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, 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 May 12, 2000, the Registrant had issued and outstanding 4,403,803
shares of the Registrant's Common Stock. In addition, it had also
repurchased 328,080 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 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities 22
Item 3. Defaults upon Senior Securities 22
Item 4. Submission of Matters to a Vote
of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports of Form 8-K 22
Form 10-Q Signatures 24
PART 1. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
(unaudited)
COVEST BANCSHARES INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
MAR. 31, DEC. 31,
(Dollars in thousands) 2000 1999
--------- ---------
ASSETS
- ------
CASH ON HAND AND IN BANKS $ 7,992 $ 9,027
INTEREST BEARING DEPOSITS 9,308 1,590
--------- ---------
Cash and Cash Equivalents 17,300 10,617
INVESTMENTS:
Securities Available-for-Sale 44,441 51,702
Mortgage-Backed Securities and
Related Securities Available-
for-Sale 17,840 18,759
Federal Home Loan Bank Stock and
FRB Stock 6,529 6,529
-------- --------
TOTAL INVESTMENTS 68,810 76,990
LOANS RECEIVABLE:
Commercial Loans 22,205 17,426
Multi-Family Loans 132,120 126,109
Commercial Real Estate Loans 72,956 74,284
Construction Loans 44,051 46,177
Commercial/Municipal Leases 17,652 22,029
Mortgage Loans 129,506 130,160
Consumer Loans 51,742 51,239
Mortgage Loans held for Sale 364 106
-------- --------
TOTAL LOANS RECEIVABLE 470,596 467,530
Allowance for Possible Loan Loss ( 5,091) ( 4,833)
-------- --------
LOANS RECEIVABLE, NET 465,505 462,697
ACCRUED INTEREST RECEIVABLE 3,163 3,437
PREMISES AND EQUIPMENT 10,461 10,669
OTHER REAL ESTATE OWNED 122 0
INTANGIBLE ASSETS 1,841 1,897
OTHER ASSETS 2,174 2,189
-------- --------
TOTAL ASSETS $569,376 $568,496
======== ========
See notes to consolidated financial statements
MAR. 31, DEC. 31,
2000 1999
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
LIABILITIES:
Deposits:
Non-Interest Bearing $ 22,385 $ 19,691
Interest Bearing Checking 22,181 21,930
Savings Accounts 49,449 49,700
Money Market Accounts 91,857 88,779
Certificates of Deposit 165,519 165,578
Jumbo CDs 9,149 8,204
Purchased CDs 49,490 44,173
-------- --------
410,030 398,055
Short-Term Borrowings and Securities
Sold U/A to Repurchase 85,627 85,004
Long-Term Advances from Federal
Home Loan Bank 19,000 29,000
Advances from Borrowers for
Taxes and Insurance 3,302 4,640
Accrued Expenses and Other Liabilities 5,109 5,523
--------- ---------
TOTAL LIABILITIES 523,068 522,222
STOCKHOLDERS' EQUITY:
Common Stock, par value $.01 per share;
7,500,000 authorized shares; 4,403,803
shares issued at 3/31/00 and 12/31/99
respectively 44 44
Additional Paid-in Capital 17,824 17,919
Retained Earnings 34,285 33,514
Treasury Stock, 328,080 shares and
299,796 shares, held at cost 3/31/00
and 12/31/99 respectively (4,563) (4,312)
Unearned Stock Award 0 (14)
Accumulated Other Comprehensive
(Loss) (1,282) (877)
--------- --------
TOTAL STOCKHOLDERS' EQUITY 46,308 46,274
--------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $569,376 $568,496
======== ========
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF INCOME THREE MONTHS ENDED
(Unaudited) MAR. 31, MAR. 31,
(Dollars in thousands, except per share 2000 1999
amounts)
--------- ---------
INTEREST INCOME
Loans and Leases Receivable $ 9,247 $ 7,593
Interest Bearing Deposits at Banks 117 387
Mortgage-Backed and Related Securities 318 508
Taxable Securities 538 477
Tax Exempt Securities 101 156
Other Interest and Dividend Income 117 129
-------- --------
Total Interest Income 10,438 9,250
INTEREST EXPENSE
Deposits 4,826 3,676
Advances from Federal Home Loan Bank 1,341 1,603
Other Borrowed Money 119 55
-------- --------
Total Interest Expense 6,286 5,334
-------- --------
NET INTEREST INCOME 4,152 3,916
Provision for Possible Loan Losses 260 99
NET INTEREST INCOME AFTER PROVISION -------- --------
FOR POSSIBLE LOAN LOSSES 3,892 3,817
NON-INTEREST INCOME
Loan Servicing Fees 324 202
