UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended Commission File Number
June 30, 1999 0-20160
-----------------------------
COVEST BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-3820609
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or Number)
organization)
749 Lee Street, Des Plaines, Illinois 60016
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (847) 294-6500
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes --X-- No -----
As of August 12, 1999, the Registrant had issued and outstanding 4,403,803
shares of the Registrant's Common Stock. In addition, it had also
repurchased 265,296 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 August 12, 1999, was $47,000,000.
COVEST BANCSHARES, INC.
Table of Contents
PART I. FINANCIAL INFORMATION (UNAUDITED) PAGE NO.
Item 1. Financial Statements....................3
Item 2. Management's Discussion and
Analysis of Financial Condition and
Results of Operations..................17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................32
Item 2. Changes in Securities..................32
Item 3. Defaults upon Senior Securities........32
Item 4. Submission of Matters to a Vote
of Security Holders....................33
Item 5. Other Information......................33
Item 6. Exhibits and Reports of Form 8-K.......33
Form 10-Q Signatures.............................34
PART 1. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
see notes to condensed consolidated financial statements
(unaudited)
COVEST BANCSHARES INC.
CONSOLIDATED STATEMENTS OF CONDITION
(Unaudited) JUNE 30, DEC. 31,
(Dollars in thousands except 1999 1998
per share amounts) --------- ---------
ASSETS
- ------
CASH AND CASH EQUIVALENTS $ 8,362 $ 18,395
INTEREST BEARING DEPOSITS AT BANKS 13,799 21,282
INVESTMENTS:
Securities Available-for-Sale 62,863 30,894
Mortgage-Backed Securities and
Related Securities Available-
for-Sale 22,051 34,872
Tax Exempt Municipal Securities
Available-for-Sale 17,497 13,872
Federal Home Loan Bank Stock and
Federal Reserve Bank Stock 6,469 8,379
--------- ---------
TOTAL INVESTMENTS 108,880 88,017
LOANS RECEIVABLE:
Commercial Loans 10,868 8,084
Commercial Real Estate Loans 68,586 66,699
Multi-Family Loans 79,245 55,661
Construction Loans 39,623 40,572
Commercial Leases 30,610 35,166
Mortgage Loans 125,303 150,185
Consumer Loans 42,361 45,980
Mortgage Loans held for Sale 964 4,294
--------- ---------
TOTAL LOANS RECEIVABLE 397,560 406,641
Allowance for Possible Loan Loss ( 4,545) ( 4,312)
--------- ---------
LOANS RECEIVABLE, NET 393,015 402,329
ACCRUED INTEREST RECEIVABLE 3,083 3,280
PREMISES AND EQUIPMENT 10,939 11,372
OTHER ASSETS 4,354 4,022
--------- ---------
TOTAL ASSETS $542,432 $548,697
========= ========
JUNE 30, DEC. 31,
1999 1998
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
LIABILITIES:
Deposits:
Non-Interest Bearing $ 17,113 $ 14,998
Interest Bearing Checking 21,195 23,825
Money Market Accounts 84,473 85,209
Savings Accounts 51,767 52,990
Certificates of Deposit 180,976 187,513
-------- --------
355,524 364,535
Short-Term Borrowings and Securities
Sold U/A to Repurchase 35,351 6,755
Long-Term Advances from Federal
Home Loan Bank 95,000 120,000
Advances from Borrowers for
Taxes and Insurance 3,939 3,637
Accrued Expenses and Other Liabilities 6,301 6,819
--------- ---------
TOTAL LIABILITIES 496,115 501,746
STOCKHOLDERS' EQUITY:
Common Stock, par value $.01 per share;
7,500,000 authorized shares;
4,403,803 shares issued 44 44
Additional Paid-in Capital 17,936 18,967
Retained Earnings 32,061 30,905
Treasury Stock, 212,758 shares and
193,188 shares, held at cost
6/30/99 and 12/31/98 respectively (2,987) (3,017)
ESOP Loan -0- (161)
Unearned Stock Award (54) (73)
Accumulated Other Comprehensive
Income (683) 286
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 46,317 46,951
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 542,432 $ 548,697
========= =========
<TABLE>
<CAPTION>
COVEST BANCSHARES INC.
CONSOLIDATED STATEMENTS OF INCOME THREE MONTHS ENDED SIX MONTHS
ENDED
(Unaudited) JUNE 30, JUNE 30, JUNE 30, JUNE 30
(Dollars in thousands) 1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans and Leases Receivable $ 7,672 $ 7,879 $15,263 $15,446
Interest Bearing Deposits at Banks 185 234 572 385
Mortgage-Backed and Related Securities 385 1,475 894 3,400
Taxable Securities 808 328 1,285 941
Tax Exempt Securities 178 98 334 148
Other Interest and Dividend Income 115 137 244 279
--------- --------- --------- ---------
Total Interest Income 9,343 10,151 18,592 20,599
INTEREST EXPENSE
Deposits 3,660 3,887 7,337 8,031
Advances from Federal Home Loan Bank 1,621 2,179 3,224 4,345
Other Borrowed Money 72 113 126 207
--------- --------- --------- ---------
Total Interest Expense 5,353 6,179 10,687 12,583
NET INTEREST INCOME 3,990 3,972 7,905 8,016
Provision for Possible Loan Losses 288 769 387 1,168
NET INTEREST INCOME AFTER PROVISION --------- --------- -------- ---------
FOR POSSIBLE LOAN LOSSES 3,702 3,203 7,518 6,848
NON-INTEREST INCOME
Loan Servicing Fees 275 279 477 600
Mortgage Center Income 495 468 1,031 679
Deposit Related Charges and Fees 252 247 488 466
Gain on Sale of Securities -0- 463 2 719
Insurance and Annuity Commissions 59 69 98 210
Other 129 52 160 91
--------- --------- --------- ---------
TOTAL NON-INTEREST INCOME 1,210 1,578 2,256 2,765
NON-INTEREST EXPENSE
Compensation and Benefits 1,516 1,612 3,483 3,296
Commissions and Incentives 230 240 415 305
Occupancy and Equipment 522 496 1,049 997
Federal Insurance Premium 54 57 107 117
Data Processing 244 268 488 575
Advertising 103 110 195 197
Other Real Estate Owned -0- (42) 2 (36)
Other 675 563 1,278 1,145
--------- --------- --------- ----------
TOTAL NON-INTEREST EXPENSE 3,344 3,304 7,017 6,596
--------- --------- --------- ----------
INCOME BEFORE TAXES 1,568 1,477 2,757 3,017
Income Tax Provision (529) (505) (932) (1,035)
--------- --------- --------- ----------
NET INCOME $ 1,039 $ 972 $ 1,825 $ 1,982
========= ========= ========= ==========
</TABLE>
COVEST BANCSHARES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED
(Unaudited) JUNE 30, JUNE 30,
(Dollars in thousands) 1999 1998
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 1,825 $ 1,982
Adjustments to Reconcile Net Income to
Cash Provided by Operating Activities
Depreciation and Amortization of
Premises and Equipment 519 482
Provision for Possible Loan Losses 387 1,168
Net Gain on Sale of Securities (2) (719)
Change In:
