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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended Commission File Number
June 30, 2002 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 July 23, 2002, the Registrant had issued and outstanding 4,403,803
shares of the Registrant's Common Stock. In addition, it had also
repurchased 906,928 shares which were being held as treasury stock and 81,477
shares which were being held as unallocated ESOP shares.
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 30
Item 2. Changes in Securities 30
Item 3. Defaults upon Senior Securities 30
Item 4. Submission of Matters to a Vote of
Security Holders 30
Item 5. Other Information 30
Item 6. Exhibits and Reports 31
Form 10-Q Signatures 32
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)
JUNE 30, 2002 DEC 31, 2001
ASSETS ------------- ------------
- ------------
CASH ON HAND AND IN BANKS $ 13,376 $ 6,552
INTEREST BEARING DEPOSITS 16,480 21
-------- --------
Cash and Cash Equivalents 29,856 6,573
SECURITIES:
Securities Available-for-Sale 55,354 40,897
Mortgage-Backed and Related
Securities Available-for-Sale 3,012 3,948
Federal Home Loan Bank and
Federal Reserve Bank Stock 7,504 7,319
-------- --------
TOTAL SECURITIES 65,870 52,164
LOANS RECEIVABLE:
Commercial Loans 51,786 47,024
Multi-Family Loans 225,955 223,613
Commercial Real Estate Loans 72,300 79,443
Construction Loans 47,379 58,796
Commercial/Municipal Leases 1,121 1,778
Mortgage Loans 55,598 58,175
Consumer Loans 42,382 46,273
Mortgage Loans Held for Sale 869 1,065
-------- --------
TOTAL LOANS RECEIVABLE 497,390 516,167
Allowance for Loan Losses ( 6,650) ( 6,547)
-------- --------
LOANS RECEIVABLE, NET 490,740 509,620
ACCRUED INTEREST RECEIVABLE 2,923 3,281
PREMISES AND EQUIPMENT 9,241 9,466
OTHER REAL ESTATE OWNED 746 661
GOODWILL 1,235 1,338
MORTGAGE SERVICING RIGHTS 177 222
OTHER ASSETS 3,459 2,404
-------- --------
TOTAL ASSETS $604,247 $585,729
======== ========
See accompanying notes to unaudited consolidated financial statements
COVEST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Continued)
(Unaudited)
(Dollars in thousands, except per share data)
JUNE 30, 2002 DEC 31, 2001
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
LIABILITIES:
Deposits:
Non-Interest Bearing $ 34,376 $ 30,993
Interest Bearing Checking 30,588 29,339
Savings Accounts 74,210 52,141
Money Market Accounts 98,339 113,864
Certificates of Deposit 172,898 172,055
Jumbo CDs 2,831 11,834
Purchased CDs 55,963 45,776
------- -------
469,205 456,002
Short-Term Borrowings and Securities
Sold U/A to Repurchase 27,217 29,425
Long-Term Advances from Federal
Home Loan Bank 49,000 44,000
Advances from Borrowers for Taxes and
Insurance 5,599 4,865
Accrued Expenses and Other Liabilities 6,701 6,286
------- -------
TOTAL LIABILITIES 557,722 540,578
STOCKHOLDERS' EQUITY:
Common Stock, par value $.01 per share;
7,500,000 authorized shares; 4,403,803
shares issued at 6/30/02 and 12/31/01
respectively 44 44
Additional Paid-in Capital 18,325 17,268
Retained Earnings 44,090 41,360
Treasury Stock, 906,928 shares and
965,580 shares, held at cost 6/30/02
and 12/31/01, respectively (15,407) (14,290)
Unearned ESOP shares (1,450) -
Accumulated Other Comprehensive Income 923 769
-------- --------
TOTAL STOCKHOLDERS' EQUITY 46,525 45,151
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $604,247 $585,729
======== ========
See accompanying notes to unaudited consolidated financial statements
COVEST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands, except per THREE MONTHS ENDED SIX MONTHS ENDED
share data) JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2002 2001 2002 2001
INTEREST INCOME ------- ------- ------- -------
Loans and Leases Receivable $ 8,301 $ 9,685 $17,282 $20,181
Mortgage-Backed and Related Securities 52 95 114 225
Taxable Securities 493 478 907 890
Tax Exempt Securities 63 92 126 184
Other Interest and Dividend Income 192 403 312 591
------- ------- ------- -------
Total Interest Income 9,101 10,753 18,741 22,071
INTEREST EXPENSE
Deposits 3,191 5,113 6,433 10,697
Advances from Federal Home Loan Bank 711 703 1,415 1,574
Other Borrowed Funds 59 124 150 305
------- ------- ------- -------
Total Interest Expense 3,961 5,940 7,998 12,576
------- ------- ------- -------
NET INTEREST INCOME 5,140 4,813 10,743 9,495
Provision for Loan Losses 164 250 636 500
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 4,976 4,563 10,107 8,995
NON-INTEREST INCOME
Loan Charges and Servicing Fees 218 270 441 473
Loan Prepayment Fees 494 292 956 338
Mortgage Banking Fees 137 203 268 360
Deposit Related Charges and Fees 308 294 606 552
Gain/(Loss) on Sale of Securities/Loans - (1) 74 375
Insurance and Annuity Commissions 7 31 23 46
Other 89 58 121 121
------- ------- ------- -------
Total Non-Interest Income 1,253 1,147 2,489 2,265
NON-INTEREST EXPENSE
Compensation and Benefits 1,849 1,650 3,737 3,205
Commissions and Incentives 145 285 338 622
Occupancy and Equipment 472 470 957 959
Federal Deposit Insurance Premium 20 21 40 44
Data Processing 266 280 526 498
Advertising 204 255 410 401
Other Real Estate Owned 73 83 273 80
Amortization of Goodwill 51 51 103 102
Amortization of Mortgage Servicing Rights 18 28 44 35
Other 475 536 964 1,005
------- ------- ------- -------
Total Non-Interest Expense 3,573 3,659 7,392 6,951
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 2,656 2,051 5,204 4,309
Income Tax Provision (976) (739) (1,911) (1,562)
------- ------- ------- -------
NET INCOME $ 1,680 $ 1,312 $ 3,293 $ 2,747
======= ======= ======= =======
Basic Earnings per Share $0.49 $0.34 $0.96 $0.71
Diluted Earnings per Share $0.47 $0.33 $0.91 $0.70
Comprehensive Income $ 1,976 $ 1,397 $ 3,447 $ 3,317
See accompanying notes to unaudited consolidated financial statements
COVEST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands) SIX MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001
OPERATING ACTVITIES -------- ---------
Net Income $ 3,293 $ 2,747
