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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-----------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from _______ to _______
Commission File Number 0-20160
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COVEST BANCSHARES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 36-3820609
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
749 Lee Street, Des Plaines, Illinois 60016
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 294-6500
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
------------------- ---------------------
NONE NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
--------------------------------------
(Title of Class)
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 twelve months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such requirements
for the past 90 days.
YES __X__ NO _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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1
As of March 3, 2000, the Registrant had issued 4,403,803 shares of the
Registrant's Common Stock. In addition, it had also repurchased 328,080 shares
which were being held as treasury stock. The aggregate market value of the
voting stock held by non-affiliates of the Registrant as of March 3, 2000, was
$50,427,000.*
DOCUMENTS INCORPORATED BY REFERENCE
-------------------------------------------------------------------
PART III of Form 10-K--Portions of the Proxy Statement for the 2000
Annual Meeting of Stockholders.
* Based on the closing price of the Registrant's Common Stock on March 3, 2000,
and reports of beneficial ownership filed by directors and executive officers of
Registrant and by beneficial owners of more than 5% of the outstanding shares of
Common Stock of Registrant; however, such determination of shares owned by
affiliates does not constitute an admission of affiliate status or beneficial
interest in shares of Registrant's Common Stock.
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2
COVEST BANCSHARES, INC.
1999 ANNUAL REPORT ON FORM 10-K
Table of Contents
Page
Number
PART I
Item 1. Business.............................................................5
Item 2. Properties..........................................................33
Item 3. Legal Proceedings...................................................33
Item 4. Submission of Matters to a Vote of Security Holders.................33
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stock Holder Matters.............................................34
Item 6. Selected Financial Data.............................................37
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition..............................................39
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..........49
Item 8. Consolidated Financial Statements...................................52
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.............................................83
PART III
Item 10. Directors and Executive Officers of the Registrant.................83
Item 11. Executive Compensation.............................................83
Item 12. Security Ownership of Certain Beneficial Owners and Management....83
Item 13. Certain Relationships and Related Transactions.....................83
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PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K........................................................84
SIGNATURES....................................................................85
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PART I
SAFE HARBOR STATEMENT
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Company, are
generally identifiable by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project" or similar expressions. The Company's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse affect on the
operations and future prospects of the Company and the subsidiary include, but
are not limited to, changes in: interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or securities portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Company's market area and accounting principles, policies and guidelines.
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements. Further
information concerning the Company and its business, including additional
factors that could materially affect the Company's financial results, is
included in the Company's filings with the Securities and Exchange Commission.
ITEM 1. BUSINESS
THE COMPANY
GENERAL
CoVest Bancshares, Inc., a Delaware corporation (the "Company"), is a bank
holding company registered under the Bank Holding Company Act of 1956, as
amended (the "BHCA"). The Company's subsidiary is CoVest Banc, National
Association, a national banking association (the "Bank"). The Bank's subsidiary
service corporation, CoVest Investments, Inc., an Illinois corporation ("CII"),
engages in the business of selling annuities, insurance products and complete
brokerage services. The Company was organized in 1992, in connection with the
Bank's conversion from the mutual to the stock form of organization (the
"Conversion") which was completed on June 30, 1992. The Company's common stock
is quoted on the Nasdaq National Market System under the symbol "COVB". Prior to
August, 1997, the Company was a savings and loan holding company registered
under the Home Owners Loan Act, as amended. The Company became a bank holding
company effective August 1, 1997, when the Bank completed its conversion from a
federal savings association to a national bank.
The Company, the Bank and CII are subject to comprehensive regulation,
examination and supervision by the Board of Governors of the Federal Reserve
System (the "FRB"), the Office of the Comptroller of the Currency (the "OCC")
and the Federal Deposit Insurance Corporation (the "FDIC"). The Bank is a member
of the Federal Home Loan Bank System (the "FHLB") and its deposits are insured
by the Savings Association Insurance Fund ("SAIF") to the maximum extent
permitted by the FDIC. The Company engages in a general full service retail
banking business and offers a broad variety of commercial and consumer oriented
products and services to customers in its primary market area. The Company is
principally engaged in the business of attracting deposits from the general
public and originating commercial loans and to a lesser extent mortgage loans in
its primary market area. The Company also originates consumer loans and invests
in securities.
