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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
March 31, 2003 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 -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes ----- No --X--
As of April 29, 2003, the Registrant had issued and outstanding 4,403,803
shares of the Registrant's Common Stock. In addition, it had also repurchased
956,550 shares which were being held as treasury stock and 66,307 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 14
Item 3. Quantitative and Qualitative
Disclosure About Market Risk 23
Item 4. Controls and Procedures 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 2. Changes in Securities 26
Item 3. Defaults upon Senior Securities 26
Item 4. Submission of Matters to a Vote of
Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits and Reports 26
Form 10-Q Signatures 27
Certification by Executive Officers 28
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)
MAR 31, 2003 DEC 31, 2002
ASSETS ------------- ------------
- ------------
CASH ON HAND AND IN BANKS $ 12,113 $ 7,562
INTEREST BEARING DEPOSITS 10,978 17
-------- --------
Cash and Cash Equivalents 23,091 7,579
SECURITIES:
Securities Available-for-Sale 32,926 41,489
Mortgage-Backed and Related
Securities Available-for-Sale - -
Federal Home Loan Bank and
Federal Reserve Bank Stock 7,881 7,681
-------- --------
TOTAL SECURITIES 40,807 49,170
LOANS RECEIVABLE:
Commercial Loans 52,392 56,799
Multi-Family Loans 250,463 252,766
Commercial Real Estate Loans 83,903 84,607
Construction Loans 53,514 54,404
Commercial/Municipal Leases 366 522
Mortgage Loans 53,404 54,037
Consumer Loans 35,887 37,902
Mortgage Loans Held for Sale 390 1,026
-------- --------
TOTAL LOANS RECEIVABLE 530,319 542,063
Allowance for Loan Losses ( 6,945) ( 7,039)
-------- --------
LOANS RECEIVABLE, NET 523,374 535,024
ACCRUED INTEREST RECEIVABLE 2,497 2,639
PREMISES AND EQUIPMENT 8,610 8,824
OTHER REAL ESTATE OWNED - 661
GOODWILL 1,042 1,084
MORTGAGE SERVICING RIGHTS 103 128
OTHER ASSETS 3,975 3,812
-------- --------
TOTAL ASSETS $603,499 $608,921
======== ========
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)
MAR 31, 2003 DEC 31, 2002
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
LIABILITIES:
Deposits:
Non-Interest Bearing $ 38,505 $ 33,700
Interest Bearing Checking 34,613 34,836
Savings Accounts 118,387 94,885
Money Market Accounts 75,526 85,372
Certificates of Deposit 140,768 155,988
Jumbo CDs 1,830 1,880
Purchased CDs 71,962 66,946
------- -------
481,591 473,607
Short-Term Borrowings and Securities
Sold U/A to Repurchase 35,857 47,370
Long-Term Advances from Federal
Home Loan Bank 27,000 27,000
Advances from Borrowers for Taxes and
Insurance 3,867 5,587
Accrued Expenses and Other Liabilities 6,327 6,771
------- -------
TOTAL LIABILITIES 554,642 560,335
STOCKHOLDERS' EQUITY:
Common Stock, par value $.01 per share;
7,500,000 authorized shares; 4,403,803
shares issued at 3/31/03 and 12/31/02
respectively 44 44
Additional Paid-in Capital 18,914 18,831
Retained Earnings 47,991 46,838
Treasury Stock, 956,841 shares and
923,422 shares, held at cost at 3/31/03
and 12/31/02, respectively (17,649) (16,603)
Unearned ESOP shares (1,000) (1,202)
Accumulated Other Comprehensive Income 557 678
-------- --------
TOTAL STOCKHOLDERS' EQUITY 48,857 48,586
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $603,499 $608,921
======== ========
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
share data) MAR 31, MAR 31,
2003 2002
INTEREST INCOME ------- -------
Loans and Leases Receivable $ 7,881 $ 8,979
Mortgage-Backed and Related Securities - 62
Taxable Securities 295 414
Tax Exempt Securities 45 64
Other Interest and Dividend Income 147 120
------- -------
Total Interest Income 8,368 9,639
INTEREST EXPENSE
Deposits 2,613 3,242
Advances from Federal Home Loan Bank 552 703
Other Borrowed Funds 32 92
------- -------
Total Interest Expense 3,197 4,037
------- -------
NET INTEREST INCOME 5,171 5,602
Provision for Loan Losses 215 472
------- -------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 4,956 5,130
NON-INTEREST INCOME
Loan Charges and Servicing Fees 180 223
Loan Prepayment Fees 228 461
Mortgage Banking Fees 196 131
Deposit Related Charges and Fees 319 299
Gain on Sale of Securities - 74
Insurance and Annuity Commissions 22 16
Other 4 32
------- -------
Total Non-Interest Income 949 1,236
NON-INTEREST EXPENSE
Compensation and Benefits 2,032 1,888
Commissions and Incentives 130 193
Occupancy and Equipment 461 485
Federal Deposit Insurance Premium 19 20
Data Processing 280 260
Advertising 145 206
Other Real Estate Owned 24 200
Amortization of Goodwill 42 42
Amortization of Mortgage Servicing Rights 25 26
Other 443 498
------- -------
Total Non-Interest Expense 3,601 3,818
------- -------
INCOME BEFORE INCOME TAXES 2,304 2,548
Income Tax Provision (874) (935)
------- -------
NET INCOME $ 1,430 $ 1,613
======= =======
Basic Earnings per Share $0.42 $0.47
Diluted Earnings per Share $0.40 $0.45
Total Comprehensive Income $ 1,309 $ 1,471
See accompanying notes to unaudited consolidated financial statements
COVEST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands) THREE MONTHS ENDED
MAR 31, MAR 31,
2003 2002
OPERATING ACTVITIES -------- ---------
Net Income $ 1,430 $ 1,613
Adjustments to Reconcile Net Income to
Net Cash from Operating Activities
Depreciation and Amortization of
Premises and Equipment 221 221
Amortization of Intangibles 77 78