Prepaid Expenses and Other Assets 1,031 (18)
Accrued Interest Receivable 197 447
Accrued Expenses and Other Liabilities (1,309) (123)
--------- ---------
NET CASH FROM OPERATING ACTIVITIES 2,648 3,219
CASH FLOWS FROM INVESTING ACTIVITIES
Loan Originations, Net of Principal
Payments 9,081 (34,243)
Principal Payments on Mortgage-Backed
and Related Securities 6,006 26,945
Purchases of Mortgage-Backed and
Related Securities -0- (40,363)
Purchases of Securities (42,399) (31,693)
Proceeds from Sales and Maturities
of Securities 12,218 71,700
(Purchase)/Sale of Federal Home Loan Bank
and Federal Reserve Bank Stock 1,910 (1,750)
Purchase of Office Properties and
Equipment (86) (963)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES ( 13,270) (10,367)
SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase (Decrease) in NOW Accounts,
Money Markets, Savings and
Certificates of Deposit (9,011) (23,672)
Net Borrowings of Federal
Home Loan Bank Advances -0- 45,000
Proceeds (Repayments) from Other
Borrowings 3,596 (14,228)
Net Change in Mortgage Escrow Funds 302 163
Purchase of Common Stock Net of
Proceeds from Exercise of Stock Options (1,273) (1,909)
Payment Received on Loan to ESOP 161 143
Dividend Paid, Net of Dividend
Reinvestment Program (669) (696)
--------- ---------
NET CASH FROM FINANCING ACTIVITIES (6,894) 4,801
--------- ---------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (17,516) (2,347)
CASH AND CASH EQUIVALENTS, BEGINNING 39,677 23,470
--------- ---------
CASH AND CASH EQUIVALENTS, ENDING $ 22,161 $ 21,123
========= =========
<TABLE>
<CAPTION>
COVEST BANCSHARES INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
(Dollars in thousands)
Six months ended June 30, 1998 and 1999
ACCUMULATED
ADDITIONAL UNEARNED OTHER
COMMON PAID-IN RETAINED TREASURY ESOP STOCK COMPREHENSIVE
STOCK CAPITAL EARNINGS STOCK LOAN AWARD INCOME TOTAL
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $44 $19,365 $28,410 $ -0- ($511) ($73) $ 1,059 $48,294
Net Income 1,982 1,982
Change in Unrealized Gain on Securities
Available-for-Sale (699) (699)
--------
Comprehensive Income 1,283
--------
Cash Dividends ($.16 per share) (696) (696)
Purchase of Treasury Stock (2,821) (2,821)
Principal Payment on ESOP Loan 143 143
Treasury Stock Reissued in Conjunction
with Stock Option Exercises (506) 1,418 912
Tax Benefits related to
Employee Stock Option Plans 464 464
- ------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 $44 $19,323 $29,696 ($1,403) ($368) ($73) $360 $47,579
=======================================================================================================================
Balance at December 31, 1998 $44 $18,967 $30,905 ($3,017) ($161) ($73) $286 $46,951
Net Income 1,825 1,825
Change in Unrealized Gain on Securities
Available-for-sale (969) (969)
--------
Comprehensive Income 856
--------
Cash Dividends ($.16 per share) (669) (669)
Purchase of Treasury Stock (2,855) (2,855)
Stock Award Expense 3 19 22
Principal payment on ESOP Loan 161 161
Treasury Stock Reissued in Conjunction
with Stock Option Exercises (1,303) 2,885 1,582
Tax Benefits Related to
Employee Stock Option Plans 269 269
- -----------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 $44 $17,936 $32,061 ($2,987) ($0) ($54) ($683) $46,317
========================================================================================================================
</TABLE>
COVEST BANCSHARES INC.
AVERAGE BALANCE SHEET
(Unaudited)
(Dollars in thousands)
The following table sets forth certain information related to the Company's
average balance sheet. It reflects the average yield on assets and average
cost of liabilities for the periods indicated, as derived by dividing
income or expense by the average daily balance of assets or liabilities,
respectively, for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------------------
JUNE 30, 1999 JUNE 30, 1998
----------------------------------------- ---------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
INTEREST-EARNING ASSETS: ----------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial Loans (1) $ 10,488 $ 171 6.51% $ 7,112 $ 168 9.45%
Commercial Real Estate 68,721 1,473 8.57 63,408 1,341 8.37
Multi-Family Loans 71,799 1,405 7.83 17,149 344 8.02
Construction Loans 40,722 901 8.85 13,545 322 9.40
Commercial Leases 31,999 501 6.27 33,922 557 6.57
Mortgage Loans (1) 128,777 2,313 7.18 208,625 3,784 7.26
Consumer Loans (1) 42,680 908 8.51 58,228 1,363 9.36
Securities 84,652 1,190 5.63 39,972 616 6.16
Mortgage-Backed and
Related Securities 22,355 385 6.89 91,425 1,475 6.45
Other Investments 15,849 185 4.67 16,571 234 5.65
----------------------------------------- ---------------------------------------
Total Interest-Earning Assets $518,042 $ 9,432 7.28% $549,957 $ 10,204 7.42%
Non-Interest Earning Assets 21,777 22,633
----------------------------------------- --------------------------------------
TOTAL ASSETS $539,819 $572,590
=========================================
=======================================
INTEREST-BEARING LIABILITIES:
Interest-Bearing Checking $ 22,628 $ 59 1.05% $ 22,431 $ 72 1.28%
Savings 52,152 324 2.49 56,468 352 2.49
Money Market 82,375 898 4.36 74,146 903 4.87
Certificates of Deposits 173,168 2,261 5.22 175,120 2,423 5.53
Jumbo CD's 9,273 118 5.10 9,781 137 5.64
FHLB Advances 120,000 1,621 5.40 156,484 2,179 5.57
Other Borrowed Funds 6,318 72 4.55 7,799 113 5.75
----------------------------------------- ---------------------------------------
Total Interest-Bearing
Liabilities $465,914 $ 5,353 4.60% $502,229 $ 6,179 4.92%
Non-Interest Bearing
Deposits 16,646 11,391
Other Liabilities 10,863 11,064
----------------------------------------- --------------------------------------
TOTAL LIABILITIES $493,423 $524,684
----------------------------------------- --------------------------------------
Stockholders' Equity 46,396 47,906
----------------------------------------- ---------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $539,819 $572,590
=========================================
=======================================
NET INTEREST INCOME $ 4,079 $ 4,025
----------------------------------------- ---------------------------------------
NET INTEREST RATE SPREAD (2) 2.68% 2.50%
----------------------------------------- ---------------------------------------
NET INTEREST MARGIN (3) 3.08% 2.93%
----------------------------------------- ---------------------------------------
(1) Includes cash basis loans.
