UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended Commission File Number
September 30, 2000 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 October 24, 2000, the Registrant had issued and outstanding 4,403,803
shares of the Registrant's Common Stock. In addition, it had also
repurchased 485,782 shares which were being held as treasury stock.
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 15
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 25
Form 10-Q Signatures 26
PART 1. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
(unaudited)
COVEST BANCSHARES INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
(Dollars in thousands, except
per share data)
SEP 30, DEC 31,
2000 1999
--------- ---------
ASSETS
------
CASH ON HAND AND IN BANKS $ 12,731 $ 9,027
INTEREST BEARING DEPOSITS 7 1,590
--------- ---------
Cash and Cash Equivalents 12,738 10,617
SECURITIES:
Securities Available-for-Sale 40,365 51,702
Mortgage-Backed and Related
Securities Available-for-Sale 14,572 18,759
Federal Home Loan Bank and
Federal Reserve Bank Stock 6,843 6,529
-------- --------
TOTAL SECURITIES 61,780 76,990
LOANS RECEIVABLE:
Commercial Loans 41,130 17,426
Multi-Family Loans 155,635 126,109
Commercial Real Estate Loans 67,028 74,284
Construction Loans 47,480 46,177
Commercial/Municipal Leases 9,036 22,029
Mortgage Loans 118,917 130,160
Consumer Loans 52,816 51,239
Mortgage Loans Held for Sale 287 106
-------- --------
TOTAL LOANS RECEIVABLE 492,329 467,530
Allowance for Possible Loan Losses ( 5,474) ( 4,833)
-------- --------
LOANS RECEIVABLE, NET 486,855 462,697
ACCRUED INTEREST RECEIVABLE 3,475 3,437
PREMISES AND EQUIPMENT 10,125 10,669
GOODWILL 1,595 1,749
MORTGAGE SERVICING RIGHTS 126 148
OTHER ASSETS 1,922 2,189
-------- --------
TOTAL ASSETS $578,616 $568,496
======== ========
See accompanying notes to consolidated financial statements
COVEST BANCSHARES INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Continued)
(Unaudited)
(Dollars in thousands, except
per share data)
SEP 30, DEC 31,
2000 1999
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES:
Deposits:
Non-Interest Bearing $ 25,938 $ 19,691
Interest Bearing Checking 22,096 21,930
Savings Accounts 44,158 49,700
Money Market Accounts 113,733 88,779
Certificates of Deposit 163,557 165,578
Jumbo CDs 11,771 8,204
Purchased CDs 84,684 44,173
-------- --------
465,937 398,055
Short-Term Borrowings and Securities
Sold U/A to Repurchase 33,858 85,004
Long-Term Advances from Federal
Home Loan Bank 24,000 29,000
Advances from Borrowers for
Taxes and Insurance 2,729 4,640
Accrued Expenses and Other Liabilities 5,239 5,523
--------- ---------
TOTAL LIABILITIES 531,763 522,222
STOCKHOLDERS' EQUITY:
Common Stock, par value $.01 per share;
7,500,000 authorized shares; 4,403,803
shares issued at 9/30/00 and 12/31/99
respectively 44 44
Additional Paid-in Capital 17,727 17,919
Retained Earnings 35,927 33,514
Treasury Stock, 485,782 shares and
299,796 shares, held at cost 9/30/00
and 12/31/99 respectively (6,204) (4,312)
Unearned Stock Award 0 (14)
Accumulated Other Comprehensive
Loss (641) (877)
--------- --------
TOTAL STOCKHOLDERS' EQUITY 46,853 46,274
--------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $578,616 $568,496
========= ========
See accompanying notes to consolidated financial statements
<TABLE>
<CAPTION>
COVEST BANCSHARES INC.
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME THREE MONTHS ENDED NINE MONTHS ENDED
(Unaudited) SEP 30, SEP 30, SEP 30, SEP 30,
(Dollars in thousands, except 2000 1999 2000 1999
per share data) --------- --------- -------- --------
INTEREST INCOME
Loans and Leases Receivable $10,050 $ 8,254 $28,871 $23,518
Interest Bearing Deposits at Banks 10 25 288 596
Mortgage-Backed and Related Securities 261 358 868 1,253
Taxable Securities 465 677 1,527 1,962
Tax Exempt Securities 95 171 288 505
Other Interest and Dividend Income 132 110 369 354
--------- --------- --------- ---------
Total Interest Income 11,013 9,595 32,211 28,188
INTEREST EXPENSE
Deposits 5,760 3,773 15,582 11,110
Advances from Federal Home Loan Bank 670 1,486 3,206 4,710
Other Borrowed Money 204 174 559 300
--------- --------- --------- ---------
Total Interest Expense 6,634 5,433 19,347 16,120
NET INTEREST INCOME 4,379 4,162 12,864 12,068
Provision for Possible Loan Losses 250 454 760 841
NET INTEREST INCOME AFTER PROVISION --------- --------- -------- ---------
FOR POSSIBLE LOAN LOSSES 4,129 3,708 12,104 11,227
NON-INTEREST INCOME
Loan Servicing Fees 197 286 790 763
Mortgage Center Income 122 206 330 1,237
Deposit Related Charges and Fees 281 267 770 755
Gain/(Loss) on Sale of Securities -0- (17) (96) (15)
Insurance and Annuity Commissions 32 30 123 128
Other 19 177 164 337
--------- --------- --------- ---------
TOTAL NON-INTEREST INCOME 651 949 2,081 3,205
NON-INTEREST EXPENSE
Compensation and Benefits 1,478 1,313 4,588 4,799
Commissions and Incentives 159 195 416 610
Occupancy and Equipment 488 515 1,500 1,564
Federal Insurance Premium 21 52 61 158
Data Processing 217 239 654 727
Advertising 148 154 350 349
Other Real Estate Owned (2) -0- (8) 2
Amortization of Goodwill 51 51 153 154