Mortgage Center Income 86 536
Deposit Related Charges and Fees 225 237
Gain/(Loss) on Sale of Securities (88) 2
Insurance and Annuity Commissions 60 39
Other 66 30
-------- --------
Total Non-Interest Income 673 1,046
NON-INTEREST EXPENSE
Compensation and Benefits 1,492 1,858
Commissions and Incentives 99 185
Occupancy and Equipment 494 527
Federal Insurance Premium 19 53
Data Processing 218 244
Advertising 91 92
Other Real estate Owned 0 2
Amortization of Goodwill 51 51
Amortization of Mortgage Servicing Rights 5 21
Other 399 640
-------- --------
TOTAL NON-INTEREST EXPENSE 2,868 3,673
-------- --------
INCOME BEFORE TAXES 1,697 1,190
Income Tax Provision (600) (404)
-------- --------
NET INCOME $ 1,097 $ 786
======== ========
Basic Earnings per Share $0.27 $0.19
Diluted Earnings per Share $0.26 $0.18
See notes to consolidated financial statements
COVEST BANCSHARES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED
(Unaudited) MAR. 31, MAR. 31,
(Dollars in thousands) 2000 1999
--------- ---------
OPERATING ACTIVITIES
Net Income $ 1,097 $ 786
Adjustments to Reconcile Net Income to
Net Cash from Operating Activities
Depreciation and Amortization of
Premises and Equipment 244 264
Provision for Possible Loan Losses 260 99
Net (Gain)/loss on Sale of Securities 88 (2)
Stock Award Earned 14 -0-
Change In:
Prepaid Expenses and Other Assets 92 272
Accrued Interest Receivable 274 295
Accrued Expenses and Other Liabilities (105) 755
--------- ---------
NET CASH FROM OPERATING ACTIVITIES 1,964 2,469
CASH FLOWS FROM INVESTING ACTIVITIES
Loan Originations, Net of Principal
Payments (3,211) 14,052
Principal Payments on Mortgage-Backed
and Related Securities 744 4,602
Purchases of Securities -0- (14,320)
Proceeds from Sales and Maturities
of Securities 6,672 6,461
Purchase of Office Properties and
Equipment (36) (36)
--------- ---------
NET CASH FROM INVESTING ACTIVITIES 4,169 10,759
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase/(Decrease) in Deposits 11,975 (8,543)
Net Borrowings of Federal
Home Loan Bank Advances (15,000) -0-
Repayments of Other Borrowings 5,623 (740)
Net (Decrease) in Mortgage Escrow Funds (1,338) (979)
Purchase of Common Stock Net of
Proceeds from Exercise of Stock Options (384) (1,224)
Payment Received on Loan to ESOP -0- 31
Dividend Paid (326) (337)
--------- ---------
NET CASH FROM FINANCING ACTIVITIES 550 (11,792)
--------- ---------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 6,683 1,436
CASH AND CASH EQUIVALENTS, BEGINNING 10,617 39,677
--------- ---------
CASH AND CASH EQUIVALENTS, ENDING $17,300 $41,113
========= =========
See notes to consolidated financial statements
<TABLE>
<CAPTION>
COVEST BANCSHARES INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
(Dollars in thousands)
Three months ended March 31, 1999 and 2000
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> <C>
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
================================================================================
========================================
Balance at December 31, 1999 $44 $17,919 $33,514 ($4,312)
-0- ($14) ($877) $46,274
Net Income 1,097
1,097
Change in Unrealized Gain on Securities
Available-for-Sale, Net of Taxes
(405) (405)
------
Comprehensive Income
692
Cash Dividends ($.08 per share) (326)
(326)
Purchase of Treasury Stock (451)
(451)
Stock Award Earned
14 14
Treasury Stock Reissued in Conjunction
with Stock Option Exercises (133) 200
67
Tax Benefits related to
Employee Stock Option Plans 38
38
- --------------------------------------------------------------------------------
- ----------------------------------------
Balance at March 31, 2000 $44 $17,824 $34,285 ($4,563) -
0- -0- ($1,282) $46,308
================================================================================
========================================
</TABLE>
See notes to consolidated financial statements
<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
orexpense by the average daily balance of assets or liabilities, respectively,
for the periods indicated.