(2) Interest Rate Spread is calculated by subtracting the average cost of
interest-bearing liabilities from the average rate on interest-earning
assets.
(3) Net Interest Margin is calculated by dividing net interest income by
average interest-earning assets.
</TABLE>
COVEST BANCSHARES INC.
AVERAGE BALANCE SHEET
(Unaudited)
(Dollars in thousands)
The following table sets forth certain information related to the Company's
average balance sheet. It reflects the average yield on assets and average
cost of liabilities for the periods indicated, as derived by dividing income
or expense by the average daily balance of assets or liabilities, respectively,
for the periods indicated.
[CAPTION]
<TABLE>
SIX MONTHS ENDED
----------------------------------------------------------------------------------------
JUNE 30, 1999 JUNE 30, 1998
----------------------------------------- ---------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
INTEREST-EARNING ASSETS: ----------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial Loans (1) $ 9,914 $ 307 6.19 $ 6,493 $ 304 9.36%
Commercial Real Estate 65,339 2,795 8.56 61,049 2,575 8.39
Multi-Family Loans 68,501 2,677 7.82 12,920 516 7.99
Construction Loans 38,271 1,697 8.87 11,953 557 9.26
Commercial Leases 32,445 1,020 6.29 24,904 831 6.67
Mortgage Loans (1) 136,538 4,922 7.21 218,908 7,952 7.27
Consumer Loans (1) 43,810 1,845 8.42 58,348 2,710 9.29
Securities 71,008 2,036 5.74 46,740 1,412 6.04
Mortgage-Backed and
Related Securities 26,397 894 6.77 102,060 3,400 6.66
Other Investments 24,653 572 4.64 14,137 385 5.45
----------------------------------------- ---------------------------------------
Total Interest-Earning Assets $516,876 $ 18,765 7.26% $557,512 $ 20,675 7.42%
Non-Interest Earning Assets 21,855 23,288
----------------------------------------- ---------------------------------------
TOTAL ASSETS $538,731 $580,800
=========================================
=======================================
INTEREST-BEARING LIABILITIES:
Interest-Bearing Checking $ 22,617 $ 118 1.05% $ 22,252 $ 147 1.32%
Savings 52,297 647 2.47 57,405 712 2.48
Money Market 81,581 1,762 4.32 68,307 1,660 4.86
Certificates of Deposits 173,808 4,553 5.24 187,734 5,243 5.59
Jumbo CD's 9,968 257 5.16 9,559 269 5.65
FHLB Advances 120,000 3,224 5.37 156,298 4,345 5.56
Other Borrowed Funds 5,661 126 4.46 7,947 207 5.18
----------------------------------------- ---------------------------------------
Total Interest-Bearing
Liabilities $465,932 $ 10,687 4.59% $509,502 $ 12,583 4.94%
Non-Interest Bearing
Deposits 15,380 11,594
Other Liabilities 10,703 11,604
----------------------------------------- ---------------------------------------
TOTAL LIABILITIES $492,015 $532,700
----------------------------------------- --------------------------------------
Stockholders' Equity 46,716 48,100
----------------------------------------- ---------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $538,731 $580,800
=========================================
=======================================
NET INTEREST INCOME $ 8,078 $ 8,092
----------------------------------------- ---------------------------------------
NET INTEREST RATE SPREAD (2) 2.67% 2.48%
----------------------------------------- ---------------------------------------
NET INTEREST MARGIN (1) 3.06% 2.90%
----------------------------------------- ---------------------------------------
(1) Includes cash basis loans.
(2) Interest Rate Spread is calculated by subtracting the average cost of
interest-bearing liabilities from the average rate on interest-earning
assets.
(3) Net Interest Margin is calculated by dividing net interest income by
average interest-earning assets.
</TABLE>
COVEST BANCSHARES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Regulation S-X. Accordingly, they do not include all
the information and footnotes required by generally accepted accounting
principles for complete financial statements.
The results of operations and other data for the quarter and six months
ended June 30, 1999 are not necessarily indicative of results that
may be expected for the entire year ended December 31, 1999.
In the opinion of management, the unaudited condensed consolidated
financial statements contain all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the
financial condition of CoVest Bancshares, Inc. (the "Company"),
including its wholly owned subsidiary, CoVest Banc (the "Bank"),
as of June 30, 1999 and December 31, 1998, the results of
the Company's operations for the three and six months ended June 30,
1999 and 1998, its cash flows for the six months ended June 30, 1999
and 1998, its changes in stockholders' equity for the six months
ended June 30, 1999 and 1998, and its average balance sheet for the
three and six months ended June 30, 1999 and 1998.
Certain amounts in prior condensed consolidated financial statements
have been reclassified to conform with the June, 1999 presentation.
(2) Nature of Operations
The Company is a bank holding company organized under the laws of the
state of Delaware. It provides a full line of financial services to
customers within nine counties in northeast Illinois from its three
branch locations. The Company opened a mortgage center in McHenry,
Illinois in February, 1998, which concentrates on mortgage loan
origination and sales. A second mortgage center in Aurora, Illinois
was opened in July, 1998, but operations were consolidated with the
McHenry office in May, 1999. In December, 1998 the Company opened an
investment center in Berwyn, Illinois, which concentrates on annuity
sales, insurance sales and securities transactions.
The banking operations and mortgage center operations are considered
to be reportable segments during 1999. Loans, investments, and
deposits provide the revenues in the banking operations, and servicing
release fees and loan sales provide the revenues in mortgage banking.
All operations are domestic.
The accounting policies used for mortgage banking operations are the
same as those for banking operations except that income taxes are not
allocated to the mortgage banking operations. Information reported
internally for performance assessment for the six months ended June
30, 1999 and 1998, respectively, follows.
[CAPTION]
<TABLE>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998 (1)
Mortgage Consolidated Mortgage Consolidated
Banking Banking Total Banking Banking Total
======= ======== ============ ======= ======= ============
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands) (Dollars in Thousands)
Net Interest Income $7,758 $147 $7,905 $7,867 $149 $8,016
Other Revenue 1,222 1,031(2) 2,256 2,086 679 2,765
Other Expense 5,419(2) 1,079 6,498 5,505 609 6,114
Noncash Items:
Depreciation 504 15 519 479 3 482
Provision for 387 -0- 387 1,168 -0- 1,168
Loan Loss
Segment Profit, 2,618 139 2,757 2,801 216 3,017
Before Income Taxes
Segment Assets 541,288 1,144 542,432 538,211 4,221 542,432
</TABLE>
(1) Operations commenced February 12, 1998.
(2) Presented net of $55,000 intercompany sales.