Amortization of Mortgage Servicing Rights 10 8 21 43
Other 413 505 1,216 1,643
--------- --------- --------- ----------
TOTAL NON-INTEREST EXPENSE 2,983 3,032 8,951 10,049
--------- --------- --------- ----------
INCOME BEFORE INCOME TAXES 1,797 1,625 5,234 4,383
Income Tax Provision (640) (557) (1,855) (1,490)
--------- --------- --------- ----------
NET INCOME $ 1,157 $ 1,068 $ 3,379 $ 2,893
========= ========= ========= ==========
Basic Earnings Per Share $0.29 $0.26 $0.84 $0.70
Diluted Earnings Per Share $0.29 $0.25 $0.82 $0.67
Comprehensive Income $ 1,763 $ 984 $ 3,615 $ 1,840
See accompanying notes to consolidated financial statements
</TABLE>
COVEST BANCSHARES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED
(Unaudited) SEP 30, SEP 30,
(Dollars in thousands) 2000 1999
--------- ---------
OPERATING ACTIVITIES
Net Income $ 3,379 $ 2,893
Adjustments to Reconcile Net Income to
Net Cash from Operating Activities
Depreciation and Amortization of
Premises and Equipment 722 777
Provision for Possible Loan Losses 760 841
Federal Home Loan Bank Stock Dividend (217) -0-
Net Loss on Sale of Securities 96 15
Stock Award Earned 14 -0-
Change In:
Prepaid Expenses and Other Assets 443 105
Accrued Interest Receivable 38 61
Accrued Expenses and Other Liabilities (808) (537)
--------- ---------
NET CASH FROM OPERATING ACTIVITIES 4,427 4,155
CASH FLOWS FROM INVESTING ACTIVITIES
Loan Originations, Net of Principal
Payments (24,918) (50,216)
Principal Payments on Mortgage-Backed
and Related Securities 2,262 7,683
Purchases of Securities (120) (42,399)
Proceeds from Sales and Maturities
of Securities 13,570 39,269
Sale of Federal Home Loan Bank and
Federal Reserve Bank Stock -0- 1,910
Purchase of Office Properties and
Equipment 178 (294)
--------- ---------
NET CASH FROM INVESTING ACTIVITIES (9,028) (44,047)
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase in Deposits 67,882 1,456
Repayment of Long Term Federal Home
Loan Bank Advances (5,000) (15,000)
Proceeds/(Repayments) of Other Borrowings (51,146) 21,084
Net Increase/(Decrease)in Mortgage
Escrow Funds (1,911) 2,425
Purchase of Common Stock Net of
Proceeds from Exercise of Stock Options (2,137) (2,612)
Payment Received on Loan to ESOP -0- 161
Dividend Paid (966) (998)
--------- ---------
NET CASH FROM FINANCING ACTIVITIES 6,722 6,516
--------- ---------
NET INCREASE/(DECREASE) IN CASH AND
CASH EQUIVALENTS 2,121 (33,376)
CASH AND CASH EQUIVALENTS, BEGINNING 10,617 39,677
--------- ---------
CASH AND CASH EQUIVALENTS, ENDING $12,738 $ 6,301
========= =========
See accompanying notes to consolidated financial statements
<TABLE>
<CAPTION>
COVEST BANCSHARES INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
(Dollars in thousands)
ACCUMULATED
ADDITIONAL UNEARNED OTHER
COMMON PAID-IN RETAINED TREASURY ESOP STOCK COMPREHENSIVE
STOCK CAPITAL EARNINGS STOCK LOAN AWARD INCOME/(LOSS) TOTAL
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 $ 44 $18,967 $30,905 ($3,017) ($161) ($73) $286 $46,951
Net Income 2,893 2,893
Change in Unrealized Gain on Securities
Available-for-Sale, Net of Taxes (1,053) (1,053)
--------
Comprehensive Income 1,840
--------
Cash Dividends ($.24 per share) (998) (998)
Purchase of Treasury Stock (4,248) (4,248)
Stock Award Earned 40 40
Principal payment on ESOP Loan 161 161
Treasury Stock Reissued in Conjunction
with Stock Option Exercises (1,319) 2,955 1,636
Tax Benefits related to
Employee Stock Option Plans 280 280
------------------------------------------------------------------------------------------------------------------------
Balance at Sept 30, 1999 $44 $17,928 $32,800 ($4,310) $-0- ($33) ($767) $45,662
========================================================================================================================
Balance at December 31, 1999 $44 $17,919 $33,514 ($4,312) $-0- ($14) ($877) $46,274
Net Income 3,379 3,379
Change in Unrealized Gain on Securities
Available-for-Sale, Net of Taxes 236 236
------
Comprehensive Income 3,615
------
Cash Dividends ($.24 per share) (966) (966)
Purchase of Treasury Stock (2,403) (2,403)
Stock Award Earned 14 14
Treasury Stock Reissued in Conjunction
with Stock Option Exercises (245) 511 266
Tax Benefits related to
Employee Stock Option Plans 53 53
------------------------------------------------------------------------------------------------------------------------
Balance at Sept 30, 2000 $44 $17,727 $35,927 ($6,204) $-0- $-0- ($641) $46,853
========================================================================================================================
See accompanying notes to consolidated financial statements
</TABLE>
<TABLE>
<CAPTION>
COVEST BANCSHARES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
AVERAGE BALANCE SHEET
(Unaudited)
(Dollars in thousands)
The following table sets forth certain information related to the Company's
average balance sheet. It reflects the average yield on assets and average
cost of liabilities for the periods indicated, as derived by dividing income or
expense by the average daily balance of assets or liabilities, respectively, for
the periods indicated.
