. The Employer
shall also continue to provide coverage for the Executive under the Bank
health insurance program for one (1) year following such termination. The
following shall constitute termination under this paragraph:
<PAGE>
A. The Executive terminates his employment by a written notice to
that effect delivered to the Board within one hundred and eighty
(180) days after the Change in Control.
B. The employment of the Executive is terminated by the Employer or
its successor either in contemplation of or within one (1) year
after the Change in Control.
(ii) For purposes of this paragraph, the term "Change in Control"
shall mean the following:
A. The consummation of the acquisition by any person (as such term
is defined in Section 13(d) or 14(d) of the Securities Exchange
Act of 1934, as amended (the "1934 Act")) of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the 1934 Act)
of thirty-three percent (33%) or more of the combined voting
power of the then outstanding voting securities; or
B. The individuals who, as of the date hereof, are members of the
Board cease for any reason to constitute a majority of the Board,
unless the election, or nomination for election by the
stockholders, of any new director was approved by a vote of a
majority of the Board, and such new director shall, for purposes
of this Agreement, be considered as a member of the Board; or
C. Approval by stockholders of: (1) a merger or consolidation if
the stockholders immediately before such merger or consolidation
do not, as a result of such merger or consolidation, own,
directly or indirectly, more than sixty-seven percent (67%) of
the combined voting power of the then outstanding voting
securities of the entity resulting from such merger or
consolidation in substantially the same proportion as their
ownership of the combined voting power of the voting securities
outstanding immediately before such merger or consolidation; or
(2) a complete liquidation or dissolution or an agreement for the
sale or other disposition of all or substantially all of the
assets of the entity.
Notwithstanding the foregoing, a Change in Control shall not be deemed
to occur solely because thirty-three percent (33%) or more of the combined
voting power of the then outstanding securities is acquired by: (1) a
trustee or other fiduciary holding securities under one or more employee
benefit plans maintained for employees of the entity; or (2) any
corporation which, immediately prior to such acquisition, is owned directly
or indirectly by the stockholders in the same proportion as their ownership
of stock immediately prior to such acquisition.
(c) REGULATORY SUSPENSION AND TERMINATION.
2
<PAGE>
(i) If the Executive is suspended from office and/or
temporarily prohibited from participating in the conduct of the
Employer's affairs by a notice served under Section 8(e)(3) (12 U.S.C.
Section 1818(e)(3)) or 8(g) (12 U.S.C. Section 1818(g)) of the Federal
Deposit Insurance Act, as amended, the Employer's obligations under this
Agreement shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed,
the Employer may in its discretion (A) pay the Executive all or part of
the compensation withheld while their Agreement obligations were
suspended and (B) reinstate (in whole or in part) any of the obligations
which were suspended.
(ii) If the Executive is removed and/or permanently
prohibited from participating in the conduct of the Employer's affairs
by an order issued under Section 8(e) (12 U.S.C. Section 1818(e)) or
8(g) (12 U.S.C. Section 1818(g)) of the Federal Deposit Insurance Act,
as amended, all obligations of the Employer under this Agreement shall
terminate as of the effective date of the order, but vested rights of
the contracting parties shall not be affected.
(iii) If the Employer is in default as defined in Section 3(x)
(12 U.S.C. Section 1813(x)(1)) of the Federal Deposit Insurance Act, as
amended, all obligations of the Employer under this Agreement shall
terminate as of the date of default, but this paragraph shall not affect
any vested rights of the contracting parties.
(iv) All obligations of the Employer under this Agreement
shall be terminated, except to the extent determined that continuation
of this Agreement is necessary for the continued operation of the
institution by the Federal Deposit Insurance Corporation (the "FDIC"),
at the time the FDIC enters into an agreement to provide assistance to
or on behalf of the Employer under the authority contained in Section
13(c) (12 U.S.C. Section 1823(c)) of the Federal Deposit Insurance Act,
as amended, or when the Employer is determined by the FDIC to be in an
unsafe or unsound condition. Any rights of the parties that have already
vested, however, shall not be affected by such action.
(v) Any payments made to the Executive pursuant to this
Agreement, or otherwise, are subject to and conditioned upon their
compliance with Section 18(k) (12 U.S.C. Section 1828(k)) of the Federal
Deposit Insurance Act, as amended, and any regulations promulgated
thereunder.
2. WITHHOLDING. The Employer shall be entitled to withhold from amounts
payable to the Executive hereunder, any federal, state or local withholding or
other taxes or charges which it is from time to time required to withhold. The
Employer shall be entitled to rely upon the opinion of its legal counsel with
regard to any question concerning the amount or requirement of any such
withholding.
3
<PAGE>
3. INTERCORPORATE TRANSFERS. If the Executive shall be voluntarily
transferred to an affiliate of the Employer, such transfer shall not be deemed
to terminate or modify this Agreement and the employing corporation to which the
Executive shall have been transferred shall, for all purposes of this Agreement,
be construed as standing in the same place and stead as the Employer as of the
date of such transfer. For purposes hereof, an affiliate of the Employer shall
mean any corporation directly or indirectly controlling, controlled by, or under
common control with the Employer.
4. INTEREST IN ASSETS. Neither the Executive nor his estate shall
acquire hereunder any rights in funds or assets of the Employer, otherwise than
by and through the actual payment of amounts payable hereunder; nor shall the
Executive or his estate have any power to transfer, assign, anticipate,
hypothecate or otherwise encumber in advance any of said payments; nor shall any
of such payments be subject to seizure for the payment of any debt, judgment,
alimony, separate maintenance or be transferable by operation of law in the
event of bankruptcy, insolvency or otherwise of the Executive.
5. NOT AN EMPLOYMENT AGREEMENT. Nothing in this Agreement shall give the
Executive any rights (or impose any obligations) to continued employment by the
Employer or successor of the Employer, nor shall it give the Employer any rights
(or impose any obligations) for the continued performance of duties by the
Executive for the Employer or successor of the Employer.
6. GENERAL PROVISIONS.
(a) SUCCESSORS; ASSIGNMENT. This Agreement shall be binding upon and
inure to the benefit of the Executive, the Employer and his and its respective
personal representatives, successors and assigns, and any successor or assign of
the Employer shall be deemed the "Employer" hereunder. The Employer shall
require any successor to all or substantially all of the business and/or assets
of the Employer, whether directly or indirectly, by purchase, merger,
consolidation, acquisition of stock, or otherwise, by an agreement in form and
substance satisfactory to the Executive, expressly to assume and agree to
perform this Agreement in the same manner and to the same extent as the Employer
would be required to perform if no such succession had taken place.
(b) ENTIRE AGREEMENT; MODIFICATIONS. This Agreement constitutes the
entire agreement between the parties respecting the employment of the Executive,
and supersedes all prior negotiations, undertakings, agreements and arrangements
with respect thereto, whether written or oral. Except as otherwise explicitly
provided herein, this Agreement may not be amended or modified except by written
agreement signed by the Executive and the Employer.
(c) ENFORCEMENT AND GOVERNING LAW. The provisions of this Agreement
shall be regarded as divisible and separate; if any of said provisions should be
declared invalid or unenforceable by a court of competent jurisdiction, the
validity and enforceability of the remaining provisions shall not be affected
thereby. This Agreement shall be construed and the legal relations of the
parties hereto shall be determined in accordance with the laws of the state of
Illinois without reference to the law regarding conflicts of law.
4
<PAGE>
(d) ARBITRATION. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration,
conducted before a panel of three arbitrators sitting in a location selected by
the Executive within fifty (50) miles from the location of the Employer, in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction.
(e) LEGAL FEES. All reasonable legal fees paid or incurred by the
prevailing party pursuant to any dispute or question of interpretation relating
to this Agreement shall be paid or reimbursed by the losing party if the
prevailing party is successful on the merits pursuant to a legal judgment,
arbitration or settlement.
(f) WAIVER. No waiver by either party at any time of any breach by
the other party of, or compliance with, any condition or provision of this
Agreement to be performed by the other party, shall be deemed a waiver of any
similar or dissimilar provisions or conditions at the same time or any prior or
subsequent time.
(g) NOTICES. Notices pursuant to this Agreement shall be in writing
and shall be deemed given when received; and, if mailed, shall be mailed by
United States registered or certified mail, return receipt requested, postage
prepaid; and if to the Employer, addressed to the principal headquarters of the
Employer, attention: Chairman; or, if to the Executive, to the address set
forth below the Executive's signature on this Agreement, or to such other
address as the party to be notified shall have given to the other.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
FIRSTFED BANCSHARES, INC. EXECUTIVE
- ----------------------------------- --------------------------------------
Larry G. Gillie, President
--------------------------------------
--------------------------------------
(Address)
FIRST FEDERAL BANK FOR SAVINGS
- -----------------------------------
Larry G. Gillie, President
ras\FFBI\CHNGCTRL.FRM
5
<PAGE>
CHANGE OF CONTROL AGREEMENT
---------------------------
This Change of Control Agreement (this "Agreement"), is made and entered
into as of the ______ day of ________________, 1996, (the "Effective Date") by
and between FIRSTFED BANCSHARES, INC., a Delaware corporation (the "Employer"),
and ____________________________ (the "Executive").
RECITALS
--------
A. The Executive is currently serving as the ______________________ of
First Federal Bank for Savings (the "Bank").
B. The Employer owns all of the issued and outstanding capital stock of
the Bank.
C. The Employer desires to continue to employ the Executive as an officer
of the Employer and the Executive is willing to continue such employment.
D. In addition, the Employer recognizes that circumstances may arise in
which a change of control of the Employer through acquisition or otherwise may
occur thereby causing uncertainty of employment without regard to the competence
or past contributions of the Executive, which uncertainty may result in the loss
of valuable services of the Executive, and the Employer and the Executive wish
to provide reasonable security to the Executive against changes in the
employment relationship in the event of any such change of control.
NOW, THEREFORE, in consideration of the premises and of the covenants and
agreements hereinafter contained, it is covenanted and agreed by and between the
parties hereto as follows:
AGREEMENTS
----------
1. TERM AND TERMINATION.
(a) BASIC TERM. The term of this Agreement shall be for two (2)
years commencing as of the Effective Date, and shall, upon the favorable review
of the performance of the Executive by the Board of Directors of the Employer,
automatically extend for one (1) additional year commencing on each anniversary
of the Effective Date. This Agreement may be terminated by either party
effective as of the last day of the then current one (1) year period by written
notice to that effect delivered to the other not less than ninety (90) days
prior to the anniversary of such Effective Date.
(b) TERMINATION UPON CHANGE OF CONTROL.
(i) In the event of a Change in Control (as defined below) of
the Employer and the termination of the Executive's employment under either
A or B below, the Executive shall be entitled to a lump sum payment equal
to his annual base salary at the time of such termination. The Employer
shall also continue to provide coverage for the Executive under the Bank
health insurance program for one (1) year following such termination. The
following shall constitute termination under this paragraph:
<PAGE>
A. The Executive terminates his employment by a written notice to
that effect delivered to the Board within one hundred and eighty
(180) days after the Change in Control.
B. The employment of the Executive is terminated by the Employer or
its successor either in contemplation of or within one (1) year
after the Change in Control.
(ii) For purposes of this paragraph, the term "Change in
Control" shall mean the following:
A. The consummation of the acquisition by any person (as such term
is defined in Section 13(d) or 14(d) of the Securities Exchange
Act of 1934, as amended (the "1934 Act")) of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the 1934 Act)
of thirty-three percent (33%) or more of the combined voting
power of the then outstanding voting securities; or
B. The individuals who, as of the date hereof, are members of the
Board cease for any reason to constitute a majority of the Board,
unless the election, or nomination for election by the
stockholders, of any new director was approved by a vote of a
majority of the Board, and such new director shall, for purposes
of this Agreement, be considered as a member of the Board; or
C. Approval by stockholders of: (1) a merger or consolidation if
the stockholders immediately before such merger or consolidation
do not, as a result of such merger or consolidation, own,
directly or indirectly, more than sixty-seven percent (67%) of
the combined voting power of the then outstanding voting
securities of the entity resulting from such merger or
consolidation in substantially the same proportion as their
ownership of the combined voting power of the voting securities
outstanding immediately before such merger or consolidation; or
(2) a complete liquidation or dissolution or an agreement for the
sale or other disposition of all or substantially all of the
assets of the entity.
Notwithstanding the foregoing, a Change in Control shall not be deemed
to occur solely because thirty-three percent (33%) or more of the combined
voting power of the then outstanding securities is acquired by: (1) a
trustee or other fiduciary holding securities under one or more employee
benefit plans maintained for employees of the entity; or (2) any
corporation which, immediately prior to such acquisition, is owned directly
or indirectly by the stockholders in the same proportion as their ownership
of stock immediately prior to such acquisition.
(c) REGULATORY SUSPENSION AND TERMINATION.
2
<PAGE>
(i) If the Executive is suspended from office and/or
temporarily prohibited from participating in the conduct of the
Employer's affairs by a notice served under Section 8(e)(3) (12 U.S.C.