Adjustments to Reconcile Net Income to
Net Cash from Operating Activities
Depreciation and Amortization of
Premises and Equipment 450 421
ESOP Compensation Expense 50 -
Provision for Loan Losses 636 500
Net Gain on Sales of
Securities/Loans (74) (375)
Federal Home Loan Bank Stock Dividend (185) (241)
Change In:
Prepaid Expenses and Other Assets (907) (249)
Accrued Interest Receivable 358 710
Accrued Expenses and Other Liabilities 1,071 1,360
--------- ---------
NET CASH FROM OPERATING ACTIVITIES 4,692 4,693
CASH FLOWS FROM INVESTING ACTIVITIES
Loan Originations, Net of Principal
Payments (1,924) (33,203)
Proceeds from Sale of Loans 20,083 54,547
Principal Payments on Mortgage-Backed
and Related Securities 968 1,174
Purchases of Securities (32,146) (40,444)
Proceeds from Sales and Maturities
of Securities 17,930 31,223
Purchase of Office Properties and
Equipment (225) (161)
--------- ---------
NET CASH FROM INVESTING ACTIVITIES 4,686 13,136
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase in Deposits 13,203 4,240
Borrowings 5,000 1,470
Repayment of Borrowings (2,208) (18,520)
Net Increase in Mortgage
Escrow Funds 734 40
Purchase of Common Stock Net of Proceeds
from Exercise of Stock Options (2,261) (1,377)
Dividend Paid (563) (614)
--------- ---------
NET CASH FROM FINANCING ACTIVITIES 13,905 (14,761)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 23,283 3,068
CASH AND CASH EQUIVALENTS, BEGINNING 6,573 10,522
--------- ---------
CASH AND CASH EQUIVALENTS, ENDING $29,856 $13,590
========= =========
See accompanying notes to unaudited consolidated financial statements
COVEST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
(Dollars in thousands)
Three months ended JUNE 30, 2002 and 2001
COMMON
STOCK AND ACCUMULATED
ADDITIONAL UNEARNED OTHER
PAID-IN RETAINED TREASURY ESOP COMPREHENSIVE
CAPITAL EARNINGS STOCK SHARES INCOME/(LOSS) TOTAL
- ----------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 $17,545 $36,783 ($6,244) - ($50) $48,034
Net Income 2,747 2,747
Change in Unrealized Gain on
Securities Available-for-Sale,
Net of Taxes 570 570
-------
Comprehensive Income 3,317
Cash Dividends ($.16 per share) (614) (614)
Purchase of Treasury Stock (1,205) (1,205)
Treasury Stock Reissued in
Conjunction with Stock Option
Exercises (443) 112 (331)
Tax Benefits Related to Employee
Stock Option Plans 159 159
- -----------------------------------------------------------------------------------------------------------
Balance at June 30, 2001 $17,261 $38,916 ($7,337) - $520 $49,360
===========================================================================================================
Balance at December 31, 2001 $17,312 $41,360 ($14,290) - $769 $45,151
Net Income 3,293 3,293
Change in Unrealized Gain on
Securities Available-for-Sale,
Net of Taxes 154 154
-----
Comprehensive Income 3,447
Cash Dividends ($.16 per share) (563) (563)
Purchase of Treasury Stock (5,053) (5,053)
Treasury Stock Reissued in
Conjunction with Stock Option
Exercises and ESOP Plan 356 3,936 (1,500) 2,792
Release of ESOP Shares 50 50
Tax Benefits related to Employee
Stock Option Plans 701 701
- ----------------------------------------------------------------------------------------------------------
Balance at June 30, 2002 $18,369 $44,090 ($15,407) ($1,450) $923 $46,525
==========================================================================================================
See accompanying notes to unaudited consolidated financial statements
COVEST BANCSHARES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
AVERAGE BALANCE SHEET
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, on a
fully tax equivalent basis, as derived by dividing income or expense by the average daily balance of
assets or liabilities, respectively, for the periods indicated. (Dollars in Thousands)
THREE MONTHS ENDED
-------------------------------------------------------------------
JUNE 30, 2002 JUNE 30, 2001
--------------------------------- ---------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST
-------- -------- ---------- ------- -------- ----------
INTEREST EARNING ASSETS:
Commercial Loans(A)(B) $ 53,045 $ 784 5.91% $ 37,564 $ 707 7.53%
Multi-Family Loans(A)(B) 226,610 3,465 6.12 185,345 3,614 7.80
Commercial Real Estate Loans(A)(B) 78,944 1,407 7.13 84,036 1,729 8.23
Construction Loans(A)(B) 48,437 865 7.14 51,603 1,285 9.96
Commercial/Muni Leases(B) 1,288 20 6.21 3,594 55 6.12
Mortgage Loans(A)(B) 55,439 1,036 7.47 63,677 1,248 7.84
Consumer Loans (A) 43,273 725 6.70 49,276 1,047 8.50
Securities 47,177 588 4.99 42,735 618 5.78
Mortgage-Backed and Related
Securities 2,906 52 7.16 5,366 95 7.08
Equity Investments 9,405 121 5.15 8,268 121 5.85
Other Investments 17,686 71 1.61 26,814 282 4.21
-------- ------- ---- -------- ------- ----
Total Interest-Earning Assets $584,210 $ 9,134 6.25% $558,278 $10,801 7.74%
Non-Interest Earning Assets 19,613 18,736
-------- --------
TOTAL ASSETS $603,823 $577,014
======== ========
INTEREST-BEARING LIABILITIES:
Interest-Bearing Checking $ 30,349 $ 101 1.33% $ 23,952 $ 81 1.35%
Savings 69,520 434 2.50 43,137 269 2.49
Money Market 101,601 440 1.73 119,506 1,091 3.65
Certificates of Deposits 170,067 1,642 3.86 171,830 2,573 5.99
Jumbo CDs 3,673 22 2.40 9,619 141 5.86
Purchased CDs 62,327 552 3.54 60,746 958 6.31
FHLB Advances 67,000 711 4.25 45,000 703 6.25
Other Borrowed Funds 10,260 59 2.30 12,095 124 4.10
--------- ------- ---- -------- ------- ----
Total Interest-Bearing Liabilities $514,797 $ 3,961 3.08% $485,885 $ 5,940 4.89%
Non-Interest Bearing Deposits 32,014 27,350
Other Liabilities 11,002 14,869
--------- --------
TOTAL LIABILITIES $557,813 $528,104
Stockholders' Equity 46,010 48,910
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $603,823 $577,014
======== ========
NET INTEREST INCOME $ 5,173 $ 4,861
======= =======
NET INTEREST RATE SPREAD (C) 3.17% 2.85%
==== ====
NET INTEREST MARGIN (D) 3.54% 3.48%
==== ====
(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.