ESOP Compensation Expense 254 -
Provision for Loan Losses 215 472
Net Gain on Sales of Securities - (74)
Federal Home Loan Bank Stock Dividend (200) (99)
Change In:
Prepaid Expenses and Other Assets (173) (670)
Accrued Interest Receivable 142 271
Accrued Expenses and Other Liabilities (317) 1,564
--------- ---------
NET CASH FROM OPERATING ACTIVITIES 1,649 3,376
CASH FLOWS FROM INVESTING ACTIVITIES
Loan Originations, Net of Principal
Payments 11,435 (8,411)
Principal Payments on Mortgage-Backed
and Related Securities - 750
Purchases of Securities (8,135) (10,125)
Proceeds from Sales and Maturities
of Securities 16,500 11,990
Proceeds from the Sale of Other Real
Estate Owned 661 -
Purchase of Office Properties and
Equipment (7) (164)
--------- ---------
NET CASH FROM INVESTING ACTIVITIES 20,454 (5,960)
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase in Deposits 7,984 2,082
Borrowings 1,000 5,000
Repayment of Borrowings (12,513) (574)
Net Increase in Mortgage
Escrow Funds (1,720) (1,735)
Purchase of Common Stock Net of Proceeds
from Exercise of Stock Options (1,065) (768)
Dividends Paid (277) (283)
--------- ---------
NET CASH FROM FINANCING ACTIVITIES (6,591) 3,722
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 15,512 1,138
CASH AND CASH EQUIVALENTS, BEGINNING 7,579 6,573
--------- ---------
CASH AND CASH EQUIVALENTS, ENDING $23,091 $7,711
========= =========
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 March 31, 2003 and 2002
COMMON
STOCK AND ACCUMULATED
ADDITIONAL UNEARNED OTHER
PAID-IN RETAINED TREASURY ESOP COMPREHENSIVE
CAPITAL EARNINGS STOCK SHARES INCOME/(LOSS) TOTAL
- ----------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 $17,312 $41,360 ($14,290) - $769 $45,151
Net Income 1,613 1,613
Change in Unrealized Gain on
Securities Available-for-Sale,
Net of Taxes (142) (142)
-------
Comprehensive Income 1,471
Cash Dividends ($.08 per share) (283) (283)
Purchase of Treasury Stock (2,376) (2,376)
Treasury Stock Reissued in
Conjunction with Stock Option
Exercises 319 2,789 (1,500) 1,608
Tax Benefits Related to Employee
Stock Option Plans 423 423
- -----------------------------------------------------------------------------------------------------------
Balance at March 31, 2002 $18,054 $42,690 ($13,877) ($1,500) $627 $45,994
===========================================================================================================
Balance at December 31, 2002 $18,875 $46,838 ($16,603) ($1,202) $678 $48,586
Net Income 1,430 1,430
Change in Unrealized Gain on
Securities Available-for-Sale,
Net of Taxes (121) (121)
-----
Comprehensive Income 1,309
Cash Dividends ($.08 per share) (277) (277)
Purchase of Treasury Stock (1,123) (1,123)
Treasury Stock Reissued in
Conjunction with Stock Option
Exercises (19) 77 58
Release of ESOP Shares 52 202 254
Tax Benefits related to Employee
Stock Option Plans 50 50
- ----------------------------------------------------------------------------------------------------------
Balance at March 31, 2003 $18,958 $47,991 ($17,649) ($1,000) $557 $48,857
==========================================================================================================
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
-------------------------------------------------------------------
MAR 31, 2003 MAR 31, 2002
--------------------------------- ---------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST
-------- -------- ---------- ------- -------- ----------
INTEREST EARNING ASSETS:
Commercial Loans(A)(B) $ 54,939 $ 718 5.23% $ 50,680 $ 753 5.94%
Multi-Family Loans(A)(B) 252,893 3,577 5.66 230,274 3,819 6.63
Commercial Real Estate Loans(A)(B) 84,416 1,267 6.00 81,202 1,501 7.39
Construction Loans(A)(B) 53,651 784 5.85 54,754 1,029 7.52
Commercial/Muni Leases(B) 445 6 5.39 1,612 24 5.96
Mortgage Loans(A)(B) 54,723 976 7.13 57,555 1,094 7.60
Consumer Loans (A) 36,969 552 5.97 44,978 760 6.76
Securities 33,558 365 4.35 39,489 511 5.18
Mortgage-Backed and Related
Securities - - - 3,321 62 7.47
Equity Investments 9,761 140 5.74 9,127 116 5.08
Other Investments 2,507 7 1.12 1,007 4 1.59
-------- ------- ---- -------- ------- ----
Total Interest-Earning Assets $583,862 $ 8,392 5.75% $573,999 $ 9,673 6.74%
Non-Interest Earning Assets 18,211 18,674
-------- --------
TOTAL ASSETS $602,073 $592,673
======== ========
INTEREST-BEARING LIABILITIES:
Interest-Bearing Checking $ 34,382 $ 108 1.26% $ 29,364 $ 97 1.32%
Savings 105,448 547 2.07 58,388 360 2.47
Money Market 81,496 245 1.20 108,659 464 1.71
Certificates of Deposits 149,523 1,223 3.27 170,488 1,774 4.16
Jumbo CDs 1,866 9 1.93 9,090 62 2.73
Purchased CDs 69,652 481 2.76 48,950 485 3.96
FHLB Advances 55,556 552 3.97 65,167 703 4.32
Other Borrowed Funds 9,170 32 1.44 15,788 92 2.33
--------- ------- ---- -------- ------- ----
Total Interest-Bearing Liabilities $507,093 $ 3,197 2.52% $505,894 $ 4,037 3.19%
Non-Interest Bearing Deposits 35,063 31,086
Other Liabilities 11,021 10,087
--------- --------
TOTAL LIABILITIES $553,177 $547,067
Stockholders' Equity 48,896 45,606
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $602,073 $592,673
======== ========
NET INTEREST INCOME (Tax Equivalent) $ 5,195 $ 5,636
======= =======
NET INTEREST RATE SPREAD (C) 3.23% 3.55%
==== ====
NET INTEREST MARGIN (D) 3.56% 3.93%
==== ====
(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 period ended
March 31, 2003 are not necessarily indicative of results that may be expected
for the entire year ending December 31, 2003.