THREE MONTHS
ENDED
------------------------------------------------
- -----------------------------------
MARCH 31, 2000
MARCH 31, 1999
----------------------------------------- --
- -------------------------------
AVERAGE AVERAGE
AVERAGE AVERAGE
BALANCE INTEREST YIELD/COST
BALANCE INTEREST YIELD/COST
INTEREST-EARNING ASSETS: ----------------------------------------- --
- -------------------------------
<S>
<C> <C> <C> <C>
<C> <C> <C>
Commercial Loans (A)(B) $18,205 $ 334 7.34%
$ 9,334 $ 136 5.83%
Multi-Family Loans (B) 123,956 2,446 7.89
65,167 1,274 7.82
Commercial Real Estate (B) 74,252 1,487 8.01
61,918 1,324 8.55
Construction Loans (B) 45,201 1,166 10.32
35,792 796 8.89
Commercial/Muni Leases 19,747 308 6.24
32,897 518 6.30
Mortgage Loans (A)(B) 130,011 2,393 7.36
144,385 2,609 7.23
Consumer Loans 51,263 1,113 8.68
44,953 936 8.32
Securities 53,785 808 6.01
57,213 845 5.91
Mortgage-Backed and
Related Securities 18,317 318 6.94
30,485 508 6.67
Other Investments 8,466 117 5.53
33,554 387 4.61
----------------------------------------- ----
- ------------------------------
Total Interest-Earning Assets $543,203 $10,490 7.72%
$515,698 $ 9,333 7.24%
Non-Interest Earning Assets 17,621
21,576
----------------------------------------- ----
- ------------------------------
TOTAL ASSETS $560,824
$537,274
=========================================
=======================================
INTEREST-BEARING LIABILITIES:
Interest-Bearing Checking $ 22,417 $ 61 1.09%
$ 22,607 59 1.04%
Savings 49,529 308 2.49
52,444 323 2.46
Money Market 89,484 1,206 5.39
80,778 865 4.28
Certificates of Deposits 165,872 2,321 5.60
174,454 2,291 5.25
Jumbo CDs 8,390 118 5.63
10,670 138 5.17
Purchased CDs 50,311 812 6.46
0 0 0.00
FHLB Advances 89,824 1,341 5.97
120,000 1,603 5.34
Other Borrowed Funds 8,759 119 5.43
4,997 55 4.40
----------------------------------------- -----
- -------------------------------
Total Interest-Bearing
Liabilities $484,586 $ 6,286 5.19%
$465,950 $5,334 4.58%
Non-Interest Bearing Deposits 19,798
14,127
Other Liabilities 10,272
10,158
----------------------------------------- ----
- ------------------------------
TOTAL LIABILITIES $514,656
$490,235
----------------------------------------- ----
- ------------------------------
Stockholders' Equity 46,168
47,039
----------------------------------------- ----
- ------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $560,824
$537,274
=========================================
==================================
NET INTEREST INCOME $ 4,204
$3,999
----------------------------------------- ----
- ------------------------------
NET INTEREST RATE SPREAD (C) 2.53%
2.66%
----------------------------------------- ----
- ------------------------------
NET INTEREST MARGIN (D) 3.10%
3.10%
----------------------------------------- ----
- ------------------------------
(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>
COVEST BANCSHARES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(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 quarter ended March 31, 2000
are not necessarily indicative of results that may be expected for the entire
year ended 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 with the March, 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.
