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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, 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 July 29, 2003, the Registrant had issued and outstanding 4,403,803
shares of the Registrant's Common Stock. In addition, it had also repurchased
952,944 shares which were being held as treasury stock and 66,307 shares which
were being held as unallocated ESOP shares.
2
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 16
Item 3. Quantitative and Qualitative
Disclosure About Market Risk 28
Item 4. Controls and Procedures 31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 2. Changes in Securities 32
Item 3. Defaults upon Senior Securities 32
Item 4. Submission of Matters to a Vote of
Security Holders 32
Item 5. Other Information 32
Item 6. Exhibits and Reports 33
Form 10-Q Signatures 34
Certification by Executive Officers 35
3
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, 2003 DEC 31, 2002
ASSETS ------------- ------------
- ------------
CASH ON HAND AND IN BANKS $ 12,481 $ 7,562
INTEREST BEARING DEPOSITS 15,706 17
-------- --------
CASH AND CASH EQUIVALENTS 28,187 7,579
SECURITIES:
Securities Available-for-Sale 30,425 41,489
Federal Home Loan Bank and
Federal Reserve Bank Stock 7,999 7,681
-------- --------
TOTAL SECURITIES 38,424 49,170
LOANS RECEIVABLE:
Commercial Loans 53,604 56,799
Multi-Family Loans 270,165 252,766
Commercial Real Estate Loans 80,602 84,607
Construction Loans 57,607 54,404
Commercial Leases 258 522
Mortgage Loans 51,253 54,037
Consumer Loans 33,730 37,902
Mortgage Loans Held for Sale 1,793 1,026
-------- --------
TOTAL LOANS RECEIVABLE 549,012 542,063
Allowance for Loan Losses ( 7,117) ( 7,039)
-------- --------
LOANS RECEIVABLE, NET 541,895 535,024
ACCRUED INTEREST RECEIVABLE 2,303 2,639
PREMISES AND EQUIPMENT 8,423 8,824
OTHER REAL ESTATE OWNED - 661
GOODWILL 1,000 1,084
MORTGAGE SERVICING RIGHTS 85 128
OTHER ASSETS 3,921 3,812
-------- --------
TOTAL ASSETS $624,238 $608,921
======== ========
See accompanying notes to unaudited consolidated financial statements
4
COVEST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Continued)
(Unaudited)
(Dollars in thousands, except per share data)
JUNE 30, 2003 DEC 31, 2002
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
LIABILITIES:
Deposits:
Non-Interest Bearing $ 38,049 $ 33,700
Interest Bearing Checking 37,163 34,836
Savings Accounts 117,564 94,885
Money Market Accounts 73,000 85,372
Certificates of Deposit 139,807 155,988
Jumbo CDs 1,677 1,880
Purchased CDs 83,684 66,946
------- -------
490,944 473,607
Short-Term Borrowings and Securities
Sold U/A to Repurchase 37,135 47,370
Long-Term Advances from Federal
Home Loan Bank 33,000 27,000
Advances from Borrowers for Taxes and
Insurance 6,232 5,587
Accrued Expenses and Other Liabilities 6,443 6,771
------- -------
TOTAL LIABILITIES 573,754 560,335
STOCKHOLDERS' EQUITY:
Common Stock, par value $.01 per share;
7,500,000 authorized shares; 4,403,803
shares issued at 6/30/03 and 12/31/02
respectively 44 44
Additional Paid-in Capital 18,926 18,831
Retained Earnings 49,424 46,838
Treasury Stock, 954,773 shares and
923,422 shares, held at cost at 6/30/03
and 12/31/02, respectively (17,627) (16,603)
Unearned ESOP shares (944) (1,202)
Accumulated Other Comprehensive Income 661 678
-------- --------
TOTAL STOCKHOLDERS' EQUITY 50,484 48,586
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $624,238 $608,921
======== ========
See accompanying notes to unaudited consolidated financial statements
5
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,
2003 2002 2003 2002
INTEREST INCOME ------- ------- ------- -------
Loans and Leases Receivable $ 7,845 $ 8,301 $15,726 $17,282
Mortgage-Backed and Related Securities - 52 - 114
Taxable Securities 266 493 561 907
Tax Exempt Securities 44 63 89 126
Other Interest and Dividend Income 177 192 324 312
------- ------- ------- -------
Total Interest Income 8,332 9,101 16,700 18,741
INTEREST EXPENSE
Deposits 2,324 3,191 4,937 6,433
Advances from Federal Home Loan Bank 560 711 1,112 1,415
Other Borrowed Funds 62 59 94 150
------- ------- ------- -------
Total Interest Expense 2,946 3,961 6,143 7,998
------- ------- ------- -------
NET INTEREST INCOME 5,386 5,140 10,557 10,743
Provision for Loan Losses 300 164 515 636
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 5,086 4,976 10,042 10,107
NON-INTEREST INCOME
Loan Charges and Servicing Fees 214 218 394 441
Loan Prepayment Fees 355 494 583 956
Mortgage Banking Fees 264 137 460 268
Deposit Related Charges and Fees 324 308 643 606
Gain/(Loss) on Sale of Securities/Loans 50 - 50 74
Insurance and Annuity Commissions 26 7 48 23
Other 24 89 28 121
------- ------- ------- -------
Total Non-Interest Income 1,257 1,253 2,206 2,489
NON-INTEREST EXPENSE
Compensation and Benefits 1,750 1,849 3,782 3,737
Commissions and Incentives 159 145 289 338
Occupancy and Equipment 462 472 923 957
Federal Deposit Insurance Premium 19 20 38 40
Data Processing 293 266 573 526
Advertising 216 204 361 410
Other Real Estate Owned - 73 24 273
Amortization of Goodwill 42 51 84 103
Amortization of Mortgage Servicing Rights 18 18 43 44
Other 639 475 1,082 964
------- ------- ------- -------
Total Non-Interest Expense 3,598 3,573 7,199 7,392
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 2,745 2,656 5,049 5,204
Income Tax Provision (1,038) (976) (1,912) (1,911)
------- ------- ------- -------
NET INCOME $ 1,707 $ 1,680 $ 3,137 $ 3,293
======= ======= ======= =======