A reconciliation of the numerators and denominators for earnings per
common share dilution computations for the three months ended June 30,
1999 and 1998 are presented below: (in thousands except per share data)
Three Months Ended June 30,
--------------------------
1999 1998
------ ------
Earnings per share:
Net Income $1,039 $ 972
Weighted average common
shares outstanding 4,130 4,230
----- -----
Earnings per share $ .25 $ .23
===== =====
Earnings per share assuming dilution:
Net Income $1,039 $ 972
===== =====
Weighted average common
shares outstanding 4,130 4,230
Add: dilutive effect of assumed
exercises, incentive stock
options and management
retention plan 116 322
----- -----
Weighted average common and
dilutive potential common
shares outstanding 4,246 4,552
===== =====
Diluted earnings per share $ .24 $ .21
===== =====
A reconciliation of the numerators and denominators for earnings per
common share dilution computations for the six months ended June 30,
1999 and 1998 are presented below: (in thousands except per share data)
Six Months Ended June 30,
------------------------
1999 1998
---- ----
Earning per share:
Net Income $1,825 $1,982
Weighted average common
shares outstanding 4,144 4,234
----- -----
Earnings per share $ .44 $ .47
===== =====
Earnings per share assuming dilution:
Net Income $1,825 $1,982
===== =====
Weighted average common
shares outstanding 4,144 4,234
Add: dilutive effect of assumed
exercises, incentive stock
options and management
retention plan 155 303
----- -----
Weighted average common and
dilutive potential common
shares outstanding 4,299 4,537
===== =====
Diluted earnings per share $ .42 $ .44
===== =====
(3) Stock Repurchase Program
The Company completed its fifteenth Stock Repurchase Program on March
25, 1999; a total of 100,250 shares were repurchased at an average
price of $13.96.
On March 25, 1999, the Company's Board of Directors approved the
Company's sixteenth Stock Repurchase Program, which enabled the
Company to repurchase up to 100,000 shares of its outstanding stock.
On June 25, 1999, the buyback was completed; a total of 101,000 shares
were repurchased at an average price of $14.42.
On June 28, 1999 the Company's Board of Directors announced a new
Stock Repurchase Program, the Company's seventeenth, enabling the
Company to repurchase up to 100,000 shares of its outstanding stock.
These purchases will be made in the open market and/or through
privately negotiated transactions. The stock will be used for the
issuance of shares in connection with the exercises of previously
granted stock options. As of August 12, 1999, 57,038 shares had been
repurchased under the seventeenth Stock Repurchase Program.
(4) Stock Dividend and Cash Dividend
The regular quarterly dividend for the first and second quarters of
1999 were paid at $.08 per share.
(5) Regulatory Capital Requirements
Pursuant to the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA"), as implemented by regulations
promulgated by the Office of Comptroller of Currency (the "OCC"),
National banks must meet three separate minimum capital requirements.
The following table summarizes, as of June 30, 1999, the Bank's
capital requirements under FIRREA and its actual capital ratios. As
of June 30, 1999, the Bank exceeded all current minimum regulatory
capital requirements.
BANK ONLY
----------------------------------------------------
Actual Regulatory Excess Above
Capital Capital Req. Capital Req.
Amount % Amount % Amount %
------- ------ ------- ----- ------- -----
(Dollars in Thousands)
Total Capital to
Risk Weighted
Assets $47,004 13.33% $28,230 8.00% $18,774 5.33%
Tier I Capital to
Risk Weighted
Assets 42,593 12.07 14,115 4.00 28,478 8.07
Tier I Capital to
Average Assets 42,593 7.92 21,521 4.00 21,072 3.92
(6) Safe Harbor Statement
This report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. The
Company intends such forward-looking statements to be covered by the
safe harbor provisions for forward-looking statements contained in the
Private Securities Reform Act of 1995, and is included in this
statement for purposes of these safe harbor provisions. Forward-
looking statements, strategies and expectations of the Company, are
generally identifiable by use of the words 'believe', 'expect',
'intend', 'anticipate', 'estimate', 'project' or similar expressions.
The Company's ability to predict results or the actual effect of
future plans or strategies is inherently uncertain. Factors which
could have a material adverse affect on the operations and future
prospects of the Company and its subsidiaries include, but are not
limited to, changes in: interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the
U.S. Government, including policies of the U.S. Treasury and the
Federal Reserve Board, the quality of composition of the loan or
investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in the Company's market
area and accounting principles, policies and guidelines. These
risks and uncertainties should be considered in evaluating forward-
looking statements and undue reliance should not be placed on such
statements. Further information concerning the Company and its
business, including additional factors that could materially affect
the Company's financial results, is included in the Company's filings
with the Securities and Exchange Commission.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
- --------
The Company's business activities currently consist of ownership of
the Bank, and investments in other equity securities. The Bank's
principal business consists of attracting deposits from the public and
investing these deposits, together with funds generated from
operations, primarily in commercial loans, leases, commercial real
estate loans, and consumer loans. The Bank's mortgage center
concentrates on mortgage loan origination and sales. The Bank's
deposit accounts are insured to the maximum allowable by the Federal
Deposit Insurance Corporation (the "FDIC").
The Bank's results of operations are dependent primarily on net
interest income, which is the difference between the interest earned
on its loans and securities portfolios, and the interest paid on
deposits and borrowed funds. The Bank's operating results are also
affected by loan commitment and servicing fees, loan service release
fees from its mortgage center operation, customer service charges,
fees from annuity and insurance products, and other income. Operating
expenses of the Bank include employee compensation and benefits,
equipment and occupancy costs, federal deposit insurance premiums and
other administrative expenses.
The Bank's results of operations are further affected by economic and
competitive conditions, particularly changes in market interest rates.
Results are also affected by monetary and fiscal policies of federal
agencies, and actions of regulatory authorities.
FINANCIAL CONDITION
- -------------------
Total consolidated assets of the Company decreased 1% or $6.3 million
from $548.7 million at December 31, 1998, to $542.4 million at June
30, 1999.
Loans receivable, net, declined 2% or $9.3 million to $393.0 million
as of June 30, 1999 versus $402.3 million outstanding as of December
31, 1998. Mortgage loans declined $24.9 million as a result of
continued refinancing activity, especially during the first quarter of
1999. The CoVest Banc mortgage center in McHenry, Illinois processed
many of the refinanced mortgages, which are then sold on a service
released base to the investor market. This reduction was offset by a
$23.6 million increase in multifamily loans outstanding. The
composition of the loan portfolio continues to change as commercial
loans represented 3%, commercial real estate loans represented 17%,
multi-family loans represented 20%, construction loans represented
10%, and leases represented 8% at June 30, 1999. These loans now
represent 58% of total loans receivable, up from 51% at year-end 1998,
and up from 38% at June 30, 1998. With $27.6 million of approved and
accepted commitments outstanding as of June 30, 1999, which should be
funded in the next 90 days, management expects the composition of
commercial loans, commercial real estate, multi-family, and
construction loans to continue to grow and become a larger percentage
of the overall loan portfolio and assets mix.
At June 30, 1999, the allowance for possible loan losses amounted to
$4.5 million. This represented coverage of 1.14% of total loans as of
June 30, 1999, and is greater than the 1.06% coverage which existed at
year-end 1998.
Securities available-for-sale increased by $20.9 million or 24% since
December 31, 1998. Mortgage-backed and other mortgage-related
securities decreased $12.8 million or 37% from December 31, 1998.