THREE MONTHS ENDED
-----------------------------------------------------------------------------------
SEPT 30, 2000 SEPT 30, 1999
----------------------------------------- ---------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST
INTEREST-EARNING ASSETS: ----------------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial Loans (A)(B) $32,443 $ 693 8.54% $ 13,160 $ 238 7.23%
Multi-Family Loans (B) 146,186 2,973 8.13 99,598 1,968 7.90
Commercial Real Estate (A)(B) 67,087 1,386 8.26 64,989 1,352 8.32
Construction Loans (B) 44,970 1,271 11.31 43,270 987 9.12
Commercial/Muni Leases 10,787 166 6.17 29,178 459 6.30
Mortgage Loans (A)(B) 125,082 2,343 7.49 125,775 2,273 7.23
Consumer Loans (A) 52,530 1,222 9.30 45,176 977 8.65
Securities 48,148 735 6.11 72,018 1,046 5.81
Mortgage-Backed and
Related Securities 15,086 261 6.93 20,875 358 6.86
Other Investments 625 10 6.57 2,082 25 4.80
----------------------------------------- ----------------------------------
Total Interest-Earning Assets $542,944 $11,060 8.15% $516,121 $ 9,683 7.50%
Non-Interest Earning Assets 16,503 21,987
----------------------------------------- ----------------------------------
TOTAL ASSETS $559,447 $538,108
========================================= =======================================
INTEREST-BEARING LIABILITIES:
Interest-Bearing Checking $ 23,300 $ 66 1.13% $ 21,813 $ 58 1.06%
Savings 45,967 289 2.52 52,056 328 2.52
Money Market 107,699 1,611 5.98 86,816 1,007 4.64
Certificates of Deposits 159,864 2,379 5.95 171,456 2,262 5.28
Jumbo CDs 11,662 185 6.35 8,962 118 5.27
Purchased CDs 72,302 1,230 6.80 0 0 0.00
FHLB Advances 42,750 670 6.27 107,283 1,486 5.54
Other Borrowed Funds 12,578 204 6.49 13,336 174 5.22
----------------------------------------- ------------------------------------
Total Interest-Bearing
Liabilities $476,122 $ 6,634 5.57% $461,722 $ 5,433 4.71%
Non-Interest Bearing Deposits 24,026 17,964
Other Liabilities 12,715 12,455
----------------------------------------- ----------------------------------
TOTAL LIABILITIES $512,863 $492,141
----------------------------------------- ----------------------------------
Stockholders' Equity 46,584 45,967
----------------------------------------- ----------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $559,447 $538,108
========================================= ==================================
NET INTEREST INCOME $ 4,426 $ 4,250
----------------------------------------- ----------------------------------
NET INTEREST RATE SPREAD (C) 2.58% 2.79%
----------------------------------------- ----------------------------------
NET INTEREST MARGIN (D) 3.26% 3.29%
----------------------------------------- ----------------------------------
(A) Includes cash basis loans.
(B) Includes deferred fees/costs.
(C) Interest Rate Spread is calculated by subtracting the average cost of interest-bearing liabilities from the
average rate on interest-earning assets.
(D) Net Interest Margin is calculated by dividing net interest income by average interest-earning assets.
</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.
NINE MONTHS ENDED
-----------------------------------------------------------------------------------
SEPT 30, 2000 SEPT 30, 1999
----------------------------------------- ---------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST
INTEREST-EARNING ASSETS: ----------------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial Loans (A)(B) $24,635 $ 1,492 8.08% $ 11,008 $ 544 6.59%
Multi-Family Loans (B) 135,595 8,048 7.91 78,981 4,646 7.84
Commercial Real Estate (A)(B) 70,879 4,420 8.31 65,221 4,148 8.48
Construction Loans (B) 43,776 3,569 10.87 39,956 2,684 8.96
Commercial/Muni Leases 15,077 710 6.28 31,344 1,479 6.29
Mortgage Loans (A)(B) 127,637 7,130 7.45 132,911 7,196 7.22
Consumer Loans (A) 52,002 3,505 8.99 44,270 2,820 8.50
Securities 51,393 2,329 6.04 71,348 3,082 5.76
Mortgage-Backed and
Related Securities 16,690 868 6.93 24,536 1,253 6.80
Other Investments 6,526 288 5.90 17,047 596 4.66
----------------------------------------- ----------------------------------
Total Interest-Earning Assets $544,210 $32,359 7.93% $516,622 $ 28,448 7.34%
Non-Interest Earning Assets 17,211 21,902
----------------------------------------- ----------------------------------
TOTAL ASSETS $561,421 $538,524
========================================= =======================================
INTEREST-BEARING LIABILITIES:
Interest-Bearing Checking $ 22,811 $ 190 1.11% $ 22,346 $ 177 1.05%
Savings 47,961 899 2.50 52,216 975 2.49
Money Market 98,645 4,225 5.71 83,345 2,769 4.43
Certificates of Deposits 162,460 7,007 5.75 173,015 6,814 5.25
Jumbo CDs 9,903 445 5.99 9,629 375 5.20
Purchased CDs 57,037 2,816 6.58 0 0 0.00
FHLB Advances 70,168 3,206 6.09 115,714 4,710 5.43
Other Borrowed Funds 12,364 559 6.03 8,248 300 4.85
----------------------------------------- ------------------------------------
Total Interest-Bearing
Liabilities $481,349 $19,347 5.36% $464,513 $ 16,120 4.63%
Non-Interest Bearing Deposits 22,303 16,251
Other Liabilities 11,312 11,296
----------------------------------------- ----------------------------------
TOTAL LIABILITIES $514,964 $492,060
----------------------------------------- ----------------------------------
Stockholders' Equity 46,457 46,464
----------------------------------------- ----------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $561,421 $538,524
========================================= ==================================
NET INTEREST INCOME $13,012 $ 12,328
----------------------------------------- ----------------------------------
NET INTEREST RATE SPREAD (C) 2.57% 2.71%
----------------------------------------- ----------------------------------
NET INTEREST MARGIN (D) 3.19% 3.18%
----------------------------------------- ----------------------------------
(A) Includes cash basis loans.
