UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended Commission File Number
March 31, 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 May 12, 1999, the Registrant had issued and outstanding 4,403,803
shares of the Registrant's Common Stock. In addition, it had also
repurchased 246,106 shares which were being held as treasury stock.
The aggregate market value of the voting stock held by non-affiliates
of the Registrant as of May 12, 1999, was $47,950,000.
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..................14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................25
Item 2. Changes in Securities..................25
Item 3. Defaults upon Senior Securities........25
Item 4. Submission of Matters to a Vote
of Security Holders..................25
Item 5. Other Information......................25
Item 6. Exhibits and Reports of Form 8-K.......25
Form 10-Q Signatures.............................26
PART 1. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
see notes to condensed consolidated financial statements
(unaudited)
COVEST BANCSHARES INC.
CONSOLIDATED STATEMENTS OF CONDITION
(Unaudited) MAR. 31, DEC. 31,
(Dollars in thousands except 1999 1998
per share amounts) --------- ---------
ASSETS
- ------
CASH AND CASH EQUIVALENTS $ 6,652 $ 18,395
INTEREST BEARING DEPOSITS AT BANKS 34,461 21,282
INVESTMENTS:
Securities Available-for-Sale 40,099 30,894
Mortgage-Backed Securities and
Related Securities Available-
for-Sale 23,805 34,872
Tax Exempt Securities Available-
for-Sale 18,500 13,872
Federal Home Loan Bank Stock and
FRB Stock 8,379 8,379
--------- ---------
TOTAL INVESTMENTS 90,783 88,017
LOANS RECEIVABLE:
Commercial Real Estate Loans 67,627 66,699
Multi-Family Loans 65,859 55,661
Construction Loans 36,661 40,572
Commercial Loans 10,107 8,084
Commercial/Municipal Leases 30,840 35,166
Mortgage Loans 135,199 150,185
Consumer Loans 43,857 45,980
Mortgage Loans held for Sale 2,437 4,294
--------- ---------
TOTAL LOANS RECEIVABLE 392,587 406,641
Allowance for Possible Loan Loss ( 4,409) ( 4,312)
--------- ---------
LOANS RECEIVABLE, NET 388,178 402,329
ACCRUED INTEREST RECEIVABLE 2,985 3,280
PREMISES AND EQUIPMENT 11,144 11,372
OTHER ASSETS 4,241 4,022
--------- ---------
TOTAL ASSETS $538,444 $548,697
======== ========
MAR. 31, DEC. 31,
1999 1998
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
LIABILITIES:
Deposits:
Non-Interest Bearing $ 15,926 $ 14,998
Interest Bearing Checking 22,052 23,825
Money Market Accounts 80,602 85,209
Savings Accounts 52,551 52,990
Certificates of Deposit 184,861 187,513
-------- --------
355,992 364,535
Short-Term Borrowings and Securities
Sold U/A to Repurchase 6,015 6,755
Long-Term Advances from Federal
Home Loan Bank 120,000 120,000
Advances from Borrowers for
Taxes and Insurance 2,658 3,637
Accrued Expenses and Other Liabilities 7,693 6,819
--------- ---------
TOTAL LIABILITIES 492,358 501,746
STOCKHOLDERS' EQUITY:
Common Stock, par value $.01 per share;
7,500,000 authorized shares; 4,403,803
shares issued at 3/31/99 and 12/31/98
respectively 44 44
Additional Paid-in Capital 18,282 18,967
Retained Earnings 31,354 30,905
Treasury Stock, 243,188 shares and
193,188 shares, held at cost 3/31/99
and 12/31/98 respectively (3,376) (3,017)
ESOP Loan (130) (161)
Unearned Stock Award (73) (73)
Accumulated Other Comprehensive
Income (15) 286
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 46,086 46,951
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 538,444 $548,697
========= =========
COVEST BANCSHARES INC.