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 March 31, 2003 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 March 31, 2003 and
2002 are presented below: (dollars and shares in thousands)
Three Months Ended March 31,
----------------------------
2003 2002
---- ----
Earnings per share:
Net Income $1,430 $1,613
====== ======
Weighted average common shares
outstanding 3,404 3,447
===== =====
Basic earnings per share $0.42 $0.47
===== =====
Earnings per share assuming dilution:
Net Income $1,430 $1,613
====== ======
Weighted average common shares
outstanding 3,404 3,447
Add: dilutive effect of assumed
exercises of stock options 200 161
----- -----
Weighted average common and dilutive
potential common shares outstanding 3,604 3,608
===== =====
Diluted earnings per share $0.40 $0.45
===== =====
At March 31, 2003 and 2002 respectively, no options to purchase shares were
excluded in the computation of diluted earnings per share for the three month
periods ended because all of the options' exercise prices were lower than the
average market price of the common stock.
(3) Stock Compensation
Employee compensation expense under stock options is reported using the
intrinsic value method. No stock-based compensation cost is reflected in net
income, as all options granted had an exercise price equal to or greater than
the market price of the underlying common stock at date of grant. The following
table illustrates the effect on net income and earnings per share if expense was
measured using the fair value recognition provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation.
2003 2002
---- ----
Net income as reported $1,430 $1,613
Deduct: Stock-based compensation expense
determined under fair value based method 25 129
------ ------
Pro forma net income $1,405 $1,484
====== ======
Basic earnings per share as reported $ 0.42 $ 0.47
Pro forma basic earnings per share 0.41 0.43
Diluted earnings per share as reported $ 0.40 $ 0.45
Pro forma diluted earnings per share 0.39 0.41
(4) 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
======== ========= ========= =========== =========
25th 6/18/02 3/7/03 100,000 $26.53
26th 3/7/03 - 13,440 $28.01
The Company announced its 26th stock repurchase program on March 7, 2003,
enabling the Company to repurchase 100,000 shares of its outstanding common
stock. The Company repurchased 40,051 shares in the first quarter of 2003 at
an average price of $28.04.
(5) Cash Dividend
The regular quarterly dividend for the first quarter of 2003 was paid at $.08
per share. The same quarterly dividend was paid for the first quarter of 2002.
(6) 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,
2003, the Company's and Bank's capital requirements under FIRREA and their
actual capital ratios. As of March 31, 2003, the Company and the Bank exceeded
all current minimum and well capitalized regulatory capital requirements.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purpose Action Provisions
MARCH 31, 2003 Amount Ratio Amount Ratio Amount Ratio
============== ------ ------ ------ ------ ------ -----
(Dollars in Thousands)
Total Capital
(to Risk Weighted Assets)
Company $52.7 12.6% $33.4 8.0% $41.7 10.0%
Bank 50.9 12.2 33.3 8.0 41.6 10.0
Tier I Capital
(to Risk Weighted Assets)
Company $47.2 11.3% $16.7 4.0% $25.0 6.0%
Bank 45.7 11.0 16.6 4.0 24.9 6.0
Tier I Capital
(to Average Assets)
Company $47.2 7.8% $24.1 4.0% $30.1 5.0%
Bank 45.7 7.6 23.9 4.0 29.9 5.0
Risk Weighted Assets (Company) $417,376
Average Assets (Company) 602,073
Risk Weighted Assets (Bank) 415,812
Average Assets (Bank) 598,377
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purpose Action Provisions
MARCH 31, 2002 Amount Ratio Amount Ratio Amount Ratio
============== ------ ------ ------ ------ ------ -----
(Dollars in Thousands)
Total Capital
(to Risk Weighted Assets)
Company $49.4 11.9% $33.3 8.0% $41.6 10.0%
Bank 50.1 12.0 33.3 8.0 41.6 10.0
Tier I Capital
(to Risk Weighted Assets)
Company $44.1 10.6% $16.6 4.0% $25.0 6.0%
Bank 44.8 10.8 16.6 4.0 25.0 6.0
Tier I Capital
(to Average Assets)
Company $44.1 7.4% $23.7 4.0% $29.6 5.0%
Bank 44.8 7.6 23.6 4.0 29.5 5.0
Risk Weighted Assets (Company) $416,053
Average Assets (Company) 592,673
Risk Weighted Assets (Bank) 415,905
Average Assets (Bank) 589,532
(7) Pending Merger Transaction
The Company entered into an Agreement and Plan of Reorganization with Midwest
Banc Holdings, Inc. ("Midwest Banc") on November 1, 2002 (the "Merger
Agreement") that, if approved by the Company's stockholders at a special meeting
of stockholders, will result in the Company being merged with and into Midwest
Banc. The special meeting of stockholders originally scheduled for March 17,
2003, was cancelled after Midwest Banc informed the Company that bank regulatory
agencies would be delaying the processing of Midwest's applications to acquire
the Company. As of the date of this filing, the Company has not rescheduled the
special meeting.