Basic Earnings per Share $0.50 $0.49 $0.92 $0.96
Diluted Earnings per Share $0.48 $0.47 $0.87 $0.91
Total Comprehensive Income $ 1,810 $ 1,976 $ 3,120 $ 3,447
See accompanying notes to unaudited consolidated financial statements
6
COVEST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands) SIX MONTHS ENDED
JUNE 30, JUNE 30,
2003 2002
OPERATING ACTVITIES -------- ---------
Net Income $ 3,137 $ 3,293
Adjustments to Reconcile Net Income to
Net Cash from Operating Activities
Depreciation and Amortization of
Premises and Equipment 431 450
Amortization of Intangibles 127 147
ESOP Compensation Expense 328 50
Provision for Loan Losses 515 636
Net Gain on Sales of
Securities/Loans (50) (74)
Federal Home Loan Bank Stock Dividend (318) (185)
Change In:
Prepaid Expenses and Other Assets (108) (1,054)
Accrued Interest Receivable 336 358
Accrued Expenses and Other Liabilities (256) 1,071
--------- ---------
NET CASH FROM OPERATING ACTIVITIES 4,142 4,692
CASH FLOWS FROM INVESTING ACTIVITIES
Loan Originations, Net of Principal
Payments (7,386) (1,924)
Proceeds from Sale of Loans - 20,083
Principal Payments on Mortgage-Backed
and Related Securities - 968
Purchases of Securities (18,938) (32,146)
Proceeds from Sales and Maturities
of Securities 30,025 17,930
Proceeds from the Sale of Other Real
Estate Owned 661 -
Purchase of Office Properties and
Equipment (30) (225)
--------- ---------
NET CASH FROM INVESTING ACTIVITIES 4,332 4,686
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase in Deposits 17,337 13,203
Borrowings 6,000 5,000
Repayment of Borrowings (10,235) (2,208)
Net Increase in Mortgage
Escrow Funds 645 734
Purchase of Common Stock Net of Proceeds
from Exercise of Stock Options (1,062) (2,261)
Dividend Paid (551) (563)
--------- ---------
NET CASH FROM FINANCING ACTIVITIES 12,134 13,905
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 20,608 23,283
CASH AND CASH EQUIVALENTS, BEGINNING 7,579 6,573
--------- ---------
CASH AND CASH EQUIVALENTS, ENDING $28,187 $29,856
========= =========
See accompanying notes to unaudited consolidated financial statements
7
COVEST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
(Dollars in thousands)
Six months ended June 30, 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 $45,151
Net Income 3,293 3,293
Change in Unrealized Gain on
Securities Available-for-Sale,
Net of Taxes 154 154
-------
Comprehensive Income 3,447
Cash Dividends ($.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
===========================================================================================================
Balance at December 31, 2002 $18,875 $46,838 ($16,603) ($1,202) $678 $48,586
Net Income 3,137 3,137
Change in Unrealized Gain on
Securities Available-for-Sale,
Net of Taxes (17) (17)
-----
Comprehensive Income 3,120
Cash Dividends ($.16 per share) (551) (551)
Purchase of Treasury Stock (1,125) (1,125)
Treasury Stock Reissued in
Conjunction with Stock Option
Exercises (38) 101 63
Release of ESOP Shares 70 258 328
Tax Benefits related to Employee
Stock Option Plans 63 63
- ----------------------------------------------------------------------------------------------------------
Balance at June 30, 2003 $18,970 $49,424 ($17,627) ($944) $661 $50,484
==========================================================================================================
See accompanying notes to unaudited consolidated financial statements
8
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, 2003 JUNE 30, 2002
--------------------------------- ---------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST
-------- -------- ---------- ------- -------- ----------
INTEREST EARNING ASSETS:
Commercial Loans(A)(B) $ 53,231 $ 683 5.13% $ 53,045 $ 784 5.91%
Multi-Family Loans(A)(B) 266,017 3,680 5.53 226,610 3,465 6.12
Commercial Real Estate Loans(A)(B) 82,016 1,213 5.92 78,944 1,407 7.13
Construction Loans(A)(B) 55,094 811 5.89 48,437 865 7.14
Commercial Leases(B) 302 5 6.62 1,288 20 6.21
Mortgage Loans(A)(B) 53,262 944 7.09 55,439 1,036 7.47
Consumer Loans (A) 34,468 510 5.92 43,273 725 6.70
Securities 34,013 332 3.90 47,177 588 4.99
Mortgage-Backed and Related
Securities - - - 2,906 52 7.16
Equity Investments 10,041 163 6.49 9,405 121 5.15
Other Investments 5,371 14 1.04 17,686 71 1.61
-------- ------- ---- -------- ------- ----
Total Interest-Earning Assets $593,815 $ 8,355 5.63% $584,210 $ 9,134 6.25%
Non-Interest Earning Assets 19,296 19,613
-------- --------
TOTAL ASSETS $613,111 $603,823
======== ========
INTEREST-BEARING LIABILITIES:
Interest-Bearing Checking $ 36,906 $ 118 1.28% $ 30,349 $ 101 1.33%
Savings 118,743 419 1.41 69,520 434 2.50
Money Market 74,352 210 1.13 101,601 440 1.73
Certificates of Deposits 139,481 1,095 3.14 170,067 1,642 3.86
Jumbo CDs 1,839 7 1.52 3,673 22 2.40
Purchased CDs 71,594 475 2.65 62,327 552 3.54
FHLB Advances 56,242 560 3.99 67,000 711 4.25
Other Borrowed Funds 17,263 62 1.44 10,260 59 2.30
--------- ------- ---- -------- ------- ----
Total Interest-Bearing Liabilities $516,420 $ 2,946 2.28% $514,797 $ 3,961 3.08%
Non-Interest Bearing Deposits 35,764 32,014
Other Liabilities 11,464 11,002
--------- --------
TOTAL LIABILITIES $563,647 $557,813
Stockholders' Equity 49,464 46,010
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $613,111 $603,823
======== ========
NET INTEREST INCOME (Tax Equivalent) $ 5,409 $ 5,173
======= =======
NET INTEREST RATE SPREAD (C) 3.35% 3.17%
==== ====
NET INTEREST MARGIN (D) 3.64% 3.54%
==== ====
(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.