CONSOLIDATED STATEMENTS OF INCOME THREE MONTHS ENDED
(Unaudited) MAR. 31, MAR. 31,
(Dollars in thousands) 1999 1998
--------- ---------
INTEREST INCOME
Loans and Leases Receivable $ 7,593 $ 7,566
Interest Bearing Deposits at Banks 387 151
Mortgage-Backed and Related Securities 508 1,924
Taxable Securities 477 664
Tax Exempt Securities 156 51
Other Interest and Dividend Income 129 91
--------- ---------
Total Interest Income 9,250 10,447
INTEREST EXPENSE
Deposits 3,676 4,144
Advances from Federal Home Loan Bank 1,603 2,166
Other Borrowed Money 55 93
--------- ---------
Total Interest Expense 5,334 6,403
NET INTEREST INCOME 3,916 4,044
Provision for Possible Loan Losses 99 399
NET INTEREST INCOME AFTER PROVISION --------- ---------
FOR POSSIBLE LOAN LOSSES 3,817 3,645
NON-INTEREST INCOME
Loan Servicing Fees 202 321
Mortgage Center Income 536 210
Deposit Related Charges and Fees 237 219
Gain on Sale of Securities 2 256
Insurance and Annuity Commissions 39 141
Other 30 39
--------- ---------
Total Non-Interest Income 1,046 1,186
NON-INTEREST EXPENSE
Compensation and Benefits 1,858 1,601
Commissions and Incentives 185 66
Occupancy and Equipment 527 500
Federal Insurance Premium 53 60
Data Processing 244 306
Advertising 92 87
Other Real estate Owned 2 6
Other 712 666
--------- ---------
TOTAL NON-INTEREST EXPENSE 3,673 3,292
--------- ---------
INCOME BEFORE TAXES 1,190 1,539
Income Tax Provision (404) (530)
--------- ---------
NET INCOME $ 786 $ 1,009
========= =========
COVEST BANCSHARES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED
(Unaudited) MAR. 31, MAR. 31,
(Dollars in thousands) 1999 1998
--------- ---------
OPERATING ACTIVITIES
Net Income $ 786 $ 1,009
Adjustments to Reconcile Net Income to
Cash Provided by Operating Activities
Depreciation and Amortization of
Premises and Equipment 264 262
Provision for Possible Loan Losses 99 399
Net Gain on Sale of Securities (2) (256)
Change In:
Prepaid Expenses and Other Assets 272 237
Accrued Interest Receivable 295 (138)
Accrued Expenses and Other Liabilities 755 (291)
--------- ---------
NET CASH FROM OPERATING ACTIVITIES 2,469 1,222
CASH FLOWS FROM INVESTING ACTIVITIES
Loan Originations, Net of Principal
Payments 14,052 (15,531)
Principal Payments on Mortgage-Backed
and Related Securities 4,602 8,938
Purchases of Mortgage-Backed and
Related Securities -0- (9,746)
Purchases of Securities (14,320) (21,175)
Proceeds from Sales and Maturities
of Securities 6,461 25,831
Purchase of Federal Home Loan Bank
and Federal Reserve Bank Stock -0- (1,250)
Purchase of Office Properties and
Equipment (36) (584)
--------- ---------
NET CASH FROM INVESTING ACTIVITIES 10,759 (13,517)
THREE MONTHS ENDED
MAR. 31, MAR. 31,
1999 1998
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (Decrease) in Deposits (8,543) (15,808)
Net Borrowings of Federal
Home Loan Bank Advances -0- 25,000
Repayments of Other Borrowings (740) (11,403)
Net (Decrease) in Mortgage Escrow Funds (979) (561)
Purchase of Common Stock Net of
Proceeds from Exercise of Stock Options (1,224) (1,064)
Payment Received on Loan to ESOP 31 35
Dividend Paid (337) (348)
--------- ---------
NET CASH FROM FINANCING ACTIVITIES (11,792) (4,149)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 1,436 (16,444)
CASH AND CASH EQUIVALENTS, BEGINNING 39,677 23,470
--------- ---------
CASH AND CASH EQUIVALENTS, ENDING $41,113 $7,026
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest Paid $5,194 $6,311
Income Taxes Paid -0- -0-
<TABLE>
<CAPTION>
COVEST BANCSHARES INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
(Dollars in thousands)
Three months ended March 31, 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> <C>
Balance at December 31, 1997 $44 $19,365 $28,410 -0- ($511) ($73) $1,059 $48,294
Net Income 1,009 1,009
Change in Unrealized Gain on Securities
Available-for-Sale, Net of Taxes (236) (236)
--------
Comprehensive Income 773
Cash Dividends ($.08 per share) (348) (348)
Purchase of Treasury Stock (1,447) (1,447)
Principal payment on ESOP Loan 35 35
Treasury Stock Reissued in Conjunction
with Stock Option Exercises (159) 542 383
Tax Benefits related to
Employee Stock Option Plans 314 314
- -----------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1998 $44 $19,520 $29,071 ($905) ($476) ($73) $823 $48,004
========================================================================================================================
Balance at December 31, 1998 $44 $18,967 $30,905 ($3,017) ($161) ($73) $286 $46,951
Net Income 786 786
Change in Unrealized Gain on Securities
Available-for-Sale, Net of Taxes (301) (301)
------
Comprehensive Income 485
Cash Dividends ($.08 per share) (337) (337)
Purchase of Treasury Stock (2,150) (2,150)
Principal Payment on ESOP Loan 31 31
Treasury Stock Reissued in Conjunction
with Stock Option Exercises (865) 1,791 926
Tax Benefits related to
Employee Stock Option Plans 180 180
- ------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1999 $44 $18,282 $31,354 ($3,376) ($130) ($73) ($15) $46,086
========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
COVEST BANCSHARES INC.