The banking operations and mortgage center operations are considered to be
reportable segments during 2000 and 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, 2000 and 1999 are as follows.
March 31, 2000
Mortgage Consolidated
Banking Banking Total
--------- ---------- -------------
Net Interest Income $4,146 $ 6 $4,152
Other Revenue 587 86 673
Other Expense 2,480 144 2,624
Noncash Items:
Depreciation 234 10 244
Provision for Possible Loan Loss 260 -0- 260
Segment Profit, Before Income Taxes 1,759 (62) 1,697
Segment Assets 569,012 364 569,376
March 31, 1999
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 Possible 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 three month periods ended March 31, 2000
and 1999 are presented below: (dollars and shares in thousands)
Period Ended March 31
---------------------
2000 1999
----- -----
Earnings per share:
Net Income $1,097 786
Weighted average common
shares outstanding 4,092 4,159
----- -----
Earnings per share $.27 $.19
===== =====
Earnings per share assuming dilution:
Net Income $1,097 $ 786
====== ======
Weighted average common
shares outstanding 4,092 4,159
Add: dilutive effect of assumed
exercises, incentive stock
options and management
retention plan 57 176
----- -----
Weighted average common and
dilutive potential common
shares outstanding 4,149 4,335
===== =====
Diluted earnings per share $.26 $.18
===== =====
At March 31, 2000 options to purchase 667,250 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 announced its 18th stock repurchase program on February 3,
2000, enabling the Company to repurchase 100,000 shares of its outstanding
stock. As of May 12, 2000, 39,822 shares have been repurchased at an average
price of $10.38.
(4) Stock Dividend and Cash Dividend
The regular quarterly dividend for the first quarter of 2000 was paid at $.08
per share. The same quarterly dividend was paid for the first 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
March 31, 2000, the Bank's capital requirements under FIRREA and its actual
capital ratios. As of March 31, 2000, the Bank exceeded all current minimum
regulatory capital requirements.
March 31, 2000
BANK ONLY
----------------------------------------------------
Actual Regulatory Excess Above
Capital Capital Req. Capital Req.
Amount % Amount % Amount %
------- ------ ------- ----- ------- -----
(Dollars in Thousands)
Total Capital to
Risk Weighted
Assets $51,889 13.30% $31,220 8.00% $20,669 5.30%
Tier I Capital to
Risk Weighted
Assets 47,011 12.05 15,610 4.00 31,401 8.05
Tier I Capital to
Average Assets 47,011 8.38 22,433 4.00 24,578 4.38
March 31, 1999
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 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 mortgage
centers concentrate on mortgage loan origination and sales. The Bank's deposit
accounts are insured to the maximum allowable by the Federal Deposit Insurance
Corporation (the "FDIC").
The Bank's results of operations are dependent primarily on net interest
income, which is the difference between the interest earned on its loans and
securities portfolios, and the interest paid on deposits and borrowed funds.