Section 1818(e)(3)) or 8(g) (12 U.S.C. Section 1818(g)) of the Federal
Deposit Insurance Act, as amended, the Employer's obligations under this
Agreement shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed,
the Employer may in its discretion (A) pay the Executive all or part of
the compensation withheld while their Agreement obligations were suspended
and (B) reinstate (in whole or in part) any of the obligations which were
suspended.
(ii) If the Executive is removed and/or permanently prohibited
from participating in the conduct of the Employer's affairs by an order
issued under Section 8(e) (12 U.S.C. Section 1818(e)) or 8(g) (12 U.S.C.
Section 1818(g)) of the Federal Deposit Insurance Act, as amended, all
obligations of the Employer under this Agreement shall terminate as of the
effective date of the order, but vested rights of the contracting parties
shall not be affected.
(iii) If the Employer is in default as defined in Section 3(x)
(12 U.S.C. Section 1813(x)(1)) of the Federal Deposit Insurance Act, as
amended, all obligations of the Employer under this Agreement shall
terminate as of the date of default, but this paragraph shall not affect
any vested rights of the contracting parties.
(iv) All obligations of the Employer under this Agreement
shall be terminated, except to the extent determined that continuation
of this Agreement is necessary for the continued operation of the
institution by the Federal Deposit Insurance Corporation (the "FDIC"), at
the time the FDIC enters into an agreement to provide assistance to or on
behalf of the Employer under the authority contained in Section 13(c)
(12 U.S.C. Section 1823(c)) of the Federal Deposit Insurance Act, as
amended, or when the Employer is determined by the FDIC to be in an unsafe
or unsound condition. Any rights of the parties that have already vested,
however, shall not be affected by such action.
(v) Any payments made to the Executive pursuant to this
Agreement, or otherwise, are subject to and conditioned upon their
compliance with Section 18(k) (12 U.S.C. Section 1828(k)) of the Federal
Deposit Insurance Act, as amended, and any regulations promulgated
thereunder.
2. WITHHOLDING. The Employer shall be entitled to withhold from amounts
payable to the Executive hereunder, any federal, state or local withholding or
other taxes or charges which it is from time to time required to withhold. The
Employer shall be entitled to rely upon the opinion of its legal counsel with
regard to any question concerning the amount or requirement of any such
withholding.
3
<PAGE>
3. INTERCORPORATE TRANSFERS. If the Executive shall be voluntarily
transferred to an affiliate of the Employer, such transfer shall not be deemed
to terminate or modify this Agreement and the employing corporation to which the
Executive shall have been transferred shall, for all purposes of this Agreement,
be construed as standing in the same place and stead as the Employer as of the
date of such transfer. For purposes hereof, an affiliate of the Employer shall
mean any corporation directly or indirectly controlling, controlled by, or under
common control with the Employer.
4. INTEREST IN ASSETS. Neither the Executive nor his estate shall
acquire hereunder any rights in funds or assets of the Employer, otherwise than
by and through the actual payment of amounts payable hereunder; nor shall the
Executive or his estate have any power to transfer, assign, anticipate,
hypothecate or otherwise encumber in advance any of said payments; nor shall any
of such payments be subject to seizure for the payment of any debt, judgment,
alimony, separate maintenance or be transferable by operation of law in the
event of bankruptcy, insolvency or otherwise of the Executive.
5. NOT AN EMPLOYMENT AGREEMENT. Nothing in this Agreement shall give the
Executive any rights (or impose any obligations) to continued employment by the
Employer or successor of the Employer, nor shall it give the Employer any rights
(or impose any obligations) for the continued performance of duties by the
Executive for the Employer or successor of the Employer.
6. GENERAL PROVISIONS.
(a) SUCCESSORS; ASSIGNMENT. This Agreement shall be binding upon and
inure to the benefit of the Executive, the Employer and his and its respective
personal representatives, successors and assigns, and any successor or assign of
the Employer shall be deemed the "Employer" hereunder. The Employer shall
require any successor to all or substantially all of the business and/or assets
of the Employer, whether directly or indirectly, by purchase, merger,
consolidation, acquisition of stock, or otherwise, by an agreement in form and
substance satisfactory to the Executive, expressly to assume and agree to
perform this Agreement in the same manner and to the same extent as the Employer
would be required to perform if no such succession had taken place.
(b) ENTIRE AGREEMENT; MODIFICATIONS. This Agreement constitutes the
entire agreement between the parties respecting the employment of the Executive,
and supersedes all prior negotiations, undertakings, agreements and arrangements
with respect thereto, whether written or oral. Except as otherwise explicitly
provided herein, this Agreement may not be amended or modified except by written
agreement signed by the Executive and the Employer.
(c) ENFORCEMENT AND GOVERNING LAW. The provisions of this Agreement
shall be regarded as divisible and separate; if any of said provisions should be
declared invalid or unenforceable by a court of competent jurisdiction, the
validity and enforceability of the remaining provisions shall not be affected
thereby. This Agreement shall be construed and the legal relations of the
parties hereto shall be determined in accordance with the laws of the state of
Illinois without reference to the law regarding conflicts of law.
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(d) ARBITRATION. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration,
conducted before a panel of three arbitrators sitting in a location selected by
the Executive within fifty (50) miles from the location of the Employer, in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction.
(e) LEGAL FEES. All reasonable legal fees paid or incurred by the
prevailing party pursuant to any dispute or question of interpretation relating
to this Agreement shall be paid or reimbursed by the losing party if the
prevailing party is successful on the merits pursuant to a legal judgment,
arbitration or settlement.
(f) WAIVER. No waiver by either party at any time of any breach by
the other party of, or compliance with, any condition or provision of this
Agreement to be performed by the other party, shall be deemed a waiver of any
similar or dissimilar provisions or conditions at the same time or any prior or
subsequent time.
(g) NOTICES. Notices pursuant to this Agreement shall be in writing
and shall be deemed given when received; and, if mailed, shall be mailed by
United States registered or certified mail, return receipt requested, postage
prepaid; and if to the Employer, addressed to the principal headquarters of the
Employer, attention: Chairman; or, if to the Executive, to the address set
forth below the Executive's signature on this Agreement, or to such other
address as the party to be notified shall have given to the other.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
FIRSTFED BANCSHARES, INC. EXECUTIVE
_________________________________ ________________________________
Larry G. Gillie, President ________________________________
________________________________
(Address)
FIRST FEDERAL BANK FOR SAVINGS
_________________________________
Larry G. Gillie, President
5
<PAGE>
FIRSTFED BANCSHARES, INC.
1992 STOCK OPTION AND INCENTIVE PLAN
AMENDMENT 1997-1
FEBRUARY 24, 1997
Pursuant to Section 19 of the FirstFed Bancshares, Inc. 1992 Stock Option
and Incentive Plan (the "1992 Option Plan"), FirstFed Bancshares, Inc., by its
Directors and on the date stated above, hereby amends the Stock Option Plan,
subject to stockholder approval, effective as of January 1, 1997.
1. 1992 Option Plan Section 7(a) is amended to read as follows:
"(a) An Option or Right granted under the Plan shall be
exercisable as provided in paragraphs (c) and (d) of this Section
7. Cash settlements of Rights may be made only in accordance
with any applicable restrictions pursuant to Rule 16b-3(e) under
the Securities Exchange Act of 1934 or any similar or successor
provision."
2. 1992 Stock Option Plan Section 11(a) is hereby amended to read as
follows:
"(a) At the time of an award of Restricted Stock, the
committee shall establish for each Participant a Restricted
Period of not less than six months during which or at the
expiration of which, as the Committee shall determine and provide
in the agreement referred to in paragraph (d) of this Section 11,
the Shares awarded as Restricted Stock shall vest. Subject to
any such other terms and conditions as the Committee shall
provide, shares of Restricted Stock may not be sold, assigned,
transferred, pledged or otherwise encumbered by the Participant,
except as hereinafter provided. Except for such restrictions,
and subject to paragraphs (c), (d) and (e) of this Section 11 and
Section 12 hereof, the Participant as owner of such shares shall
have all the rights of a stockholder, including but not limited
to the right to receive all dividends paid on such shares and the
right to vote such shares. The Committee shall have the
authority, in its discretion, to accelerate the time at which any
or all of the restrictions shall lapse with respect to any shares
of Restricted Stock prior to the expiration of the Restricted
Period with respect thereto, or to remove any or all of such
restrictions, whenever it may determine that such
<PAGE>
action is appropriate by reason of changes in applicable tax or
other laws or other changes in circumstances occurring after the
commencement of such Restricted Period."
3. 1992 Option Plan Section 15 is hereby amended to read as follows:
"15. ASSIGNMENTS AND TRANSFERS. No Award nor any right or
interest of a Participant under the Plan in any instrument
evidencing any Award under the Plan may be assigned, encumbered
or transferred except by will or the laws of descent and
distribution in the event of the death of the Participant, or in
the case of an award other than an Incentive Stock Option: (i) by
gifting for the benefit of descendants for estate planning
purposes; or (ii) pursuant to a certified domestic relations
order."
The remaining 1992 Option Plan provisions shall continue in full force and
effect.
FIRSTFED BANCSHARES, INC.
By:_____________________________
Secretary
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FIRSTFED BANCSHARES, INC.
1996 STOCK OPTION
AND INCENTIVE PLAN
<PAGE>
TABLE OF CONTENTS
PAGE
1. PLAN PURPOSE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
3. ADMINISTRATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
4. PARTICIPATION IN COMMITTEE AWARDS . . . . . . . . . . . . . . . . . . 3
5. SHARES SUBJECT TO PLAN. . . . . . . . . . . . . . . . . . . . . . . . 3
6. GENERAL TERMS AND CONDITIONS OF OPTIONS AND RIGHTS. . . . . . . . . . 3
7. EXERCISE OF OPTIONS OR RIGHTS . . . . . . . . . . . . . . . . . . . . 4
8. STOCK APPRECIATION RIGHTS . . . . . . . . . . . . . . . . . . . . . . 5
9. LIMITED STOCK APPRECIATION RIGHTS . . . . . . . . . . . . . . . . . . 5
10. TERMS AND CONDITIONS OF RESTRICTED STOCK. . . . . . . . . . . . . . . 6
11. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. . . . . . . . . . . . . . 8
12. EFFECT OF MERGER ON OPTIONS OR RIGHTS . . . . . . . . . . . . . . . . 8
13. EFFECT OF CHANGE IN CONTROL . . . . . . . . . . . . . . . . . . . . . 9
14. ASSIGNMENTS AND TRANSFERS . . . . . . . . . . . . . . . . . . . . . . 9
15. EMPLOYEE RIGHTS UNDER THE PLAN. . . . . . . . . . . . . . . . . . . . 9
16. DELIVERY AND REGISTRATION OF STOCK. . . . . . . . . . . . . . . . . . 10
17. WITHHOLDING TAX . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
18. AMENDMENT OR TERMINATION. . . . . . . . . . . . . . . . . . . . . . . 10
19. EFFECTIVE DATE AND TERM OF PLAN . . . . . . . . . . . . . . . . . . . 11
20. NON-EMPLOYEE DIRECTOR GRANTS. . . . . . . . . . . . . . . . . . . . . 11
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FIRSTFED BANCSHARES, INC.
1996 STOCK OPTION AND INCENTIVE PLAN
1. PLAN PURPOSE. The purpose of the Plan is to promote the long-term
interests of the Corporation and its stockholders by providing a means for
attracting and retaining directors, officers and employees of the Corporation
and its Affiliates.
2. DEFINITIONS. The following definitions are applicable to the Plan:
"Affiliate" - means any "parent corporation" or "subsidiary corporation" of
the Corporation, as such terms are defined in Section 424(e) and (f),
respectively, of the Code.
"Award" - means the grant of a Stock Option, a Stock Appreciation Right, a
Limited Stock Appreciation Right, or of Restricted Stock, or any combination
thereof, as provided in the Plan.
"Bank" - means First Federal Bank for savings and its predecessors and
successors.
"Code" - means the Internal Revenue Code of 1986, as amended.
"Committee" - means the Committee referred to in Section 3 hereof.
"Continuous Service" - means the absence of any interruption or
termination of service as a director, officer or employee of the Corporation
or an Affiliate. Service shall not be considered interrupted in the case of
sick leave, military leave or any other leave of absence approved by the
Corporation, or in the case of transfers between payroll locations of the
Corporation or between the Corporation, its parent, its subsidiaries or its
successor.
"Corporation" - means FirstFed Bancshares, Inc. , a Delaware corporation.
"Employee" - means any person, including an officer or director, who is
employed by the Corporation or any Affiliate.
"ERISA" - means the Employee Retirement Income Security Act of 1974, as
amended.
"Exercise Price" - means (i) in the case of an Option, the price per
Share at which the Shares subject to such Option may be purchased upon
exercise of such Option and (ii) in the case of a Right, the price per Share
(other than the Market Value per Share on the date of exercise and the Offer
Price per Share as defined in Section 9 hereof) which, upon grant, the
Committee determines shall be utilized in calculating the aggregate value
which a Participant shall be entitled to receive pursuant to Sections 8, 9 or
12 hereof upon exercise of such Right.
"Limited Stock Appreciation Right" - means a stock appreciation right
with respect to Shares granted by the Committee pursuant to Sections 6 and 9
hereof.