(8) Special Note Concerning Forward-Looking Statements
This document (including information incorporated by reference) contains, and
future oral and written statements of 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 past and any future terrorist attacks, acts of war or
threats thereof 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 decreased 1% to $603.5 million as of March 31, 2003, as compared to
$608.9 million at December 31, 2002. Total liabilities decreased 1% to $554.6
million as of March 31, 2003, as compared to $560.3 million at December 31,
2002. Stockholders' equity as of March 31, 2003 was $48.9 million, relatively
the same level compared to $48.6 million at December 31, 2002.
Cash and cash equivalents increased to $23.1 million at March 31, 2003 from $7.6
million at December 31, 2002. The increase resulted from an increase in
interest bearing deposits.
Securities decreased 17% to $40.8 million as of March 31, 2003 from $49.2
million at December 31, 2002. As of March 31, 2003, the Company had commitments
to purchase FHLB agency issues totaling $10.6 million. That will be funded from
interest bearing deposits.
Net loans receivable decreased 2% to $523.4 million as of March 31, 2003,
compared to $535.0 million at December 31, 2002. Commercial loans decreased to
$52.4 million, as compared to $56.8 million at December 31, 2002. The multi-
family loan portfolio remained basically unchanged in volume from year-end and
is comprised of adjustable rate loans indexed to prime, the 91-day Treasury
bill rate, and 1 year, 3 year and 5 year Treasury notes. The loans have floors
and prepayment penalties established upon origination. Consumer loans decreased
5% to $35.9 million as of March 31, 2003, compared to $37.9 million at
December 31, 2002. Home equity loans outstanding decreased $1.0 million and auto
loans decreased $1.0 million. Securities decreased 17% to $40.8 million as of
March 31, 2003, compared to $49.2 million at December 31, 2002. Federal Home
Loan Bank agency issues totaling $14.0 million with yields ranging from 3.05%
to 5.55% were called in the first quarter of 2003. A $2.5 million Federal
Home Loan Bank agency issue with a yield of 6.12% matured in the first quarter
of 2003. These were partially replaced with Federal Home Loan Bank agency
issues totaling $8.0 million with yields ranging from 2.30% to 3.35%. The
Company limits its investment purchases to cover collateral requirements for its
borrowings and repurchase agreements.
Total deposits increased 2% to $481.6 million as of March 31, 2003, compared to
$473.6 million at December 31, 2002. Non-interest bearing deposits increased 14%
to $38.5 million, compared to $33.7 million at December 31, 2002. The Company
continues to strengthen its commercial banking business. Corporate checking
increased to $18.4 million at March 31, 2003, compared to $15.5 million at
December 31, 2002. Savings deposits increased 25% to $118.4 million, compared to
$94.9 million at December 31, 2002. Money market accounts decreased 12% to
$75.5 million, compared to $85.4 million at December 31, 2002. The Company
believes that the decrease in the average money market account index rate to
1.16% caused the savings deposits to increase as the savings account rate for
relationship savings (with related checking accounts) was 2.25% and regular
savings (with no related checking accounts) was 1.50%. In addition, on
January 30, 2003, the Company reduced the floor rate on its money market
accounts from 1.25% to 1.00%. Certificates of deposit decreased 10% to $140.8
million, compared to $156.0 million at December 31, 2002. The Company also
believes that a portion of these decreases was related to a shift to savings
accounts as the rate was higher than the short-term certificates of deposit
rates. On April 1, 2003, the Company reduced their savings account rates to
1.50% for relationship savings (with related checking accounts) and 1.00% for
regular savings (with no related savings accounts). As of March 31, 2003, $97.7
million of the Company's savings accounts had checking account relationships
and $20.7 million were regular savings accounts with no checking account
relationships. Purchased certificates of deposit increased 8% to $72.0 million
from $66.9 million at December 31, 2002. The increase consisted of deposits from
public institutions placed by local deposit brokers.
Total borrowings decreased 15% to $62.9 million, compared to $74.4 million at
December 31, 2002. Short-term borrowings decreased 24% to $35.9 million,
compared to $47.4 million as of December 31, 2002. The Company paid off $5.0
million of FHLB term advances, $3.2 million of FHLB overnight borrowings and
$5.0 million of overnight borrowings from a commercial bank correspondent.
Treasury, tax and loan deposits decreased $1.1 million. Repurchase agreements
increased $1.8 million. Included in short-term borrowings was an $1.1 million
draw on the Company's line of credit incurred in connection with the Company's
stock repurchase program. $1.0 million was paid in dividends from the Bank to
the Company during the month of April.
Stockholders' equity totaled $48.9 million at March 31, 2003, compared to $48.6
million at December 31, 2002. The number of shares outstanding excluding
unallocated Employee Stock Ownership Plan shares was 3,380,655 and the book
value per common share outstanding was $14.45, a 1.12% increase over $14.29
per share outstanding at December 31, 2002.