The Bank's operating results are also affected by loan commitment and
servicing fees, loan service release fees from its mortgage center 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
- -------------------
The Company's assets remained stable at $569 million as of March 31, 2000, as
compared to $568 million at December 31, 1999. Loans receivable increased $3
million to $466 million as of March 31, 2000 versus $463 million outstanding
as of December 31, 1999. Multi-family loans increased by $6 million and
commercial loans increased by $5 million. This increase was offset by a
decrease in commercial leases and construction loans of approximately $4
million and $2 million, respectively. Limited growth in the loan portfolio is
expected during the remainder of 2000. Total investments have decreased by
$8.2 million as a result of the sale of $6.8 million of municipal securities
and mortgage-backed security paydowns. These funds increased our liquidity as
interest bearing deposits at quarter-end were up by $7.7 million. Deposits
increased 3% to $410 million as of March 31, 2000 compared to $398 million as
of December 31, 1999. The growth has been centered in non-interest bearing
deposits that grew by approximately 14% and purchased certificates of deposit,
which increased by approximately 12% or $5.3 million. 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. These funds will be used to pay down purchased CD's and
FHLB borrowings.
At March 31, 2000, the Allowance for Possible Loan Losses was $5.1 million, or
878% of non-performing loans, as compared to $4.8 million, a 631% coverage at
December 31, 1999. In addition, at March 31, 2000 the Company had $143,000 of
other real estate owned, which consisted of one parcel of residential real
estate.
Stockholders' equity totaled $46 million at March 31, 2000. The number of
common shares outstanding was 4,075,723 and the book value per common share
outstanding was $11.36. 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 announced its 18th stock repurchase
program on February 3, 2000, enabling the Company to repurchase 100,000 shares
of its outstanding stock. As of May 12, 2000, 39,822 shares have been
repurchased at an average price of $10.38.
At March 31, 2000, total non-performing assets amounted to $723,000, or 0.13%
of total assets compared to $766,000, or 0.13% of total assets at December 31,
1999. These are first mortgage loans in various stages of foreclosure and one
parcel of residential Other Real Estate Owned.
The following table sets forth the amounts and categories of non-performing
loans and assets.
March 31, 2000 Dec. 31, 1999
------------- -------------
(Dollars in Thousands)
Non-performing loans:
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 $580 $766
Consumer -0- -0-
------------- -------------
Total non-performing loans 580 766
Other real estate owned 122 -0-
Other repossessed assets 21 -0-
------------- -------------
Total non-performing assets $723 $766
==== ====
Total non-performing loans as
a percentage of net loans .12% .17%
Total non-performing assets as
a percentage of total assets .13 .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 $2.0 million for the three months ended March 31,
2000. Net cash provided by investing activities was $4.2 million for the
quarter ended March 31, 2000. Net cash provided by financing activities
amounted to $0.6 million for the three months ended March 31, 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
March 31, 2000, 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 $33 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,
2000 1999
--------- ---------
Annualized Return on Avg. Equity 9.51% 6.68%
Annualized Return on Avg. Assets 0.78 0.59
Book Value per Share $11.36 $11.08
Closing Market Price per Share 9.25 14.88
Earning per Primary Share:
Basic $.27 $.19
Diluted .26 .18
Net Interest Margin 3.10% 3.10%
Ratio of Operating Expense to
Average Total Assets,
Annualized 2.05 2.73
Ratio of Net Interest Income to
Non-Interest Expense,
Annualized 1.45X 1.07X
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
- -----------------------------------------------------------------------------
Net income was $1,097,000 for the first quarter of 2000, up 40% over $786,000
for the same period last year. Basic earnings per share were $0.27 compared
to $0.19 per share for the first quarter of 1999. Diluted earnings per share
were $0.26, a 44% increase compared to $0.18 per share for first quarter 1999.
Return on average assets was 0.78% compared to 0.59% in the first quarter of
last year. Return on average equity was 9.51%, a 42% increase from 6.68% for
the same period in 1999. The Company's efficiency ratio was 59.43% compared
to 74.02% in the first quarter of 1999.
Cash earnings (net earnings adjusted for the after tax impact of amortization
of goodwill) for the first quarter of 2000 were $1,123,000, or $0.27 (basic)
and $0.26 (diluted) earnings per share, compared to $812,000 or $0.20 (basic)
and $0.19 (diluted) earnings per share for the same period in 1999.