(B) Includes deferred fees/costs.
(C) Interest Rate Spread is calculated by subtracting the average cost of interest-bearing liabilities from the
average rate on interest-earning assets.
(D) Net Interest Margin is calculated by dividing net interest income by average interest-earning assets.
</TABLE>
(1) Basis of Presentation
The accompanying unaudited 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 periods ended September 30,
2000 are not necessarily indicative of results that may be expected for the
entire year ending December 31, 2000.
In the opinion of management, the unaudited consolidated financial statements
contain all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the financial information of CoVest Bancshares,
Inc. (the "Company"), including its wholly owned subsidiary, CoVest Banc (the
"Bank").
Certain amounts in prior consolidated financial statements have been
reclassified to conform to the September, 2000 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.
As of August 21, 2000, the Mortgage Center operation was merged with the
regular banking operations and the McHenry Mortgage Center was closed. The
total financial impact was $113,000. Included in other income was the write
off of leasehold improvements of $69,574. Expenses of $40,000 were incurred
which included the buy out of the remaining lease on the center, relocation
of the Mortgage Center staff to the Arlington Heights office and a minimal
amount of termination expenses.
A reconciliation of the numerators and denominators for earnings per common
share dilution computations for the three month periods ended September 30,
2000 and 1999 are presented below: (dollars and shares in thousands)
Three Months Ended September 30
-------------------------------
2000 1999
---- ----
Earnings per share:
Net Income $1,157 $1,068
Weighted average common shares
outstanding 3,952 4,113
----- -----
Basic earnings per share $0.29 $0.26
===== =====
Earnings per share assuming dilution:
Net Income $1,157 $1,068
====== ======
Weighted average common shares
outstanding 3,952 4,113
Add: dilutive effect of assumed
exercises, incentive stock options
and management retention plan 69 136
----- -----
Weighted average common and dilutive
potential common shares outstanding 4,021 4,249
===== =====
Diluted earnings per share $0.29 $0.25
===== =====
A reconciliation of the numerators and denominators for earnings per common
share dilution computations for the nine month periods ended September 30,
2000 and 1999 are presented below: (dollars and shares in thousands)
Nine Months Ended September 30
------------------------------
2000 1999
---- ----
Earnings per share:
Net Income $3,379 $2,893
Weighted average common shares
outstanding 4,039 4,134
----- -----
Basic earnings per share $0.84 $0.70
===== =====
Earnings per share assuming dilution:
Net Income $3,379 $2,893
====== ======
Weighted average common shares
outstanding 4,039 4,134
Add: dilutive effect of assumed
exercises, incentive stock options
and management retention plan 61 155
----- -----
Weighted average common and dilutive
potential common shares outstanding 4,100 4,289
===== =====
Diluted earnings per share $0.82 $0.67
===== =====
At September 30, 2000, options to purchase 628,108 shares were outstanding.
These options were not included in the computation of diluted earnings per
share because the options' exercise price was greater than the average market
price of the common stock and were therefore, antidilutive.
(3) Stock Repurchase Program
The Company completed its 17th stock repurchase program on February 3, 2000.
A total of 100,000 shares were repurchased at an average price of $14.84.
The Company completed its 18th stock repurchase program on July 3, 2000. A
total of 100,000 shares were repurchased at an average price of $10.45.
The Company completed its 19th stock repurchase program on September 1, 2000.
A total of 100,000 shares were repurchased at an average price of $10.93.
The Company announced its 20th stock repurchase program on September 1, 2000,
enabling the Company to repurchase 100,000 shares of its outstanding stock.
As of October 24, 2000, 19,790 shares had been repurchased at an average
price of $11.54.
(4) Cash Dividend
The regular quarterly dividend for the third quarter of 2000 was paid at $.08
per share. The same quarterly dividend was paid for the third quarter of
1999.