AVERAGE BALANCE SHEET
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, on a
fully tax equivalent basis, as derived by dividing income or expense by the average daily balance of
assets or liabilities, respectively, for the periods indicated. (Dollars in thousands)
SIX MONTHS ENDED
-------------------------------------------------------------------
JUNE 30, 2002 JUNE 30, 2001
--------------------------------- ---------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST
-------- -------- ---------- ------- -------- ----------
INTEREST EARNING ASSETS:
Commercial Loans(A)(B) $ 51,869 $ 1,537 5.93% $ 37,652 $ 1,475 7.83%
Multi-Family Loans(A)(B) 228,432 7,284 6.38 179,832 7,067 7.86
Commercial Real Estate Loans(A)(B) 80,067 2,907 7.26 81,515 3,350 8.22
Construction Loans(A)(B) 51,578 1,894 7.34 50,148 2,518 10.04
Commercial/Muni Leases(B) 1,449 44 6.07 4,198 126 6.00
Mortgage Loans(A)(B) 56,491 2,130 7.54 88,710 3,436 7.75
Consumer Loans (A) 44,121 1,485 6.73 50,383 2,209 8.77
Securities 43,354 1,099 5.07 39,620 1,169 5.90
Mortgage-Backed and Related
Securities 3,112 114 7.33 6,481 225 6.94
Equity Investments 9,267 237 5.11 8,235 246 5.97
Other Investments 9,393 75 1.60 15,953 345 4.33
-------- ------- ---- -------- ------- ----
Total Interest-Earning Assets $579,133 $18,806 6.49% $562,727 $22,166 7.88%
Non-Interest Earning Assets 19,135 18,307
-------- --------
TOTAL ASSETS $598,268 $581,034
======== ========
INTEREST-BEARING LIABILITIES:
Interest-Bearing Checking $ 29,860 $ 198 1.33% $ 23,409 $ 145 1.24%
Savings 63,985 794 2.48 42,756 529 2.47
Money Market 105,111 904 1.72 120,768 2,552 4.23
Certificates of Deposits 170,276 3,416 4.01 168,851 5,117 6.06
Jumbo CDs 6,366 84 2.64 9,433 286 6.06
Purchased CDs 55,676 1,037 3.73 64,016 2,068 6.46
FHLB Advances 66,088 1,415 4.28 50,359 1,574 6.25
Other Borrowed Funds 13,009 150 2.32 12,799 305 4.79
--------- ------- ---- -------- ------- ----
Total Interest-Bearing Liabilities $510,371 $ 7,998 3.13% $492,391 $12,576 5.11%
Non-Interest Bearing Deposits 31,553 25,911
Other Liabilities 10,536 14,140
--------- --------
TOTAL LIABILITIES $552,459 $532,442
Stockholders' Equity 45,809 48,592
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $598,268 $581,034
======== ========
NET INTEREST INCOME $10,808 $ 9,590
======= =======
NET INTEREST RATE SPREAD (C) 3.36% 2.77%
==== ====
NET INTEREST MARGIN (D) 3.73% 3.41%
==== ====
(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.
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America 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 accounting principles
generally accepted in the United States of America for complete financial
statements.
The results of operations and other data for the three-month and six-month
periods ended June 30, 2002 are not necessarily indicative of results that may
be expected for the entire year ending December 31, 2002.
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 June 30, 2002 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
six counties in northeast Illinois from its three branch locations.
A reconciliation of the numerators and denominators for earnings per common
share dilution computations for the three month periods ended June 30, 2002
and 2001 are presented below: (dollars and shares in thousands)
Three Months Ended June 30,
--------------------------------
2002 2001
---- ----
Earnings per share:
Net Income $1,680 $1,312
Weighted average common shares
outstanding 3,432 3,832
----- -----
Basic earnings per share $0.49 $0.34
===== =====
Earnings per share assuming dilution:
Net Income $1,680 $1,312
Weighted average common shares
outstanding 3,432 3,832
Add: dilutive effect of assumed
exercises of stock options 169 89
----- -----
Weighted average common and dilutive
potential common shares outstanding 3,601 3,921
===== =====
Diluted earnings per share $0.47 $0.33
===== =====
A reconciliation of the numerators and denominators for earnings per common
share dilution computations for the six month periods ended June 30, 2002 and
2001 are presented below: (dollars and shares in thousands)
Six Months Ended June 30,
--------------------------------
2002 2001
---- ----
Earnings per share:
Net Income $3,293 $2,747
Weighted average common shares
outstanding 3,440 3,851
----- -----
Basic earnings per share $0.96 $0.71
===== =====
Earnings per share assuming dilution:
Net Income $3,293 $2,747
Weighted average common shares
outstanding 3,440 3,851
Add: dilutive effect of assumed
exercises of stock options 165 75
----- -----
Weighted average common and dilutive
potential common shares outstanding 3,605 3,926
===== =====
Diluted earnings per share $0.91 $0.70
===== =====
At June 30, 2002, no options to purchase shares were excluded in the
computation of diluted earnings per share because all of the options' exercise
prices were lower than the average market price of the common stock. At June
30, 2001, options to purchase 305,000 shares were not included in the
computation of diluted earnings per share because the options' exercise prices
were greater than the average market price of the common stock and were
therefore, antidilutive.
(3) Stock Repurchase Program
The following table summarizes the Company's stock repurchase programs.
Average
Date Date # of Shares Price per
Program# Announced Completed Repurchased Share
======== ========= ========= =========== =========
24th 3/29/02 6/18/02 100,000 $21.32
25th 6/18/02 - 5,476 $22.04
The Company repurchased 105,476 shares in the second quarter of 2002.
The Company announced its 25th stock repurchase program on June 18, 2002,
enabling the Company to repurchase 100,000 shares of its outstanding common
stock.
(4) Cash Dividend
The regular quarterly dividend for the second quarter of 2002 was paid at $.08
per share. The same quarterly dividend was paid for the second quarter of
2001.
(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
June 30, 2002, the Company's and Bank's capital requirements under FIRREA and
their actual capital ratios. As of June 30, 2002, the Company and the Bank
exceeded all current minimum regulatory capital requirements.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purpose Action Provisions
JUNE 30, 2002 Amount Ratio Amount Ratio Amount Ratio
============== ------ ------ ------ ------ ------ -----
(Dollars in Thousands)
Total Capital
(to Risk Weighted Assets)
Company $49.5 12.3% $32.1 8.0% $40.1 10.0%
Bank 49.4 12.3 32.0 8.0 40.0 10.0
Tier I Capital
(to Risk Weighted Assets)
Company $44.4 11.1% $16.0 4.0% $24.0 6.0%
Bank 44.3 11.1 16.0 4.0 24.0 6.0
Tier I Capital
(to Average Assets)
Company $44.4 7.3% $24.2 4.0% $30.2 5.0%
Bank 44.3 7.4 24.0 4.0 30.0 5.0
Risk Weighted Assets (Company) $400,832
Average Assets (Company) 603,823
Risk Weighted Assets (Bank) 400,274
Average Assets (Bank) 600,974
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purpose Action Provisions
JUNE 30, 2001 Amount Ratio Amount Ratio Amount Ratio
============== ------ ------ ------ ------ ------ -----
(Dollars in Thousands)
Total Capital
(to Risk Weighted Assets)
Company $52.5 13.0% $32.3 8.0% $40.4 10.0%
Bank 49.9 12.4 32.2 8.0 40.3 10.0
Tier I Capital
(to Risk Weighted Assets)
Company $47.4 11.7% $16.2 4.0% $24.2 6.0%
Bank 44.8 11.1 16.1 4.0 24.2 6.0
Tier I Capital
(to Average Assets)
Company $47.4 8.2% $23.1 4.0% $28.9 5.0%
Bank 44.8 7.8 22.9 4.0 28.6 5.0
Risk Weighted Assets (Company) $404,008
Average Assets (Company) 577,014
Risk Weighted Assets (Bank) 402,623
Average Assets (Bank) 572,858
(6) New Accounting Pronouncement
In 2001, the Financial Accounting Standard Board issued SFAS No. 142,
"Goodwill and Other Intangible Assets," which requires that goodwill no longer
be amortized to earnings, but instead be reviewed for impairment. The
amortization of goodwill ceases upon adoption of SFAS No. 142, which for most
companies, will be January 1, 2002. The goodwill recorded by the Company is
related to a branch acquisition. This goodwill will continue to be accounted
for under SFAS No. 72, "Accounting for Certain Acquisitions of Banking or
Thrift Institutions," (excluded from the scope from SFAS No. 142) and continue
to be amortized to expense.