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Finally, the Company offers, on an agency basis through CII, annuities,
insurance products and complete brokerage services to its customers.
The Company's income is derived from interest on loans and securities, service
charges, loan origination and servicing fees, mortgage center fees, and proceeds
from the sale, through CII, of annuity and insurance products. The Company's
operations are affected by general economic conditions, the monetary and fiscal
policies of the federal government and the policies of the various regulatory
authorities, including the OCC, FDIC and the FRB. Its results of operations are
largely dependent upon its net interest income, which is the difference between
the interest it receives on its loan and securities portfolios and the interest
it pays on its deposit accounts and borrowed money.
The Company's corporate headquarters are located at 749 Lee Street, Des Plaines,
Illinois. The Company's telephone number is (847) 294-6500. Its internet address
is www.covestbanc.com.
MARKET AREA
The Company's main office and a drive-up facility are located in downtown Des
Plaines, Illinois. Des Plaines is a mature suburban Chicago community which had
a population of approximately 53,200 in 1990. Des Plaines is located
approximately 20 miles from downtown Chicago and five miles north of Chicago's
O'Hare airport.
In March, 1994, the Company established its first branch office in Arlington
Heights, Illinois, through the acquisition from the Resolution Trust Corporation
of the deposits and office building of the Arlington Heights branch of the
former Irving Federal Bank, F.S.B. Arlington Heights is a suburban Chicago
community located approximately 10 miles northwest of Des Plaines. Based on the
1990 census, it had a population of approximately 75,500.
On March 2, 1995, the Company opened its second branch in Schaumburg, Illinois.
Schaumburg is located approximately 16 miles southwest of Arlington Heights and
approximately 13 miles west of Des Plaines. Schaumburg had a population of
68,586 in 1990.
On February 11, 1998, the Company opened a Mortgage Center in McHenry, Illinois,
the county seat of McHenry County, located approximately 35 miles northwest of
Des Plaines. The CoVest Banc Mortgage Center concentrates on mortgage loan
origination and sales.
Des Plaines and parts of the surrounding contiguous communities such as Park
Ridge, Niles and Mount Prospect had historically constituted the Company's
primary market area. However, with the establishment of the two additional
offices by the Company, the market area has expanded into several other suburban
areas such as Arlington Heights, Prospect Heights, Buffalo Grove, Schaumburg and
Hoffman Estates. These suburban areas are characterized by single-family
residences and apartment buildings. Many of the residents of the Company's
primary market area consist of professional or "white collar" workers who
commute into Chicago or engage in local retail trade, although a significant
number of residents in the farther outlying suburbs, such as Schaumburg, work in
that community at jobs in the service sector. The Company's success has been
due, in part, to its market area's growth, favorable population and income
demographics.
LENDING ACTIVITIES
GENERAL
The Company faces strong competition both in originating loans and in attracting
deposits. Competition for commercial, commercial real estate, construction and
multi-family loans comes primarily from large commercial banks and smaller
community banks. Competition in originating real estate loans comes primarily
from mortgage bankers, other savings institutions and commercial banks, all of
which also make loans secured
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6
by real estate located in the Company's primary market area. The Company
competes for real estate loans principally on the basis of the interest rates,
loan fees it charges, the types of loans it offers and the quality of services
it provides to borrowers. The competition for consumer loans comes primarily
from commercial banks, smaller community banks, and finance companies.
The principal lending activity of the Bank before 1996 had historically been
originating first mortgage loans for its portfolio, secured by owner occupied
one-to-four family residential properties located in its primary market area.
The Bank also offers a wide selection of consumer loans. Beginning in 1996, the
Bank began a major balance sheet restructuring project, and is now a
full-service commercial bank.
The Bank's Mortgage Center provides a full array of first mortgage products for
which it acts as a loan originator and placer. Most loans are sold on a service
released basis to other financial institutions, for which the Bank receives a
fee and has no additional rights.