Treasury and agency securities increased $32.0 million from December
31, 1998. These were purchased with funds derived from the $17.5
million reduction in cash equivalents and interest bearing deposits in
other financial institutions as well as proceeds from the sales of and
paydowns on mortgage backed securities.
Deposits decreased to $355.5 million at June 30, 1999, from $364.5
million at December 31, 1998. Certificates of deposit outstanding
decreased $6.5 million between December 31, 1998 and June 30, 1999.
Stockholders' equity totaled $46.3 million at June 30, 1999. At the
end of the second quarter, the number of common shares outstanding was
4,191,045 and the book value per common share outstanding was $11.05.
The Company repurchased 201,250 shares during the first half of 1999
at an average price of $14.19. This compares to December 31, 1998,
when the number of common shares outstanding was 4,210,615 and the
book value per common share outstanding was $11.15. The Company
announced its most recent stock repurchase plan on June 28, 1999.
At June 30, 1999, total non-performing assets amounted to $2.0
million, or 0.36% of total assets compared to $1.0 million, or 0.19%
of total assets at December 31, 1998. Management believes the
reserves for possible loan losses to be adequate. Non performing
assets as of June 30, 1999 included one commercial loan with a balance
of $874,000. The remainder of the non performing assets were first
mortgage loans in various stages of foreclosure and one parcel of
other real estate owned.
The following table sets forth the amounts and categories of non-
performing loans and assets.
June 30, 1999 Dec. 31, 1998
------------- -------------
(Dollars in Thousands)
Non-performing loans:
Commercial Loans & Leases $ 874 $ -0-
Commercial Real Estate Loans -0- -0-
Multi-family Loans -0- -0-
Construction Loans -0- -0-
Mortgage Loans 823 996
Consumer 25 25
------------- -------------
Total non-performing loans $ 1,722 $ 1,021
Other real estate owned $ 230 $ -0-
Other repossessed assets $ -0- $ -0-
------------- -------------
Total non-performing assets $ 1,952 $ 1,021
Total non-performing loans as
a percentage of net loans .44% .25%
Total non-performing assets as
a percentage of total assets .36% .19%
LIQUIDITY
- ---------
The Company's primary sources of funds are deposits, principal and
interest payments on loans and mortgage-backed securities, and funds
provided by other operations. While scheduled loan and mortgage-
backed securities repayments and maturities of short-term investments
are a relatively predictable source of funds, deposit flows and loan
prepayments are greatly influenced by general interest rates, economic
conditions, competition and the restructuring occurring in the banking
industry.
The Company's cash flows are a result of three principal activities:
operating activities, investing activities and financing activities.
Net cash provided by operating activities, primarily net income, was
$2.6 million for the six months ended June 30, 1999. Net cash used in
investing activities was $13.3 million for the six months ended June
30, 1999. Net cash used in financing activities amounted to $6.9
million for the six months ended June 30, 1999.
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 June 30, 1999, the Company had commitments to
originate loans and undisbursed loan balances totaling $89 million,
and its customers had approved but unused lines of credit totaling $30
million. The Company considers its liquidity and capital resources to
be adequate to meet its foreseeable short and long-term needs. The
Company expects to be able to fund or refinance, on a timely basis,
its material commitments and long-term liabilities.
SELECTED RATIOS
- ---------------
(unaudited) THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1999 1998 1999 1998
-------------------- -------------------
Annualized Return on Avg. Equity 8.96% 8.12% 7.81% 8.24%
Annualized Return on Avg. Assets 0.77% 0.68% 0.68% 0.68%
Book Value per Share $11.05 $11.00 $11.05 $11.00
Closing Market Price per Share $14.875 $18.125 $14.875 $18.125
Earnings per Primary Share:
Basic $ .25 $ .23 $ .44 $ .47
Diluted $ .24 $ .21 $ .42 $ .44
Net Interest Margin 3.08% 2.93% 3.06% 2.90%
Ratio of Operating Expense to
Average Total Assets,
Annualized 2.48% 2.31% 2.61% 2.27%
Ratio of Net Interest Income to
Non-Interest Expense,
Annualized 1.19x 1.20X 1.07x 1.22x
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30,1999 AND 1998
- ----------------------------------------------------------------------
GENERAL. Net income for the three months ended June 30, 1999 totaled
$1,039,000, or $0.25 (basic) and $0.24 (diluted) earnings per share,
versus $972,000, or $0.23 (basic) and $0.21 (diluted) earnings per
share for the like quarter in 1998. Return on average assets and
return on average equity during the second quarter were 0.77% and
8.96% respectively during 1999 compared to 0.68% and 8.12% in 1998.
Cash earnings (net earnings adjusted for the after-tax impact of
amortization of goodwill) for the three months ended June 30, 1999
were $1,070,000 or $0.26 (basic) and $0.25 (diluted) earnings per
share versus $1,003,000 or $0.24 (basic) and $0.22 (diluted) earnings
per share for the same quarter in 1998. Cash earnings for the second
quarter of 1999 represented returns on average tangible assets and
average tangible common equity of 0.79% and 9.22% respectively,
compared to 0.70% and 8.37% respectively for the same period in 1998.
Net interest income increased by $18,000 to $3,990,000 for the second
quarter of 1999 compared to $3,872,000 for the second quarter of 1998,
even though the Company had a $32 million decrease in average earning
assets for the second quarter of 1999 versus the second quarter of
1998. During the fourth quarter of 1997, the Company entered into an
arbitrage transaction and purchased mortgage backed securities
utilizing $50 million in FHLB borrowings. The borrowings matured in
November, 1998 and the securities were sold to repay the borrowings.
The Company's net interest rate spread and margin averaged 2.68% and
3.08% respectively during the second quarter of 1999, an 18 and 15
basis point increase from 2.50% and 2.93% respectively during the
second quarter of 1998. This represents increases of 7% in interest
rate spread and 5% in net interest margin growth.
The provision for possible loan losses was $288,000 for the second
quarter of 1999 versus $769,000 for the like period in 1998. This
decrease, as well as the year to date decrease in the provision, is
primarily the result of the sale of the credit card portfolio late in
1998. During 1998, the Company experienced net loan losses from the
credit card portfolio of $1.1 million out of total net chargeoffs of
$1.2 million.
LOAN LOSS ALLOWANCE ANALYSIS. The following table sets forth an
analysis of the Company's allowance for possible loan losses for the
periods indicated.