(7) Special Note Concerning Forward-Looking Statements
This document (including information incorporated by reference) contains, and
future oral and written statements of CoVest Bancshares, Inc., a Delaware
corporation (the "Company") and its management may contain, forward-looking
statements, within the meaning of such term in the Private Securities
Litigation Reform Act of 1995, with respect to the financial condition,
results of operations, plans, objectives, future performance and business of
the Company. Forward-looking statements, which may be based upon beliefs,
expectations and assumptions of the Company's management and on information
currently available to management, are generally identifiable by the use of
words such as "believe," "expect," "anticipate," "plan," "intend," "estimate,"
"may," "will," "would," "could," "should" or other similar expressions.
Additionally, all statements in this document, including forward-looking
statements, speak only as of the date they are made, and the Company
undertakes no obligation to update any statement in light of new information
or future events.
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 effect on the operations and future prospects of the Company and its
subsidiaries include, but are not limited to, the following:
The strength of the United States economy in general and the strength of
the local economies in which the Company conducts its operations which may
be less favorable than expected and may result in, among other things, a
deterioration in the credit quality and value of the Company's assets.
The economic impact of the terrorist attacks that occurred on September
11th, as well as any future threats and attacks, and the response of the
United States to any such threats and attacks.
The effects of, and changes in, federal, state and local laws, regulations
and policies affecting banking, securities, insurance and monetary and
financial matters.
The effects of changes in interest rates (including the effects of changes
in the rate of prepayments of the Company's assets) and the policies of
the Board of Governors of the Federal Reserve System.
The ability of the Company to compete with other financial institutions as
effectively as the Company currently intends due to increases in
competitive pressures in the financial services sector.
The inability of the Company to obtain new customers and to retain
existing customers.
The timely development and acceptance of products and services, including
products and services offered through alternative delivery channels such
as the Internet.
Technological changes implemented by the Company and by other parties,
including third party vendors, which may be more difficult or more
expensive than anticipated or which may have unforeseen consequences to
the Company and its customers.
The ability of the Company to develop and maintain secure and reliable
electronic systems.
The ability of the Company to retain key executives and employees and the
difficulty that the Company may experience in replacing key executives and
employees in an effective manner.
Consumer spending and saving habits which may change in a manner that
affects the Company's business adversely.
Business combinations and the integration of acquired businesses which may
be more difficult or expensive than expected.
The costs, effects and outcomes of existing or future litigation.
Changes in accounting policies and practices, as may be adopted by state
and federal regulatory agencies and the Financial Accounting Standards
Board.
The ability of the Company to manage the risks associated with the
foregoing as well as anticipated.
These risks and uncertainties should be considered in evaluating forward-
looking statements and undue reliance should not be placed on such statements.
Additional information concerning the Company and its business, including
other 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,
multi-family, 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
- -------------------
Total assets increased by 3% to $604.2 million as of June 30, 2002, as
compared to $585.7 million at December 31, 2001. Total liabilities increased
by 3% to $557.7 million, as compared to $540.6 million as of December 31,
2001. Stockholders' equity increased by 3% to $46.5 million, as compared to
$45.2 million as of December 31, 2001.
Cash and cash equivalents increased to $29.9 million at June 30, 2002 from
$6.6 million at December 31, 2001. The change was from the increase in
deposits and from the sale of multi-family loans in the latter part of April
2002. The funds will be used to pay off higher yielding purchased certificates
of deposits and Federal Home Loan Bank term advances.
Securities increased by 26% to $65.9 million from $52.2 million as of December
31, 2001. U.S. government agencies increased 47% to $46.9 million from $31.9
million as of December 31, 2001. The issues consisted of Federal Home Loan
Bank Multi-Step Agencies with maturities out to 5 years, callable semi-
annually with coupon resets annually. Initial coupons range for 3.75% to
5.00%. Investments not used to secure public fund repurchase agreements and
deposits will be sold as needed to fund higher yielding variable rate loans.
Net loans receivable decreased 4% to $490.7 million as of June 30, 2002, as
compared to $509.6 million as of December 31, 2001. It has been the Company's
strategy for the last year to concentrate on funding short-term adjustable
rate loans to minimize our exposure to rising interest rates. Commercial loans
increased to $51.8 million compared to $47.0 million as of December 31, 2001.
Commercial real estate loans decreased to $72.3 million compared to $79.4
million as of December 31, 2001. Construction loans decreased to $47.4 million
compared to $58.8 million as of December 31, 2001. The Company is not actively
expanding its new construction lending, but still is funding prior commitments
and expects to see an overall decrease in balances by year-end. Multi-family
loans increased slightly to $226.0 million compared to $223.4 million as of
December 31, 2001. The multi-family loan portfolio is comprised of adjustable
rate loans with floors established upon origination. The Company continues to
originate adjustable rate multi-family loans; however, prepayments with
regular payments exceeded the originations. In April 2002, the Company sold
$20.1 million of its multi-family loan portfolio to better position itself in
an increasing rate environment. The sale consisted of 5-year adjustable rate
loans where the rate is fixed for the first 5-year term and then reprice off
the 5-year Treasury index for the next five years. There was no gain or loss
on the transactions and the loans were sold at 7% pass-through until the next
rate adjustment date. At the next rate adjustment date, the service fee will
be set at .25% and the pass through rate will be adjusted accordingly. The
gross coupon rates range from 7.25% to 9.625%. The overall average gross rate
was 8.00%. The Company retains the servicing of the loans and a 50/50 split
of the prepayment fee was negotiated for the life of the contract. Mortgage
loans decreased to $55.6 million compared to $58.2 million as of December 31,
2001. Consumer loans decreased to $42.4 million compared to $46.3 million as
of December 31, 2001.
Total deposits increased 3% to $469.2 million as of June 30, 2002, as compared
to $456.0 million as of December 31, 2001. Savings deposits increased 42% to
$74.2 million compared to $52.1 million as of December 31, 2001. The High
Yield Money Market account decreased 14% to $98.3 million compared to $113.9
million as of December 31, 2001. The Company believes that the decrease in the
High Yield Money Market account is caused by the decline in the 91-day
Treasury Bill rate to which the account is indexed. The Company also believes
that the decrease in the average High Yield Money Market account index rate to
1.72% caused the savings deposits to increase as the savings account rate
remained at a fixed 2.50%. Non-interest bearing checking accounts and interest
bearing checking accounts increased $3.4 million, or 11%, and $1.3 million, or
4%, respectively. The decrease in jumbo certificates of deposits by $9.0
million was offset by an increase in purchased certificates of deposit by
$10.2 million. The Company had not purchased any out-of-market certificates of
deposits since March 2002. Certificates of deposit remained at relatively the
same level at $172.9 million.