9
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, 2003 JUNE 30, 2002
--------------------------------- ---------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST
-------- -------- ---------- ------- -------- ----------
INTEREST EARNING ASSETS:
Commercial Loans(A)(B) $ 54,081 $ 1,401 5.18% $ 51,869 $ 1,537 5.93%
Multi-Family Loans(A)(B) 259,492 7,257 5.59 228,432 7,284 6.38
Commercial Real Estate Loans(A)(B) 83,209 2,480 5.96 80,067 2,907 7.26
Construction Loans(A)(B) 54,377 1,595 5.87 51,578 1,894 7.34
Commercial Leases(B) 373 11 5.90 1,449 44 6.07
Mortgage Loans(A)(B) 53,988 1,919 7.11 56,491 2,130 7.54
Consumer Loans (A) 35,712 1,063 5.95 44,121 1,485 6.73
Securities 33,787 696 4.12 43,354 1,099 5.07
Mortgage-Backed and Related
Securities - - - 3,112 114 7.33
Equity Investments 9,902 304 6.14 9,267 237 5.11
Other Investments 3,947 21 1.06 9,393 75 1.60
-------- ------- ---- -------- ------- ----
Total Interest-Earning Assets $588,868 $16,747 5.69% $579,133 $18,806 6.49%
Non-Interest Earning Assets 18,763 19,135
-------- --------
TOTAL ASSETS $607,629 $598,268
======== ========
INTEREST-BEARING LIABILITIES:
Interest-Bearing Checking $ 35,651 $ 226 1.27% $ 29,860 $ 198 1.33%
Savings 112,132 965 1.72 63,985 794 2.48
Money Market 77,904 456 1.17 105,111 904 1.72
Certificates of Deposits 144,474 2,319 3.21 170,276 3,416 4.01
Jumbo CDs 1,852 16 1.73 6,366 84 2.64
Purchased CDs 70,628 955 2.70 55,676 1,037 3.73
FHLB Advances 55,901 1,112 3.98 66,088 1,415 4.28
Other Borrowed Funds 13,239 95 1.44 13,009 150 2.32
--------- ------- ---- -------- ------- ----
Total Interest-Bearing Liabilities $511,781 $ 6,144 2.40% $510,371 $ 7,998 3.13%
Non-Interest Bearing Deposits 35,415 31,553
Other Liabilities 11,252 10,536
--------- --------
TOTAL LIABILITIES $558,448 $552,459
Stockholders' Equity 49,181 45,809
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $607,629 $598,268
======== ========
NET INTEREST INCOME $10,603 $10,808
======= =======
NET INTEREST RATE SPREAD (C) 3.29% 3.36%
==== ====
NET INTEREST MARGIN (D) 3.60% 3.73%
==== ====
(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.
10
(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, 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 June 30, 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 for the three month periods ended June 30, 2003 and 2002 are presented
below: (dollars and shares in thousands)
Three Months Ended June 30,
----------------------------
2003 2002
---- ----
Earnings per share:
Net Income $1,707 $1,680
====== ======
Weighted average common shares
outstanding 3,381 3,432
===== =====
Basic earnings per share $0.50 $0.49
===== =====
Earnings per share assuming dilution:
Net Income $1,707 $1,680
====== ======
Weighted average common shares
outstanding 3,381 3,432
Add: dilutive effect of assumed
exercises of stock options 187 169
----- -----
Weighted average common and dilutive
potential common shares outstanding 3,568 3,601
===== =====
Diluted earnings per share $0.48 $0.47
===== =====
11
A reconciliation of the numerators and denominators for earnings per common
share for the six month periods ended June 30, 2003 and 2002 are presented
below: (dollars and shares in thousands)
Six Months Ended June 30,
---------------------------
2003 2002
---- ----
Earnings per share:
Net Income $3,137 $3,293
====== ======
Weighted average common shares
outstanding 3,392 3,440
===== =====
Basic earnings per share $0.92 $0.96
===== =====
Earnings per share assuming dilution:
Net Income $3,137 $3,293
====== ======
Weighted average common shares
outstanding 3,392 3,440
Add: dilutive effect of assumed
exercises of stock options 193 165
----- -----
Weighted average common and dilutive
potential common shares outstanding 3,586 3,605
===== =====
Diluted earnings per share $0.87 $0.91
===== =====
At June 30, 2003 and 2002 respectively, 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.
12
(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.
Three Months Ended Six Months Ended
2003 2002 2003 2002
---- ---- ---- ----
Net income as reported $1,707 $1,680 $3,137 $3,293
Deduct: Stock-based compensation expense
determined under fair value based method 23 23 48 152
------ ------ ------ ------
Pro forma net income $1,684 $1,657 $3,089 $3,141
====== ====== ====== ======
Basic earnings per share as reported $ 0.50 $ 0.49 $ 0.92 $ 0.96
Pro forma basic earnings per share 0.50 0.48 0.91 0.91
Diluted earnings per share as reported $ 0.48 $ 0.47 $ 0.87 $ 0.91
Pro forma diluted earnings per share 0.47 0.46 0.86 0.87
(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
======== ========= ========= =========== =========
26th 3/7/03 - 13,525 $28.00
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 85 shares in the second quarter of 2003 at an
average price of $26.23.
(5) Cash Dividend
The regular quarterly dividend for the second quarter of 2003 was paid at $.08
per share. The same quarterly dividend was paid for the second quarter of
2002.
13
(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
June 30, 2003, the Company's and Bank's capital requirements under FIRREA and
their actual capital ratios. As of June 30, 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
JUNE 30, 2003 Amount Ratio Amount Ratio Amount Ratio
============== ------ ------ ------ ------ ------ -----
(Dollars in Thousands)
Total Capital
(to Risk Weighted Assets)
Company $54.4 12.8% $34.1 8.0% $42.6 10.0%
Bank 50.7 12.0 33.9 8.0 42.4 10.0
Tier I Capital
(to Risk Weighted Assets)
Company $48.8 11.5% $17.0 4.0% $25.6 6.0%
Bank 45.4 10.7 17.0 4.0 25.5 6.0
Tier I Capital
(to Average Assets)
Company $48.8 8.0% $24.5 4.0% $30.7 5.0%
Bank 45.4 7.5 24.4 4.0 30.5 5.0
Risk Weighted Assets (Company) $425,938
Average Assets (Company) 613,111
Risk Weighted Assets (Bank) 424,209
Average Assets (Bank) 609,097
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
14
(7) Termination of the Merger Agreement
The Company entered into an Agreement and Plan of Reorganization with Midwest
Banc Holdings, Inc. on November 1, 2002. The merger agreement was terminated
on June 30, 2003 due to the inability of the parties to agree upon the terms
of an extension of the merger agreement.
(8) New Accounting Pronouncement
The Financial Accounting Standards Board (FASB) recently issued two new
accounting standards, Statement 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, and Statement 150,
Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equities, both of which generally become effective in the
quarter beginning July 1, 2003.
Because the Company does not have these instruments or is only nominally
involved in these instruments, Management determined that, upon adopting the
new standards the new accounting standards will not materially affect the
Company's operating results or financial condition.
(9) 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.
15
* 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.
16
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 loans, 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 3% to $624.2 million as of June 30, 2003, as compared
to $608.9 million at December 31, 2002. Total liabilities increased 2% to
$573.8 million as of June 30, 2003, as compared to $560.3 million at December
31, 2002. Stockholders' equity increased 4% to $50.5 million as of June 30,
2003, as compared to $48.6 million at December 31, 2002.