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. Shares issued to
the ESOP are allocated to ESOP participants based on principal repayments made
by the ESOP on the loan from the Company. The loan is secured by shares
purchased with the loan proceeds and will be repaid by the ESOP with
contributions from the Company. $500,281 of principal plus interest has been
repaid since the inception of the loan.
The Company announced its 26th stock repurchase program on March 7, 2003,
enabling the Company to repurchase 100,000 shares of its outstanding stock. A
total of 13,440 shares were repurchased at an average price of $28.01 through
April 29, 2003.
At March 31, 2003, the allowance for loan losses was $6.9 million compared to
$7.0 million at December 31, 2002. The Company recognized net charge-offs of
$309,000 and provided an additional $215,000 during the first three months of
2003. The ratio of allowance for loan losses at March 31, 2003 was 1.31%
compared to 1.30% at December 31, 2002. Management believes that the allowance
for loan losses at March 31, 2003 was at a level adequate to absorb probable
losses on existing loans. However, there can be no assurance that such losses
will not exceed estimated amounts.
At March 31, 2003, total non-performing loans amounted to $4,853,000, or 0.93%
of net loans, compared to $5,967,000, or 1.12% of net loans at December 31,
2002. The ratio of non-performing loans to total assets was 0.80% at March 31,
2003, compared to 0.98% at December 31, 2002. Of the $3,016,000 commercial real
state loans to related borrowers in non-accrual status at December 31, 2002,
$300,000 was charged off in March 2003 due to the receipt of a new appraisal on
these properties. A total of $565,000 in multi-family loans to related borrowers
as added to non-accrual status at March 31, 2003, bringing the total of multi-
family loans in non-accrual status to $1,467,000. The remaining amount of
902,000 is multi-family loan originally at $1,426,000, which was changed to on-
accrual status in June 2002. The Company charged-off $159,000 of this loan prior
to its move to non-accrual status. The Company has received $524,000 payments \
on this loan and now has a balance of $902,000. A $163,000 commercial loan was
put on non-accrual in March 2003. The Company considered these loans in the
March 31, 2003 analysis for allowance for loan losses, however, it is too early
to ascertain what losses, if any, will be realized. As of March 31, 2003, loans
delinquent 90 days or more and still accruing amounted to $17,000. The
$1,416,000 of commercial loans and $38,000 of consumer loans delinquent 90 days
or more and still accruing at December 31, 2002 have been made current. The
$14,000 commercial lease loan delinquent 90 days or more and still accruing at
December 31, 2002 was charged-off.
The $661,000 other real estate owned at December 31, 2002 was sold in February
2003. The Company incurred $57,000 of expenses and a loss on the sale of $27,000
which was included as a reduction to other income.
Along with other financial institutions, management shares a concern for the
outlook of the economy for 2003. A slowdown in economic activity has severely
impacted several major industries as well as the economy as a whole. Even though
there are numerous indications of emerging strength, it is not certain that this
strength is sustainable. In addition, consumer confidence may be negatively
impacted by the sustained decline in equity prices. These events could still
adversely affect cash flows for both commercial and individual borrowers, as a
result of which, the Company could experience increases in problem assets,
delinquencies and losses on loans.
The following table sets forth the amounts and categories of non-performing
loans and assets.
MAR 31, 2003 DEC 31, 2002
------------- ------------
(Dollars in Thousands)
Non-accruing Loans:
Commercial Loans $ 163 $ -
Multi-family Loans 1,467 918
Commercial Real Estate Loans 2,717 3,016
Construction Loans - -
Commercial/Municipal Leases - -
Mortgage Loans 474 530
Consumer 15 35
------ ------
Total 4,836 4,499
Accruing Loans Delinquent 90 days or More:
Commercial Loans $ 17 $ 1,416
Multi-family Loans - -
Commercial Real Estate Loans - -
Construction Loans - -
Commercial/Municipal Leases - 14
Mortgage Loans - -
Consumer - 38
------ ------
Total 17 1,468
------ ------
Total Non-performing Loans $4,853 $5,967
Other Real Estate Owned - 661
Other Repossessed Assets - -
------ ------
Total Non-performing Assets $4,853 $6,628
====== ======
Total Non-performing Loans as
a Percentage of Net Loans 0.93% 1.12%
==== ====
Total Non-performing Assets as
a Percentage of Total Assets 0.80% 1.09%
==== ====
LIQUIDITY
- ---------
The Company's primary sources of funds are deposits, principal and interest
payments on loans, and funds provided by other operations. While scheduled loan
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 $1.6 million, for the three months ended March 31,
2003. Net cash provided by investing activities was $20.4 million for the
three months ended March 31, 2003. Net cash used by financing activities was
$6.6 million for the three months ended March 31, 2003.
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, 2003, the Company has commitments to originate loans totaling $37.0
million and its customers had approved but unused lines of credit totaling
$49.0 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
MAR 31, MAR 31,
2003 2002
------ -----
Annualized Return on Avg. Equity 11.70% 14.15%
Annualized Return on Avg. Assets 0.95 1.09
Book Value per Share $14.45 $13.34
Closing Market Price per Share $26.42 $21.10
Earnings per Primary Share:
Basic $0.42 $0.47
Diluted $0.40 $0.45
Net Interest Margin 3.56% 3.93%
Ratio of Operating Expense to
Average Total Assets, Annualized 2.39% 2.58%
Ratio of Net Interest Income to
Non-Interest Expense 1.44x 1.47x
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
- -----------------------------------------------------------------------------
Net income for the first quarter of 2003 was $1,430,000, down 11% over
$1,613,000 for the same period in 2002. Basic earnings per share were $0.42, an
11% decrease compared to $0.47 for the same period in 2002. Diluted earnings
per share were $0.40, an 11% decrease compared to $0.45 for the same period in
2002.