Total borrowings increased 4% to $76.2 million compared to $73.4 million as of
December 31, 2001. Short-term borrowings decreased $2.2 million. Included in
short-term borrowings is a $2.2 million note incurred in connection with the
Company's stock repurchase program. This borrowing will be repaid from the
dividends from the Bank over the next several quarters. Long-term borrowings
increased $5.0 million. An 18-month advance was taken in January 2002 to fund
loan growth. Long-term borrowings consisted of FHLB Term Advances and are the
primary source of funding subject to collateral availability.
Stockholders' equity totaled $46.5 million at June 30, 2002. The number of
shares outstanding excluding unallocated Employee Stock Ownership Plan shares
was 3,415,398 and the book value per common share outstanding was $13.62.
On February 22, 2002, the Employee Stock Ownership Plan purchased 81,477
shares of CoVest Bancshares, Inc. common stock, held in the Company's
treasury, for an aggregate purchase price of $1,500,000, or $18.41 per share.
A new loan, internally financed, in the amount of $1.5 million plus interest
will be repaid over a period of fifteen years from earnings generated by the
Company. $50,000 plus interest have been paid during the first six months of
2002.
The Company announced its 24th stock repurchase program on March 29, 2002,
enabling the Company to repurchase 100,000 shares of its outstanding stock.
The repurchase was completed on June 18, 2002. A total of 100,000 shares were
repurchased at an average price of $21.32.
The Company announced its 25th stock repurchase program on June 18, 2002,
enabling the Company to repurchase 100,000 shares of its outstanding stock. A
total of 5,476 shares were repurchased at an average price of $22.04.
At June 30, 2002, the allowance for loan losses was $6.6 million as compared
to $6.5 million as of December 31, 2001. The Company recognized net charge-
offs of $533,000 and provided an additional $636,000 during the first six
months of 2002. Management believes that the allowance for loan losses at June
30, 2002, was at a level adequate to absorb probable incurred losses on
existing loans. However, there can be no assurance that such losses will not
exceed estimated amounts.
At June 30, 2002, total non-performing loans amounted to $2,285,000, or 0.38%
of total assets compared to $2,538,000, or 0.43% of total assets at December
31, 2001. A $1,540,000 motel property in Wisconsin that had been categorized
as a non-accrual loan as of December 31, 2001, was foreclosed on and sold in
April, 2002. An additional $240,000 of this loan was charged-off prior to its
move to Other Real Estate Owned. A $1,426,000 multi-family loan was classified
in non-accrual status in June 2002. The Company charged off $159,000 of this
loan during the second quarter.
The Company had no impaired loans as of June 30, 2002.
Total Other Real Estate Owned increased to $746,000 at June 30, 2002 compared
to $661,000 as of December 31, 2001. The properties represent one single-
family property for $85,000 and an undeveloped commercial real estate property
in Chicago for $661,000. The Company has received purchase contracts on both
properties and expects no losses.
The following table sets forth the amounts and categories of non-performing
loans and assets.
JUNE 30, 2002 DEC 31, 2001
------------- ------------
(Dollars in Thousands)
Non-accruing Loans:
Commercial Loans $ - $ -
Multi-family Loans 1,426 -
Commercial Real Estate Loans - 1,540
Construction Loans - 48
Commercial/Municipal Leases - -
Mortgage Loans 491 668
Consumer 17 43
------ ------
Total 1,934 2,299
Accruing Loans Delinquent 90 days or More:
Commercial Loans $ - $ -
Multi-family Loans - -
Commercial Real Estate Loans - 100
Construction Loans - -
Commercial/Municipal Leases - 20
Mortgage Loans 301 119
Consumer 50 -
------ ------
Total 351 239
------ ------
Total Non-performing Loans $2,285 $2,538
Other Real Estate Owned 746 662
Other Repossessed Assets - -
------ ------
Total Non-performing Assets $3,031 $3,200
====== ======
Total Non-performing Loans as
a Percentage of Net Loans 0.47% 0.50%
==== ====
Total Non-performing Assets as
a Percentage of Total Assets 0.50% 0.55%
==== ====
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 $4.7 million, for the six months ended June 30,
2002. Net cash provided by investing activities was $4.7 million for the six
months ended June 30, 2002. Net cash provided by financing activities was
$13.9 million for the six months ended June 30, 2002.
The Company uses its liquidity to meet its ongoing commitments to fund
maturing certificates of deposit and deposit withdrawals, repay borrowings,
fund existing and continuing loan commitments, and pay operating expenses. At
June 30, 2002, the Company has commitments to originate loans totaling $36
million and its customers had approved but unused lines of credit totaling $38
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
- ---------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2002 2001 2002 2001
------ ----- ------ ------
Annualized Return on Avg. Equity 14.61% 10.73% 14.38% 11.31%
Annualized Return on Avg. Equity (Core)* 14.61 10.73 14.38 10.28
Annualized Return on Avg. Assets 1.11 0.91 1.10 0.95
Annualized Return on Avg. Assets (Core)* 1.11 0.91 1.10 0.86
Book Value per Share $13.62 $12.92 $13.62 $12.92
Closing Market Price per Share $22.46 $15.32 $22.46 $15.32
Earnings per Primary Share:
Basic $0.49 $0.34 $0.96 $0.71
Basic (Core)* $0.49 $0.34 $0.96 $0.65
Diluted $0.47 $0.33 $0.91 $0.70
Diluted (Core)* $0.47 $0.33 $0.91 $0.64
Net Interest Margin 3.54% 3.48% 3.73% 3.41%
Ratio of Operating Expense to
Average Total Assets, Annualized 2.37% 2.54% 2.47% 2.39%
Ratio of Net Interest Income to
Non-Interest Expense 1.44x 1.32x 1.45x 1.37x
* Core net income: Net income, adjusted for the after tax effect of the gain of
sale of loans, that occurred in the first quarter of 2001.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2002 AND 2001
- -----------------------------------------------------------------------------
Net income was $1,680,000 for the second quarter of 2002, up 28% over
$1,312,000 for the same period in 2001. Basic earnings per share were $0.49, a
44% increase compared to $0.34 for the second quarter of 2001. Diluted
earnings per share were $0.47, a 42% increase compared to $0.33 for the second
quarter of 2001.
Return on average equity and return on average assets during the second
quarter of 2002 were 14.61% and 1.11% respectively, compared to 10.73% and
0.91% for the second quarter in 2001.
The Company's efficiency ratio improved to 55.89% compared to 61.39% in the
second quarter of 2001. The Company's goal is to maintain an efficiency ratio
at lower than 56% for 2002.
Cash earnings (net income adjusted for the after tax impact of amortization of
goodwill) for the second quarter of 2002 were $1,711,000, or $0.50 (basic) and
$0.48 (diluted) earnings per share, compared to $1,343,000, or $0.35 (basic)
and $0.34 (diluted) earnings per share for the same period in 2001.
Net interest income for the second quarter of 2002 increased $327,000, or 7%
compared to the same period in 2001. The increase in net interest income can
be attributed to the Company being in a liability sensitive position, where
liabilities reprice faster than assets, in 2001 when rates were declining.