AVERAGE BALANCE SHEET
(Unaudited)
(Dollars in thousands)
The following table sets forth certain information related to the Company's average balance sheet. It reflects the
average yield on assets and average cost of liabilities for the periods indicated, as derived by dividing income or
expense by the average daily balance of assets or liabilities, respectively, for the periods indicated.
THREE MONTHS ENDED
----------------------------------------------------------------------------------------
MARCH 31, 1999 MARCH 31, 1998
----------------------------------------- ---------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
INTEREST-EARNING ASSETS: ----------------------------------------- ---------------------------------------
<S>
<C> <C> <C> <C> <C> <C> <C>
Commercial Real Estate $61,918 $1,324 8.55% $58,664 $1,234 8.42%
Multi-Family Loans 65,167 1,274 7.82 8,644 172 7.97
Construction Loans 35,792 796 8.89 10,342 235 9.09
Commercial Loans (1) 9,334 136 5.83 5,867 136 9.41
Commercial Leases 32,897 518 6.30 15,787 274 6.94
Mortgage Loans 144,385 2,609 7.23 229,305 4,168 7.27
Consumer Loans 44,953 936 8.32 58,469 1,347 9.19
Securities 57,213 845 5.91 39,446 613 6.22
Mortgage-Backed and
Related Securities 30,485 508 6.67 112,814 1,924 6.82
Other Investments 33,554 387 4.61 25,101 344 5.48
----------------------------------------- ---------------------------------------
Total Interest-Earning Assets $515,698 $9,333 7.24% $564,439 $10,447 7.40%
Non-Interest Earning Assets 21,576 23,765
----------------------------------------- ---------------------------------------
TOTAL ASSETS $537,274 $588,204
========================================= =======================================
INTEREST-BEARING LIABILITIES:
Interest-Bearing Checking $22,607 $59 1.04% $22,071 $75 1.36%
Savings 52,444 323 2.46 58,352 360 2.47
Money Market 80,778 865 4.28 62,401 757 4.85
Certificates of Deposit 174,454 2,291 5.25 200,489 2,819 5.62
Jumbo CD's 10,670 138 5.21 9,335 133 5.69
FHLB Advances 120,000 1,603 5.34 156,111 2,166 5.55
Other Borrowed Funds 4,997 55 4.38 7,532 93 4.99
----------------------------------------- ---------------------------------------
Total Interest-Bearing
Liabilities $465,950 $5,334 4.58% $516,291 $6,403 4.96%
Non-Interest Bearing
Deposits 14,127 12,596
Other Liabilities 10,158 11,623
----------------------------------------- ---------------------------------------
TOTAL LIABILITIES $490,235 $540,510
----------------------------------------- ---------------------------------------
Stockholders' Equity 47,039 47,694
----------------------------------------- ---------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $537,274 $588,204
========================================= =======================================
NET INTEREST INCOME $3,999 $4,044
----------------------------------------- ---------------------------------------
NET INTEREST RATE SPREAD (2) 2.66% 2.44%
----------------------------------------- ---------------------------------------
NET INTEREST MARGIN (3) 3.10% 2.87%
----------------------------------------- ---------------------------------------
</TABLE>
(1) Includes an $874,000 cash basis loan.
(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.
COVEST BANCSHARES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Regulation S-X. Accordingly, they do not include all
the information and footnotes required by generally accepted
accounting principles for complete financial statements.