(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 September 30, 2000, the Company's and Bank's capital requirements under
FIRREA and their actual capital ratios. As of September 30, 2000, the Bank
exceeded all current minimum regulatory capital requirements.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purpose Action Provisions
SEPT 30, 2000 Amount Ratio Amount Ratio Amount Ratio
============= ------ ----- ------ ----- ------ -----
Total Capital (Dollars in thousands)
(to Risk Weighted Assets)
Company $50.9 12.8% $31.8 8.0% $39.8 10.0%
Bank 49.0 12.4 31.7 8.0 39.7 10.0
Tier I Capital
(to Risk Weighted Assets)
Company 45.9 11.5 15.9 4.0 23.9 6.0
Bank 44.0 11.1 15.9 4.0 23.8 6.0
Tier I Capital
(to Average Assets)
Company 45.9 8.2 22.4 4.0 28.0 5.0
Bank 44.0 7.9 22.3 4.0 27.9 5.0
Risk Weighted Assets (Company) $397,538
Average Assets (Company) $559,447
Risk Weighted Assets (Bank) $396,607
Average Assets (Bank) $558,597
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purpose Action Provisions
SEPT 30, 1999 Amount Ratio Amount Ratio Amount Ratio
============= ------ ----- ------ ----- ------ -----
Total Capital (Dollars in thousands)
(to Risk Weighted Assets)
Company $49.2 12.7% $31.0 8.0% $38.7 10.0%
Bank 47.5 12.3 30.9 8.0 38.6 10.0
Tier I Capital
(to Risk Weighted Assets)
Company 44.6 11.5 15.5 4.0 23.2 6.0
Bank 42.9 11.1 15.5 4.0 23.2 6.0
Tier I Capital
(to Average Assets)
Company 44.6 8.3 21.5 4.0 26.9 5.0
Bank 42.9 8.0 21.4 4.0 26.8 5.0
Risk Weighted Assets (Company) $387,428
Average Assets (Company) $538,108
Risk Weighted Assets (Bank) $386,309
Average Assets (Bank) $535,917
(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 including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain
assumptions and describe future plans, strategies and expectations of the
Company, are generally identifiable by use of the words "believe," "expect,"
"intend," "anticipate," "estimate," "project" or similar expressions. The
Company's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material
adverse affect on the operations and future prospects of the Company and the
subsidiary include, but are not limited to, changes in: interest rates,
general economic conditions, legislative/regulatory changes, monetary and
fiscal policies of the U.S. Government, including policies of the U.S.
Treasury and the Federal Reserve Board, the quality or composition of the
loan or securities portfolios, demand for loan products, deposit flows,
competition, demand for financial services in the Company's market area, our
implementation of new technologies, our ability to develop and maintain
secure and reliable electronic systems 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 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, 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
-------------------
The Company's assets increased to $579 million as of September 30, 2000, as
compared to $568 million at December 31, 1999. Net loans receivable increased
$24.2 million to $487 million as of September 30, 2000 versus $463 million
outstanding as of December 31, 1999. Multi-family loans increased by $29.5
million and commercial loans increased by $23.7 million. These increases
were offset by a decrease in leases, commercial real estate, and mortgage
loans of approximately $31.5 million. Limited growth in the loan portfolio
is expected during the remainder of 2000. Total securities have decreased by
$15.2 million as a result of the sales maturities and security paydowns.
These funds were used to repay FHLB advances. Deposits increased 17% to $466
million as of September 30, 2000 compared to $398 million as of December 31,
1999. In March 2000, the Bank introduced a High Yield Account. This account
has a market sensitive rate of interest that is indexed to the 91-day
Treasury Bill weekly auction rate. All balances over $2,500 are tiered to
this market interest rate. The Company is focused on growing High Yield
Account balances and attracting new commercial deposit accounts. At
September 30, 2000, the account had a $114 million balance, a 28% increase
from year-end 1999. Additional deposit growth has been centered in non-
interest bearing deposits that grew by approximately 32% or $6.2 million and
purchased certificates of deposit, which increased by approximately 92% or
$40.5 million. The increase in purchased money certificates of deposits has
been used to pay down FHLB borrowings because of pricing considerations.
Stockholders' equity totaled $47 million at September 30, 2000. The number
of common shares outstanding was 3,918,021 and the book value per common
share outstanding was $11.96.
At September 30, 2000, the Allowance for Possible Loan Losses was $5.5
million as compared to $4.8 million at December 31, 1999.
At September 30, 2000, total non-performing assets amounted to $3,030,000, or
0.52% of total assets compared to $766,000, or 0.13% of total assets at
December 31, 1999. Most of this increase is related to one commercial real
estate borrower for $1.9 million.
The following table sets forth the amounts and categories of non-performing
loans and assets.
Sept. 30, 2000 Dec. 31, 1999
------------- -------------
(Dollars in Thousands)
Non-performing loans:
Commercial Loans $ 37 -0-
Multi-family Loans -0- -0-
Commercial Real Estate Loans 1,904 -0-
Construction Loans 622 -0-
Commercial/Municipal Leases -0- -0-
Mortgage Loans 431 $766
Consumer 20 -0-
------------- -------------
Total non-performing loans 3,014 766
Other real estate owned -0- -0-
Other repossessed assets 16 -0-
------------- -------------
Total non-performing assets $3,030 $766
====== ====
Total non-performing loans as
a percentage of net loans .62% .17%
=== ===
Total non-performing assets as
a percentage of total assets .52 .13
=== ===
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 $4.4 million for the nine months ended September
30, 2000. Net cash used in investing activities was $9.0 million for the
nine months ended September 30, 2000. Net cash provided by financing
activities amounted to $6.7 million for the nine months ended September 30,
2000.