Cash and cash equivalents increased to $28.2 million at June 30, 2003 from
$7.6 million at December 31, 2002. The increase resulted from an increase in
interest bearing deposits. The funds will be used to pay down Federal Home
Loan Bank Term Advances in the next 30 days.
Securities decreased 22% to $38.4 million as of June 30, 2003 from $49.2
million at December 31, 2002. The Company limits its investment purchases to
cover collateral requirements for its borrowings and repurchase agreements.
Net loans receivable increased 1% to $541.9 million as of June 30, 2003,
compared to $535.0 million at December 31, 2002. The multi-family loan
portfolio increased 7% to $270.2 million as of June 30, 2003, compared to
$252.7 million at December 31, 2002. The Company repurchased $16.5 million of
previously participated multi-family loans in April 2003. The multi-family
loan portfolio 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. The
loan principal prepayments in the multi-family loan portfolio amounted to
$34.8 million for the first six months of 2003. Construction loans increased
6% to $57.6 million as of June 30, 2003, compared to $54.4 million at December
31, 2002. The increase in construction loans represented draws on previously
approved commitments. The increases in multi-family loans and construction
loans were offset by decreases in commercial loans by 6%, commercial real
estate loans by 5%, mortgage loans by 5% and consumer loans by 11%. In the
consumer loan portfolio, auto loans decreased 26% to $5.4 million as of June
30, 2003, compared to $7.3 million at December 31, 2002. Automobile
17
manufacturers' zero percentage rate loans continue to impact the new loan
fundings.
Total deposits increased 4% to $490.9 million as of June 30, 2003, compared to
$473.6 million at December 31, 2002. Non-interest bearing checking accounts
increased 13% to $38.0 million as of June 30, 2003, compared to $33.7 million
as of December 31, 2002. Interest-bearing checking accounts increased 7% to
$37.2 million as of June 30, 2003, compared to $34.8 million at December 31,
2002. Savings accounts increased 24% to $117.6 million as of June 30, 2003,
compared to $94.9 million at December 31, 2002. In April 2003, the Company
reduced its regular savings (with no related checking account) account rate
from 1.75% to 1.00% and its relationship savings (with related checking
account) account rate from 2.25% to 1.50%. The balance of savings accounts
remained at relatively the same level since March 2003. The relationship
savings accounts totaled $98.3 million at June 30, 2003 compared to $97.7
million at March 31, 2003. The Company believes that the savings account
pricing is still competitive in its market area. Money market accounts
decreased 15% to $73.0 million as of June 30, 2003, compared to $85.4 million
at December 31, 2002. The Company believes that the decrease in the average
weekly money market account index rate to 1.07% caused the decrease in the
accounts. On June 16, 2003, the money market account index rate dropped to
below 1%. The floor rate for money market accounts has been 1.00% since
January 30, 2003. Certificates of deposit decreased 10% to $139.8 million as
of June 30, 2003, compared to $156.0 million at December 31, 2002. Purchased
certificates of deposit increased 25% to $83.7 million as of June 30, 2003,
compared to $66.9 million at December 31, 2002. The Company purchased brokered
certificates of deposit totaling $11.1 million with an average rate of 1.71%
in the second quarter of 2003. The remainder of the increase consisted of
deposits from public institutions placed by their local deposit brokers.
Total borrowings decreased 6% to $70.1 million as of June 30, 2003, compared
to $74.3 million at December 31, 2002. Short-term borrowings decreased 22% to
$37.1 million as of June 30, 2003, compared to $47.4 million at December 31,
2002. The Company paid off $3.2 million of FHLB overnight borrowings, $5.0
million of overnight borrowings from a commercial bank correspondent and $1.0
million of the Company's line of credit incurred in connection with the
Company's stock repurchase program. The $1.0 million was paid in dividends
from the Bank to the Company in April. Repurchase agreements decreased $0.8
million. Long-term borrowings increased 22% to $33.0 million as of June 30,
2003, compared to $27.0 million at December 31, 2002. The Company purchased
two FHLB fixed term advances for $3.0 million each, at a cost of 2.06% with a
3-year term, and 2.77% with a 5-year term during the second quarter of 2003.
Stockholders' equity totaled $50.5 million at June 30, 2003, compared to $48.6
million at December 31, 2002. The number of shares outstanding excluding
unallocated Employee Stock Ownership Plan shares was 3,382,723 and the book
value per common share outstanding was $14.92, a 10% increase over $13.62 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. $555,586 of principal plus
interest has been repaid since the inception of the loan.
The Company announced its 26th stock repurchase program in March 7, 2003,
enabling the Company to repurchase 100,000 shares of its outstanding stock. A
total of 13,525 shares were repurchased at an average price of $28.00 through
July 29, 2003.
18
At June 30, 2003, the allowance for loan losses was $7.1 million compared to
$7.0 million at December 31, 2002. The Company recognized net charge-offs of
$437,000 for the six months ended June 30, 2003. During this period, the
Company recorded a $159,000 recovery on a multi-family loan which is currently
in non accrual status. In June 2002, $159,000 was charged off on this loan.
The loan will remain in non-accrual status pending a continuing overall
improvement in the outstanding credit. The Company provided $515,000 to the
allowance for loan losses. The ratio of the allowance for loan losses to
outstanding loans at June 30, 2003 was 1.30%, the same level at December 31,
2002. Management believes that the allowance for loan losses at June 30, 2003
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, 2003, total non-performing loans amounted to $4,982,000, or 0.92%
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 June 30,
2003, compared to 0.98% at December 31, 2002. Of the $3,016,000 commercial
real estate loans to related borrowers in non-accrual status at December 31,
2002, $300,000 was charged-off in the first quarter of 2003 and an additional
$300,000 was charged off in May 2003 due to the receipt of a new appraisal on
these properties. The $1,614,000 of non-performing multi-family loans consists
of $565,000 loans to related borrowers and a $1,049,000 loan. The $1,049,000
loan was originally for $1,426,000 and $159,000 of this loan was charged off
prior to its move to non-accrual status in June 2002. In June 2003, this loan
was upgraded and the $159,000 that had been charged off was reversed and
booked as recovery, with an increase in the balance of the loan to $1,049,000.
The Company considered these loans in the June 30, 2003 analysis for allowance
for loan losses. As of June 30, 2003, loans delinquent 90 days or more and
still accruing amounted to $321,000. 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 in the first quarter.
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 was
$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 and beyond. 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 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.
19
The following table sets forth the amounts and categories of non-performing
loans and assets.