Net interest income increased by $236,000, or 6%, for the first quarter of
2000 compared to the first quarter of 1999. A $28 million increase in average
earning assets for the first quarter of 2000 versus the first quarter of 1999
accounted for part of this income increase, as did an increase in the total
average loans outstanding to total assets of 82% for the first quarter of
2000, up from 73% during the like quarter of 1999. The Company's net interest
margin averaged 3.10% for the first quarters of 2000 and 1999. The net spread
averaged 2.53% for the first quarter of 2000, a 13 basis point decrease from
2.66% during the first quarter of 1999. An increase in average non-interest
bearing liabilities offset the interest spread compression. The yield on
average earning assets increased by 48 basis points while the cost of
interest-bearing liabilities increased by 61 basis points. The Company
expects the net interest margin to remain relatively constant during the next
several quarters.
The provision for possible loan losses increased by $161,000 from $99,000 to
$260,000 in the first quarter of 2000. This was a reflection of the change in
loan mix which resulted in increases in commercial, commercial real estate,
multi-family and construction loans since March 31, 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. Management believes the
allowance for possible loan losses as of March 31, 2000 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,
2000 1999
--------- ---------
(Dollars in Thousands)
Balance at beginning of period $4,833 $4,312
Charge-offs:
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 10 22
-------- --------
Total 10 22
-------- --------
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 8 20
-------- --------
Total 2 20
-------- --------
Net charge-offs 2 2
Additions charged to
operations 260 99
======= =======
Balance at end of period $5,091 $4,409
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 8.78x 2.18x
Non interest income decreased $373,000, or 36%, to $673,000 from the
comparable quarter last year. Loan charges and servicing fees increased by
$122,000 as the volume of loans increased. Mortgage Center income was down
84%, to $86,000 in the first quarter of 2000 compared to $536,000 in the
similar quarter in 1999. The volume of new loans generated dropped to $7
million from $28 million during the first quarter of 1999. The higher level of
interest rates had a major impact on mortgage loan refinancings and new loan
generation. Of the $7 million generated in the first quarter of 2000, 51%
were retained in the Bank's portfolio. During the first quarter of 1999, only
3% were retained in the Bank's portfolio. Based on current pending loans in
process, management expects the second quarter to return to roughly the same
dollar levels experienced in 1999. About 30% of the new production is
expected to be retained in the Bank's portfolio. Deposit related charges and
fees decreased by $12,000 during the first quarter of 2000 as compared to the
first quarter of 1999. During the first quarter of 2000, the Company
recognized a loss of $88,000 from the sale of $6.8 million of municipal
securities versus gains of $2,000 during the first quarter of 1999. The
municipal securities sold were scheduled to mature within the next two years.
Non-interest expense decreased $805,000, or 22% for the first quarter of 2000
from the comparable quarter in 1999. Total compensation and benefit costs
decreased $366,000 for the quarter ended March 31, 2000 versus March 31, 1999.
During the first quarter of 1999, the Company recognized $182,000 in non-
recurring employee termination expenses, as certain positions were eliminated
to bring operating costs more in line with the revenue of the Bank. Mortgage
center commissions and employee sales incentives decreased to $99,000 from
$185,000 for the same period in 1999. There were decreases in occupancy and
equipment expenses of $33,000; the cost of Federal Deposit Insurance premiums
decreased by $34,000 because of a lower assessment level; data processing
expenses decreased by $26,000 as Y2K expenses were not present during 2000;
and miscellaneous expenses decreased by $266,000. The Company's goal is to
maintain an efficiency ratio in the 60% range.
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, 2000
Change in Percent Change Percent Change
Interest Rates in Net Interest in MV of
(basis points) Income Portfolio Equity
-------------- --------------- ----------------
+200 -6% -12%
+100 -3 -6
0 0 0
-100 +3 +6
-200 +5 +10
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
On November 12, 1999, President Clinton signed legislation that will allow
bank holding companies to engage in a wider range of nonbanking activities,
including greater authority to engage in securities and insurance activities.