The Company uses its liquidity to meet its ongoing commitments to fund
maturing certificates of deposit and deposit withdrawals, repay borrowings,
fund existing and continuing loan commitments, and pay operating expenses. At
September 30, 2000, the Company had commitments to originate loans and
undisbursed loan balances totaling $54 million, and its customers had approved
but unused lines of credit totaling $36 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 NINE MONTHS ENDED
SEPT 30, SEPT 30, SEPT 30, SEPT 30,
2000 1999 2000 1999
-------------------- -------------------
Annualized Return on Avg. Equity 9.93% 9.29% 9.70% 8.30%
Annualized Return on Avg. Assets 0.83% 0.79% 0.80% 0.72%
Book Value per Share $11.96 $11.13 $11.96 $11.13
Closing Market Price per Share $12.00 $13.56 $12.00 $13.56
Earnings per Primary Share:
Basic $0.29 $0.26 $0.84 $0.70
Diluted $0.29 $0.25 $0.82 $0.67
Net Interest Margin 3.26% 3.29% 3.19% 3.18%
Ratio of Operating Expense to
Average Total Assets,
Annualized 2.13% 2.25% 2.13% 2.49%
Ratio of Net Interest Income to
Non-Interest Expense,
Annualized 1.47x 1.37x 1.44x 1.20x
Number of Full-Service Branches 3 3 3 3
Number of ATMs 3 4 3 4
Number of Employees (FTE) 124 136 124 136
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
------------------------------------------------------------------------------
Net income was $1,157,000 for the third quarter of 2000, up 8% over $1,068,000
for the same period last year. Basic earnings per share were $0.29 compared
to $0.26 per share for the third quarter of 1999. Diluted earnings per share
were $0.29, a 16% increase compared to $0.25 per share for the third quarter
1999.
Return on average equity and return on average assets during the third quarter
were 9.93% and 0.83% respectively during 2000 compared to 9.29% and 0.79% in
1999.
The Company's efficiency ratio was 59.31% compared to 59.32% in the third
quarter of 1999. The Company's goal is to maintain an efficiency ratio in the
60% range.
Cash earnings (net income adjusted for the after tax impact of amortization of
goodwill) for the third quarter of 2000 were approximately $1,188,000, or
$0.30 (basic) and $0.30 (diluted) earnings per share, compared to $1,094,000
or $0.27 (basic) and $0.26 (diluted) earnings per share for the same period in
1999.
Net interest income increased by $217,000, or 5%, for the third quarter of
2000 compared to the third quarter of 1999. A $27 million increase in average
earning assets for the third quarter of 2000 versus the third quarter of 1999
accounted for part of this increase. The Company's net interest margin
averaged 3.26% for the third quarter of 2000, a 3 basis point decrease from
3.29% in 1999. The net spread averaged 2.58% for the third quarter of 2000, a
21 basis point decrease from 2.79% during the third quarter of 1999. The
yield on average earning assets increased by 65 basis points while the cost of
interest-bearing liabilities increased by 86 basis points. The Company
expects the net interest margin to remain relatively stable during the next
several quarters.
The provision for possible loan losses was $250,000 for the third quarter of
2000 versus $454,000 for the like period in 1999. On a year to date basis,
the provision has decreased from $841,000 for the first nine months of 1999 to
$760,000 for the first nine months of 2000.
On a quarterly basis, management of the Bank meets to review the adequacy of
the allowance for possible 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. Although management believes
that the allowance for estimated losses on loans at September 30, 2000 was at
a level adequate to absorb losses on existing loans, there can be no assurance
that such losses will not exceed the estimated amounts.
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
Sep 30, Sep 30,
2000 1999
--------- ---------
(Dollars in Thousands)
Balance at beginning of period $5,240 $4,545
Charge-offs:
Commercial Loans -0- $ 399
Multi-Family Loans -0- -0-
Commercial Real Estate Loans -0- -0-
Construction Loans -0- -0-
Commercial/Municipal Leases -0- -0-
Mortgage Loans -0- -9-
Consumer 21 42
-------- --------
Total 21 450
-------- --------
Recoveries:
Commercial Loans -0- -0-
Multi-Family Loans -0- -0-
Commercial Real Estate Loans -0- -0-
Construction Loans -0- -0-
Commercial/Municipal Leases -0- -0-
Mortgage Loans -0- -0-
Consumer 5 22
-------- --------
Total 5 22
-------- --------
Net charge-offs 16 428
Additions charged to
operations 250 454
-------- --------
Balance at end of period $5,474 $4,571
======== ========
Ratio of net charge-offs during
the period to average loans
outstanding during the period 0.00% 0.10%
Ratio of allowance for possible
loan losses to non-performing loans 1.82x 8.31x
Net interest income after provision for possible loan losses increased by
$421,000, or 11% to $4,129,000 for the three month period ended September 30,
2000, as compared to $3,708,000 for the three month period ended September
30, 1999.
Non-interest income decreased $298,000, or 31%, to $651,000 from the
comparable quarter last year. Loan charges and servicing fees decreased by
$89,000 as the volume of loans remained the same. Mortgage Center income was
down 41%, to $122,000 in the third quarter of 2000 compared to $206,000 in
the similar quarter in 1999. The volume of new loans generated dropped due
to higher interest rates, which had a major impact on mortgage loan
refinancings and new loan generation. As of August 21, 2000, the Mortgage
Center operation was merged with the regular banking operations and the
McHenry Mortgage Center was closed. Deposit related charges and fees
increased by $14,000 during the third quarter of 2000 as compared to the
third quarter of 1999. During the third quarter of 2000, other income
decreased by $158,000, or 89%, to $19,000 from the comparable quarter last
year. This included a gain on the sale of other real estate owned of $94,332
in 1999 and the write off of leasehold improvements of $69,574 related to the
closing of the Mortgage Center in 2000.