JUNE 30, 2003 DEC 31, 2002
------------- ------------
(Dollars in Thousands)
Non-accruing Loans:
Commercial Loans $ 162 $ -
Multi-family Loans 1,614 918
Commercial Real Estate Loans 2,417 3,016
Construction Loans - -
Commercial Leases - -
Mortgage Loans 454 530
Consumer 14 35
------ ------
Total 4,661 4,499
Accruing Loans Delinquent 90 days or More:
Commercial Loans $ 17 $ 1,416
Multi-family Loans 295 -
Commercial Real Estate Loans - -
Construction Loans - -
Commercial Leases 9 14
Mortgage Loans - -
Consumer - 38
------ ------
Total 321 1,468
------ ------
Total Non-performing Loans $4,982 $5,967
Other Real Estate Owned - 661
Other Repossessed Assets - -
------ ------
Total Non-performing Assets $4,982 $6,628
====== ======
Total Non-performing Loans as
a Percentage of Net Loans 0.92% 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 $4.1 million, for the six months ended June 30,
2003. Net cash provided by investing activities was $4.3 million for the six
months ended June 30, 2003. Net cash provided by financing activities was
$12.1 million for the six months ended June 30, 2003.
The Company uses its liquidity to meet its ongoing commitments to fund
maturing certificates of deposit and deposit withdrawals, repay borrowings,
20
fund existing and continuing loan commitments, and pay operating expenses. At
June 30, 2003, the Company has commitments to originate loans totaling $34.7
million and its customers had approved but unused lines of credit totaling
$48.3 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,
2003 2002 2003 2002
------ ----- ------ ------
Annualized Return on Avg. Equity 13.80% 14.61% 12.76% 14.38%
Annualized Return on Avg. Assets 1.11 1.11 1.03 1.10
Book Value per Share $14.92 $13.62 $14.92 $13.62
Closing Market Price per Share $24.75 $22.46 $24.75 $22.46
Earnings per Primary Share:
Basic $0.50 $0.49 $0.92 $0.96
Diluted $0.48 $0.47 $0.87 $0.91
Net Interest Margin 3.64% 3.54% 3.60% 3.73%
Ratio of Operating Expense to
Average Total Assets, Annualized 2.35% 2.37% 2.37% 2.47%
Ratio of Net Interest Income to
Non-Interest Expense 1.50x 1.44x 1.47x 1.45x
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2003 AND 2002
- -----------------------------------------------------------------------------
Net income for the second quarter of 2003 was $1,707,000, up 2% over
$1,680,000 for the same period in 2002, and up 19% over $1,430,000 for the
first quarter of 2003. Basic earnings per share were $0.50, a 2% increase
compared to $0.49 for the same period in 2002, and a 19% increase over $0.42
for the first quarter of 2003. Diluted earnings per share were $0.48, a 2%
increase compared to $0.47 for the same period in 2002, and a 20% increase
over $0.40 for the first quarter of 2003.
Return on average equity and return on average assets for the second quarter
of 2003 were 13.80% and 1.11% respectively, compared to 14.61% and 1.11% for
the same quarter in 2002. Return on average equity and return on average
assets for the first quarter of 2003 were 11.70% and 0.95% respectively.
The Company's efficiency ratio for the second quarter of 2003 improved to
54.16% compared to 55.89% for the same period in 2002. The Company's
efficiency ratio for the first quarter of 2003 was 58.84%. The goal for 2003
is to maintain an efficiency ratio at lower than 56%.
Net interest income for the second quarter of 2003 increased $246,000, or a 5%
increase compared to the same period in 2002, or a 4% increase compared to the
first quarter of 2003. Net interest margin for the second quarter of 2003 was
3.64%, or a 3% increase compared to 3.54% for the same period in 2002 versus
3.56% for the first quarter of 2003. The net interest spread for the second
quarter of 2003 was 3.35%, a 6% increase compared to 3.17% for the second
quarter of 2002, or a 4% increase compared to 3.23% for the first quarter of
2003. The average yield on interest earning assets for the second quarter of
2003 was 5.63%, a 62 basis points decrease compared to 6.25% for the same
period in 2002. The average cost of interest bearing liabilities for the
21
second quarter of 2003 was 2.28%, an 80 basis point decrease compared to 3.08%
for the same period in 2002. The decrease in the cost of average interest
bearing liabilities exceeded the decrease in the yield on average interest
earning assets. The increase in average non-interest bearing deposits by $3.8
million, or 12%, contributed to the improved interest margin.
The Company's total interest income (tax equivalent) on earning assets
decreased 9% to $8,355,000 for the second quarter of 2003, compared to
$9,134,000 for the same period in 2002. It was the Company's strategy since
2002 to concentrate in funding adjustable rate loans to minimize exposure to
rising interest rates. The Company has been asset sensitive since February
2002. The Company's loan portfolio was comprised of 81% adjustable/floating
rate loans at June 30, 2003. The average balance of loans for the second
quarter of 2003 increased 7% to $544.4 million, compared to $507.0 million for
the same period in 2002. The biggest increase was in multi-family loans, which
is mostly comprised of adjustable rate term loans with floors and prepayment
penalties established upon origination. The Company repurchased $16.5 million
of medium-term multi-family loan participations that have an average yield of
7.00%, in April 2003. Loan principal prepayments in the multi-family loan
portfolio for the second quarter of 2003 totaled $20.0 million. Loan costs
associated with loan prepayments, which are accounted for as reduction to
interest income, amounted to $57,000 for the second quarter of 2003. The
average yield on loans for the second quarter of 2003 decreased to 5.76%, a 79
basis point decrease compared to 6.55% for the same period in 2002. The
increased volume of loans partially offset the effect of income reduction from
falling rates. In February 2002, the Company set a 5.00% floor on its home
equity loan portfolio. The average balance of home equity and home improvement
loans decreased 16% to $26.9 million for the second quarter of 2003, compared
to $32.0 million for the same period in 2002. The Company's ALCO Committee at
its May 2003 meeting approved the removal of the 5.00% floor, effective August
2003. The Company hopes that the change in pricing strategy will help to
increase loan volume. The average balance of investments for the second
quarter of 2003 decreased 36% to $49.4 million, compared to $77.2 million for
the same period in 2002. The Company limits its investment purchases to cover
collateral requirements for its borrowings and repurchase agreements. The
average yield on investments for the second quarter of 2003 was 4.13%, a 14
basis point decrease compared to 4.27% for the same period in 2002. Overnight
investments averaged $5.4 million in the second quarter of 2003, a 69%
decrease compared to $17.7 million for the same period in 2002. The
redeployment of funds to higher yielding loans contributed to a higher
interest margin for the second quarter of 2003 as compared to the same period
in 2002 and the first quarter of 2003. Included in equity investments at the
holding company are $1.7 million of trust preferred issues with fixed rates
ranging from 8.25% to 10.00%.