Under the Gramm-Leach-Bliley Act (the "Act"), a 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. The Act specifies certain activities that are deemed to be
financial in nature, including lending, exchanging, transferring, investing
for others, or safeguarding money or securities; underwriting and selling
insurance; providing financial, investment, or economic advisory services;
underwriting, dealing in or making a market in, securities; and any activity
currently permitted for bank holding companies by the Federal Reserve under
section 4(c)(8) of the Bank Holding Company Act. A bank holding company may
elect to be treated as a financial holding company only if all depository
institution subsidiaries of the holding company are well-capitalized, well-
managed and have at least a satisfactory rating under the Community
Reinvestment Act.
National banks are also authorized by the Act to engage, through "financial
subsidiaries," in any activity that is permissible for financial holding
companies (as described above) and any 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, except (i) insurance
underwriting, (ii) real estate development or real estate investment
activities (unless otherwise expressly permitted by law), (iii) insurance
company portfolio investments and (iv) merchant banking. The authority of a
national bank to invest in a financial subsidiary is subject to a number of
conditions, including, among other things, requirements that the bank must be
well-managed and well-capitalized (after deducting from capital the bank's
outstanding investments in financial subsidiaries). The Act provides that
state banks may invest in financial subsidiaries (assuming they have the
requisite investment authority under applicable state law) subject to the same
conditions that apply to national banks.
Various bank regulatory agencies have begun issuing regulations as mandated
by the Act. The Federal Reserve has issued an interim regulation
establishing procedures for bank holding companies to elect to become
financial holding companies. In addition, the Federal Reserve has issued
interim regulations listing the financial activities permissible for
financial holding companies and describing the parameters under which
financial holding companies may engage in securities and merchant banking
activities. The Office of the Comptroller of the Currency has issued a
regulation regarding the parameters under which national banks may establish
and maintain financial subsidiaries. In addition, all federal bank regulatory
agencies have jointly issued a proposed regulation that would implement the
privacy provisions of the Act. At this time, it is not possible to predict
the impact the Act and its implementing regulations may have on the Company.
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 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 ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
A report on Form 8-K was filed on January 20, 2000 to
report under Item 5 the Company's earnings for the
fourth quarter of 1999 and calendar year 1999.
A report on Form 8-K was filed on February 3, 2000 to
report under Item 5 completion of the Company's 17th stock
repurchase program and announcement of the Company's 18th
stock repurchase program.
A report on Form 8-K was filed on March 1, 2000 to report
under Item 5 declaration of a regular quarterly dividend.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
COVEST BANCSHARES, INC.
Date: By: /s/ James L. Roberts
----------------- ---------------------------
James L. Roberts
President and
Chief Executive Officer
Date: By: /s/ Paul A. Larsen
----------------- ---------------------------
Paul A. Larsen
Executive Vice President,
Treasurer and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Financial Statements at March 31, 2000.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 7,992
<INT-BEARING-DEPOSITS> 9,308
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 68,810
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 68,810
<LOANS> 470,596
<ALLOWANCE> 5,091
<TOTAL-ASSETS> 569,376
<DEPOSITS> 410,030
<SHORT-TERM> 85,627
<LIABILITIES-OTHER> 8,411
<LONG-TERM> 19,000
0
0
<COMMON> 44
<OTHER-SE> 46,264
<TOTAL-LIABILITIES-AND-EQUITY> 569,376
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<INTEREST-TOTAL> 10,438
<INTEREST-DEPOSIT> 4,826
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<INCOME-PRETAX> 1,697
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<NET-INCOME> 1,097
<EPS-BASIC> .27
<EPS-DILUTED> .26
<YIELD-ACTUAL> 7.72
<LOANS-NON> 580
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