Non-interest expense decreased $49,000, or 2% for the third quarter of 2000
from the comparable quarter in 1999. Total compensation and benefit costs
increased $165,000 for the quarter ended September 30, 2000 versus September
30, 1999. There were decreases in commission expenses of $36,000 due to a
lower volume of loan originations; the cost of Federal Deposit Insurance
premiums decreased by $31,000 because of a lower assessment level; data
processing expenses decreased by $22,000 as Y2K expenses were not present
during 2000; and miscellaneous expenses decreased by $92,000. Total expenses
of $40,000 related to the closing of the Mortgage Center was incurred during
the third quarter of 2000. The Company's goal is to maintain an efficiency
ratio in the 60% range.
Income tax expense increased $83,000 to $640,000 for the quarter ended
September 30, 2000, compared to $557,000 for the same period in 1999.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
----------------------------------------------------------------------------
For the first nine months of 2000, the Company earned $3,379,000 versus
$2,893,000 for the like period in 1999, an increase of 17%. This represents
$0.84 (basic) and $0.82 (diluted) earnings per share versus $0.70 (basic) and
$0.67 (diluted) earnings per share for the first nine months of 1999. Return
on average equity and average assets for the first nine months of 2000 was
9.70% and 0.80% respectively compared to 8.30% and 0.72% in 1999.
Cash earnings for the first nine months of 2000 were $3,473,000, or $0.86
(basic) and $0.85 (diluted) earnings per share, compared to $2,987,000, or
$0.73 (basic) and $0.70 (diluted) earnings per share for the same period in
1999.
The efficiency ratio was 59.89%, a 9% decrease compared to 65.80% for the
first nine months of 1999. 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.
The Company's net interest income totaled $12,864,000 for the nine months
ended September 30, 2000, compared to $12,068,000 for the first nine months
of 1999. The Company's net interest margin increased 1 basis point, to 3.19%
for the nine months ended September 30, 2000 from 3.18% for the like period
of 1999. The interest rate spread averaged 2.57% for 2000, a 14 basis point
decrease from 2.71% for the first nine months of 1999.
The volume of earning assets increased by $27.6 million between the two
periods, but this was offset by a $16.8 million increase in interest-bearing
liabilities and an increase in average cost of funds of 73 basis points.
The provision for possible loan losses was $760,000 for the first nine months
of 2000 versus $841,000 for the like period in 1999.
On a quarterly basis, management of the Bank meets to review the adequacy of
the allowance for possible 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. Although management believes
that the allowance for estimated losses on loans at September 30, 2000 was at
a level adequate to absorb losses on existing loans, there can be no
assurance that such losses will not exceed the estimated amounts.
LOAN LOSS ALLOWANCE ANALYSIS. The following table sets forth an analysis
of the Company's allowance for possible loan losses for the periods
indicated.
Nine Months Ended
Sep 30, Sep 30,
2000 1999
--------- ---------
(Dollars in Thousands)
Balance at beginning of period $4,833 $4,312
Charge-offs:
Commercial Loans -0- $ 399
Multi-Family Loans -0- -0-
Commercial Real Estate Loans -0- -0-
Construction Loans -0- -0-
Commercial/Municipal Leases -0- -0-
Mortgage Loans 26 107
Consumer 113 142
-------- --------
Total 139 648
-------- --------
Recoveries:
Commercial Loans -0- -0-
Multi-Family Loans -0- -0-
Commercial Real Estate Loans -0- -0-
Construction Loans -0- -0-
Commercial/Municipal Leases -0- -0-
Mortgage Loans -0- -0-
Consumer 20 66
-------- --------
Total 20 66
-------- --------
Net charge-offs 119 582
Additions charged to
operations 760 841
-------- -------
Balance at end of period $5,474 $4,571
======== =======
Ratio of net charge-offs during
the period to average loans
outstanding during the period 0.03% 0.14%
Ratio of allowance for possible
loan losses to non-performing loans 1.82x 8.31x
Net interest income after provision for possible loan losses increased by
$877,000, or 8% to $12,104,000 for the nine month period ended September 30,
2000, as compared to $11,227,000 for the nine month period ended September
30, 1999.
Non-interest income decreased $1,124,000, or 35%, from the comparable period
last year. Loan servicing fees were up $27,000, or 4% to $790,000 in 2000,
compared to $763,000 in 1999. Mortgage center income decreased by $907,000
or 73% to $330,000 in 2000 compared to $1,237,000 for the same period last
year. This was due to an increase in interest rates, which caused the volume
of loan refinancing and new loan generation to decline. As of August 21,
2000, the Mortgage Center operation was merged with the regular banking
operations and the McHenry Mortgage Center was closed. Realized losses of
$96,000 on sales of securities were also recorded from the sale of securities
that was scheduled to mature in the next two years. Insurance and annuity
commissions decreased $5,000 or 4% to $123,000 for the nine month period
ended September 30, 2000 versus the same period in 1999. Other income
decreased $173,000, or 51% to $164,000 in 2000, compared to $337,000 in 1999.