Total interest expense for the second quarter of 2003 decreased 26% to
$2,946,000, compared to $3,961,000. The average balance of interest-bearing
deposits was $442.9 million for the second quarter of 2003, a 1% increase
compared to $437.5 million for the same period in 2002. Money market accounts
decreased 27% to $74.4 million, certificates of deposit decreased 18% to
$139.5 million, while savings accounts increased 71% to $118.7 million. Until
April 1, 2003, the relationship savings (with related checking accounts) rate
was 2.25% while the regular savings (with no related checking accounts) rate
was 1.75%. The decline in the average weekly money market account index to
1.05% for the second quarter and the reduced rates on short-term certificates
of deposit caused customers to shift their deposits to savings accounts. In
April 2003, the Company reduced the relationship savings rate to 1.50% and the
regular savings rate to 1.00%. The relationship savings accounts totaled $98.3
million at June 30, 2003, compared to $97.7 million at March 31, 2003. The
Company believes the new savings account pricing is still competitive in its
market area. Purchased certificates of deposit increased 15% to $71.6 million
for the second quarter of 2003, compared to $62.3 million for the same period
22
in 2002. The cost of purchased funds for the second quarter of 2003 was 89
basis points less than that of the same period in 2002. The total cost of
deposits for the second quarter of 2003 was 2.10%, 82 basis points less than
the 2.92% for the same period in 2002. The average balance of borrowings for
the second quarter of 2003 decreased 5% to $73.5 million, compared to $77.3
million for the same period in 2002. The average cost of borrowings for the
second quarter of 2003 was 3.39%, 60 basis points less than 3.99% for the same
period in 2002.
The provision for loan losses was $300,000 for the second quarter of 2003
versus $164,000 for the same period in 2002. The net charge-offs for the
second quarter of 2003 were $128,000, compared to $164,000 for the same period
in 2002. The ratio of net charge-offs to average loans for the second quarter
of 2003 was 0.02% compared to 0.03% for the same period in 2002. The ratio of
allowance for loan losses to total outstanding loans at June 30, 2003 was
1.30% compared to 1.34% at June 30, 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 the 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 June 30, 2003 was at a level adequate to absorb probable incurred losses on
existing loans, although there can be assurance that such losses will not
exceed the estimated amounts.
23
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,
2003 2002
---------- ----------
(Dollars in Thousands)
Balance at Beginning of Period $6,945 $6,650
Charge-offs:
Commercial Loans - -
Multi-family Loans - 159
Commercial Real Estate Loans 300 -
Construction Loans - -
Commercial/Municipal Leases - -
Mortgage Loans - -
Consumer 1 21
------ ------
Charge-offs Total 301 180
Recoveries:
Commercial Loans - 8
Multi-family Loans 159 -
Commercial Real Estate Loans - -
Construction Loans - -
Commercial/Municipal Leases - -
Mortgage Loans - -
Consumer 14 8
------ ------
Recoveries Total 173 16
------ ------
Net Charge-offs 128 164
Additions Charged to Operations 300 164
------ ------
Balance at End of Period $7,117 $6,650
====== ======
Ratio of Net Charge-offs During
the Period to Average Loans
Outstanding During the Period 0.02% 0.03%
Ratio of Allowance for Loan
Losses to Non-performing Loans 1.43x 2.91x
Ratio of Allowance for Loan
Losses to Total Outstanding Loans 1.30% 1.34%
Non-interest income for the second quarter of 2003 was at relatively the same
level compared to the second quarter of 2002. Loan charges and servicing fees
decreased $4,000. Loan charges increased $15,000 while loan servicing fees
decreased $19,000. An average of 588 loans were serviced in the second quarter
of 2003 compared to 947 loans in the second quarter of 2002. Prepayment fees
decreased 28% to $355,000 for the second quarter of 2003, compared to $494,000
for the same period in 2002. Loan prepayments for the second quarter of 2003
totaled 27 loans for $20.0 million compared to 40 loans for $29.7 million for
the same period in 2002. Mortgage banking fees for the second quarter of 2003
24
increased 93% to $264,000, compared to $137,000 for the same period in 2002.
Other income for the second quarter of 2003 decreased 73% to $24,000, compared
to $89,000 for the same period in 2002. Included in other income for 2002 was
$65,000 representing interest on 1992 and 1993 State of Illinois income tax
refunds. Included in other income for 2003 was $3,000 representing interest on
1999 and 2000 State of Illinois income tax refunds.
Non-interest expense for the second quarter of 2003 remained at relatively the
same level to that of the second quarter of 2002. Compensation and benefits
decreased $99,000 to $1,750,000, compared to $1,849,000. Payroll taxes
decreased $26,000 and 401K employer match decreased $10,000. Group medical
self-insurance decreased $79,000 compared to 2002 due to medical insurance
being accrued based on average insurance claims compared to 2002 where accrual
was based on maximum insurance claims. Education and training expenses
decreased $27,000. Post retirement expenses decreased $14,000 as the plan was
frozen in 2002 and benefits will only be provided to current retirees. ESOP
expense increased $48,000, that included $23,000 of stock price appreciation
on released ESOP shares. Commissions and incentives increased $14,000.
Commissions increased $73,000 due to greater mortgage loan originations in the
second quarter of 2003 compared to the same period in 2002. Incentive
compensation on retail banking increased $7,000. Bonus expense decreased
$64,000. Committee incentives decreased $2,000. Occupancy and equipment
expenses decreased $10,000 due to planned computer upgrades and the purchase
of a replacement van. These projects will be revisited since the acquisition
has been terminated. Data processing expenses increased $27,000. Core
processing expenses increased $10,000, internet maintenance expenses increased
$11,000. REO expenses decreased $73,000. The average balance of REO for the
second quarter of 2002 was $1.0 million compared to none for the second
quarter of 2003. Other expenses increased $164,000. Legal expenses increased
$109,000, which included $70,000 related to the proposed acquisition of the
Company. Audit expenses increased $40,000 as the Company reactivated services
that had been placed on hold because of the proposed acquisition of the
Company. Consulting fees increased $25,000, also from fees related to the
proposed acquisition of the Company. Deposit related expenses decreased
$13,000, mainly from outclearing chargeback losses that decreased $11,000.
General and administrative expenses remained at relatively the same levels in
the second quarter of 2003 as compared to the same period in 2002. In
addition to out-of-pocket expenses incurred by the Company in connection with
the terminated merger agreement, the Company also incurred lost opportunity
costs associated with the delay in implementing its business strategies and
resulting from the disruption of its normal operations. The Company may also
incur additional future recruiting and compensation expenses to replace some
officers who left the Company, while the merger agreement was pending, for
other employment opportunities.