The results of operations and other data for the quarter ended March
31, 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
March 31, 1999 and December 31, 1998, the results of the Company's
operations for the three months ended March 31, 1999 and 1998, its
cash flows for the three months ended March 31, 1999 and 1998, its
changes in stockholders' equity for the three months ended March 31,
1999 and 1998, and its average balance sheet for the three months
ended March 31, 1999 and 1998.
Certain amounts in prior condensed consolidated financial statements
have been reclassified to conform with the March, 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, and a second mortgage center in Aurora,
Illinois in July, 1998. These entities concentrate on mortgage loan
origination and sales. 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 operation, 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 as of March 31, 1999 follows.
Mortgage Consolidated
Banking Banking Total
--------- ---------- -------------
Net Interest Income $3,825 $91 $3,916
Other Revenue 510 536 1,046
Other Expense 2,967 540 3,507
Noncash Items:
Depreciation 159 7 166
Provision for Loan Loss 99 -0- 99
Segment Profit, Before Income Taxes 1,110 80 1,190
Segment Assets 534,943 3,501 538,444
A reconciliation of the numerators and denominators for earnings per
common share dilution computations for the period ended March 31, 1999
and 1998 are presented below: (dollars and shares in thousands)
Period Ended March 31
---------------------
1999 1998
---- ----
Earnings per share:
Net Income $786 $1,009
Weighted average common shares
outstanding 4,159 4,238
----- -----
Earnings per share $.19 $.24
===== =====
Earnings per share assuming dilution:
Net Income $786 $1,009
==== ======
Weighted average common shares
outstanding 4,159 4,238
Add: dilutive effect of assumed
exercises, incentive stock
options and management
retention plan 176 276
--- ---
Weighted average common and
dilutive potential common shares
outstanding 4,335 4,514
===== =====
Diluted earnings per share $.18 $.22
==== ====
(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 announced a
new stock repurchase program, the Company's sixteenth, enabling
the Company to repurchase up to 100,000 shares of its
outstanding stock. These purchases will be made in the open
market and/or through privately negotiated transactions. The
stock will be used for the issuance of shares in connection with
the exercises of previously granted stock options.
(4) Stock Dividend and Cash Dividend
The regular quarterly dividend for the first quarter of 1999 was
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 the Comptroller of the
Currency (the "OCC"), national banks must meet three separate
minimum capital requirements. The following table summarizes, as
of March 31, 1999, the Bank's capital requirements under FIRREA
and its actual capital ratios. As of March 31, 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 $46,530 13.39% $27,800 8.00% $18,730 5.39%
Tier I Capital to
Risk Weighted
Assets 42,185 12.14 13,900 4.00 28,185 8.14
Tier I Capital to
Average Assets 42,185 7.86 21,491 4.00 20,694 3.86
(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 centers
concentrate on mortgage loan origination and sales. It is management's
intention that commercial loans will become an increasingly larger
portion of the total loan portfolio as the balance sheet is
restructured to become more like that of a community bank. The Bank's
deposit accounts are insured to the maximum allowable by the Federal
Deposit Insurance Corporation (the "FDIC").
The Bank's results of operations are dependent primarily on net
interest income, which is the difference between the interest earned
on its loans and securities portfolios, and the interest paid on
deposits and borrowed funds. The Bank's operating results are also
affected by loan commitment and servicing fees, loan service release
fees from its mortgage center operations, customer service charges,
fees from annuity and insurance products, and other income. Operating
expenses of the Bank include employee compensation and benefits,
equipment and occupancy costs, federal deposit insurance premiums and
other administrative expenses.
The Bank's results of operations are further affected by economic and
competitive conditions, particularly changes in market interest rates.
Results are also affected by monetary and fiscal policies of federal
agencies, and actions of regulatory authorities.
FINANCIAL CONDITION
- -------------------
Total consolidated assets of the Company decreased by $10.3 million
from $548.7 million at December 31, 1998, to $538.4 million at
March 31, 1999.
During the first quarter, the Company funded $19 million of
commercial loans, commercial real estate loans, multi-family
loans, construction loans, and commercial leases. The
composition of the loan portfolio continues to change as
commercial real estate loans represented 17%, multi-family loans
represented 17%, construction loans represented 9%, commercial
loans represented 3%, and commercial leases represented 8% at
March 31, 1999. With $12.8 million of approved and accepted
commitments outstanding as of March 31, 1999, which are anticipated
to be funded in the next 90 days, management expects the composition
of commercial real estate, multi-family loans, construction loans,
and commercial loans to continue to grow and become a larger
percentage of the overall loan portfolio and assets mix.