LOAN PORTFOLIO COMPOSITION
The following table outlines the composition of the Company's loan portfolio in
dollar amounts and in percentages as of the dates indicated:
----------------------------------------------December 31,--------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(Dollars in Thousands)
Commercial loans $ 17,207 3.69% $ 8,035 1.98% $ 5,504 1.44% $ 58 0.02% $ -- --%
Real estate loans
One-to-four family 130,235 27.91 154,182 37.94 235,425 61.76 251,831 74.21 275,570 83.04
Multi-family 126,109 27.03 55,661 13.70 4,604 1.21 995 0.29 177 0.06
Commercial real estate 73,596 15.77 66,776 16.43 56,220 14.75 20,705 6.11 2,200 0.66
Construction 46,177 9.90 40,572 9.98 8,939 2.34 1,811 0.53 -- --
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total real estate loans 376,117 80.61 317,191 78.05 305,188 80.06 275,342 81.14 277,947 83.76
Commercial leases 22,029 4.72 35,166 8.66 11,274 2.96 7,053 2.08 -- --
Consumer loans
Automobile 21,387 4.58 21,036 5.18 22,781 5.98 21,802 6.42 18,618 5.61
Home equity 27,786 5.96 22,654 5.57 21,987 5.77 18,570 5.47 16,323 4.92
Credit card -- -- -- -- 13,469 3.53 15,812 4.66 18,289 5.51
Other 2,066 0.44 2,290 0.56 1,008 0.26 716 0.21 677 0.20
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total consumer loans 51,239 10.98 45,980 11.31 59,245 15.54 56,900 16.76 53,907 16.24
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total loans 466,592 100.00% 406,372 100.00% 381,211 100.00% 339,353 100.00% 331,854 100.00%
======== ======== ======== ======== ========
Net deferred costs 938 269 275 616 542
-------- -------- -------- -------- --------
Total loans receivable $467,530 $406,641 $381,486 $339,969 $332,396
======== ======== ======== ======== ========
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The following table shows the composition of the Company's loan portfolio by
fixed and adjustable rate at the dates indicated:
----------------------------------------------December 31,-------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- -------- -------- -------- -------- -------- -------- ------- -------- --------
(Dollars in Thousands)
Fixed rate loans
Commercial loans $ 9,799 2.10% $ 1,722 0.42% $ 438 0.11% $ 58 0.02% $ -- --%
Real estate loans
One-to-four family 65,526 14.04 89,390 22.00 137,314 36.02 157,430 46.39 215,556 64.96
Multi-family 4,390 0.94 391 0.10 576 0.15 995 0.29 177 0.06
Commercial real estate 29,687 6.36 19,735 4.85 15,863 4.16 20,304 5.98 2,200 0.66
Construction 600 0.13 199 0.05 63 0.02 -- -- -- --
-------- -------- -------- -------- -------- -------- -------- ------- -------- --------
Total real estate loans 100,203 21.47 109,715 27.00 153,816 40.35 178,729 52.66 217,933 65.68
Commercial leases 22,029 4.72 35,166 8.66 11,274 2.96 7,053 2.08 -- --
Consumer loans 31,436 6.74 27,292 6.71 29,424 7.72 26,160 7.71 22,449 6.76
-------- -------- -------- -------- -------- -------- -------- ------- -------- --------
Total fixed loans 163,467 35.03 173,895 42.79 194,952 51.14 212,000 62.47 240,382 72.44
-------- -------- -------- -------- -------- -------- -------- ------- -------- --------
Adjustable-rate loans
Commercial loans 7,408 1.59 6,313 1.56 5,066 1.32 -- -- -- --
Real estate loans
One-to-four family 64,709 13.87 64,792 15.94 98,111 25.74 94,401 27.82 60,014 18.08
Multi-family 121,719 26.09 55,270 13.60 4,028 1.06 -- -- -- --
Commercial real estate 43,909 9.41 47,041 11.58 40,357 10.59 2,212 0.65 -- --
Construction 45,577 9.77 40,373 9.93 8,876 2.33 -- -- -- --
-------- -------- -------- -------- -------- -------- -------- ------- -------- --------
Total real estate loans 275,914 59.14 207,476 51.05 151,372 39.72 96,613 28.47 60,014 18.08
Consumer loans 19,803 4.24 18,688 4.60 29,821 7.82 30,740 9.06 31,458 9.48
-------- -------- -------- -------- -------- -------- -------- ------- -------- --------
Total adjustable rate
loans 303,125 64.97 232,477 57.21 186,259 48.86 127,353 37.53 91,472 27.56
-------- -------- -------- -------- -------- -------- -------- ------- -------- --------
Total loans 466,592 100.00% 406,372 100.00% 381,211 100.00% 339,353 100.00% 331,854 100.00%
======== ======== ======== ======= ========
Net deferred costs 938 269 275 616 542
-------- -------- -------- -------- --------