Three Months Ended
June 30, June 30,
1999 1998
--------- ---------
(Dollars in Thousands)
Balance at beginning of period $ 4,409 $ 4,161
Charge-offs:
Commercial Loans & Leases $ -0- $ -0-
Commercial Real Estate Loans -0- -0-
Multi-family Loans -0- -0-
Construction Loans -0- -0-
Mortgage Loans 99 -0-
Consumer 78 326
-------- --------
Total 177 326
-------- --------
Recoveries:
Commercial Loans & Leases $ -0- $ -0-
Commercial Real Estate Loans -0- -0-
Multi-family Loans -0- -0-
Construction Loans -0- -0-
Mortgage Loans -0- -0-
Consumer 25 28
-------- --------
Total 25 28
-------- --------
Net charge-offs 152 298
Additions charged to
operations 288 769
-------- ---------
Balance at end of period $ 4,545 $4,632
======== =========
Ratio of net charge-offs during
the period to average loans
outstanding during the period 0.04% 0.07%
Ratio of allowance for possible
loan losses to non- performing loans 2.64x 5.79x
NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES. Net
interest income after provision for possible loan losses increased by
$499,000 or 16% to $3,702,000 for the three month period ended June
30, 1999, as compared to $3,203,000 for the three month period ended
June 30, 1998.
NON INTEREST INCOME. Non interest income decreased $368,000, or 23%,
to $1,210,000 from the comparable quarter last year. The Company had
no securities gains during the second quarter of 1999, but recognized
$463,000 in securities gains during the second quarter of 1998.
Without the effect of securities gains, non interest income increased
$95,000 for the quarter ending June 30, 1999 versus 1998. Mortgage
Center income increased by $27,000 to $495,000 in the second quarter
of 1999 compared to $468,000 in the similar quarter in 1998. Other
income increased by $108,000 during the second quarter of 1999 versus
1998. Of this total, $84,000 was the result of a final settlement
with respect to the sale of the credit card portfolio in the last
quarter of 1998. Brokerage income decreased by $30,000 during the
second quarter of 1999 compared to the second quarter of 1998.
NON INTEREST EXPENSE. Non interest expense increased $40,000, or 1%
for the second quarter of 1999 from the comparable quarter in 1998.
Total compensation, commission, and benefit costs decreased $106,000
for the quarter ended June 30, 1999 versus 1998. During the first
quarter of 1999, certain employee positions were eliminated to bring
operating costs more in line with revenues. Increases in building
occupancy expenses of $26,000 were offset by a similar decline in data
processing expenses for the second quarter of 1999 compared to the
second quarter of 1998. Loan related expenses increased by $28,000 in
the second quarter of 1999 as compared to the second quarter of 1998.
Deposit related expenses declined by $34,000 in the second quarter of
1999 versus the second quarter of 1998 as a result of the
implementation of additional controls to stem chargeback losses. In
the second quarter of 1999, the Company also recorded $40,000 in non
recurring professional service fees.
INCOME TAX EXPENSE. Income tax expense increased $24,000 to $529,000
for the quarter ended June 30, 1999, compared to $505,000 for the same
period in 1998.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30,1999 AND 1998
- ----------------------------------------------------------------------
GENERAL. For the first six months of 1999, the Company earned
$1,825,000 versus $1,982,000 for the like period in 1998, a decrease
of 8%. This represents $0.44 (basic) and $0.42 (diluted) earnings per
share versus $0.47 (basic) and $0.44 (diluted) earnings per share for
the first six months of 1998. Return on average assets and average
equity for the first six months of 1999 was 0.68% and 7.81%
respectively compared to 0.68% and 8.24% in 1998.
Cash earnings (net earnings adjusted for the after-tax impact of
amortization of goodwill) for the six months ended June 30, 1999 were
$1,888,000 or $0.45 (basic) and $0.44 (diluted) earnings per share
versus $2,045,000 or $0.49 (basic) and $0.45 (diluted) earnings per
share for the same period in 1998. Cash earnings for the first half
of 1999 represented returns on average tangible assets and average
tangible common equity of 0.70% and 8.08% respectively, compared to
0.70% and 8.50% respectively for the same period in 1998.
NET INTEREST INCOME. The Company's net interest income totaled
$7,905,000 for the six months ended June 30, 1999, compared to
$8,016,000 for the first six months of 1998. The Company's net
interest margin increased 16 basis points, to 3.06% for the six months
ended June 30, 1999 from 2.90% for the like period of 1998. The
interest rate spread averaged 2.67% for 1999, a 19 basis point
increase from 2.48% for the first six months of 1998. This represents
increases of 6% in net interest margin and 8% in interest rate spread.
The volume of earning assets decreased by $40.6 million between the
two periods. During the fourth quarter of 1997, the Company entered
into an arbitrage transaction and purchased mortgage backed securities
utilizing $50 million in FHLB borrowings. The borrowings matured in
November, 1998 and the securities were sold to repay the borrowings.
PROVISION FOR POSSIBLE LOAN LOSSES. The provision for possible loan
losses was $387,000 for the first six months of 1999 versus $1,168,000
for the like period in 1998. This decrease was primarily the result
of the sale of the credit card portfolio late in 1998. During 1998,
the Company experienced net loan losses from the credit card portfolio
of $1.1 million out of total net chargeoffs of $1.2 million.
LOAN LOSS ALLOWANCE ANALYSIS. The following table sets forth an
analysis of the Company's allowance for possible loan losses for the
periods indicated.
Six Months Ended
June 30, June 30,
1999 1998
--------- ---------
(Dollars in Thousands)
Balance at beginning of period $ 4,312 $ 3,977
Charge-offs:
Commercial Loans & Leases $ -0- $ -0-
Commercial Real Estate Loans -0- -0-
Multi-family Loans -0- -0-
Construction Loans -0- -0-
Mortgage Loans 99 38
Consumer 100 559
-------- --------
Total 199 597
-------- --------
Recoveries:
Commercial Loans & Leases $ -0- $ -0-
Commercial Real Estate Loans -0- -0-
Multi-family Loans -0- -0-
Construction Loans -0- -0-
Mortgage Loans -0- -0-
Consumer 45 84
-------- --------
Total 45 84
-------- --------
Net charge-offs 154 513
Additions charged to
operations 387 1,168
-------- ---------
Balance at end of period $ 4,545 $4,632
======== =========
Ratio of net charge-offs during
the period to average loans
outstanding during the period 0.04% 0.13%
Ratio of allowance for possible
loan losses to non- performing loans 2.64x 5.79x
NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES. Net
interest income after provision for possible loan losses increased by
$670,000 or 10% to $7,518,000 for the six month period ended June 30,
1999, as compared to $6,848,000 for the six month period ended June
30, 1998.
NON-INTEREST INCOME. Non-interest income excluding security gains
increased $208,000, or 10%, from the comparable period last year. Loan
servicing fees declined $123,000 or 21% to $477,000 in 1999, compared
to $600,000 in 1998, primarily as a result of the loss of credit card
fee income. The Company's credit card loan portfolio was sold in the
fourth quarter of 1998. Mortgage center income increased by $352,000
or 52% to $1,031,000 in 1999 compared to $679,000 for the same period
last year. The mortgage center commenced operations on February 12,
1998. Realized gains of $2,000 on sales of securities were also
recorded. This was a decrease of $717,000 in net gains on security
sales from the comparable period in 1998. Insurance and annuity
commissions decreased $112,000 or 53% to $98,000 for the six month
period ending June 30, 1999 versus the same period in 1998, as
customers migrated to products offering lower commissions. Other
income increased $69,000, or 76% to $160,000 in 1999, compared to
$91,000 in 1998. In the latter category, $84,000 was the result of a
final settlement with respect to the sale of the credit card portfolio
in the last quarter of 1998.