<PAGE>
"Market Value" - means the average of the high and low quoted sales price
on the date in question (or, if there is no reported sale on such date, on the
last preceding date on which any reported sale occurred) of a Share on the
Composite Tape for the New York Stock Exchange-Listed Stocks, or, if on such
date the Shares are not quoted on the Composite Tape, on the New York Stock
Exchange, or, if the Shares are not listed or admitted to trading on such
exchange, on the principal United States securities exchange registered under
the Securities Exchange Act of 1934 on which the Shares are listed or admitted
to trading, or, if the Shares are not listed or admitted to trading on any such
exchange, the mean between the closing high bid and low asked quotations with
respect to a Share on such date on the National Association of Securities
Dealers, Inc., Automated Quotations System, or any similar system then in use,
or, if no such quotations are available, the fair market value on such date of a
Share as the Committee shall determine.
"Non-Employee Director" - means any member of the Board of Directors of the
Corporation who: (i) is not currently an officer of the Corporation or an
Affiliate; (ii) does not receive compensation for services rendered to the
Corporation or an Affiliate in any capacity other than as a director; (iii) does
not possess an interest in any transaction with the Corporation for which
disclosure would be required under the securities laws; or (iv) is not engaged
in a business relationship with the Corporation for which disclosure would be
required under the securities laws.
"Option" - means an option to purchase Shares granted by the Committee
pursuant to Section 6 hereof.
"Participant" - means any officer or employee of the Corporation or any
Affiliate who is selected by the Committee to receive an Award and any director
of the Corporation who is granted an Award pursuant to Section 20 hereof.
"Plan" - means the 1996 Stock Option and Incentive Plan of the Corporation.
"Related" - means (i) in the case of a Right, a Right which is granted in
connection with, and to the extent exercisable, in whole or in part, in lieu of,
an Option or another Right and (ii) in the case of an Option, an Option with
respect to which and to the extent a Right is exercisable, in whole or in part,
in lieu thereof has been granted.
"Restricted Period" - means the period of time selected by the Committee
for the purpose of determining when restrictions are in effect under Section 10
hereof with respect to Restricted Stock awarded under the Plan.
"Restricted Stock" - means Shares which have been contingently awarded to a
Participant by the Committee subject to the restrictions referred to in Section
10 hereof, so long as such restrictions are in effect.
"Right" - means a Limited Stock Appreciation Right or a Stock Appreciation
Right.
"Shares" - means the shares of common stock of the Corporation.
2
<PAGE>
"Senior Officer" - means the Corporation's president, principal
financial officer, or principal accounting officer, any vice president of the
Corporation in charge of a principal business unit, division or function
(such as lending, savings, administration or finance), any other officer who
performs a policy-making function, or any other person who performs similar
policy-making functions for the Corporation. Officers of the Corporation's
Affiliates shall be deemed senior officers of the Corporation if they perform
such policy-making functions for the Corporation.
"Stock Appreciation Right" - means a stock appreciation right with
respect to Shares granted by the Committee pursuant to Sections 6 and 8
hereof.
3. ADMINISTRATION. The Plan shall be administered by a Committee
consisting of two or more members, each of whom shall be a Non-Employee
Director. The members of the Committee shall be appointed by the Board of
Directors of the Corporation. Except as limited by the express provisions of
the Plan, the Committee shall have sole and complete authority and discretion
to: (i) select Participants and grant Awards; (ii) determine the number of
Shares to be subject to types of Awards generally, as well as to individual
Awards granted under the Plan; (iii) determine the terms and conditions upon
which Awards shall be granted under the Plan; (iv) prescribe the form and
terms of instruments evidencing such grants; and (v) establish from time to
time regulations for the administration of the Plan, interpret the Plan, and
make all determinations deemed necessary or advisable for the administration
of the Plan.
A majority of the Committee shall constitute a quorum, and the acts of a
majority of the members present at any meeting at which a quorum is present,
or acts approved in writing by a majority of the Committee without a meeting,
shall be acts of the Committee.
4. PARTICIPATION IN COMMITTEE AWARDS. The Committee may select from
time to time Participants in the Plan from those directors, officers and
employees of the Corporation or its Affiliates who, in the opinion of the
Committee, have the capacity for contributing to the successful performance
of the Corporation or its Affiliates.
5. SHARES SUBJECT TO PLAN. Subject to adjustment by the operation of
Section 11 hereof, the maximum number of Shares with respect to which Awards
may be made under the Plan is 250,000 Shares. The Shares with respect to
which Awards may be made under the Plan may be either authorized and unissued
shares or issued shares heretofore or hereafter reacquired and held as
treasury shares. Shares which are subject to Related Rights and Related
Options shall be counted only once in determining whether the maximum number
of Shares with respect to which Awards may be granted under the Plan has been
exceeded. An Award shall not be considered to have been made under the Plan
with respect to any Option or Right which terminates or with respect to
Restricted Stock which is forfeited, and new Awards may be granted under the
Plan with respect to the number of Shares as to which such termination or
forfeiture has occurred.
6. GENERAL TERMS AND CONDITIONS OF OPTIONS AND RIGHTS. The Committee
shall have full and complete authority and discretion, except as expressly
limited by the Plan, to grant Options and/or Rights and to provide the terms
and conditions (which need not be identical
3
<PAGE>
among Participants) thereof. In particular, the Committee shall prescribe
the following terms and conditions: (i) the Exercise Price of any Option or
Right; (ii) the number of Shares subject to, and the expiration date of, any
Option or Right, which expiration date shall not exceed ten (10) years from
the date of grant; (iii) the manner, time and rate (cumulative or otherwise)
of exercise of such Option or Right; and (iv) the restrictions, if any, to be
placed upon such Option or Right or upon Shares which may be issued upon
exercise of such Option or Right. The Committee may, as a condition of
granting any Option or Right, require that a Participant agree not to
thereafter exercise one (1) or more Options or Rights previously granted to
such Participant.
7. EXERCISE OF OPTIONS OR RIGHTS.
(a) An Option or Right granted under the Plan shall be exercisable
during the lifetime of the Participant to whom such Option or Right was
granted only by such Participant and, except as provided in paragraphs (c)
and (d) of this Section 7, no such Option or Right may be exercised unless at
the time such Participant exercises such Option or Right, such Participant
has maintained Continuous Service since the date of grant of such Option or
Right. Cash settlements of Rights may be made only in accordance with any
applicable restrictions pursuant to Rule 16b-3(e) under the Securities
Exchange Act of 1934 or any similar or successor provision.
(b) To exercise an Option or Right under the Plan, the Participant
to whom such Option or Right was granted shall give written notice to the
Corporation in form satisfactory to the Committee (and, if partial exercises
have been permitted by the Committee, by specifying the number of Shares with
respect to which such Participant elects to exercise such Option or Right)
together with full payment of the Exercise Price, if any and to the extent
required. The date of exercise shall be the date on which such notice is
received by the Corporation. Payment, if any is required, shall be made
either: (i) in cash (including check, bank draft or money order); or (ii) if
permitted by the Committee, by delivering (A) Shares already owned by the
Participant and having a fair market value equal to the applicable exercise
price, such fair market value to be determined in such appropriate manner as
may be provided by the Committee or as may be required in order to comply
with or to conform to requirements of any applicable laws or regulations, or
(B) a combination of cash and such Shares.
(c) If a Participant to whom an Option or Right was granted shall
cease to maintain Continuous Service for any reason (including total or
partial disability and normal or early retirement, but excluding death and
termination of employment by the Corporation or any Affiliate for cause),
such Participant may, but only within the period of three (3) months
immediately succeeding such cessation of Continuous Service and in no event
after the expiration date of such Option or Right, exercise such Option or
Right to the extent that such Participant was entitled to exercise such
Option or Right at the date of such cessation, provided, however, that such
right of exercise after cessation of Continuous Service shall not be
available to a Participant if the Committee otherwise determines and so
provides in the applicable instrument or instruments evidencing the grant of
such Option or Right. Notwithstanding the foregoing, if a Participant to
whom an Option or Right was granted shall cease to maintain Continuous
Service due to normal retirement, and such Participant has served the
Corporation or the Bank
4
<PAGE>
for at least ten (10) years, such Option or Right granted to such Participant
shall become immediately exercisable, and the Participant may, but only
during the period of five (5) years immediately succeeding such cessation of
Continuous Service and in no event after the expiration of such Option or
Right, exercise such Option or Right. If the Continuous Service of a
Participant to whom an Option or Right was granted by the Corporation is
terminated for cause, all rights under any Option or Right of such
Participant shall expire immediately upon the giving to the Participant of
notice of such termination.
(d) In the event of the death of a Participant while in the
Continuous Service of the Corporation or an Affiliate or within the three (3)
month and, five (5) year periods referred to in paragraph (c) of this Section
7, the person to whom any Option or Right held by the Participant at the time
of his death is transferred by will or the laws of descent and distribution
may, but only to the extent such Participant was entitled to exercise such
Option or Right immediately prior to his death, exercise such Option or Right
at any time within a period of one (1) year succeeding the date of death of
such Participant, but in no event later than ten (10) years from the date of
grant of such Option or Right. Following the death of any Participant to
whom an Option was granted under the Plan, irrespective of whether any
Related Right shall have theretofore been granted to the Participant or
whether the person entitled to exercise such Related Right desires to do so,
the Committee may, as an alternative means of settlement of such Option,
elect to pay to the person to whom such Option is transferred by will or by
the laws of descent and distribution or pursuant to a qualified domestic
relations order as defined in the Code or Title I of the ERISA or the rules
thereunder, the amount by which the Market Value per Share on the date of
exercise of such Option shall exceed the Exercise Price of such Option,
multiplied by the number of Shares with respect to which such Option is
properly exercised. Any such settlement of an Option shall be considered an
exercise of such Option for all purposes of the Plan.
8. STOCK APPRECIATION RIGHTS. A Stock Appreciation Right shall, upon
its exercise, entitle the Participant to whom such Stock Appreciation Right
was granted to receive a number of Shares or cash, or a combination thereof,
as the Committee in its discretion shall determine, the aggregate value of
which (i. e. , the sum of the amount of cash and/or Market Value of such
Shares on date of exercise) shall equal (as nearly as possible, it being
understood that the Corporation shall not issue any fractional shares) the
amount by which the Market Value per Share on the date of such exercise shall
exceed the Exercise Price of such Stock Appreciation Right, multiplied by the
number of Shares with respect to which such Stock Appreciation Right shall
have been exercised. A Stock Appreciation Right may be Related to an Option
or may be granted independently of any Option as the Committee shall from
time to time in each case determine. At the time of grant of an Option, the
Committee shall determine whether and to what extent a Related Stock
Appreciation Right shall be granted with respect thereto. In the case of a
Related Option, such Related Option shall cease to be exercisable to the
extent of the Shares with respect to which the Related Stock Appreciation
Right was exercised. Upon the exercise or termination of a Related Option,
any Related Stock Appreciation Right shall terminate to the extent of the
Shares with respect to which the Related Option was exercised or terminated.
9. LIMITED STOCK APPRECIATION RIGHTS. At the time of grant of an
Option or Stock Appreciation Right to any Participant, the Committee shall
have full and complete authority and
5
<PAGE>
discretion to also grant to such Participant a Limited Stock Appreciation
Right which is Related to such Option or Stock Appreciation Right.
Notwithstanding any other provision of the Plan, a Limited Stock Appreciation
Right shall be exercisable only during the period beginning on the first day
following the date of expiration of any "offer" (as such term is hereinafter
defined) and ending on the forty-fifth day following such date.
A Limited-Stock Appreciation Right shall, upon its exercise, entitle the
Participant to whom such Limited Stock Appreciation Right was granted to
receive an amount of cash equal to the amount by which the "Offer Price per
Share" (as such term is hereinafter defined) or the Market Value on the date
of such exercise, as shall have been provided by the Committee in its
discretion at the time of grant, shall exceed the Exercise Price of such
Limited Stock Appreciation Right, multiplied by the number of Shares with
respect to which such Limited Stock Appreciation Right shall have been
exercised. Upon the exercise of a Limited Stock Appreciation Right, any
Related Option and/or Related Stock Appreciation Right shall cease to be
exercisable to the extent of the Shares with respect to which such Limited
Stock Appreciation Right was exercised. Upon the exercise or termination of
a Related Option or Related Stock Appreciation Right, any Related Limited
Stock Appreciation Right shall terminate to the extent of the Shares with
respect to which such Related Option or Related Stock Appreciation Right was
exercised or terminated.
For the purposes of this Section 9, the term "Offer" shall mean any
tender offer or exchange offer for Shares other than one made by the
Corporation, provided that the corporation, person or other entity making the
offer acquires pursuant to such offer either: (i) twenty-five percent (25%)
of the Shares outstanding immediately prior to the commencement of such
offer; or (ii) a number of Shares which, together with all other Shares
acquired in any tender offer or exchange offer (other than one made by the
Corporation) which expired within sixty (60) days of the expiration date of
the offer in question, equals twenty-five percent (25%) of the Shares
outstanding immediately prior to the commencement of the offer in question.