Total loans receivable $467,530 $406,641 $381,486 $339,969 $332,396
======== ======== ======== ======== ========
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The following schedule illustrates the contractual maturities of the Company's
loan portfolio at December 31, 1999. Mortgages which have adjustable or floating
interest rates are shown as maturing in the period during which the contract is
due. The schedule does not reflect the effects of possible prepayments or
enforcement of due-on-sale clauses:
One-to-Four Family Commercial Consumer
Residential Loans Loans(1) Loans Total
----------------- ----- ----- -----
(Dollars in Thousands)
Coming due during Weighted Weighted Weighted Weighted
years ending Average Average Average Average
December 31, Amount Rate Amount Rate Amount Rate Amount Rate
- ------------ --------- --------- --------- --------- --------- --------- --------- ---------
2000 $ 4,980 7.41% $ 68,911 8.67% $ 6,959 8.02% $ 80,850 8.54%
2001 4,759 7.46 27,181 8.37 6,130 7.89 38,070 8.18
2002 6,632 7.57 17,422 7.91 5,024 7.93 29,078 7.84
2003 to 2004 20,988 7.04 33,331 7.97 10,419 8.67 64,738 7.78
2005 to 2009 17,576 7.46 131,751 7.93 22,682 9.14 172,009 8.04
2010 to 2024 59,650 7.39 6,399 8.19 25 9.06 66,074 7.47
2025 and beyond 15,650 7.39 123 8.58 -- -- 15,773 7.40
--------- --------- --------- --------- --------- --------- --------- ---------
Total $ 130,235 7.35% $ 285,118 8.16% $ 51,239 8.62% $ 466,592 7.99%
========= ========= ========= ========= ========= ========= ========= =========
(1) Commercial loans consist of commercial loans, multi-family loans,
commercial real estate loans, construction loans, and commercial leases.
Approximately $134.2 million in fixed rate loans and $251.6 million in variable
rate loans had maturities in excess of one year at December 31, 1999.
The aggregate amount of loans that the Bank is permitted to make to any one
borrower is generally limited to 15% of unimpaired capital and surplus (25% if
the security for such loan has a "readily ascertainable" value). At December 31,
1999, the Bank's regulatory loan-to-one borrower limit was $7.5 million. On the
same date, the Bank's largest lending relationship was $6.5 million.
All of the Company's lending activities are conducted in accordance with its
written underwriting standards and its loan origination procedures. The Company
is an equal opportunity lender and each year offers its Affordable Housing
Program for families with a maximum household income of 115% of the median
income as published by the Federal Housing Finance Board. Decisions on all loan
approvals or denials are made on the basis of detailed applications and property
valuations (consistent with the Company's written appraisal policy) prepared by
independent appraisers. The loan applications are designed primarily to
determine the borrower's ability to repay and the more significant items on the
application are verified through use of credit reports, financial statements,
tax returns and/or third-party confirmations.
COMMERCIAL LENDING
Over the past five years, the Company has continued to increase its originations
of commercial real estate loans, multi-family loans, commercial leases and
commercial loans. Management intends to focus on this type of lending. The
commercial real estate loans, multi-family loans and construction loans are
secured by property within the Company's market area. The commercial leases,
which may extend beyond the Company's market area, are primarily investment
grade leases.
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9
The underwriting standards used by the Company for these types of loans and
leases include a determination of the applicant's payment history, cash flow,
value of collateral, and credit worthiness of the business. These types of loans
carry a rate higher than residential mortgages.
At December 31, 1999, the Company had $73.6 million in commercial real estate
loans, $46.2 million in construction loans, $17.2 million in commercial loans,
$22.0 million in commercial leases, and $126.1 million in multi-family loans.
The allowance for possible loan and lease losses included $4,012,000 for these
types of loans at December 31, 1999.