This included a gain on the sale of other real estate owned of $94,332 in
1999 and the write off of leasehold improvements of $69,574 related to the
closing of the Mortgage Center in 2000.
Non-interest expense decreased $1,098,000, or 11%, for 2000 from $10,049,000
in the comparable period in 1999. Compensation and benefits decreased
$211,000 or 4% to $4,588,000 for the nine months ended September 30, 2000
versus $4,799,000 for 1999. This was a direct result of the Company's 1999
plan to bring operating costs more in line with the rest of the Bank.
Commissions and employee sales incentives, mostly attributed to the Mortgage
Center, decreased $194,000 or 32% to $416,000 in 2000 versus 1999. There
were decreases in building occupancy expenses of $64,000, federal insurance
premium of $97,000 and miscellaneous expenses of $427,000. Total expenses of
$40,000 related to the closing of the Mortgage Center was incurred during the
third quarter of 2000.
Income tax expense increased $365,000 to $1,855,000 for the nine month period
ended September 30, 2000, compared to $1,490,000 for the same period in 1999.
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.
September 30, 2000
Change in Percent Change Percent Change
Interest Rates in Net Interest in MV of
(basis points) Income Portfolio Equity
-------------- --------------- ----------------
+200 -6% -10%
+100 -3 -5
0 0 0
-100 +3 +5
-200 +6 +11
September 30, 1999
Change in Percent Change Percent Change
Interest Rates in Net Interest in MV of
(basis points) Income Portfolio Equity
-------------- --------------- ----------------
+200 -18% -24%
+100 -9 -13
0 0 0
-100 +7 +8
-200 +16 +19
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on
certain types of assets and liabilities may fluctuate in advance of changes
in market interest rates, while interest rates on other types may lag behind
changes in market rates. Additionally, certain assets, such as adjustable-
rate mortgage loans, have features that restrict changes in interest rates on
a short-term basis and over the life of the loan. Further, in the event of a
change in interest rates, prepayment and early withdrawal levels could
deviate significantly from those assumed in calculating the tables. Finally,
the ability of many borrowers to service their debt may decrease in the event
of a significant interest rate increase.
In addition, the previous table does not necessarily indicate the impact of
general interest rate movements on the Company's net interest income because
the repricing of certain categories of assets and liabilities are subject to
competitive and other pressures beyond the Company's control. As a result,
certain assets and liabilities indicated as maturing or otherwise repricing
within a stated period may in fact mature or reprice at different times and
at different volumes.
RECENT REGULATORY DEVELOPMENTS
The Gramm-Leach-Bliley Act (the "Act"), which was enacted in November, 1999,
allows eligible bank holding companies to engage in a wider range of
nonbanking activities, including greater authority to engage in securities
and insurance activities. Under the Act, an eligible bank holding company
that elects to become a financial holding company may engage in any activity
that the Board of Governors of the Federal Reserve System (the "Federal
Reserve"), in consultation with the Secretary of the Treasury, determines by
regulation or order is financial in nature, incidental to any such financial
activity, or complementary to any such financial activity and does not pose a
substantial risk to the safety or soundness of depository institutions or the
financial system generally. As of the date of this filing, approximately 7
percent of all bank holding companies have elected to become financial
holding companies. National banks are also authorized by the Act to engage,
through "financial subsidiaries," in certain activity that is permissible for
financial holding companies (as described above) and certain activity that
the Secretary of the Treasury, in consultation with the Federal Reserve,
determines is financial in nature or incidental to any such financial
activity.
Various bank regulatory agencies have issued regulations as mandated by the
Act. All of the federal bank regulatory agencies jointly issued regulations
implementing the privacy provisions of the Act. In addition, the Federal
Reserve issued interim regulations establishing procedures for bank holding
companies to elect to become financial holding companies and listing the
financial activities permissible for financial holding companies, as well as
describing the extent to which financial holding companies may engage in
securities and merchant banking activities. The Office of the Comptroller of
the Currency issued a regulation regarding the parameters under which
national banks may establish and maintain financial subsidiaries.
The Act and its implementing regulations have had little impact on the daily
operations of the Company and the Bank and, at this time, it is not possible
to predict the impact the Act and its implementing regulations may have on
the Company or the Bank. As of the date of this filing, the Company has not
applied for or received approval to operate as a financial holding company.
In addition, the Bank has not applied for or received approval to establish
any financial subsidiaries.
NEW ACCOUNTING STANDARDS
Beginning January 1, 2001, Statement of Financial Accounting Standards
(Statement) No. 133 on derivatives will 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.
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
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
A report on Form 8-K was filed on July 3, 2000 to report
under Item 5 the completion of the Company's 18th stock
repurchase program and announcement of the Company's 19th
stock repurchase program.
A report on Form 8-K was filed on July 25, 2000 to report
under Item 5 the Company's earnings for the second quarter
of 2000.
A report on Form 8-K was filed on August 29, 2000 to
report under Item 5 the declaration of a regular quarterly
dividend.
A report on Form 8-K was filed on September 1, 2000 to
report under Item 5 the completion of the Company's 19th
stock repurchase program and announcement of the Company's
20th 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.
DATED: OCTOBER 24, 2000
BY: /s/ JAMES L. ROBERTS
JAMES L. ROBERTS
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
BY: /s/ PAUL A. LARSEN
PAUL A. LARSEN
EXECUTIVE VICE PRESIDENT,
TREASURER AND
CHIEF FINANCIAL OFFICER