The term "Offer Price per Share" as used in this Section 9 shall mean the
highest price per Share paid in any Offer which Offer is in effect any time
during the period beginning on the sixtieth day prior to the date on which a
Limited Stock Appreciation Right is exercised and ending on the date on which
such Limited Stock Appreciation Right is exercised. Any securities or
property which are part or all of the consideration paid for Shares in the
Offer shall be valued in determining the Offer Price per Share at the higher
of (A) the valuation placed on such securities or property by the
corporation, person or other entity making such Offer, or (B) the valuation
placed on such securities or property by the Committee.
10. TERMS AND CONDITIONS OF RESTRICTED STOCK. The Committee shall have
full and complete authority, subject to the limitations of the Plan, to grant
awards of Restricted Stock and, in addition to the terms and conditions
contained in paragraphs (a) through (f) of this Section 10, to provide such
other terms and conditions (which need not be identical among Participants)
in respect of such Awards, and the vesting thereof, as the Committee shall
determine and provide in the agreement referred to in paragraph (d) of this
Section 10.
(a) At the time of an award of Restricted Stock, the Committee
shall establish for each Participant a Restricted Period of not less than six
(6) months during which or at the
6
<PAGE>
expiration of which, as the Committee shall determine and provide in the
agreement referred to in paragraph (d) of this Section 10, the Shares awarded
as Restricted Stock shall vest. Subject to any such other terms and
conditions as the Committee shall provide, shares of Restricted Stock may not
be sold, assigned, transferred, pledged or otherwise encumbered by the
Participant, except as hereinafter provided, during the Restricted Period.
Except for such restrictions, and subject to paragraphs (c), (d) and (e) of
this Section 10 and Section 11 hereof, the Participant as owner of such
Shares shall have all the rights of a stockholder, including but not limited
to the right to receive all dividends paid on such Shares and the right to
vote such Shares. The Committee shall have the authority, in its discretion,
to accelerate the time at which any or all of the restrictions shall lapse
with respect to any Shares of Restricted Stock prior to the expiration of the
Restricted Period with respect thereto, or to remove any or all of such
restrictions, whenever it may determine that such action is appropriate by
reason of changes in applicable tax or other laws or other changes in
circumstances occurring after the commencement of such Restricted Period.
(b) Except as provided in Section 13 hereof, if a Participant
ceases to maintain Continuous Service for any reason (other than death, total
or partial disability or normal or early retirement), unless the Committee
shall otherwise determine, all Shares of Restricted Stock theretofore awarded
to such Participant and which at the time of such termination of Continuous
Service are subject to the restrictions imposed by paragraph (a) of this
Section 10 shall upon such termination of Continuous Service be forfeited and
returned to the Corporation. Unless the Committee shall have provided in the
agreement referred to in paragraph (d) of this Section 10 for a ratable lapse
of restrictions with respect to an award of Shares of Restricted Stock during
the Restricted Period, if a Participant ceases to maintain Continuous Service
by reason of death, total or partial disability or normal or early
retirement, such portion of such Shares of Restricted Stock awarded to such
Participant which at the time of such termination of Continuous Service are
subject to the restrictions imposed by paragraph (a) of this Section 10 as
shall be equal to the portion of the Restricted Period with respect to such
Shares which shall have elapsed at the time of such termination of Continuous
Service shall be free of restrictions and shall not be forfeited.
(c) Each certificate in respect of Shares of Restricted Stock
awarded under the Plan shall be registered in the name of the Participant and
deposited by the Participant, together with a stock power endorsed in blank,
with the Corporation and shall bear the following (or a similar) legend:
"The transferability of this certificate and the shares of stock
represented hereby are subject to the terms and conditions (including
forfeiture) contained in the 1996 Stock Option and Incentive Plan of
FirstFed Bancshares, Inc. and an Agreement entered into between the
registered owner and FirstFed Bancshares, Inc. Copies of such Plan and
Agreement are on file in the offices of the Secretary of FirstFed
Bancshares, Inc., 749 Lee Street, Des Plaines, Illinois 60016."
(d) At the time of an award of Shares of Restricted Stock, the
Participant may enter into an Agreement with the Corporation in a form specified
by the Committee, agreeing
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to the terms and conditions of the award and such other matters as the
Committee shall in its sole discretion determine.
(e) At the time of an award of Shares of Restricted Stock, the
Committee may, in its discretion, determine that the payment to the Participant
of dividends declared or paid on such Shares, or specified portions thereof, by
the Corporation shall be deferred until the earlier to occur of (i) the lapsing
of the restrictions imposed under paragraph (a) of this Section 10 or (ii) the
forfeiture of such shares under paragraph (b) of this Section 10, and shall be
held by the Corporation for the account of the Participant until such time. In
the event of such deferral, there shall be credited at the end of each year (or
portion thereof) interest on the amount of the account at the beginning of the
year at a rate per annum as the Committee, in its discretion, may determine.
Payment of deferred dividends, together with interest accrued thereon as
aforesaid, shall be made upon the earlier to occur of the events specified in
(i) or (ii) of the immediately preceding sentence.
(f) At the expiration of the restrictions imposed by paragraph (a) of
this Section 10, the Corporation shall redeliver to the Participant (or where
the relevant provision of paragraph (b) of this Section 10 applies in the case
of a deceased Participant, to his legal representative, beneficiary or heir) the
certificate(s) and stock power deposited with it pursuant to paragraph (c) of
this Section 10 and the Shares represented by such certificate(s) shall be free
of the restrictions referred to in paragraph (a) of this Section 10.
11. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. In the event of any
change in the outstanding Shares subsequent to the effective date of the Plan by
reason of any reorganization, recapitalization, stock split, stock dividend,
combination or exchange of shares, merger, consolidation or any change in the
corporate structure or Shares of the Corporation, the maximum aggregate number
and class of shares as to which Awards may be granted under the Plan and the
number and class of shares with respect to which Awards theretofore have been
granted under the Plan shall be appropriately adjusted by the Committee, whose
determination shall be conclusive. Any shares of stock or other securities
received, as a result of any of the foregoing, by a Participant with respect to
Restricted Stock shall be subject to the same restrictions and the
certificate(s) or other instruments representing or evidencing such shares or
securities shall be legended and deposited with the Corporation in the manner
provided in Section 10 hereof.
12. EFFECT OF MERGER ON OPTIONS OR RIGHTS. In the event of any merger or
consolidation of the Corporation (other than a merger or consolidation in which
the Corporation is the continuing entity and which does not result in the
outstanding Shares being converted into or exchanged for different securities,
cash or other property, or any combination thereof) pursuant to a plan or
agreement the terms of which are binding upon all stockholders of the
Corporation (except to the extent that dissenting stockholders may be entitled,
under statutory provisions or provisions contained in the certificate of
incorporation, to receive the appraised or fair value of their holdings), any
Participant to whom an Option or Right has been granted shall have the right
(subject to the provisions of the Plan and any limitation applicable to such
Option or Right), thereafter and during the term of each such Option or Right,
to receive upon exercise of any such Option or Right an amount equal to the
excess of the fair market value on
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the date of such exercise of the securities, cash or other property, or
combination thereof, receivable upon such merger, consolidation or
combination in respect of a Share over the Exercise Price of such Right or
Option, multiplied by the number of Shares with respect to which such Option
or Right shall have been exercised. Such amount may be payable fully in
cash, fully in one or more of the kind or kinds of property payable in such
merger, consolidation or combination, or partly in cash and partly in one or
more of such kind or kinds of property, all in the discretion of the
Committee.
13. EFFECT OF CHANGE IN CONTROL. Each of the events specified in the
following clauses (i) through (iii) of this Section 13 shall be deemed a
"change of control": (i) any third person, including a "group" as defined in
Section 13(d)(3) of the Securities Exchange Act of 1934, shall become the
beneficial owner of shares of the Corporation with respect to which
twenty-five percent (25%) or more of the total number of votes for the
election of the Board of Directors of the Corporation may be cast; (ii) as a
result of, or in connection with, any cash tender offer, merger or other
business combination, sale of assets or contested election, or combination of
the foregoing, the persons who were directors of the Corporation shall cease
to constitute a majority of the Board of Directors of the Corporation; or
(iii) the shareholders of the Corporation shall approve an agreement
providing either for a transaction in which the Corporation will cease to be
an independent publicly owned entity or for a sale or other disposition of
all or substantially all the assets of the Corporation; provided, however,
that the occurrence of any such events shall not be deemed a "change of
control" if, prior to such occurrence, a resolution specifically approving
such occurrence shall have been adopted by at least a majority of the Board
of Directors of the Corporation. If the Continuous Service of any
Participant of the Corporation or any Affiliate is involuntarily terminated
for whatever reason, at any time within eighteen (18) months after a change
of control, unless the Committee shall have otherwise provided in the
agreement referred to in paragraph (d) of Section 10 hereof, any Restricted
Period with respect to Restricted Stock theretofore awarded to such
Participant shall lapse upon such termination and all Shares awarded as
Restricted Stock shall become fully vested in the Participant to whom such
Shares were awarded. If a tender offer or exchange offer for Shares (other
than such an offer by the Corporation) is commenced, or if the event
specified in clause (iii) above shall occur, unless the Committee shall have
otherwise provided in the instrument evidencing the grant of an Option or
Stock Appreciation Right, all Options and Stock Appreciation Rights
theretofore granted and not fully exercisable shall become exercisable in
full upon the happening of such event and shall remain so exercisable for a
period of sixty (60) days following such date, after which they shall revert
to being exercisable in accordance with their terms.
14. ASSIGNMENTS AND TRANSFERS. No Award nor any right or interest of a
Participant under the Plan in any instrument evidencing any Award under the
Plan may be assigned, encumbered or transferred except, in the event of the
death of a Participant, by will or the laws of descent and distribution or
pursuant to a qualified domestic relations order as defined in the Code or
Title I of the ERISA or the rules thereunder.
15. EMPLOYEE RIGHTS UNDER THE PLAN. No director, officer or employee
shall have a right to be selected as a Participant nor, having been so
selected, to be selected again as a Participant and no director, officer,
employee or other person shall have any claim or right to be granted an Award
under the Plan or under any other incentive or similar plan of the
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Corporation or any Affiliate. Neither the Plan nor any action taken
thereunder shall be construed as giving any employee any right to be retained
in the employ of the Corporation or any Affiliate.
16. DELIVERY AND REGISTRATION OF STOCK. The Corporation's obligation
to deliver Shares with respect to an Award shall, if the Committee so
requests, be conditioned upon the receipt of a representation as to the
investment intention of the Participant to whom such Shares are to be
delivered, in such form as the Committee shall determine to be necessary or
advisable to comply with the provisions of the Securities Act of 1933 or any
other Federal, state or local securities legislation or regulation. It may
be provided that any representation requirement shall become inoperative upon
a registration of the Shares or other action eliminating the necessity of
such representation under such Securities Act or other securities
legislation. The Corporation shall not be required to deliver any Shares
under the Plan prior to (i) the admission of such shares to listing on any
stock exchange on which Shares may then be listed, and (ii) the completion of
such registration or other qualification of such Shares under any state or
Federal law, rule or regulation, as the Committee shall determine to be
necessary or advisable.
This Plan is intended to comply with Rule 16b-3 under the Securities
Exchange Act of 1934. Any provision of the Plan which is inconsistent with
said Rule shall, to the extent of such inconsistency, be inoperative and
shall not affect the validity of the remaining provisions of the Plan.
17. WITHHOLDING TAX. Upon the termination of the Restricted Period
with respect to any Shares of Restricted Stock (or at any such earlier time,
if any, that an election is made by the Participant under Section 83(b) of
the Code, or any successor provision thereto, to include the value of such
Shares in taxable income), the Corporation shall have the right to require
the Participant or other person receiving such Shares to pay the Corporation
the amount of any taxes which the Corporation is required to withhold with
respect to such Shares, or, in lieu thereof, to retain or sell without
notice, a sufficient number of Shares held by it to cover the amount required
to be withheld. The Corporation shall have the right to deduct from all
dividends paid with respect to Shares of Restricted Stock the amount of any
taxes which the Corporation is required to withhold with respect to such
dividend payments.
The Corporation shall have the right to deduct from all amounts paid in
cash with respect to the exercise of a Right under the Plan any taxes
required by law to be withheld with respect to such cash payments. Where a
Participant or other person is entitled to receive Shares pursuant to the
exercise of an Option or Right pursuant to the Plan, the Corporation shall
have the right to require the Participant or such other person to pay the
Corporation the amount of any taxes which the Corporation is required to
withhold with respect to such Shares, or, in lieu thereof, to retain, or sell
without notice, a number of such Shares sufficient to cover the amount
required to be withheld.
18. AMENDMENT OR TERMINATION. The Board of Directors of the
Corporation may amend, suspend or terminate the Plan or any portion thereof
at any time; provided, however, that no such amendment, suspension or
termination shall impair the rights of any Participant, without his consent,
in any Award theretofore made pursuant to the Plan.
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19. EFFECTIVE DATE AND TERM OF PLAN. The Plan shall become effective
upon its adoption by the Board of Directors of the Corporation. It shall
continue in effect for a term of ten (10) years unless sooner terminated
under Section 18 hereof.