Multi-family loans showed the largest increase in 1999. These loans are
concentrated in the counties surrounding the Company's locations with the major
dollar volumes and numbers being situated in Cook County, Illinois. Most of
these loans are to finance or refinance apartment buildings ranging in size from
five units up to 24 units. The terms of the loans are one year adjustable rate,
three year adjustable rate, or five year adjustable rate and have a maximum
loan-to-value ratio of 80%. The Company, depending on liquidity needs, may sell
participations in some of these loans in 2000.
Construction lending is primarily for rehabilitation projects in Cook County and
some land development projects around the Company's lending area. These
rehabilitation projects are for the conversion of old warehouse and factory
space into single family townhouses or condominiums. The typical build out time
is less than eighteen months and is priced at a margin above the prime rate.
Commercial real estate loans are primarily for mixed use properties, office
buildings that are occupied, operating strip malls and hotel or motel loans.
These loans usually reprice at least every five years based upon a margin over
the five year constant maturity treasury.
ONE-TO-FOUR FAMILY RESIDENTIAL REAL ESTATE LENDING
In February, 1998, the Company established the CoVest Banc Mortgage Center.
During 1999, the Mortgage Center originated and sold 493 loans and 330
additional loans were originated and retained in the Bank's portfolio. The
Mortgage Center's investor network of approximately thirty investors allows the
Company to offer Conventional, Jumbo, VA and B, C and D (sub-prime) loan
programs. The Mortgage Center also has the ability to originate and sell 125%
equity loans.
The Company will continue to originate loans targeted at low and moderate income
home buyers, through the Affordable Housing Program and the Community Investment
Program, which will be retained in its portfolio.
At December 1999, the Company held as mortgage backed securities ("MBS")
previously securitized with Federal Home Loan Mortgage Corporation $13.5 million
of 15 and 30 year fixed-rate and balloon single family residential mortgage
loans. At December 31, 1999, $130.2 million of the Company's loan portfolio
consisted of permanent loans on one-to-four family residences. At December 31,
1999, the Company's largest outstanding residential loan was $764,000.
Substantially all of the residential loans originated by the Company are secured
by properties located in the Company's primary market area. See "Origination,
Purchases and Sales of Loans."
Mortgage loans retained by the Company may have loan-to-value ratios of up to
95%. On any mortgage loan exceeding an 80% loan-to-value ratio at the time of
origination, the Company requires private mortgage insurance in an amount
intended to reduce the Company's exposure to 80% or less of the appraised value
of the underlying property.
The Company's residential mortgage loans customarily include due-on-sale
clauses, giving the Company the right to declare the loan immediately due and
payable in the event that, among other things, the borrower sells or otherwise
disposes of the property subject to the mortgage.
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10
CONSUMER LENDING
Management believes that offering consumer loan products helps to expand and
create stronger ties to the Company's existing customer base. In addition,
because consumer loans generally have shorter terms to maturity and/or
adjustable rates and carry higher rates of interest than do residential mortgage
loans, they can be valuable asset/liability management tools. Finally,
management believes that consumer loans can diversify the portfolio.
Accordingly, the Company pursues consumer lending through marketing and pricing
initiatives.
The Company currently originates substantially all of its consumer loans in its
primary market area. At December 31, 1999, the Company's consumer loans totaled
$51.2 million or 10.98% of the Company's loan portfolio.
For second mortgage and home equity loans, the Company evaluates both the
borrower's ability to make principal, interest and escrow payments and the value
of the property that will secure the loan. The Company's second mortgage loans
and home equity lines of credit are generally originated in amounts which,
together with the amount of the first mortgage, do not exceed 80% of the
appraised value of the property securing the loan. Home equity loans are
revolving lines-of-credit, with the interest rate floating at a stated margin
over the prime rate. Second mortgage loans are generally made for terms of up to
ten years with fixed interest rates. Other consumer loan terms vary according to
the type of collateral, length of contract and creditworthiness of the borrower.
The Company offers a variety of secured consumer loans, including direct
automobile loans, second mortgage loans (including home improvement loans), home
equity loans, and loans secured by deposit accounts. In addition, the Company
offers unsecured consumer loans. Management believes that these loans, which
carry a higher rate of interest, can enhance the bottom line when offered in
conjunction with a prudent credit risk policy and collection program. In 1999,
the Company also began accepting loan applications through the internet.