Income tax expense decreased $62,000 to $976,000 for the second quarter of
2003, compared to $1,038,000 for the same period in 2002. The effective tax
rate was 37% for the second quarter of 2003 as compared to 38% for the same
period in 2002.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
- ----------------------------------------------------------------------
Net income for the first six months of 2003 decreased 5% to $3,137,000 as
compared to $3,293,000 for the same period in 2002. Basic earnings per share
were $0.92, a 4% decrease compared to $0.96 for the same period in 2002.
Diluted earnings per share were $0.87, a 4% decrease compared to $0.91 for the
same period in 2002.
Return on average equity and return on average assets for the first six months
of 2003 were 12.76% and 1.03% respectively, compared to 14.38% and 1.10% for
the same period in 2002.
25
The Company's efficiency ratio for the first six months of 2003 was 56.41%
compared to 55.86% for the same period in 2002. The Company's goal for 2003 is
to maintain an efficiency ratio at lower than 56%.
Net interest income for the first six months of 2003 decreased $186,000, or 2%
to $10,557,000 compared to $10,743,000 for the same period in 2002. Interest
income for the first six months of 2003 decreased 11% while interest expense
decreased 23% as compared to the same period in 2002. The average yield on
interest earning assets for the first six months of 2003 was 5.69%, an 80
basis point decrease compared to 6.49% for the same period in 2002. The
average cost of interest bearing liabilities was 2.40%, a 73 basis point
decrease compared to 3.13% for the same period in 2002. The net interest
spread for the first six months of 2003 was 3.29% compared to 3.36% for the
same period in 2002. The net interest margin for the first six months of 2003
was 3.60% compared to 3.73% for the same period in 2002. The increase in the
average balance of non-interest bearing deposits by $3.9 million partially
offset the effect of the contraction in the net interest rate spread.
The Company's total interest income (tax equivalent) on earnings assets
decreased 11% to $16,747,000 for the first six months of 2003 compared to
$18,806,000 for the same period in 2002. The average balance of interest
earning assets increased 2% for the first six months of 2003. The average
balance of loans for the first six months of 2003 increased 5% to $541.2
million compared to $514.0 million for the same period in 2002. The average
yield on loans was 5.81%, a 91 basis point decrease compared to 6.72% for the
same period in 2002. Multi-family loans make up 48% of the Company's loan
portfolio and increased 13% to $259.5 million compared to $228.4 million for
the same period in 2002. The multi-family loan portfolio is comprised of
adjustable rate loans with floors and prepayment penalties established upon
origination. In April 2003, the Company repurchased $16.5 million of medium-
term multi-family loan participations that have an average yield of 7.00%.
Loan principal prepayments in the multi-family loan portfolio for the first
six months of 2003 totaled 54 loans for a total loan balance of $34.8 million.
Loan costs associated with loan prepayments that are accounted for as
reduction to interest income amounted to $112,000 for the first six months of
2003. The increased volume of loans partially offset the effect of interest
income reduction from falling rates. The average balance of investments
decreased $17.5 million for the first six months of 2003. The Company limits
its investment purchases to cover collateral requirements for its borrowings
and repurchase agreements. The average balance of overnight investments for
the first six months of 2003 decreased $5.8 million compared to the same
period in 2002 and the first quarter of 2003. The redeployment of funds to
higher yielding loans contributed to a higher yield on interest earning
assets. Included in equity investments at the holding company are $1.7 million
of trust preferred issues with fixed rates ranging from 8.25% to 10.00%.
Total interest expense for the first six months of 2003 decreased 23% to
$6,144,000 compared to $$7,998,000. The average balance of interest bearing
liabilities for the first six months of 2003 was $511.9 million, relatively
the same level compared to $510.4 million for the same period in 2002. The
average balance of interest bearing liabilities increased 3% to $442.6 million
compared to $431.3 million for the same period in 2002. Money market accounts
decreased 26% and certificates of deposit decreased 15%. Savings accounts
increased 75% and purchased certificates of deposit increased 27%. Until April
2003, the relationship savings (with related checking accounts) rate was 2.25%
while regular savings (with no related checking accounts) rate was 1.75%. The
money market index rate declined to an average of 1.11% for the first six
months in 2003. The Company believes that money market customers and short-
term certificate of deposit account holders shifted their deposits to savings
accounts. In April 2003, the Company reduced the relationship savings rate to
1.50% and the regular savings rate to 1.00%. The Company believes that this
26
savings account pricing is still competitive in its market area. The average
cost of interest bearing deposits decreased 26% to 2.23%, a 75 basis point
decrease compared to 2.98% for the same period in 2002. The average cost of
purchased certificates of deposit decreased to 2.70%, a 102 basis point
decrease compared to 3.72% for the same period in 2002. The average balance of
borrowings for the first six months of 2003 decreased 13% to $69.1 million
compared to $79.1 million for the same period in 2002. The average cost of
borrowings decreased 12% to 3.49%, a 47 basis point decrease compared to 3.96%
for the same period in 2002.
The provision for loan losses was $515,000 for the first six months of 2003
compared to $636,000 for the same period in 2002. The net charge-offs for the
first six months of 2003 were $434,000 compared to $533,000 for the same
period in 2002. Management believes that the allowance for loan losses at June
30, 2003, 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
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, 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.
27
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,
2003 2002
---------- ----------
(Dollars in Thousands)
Balance at Beginning of Period $7,039 $6,547
Charge-offs:
Commercial Loans - 20
Multi-family Loans - 159
Commercial Real Estate Loans 600 240
Construction Loans - -
Commercial/Municipal Leases 14 -
Mortgage Loans - 49
Consumer 11 87
------ ------
Charge-offs Total 625 555
Recoveries:
Commercial Loans - 10
Multi-family Loans 159 -
Commercial Real Estate Loans - -
Construction Loans - -
Commercial/Municipal Leases - -
Mortgage Loans - -
Consumer 29 12
------ ------
Recoveries Total 188 22
------ ------
Net Charge-offs 437 533
Additions Charged to Operations 515 636
------ ------
Balance at End of Period $7,117 $6,650
====== ======
Ratio of Net Charge-offs During
the Period to Average Loans
Outstanding During the Period 0.08% 0.10%
Ratio of Allowance for Possible
Loan Losses to Non-performing Loans 1.43x 2.91x
Non-interest income decreased $283,000, or 11%, for the first six months of
2003 compared to the same period in 2002. Loan prepayment fees decreased
$373,000. Loan prepayments for the first six months of 2003 totaled 54 loans
amounting to $34.8 million compared to 71 loans amounting to $61.6 million for
the same period in 2002. Loan charges and servicing fees decreased $47,000.