During the first quarter of 1999, residential mortgage loans decreased
by $15 million as borrowers took advantage of lower rates and
refinanced their mortgages. The CoVest Banc mortgage centers in
McHenry and Aurora, Illinois processed many of the refinanced
mortgages that are then sold on a service released basis to the
investor market. The mortgage center had over $2.4 million of loans
held for sale at March 31, 1999.
At March 31, 1999, the allowance for possible loan losses amounted to
$4.4 million. This represented coverage of 1.12% of total loans as of
March 31, 1999, an increase from the 1.06% coverage which existed at
year-end 1998.
Securities available-for-sale increased by $2.8 million as various
municipal bonds and short-term governments were added to the
portfolio. Mortgage-backed and other mortgage-related securities
decreased $11.1 million or 31.7% from December 31, 1998. The proceeds
from the sales of, and paydowns on, mortgage-backed securities were
used to fund municipal and government bond purchases.
Deposits decreased to $356.0 million at March 31, 1999, from $364.5
million at December 31, 1998. This decrease was the result of a $2.6
million reduction in certificates of deposit and a $4.6 million
reduction in money market account balances.
Stockholders' equity totaled $46.1 million at March 31, 1999. At
quarter-end, the number of common shares outstanding was 4,109,295 and
the book value per common share outstanding was $11.08. This compares
to December 31, 1998, when the number of common shares outstanding was
4,159,295 and the book value per common share outstanding was $11.15.
At May 12, 1999, approximately 47,000 shares remain to be repurchased
under the current stock repurchase program.
At March 31, 1999, total non-performing assets amounted to $2.0
million, or 0.38% 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 March 31, 1999 included one commercial loan with a
balance of $874,000. A specific reserve of $250,000 has been
designated for that loan.
The following table sets forth the amounts and categories of non-
performing loans and assets.
March 31, 1999 Dec. 31, 1998
------------- -------------
(Dollars in Thousands)
Non-performing loans:
Mortgage Loans $1,123 $996
Commercial Real Estate Loans -0- -0-
Multi-family Loans -0- -0-
Construction Loans -0- -0-
Commercial Loans 874 -0-
Commercial Leases -0- -0-
Consumer 25 25
------------- -------------
Total non-performing loans $2,022 $1,021
Other real estate owned -0- -0-
Other repossessed assets -0- -0-
------------- -------------
Total non-performing assets $2,022 $1,021
Total non-performing loans as
a percentage of net loans .52% .25%
Total non-performing assets as
a percentage of total assets .38% .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 was $2.5 million for the
three months ended March 31, 1999. Net cash provided by investing
activities was $10.8 million for the quarter ended March 31, 1999.
Net cash used in financing activities amounted to $11.8 million for
the three months ended March 31, 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 March 31, 1999, the Company had commitments to
originate loans and undisbursed loan balances totaling $59 million,
and its customers had approved but unused lines of credit totaling $31
million. The Company considers its liquidity and capital resources to be
adequate to meet its foreseeable short and long-term needs. The Company
expects to be able to fund or refinance, on a timely basis, its material
commitments and long-term liabilities.
SELECTED RATIOS
- ---------------
(unaudited) THREE MONTHS ENDED
MARCH 31, MARCH 31,
1999 1998
--------------------
Annualized Return on Avg. Equity 6.68% 8.46%
Annualized Return on Avg. Assets 0.59% 0.69%
Book Value per Share $11.08 $11.03
Closing Market Price per Share $14.88 $17.25
Earnings per Primary Share:
Basic $.19 $.24
Diluted .18 .22
Net Interest Margin 3.10% 2.87%
Ratio of Operating Expense to
Average Total Assets,
Annualized 2.73% 2.24%
Ratio of Net Interest Income to
Non-Interest Expense,
Annualized 1.07x 1.23X
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND
1998
- ----------------------------------------------------------------------
GENERAL. Net income for the three months ended March 31, 1999 totaled
$786,000, or $0.19 (basic) and $0.18 (diluted) earnings per share, a
decrease of 22% from the $1,009,000, or $0.24 (basic) and $0.22
(diluted) earnings per share for the first quarter in 1998. Excluding
the effect of non recurring employee termination expense of $182,000
($112,000 net of tax), net income for the quarter ended March 31, 1999
would have been $898,000, or $0.22 (basic) and $0.21 (diluted)
earnings per share.