The Company employs risk based underwriting standards for consumer loans. These
include a determination of the applicant's payment history on other debt, and an
assessment of the borrower's ability to meet payments on the proposed loan along
with existing obligations, and an assessment of the borrower's FICO credit
score. In addition to the creditworthiness of the applicant, the underwriting
process also includes a comparison of the value of the security, if any, in
relation to the proposed loan amount.
Consumer loans may entail greater risk than residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
depreciable assets such as automobiles. In such cases, any repossessed
collateral for defaulted consumer loans may not provide adequate sources of
repayment for the outstanding loan balances as a result of the greater
likelihood of damage, loss or depreciation. In addition, consumer loan
collections are dependent on the borrower's continuing financial stability, and
thus are more likely to be affected by adverse personal circumstances.
Furthermore, the application of various federal and state laws, including
federal and state bankruptcy and insolvency laws, may limit the amount which can
be recovered on such loans. Although the level of delinquencies in the Company's
consumer loan portfolio has been manageable, there can be no assurance that
delinquencies will not increase in the future.
MORTGAGE-BACKED AND RELATED SECURITIES
The Company purchases mortgage-backed and mortgage-related securities to
supplement loan production. The Company has also retained the servicing rights
on all loans securitized with FHLMC. The Company will evaluate mortgage-backed
securities purchases in the future based on its asset/liability objectives,
market conditions and alternative investment opportunities. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Business Strategy".
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11
The following schedule sets forth the contractual maturities of the Company's
mortgage-backed securities using amortized cost as of December 31, 1999. All
such securities are considered available-for-sale. Almost all of the
mortgage-backed securities are anticipated to be repaid in advance of their
contractual maturity as a result of projected mortgage loan prepayments, driven
to a large extent by changes in the level of interest rates.
------------------------------Due In-------------------------------
1 to 5 5 to 10 10 to 20 Over 20 Balance
Years Years Years Years Outstanding
----- ----- ----- ----- -----------
(Dollars in Thousands)
Mortgage-backed securities
Federal Home Loan Mortgage Corp. $ 260 $ 242 $ 2,784 $ 12,132 $ 15,418
Federal National Mortgage Assoc -- -- -- 3,411 3,411
---------- ---------- ---------- ---------- ----------
$ 260 $ 242 $ 2,784 $ 15,543 $ 18,829
========== ========== ========== ========== ==========
ORIGINATIONS, PURCHASES AND SALES OF LOANS AND MORTGAGE-BACKED SECURITIES
The Company originates loans through loan officers, including commissioned
originators. Walk-in customers and referrals from real estate brokers, builders
and commercial lenders in the area are also important sources for loan
originations.
In order to supplement loan origination during periods of unusual competition or
reduced loan demand, and in order to acquire additional adjustable rate loans
for asset/liability management purposes, the Company periodically considers the
purchase of mortgage-backed and related securities and/or residential loans from
third party lenders. In 1999, the Company did not purchase any mortgage backed
securities or residential loans.
The Company has securitized residential real estate loans from time to time.
When loans have been securitized, the Company retains the responsibility for
servicing the loan. At December 31, 1999, and 1998, there was approximately
$88.4 million and $118.8 million in the loan servicing portfolio. The Company
currently holds $13.5 million of these loans as mortgage-backed securities on
the balance sheet. At December 31, 1999, the Company had no outstanding
commitments to sell mortgage-backed securities.