Loan charges decreased $10,000 while servicing fees decreased $37,000. An
average of 633 loans were serviced during the first six month of 2003 compared
to 986 for the same period in 2002. Mortgage banking fees increased $192,000.
Other income decreased $93,000. Included in other income for 2002 were $65,000
representing interest on 1992 and 1993 State of Illinois income tax refunds
and a $2,000 loss on sale of OREO. Included in other income for 2003 were
28
$3,000 representing interest on 1999 and 2000 State of Illinois income tax
refunds and a $21,000 loss on sale of OREO.
Non-interest expense decreased $192,000, or 3% for the first six months of
2003 compared to the same period in 2002. REO expenses decreased $249,000.
The average balance of OREO for the first six months of 2003 was $181,000
compared to $1,106,000 for the same period in 2002. Other expenses increased
$118,000. Legal expenses increased $126,000 and consulting fees increased
$36,000 due to legal and consulting expenses incurred in relation to the
proposed acquisition of the Company. Loan related expenses increased $32,000
while deposit related expenses decreased $14,000. General and administrative
expenses decreased $51,000. Compensation and benefits increased $45,000.
Salary, overtime and temporary help expenses increased $63,000. ESOP expense
increased $266,000. An additional payment was made to the ESOP plan when it
was thought that the proposed acquisition of the Company would be consummated.
Included in ESOP expense was $70,000 of stock price appreciation on the
released ESOP shares. Group medical self-insurance decreased $180,000 because
the accrual for 2003 is based on estimated average claims, while the accrual
for 2002 was based on estimated maximum claims. Taxes and benefits decreased
$34,000. Education and training expenses decreased $42,000. Post retirement
expenses decreased $30,000, as the plan was frozen in 2002 and benefits will
only be provided to current retirees. Occupancy and equipment expenses
decreased $34,000 due to planned computer upgrades being placed on hold due to
the proposed acquisition of the Company. These expenditures will now be
revisited since the acquisition has been terminated. In addition to out-of-
pocket expenses incurred by the Company in connection with the terminated
merger agreement, the Company also incurred lost opportunity costs associated
with the delay in implementing its business strategies and resulting from the
disruption of its normal operations. The Company may also incur additional
future recruiting and compensation expenses to replace some officers who left
the Company, while the merger agreement was pending, for other employment
opportunities.
Income tax expense for the first six months of 2003 was $1,912,000 relatively
the same level compared to the same period in 2002. The effective tax rate was
38% for the first six months of 2003 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
29
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.
30
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, 2003
Change in Percent Change in
Interest Rates Percent Change in MV of Portfolio
(basis points) Net Interest Income Equity
- ---------------- --------------------- -------------------
+200 +8% -7%
+100 +4 -5
0 0 0
-100 -2 +1
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
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.
31
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation
of the Company's management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures (as defined in Rule 13a-15(e)
promulgated under the Securities and Exchange Act of 1934, as amended) as of
June 30, 2003. Based on that evaluation, the Company's management, including
the Chief Executive Officer and Chief Financial Officer, concluded that the
Company's disclosure controls and procedures were effective. There have been
no significant changes in the Company's internal controls or in other factors
that could significantly affect internal controls.
32
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 May 20, 2003, the annual meeting of stockholders was held. James L.
Roberts and Frank A. Svoboda, Jr. were elected to serve as Class II directors
with terms expiring in 2006. Continuing to serve as Class III directors with
terms expiring in 2004 are Gerald T. Niedert and David B. Speer. Continuing
to serve as Class I directors with terms expiring in 2005 are George T. Drost
and David M. Miller. The stockholders also ratified the appointment of Crowe,
Chizek and Company LLC as the Company's independent public accountants for the
year ending December 31, 2003.
There were 3,380,861 issued and outstanding shares (4,403,803 issued, less
956,635 shares of treasury stock and 66,307 shares of unallocated ESOP shares)
of common stock at the time of the annual meeting. 2,885,957 shares were
voted at the meeting. The voting on each item presented at the annual meeting
was as follows:
Election of Directors FOR WITHHELD
- --------------------- --- --------
James L. Roberts 2,718,775 167,182
Frank A. Svoboda, Jr. 2,838,050 47,907
Ratification of Accountants
- ---------------------------
FOR AGAINST ABSTAIN BROKER NON VOTES
--- ------- ------- ----------------
2,747,451 133,246 5,260 -0-
ITEM 5. OTHER INFORMATION
None
33
ITEM 6. EXHIBITS AND REPORTS
(a) Exhibits
31.1 Certification of Chief Executive Officer Pursuant to
Rule 13a-14(a)/15d-14(a)
31.2 Certification of Chief Financial Officer Pursuant to
Rule 13a-14(a)/15d-14(a)
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K
A report on Form 8-K was filed on April 29, 2003 to report under Item 5 the
Company's earnings for the first quarter of 2003.
A report on Form 8-K was filed on May 14, 2003 to report under Item 5 that
regulatory approvals required for the merger were not anticipated by June 30,
2003.
A report on Form 8-K was filed on May 20, 2003 to report under Item 5 the
declaration of a regular quarterly dividend.
A report on Form 8-K was filed on July 1, 2003 to report under Item 5 the
termination of the merger agreement between the Company and Midwest Banc
Holdings, Inc.
34
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 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
35
Exhibit 31.1
I, James L. Roberts, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CoVest Bancshares,
Inc.;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, 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 report is being prepared;
b) [intentionally omitted]
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Date: July 29, 2003
/S/ JAMES L. ROBERTS
JAMES L. ROBERTS
CHIEF EXECUTIVE OFFICER
36
Exhibit 31.2
I, Paul A. Larsen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CoVest Bancshares,
Inc.;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, 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 report is being prepared;
b) [intentionally omitted]
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Date: July 29, 2003
/S/ PAUL A. LARSEN
PAUL A. LARSEN
CHIEF FINANCIAL OFFICER
Exhibit 32.1
37
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 June 30, 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: JULY 29, 2003
/S/ JAMES L. ROBERTS
JAMES L. ROBERTS
CHIEF EXECUTIVE OFFICER
A signed original of this written statement required by Section 906 has been
provided to CoVest Bancshares, Inc. and will be retained by CoVest Bancshares,
Inc. and furnished to the Securities and Exchange Commission or its staff upon
request.
Exhibit 32.2
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 June 30, 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: JULY 29, 2003
/S/ PAUL A. LARSEN
PAUL A. LARSEN
CHIEF FINANCIAL OFFICER
A signed original of this written statement required by Section 906 has been
provided to CoVest Bancshares, Inc. and will be retained by CoVest Bancshares,
Inc. and furnished to the Securities and Exchange Commission or its staff upon
request.