The net interest spread for the second quarter of 2002 was 3.17% compared to
2.85% for the same period in 2001. The weighted average yield on interest-
earning assets was 6.25% for the second quarter of 2002, a decrease of 149
basis points compared to 7.74% in 2001. The weighted average cost of interest-
bearing liabilities was 3.08% for the second quarter of 2002, a decrease of
181 basis points compared to 4.89% in 2001. The sale of the $54 million of the
mortgage loan portfolio in March 2001 provided the Company with funds to
payoff higher cost borrowings and afforded the Company the opportunity to
price its deposits moderately. The increase in average non-interest bearing
deposits by $4.7 million, or 17%, also contributed to this situation. Net
interest margin was 3.54% for the second quarter of 2002 compared to 3.48% for
the same period in 2001. The Company is currently asset sensitive.
The Company's total interest income (tax equivalent) on earning assets
decreased 15% to $9,134,000 for the second quarter of 2002 compared to
$10,801,000 for the same period in 2001. Average balance of interest earning
assets increased 5% to $584.2 million for the second quarter of 2002 compared
to $558.3 million for the same period in 2001. The Federal Reserve's rate
reductions in 2001 caused a decrease in the Company's loan index rates and
prompted prepayments in the loan portfolio, particularly in the multi-family
loan portfolio, which is mostly comprised of adjustable rate loans with floors
established upon origination. Loan costs associated with the sale of the $20.1
million from the multi-family loan portfolio amounted to $139,000. Loan costs
associated with loan prepayments in the multi-family loan portfolio amounted
to $78,000. Average yield earned on loans for the second quarter of 2002 was
6.55%, a 160 basis point decrease compared to 8.15% for the same period in
2001. Average yield earned on investment securities for the second quarter of
2002 was 5.12%, an 80 basis point decrease compared to 5.92% for the same
period in 2001. Other investments, which is comprised of overnight
investments, yielded 1.61% for the second quarter, a 260 basis point decrease
compared to 4.21% in 2001. The increased volume of loans and investments
partially offset the effect of the income reduction from falling interest
rates.
It has been the Company's strategy for the last year to concentrate of funding
short-term adjustable rate loans to minimize our exposure to rising interest
rates. The Company sold $20.1 million of its multi-family loan portfolio in
April 2002 to better position itself in an increasing rate environment. The
sale consisted of 5-year adjustable rate loans where the rates are fixed for
the first 5-year term and then reprice off the 5-year Treasury index for the
next five years. The loans were sold at 7% pass through until the next rate
adjustment date, where the service fee will be set at .25% and the pass
through rate will be adjusted accordingly. The gross coupon rates range from
7.25% to 9.625%. The Company desires to originate prime based rate multi-
family loans, as a result, payoffs from normal business have exceeded
originations. The liquidity from the sale will enable the Company to price its
deposits moderately. In July 2002, the Company prepaid a $6 million FHLB Term
Advance maturing October 2002 at a rate of 2.39%.
Total interest expense decreased 33% to $3,961,000 for the second quarter of
2002 compared to $5,940,000 for the same period in 2001. The average cost of
deposits was 2.92% for the second quarter of 2002, a 185 basis point decrease
compared to 4.77% for same period of 2001. The average costs of certificates
of deposit, jumbo CDs and purchased CDs reduced by 213, 346 and 277 basis
points respectively. The sale of the $54 million in the mortgage loan
portfolio in March 2001 provided liquidity and afforded the Company the
opportunity to price its deposits moderately and lower than market. The
average cost of borrowings decreased to 3.99%, a 180 basis point decrease
compared to 5.79% for the second quarter of 2001. The cost of FHLB Term
Advances decreased by 200 basis points in the second quarter of 2002. The
Company was able to pay off its higher cost advances in the early part of 2001
and took on advances in the latter part of 2001 when rates were lower.
The provision for loan losses was $164,000 for the second quarter of 2002, a
34% decrease compared to $250,000 for the same period in 2001. The Company
provided for loan losses equal to net charge-offs for the second quarter of
2002.
On a quarterly basis, management of the Company meets to review the adequacy
of the Allowance for Loan Losses. Each loan officer grades his or her
individual commercial credits and the Company's outsourced loan review
function validates the officer's 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
classification and the allowance 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 an historical portion for
each loan category based on loan loss history, current economic conditions and
trends in the portfolio, including delinquencies and impairments.
LOAN LOSS ALLOWANCE ANALYSIS. The following table sets forth an analysis of
the Company's allowance for loan losses for the periods indicated.
THREE MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001
---------- ----------
(Dollars in Thousands)
Balance at Beginning of Period $6,650 $5,545
Charge-offs:
Commercial Loans - -
Multi-family Loans 159 -
Commercial Real Estate Loans - -
Construction Loans - -
Commercial/Municipal Leases - -
Mortgage Loans - -
Consumer 21 58
------ ------
Charge-offs Total 180 58
Recoveries:
Commercial Loans 8 -
Multi-family Loans - -
Commercial Real Estate Loans - -
Construction Loans - -
Commercial/Municipal Leases - -
Mortgage Loans - -
Consumer 8 15
------ ------
Recoveries Total 16 15
------ ------
Net Charge-offs 164 43
Additions Charged to Operations 164 250
------ ------
Balance at End of Period $6,650 $5,752
====== ======
Ratio of Net Charge-offs During
the Period to Average Loans
Outstanding During the Period 0.03% 0.01%
Ratio of Allowance for Loan
Losses to Non-performing Loans 2.91x 1.69x
Ratio of Allowance for Loan
Losses to Total Outstanding Loans 1.34% 1.19%
Non-interest income increased $106,000, a 9% increase to $1,253,000 for the
second quarter of 2002 compared to $1,147,000 for the same period in 2001.
Loan prepayment fees increased $202,000, mostly from prepayments in the multi-
family loan portfolio. Loan charges and servicing fees decreased $52,000,
mostly due to a decrease in the investor servicing fees. The low interest rate
environment continues to generate payoffs of mortgage loans. Document
preparation fees decreased $27,000. Mortgage banking fees decreased $66,000
due to lower mortgage loan originations during the second quarter of 2002,
compared to that in 2001. Deposit related charges and fees, and other income,
remained relatively the same for both periods. The increase in non-interest
bearing checking accounts was centered in corporate checking accounts. The
increase in service fees on account analysis was offset by a decrease in NSF
fees. Also included in other income for the second quarter of 2002 was $65,000
representing interest on 1992 and 1993 State of Illinois income tax refunds.
Non-interest expense decreased $86,000, a 2% decrease to $3,573,000 for the
second quarter of 2002 compared to $3,659,000 for the same period in 2001.
Compensation and benefits increased $199,000. Full time equivalent number of
employees remained at 133 for both periods. Base compensation increased
$43,000. Group medical insurance increased $126,000 due to the Company's
accruing for maximum claims level. The Company incurred $25,000 for the
principal payment of the ESOP loan. Commissions and incentives decreased
$140,000 due to fewer mortgage loan originations. Advertising expense
decreased $51,000. Professional fees decreased $51,000 mainly due to smaller
legal expenses in the second quarter of 2002. Loan related expenses decreased
$21,000. Other real estate owned related expenses decreased $10,000.