NON-INTEREST EXPENSE. Non-interest expense increased $421,000, or 6%,
for 1999 from $6,596,000 in the comparable period in 1998.
Compensation and benefits increased $186,000 or 6% to $3,483,000 for
the six months ending June 30, 1999 versus $3,296,000 for 1998.
During the first quarter of 1999, the Company incurred $182,000 in
non-recurring employee termination expenses, as certain positions were
eliminated to bring operating costs more in line with revenues.
Commissions and employee sales incentives, mostly attributed to the
Mortgage Center, which opened for business on February 12, 1998
increased $110,000 or 36% to $415,000 in 1999 versus 1998. Increases
in building occupancy expenses of $52,000 and miscellaneous expenses
of $133,000 were partially offset by an $87,000 reduction in data
processing expenses.
INCOME TAX EXPENSE. Income tax expense decreased $103,000 to $932,000
for the six month period ended June 30, 1999, compared to $1,035,000
for the same period in 1998.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
In an attempt to manage the Bank's exposure to changes in interest
rates, management closely monitors the Bank's interest rate risk.
Interest rate risk results when the maturity or repricing intervals
and interest rate indices of the interest-earning assets, interest-
bearing liabilities, and off-balance sheet financial instruments are
different, creating a risk that changes in the level of market
interest rates will result in disproportionate changes in the value
of, and the net earnings generated from, the Company's interest-
earning assets, interest-bearing liabilities, and off-balance sheet
financial instruments. The Company's exposure to interest rate risk is
managed primarily through the Company's strategy of selecting the
types and terms of interest-earning assets and interest-bearing
liabilities which generate favorable earnings, while limiting the
potential negative effects of changes in market interest rates. Since
the Company's primary source of interest-bearing liabilities is
customer deposits, the Company's ability to manage the types and terms
of such deposits may be somewhat limited by customer preferences in
the market areas in which the Company operates. Borrowings, which
include FHLB Advances, short-term borrowings, and long-term
borrowings, are generally structured with specific terms which in
management's judgment, when aggregated with the terms for outstanding
deposits and matched with interest-earning assets, mitigate the
Company's exposure to interest rate risk. The rates, terms and
interest rate indices of the Company's interest-earning assets result
primarily from the Company's strategy of investing in loans and
securities (a substantial portion of which have adjustable-rate terms)
which permit the Company to limit its exposure to interest rate risk,
together with credit risk, while at the same time achieving a positive
interest rate spread from the difference between the income earned on
interest-earning assets and the cost of interest-bearing liabilities.
In addition to periodic gap reports comparing the sensitivity of
interest-earning assets and interest-bearing liabilities to changes in
interest rates, management utilizes a monthly report ("model")
prepared by the Bank which measures the Bank's exposure to interest
rate risk. The model calculates the present value of assets,
liabilities, off-balance sheet financial instruments, and equity at
current interest rates, and at hypothetical higher and lower interest
rates at one percent intervals. The present value of each major
category of financial instrument is calculated by the model using
estimated cash flows based on weighted average contractual rates and
terms at discount rates representing the estimated current market
interest rate for similar financial instruments. The resulting
present value of longer term fixed-rate financial instruments are more
sensitive to change in a higher or lower market interest rate
scenario, while adjustable-rate financial instruments largely reflect
only a change in present value representing the difference between the
contractual and discounted rates until the next interest rate
repricing date.
The following table presents the Bank's exposure to hypothetical
changes in interest rates as of June 30, 1999:
Percent Change in
Change in Interest Rates Percent Change in MV of Portfolio
(basis points) Net Interest Income Equity
------------------------ ------------------- -----------------
+200 -9% -14%
+100 -4 -7
0 0 0
-100 +3 +3
-200 +7 +9
Certain shortcomings are inherent in the method of analysis presented
in the foregoing table. For example, although certain assets and
liabilities may have similar maturities or periods to repricing, they
may react in different degrees to changes in market interest rates.
Also, the interest rates on certain types of assets and liabilities
may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as adjustable-rate mortgage loans,
have features that restrict changes in interest rates on a short-term
basis and over the life of the loan. Further, in the event of a
change in interest rates, prepayment and early withdrawal levels could
deviate significantly from those assumed in calculating the tables.
Finally, the ability of many borrowers to service their debt may
decrease in the event of a significant interest rate increase.
In addition, the previous table does not necessarily indicate the
impact of general interest rate movements on the Company's net
interest income because the repricing of certain categories of assets
and liabilities are subject to competitive and other pressures beyond
the Company's control. As a result, certain assets and liabilities
indicated as maturing or otherwise repricing within a stated period
may in fact mature or reprice at different times and at different
volumes.
RECENT REGULATORY DEVELOPMENTS
- -----------------------------------------------------------
Year 2000 Compliance
The Company is devoting significant resources to minimize the risk of
potential disruption from the Y2K problem. This problem is the
result of computer programs having been written using two digits
(rather than four) to define the year. Any time-sensitive software
may recognize a date using "00" as the year 1900 rather than the year
2000, which could result in miscalculations and system failures. The
problem could affect non-information technology systems such as
operating and control systems that have embedded chip systems. The
Company is also at risk from Y2K failures on the part of business
relationships with vendors, suppliers, and public utilities providers
such as electricity, water, gas, and communications. System failures
resulting from the Y2K problem could adversely affect operations and
financial results by incorrectly calculating accrued interest
receivable and payable. Failures could also affect the ability of
customers to perform normal deposit and loan activities.
Addressing the Problem
The Company has developed, in accordance with the guidelines listed
in the Federal Financial Institutions Examination Council (FFIEC)
statement dated May 5, 1997, a six phase plan for resolving Y2K
issues that are reasonably within its control. The plan is
implemented and coordinated through a senior level task force chaired
by a Senior Vice President. As of June 30, 1999, ten officer level
staff members sit on the committee and devote a minimum of 25% of
their time to the Y2K effort. The Y2K committee chairman reports
monthly to the Board of Directors. The Company's Y2K efforts are
also reviewed during internal audits and examined by the Office of
the Comptroller of the Currency. According to the FFIEC guidelines,
Phase I - Awareness, Phase II - Assessment and Inventory, Phase III -
Renovation and Phase IV - Testing were completed as required. A
description and anticipated timing of the two remaining phases are
described as follows:
Phase V - Customer Awareness Program
In this phase, the Company will outline its strategy to develop a
proactive customer awareness program. The plan is to furnish
customers and the community with enough Y2K related information for
them to make intelligent, educated decisions regarding the Company's
Y2K readiness and its ability to serve their banking needs in the
next century. Banking customers and members of the community, where
applicable, will receive informational lobby brochures, statement
stuffers, and have questions answered by personal banking
representatives. Other methods of disseminating Y2K information in
1999 will be through seminars, news releases, web-site and direct
mail letters.