Return on average equity and return on average assets for the first quarter of
2003 were 11.70% and 0.95% respectively, compared to 14.15% and 1.09% for the
first quarter of 2002.
The Company's efficiency ratio for the first quarter of 2003 was 58.84% compared
to 55.84% for the same period in 2002. The goal for 2003 is to maintain its
efficiency ratio at under 56%.
Net interest income for the first quarter of 2003 decreased $431,000, or an 8%
decrease compared to the same period in 2002. The yield on average interest
earning assets for the first quarter of 2003 was 5.75%, a 99 basis point
decrease compared to 6.74% for the same period in 2002. The cost of average
interest bearing liabilities for the first quarter of 2003 was 2.52%, a 67 basis
point decrease compared to 3.19% for the same period in 2002. The decrease in
the yield on average interest earning assets exceeded the decrease in the cost
of average interest bearing liabilities. The Company started to be asset
sensitive in the first quarter of 2002. As of December 31, 2002, the Company had
$176.3 million in loans floating/adjusting to prime. As of March 31, 2003, total
loans floating/adjusting to prime was $161.4 million. The Company believes that
interest rates will likely rise later in 2003 or early 2004 and has chosen to
originate a higher percentage of short-term adjustable rate loans. The
Company's ALCO committee at its meeting on April 8, 2003, voted on the
repurchase of a multi-family loan participation of approximately $16.5 million
that has an average yield of 7.00%. The average yield on investments for the
first quarter of 2003 was 4.66%, a 65 basis points decrease compared to 5.31%
for the same period in 2002. The average yield on overnight investments for the
first quarter of 2003 was 1.12%, a 47 basis point decrease compared to 1.59% for
the same period in 2002. The Federal Reserve Bank's 50 basis point rate
reduction in November 2002 contributed to the decline in interest income. The
Company continues to manage its cost of funds and still remain competitive in
its market area. Until October 2002, the Company's savings deposit rate was
fixed at 2.50%. In October 2002, the Company implemented relationship pricing
on its savings deposits. Relationship savings accounts (with related checking
accounts) earned 2.25% while regular savings accounts (with no related
checking accounts) earned 1.75%. On April 1, 2003, the Company reduced the
savings account rates to 1.50% for relationship savings (with related
checking accounts) and 1.00% for regular savings (with no related checking
accounts). The Company's money market account is indexed to the 91-day
Treasury Bill rate. The Company reduced the floor rate on the money market
account from 1.25% to 1.00%, effective January 30, 2003. The Company believes
that these rates are still competitive in its market area. The increase in the
average non-interest bearing deposits by $4.0 million offset part of the
margin compression. The net interest spread for the first quarter of 2003 was
3.23%, 32 basis points lower than 3.55% for the same period in 2002. The net
interest margin for the first quarter of 2003 was 3.56%, 37 basis points lower
than 3.93% for the same period in 2002. The Company expects the net interest
margin to increase in the second quarter of 2003 and beyond because of some of
the recent deposit repricing steps that have been implemented and the
participated loan repurchases.
The Company's total interest income (tax equivalent) on earning assets decreased
13% to $8,392,000 for the first quarter of 2003, compared to $9,673,000 for the
same period in 2002. The average balance of interest earning assets increased 2%
to $583.9 million compared to $574.0 million for the first quarter of 2002. The
average balance of loans for the first quarter of 2003 increased 3% to $538.0
million, compared to $521.1 million for the same period in 2002. The average
yield on loans decreased to 5.86%, a 103 basis point decrease compared to 6.89%
for the first quarter of 2002. The average balance on the multi-family loan
portfolio was $252.9 million, a 10% increase compared to $230.3 million for the
same period in 2002. The multi-family loan portfolio is mostly comprised of
adjustable rate loans with floors and prepayment penalties established upon
origination. Loan costs associated with loan prepayments in the multi-family
loan portfolio for the first quarter of 2003 were $55,000 compared to $99,000
in 2002. The increases in the multi-family loan portfolio were partially offset
by decreases in consumer loans and mortgage loans. The average balance of
investments for the first quarter of 2003 decreased 13% to $45.8 million,
compared to $52.9 million for the same period in 2002. The average yield on
investments decreased to 4.47%, a 77 basis point decrease compared to 5.24% for
the first quarter of 2002. Included in investments are $1.6 million of trust
preferred issues with fixed rates ranging from 8.25% to 10.00%.