20. NON-EMPLOYEE DIRECTOR GRANTS. Notwithstanding the foregoing, each
Non-Employee Director of the Corporation and the Bank shall receive each
year, on January 1, a grant of Options to purchase 1,000 Shares, subject to
availability. Each such Option shall be exercisable after six (6) months,
unless otherwise provided, and shall be subject in all respects to the terms
and conditions of the Plan, which are controlling.
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FIRSTFED BANCSHARES, INC.
1996 STOCK OPTION AND INCENTIVE PLAN
AMENDMENT 1997-1
FEBRUARY 24, 1997
Pursuant to Section 18 of the FirstFed Bancshares, Inc. 1996 Stock
Option and Incentive Plan (the "1996 Option Plan"), FirstFed Bancshares,
Inc., by its Directors and on the date stated above, hereby amends the Stock
Option Plan, subject to stockholder approval, effective as of January 1,
1997.
1. 1996 Option Plan Section 7(a) is amended to read as follows:
"(a) An Option or Right granted under the Plan shall be
exercisable as provided in paragraphs (c) and (d) of this Section
7. Cash settlements of Rights may be made only in accordance
with any applicable restrictions pursuant to Rule 16b-3(e) under
the Securities Exchange Act of 1934 or any similar or successor
provision."
2. 1996 Option Plan Section 10(a) is hereby amended to read as follows:
"(a) At the time of an award of Restricted Stock, the
Committee shall establish for each Participant a Restricted
Period of not less than six (6) months during which or at the
expiration of which, as the Committee shall determine and provide
in the agreement referred to in paragraph (d) of this Section 10,
the Shares awarded as Restricted Stock shall vest. Subject to
any such other terms and conditions as the Committee shall
provide, shares of Restricted Stock may not be sold, assigned,
transferred, pledged or otherwise encumbered by the Participant,
except as hereinafter provided. Except for such restrictions,
and subject to paragraphs (c), (d) and (e) of this Section 10 and
Section 11 hereof, the Participant as owner of such Shares shall
have all the rights of a stockholder, including but not limited
to the right to receive all dividends paid on such Shares and the
right to vote such Shares. The Committee shall have the
authority, in its discretion, to accelerate the time at which any
or all of the restrictions shall lapse with respect to any Shares
of Restricted Stock prior to the expiration of the Restricted
Period with respect thereto, or to remove any or all of such
restrictions, whenever it may determine that such action is
appropriate by reason of changes in applicable tax or other laws
or other changes in circumstances occurring after the
commencement of such Restricted Period."
<PAGE>
3. 1996 Option Plan Section 14 is hereby amended to read as follows:
"14. ASSIGNMENTS AND TRANSFERS. No Award nor any right or
interest of a Participant under the Plan in any instrument
evidencing any Award under the Plan may be assigned, encumbered
or transferred except: (i) in the event of the death of the
Participant, by will or the laws of descent and distribution;
(ii) by gifting for the benefit of descendants for estate
planning purposes; or (iii) pursuant to a certified domestic
relations order."
The remaining 1996 Option Plan provisions shall continue in full force and
effect.
FIRSTFED BANCSHARES, INC.
By:____________________________________
Secretary
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DATA PROCESSING SERVICES AGREEMENT
THIS DATA PROCESSING SERVICES AGREEMENT is made as of this 31st day of
March, 1997, (the "Agreement") by and between M&I Data Services, a division of
the Marshall & Ilsley Corporation, a Wisconsin corporation ("M&I") and FirstFed
Bancshares, Inc., a Delaware corporation, together with its subsidiaries and
affiliates (collectively referred to as the "Customer").
RECITALS
WHEREAS, M&I provides data processing services to customers located across
the country; and
WHEREAS, M&I desires to provide data processing services to Customer, and
Customer desires to have M&I provide it with such services.
NOW, THEREFORE, in consideration of the recitals and for the good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. SERVICES. M&I shall provide Customer with the data processing
services requested by Customer utilizing the version of the banking system
software made available from time to time by M&I through the M&I Service Bureau
(the "Services"). The functionality of the software and a further description of
the Services is set forth in the User Manuals, copies of which will be provided,
or made available, to Customer. Except as provided with respect to Midwest
Payment Systems in Exhibit B, Customer shall purchase all of its required data
processing services from M&I, provided that such services are among those listed
on Exhibits A and A-1. Unless otherwise agreed in writing between M&I and
Customer, and subject to the other provisions of the Agreement, M&I shall make
the On-line Services available to Customer, subject to normal downtime and
maintenance, at times indicated on the M&I On-line Availability Schedule, as
modified from time to time.
2. FEES AND TAXES. Customer agrees to pay for the Services received
hereunder as follows:
a. AMOUNT OF FEES. Commencing on the Conversion Date (as defined in
Section 3) and on the first day of each month thereafter through the end of the
term of this Agreement, Customer shall pay M&I a fixed monthly fee of twenty one
thousand dollars ($21,000) per month (the "Fixed Monthly Fee") for the Services
described on Exhibit A. The Fixed Monthly Fee shall be prorated for any partial
months. For Services requested by Customer in addition to those on Exhibit A
and which are part of M&I's 1997 standard published price list, or for usage of
Services listed on Exhibit A in excess of stated maximums, Customer shall pay in
accordance with M&I's then-current
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standard published prices, discounted ten percent (10%). The Fixed Monthly
Fee will be adjusted in accordance with the provisions of Exhibit B.
Customer also agrees to pay all communication costs, telecommunication
charges, printline charges and other output costs, start-up fees,
pass-through charges, out-of-pocket expenses, conversion expenses and fees,
workshop fees, training fees, and late fees or charges billed as
miscellaneous on Customer's invoice (the "Miscellaneous Fees"). The M&I
standard published prices as of the date of this Agreement are set forth on
the fee schedule attached as Exhibit C.
b. ADDITIONAL CHARGES. In addition to the charges described above
or set forth in Exhibit C, Customer agrees to pay for any manufacturers, sales,
use, excise, personal property, or any other tax or charge, or duty or
assessment levied or assessed by any governmental authority upon or as a result
of the execution or performance of any service pursuant to this Agreement or
materials furnished with respect to the Agreement, except those taxes based on
M&I's net income.
c. TERMS OF PAYMENT. Customer shall pay the Fixed Monthly Fee on
the first day of the month in which the Services are to be performed. Any other
amounts due hereunder shall be paid within thirty (30) days of invoice, unless
otherwise provided herein. To effect the payment, Customer hereby authorizes
M&I to initiate debit entries from and, if necessary, initiate credit entries
and adjustments to Customer's account at the depository designated in the ACH
Authorization Agreement. Debit entries for the Fixed Monthly Fee will be made
on the first day of each month for which Services will be rendered under the
Agreement. In the event that a payment day is a nonbusiness day, entries will
be made on the first succeeding business day. Customer shall authorize, on the
attached ACH Authorization Agreement, debits from and credits to its account for
payment for Services received under the Agreement. The Customer shall also pay
any collection fees and reasonable attorneys' fees incurred by M&I in collecting
payment of the charges and any other amounts for which Customer is liable under
the terms and conditions of this Agreement.
Should Customer reasonably and in good faith dispute any fees so
billed, Customer may withhold payment for the disputed amount provided Customer
notifies M&I of such disagreements or objections within the prescribed thirty
(30) day period; however, the Fixed Monthly Fee and any undisputed amounts shall
be promptly paid as described above. The parties agree to promptly attempt to
resolve the dispute, and further agree if the disputed invoice is not resolved
within sixty (60) days of the invoice date, the chief executive officers of the
parties shall meet to resolve the dispute
d. MODIFICATION OF TERMS AND PRICING. If Customer is in default and
M&I elects to continue to perform the Services, or if the Customer's tangible
capital or reserve requirements computed in accordance with applicable federal
regulations for itself or any of its FDIC insured affiliates receiving Services
hereunder are less than the required regulatory minimums, Customer agrees to pay
M&I all unamortized conversion expenses in advance of M&I performing any
additional Services. In addition, Customer agrees that, in such event, all
charges for Services shall be computed
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using M&I's then-current standard published prices, paid in advance as
determined by M&I. At M&I's option, such Services shall be provided on a
month-to-month basis.
3. TERM.
a. INITIAL TERM. This Agreement shall be effective upon execution
by both parties, and both parties will promptly undertake the conversion
activities necessary to process Customer's data. M&I currently anticipates,
subject to Customer's timely and satisfactory completion of its responsibilities
described in the M&I Conversion Manual and in the Conversion Schedule to be
established by M&I, and agreed to by Customer, that all conversion activities
will be completed on October 20, 1997, (the "Conversion Date"). The term of
this Agreement shall continue for a period of eighty-four (84) months from the
Conversion Date.
b. RENEWAL OBLIGATIONS. During any renewal term, or for any
Services provided after the end of the initial term, whether or not the
Agreement is renewed, Customer agrees that the terms of this Agreement shall
continue to apply, except that all charges for Services shall be computed
using M&I's then-current standard published prices paid in advance as
determined by M&I. At M&I's option, such Services shall be provided by M&I
on a month-to-month basis.
4. AFFILIATES. All processing for Customer and Customer's subsidiaries
and affiliates which M&I does shall be included as part of the Services provided
under this Agreement and shall be done in accordance with the terms and
conditions of this Agreement. Customer agrees that it is responsible for
assuring compliance with the Agreement by its affiliates and subsidiaries.
Customer agrees to be responsible for the submission of its affiliates' data to
M&I for processing and for the transmission to Customer's affiliates of such
data processed by and received from M&I. Customer agrees to pay any and all
fees owed under this Agreement for Services hereunder.
5. CONFIDENTIALITY AND OWNERSHIP. Both parties will, to the extent
and in accordance with their policies used to protect their own information
of similar importance, use their best efforts to refrain from and prevent the
use of or disclosure of any confidential information of the other party,
disclosed or obtained by such party while performing its obligations under
this Agreement, except when such use or disclosure is for the purpose of
providing the Services. Neither party will have an obligation of
confidentiality with regard to any information insofar as the same: (1) was
known to such party prior to disclosure; (2) is or becomes publicly available
other than as a result of a breach of this Agreement; or (3) is disclosed to
such party by a third party not subject to an obligation of confidentiality.
Nor shall the obligation of confidentiality occur where disclosure is made
pursuant to: (1) any law of the United States or any state thereof; (2) the
order of any court or governmental agency; or (3) the rules and regulations
of any governmental agency.
Customer may reproduce and distribute any or all M&I's documentation,
including User Manuals, solely for its own internal use. Customer recognizes,
however, that such documentation may be copyrighted, trademarked, patented, or
otherwise
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protected by M&I. Customer will not undertake to reproduce for distribution
or distribute such documentation to any other third party. Any modifications
made to such documentation by Customer for the purpose of customization are
acknowledged to be solely at the risk of Customer, and M&I shall not be
liable to Customer for any inaccuracies arising therefrom. The distribution
of modified documentation is subject to the same restrictions and shall
further contain an acknowledgement of M&I's copyright and other protected
proprietary interests in such documentation.
6. PROGRAMMING. M&I reserves the right to determine the programming
(whether hardware or software) utilized with the equipment used in fulfilling
its duties under this Agreement. All programs (including ideas and know-how and
concepts) developed by M&I are and remain its sole property.
7. EQUIPMENT. Customer shall obtain and maintain at its own expense such
data processing and communications equipment as may be necessary or appropriate
to facilitate the proper use and receipt of the Services. Customer shall pay all
installation, monthly, and other charges relating to the installation and use of
communications lines in connection with the Services. M&I shall not be
responsible for the reliability monitoring or continued availability of the
communications lines used by Customer in accessing the Services.
8. SUPPLIES. Customer shall pay for all supplies used in connection with
the Services. All forms, supplies, or materials used in processing Customer's
items and input data shall meet M&I's specifications.
9. SYSTEMS MODIFICATION; AMENDMENT OF SERVICES. M&I may modify, amend,
enhance, update, or provide the appropriate replacement for any of the Services,
the software used to provide the Services, or any element of its systems at any
time to: (a) improve the Services or (b) facilitate the continued economic
provisions of the Service, provided that no change made pursuant to "(b)" shall
materially diminish the quality or scope of the Service. M&I may, at any time,
withdraw any of the Services upon providing one hundred twenty (120) days' prior
written notice to Customer. M&I or Customer may also terminate any of the
Services immediately upon any regulatory, legislative, or judicial determination
that providing such Services is inconsistent with applicable law or regulation.
10. DISASTER RECOVERY. M&I maintains, and shall continue to maintain
throughout the term of this Agreement, off-site disaster recovery capabilities
which permit M&I to recover from a disaster and continue providing Services to
Customers within a commercially reasonable period. An executive summary of the
current disaster recovery plan, which may change from time to time, is available
upon request from M&I at no charge. M&I shall test the operation and
effectiveness of its disaster recovery plan at least annually. M&I maintains,
and shall continue to maintain throughout the term of this Agreement, a backup
power supply system to guard against electrical outages.
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11. EVENTS OF DEFAULT. It shall be an Event of Default on the part of the
Customer if: (a) Customer is insolvent, or a receiver or conservator shall be
appointed with respect to the Customer; or (b) Customer shall fail to pay any
sum due M&I within the prescribed time; or (c) if the Customer shall fail to
perform any of its other covenants or obligations under this Agreement where
Customer's failure to perform has a material adverse impact on M&I. It shall be
an Event of Default on the part of M&I if M&I shall fail to perform any of its
obligations under this Agreement where the failure of M&I to perform has a
material adverse impact on Customer and is material to the provision of the
Services, except for those obligations under Section 20 of this Agreement as to
which the Agreement provides specific remedies for M&I's failure to perform.