Phase VI - Business Resumption Contingency Plans
This phase involves addressing any remaining open issues and points
of critical system failures at year end, 1999. As a precautionary
measure, the Company is developing detailed contingency plans for all
systems that are not expected to be Y2K compliant or have a remote
possibility for failure. Contingency plans consist of alternative
automated systems, internal stand alone computer spreadsheets, and
various manual fallback procedures.
Costs
As of June 30, 1999, costs of $42,000 had been incurred related to
the Y2K project, of which $24,000 had been capitalized. The
estimated additional costs to complete the project are expected to be
approximately $85,000, of which $25,000 is expected to be
capitalized. The remaining costs are allocated to training,
education, marketing, and contingency plans. The Company is using
current staff and other internal resources to manage the Y2K project.
The Company does not expect these redeployments of resources to have
a material adverse effect on other ongoing business operations. All
the costs of the Y2K project are incurred from operating cash flows.
At the present time, management believes that the majority of all
mission critical and mission necessary date-related software and
systems will remain operating properly after January 1, 2000. The
Company does not anticipate that internal systems failures will
result in any material adverse effect to its operational or financial
condition. During 1999, the Company will continue its efforts to
ensure that providers of infrastructure services, such as utilities
and communication companies, will be compliant by the Year 2000. At
this time, management believes that the most likely "worst-case"
scenario involves potential disruption of service from third party
vendors whose systems may not work after January 1, 2000, for which
the Company must rely on their testing results. While such failures
could affect Bank operations in a significant manner, the Company
cannot estimate the likelihood or the potential cost of the failures.
The Company's Year 2000 plan may be revised periodically as some
goals are completed and new issues are identified. It is important
to note that the description of the plan involves estimates and
projections with respect to some activities required in the future
which are subject to possible substantial changes or corrections.
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (Statement) No. 133 on
derivatives will, in 2000, require all derivatives to be recorded at
fair value in the balance sheet, with changes in fair value charged
or credited to income. If derivatives are documented and effective
as hedges, the change in the derivative fair value will be offset by
an equal change in the fair value of the hedged item. Under the new
standard, securities held-to-maturity can no longer be hedged, except
for changes in the issuer's creditworthiness. Therefore, upon
adoption of Statement No. 133, companies will have another one-time
window of opportunity to reclassify held-to-maturity securities to
either trading or available-for-sale, provided certain criteria are
met. This Statement may be adopted early at the start of a calendar
quarter. Since the Company has no significant derivative instruments
or hedging activities, adoption of Statement No. 133 is not expected
to have a material impact on the Company's financial statements.
Management has not adopted Statement No. 133 early.
Statement No. 134 on mortgage banking will, in 1999, allow mortgage
loans that are securitized to be classified as trading; available-
for-sale; or, in certain circumstances, held-to-maturity. Currently,
these must be classified as trading. Since the Company does not
intend to securitize mortgage loans, Statement No. 134 is not
expected to affect the Company.
American Institute of Certified Public Accountants Statement of
Position 98-1, effective in 1999, sets the accounting requirement to
capitalize costs incurred to develop or obtain software that is to be
used solely to meet internal needs. Costs to capitalize are those
direct costs incurred after the preliminary project stage, up to the
date when all testing has been completed and the software is
substantially ready for use. All training costs, research and
development costs, costs incurred to convert data, and all other
general and administrative costs are to be expensed as incurred. The
capitalized cost of internal-use software is amortized over its
useful life and reviewed for impairment using the criteria in
Statement No. 121. Statement of Position 98-1 is not expected to
have material impact on the Company.
American Institute of Certified Public Accountants Statement of
Position 98-5, also effective in 1999, requires all start-up, pre-
opening, and organization costs to be expensed as incurred. Any such
costs previously capitalized for financial reporting purposes must be
written off to income at the start of the year. Statement of
Position 98-5 is not expected to have a material impact on the
Company.
The Financial Accounting Standards Board continues to study several
issues, including recording all financial instruments at fair value
and abolishing pooling-of-interest accounting. Also, it is likely
that APB 25's measurement for stock option plans will be limited to
employees and not to non-employees such as directors, thereby causing
compensation expense to be required for 1999 awards of stock options
to outside directors.
PART II - OTHER INFORMATION
COVEST BANCSHARES, INC.
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which
the Company or any of its subsidiaries is a party other
than ordinary routine litigation incidental to their
respective businesses.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 27, 1999, the annual meeting of stockholders was
held. George T. Drost and David M. Miller were elected to
serve as Class I directors with terms expiring in 2002.
Continuing to serve as Class II directors with terms expiring
in 2000 are James L. Roberts and Frank A. Svoboda, Jr.
Continuing to serve as Class III directors with terms expiring
in 2001 are Gerald T. Niedert, Thomas TenHoeve, and David B.
Speer. The stockholders also ratified the appointment of
Crowe, Chizek and Company L.L.P., as the Company's independent
public accountants for the year ending December 31, 1999.
There were 4,157,697 issued and outstanding shares (4,403,803
issued, less 246,106 shares of treasury stock) of Common
Stock at the time of the annual meeting. 3,803,348 shares
were voted at the meeting. The voting on each item presented
at the annual meeting was as follows:
Election of Directors FOR WITHHELD
---------------------- --- ---------
George T. Drost 3,678,388 124,960
David M. Miller 3,678,691 124,657
Ratification of Accountants
-------------------------------------
BROKER
FOR AGAINST ABSTAIN NON VOTES
---- ------- --------- -------------
3,781,529 5,858 15,961 0
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
A report on Form 8-K was filed on April 15, 1999 to
report under Item 5 net income for the period ended
March 31, 1999.
A report on Form 8-K was filed on May 26, 1999 to
report under Item 5 that the Company announced
the issuance of a regular quarterly dividend.
A report on Form 8-K was filed on June 30, 1999 to
report under Item 5 the completion of the Company's 16th
Stock Repurchase Plan and announcing the 17th Stock
Repurchase Plan.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
COVEST BANCSHARES, INC.
Date:
----------------- By: /S/ James L. Roberts
James L. Roberts
President and
Chief Executive Officer
Date:
----------------- By: /s/ Paul A. Larsen
Paul A. Larsen
Executive Vice President,
Treasurer and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Financial Statements at June 30,, 1999.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 8,362
<INT-BEARING-DEPOSITS> 13,799
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<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 108,880
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<LOANS> 397,560
<ALLOWANCE> 4,545
<TOTAL-ASSETS> 542,432
<DEPOSITS> 355,524
<SHORT-TERM> 35,351
<LIABILITIES-OTHER> 10,240
<LONG-TERM> 95,000
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<INCOME-PRETAX> 2,757
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<EXTRAORDINARY> 0
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<NET-INCOME> 1,825
<EPS-BASIC> .44
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<YIELD-ACTUAL> 7.26
<LOANS-NON> 1,722
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