NET INTEREST INCOME. Net interest income decreased by $128,000, or
3%, for the first quarter of 1999 compared to the first quarter of
1998. A $49 million decrease in average earning assets for the first
quarter of 1999 versus the first quarter of 1998 accounted for part of
this income reduction. 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 margin increased 23 basis
points, or 8%, to 3.10% for the first quarter of 1999 from 2.87% for
the first quarter of 1998. The interest rate spread averaged 2.66%
for 1999 and 2.44% during the first quarter of 1998, a 22 basis point
or 9% increase. The net interest margin for the fourth quarter of
1998 was 2.99% and the net interest spread was 2.71%.
The cost of interest bearing liabilities declined from 4.96% for the
first quarter of 1998 to 4.58% for the first quarter of 1999. The
composition of the liabilities changed as money market accounts
continued to be a larger percentage of the Bank's deposit funding
source, replacing the shrinking pool of certificates of deposit. A
$51 million reduction in interest bearing liabilities for the first
quarter of 1999 versus the first quarter of 1998 was primarily due to
the maturity of Federal Home Loan Bank borrowings used to fund
mortgage-backed securities, as detailed above.
PROVISION FOR POSSIBLE LOAN LOSSES. The provision for possible loan losses
was decreased by $300,000, or 75%, to $99,000 for the first quarter of
1999. This reduction stemmed from the sale of the Company's credit card
portfolio in November, 1998. During the quarter ending March 31, 1998,
the Company had provided $300,000 for possible losses on credit card
loans.
On a quarterly basis, management of the Bank meets to review the adequacy
of the allowance for loan losses. Each loan officer grades his or her
individual commercial credits and the Company's outsourced loan review
function validates the officers' grades. In the event that loan review
results in a downgrade of the loan, it is included in the allowance
analysis at the lower grade. The grading system is in compliance with the
regulatory classifications and the allowance is allocated to the loans
based on the regulatory grading, except in instances where there are known
differences (i.e. collateral value is nominal, etc.). Once the specific
portion of the allowance is calculated, management then calculates a
historical portion for each loan category based on loan loss history,
current economic conditions and trends in the portfolio, including
delinquencies and impairments, as well as changes in the composition of
the portfolio. Management believes the allowance as of March 31, 1999 to
be adequate.
LOAN LOSS ALLOWANCE ANALYSIS. The following table sets forth an
analysis of the Company's allowance for possible loan losses for the
periods indicated.
Three Months Ended
March 31, March 31,
1999 1998
--------- ---------
(Dollars in Thousands)
Balance at beginning of period $4,312 $3,977
Charge-offs:
Mortgage Loans $ -0- $ 38
Commercial Real Estate Loans -0- -0-
Multi-Family Loans -0- -0-
Construction Loans -0- -0-
Commercial Loans -0- -0-
Commercial Leases -0- -0-
Consumer 22 233
-------- --------
Total 22 271
-------- --------
Recoveries:
Mortgage Loans $ -0- $ -0-
Commercial Real Estate Loans -0- -0-
Multi-Family Loans -0- -0-
Construction Loans -0- -0-
Commercial Loans -0- -0-
Commercial Leases -0- -0-
Consumer 20 56
-------- --------
Total 20 56
-------- --------
Net charge-offs 2 215
Additions charged to
operations 99 399
-------- ---------
Balance at end of period $4,409 $4,161
Ratio of net charge-offs during
the period to average loans
outstanding during the period 0.00% 0.06%
Ratio of allowance for possible
loan losses to non- performing loans 2.18x 3.62x
NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES. Net
interest income after provision for possible loan losses increased
by $172,000, or 5% to $3,817,000 for the three month period ended
March 31, 1999, as compared to $3,645,000 for the three month period
ended March 31, 1998.
NON-INTEREST INCOME. Non-interest income excluding security gains
increased $114,000, or 12%, from the comparable quarter last year.
Mortgage Center income increased by $326,000 to $536,000 in the first
quarter of 1999 compared to $210,000 in the similar quarter in 1998.
The Mortgage Center commenced operations on February 12, 1998. Loan
charges and servicing fees decreased by $119,000 as the volume of
mortgage loans decreased. Deposit related charges and fees increased
by $18,000 during the first quarter of 1999 as compared to the first
quarter of 1998. Realized gains of $2,000 on sales of securities were
also recorded. This was a decrease of $254,000 in net gains on
securities sales from the comparable quarter in 1998.