The defaulting party shall have thirty (30) days from the date of receipt of
notice from the nondefaulting party of nonpayment or nonperformance to cure such
an Event of Default, before the nondefaulting party may exercise any remedies it
may have as a result of the Event of Default.
12. REMEDIES UPON DEFAULT; LIMITATION OF LIABILITIES. If an Event of
Default occurs on the part of the Customer, and is not cured within the
thirty (30) day period prescribed in Section 11, M&I may (a) terminate this
Agreement; (b) terminate access to its central processing unit by the
Customer; and (c) declare all amounts payable under this Agreement to be
immediately due payable and file suit for or otherwise obtain payment from
the Customer of any fees or other sums due it pursuant to this Agreement,
plus any actual damages to its equipment or systems caused by the Customer's
actions, failures to act, equipment, systems, or communication facilities.
In the event Customer pays M&I all amounts for Services provided by M&I,
Customer's liability to M&I for all future amounts payable to M&I hereunder
shall be limited to the buyout amount calulated in accordance with Section 21
herein. If an Event of Default occurs on the part of M&I, and is not cured
within the thirty (30) day period prescribed in Section 11, the Customer may
only: (d) terminate this Agreement without payment of any penalty, buyout
amount, or deconversion expense; and (e) file suit or otherwise obtain
payment of an aggregate amount of fees paid by the Customer to M&I hereunder
during the three (3) months immediately preceding the Event of Default.
Either party may also seek equitable remedies, including, without limitation,
specific performance and injunctive relief, for a breach of Section 5 of this
Agreement. M&I and the Customer agree that these damage provisions are
reasonable in light of all present predictable circumstances (including
expectable actual damages in that the fees to be charged by M&I hereunder do
not include amounts sufficient to insure against greater claims). M&I and
Customer expressly waive all claims for additional, incidental,
consequential, compensatory, or punitive damages and agree that the remedies
set forth in this Agreement shall be the sole and exclusive remedies of the
parties. No lawsuit or other action may be brought by either party hereto or
on any claim or controversy based upon or arising in any way out of this
Agreement after one (1) year from the date of the occurrence allegedly giving
rise to the action, extended by any additional time during which the
breaching party attempted to cure the default. M&I agrees that except in the
case of an Event of Default relating to a breach by the Customer of its
confidentiality obligations under Section 5 of this Agreement, M&I will not
exercise its
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remedy to terminate Customer's access to the M&I central processing unit so
long as: (f) Customer is current in the payment of all amounts due M&I as
reflected on M&I's last invoice to Customer, except for those amounts
disputed reasonably and in good faith as provided for in Section 2(c) herein;
and (g) only exercise such remedy after providing Customer with sixty (60)
days' prior written notice.
13. TERMINATION.
a. END OF INITIAL TERM. This Agreement shall automatically be
extended at the end of the initial eighty-four (84) month term for an additional
twelve (12) month renewal term, unless the Customer gives M&I at least one
hundred eighty (180) days' prior written notice of its intent to terminate,
which notice may be given during the initial term of the Agreement.
b. RENEWAL TERM. During the renewal term, this Agreement shall be
automatically extended for an additional one (1) month on each monthly
anniversary date so that the term shall always be not less than one (1) month
less than twelve (12) months, unless either party gives written notice to the
other party of intent to terminate, in which event the automatic monthly
renewals will end and the Agreement will terminate at the end of the unexpired
portion of the term in existence on the date notice to terminate is given.
c. TERMINATION UPON DEFAULT. This Agreement may also terminate upon
notice of an Event of Default and failure to cure beyond applicable cure periods
at the option of the nondefaulting party as set forth in Section 12 hereof.
d. TERMINATION BY CUSTOMER. Customer may terminate this Agreement
at any time, and without cause, by giving M&I at least one hundred eighty (180)
days' prior written notice and paying M&I the then-applicable buyout amount set
forth in Section 21.
e. TERMINATION FOR CHANGE IN CONTROL OF CUSTOMER. This Agreement
may be terminated at the option of the Customer by paying buyout amount stated
in Section 21(b) herein in the event of a change in control of Customer during
the term of this Agreement or any extension thereof; provided, however, the
Customer gives M&I ninety (90) days' prior written notice of such termination.
For purposes of this Section, change in control shall mean the acquisition
(by merger, sale of stock, sale of assets, or otherwise) by a person not now in
control (within the meaning of this definition) of more than fifty percent (50%)
of either the voting power or value of the outstanding capital of Customer or
the right to elect at least fifty percent (50%) of the directors of Customer
then standing for election.
14. REGULATORY ASSURANCES. M&I and Customer acknowledge and agree that
the performance of these Services will be subject to regulation and examination
by Customer's regulatory agencies to the same extent as if such Services were
being
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performed by Customer. Upon request, M&I agrees to provide any appropriate
assurances to such agency and agrees to subject itself to any required
examination or regulation. Customer agrees to reimburse M&I for reasonable
costs actually incurred due to any such examination or regulation that is
performed solely for the purpose of examining data processing services used
by Customer.
a. NOTICE REQUIREMENTS. The Customer shall be responsible for
complying with all regulatory notice provisions to any applicable governmental
agency, which shall include providing timely and adequate notice to the Chief
Examiner of the Federal Home Loan Bank Board, the Office of Thrift Supervision,
the Office of the Comptroller of the Currency, The Federal Deposit Insurance
Corporation, the Federal Reserve Board, or their successors, as applicable
(collectively, the "Federal Agency"), as of the effective date of Services under
this Agreement, identifying those records to which this Agreement shall apply
and the location at which such Services are to be performed.
b. EXAMINATION OF RECORDS. The parties agree that the records
maintained and produced under this Agreement shall, at all times, be available
for examination and audit by governmental agencies having jurisdiction over the
Customer's business, including (without limitation) the Federal Agency. The
Director of Examinations of the Federal Agency or his designated representative
shall have the right to ask for and to receive directly from M&I any reports,
summaries, or information contained in or derived from data in the possession of
M&I related to the Customer. M&I shall notify Customer as soon as possible of
any formal request by an authorized governmental agency to examine Customer's
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records maintained by M&I, if M&I is permitted to make such a disclosure to
Customer under applicable law or regulations. Customer agrees that M&I is
authorized to provide all such described records when formally required to do
so by this authorized governmental agency.
c. FIDELITY BONDS. Throughout the term of the Agreement, M&I shall
maintain fidelity bond coverage for M&I and its employees.
d. NOTICE OF CHANGES. Customer shall give to the Director of
Examinations of the Federal Agency at least thirty (30) days' notice of the
termination of this Agreement or of any material changes in the Services to be
provided hereunder.
e. INSURANCE. Throughout the term of this Agreement, M&I shall
maintain insurance coverage (or shall be self-insured) for losses from fire,
disaster, and other causes contributing to interruption of the Services. The
proceeds of such insurance shall be payable to M&I. Nothing in this Agreement
shall be construed as to permit Customer to receive any of such proceeds, or to
be named as an additional loss payee under any insurance policy.
f. FINANCIAL INFORMATION. Customer agrees to provide M&I with a
copy of the call report filed with the Federal Agency within thirty (30) days
after its filing with the Federal Agency, and to provide such additional
financial information as to its creditors or others as M&I may reasonably
request, provided that such information is not subject to restriction or
confidentiality.
15. TRANSPORTATION AND/OR TRANSMISSION OF DATA. The responsibility and
expense for transportation and/or transmission of and risk of loss of data and
media to and from M&I's datacenters shall be borne by Customer. M&I will notify
Customer of the time by which Customer's data and media must be delivered to M&I
for processing for M&I to provide Customer's processed data within the time
period indicated by M&I.
16. RESPONSIBILITY.
a. GENERAL. M&I agrees to perform the Services in a commercially
reasonable manner, which is the same degree of care that M&I exercises in
providing Services to other M&I customers, and no other or higher degree of
care. Except as otherwise described herein, M&I assumes no other obligation as
to performance or quality of the Services provided, all other risks of error
being expressly assumed by Customer. M&I shall not be responsible for loss or
damage due to delays in processing or in the delivery of processed data as a
result of any of the causes excused by Section 19 hereof. M&I WILL IN NO EVENT
BE LIABLE FOR ANY INDIRECT, INCIDENTAL, OR CONSEQUENTIAL DAMAGES INCURRED BY
CUSTOMER INCLUDING, BUT NOT LIMITED TO, LOST PROFITS OR BUSINESS OPERATION LOSS,
REGARDLESS OF WHETHER M&I WAS ADVISED OF THE POSSIBLE OCCURRENCE OF SUCH
DAMAGES.
b. RELIANCE ON DATA SUPPLIED. M&I will process items and data and
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perform those Services described in this Agreement on the basis of information
furnished by Customer. M&I shall be entitled to rely upon any such data,
information, or instructions as provided by Customer. If any error results from
incorrect input supplied by Customer, Customer shall be responsible for
discovering and reporting such error and supplying the data necessary to correct
such error to M&I for processing at the earliest possible time. Customer will
indemnify and hold M&I harmless from any cost, claim, damage, or liability
(including attorneys' fees) whatsoever arising out of such data, information or
instructions, or any inaccuracy or inadequacy therein. Customer assumes all
risk of loss, delay, and miscommunication in the transportation or transmission
by electronic means of data and information from any terminal or remote unit
unless the same is caused by or attributable to any act or omission on M&I's
part, which act or omission does not meet the standard of care in Section 16(a),
or was caused by or attributable to any gross negligence or willful failure on
M&I's part to comply with its obligations under this Agreement.
c. DATA BACKUP. Customer shall maintain adequate records including
microfilm images of items being transported to M&I for at least ten (10)
business days' backup on magnetic tape or other electronic media where
transactions are being transmitted to M&I, from which reconstruction of lost or
damaged items or data can be made. Customer assumes all responsibility and
liability for any loss or damage resulting from failure to maintain such
records.
d. AUDIT. M&I shall cause a third-party review of its data
processing systems and Services to be conducted annually by its independent
auditors. M&I shall provide Customer one copy of the report resulting from such
review at no charge.
e. REGULATORY COMPLIANCE. Customer is responsible for determining
that the Services performed in its behalf, any forms which are used with its
customers, and all records it retains comply with all applicable laws. Should
Customer need information from the Services M&I provides in order to comply with
applicable federal or state laws and regulations, Customer's sole remedy, and
M&I's sole obligation shall be for M&I to provide the ability to process the
information requested from the Customer as promptly as is commercially
practicable.
f. BALANCING AND CONTROLS. On a daily basis, Customer shall review
all input and output, controls, reports, and documentation, to ensure the
integrity of data processed by M&I. In addition, Customer shall, on a daily
basis, check exception reports to verify that all file maintenance entries and
nondollar transactions were correctly entered. Customer is responsible for
initiating timely remedial action to correct any improperly processed data which
these reviews would disclose.
g. SERVICE DEFICIENCIES. If Customer is aware that a defect exists
in a Service, Customer shall be responsible for making whatever appropriate
adjustments may thereafter be necessary until M&I corrects the defect and, if
requested by Customer, M&I will, at M&I's expense, assist Customer in making
such corrections through the most cost-effective means, whether manual, by
system reruns, or program modifications. M&I will, where reasonable, make every
effort to correct any known
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material defect as soon as commercially reasonable at M&I's expense.
17. OWNERSHIP OF DATA. Customer is the owner of all of its data
supplied by Customer to M&I for processing hereunder. Customer acknowledges
that it has no rights in any of the software, systems documentation,
guidelines, procedures, and similar related materials or any modifications
thereof except with respect to Customer's use of the same during the term of
this Agreement to process data. Upon termination of this Agreement, M&I shall
provide Customer with all copies of Customer's data in a format that is being
used by M&I at that time for processing such data. Prior to the release of
the Customer's data: (a) all amounts owed under this Agreement by Customer
to M&I shall be current and paid in full, except for amounts disputed
reasonably and in good faith as provided for in Section 2(c) herein, and (b)
Customer shall pay M&I its "Estimated Deconversion Expenses" as described
below (except as provided for in Section 12(d) herein). Customer agrees to
pay M&I for M&I's work in providing such data at M&I's rates then in effect
for computer and personnel time, supplies, and other items as required, and
Customer further agrees to pay M&I for any and all charges associated with
the deconversion of Customer's data based on M&I's then-current charges for
such Services. Based on Customer's current volumes, and M&I's current prices
and method of performing deconversions, assuming no customized programming is
required, and further assuming Customer requests one (1) set of test tapes
and one (1) set of final tapes, deconversion costs will not exceed the
equivalent of one (1) month's processing fees which shall be equal to the
average of the three (3) months' processing fees immediately preceding notice
of termination, as further described in Section 13 herein. M&I shall make a
good faith estimate of all of such costs, expenses, and charges which shall
be paid by Customer in advance (the "Estimated Deconversion Expenses"). The
difference, if any, between the actual expenses and the prepaid Estimated
Deconversion Expenses shall be promptly paid after determination.