Total interest expense decreased 21% to $3,197,000 for the first quarter of
2003, compared to $4,037,000 for the same period in 2002. The average balance
of interest bearing liabilities for the first quarter of 2003 was $507.1
million, relatively the same level compared to $505.9 million for the same
period in 2002. The average balance of interest bearing deposits increased 4%
to $442.4 million compared to $424.9 million for the same period in 2002. The
average balance of savings deposits increased 81% to $105.4 million, compared
to $58.4 million for the same period in 2002. The average balance of money
market accounts decreased 25% to $81.5 million, compared to $108.7 million for
the same period in 2002. The average balance of certificates of deposit
decreased 12% to $149.5 million, compared to $170.5 million for the same
period in 2002. The average balance of jumbo certificates of deposit decreased
79% to $1.9 million, compared to $9.1 million for the same period in 2002. The
Company believes that the decrease in the average money market account indexrate
to 1.16% caused the savings deposits to increase as the savings account rate for
relationship savings (with related checking accounts) was 2.25% and regular
savings (with no related checking accounts) was 1.50%. The decrease in
certificates of deposit and jumbo certificates of deposit can also be attributed
to the savings account pricing where customers shifted their deposits,
particularly the shorter term certificates where the rates were lower than 2.25%
for relationship savings accounts and 1.50% for regular savings accounts. As of
March 31, 2003, $97.7 million of the Company's savings accounts had checking
account relationships and $20.7 million were regular savings accounts with no
checking account relationships. On April 1, 2003, the Company reduced the
savings accounts rates to 1.50% for relationship savings and 1.00% for regular
savings. On January 30, 2003, the Company reduced the floor rate on its money
market accounts from 1.25% to 1.00%. The Company believes that these pricing
strategies are still competitive in its market area. Purchased certificates of
deposit increased 42% to $69.7 million compared to $48.9 million for the first
quarter of 2002. The purchased certificates of deposits taken in the first
quarter of 2003 consisted of deposits from public institutions placed by local
deposit brokers. The cost of purchased certificates of deposit for the first
quarter of 2003 was 2.76%, 120 basis points lower than 3.96% for the same period
in 2002. The average balance of interest bearing checking accounts increased 17%
to $34.4 million, compared to $29.4 million for the same period in 2002. The
average balance of borrowings decreased 20% to $64.7 million for the first
quarter of 2003, compared to $81.0 million for the same period in 2002. The cost
of borrowings decreased to 3.61%, which was 32 basis points lower than 3.93% for
the first quarter of 2002.
The provision for loan losses was $215,000 for the first quarter of 2003 versus
$472,000 for the same period in 2002. The net charge-offs for the first quarter
of 2003 were $309,000, compared to net charge-offs of $369,000 during the first
quarter of 2002. $300,000 of this amount was allocated to the commercial real
estate loan relationship at December 31, 2002. The ratio of net charge-offs to
average loans for the first quarter of 2003 was 0.06% compared to 0.07% for the
same period in 2002. The ratio of allowance for loan losses to total outstanding
loans was 1.31%, compared to 1.27% for the first quarter in 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 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 losses on loans at March 31, 2003 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 loan losses for the periods indicated.
THREE MONTHS ENDED
MAR 31, MAR 31,
2003 2002
---------- ----------
(Dollars in Thousands)
Balance at Beginning of Period $7,039 $6,547
Charge-offs:
Commercial Loans - 20
Multi-family Loans - -
Commercial Real Estate Loans 300 240
Construction Loans - -
Commercial/Municipal Leases 14 -
Mortgage Loans - 49
Consumer 10 66
------ ------
Charge-offs Total 324 375
Recoveries:
Commercial Loans - 2
Multi-family Loans - -
Commercial Real Estate Loans - -
Construction Loans - -
Commercial/Municipal Leases - -
Mortgage Loans - -
Consumer 15 4
------ ------
Recoveries Total 15 6
------ ------
Net Charge-offs 309 369
Additions Charged to Operations 215 472
------ ------
Balance at End of Period $6,945 $6,650
====== ======
Ratio of Net Charge-offs During
the Period to Average Loans
Outstanding During the Period 0.06% 0.07%
Ratio of Allowance for Loan
Losses to Non-performing Loans 1.43x 9.62x
Ratio of Allowance for Loan
Losses to Total Outstanding Loans 1.31% 1.27%
Non-interest income decreased $287,000, or 23% to $949,000 for the first quarter
of 2003 compared to $1,236,000 for the same period in 2002. Loan charges and
servicing fees decreased by $43,000. Loan documentation fees decreased by
$30,000, late fees decreased by $12,000, letter of credit fees decreased by
$15,000 and investor service fees decreased by $18,000. These were offset by an
increase in loan modification fees of $31,000. Prepayment fees decreased by
$233,000 for the first three months in 2003 compared to the same period in 2002.
Prepayments for the first quarter of 2003 were generated by 27 loans totaling
$14.9 million compared to 31 loans totaling $31.9 million for the same period in
2002. Mortgage banking fees increased by $65,000. Conventional loan fees
increased by $54,000 and loan origination fees increased by $12,000. Deposit
related fees increased by $20,000. Service fees on checking accounts increased
by $3,000, NSF fees on checking accounts increased by $8,000, debit card income
increased by $8,000 and internet banking fees increased by $2,000. The Company
did not sell securities during the first quarter of 2003. Gain on the sale of
securities for the first quarter of 2002 was $74,000. Other income decreased by
$28,000 for the first quarter of 2003 compared to the same period in 2002.
Included in other income for the first quarter of 2003 was a $21,000 net loss on
the sale of two properties included in other real estate owned. Included in
other income for the first quarter of 2002 was $5,000 of credit card servicing
income. The servicing contract was terminated in February 2002.
Non-interest expense for the first quarter of 2003 decreased $217,000, or 6% to
$3,601,000, compared to $3,818,000 for the same period in 2002. Compensation and
benefits increased by $144,000. Directors' fees increased by $11,000 as there
were four board meetings held in the first quarter of 2003. ESOP expense
increased by $218,000. An additional payment was made to the ESOP plan when it
was thought that the proposed merger with Midwest Banc Holdings, Inc. would be
consummated prior to the end of the first quarter of 2003. No additional extra
payments to the plan are contemplated at this time unless the proposed sale
takes place. Included in ESOP expense was $52,000 of stock price appreciation on
the released ESOP shares. Deferred compensation expense decreased by $73,000, as
there was a smaller volume of commercial related loan originations during the
first quarter of 2003. Group medical self-insurance decreased by $101,000 as
compared to the same period in 2002. Group medical self-insurance expense
accrual for the first quarter of 2002 was based on estimated maximum claims.