Income tax expense for the second quarter of 2002 increased $237,000 to
$976,000, compared to $739,000 for the same period in 2001. The effective tax
rate was 37% for the second quarter of 2002 and 36% for the second quarter of
2001.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
- ------------------------------------------------------------------------------
Net income increased $546,000, or 20%, to $3,293,000 for the first six months
of 2002 compared to $2,747,000 for the same period in 2001. Basic earnings per
share were $0.96, a 35% increase compared to $0.71 per share for the same
period in 2001. Diluted earnings per share were $0.91, a 30% increase compared
to $0.70 for the same period in 2001. Included in net income for 2001 was a
$407,000 pretax gain on sale of single family mortgages. Core net income (net
income adjusted for the after tax effect of the gain on sale of loans) was
$2,498,000 for the first six months of 2001, or $0.65 (basic) and $0.64
(diluted) per share. Basic earnings and diluted earnings per share for the
first six months of 2002 increased 48% and 42% respectively, as compared to
the same period in 2001 on core earnings.
Return on average equity and return on average assets for the first six months
of 2002, were 14.38% and 1.10% respectively, compared to 11.31% and 0.95% for
the same period in 2001. Return on average equity and return on average assets
for the first half of 2001, without the gain on sale of mortgage loans, were
10.28% and 0.86% respectively.
The Company's efficiency ratio improved to 55.86% compared to 59.11% for the
first six months of 2001. The Company's goal is to maintain an efficiency
ratio of below 56% for 2002.
Cash earnings (net income adjusted for the after tax impact of amortization of
goodwill) for the first six months of 2002 were $3,355,000, or $0.98 (basic)
and $0.93 (diluted) earnings per share, compared to $2,809,000, or $0.73
(basic) and $0.72 (diluted) earnings per share for 2001. Core cash earnings
(net income, exclusive of the gain on sale of loans, adjusted for the after
tax impact of amortization of goodwill) for the first six months of 2001, were
approximately $2,560,000, or $0.66 (basic) and $0.65 (diluted) earnings per
share.
Net interest income for the first six months of 2002 increased $1,248,000, or
13%, to $10,743,000 compared to $9,495,000 for the same period in 2001.
Interest income decreased 15% while interest expense decreased 36% for the
first six months of 2002 as compared to the same period in 2001. Average yield
on average interest earning assets was 6.49%, a 139 basis point decrease from
7.88% for 2001. Average cost on interest bearing liabilities was 3.13%, a 198
basis point decrease from 5.11% for 2001. Net interest spread for the first
six months of 2002 was 3.36% compared to 2.77% for the same period in 2001.
Net interest margin was 3.73% for the first six months in 2002 compared to
3.41% in 2001. The increase in non-interest bearing deposits by $5.6 million,
or 22%, contributed to the increase in interest margin.
The Company's total interest income (tax equivalent) on earning assets
decreased 15% to $18,807,000 for the first six months of 2002 compared to
$22,166,000 for the same period in 2001. The average balance of interest
earning assets increased 3% for the first six months of 2002. The increase in
loans was partially offset by a decrease in overnight investments. The
Federal Reserve's interest rate cuts in 2001 caused a decrease in the
Company's loan index rates. Average yield on loans decreased to 6.72%, a 148
basis point decrease compared to 2001. Average yield on investments in
securities decreased to 5.20%, an 84 basis point decrease compared to that in
2001. Average yield on other investments, which is comprised of overnight
investments, decreased to 1.60%, a 273 basis point decrease compared to 2001.
It has been the Company's strategy for the last year to concentrate of funding
short-term adjustable rate loans to minimize our exposure to rising interest
rates. The Company sold $20.1 million of its multi-family loan portfolio in
April 2002 to better position itself in an increasing rate environment. The
sale consisted of 5-year adjustable rate loans where the rates are fixed for
the first 5-year term and then reprice off the 5-year Treasury index for the
next five years. The loans were sold at 7% pass through until the next rate
adjustment date, where the service fee will be set at .25% and the pass
through rate will be adjusted accordingly. The gross coupon rates range from
7.25% to 9.625%. The Company desires to originate prime based rate multi-
family loans, as a result, payoffs from normal business have exceeded
originations. The liquidity from the sale will enable the Company to price its
deposits moderately. In July 2002, the Company prepaid a $6 million FHLB Term
Advance maturing October 2002 at a rate of 2.39%.
Total interest expense decreased 36% to $7,998,000 for the first six months of
2002 compared to $12,576,000 for the same period in 2001. The average balance
of interest bearing deposits slightly increased by $2.0 million in the first
six months of 2002 compared to the same period in 2001. The average cost of
deposits decreased to 2.98%, a 200 basis point decrease from 4.98% for the
same period in 2001. The average balance on the High Yield Money Market
account decreased while the average balance on savings accounts increased. The
Company believes that the decline in the 91-day Treasury Bill rate to which
the account is indexed caused the decline in the High Yield Money Market
Account. The Company also believes that consumers shifted their balances from
the High Yield Money Market account that averaged 1.72% to savings accounts
that remained fixed at 2.50%. The average balance of borrowings increased
$15.9 million while the average cost of borrowings decreased to 3.96%, a 199
basis point decrease from the same period in 2001.
The provision for loan losses was $636,000 for the first six months in 2002
compared to $500,000 for the same period in 2001. The increase in the
commercial loans and multi-family loans portfolio along with the net charge-
offs of $533,000 prompted the Company to increase its provision for loan
losses. Management believes that the allowance for loan losses at June 30,
2002, was at a level adequate to absorb probable incurred losses on existing
loans. However, there can be no assurance that such losses will not exceed
estimated amounts.
On a quarterly basis, management of the Company meets to review the adequacy
of the Allowance for Loan Losses. Each loan officer grades his or her
individual commercial credits and the Company's outsourced loan review
function validates the officers' grades. In the event that loan review
results in a downgrade of the loan, it is included in the allowance analysis
at the lower grade. The grading system is in compliance with the regulatory
classifications and the allowance is allocated to the loans based on the
regulatory grading, except in instances where there are known differences
(i.e. collateral value is nominal, etc.) Once the specific portion of the
allowance is calculated, management then calculates a historical portion for
each loan category based on loan loss history, current economic conditions and
trends in the portfolio, including delinquencies and impairments. As a result
of this analysis, management believes that the allowance for estimated losses
on loans at June 30, 2002 was at a level adequate to absorb probable incurred
losses on existing loans, although 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.
SIX MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001
---------- ----------
(Dollars in Thousands)
Balance at Beginning of Period $6,547 $5,655
Charge-offs:
Commercial Loans 20 -
Multi-family Loans 159 -
Commercial Real Estate Loans 240 271
Construction Loans - -
Commercial/Municipal Leases - -
Mortgage Loans 49 -
Consumer 87 161
------ ------
Charge-offs Total 555 432
Recoveries:
Commercial Loans 10 -
Multi-family Loans - -
Commercial Real Estate Loans - -
Construction Loans - -
Commercial/Municipal Leases - -
Mortgage Loans - -
Consumer 12 29
------ ------
Recoveries Total 22 29
------ ------
Net Charge-offs 533 403
Additions Charged to Operations 636 500
------ ------
Balance at End of Period $6,650 $5,752
====== ======
Ratio of Net Charge-offs During
the Period to Average Loans
Outstanding During the Period 0.10% 0.08%
Ratio of Allowance for Possible
Loan Losses to Non-performing Loans 2.91x 1.69x
Non-interest income increased $224,000, or 10% for the first six months of
2002 compared to the same period in 2001. Core non-interest income, excluding
the $407,000 gain on sale of loans in 2001 was $1,858,000. Non-interest income
for the first six months of 2002 increased $631,000 compared to core non-
interest income for the same period in 2001. Loan prepayment fees increased
$618,000. Deposit related charges and fees increased $54,000. Net gain on
sale of securities increased $106,000. In 2001, the Company had a $32,000 loss
on the sale of securities. Loan charges and servicing fees decreased $32,000.