18. WARRANTIES. M&I represents and warrants that:
a. CAPABILITY OF COMPUTER SYSTEMS AND SOFTWARE. M&I's computer
systems (hardware and software) are capable of performing the Services in
accordance with the provisions of this Agreement. The software used to provide
the Services will operate substantially in accordance with the specifications
and documentation for the software as modified from time to time to incorporate
enhancements or modifications of the software to provide the Services.
b. QUALITY OF SERVICE. The reports and Services made available to
Customer shall be in substantial conformity with the User Manuals, as amended
from time to time, copies of which have been, or will be, provided to Customer.
c. PROPERTY RIGHTS. M&I has the right to provide the Services
hereunder, using all computer software required for that purpose.
d. ORGANIZATION AND APPROVALS. M&I is a validly organized corporate
entity with valid authority to enter into this Agreement. This Agreement has
been duly
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authorized by all necessary corporate action.
e. RESPONSE TO QUESTIONNAIRE. M&I agrees that its response to the
"Alex Sheshunoff Management Services, Inc., Application Software Features
Questionnaire" was prepared in good faith, based on information provided to M&I
by Customer, and is deemed accurate based as such. In the event such Customer
information is inaccurate or incomplete, M&I shall not be liable for any
resulting inaccuracy contained in the response.
f. DISCLAIMER OF WARRANTIES. EXCEPT AS DESCRIBED IN THIS AGREEMENT,
M&I DISCLAIMS ALL OTHER WARRANTIES, WHETHER WRITTEN, ORAL, EXPRESSED OR IMPLIED
INCLUDING, WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, ANY WARRANTY OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
19. FORCE MAJEURE. M&I shall not be liable to Customer if M&I's
fulfillment or performance of any terms or provisions of this Agreement is
delayed or prevented by revolution or other civil disorders, wars, acts of
enemies, strikes, electrical equipment or availability failure, labor disputes
except those involving M&I employees, fires, floods, acts of God, federal,
state, or municipal action, statute, ordinance or regulation, or, without
limiting the foregoing, any other causes not within its reasonable control, and
which by the exercise of reasonable diligence it is unable to prevent, whether
of the class of causes hereinbefore enumerated or not.
20. DATA SERVICES RELIABILITY AND RESPONSIVENESS. Subject to the
nonoccurrence of a force majeure and the performance of Customer's obligations
described in this Agreement, M&I agrees that the services will be provided in
accordance with the following standard. [Balance of paragraph redacted]
21. CONTRACT BUYOUT.
[Paragraph redacted]
22. IRS FILING. Customer has complied with all laws, regulations,
procedures, and requirements in attempting to secure correct tax identification
numbers (TINs) for Customer's payees and agrees to attest to this compliance by
an affidavit provided annually. Customer authorizes M&I to act as Customer's
agent and sign on Customer's behalf the Affidavit required by the Internal
Revenue Service on Form 4804, or any successor form.
Customer acknowledges that M&I's execution of the Form 4804 Affidavit on
Customer's behalf does not relieve Customer of responsibility to provide
accurate TINs or liability for any penalties which may be assessed for failure
to comply with TIN requirements. Customer agrees to hold M&I harmless from any
liabilities, claims, expenses, penalties, or damages (including attorneys' fees)
which may be assessed or incurred as a result of the failure to comply with TIN
requirements.
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23. EXPENSE REIMBURSEMENTS. Customer agrees to reimburse M&I for all
out-of-pocket expenses (travel, lodging, meals, long distance telephone
calls, and printing and copying charges) reasonably incurred in connection
with the conversion of Customer's accounts to the M&I system, subject to the
cap described on Exhibit B. The reimbursement of such expenses is in
addition to conversion charges which may arise after the conversion, or with
respect to accounts which are not currently customer accounts which are to be
converted to the M&I system. M&I shall estimate such expenses in advance,
and Customer shall pay such expenses in three (3) equal payments as follows:
first, upon execution of this Agreement; second, as of conversion Readiness
Review; and final, on the conversion sign-off date. M&I shall provide
Customer with a summary invoice of actual expenses, and any adjustments shall
be paid upon delivery of the invoice.
24. CONVERSION OBLIGATIONS. Both parties agree to make a good faith
effort to convert Customer's data in a timely fashion and to perform the
conversion in accordance with the responsibilities set forth in the M&I
Conversion Manual, the Conversion Schedule, and this Agreement. Customer agrees
to maintain an adequate staff of persons who are knowledgeable with the systems
currently used by Customer to process data. Customer further agrees to provide
such Services and perform such obligations as are contemplated by the M&I
Conversion Manual and the Conversion Schedule, and as necessary for Customer to
timely and adequately perform its obligations herein and therein. Customer
shall pay or reimburse M&I for all out-of-pocket expenses and on a
time-and-materials basis for any of its personnel, or any independent
contractors, who perform conversion or related services identified as Customer
Responsibilities in the Conversion Manual for Customer. Customer further agrees
to cooperate fully with all reasonable requests of M&I necessary to effect the
conversion in a timely and efficient manner. Customer agrees to reimburse M&I
for all conversion charges whether for the initial conversion, or for the
subsequent conversion of additional accounts as they are incurred or for the
conversion of products not identified in the Proposal.
25. USE OF THE SERVICES. (a) Customer assumes exclusive responsibility
for the consequences of any instructions Customer may give M&I, for Customer's
failure to properly access the Services in the manner prescribed by M&I, and for
Customer's failure to supply accurate input information; (b) Customer agrees
that it will use the Services in accordance with such reasonable policies as may
be established by M&I from time to time as set forth in any materials furnished
by M&I to Customer; (c) Customer agrees that, except as otherwise permitted by
M&I, Customer will use the Services only for its own internal business purposes
and will not sell or otherwise provide, directly or indirectly, any of the
Services or any portion thereof to any third party; and (d) Customer agrees and
represents that (1) this Agreement has been approved by its board of directors,
or that the officer executing this Agreement has been specifically authorized by
Customer's board of directors to execute this Agreement, (2) the performance of
this Agreement by the Customer will not adversely affect the safety or soundness
of the Customer or any of its affiliates, and (3) this Agreement, and the
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obligations evidenced hereby, will be properly reflected on the books and
records of the Customer, and the Customer will provide evidence of the same to
M&I upon request.
26. MISCELLANEOUS.
a. GOVERNING LAW. This Agreement shall be construed and governed by
the laws of the state of Wisconsin.
b. AMENDMENT. This Agreement, including the Schedules hereto, may
be amended only by an instrument in writing executed by the parties or their
permitted assignees.
c. ASSIGNMENT. This Agreement may not be assigned by either party
without the prior written consent of the other party, which such consent shall
not be unreasonably withheld, provided that M&I may freely assign this Agreement
to any company that is directly or indirectly (1) in control of M&I, (2) under
the control of M&I, or (3) under common control with M&I.
d. SECTION HEADINGS. Section headings are for reference purposes
only and shall not affect the interpretation or meaning of this Agreement.
e. NOTICES. All communications or notices required or permitted by
this Agreement shall be in writing and shall be deemed to have been given at the
earlier of the date when actually delivered to an officer of a party or when
deposited in the United States mail, certified or registered mail, postage
prepaid, return receipt requested, and addressed as set forth on the signature
page, unless and until any of such parties notifies the others. The parties
agree to provide each other the names of the appropriate individuals to whom
notices (as defined in this Section) shall be delivered.
f. NO WAIVER OF PERFORMANCE. Failure by either party at any time to
require performance by the other party to claim a breach of any provision of
this Agreement will not be construed as a waiver of any right accruing under
this Agreement, nor affect any subsequent breach, nor affect the effectiveness
of this Agreement or any part hereof, nor prejudice either party as regards any
subsequent action.
g. ENTIRE AGREEMENT; CONFLICTING PROVISIONS. This Agreement,
together with the Schedules and Exhibits hereto, constitutes the entire
agreement between the Customer and M&I with respect to the subject matter
hereof. There are no restrictions, promises, warranties, covenants, or
undertakings other than those expressly set forth herein and therein. This
Agreement supersedes all prior negotiations, agreements, and undertakings
between the parties with respect to such subject matter. In the event of any
conflict between the terms of the main body of this Agreement and any of the
Schedules hereto, the terms of the main body of this Agreement shall govern.
h. EXECUTION IN COUNTERPARTS. This Agreement may be executed
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simultaneously in any number of counterparts, each of which shall be deemed an
original but all of which shall together constitute one and the same Agreement.
i. ENFORCEABILITY. The invalidity or enforceability of any
provision hereof shall not affect or impair any other provisions.
j. SCOPE OF AGREEMENT. If the scope of any of the provisions of the
Agreement is too broad in any respect whatsoever to permit enforcement to its
full extent, then such provisions shall be enforced to the maximum extent
permitted by law and the parties hereto consent and agree that such scope may be
judicially modified accordingly and that the whole of such provisions of this
Agreement shall not thereby fail, but that the scope of such provisions shall be
curtailed only to the extent necessary to conform to law.
k. CONFIDENTIALITY OF TERMS. Customer agrees that neither it, its
directors, officers, employees, or agents will disclose this Agreement, or any
of the terms or provisions of this Agreement, to any other party.
l. YEAR 2000. The Services provided by M&I will permit Customer to
comply with regulatory requirements resulting from the change to the year 2000
AD.
m. ACCOUNT MANAGER. M&I shall assign an account manager who shall
be responsible for the ongoing relationship with Customer. In the event
Customer and the account manager are or become incompatible, upon request, and
subject to the availability of qualified personnel, M&I will appoint a
replacement within a reasonable amount of time following such request.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
in their names as of the date first above written.
M&I DATA SERVICES, A DIVISION OF THE
MARSHALL & ILSLEY CORPORATION ("M&I")
4900 W. Brown Deer Road
Brown Deer, WI 53223
By: ________________________
Name: Patrick C. Foy
Title: President, Outsourcing Business Group
By: ________________________
Name: Thomas R. Mezera
Title: Vice President
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FIRSTFED BANCSHARES, INC. ("CUSTOMER")
749 Lee Street
Des Plaines, IL 60016
By: ________________________
Name: Larry G. Gillie
Title: President and Chief Executive Officer
AUTHORIZATION AGREEMENT
The undersigned ("Customer") hereby authorizes M&I Data Services, a
division of the Marshall & Ilsley Corporation ("M&I") to initiate debit entries
consistent with terms of the Agreement and to initiate, if necessary, credit
entries and adjustments for any excess debit entries or debit entries made in
error, to Customer's account indicated below and the depository named below, to
debit and/or credit the same such account.
This authority is to remain in full force and effect for the period coinciding
with the term (and any renewals thereof) of the Data Processing Services
Agreement made the 31st day of March, 1997, and any addenda thereto (the
"Agreement"), pursuant to the terms and conditions specified in the Agreement.
DEPOSITORY NAME: ________________________________
ADDRESS: ________________________________
CITY/STATE/ZIP: ________________________________
TELEPHONE NUMBER: ________________________________
ROUTING TRANSIT NUMBER: ________________________________
ACCOUNT NUMBER: ________________________________
M&I DATA SERVICES, A DIVISION OF THE
MARSHALL & ILSLEY CORPORATION ("M&I")
By: ________________________
Name: Patrick C. Foy
Title: President, Outsourcing Business Group
By: ________________________
Name: Thomas R. Mezera
Title: Vice President
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FIRSTFED BANCSHARES, INC. ("CUSTOMER")
By: ________________________
Name: Larry G. Gillie
Title: President and Chief Executive Officer
<PAGE>
ATTORNEY-IN-FACT APPOINTMENT
Customer hereby appoints M&I Data Services, a division of the Marshall &
Ilsley Corporation ("M&I") as: (1) customer's attorney-in-fact and empowers
M&I to authorize the Internal Revenue Service (IRS) to release information
return documents supplied to the IRS by M&I to states which participate in
the "Combined Federal/State Program"; and (2) Customer's agent to sign on
Customer's behalf the Affidavit required by the Internal Revenue Service on
Form 4804, or any successor form. Customer agrees to hold M&I harmless from
any liabilities, claims, expenses, penalties, or damages (including
attorneys' fees) which may be assessed or incurred as a result of the release
of information in good faith.
FIRSTFED BANCSHARES, INC. ("CUSTOMER")
By: ________________________
<PAGE>
AFFIDAVIT
STATE OF _______________________________________)
) SS.
COUNTY OF _______________________________________)
I, ___________________________________, being first duly sworn, on oath, depose
Customer's Representative
and say:
1. I am an employee of FirstFed Bancshares, Inc. I have personal
knowledge of my employer's practices with regard to procuring and reporting tax
identification numbers (TINs) and authority to execute this Affidavit on my
employer's behalf.
2. FirstFed Bancshares, Inc. has complied with all laws, regulations,
procedures, and requirements in attempting to secure correct TINs for its
payees. This compliance has been pursued with due diligence, and any failure to
secure correct TINs is due to reasonable cause.
_________________________________
Customer's Representative
Subscribed and sworn to before me
this _____________ day of ______________________, 1997.