The accrual for 2003 was based on estimated average claims. Education and
training decreased $22,000. Employee relation expenses decreased by $6,000. Bank
incentive plan (BIP) expenses decreased by $8,000. Post retirement insurance
decreased by $10,000 as the plan was frozen as of September 30, 2002. Employee
compensation expenses decreased by $6,000 and temporary-staffing expenses
decreased by $5,000. Commissions and incentives decreased by $63,000. Bonus
expense decreased by $100,000, which was offset by a $35,000 increase in
commission expense due to higher mortgage loan originations in the first quarter
of 2003 compared to the same period in 2002. Occupancy and equipment expenses
decreased by $24,000. Building repairs and maintenance expense decreased by
$9,000, telephone expense decreased by $7,000, T1 lines/BBX maintenance expenses
decreased by $5,000 and building decoration and supplies decreased by $11,000.
These were partially offset by an increase in real estate taxes accrual by
$9,000. Planned computer upgrades, purchase of a van and repairs were put on
hold due to the proposed acquisition of the Company. Data processing expense
increased by $20,000. Core processor expenses increased by $13,000 and internet
maintenance expenses increased by $11,000. These were partially offset by a
decrease in computer software and maintenance by $5,000. Advertising expenses
decreased $61,000. Advertising strategies were also put on hold due to the
proposed merger. REO expenses decreased by $176,000. The average balance of
Other Real Estate Owned assets for the first quarter of 2003 was $363,000,
compared to $1,187,000 for the same period in 2002. Total Other Real Estate
Owned as of March 31, 2002 was $2,164,000 which consisted of an undeveloped
commercial property in Chicago for $661,000, a motel property in Wisconsin for
$1,300,000 and 3 single-family properties for a total of $202,000. REO expenses
for 2002 represented taxes and maintenance expenses on the motel property in
Wisconsin. Other expenses decreased by $55,000. Professional fees decreased by
$12,000. Included in professional fees for the first quarter of 2003 was $82,000
of legal fees related to the proposed acquisition of the Company. General and
administrative expenses decreased by $53,000. Loan related expenses decreased by
$7,000.
Income tax expense decreased $61,000 to $874,000 for the first quarter of 2003,
compared to $935,000 for the same period in 2002. The effective tax rate was 38%
for the first quarter of 2003 as compared to 37% for the same period in 2002.
ITEM 3. 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.
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.
MARCH 31, 2003
Change in Percent Change in
Interest Rates Percent Change in MV of Portfolio
(basis points) Net Interest Income Equity
- ---------------- --------------------- -------------------
+200 +9% -6%
+100 +4 -4
0 0 0
-100 -2 +5
MARCH 31, 2002
Change in Percent Change in
Interest Rates Percent Change in MV of Portfolio
(basis points) Net Interest Income Equity
- ---------------- --------------------- -------------------
+200 1% -7%
+100 1 -4
0 0 0
-100 -1 +5
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.
ITEM 4. CONTROLS AND PROCEDURES
Based upon an evaluation within the 90 days prior to the filing date of this
report, the Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect the Company's internal controls
subsequent to the date of the evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
PART II - OTHER INFORMATION
COVEST BANCSHARES, INC.
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company
or any of its subsidiaries is a party other than ordinary routine
litigation incidental to their respective businesses.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS
(a) Exhibits
99.1 - Certificate of Chief Executive Officer
99.2 - Certificate of Chief Financial Officer
(b) Reports on Form 8-K
A report on Form 8-K was filed on January 28, 2003 to report under Item 5 the
Company's earnings for the fourth quarter of 2002.
A report on Form 8-K was filed on March 5, 2003 to report under Item 5 the
declaration of a regular quarterly dividend.
A report on Form 8-K was filed on March 7, 2003 to report under Item 5 the
completion of the 25th stock repurchase program and the announcement of the 26th
stock repurchase program.
A report on Form 8-K was filed on March 7, 2003 to report under Item 5 the
cancellation of its special stockholders' meeting scheduled for March 17, 2003.
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: APRIL 29, 2003
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
I, James L. Robert, Chief Executive Officer of the Company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CoVest Bancshares,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to date of their evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
DATE: APRIL 29, 2003
/S/ JAMES L. ROBERTS
JAMES L. ROBERTS
CHIEF EXECUTIVE OFFICER
I, Paul A. Larsen, Chief Financial Officer of the Company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CoVest Bancshares,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to date of their evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
DATE: APRIL 29, 2003
/S/ PAUL A. LARSEN
PAUL A. LARSEN
CHIEF FINANCIAL OFFICER
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of CoVest Bancshares, Inc. (the
"Company") on Form 10-Q for the period ending March 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, James
L. Roberts, Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
1) The Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
DATE: APRIL 29, 2003
/S/ JAMES L. ROBERTS
JAMES L. ROBERTS
CHIEF EXECUTIVE OFFICER
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of CoVest Bancshares, Inc. (the
"Company") on Form 10-Q for the period ending March 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Paul
A. Larsen, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
1) The Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
DATE: APRIL 29, 2003
/S/ PAUL A. LARSEN
PAUL A. LARSEN
CHIEF FINANCIAL OFFICER