Mortgage banking fees decreased $92,000. CoVest Investments income decreased
$23,000. Other income was at the same level for the first six months of 2002
and 2001. NACC income decreased $60,000 as the credit card servicing
relationship was terminated in February 2002. Other income increased $67,000,
which included $65,000 representing partial interest on 1992 and 1993 State of
Illinois income tax refund.
Non-interest expense increased $441,000, or 6%, for the first six months of
2002 compared to the comparable period in 2001. Compensation and benefits
increased $532,000. Base compensation increased $140,000. Medical insurance
increased $273,000 as the Company is accruing for the maximum claims
liability. Principal related to the ESOP loan, amounted to $50,000 for the
first six months of 2002. Employer taxes increased $58,000. 401K employer
match increased $13,000. Education and training increased $30,000 while
employee relation expenses decreased $15,000. Commissions and incentives
decreased $284,000 due to fewer mortgage loan originations in the first six
months of 2002 compared to the same period in 2001. Expenses on other real
estate owned assets increased $192,000, which was comprised of back taxes,
foreclosure expenses and expenses incurred in selling the properties. Data
processing expenses increased $28,000 due to check imaging being introduced in
the third quarter of 2001. Professional services decreased $29,000. Loan
related expenses decreased $24,000. General and administrative expenses
increased $7,000.
Income tax expense increased $349,000 to $1,911,000 for the six month period
ending June 30, 2002, compared to $1,562,000 for the same period in 2001. The
effective tax rate was 37% for the six months ended June 30, 2002 as compared
to 36% for the six months ended June 30, 2001.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. In an attempt to
manage the Company's exposure to changes in interest rates, management
closely monitors the Company'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.
The Company has been setting floors on its non-retail adjustable rate loans
as a protection in a falling rate environment since the introduction of that
type of product to its loan mix. On October 9, 2001, the Company entered
into an Interest Rate Cap Agreement with Morgan Keegan for a notional amount
of $10 million for three years, against the 91 day Treasury Bill rate, at the
strike rate of 4.50%. The Company paid a fixed amount of $113,000 covering
the entire 3-year agreement. A weekly weighted average calculation will be
used to determine Morgan Keegan's position and will be liable for the
difference when the 91 day Treasury Bill rate exceeds 4.50%. The Company
believes that the move will help cushion the impact of rising rates,
particularly on the High Yield Money Market account that is indexed to the
weekly 91 day Treasury Bill auction. The derivative instrument is recorded
at its fair value and any change in fair value of the derivative is recorded
in interest expense.
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 Company's exposure for the next twelve
months, to hypothetical changes in interest rates at the dates indicated.
JUNE 30, 2002
Change in Percent Change in
Interest Rates Percent Change in MV of Portfolio
(basis points) Net Interest Income Equity
- ---------------- --------------------- -------------------
+200 +7% -5%
+100 +3 -2
0 0 0
-100 -5 +1
-200 -6 +5
JUNE 30, 2001
Change in Percent Change in
Interest Rates Percent Change in MV of Portfolio
(basis points) Net Interest Income Equity
- ---------------- --------------------- -------------------
+200 -5% -5%
+100 -3 -3
0 0 0
-100 +3 +5
-200 +7 +12
The following table presents the Company's cumulative gap position as of the
dates indicated:
JUNE 30, 2002 JUNE 30, 2001
--------------- --------------
(Dollars in Thousands)
92 days $44,859 ($40,609)
184 days $43,048 ($76,113)
365 days $28,135 ($82,414)
Gap represents the difference of repricing opportunities between the Company's
assets and liabilities for the next twelve months.
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.
PART II - OTHER INFORMATION
COVEST BANCSHARES, INC.
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company
or any of its subsidiaries is a party other than ordinary routine
litigation incidental to their respective businesses.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 23, 2002, the annual meeting of stockholders was held.
George T. Drost and David M. Miller were elected to serve as Class I
directors with terms expiring in 2005. Continuing to serve as Class
II directors with terms expiring 2003 are James L. Roberts and Frank
A. Svoboda, Jr. Continuing to serve as Class III directors with
terms expiring 2004 are Gerald T. Niedert and David B. Speer. The
stockholders also ratified the appointment of Crowe, Chizek and
Company L.L.P., as the Company's independent public accountants for
the year ending December 31, 2002.
There were 3,452,177 issued and outstanding shares (4,403,803 issued,
less 870,149 shares of treasury stock and 81,477 shares of
unallocated ESOP shares) of Common Stock at the time of the annual
meeting. 3,062,292 shares were voted at the meeting. The voting on
each item presented at the annual meeting was as follows:
Election of Directors FOR WITHHELD
- --------------------- --- --------
George T. Drost 3,056,515 5,776
David M. Miller 3,053,690 8,601
Ratification of Accountants
- ---------------------------
FOR AGAINST ABSTAIN BROKER NON VOTES
--- ------- ------- ----------------
3,050,944 2,977 8,371 -0-
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS
(a) Exhibits
Exhibit 10.1
Amendment 2002-1 to CoVest Bancshares, Inc. 1992 Stock Option and
Incentive Plan
Exhibit 10.2
Amendment 2002-1 to CoVest Bancshares, Inc. 1996 Stock Option and
Incentive Plan
Exhibit 10.3
Amendment to Employment Agreement between CoVest Bancshares, Inc. and
James L. Roberts dated January 20, 1999
Exhibit 10.4
Amendment to Employment Agreement between CoVest Bancshares, Inc. and
Paul A. Larsen dated April 27, 1999
Exhibit 10.5
Amendment to Agreement Regarding Post Employment Restrictive
Covenants between CoVest Bancshares, Inc., CoVest Banc, National
Association and Paul A. Larsen dated April 27, 1999
Exhibit 10.6
Amendment to Agreement Regarding Post Employment Restrictive
Covenants between CoVest Bancshares, Inc., CoVest Banc, National
Association and J. Stuart Boldry, Jr. dated December 31, 1999
Exhibit 10.7
Change of Control and Non-Compete Agreement between CoVest
Bancshares, Inc. and Joseph J. Gillings dated June 4, 2002
(b) Reports on Form 8-K
A report on Form 8-K was filed on April 23, 2002 to report under Item
5 the Company's earnings for the first quarter of 2002.
A report on Form 8-K was filed on May 21, 2002 to report under Item 5
the declaration of a regular quarterly dividend.
A report on Form 8-K was filed on June 18, 2002 to report under Item
5 the completion of the 24th stock repurchase program and the
announcement of the 25th 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: JULY 23, 2002
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