_______________________________________
_______________________________________ Notary Public
My Commission expires: ________________
<PAGE>
AUTOMATED CLEARING HOUSE SERVICES
ADDENDUM AND AUTHORIZATION AGREEMENT
THE UNDERSIGNED ("Customer") hereby authorizes M&I Data Services, a
division of the Marshall & Ilsley Corporation ("M&I") to initiate and receive
automated clearing house ("ACH") debit entries, adjustments to debit entries and
credit entries to Customer's account indicated below, to credit and/or debit the
same to such account, and to provide various ACH services, as described below,
to Customer pursuant to the terms and conditions specified in this Automated
Clearing House Services Addendum and Authorization Agreement (the "Addendum").
The ACH entries covered under this Addendum shall hereinafter be referred to as
the "ACH Entries."
I. GENERAL. This Addendum is an addendum to, and is part of, the
Agreement by and between M&I and Customer dated March 31, 1997, (the
"Agreement") and except as otherwise provided herein, is subject to the terms
and conditions of the Agreement. Except as otherwise provided herein, the terms
used in this Addendum shall have the same meanings as ascribed to such terms in
the Operating Rules of the National Automated Clearing House Association, as in
effect from time to time (the "NACHA Rules").
II. ACH SERVICES.
a. M&I shall act as Customer's agent for initiating and
transmitting ACH Entries to the appropriate Federal Reserve Bank or other
automated clearing house operator (an "ACH Operator"). In addition, M&I shall
act as Customer's agent for receiving ACH Entries from an ACH Operator. For all
ACH Entries, Customer, and not M&I, shall be the originating depository
financial institution (the "ODFI") or the receiving depository institution (the
"RDFI"), as the case may be, for purposes of the NACHA Rules, the rules of local
ACH associations, the rules of ACH Operators and other applicable law
(collectively, "Applicable Law").
b. M&I shall transmit ACH Entries in accordance with the format
requirements of the NACHA Rules to an ACH Operator using Customer's Routing
Number. M&I shall receive ACH Entries on behalf of Customer that are
transmitted to M&I by an ACH Operator. M&I shall provide reports to Customer,
as described in the M&I ACH Manual (the "Service Manual"). If agreed to between
Customer and M&I, M&I shall provide for the posting of ACH Entries to Customer
deposit accounts.
c. All warranties of an ODFI or RDFI prescribed under Applicable
Law shall be in effect and applicable to Customer, and not M&I, with respect to
all ACH Entries.
d. M&I may provide additional ACH services as requested by
Customer and agreed to by M&I in writing.
<PAGE>
III. M&I PC ACH SERVICES. Customer may provide its business depositors
with access to M&I's ACH Services as provided in M&I's PC ACH User Manual (the
"PC ACH Service"). Customer shall be responsible for informing M&I prior to
permitting a new depositor to begin using the PC ACH Service. Customer also
shall inform M&I whether any credit limit, as provided in Section V of this
Addendum, shall apply to the ACH Entries of a depositor utilizing the PC ACH
Service.
IV. CUSTOMER DEPOSITOR INQUIRIES; ERRONEOUS OR REJECTED ACH ENTRIES.
a. Customer shall be responsible for handling all inquiries of its
depositors regarding ACH Entries, including but not limited to inquiries
regarding credits or debits to a depositor's account resulting from an ACH
Entry. M&I agrees to reasonably assist Customer in responding to such inquiries
by providing information to Customer concerning ACH Entries.
b. As described in the Service Manual, M&I shall provide reports
to Customer showing errors and rejections resulting from ACH Entries transmitted
on behalf of Customer during a particular day. It shall be Customer's
responsibility to research and correct such ACH Entries.
V. CREDIT LIMITS.
a. M&I and Customer may agree from time to time to establish one
or more credit limits applicable to ACH Entries involving a particular depositor
or all depositors of Customer. Such credit limits may be established from time
to time by a written letter from Customer, acknowledged and agreed to in writing
by M&I.
b. If a credit limit is established pursuant to Section V.a of
this Addendum, M&I will provide oral or written notice to Customer prior to
transmitting an ACH Entry that would exceed such a credit limit.
VI. SERVICE MANUALS; PC ACH USER MANUAL.
a. M&I shall provide Customer with copies of M&I's current Service
Manual and PC ACH User Manual and any updates to such manuals. Customer agrees
to comply with the requirements of such manuals.
b. It shall be Customer's responsibility, and Customer is
authorized, to forward a copy of the PC ACH User Manual, and any updates to the
PC ACH User Manual, to Customer's depositors that utilize the PC ACH Service.
VII. COMPLIANCE WITH APPLICABLE LAW.
a. Customer shall be bound by, and comply with, Applicable Law.
M&I shall have no responsibility for Customer's compliance with Applicable Law,
and M&I shall have no liability to any person for Customer's failure to comply
with Applicable Law. Customer shall indemnify M&I and hold it harmless from any
and all liabilities, claims, costs, expenses and damages of any nature
(including but not limited
<PAGE>
to reasonable attorney's fees, allocated costs of staff counsel, expenses of
litigation and any fees and expenses incurred in enforcing this provision)
arising out of or related to any dispute or legal action by any party
alleging a violation of Applicable Law by Customer.
b. Without limiting the generality of Section VII.a, prior to
providing ACH origination services, Customer shall enter into an agreement with
the Originator in compliance with the NACHA Rules, including but not limited to
the requirement of the NACHA Rules that such agreement include a provision
whereby the Originator agrees to be bound by the NACHA Rules. M&I shall have no
responsibility for ensuring that such Originators have entered into such
agreements.
VIII. LIMITATION ON LIABILITY.
a. M&I is acting solely in its capacity as agent for Customer in
connection with the initiation, transmission and receipt of ACH Entries on
behalf of Customer. As agent, M&I will be under no obligation to provide funds
to any party to settle for any ACH Entry received or initiated by M&I.
Notwithstanding anything in the Agreement to the contrary, M&I's sole liability
to Customer for any claim arising out of the ACH services performed by M&I
pursuant to this Addendum shall be to furnish a corrected ACH Entry(ies) to an
ACH Operator, provided that Customer promptly notifies M&I of the occurrence of
an error or omission with respect to an ACH Entry and provided further that such
error or omission was caused solely by M&I.
b. M&I shall make reasonable efforts to deliver ACH Entries to
Customer or to an ACH Operator, as appropriate, prior to any applicable deadline
for such delivery. M&I does not guarantee such delivery and, notwithstanding
anything in the Agreement to the contrary, shall have no liability to Customer
as a result of any late delivery, regardless of whether such late delivery is
caused solely by M&I or in whole or in part by a third party.
c. M&I shall not be deemed to be in default of this Addendum for
any failure to perform under this Addendum that resulted, directly or
indirectly, from any cause beyond M&I's control.
d. IN NO EVENT WILL M&I BE RESPONSIBLE UNDER THIS ADDENDUM FOR ANY
DAMAGES, INCLUDING BUT NOT LIMITED TO DIRECT, SPECIAL, INDIRECT, INCIDENTAL OR
CONSEQUENTIAL DAMAGES WHICH CUSTOMER MAY INCUR OR EXPERIENCE ON ACCOUNT OF
ENTERING INTO OR RELYING ON THIS ADDENDUM, EVEN IF M&I HAS BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES.
e. Notwithstanding anything in the Agreement to the contrary, the
foregoing provisions of this Section VIII set forth the full extent of M&I's
liability under this Addendum for any claim or action, regardless of the form in
which any such claim or action may be asserted against M&I, and set forth
Customer's sole remedies against M&I.
<PAGE>
IX. TERMS AND CONDITIONS. This Addendum shall remain in full force and
effect for the period coinciding with the term (and any renewals thereof) of the
Agreement.
<PAGE>
DEPOSITORY NAME: ________________________________
ADDRESS: ________________________________
CITY/STATE/ZIP: ________________________________
TELEPHONE NUMBER: ________________________________
ROUTING TRANSIT NUMBER: ________________________________
ACCOUNT NUMBER: ________________________________
(at Federal Reserve Bank or correspondent bank)
M&I DATA SERVICES, A DIVISION OF THE
MARSHALL & ILSLEY CORPORATION ("M&I")
4900 West Brown Deer Road
Brown Deer, WI 53223-0528
By: _______________________________
Name: Patrick C. Foy
Title: President, Outsourcing Business Group
FIRSTFED BANCSHARES, INC. ("CUSTOMER")
749 Lee Street
Des Plaines, IL 60016
By: _______________________________
Name: Larry G. Gillie
Title: President and Chief Executive Officer
<PAGE>
BACKROOM AND ITEM PROCESSING ADDENDUM TO
DATA PROCESSING SERVICES AGREEMENT
THIS ADDENDUM, to the Data Processing Services Agreement (the "Agreement")
is made as of this same day by and between the undersigned parties, does hereby
alter, amend, and modify the Agreement and supersedes and takes precedence over
any conflicting provisions contained in the Agreement.
FOR GOOD AND VALUABLE CONSIDERATION, the receipt and sufficiency of which
are hereby acknowledged, the undersigned parties agree as follows:
A. M&I shall perform for Customer those certain Backroom and Item
Processing Services described in the attached Exhibit for which Customer agrees
to pay M&I in accordance with M&I's then-current standard published prices.
M&I's standard published prices as of the date of this Amendment are attached
hereto as Exhibit B. Notwithstanding anything in the Agreement to the contrary,
Backroom and Item Processing Services shall not be subject to any discount or
price adjustment provision.
B. M&I and Customer agree to perform their respective responsibilities
associated with Backroom and Item Processing Services in accordance with the
procedures established by M&I as modified from time to time. A copy of M&I's
procedure has been or will be provided to Customer.
C. M&I agrees that the Services provided under this Addendum shall be
performed in a commercially reasonable manner, as defined in the Agreement, and
no other or higher degree of care. M&I assumes no other obligation as to
performance or quality of the Services provided. M&I shall not be responsible
for any loss or damage to Customer arising as a result of any action or inaction
on the part of M&I including, but not limited to, indirect, incidental, or
consequential damages, lost profits, or business operation loss. In the event
of errors resulting from M&I's provision of the Services, M&I's sole obligation
and Customer's sole remedy, shall be for M&I to correct such errors, if
possible, and to review its systems and procedures for the purpose of
implementing changes to prevent a future occurrence of a similar error.
All other terms and conditions contained in the Agreement remain in full
force and effect.
<PAGE>
IN WITNESS WHEREOF, the undersigned parties have duly executed this
Addendum in a manner appropriate to each.
M&I DATA SERVICES, A DIVISION FIRSTFED BANCSHARES, INC.
OF THE MARSHALL & ILSLEY ("CUSTOMER")
CORPORATION ("M&I")
By: ______________________ By: ______________________
Name: Thomas R. Mezera Name: Larry G. Gillie
Title: Vice President Title: President and Chief Executive Officer
<PAGE>
SUBSIDIARIES OF THE REGISTRANT
CoVest Banc, Des Plaines, Illinois, a national banking association
CoVest Investments, Inc., Des Plaines, Illinois, an Illinois corporation
<PAGE>
[LETTERHEAD OF CROWE CHIZEK & COMPANY LLP]
We consent to the incorporation by reference of our report included herein,
dated February 27, 1998, relating to the consolidated financial statements of
CoVest Bancshares, Inc. (the "Company") as of December 31, 1997 and 1996, and
for each of the years in the three year period ended December 31, 1997, in the
Registration Statement on Form S-3 filed by the Company with the Securities and
Exchange Commission on November 4, 1994, as amended on March 14, 1997, and into
the two Registration Statements on Form S-8 filed by the Company with the
Securities and Exchange Commission on June 30, 1995.
Crowe, Chizek and Company LLP
Oak Brook, Illinois
March 24, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 1997, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,670
<INT-BEARING-DEPOSITS> 17,800
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 164,172
<INVESTMENTS-CARRYING> 164,172
<INVESTMENTS-MARKET> 164,172
<LOANS> 381,486
<ALLOWANCE> 3,977
<TOTAL-ASSETS> 582,722
<DEPOSITS> 371,752
<SHORT-TERM> 76,956
<LIABILITIES-OTHER> 10,720
<LONG-TERM> 75,000
0
0
<COMMON> 44
<OTHER-SE> 48,250
<TOTAL-LIABILITIES-AND-EQUITY> 582,722
<INTEREST-LOAN> 28,186
<INTEREST-INVEST> 10,225
<INTEREST-OTHER> 953
<INTEREST-TOTAL> 39,364
<INTEREST-DEPOSIT> 18,750
<INTEREST-EXPENSE> 23,914
<INTEREST-INCOME-NET> 15,450
<LOAN-LOSSES> 4,072
<SECURITIES-GAINS> 1,247
<EXPENSE-OTHER> 11,305
<INCOME-PRETAX> 3,745
<INCOME-PRE-EXTRAORDINARY> 2,610
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,610
<EPS-PRIMARY> .61
<EPS-DILUTED> .58
<YIELD-ACTUAL> 7.49
<LOANS-NON> 0
<LOANS-PAST> 1,304
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,424
<CHARGE-OFFS> 1,615
<RECOVERIES> 96
<ALLOWANCE-CLOSE> 3,977
<ALLOWANCE-DOMESTIC> 3,977
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,977
</TABLE>