NON-INTEREST EXPENSE. Non-interest expense increased $381,000, or 12%
for the first quarter of 1999 from the comparable quarter in 1998.
Total compensation, commission, and benefit costs increased $376,000
for the quarter ended March 31, 1999 versus March 31, 1998. Of this
total, $182,000, or 48%, represents non-recurring employee termination
expenses, as certain positions were eliminated in the first quarter of
1999 to bring operating costs more in line with the revenues of the
Bank. Commissions and employee sales incentives, mostly attributed to
the Mortgage Center, which opened for business on February 12, 1998,
increased $119,000 to $185,000 from $66,000 for the same period in
1998. The remaining $75,000 increase stems from the expansion of the
commercial loan function, some fixed costs associated with the
Mortgage Center operation, and increases in employee health insurance
costs. Increases in building occupancy expenses of $27,000 and
miscellaneous expenses of $48,000 were partially offset by a $62,000
decline in data processing expenses for the first quarter of 1999
compared to the first quarter of 1998.
INCOME TAX EXPENSE. Income tax expense decreased $126,000 to $404,000
for the quarter ended March 31, 1999, compared to $530,000 for the
same period in 1998, due to the decrease in income.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. In an
attempt to manage the Bank's exposure to changes in interest rates,
management closely monitors the Bank's interest rate risk.
Interest rate risk results when the maturity or repricing intervals
and interest rate indices of the interest-earning assets, interest-
bearing liabilities, and off-balance sheet financial instruments are
different, creating a risk that changes in the level of market
interest rates will result in disproportionate changes in the value
of, and the net earnings generated from, the Company's interest-
earning assets, interest-bearing liabilities, and off-balance sheet
financial instruments. The Company's exposure to interest rate risk is
managed primarily through the Company's strategy of selecting the
types and terms of interest-earning assets and interest-bearing
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 current exposure to
hypothetical changes in interest rates.
March 31, 1999
Change in Percent Change Percent Change
Interest Rates in Net Interest in MV of
(basis points) Income Portfolio Equity
-------------- --------------- ----------------
+200 -6% -9%
+100 -3 -3
0 0 0
-100 +2 +4
-200 +5 +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 to 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 March 31, 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 at a minimum of quarterly
to the Board of Directors. The Company's Y2K efforts are also reviewed
by 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, and Phase III - Renovation were
completed as required. A description and anticipated timing of the three
remaining phases are described as follows:
Phase IV - Testing and Validation
This phase includes establishing a test environment, performing
systems testing, and certifying and documenting the results. The
certification process requires having functional experts run system
tests and review results against pre-established criteria to ensure
compliance. Documentation should be maintained in the form of data
reports and computer print screens. The "mission critical" systems,
other than those associated with the Company's third party data
processor (M&I Data) for which the Company will participate in proxy
testing, were completed by December 31, 1998. The Company expects the
proxy tested system and the remainder of the initial 'mission
necessary' and 'mission desirable' systems to be certified by June 30,
1999. Testing for non-information technology systems, such as
utilities and other infrastructure systems, has been initiated;
however, due to the Company's reliance on their system test schedule,
it is not possible to estimate exactly when this phase will be
completed. Through communication relationships with these companies,
it is anticipated that the majority of their testing will be completed
in the third quarter of 1999.
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 will develop 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 March 31, 1999, costs of $35,000 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 $110,000, of which $50,000 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 decided whether to adopt 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 APB25'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
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit
27. Financial Data Schedule
(b) Reports on Form 8-K
A report on Form 8-K was filed on January 21, 1999 to report under
Item 5 the Company's earnings for the fourth quarter of 1998 and
calendar year 1998.
A report on Form 8-K was filed on January 22, 1999 to report under
Item 5 the election of a President and Chief Executive Officer of
the Bank and Company.
A report on Form 8-K was filed on January 26, 1999 to report under
Item 5 a new stock purchase program, the Company's 15th.
A report on Form 8-K was filed on February 23, 1999 to report under
Item 5 a regular quarterly dividend.
A report on Form 8-K was filed on March 25, 1999 to report completion
of the Company's 15th stock repurchase program and announcement of
the Company's 16th stock repurchase program.
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
President and
Chief Executive Officer
Date: By: /s/
----------------- ---------------------------
Paul A. Larsen
Executive Vice President,
Treasurer and
Chief Financial Officer