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12
The following table shows the originations, purchases, sales, and repayments of
loans and mortgage-backed securities of the Company for the periods indicated:
----------Year Ended December 31,---------
1999 1998 1997
---- ---- ----
(In Thousands)
Originations of portfolio loans
Adjustable rate
Commercial loans $ 20,549 $ 12,304 $ 5,128
Construction loans 49,379 42,845 16,170
One-to-four family 30,472 9,441 34,386
Commercial real estate 34,452 36,845 --
Multi-family 94,174 45,683 --
Consumer 18,163 15,049 19,986
----------- ----------- -----------
Total adjustable rate 247,189 162,167 75,670
Fixed rate
Commercial loans -- -- --
One-to-four family -- -- 3,962
Commercial real estate -- -- 37,577
Multi-family -- -- 2,679
Commercial leases 6,749 44,759 10,454
Consumer 12,433 11,548 15,096
----------- ----------- -----------
Total fixed rate 19,182 56,307 69,768
----------- ----------- -----------
Total loans originated 266,371 218,474 145,438
Purchases of mortgage-backed securities
Mortgage-backed securities and participation certificates -- 40,363 52,568
----------- ----------- -----------
Total purchased 0 40,363 52,568
Sales and repayments of loans and mortgage-backed
securities
Sales of mortgage-backed securities (6,460) (87,571) (46,719)
Sale of credit card loans -- (10,805) --
Principal repayments (215,218) (219,182) (101,910)
----------- ----------- -----------
Total reductions (221,678) (317,558) (148,629)
(Decrease) increase in other items, net 83 (1,999) (2,894)
----------- ----------- -----------
Net increase (decrease) in loans and mortgage-backed securities $ 44,776 $ (60,720) $ 46,483
=========== =========== ===========
- --------------------------------------------------------------------------------
13
DELINQUENCY PROCEDURES
When a borrower fails to make a required payment on a loan, the Company attempts
to cause the delinquency to be cured by contacting the borrower. In the case of
residential loans subject to late charges, a late notice is sent 15 days after
the due date, at which time a late charge is assessed. If the delinquency is not
cured by the 30th day, contact with the borrower is made by phone or a second
notice is mailed. Additional written and oral contacts are made with the
borrower between 30 and 60 days after the due date.
In the event a real estate loan payment is past due for 90 days or more,
management performs an in-depth review of the loan status, the condition of the
property and circumstances of the borrower. Based upon the results of its
review, management will decide whether to try to negotiate a repayment program
with the borrower, or initiate foreclosure proceedings. These loans are also
placed on non-accrual status.
Delinquent consumer loans are handled in a similar manner, except that initial
contact is made when the payment is ten days past due, personal contact is made
when the loan becomes more than twenty days past due, and the loan is classified
as a delinquent loan when it is past due for 30 days or more. Certain consumer
loans are placed on non-accrual status when delinquent more than 90 days and as
deemed appropriate in the collection process.
The following table sets forth the Company's loan delinquencies by type, by
amount, and by percentage. Non performing assets are excluded from the table.
------------------------Loans Delinquent For------------------------- Total
----------30 - 89 Days---------- --------90 Days and Over-------- --------Delinquent Loans--------
Percent Percent Percent
of of of
Loan Loan Loan
Number Amount Category Number Amount Category Number Amount Category
-------- -------- -------- -------- -------- -------- -------- -------- --------
(Dollars in Thousands)
One-to-four
family 3 $ 299 0.23% -- $ -- --% 3 $ 299 0.23%
Commercial real
estate 1 60 0.08 -- -- -- 1 60 0.08
Multi-family -- -- -- -- -- -- -- -- --
Construction -- -- -- -- -- -- -- -- --
Commercial -- -- -- -- -- -- -- -- --
Commercial leases -- -- -- -- -- -- -- -- --
Consumer 6 87 0.17 -- -- -- 6 87 0.17
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total 10 $ 446 0.10% -- $ -- --% 10 $ 446 0.10%
======== ======== ======== ======== ======== ======== ======== ======== ========
CLASSIFICATION OF ASSETS
OCC policies require that each national bank classify its own assets on a
regular basis. In addition, in connection with examinations of national banks,
OCC examiners have authority to identify problem assets and, if appropriate,
require them to be classified. There are three classifications for problem
assets: Substandard, Doubtful and Loss. The regulations also include a Special
Mention category. Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the institution will sustain some
loss if the deficiencies are not corrected. Doubtful assets have the weaknesses
of Substandard assets, with the additional characteristics that the weaknesses
make collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high possibility of loss. An
asset classified as Loss is considered uncollectible and of such little value
that continuance as an asset of the institution is not warranted.
- --------------------------------------------------------------------------------
14
The Special Mention category consists of assets which do not currently expose a
financial institution to a sufficient degree of risk to warrant classification,
but do possess credit deficiencies or potential weaknesses deserving
management's close attention. Assets classified as Substandard or Doubtful
require the institution to establish prudent general allowances for possible
loan losses. These loans are considered non-performing. If an asset or portion
thereof is classified as Loss, the institution must either establish specific
allowances for loan and lease losses in the amount of 100% of the portion of the
asset classified as Loss, or charge off such amount. If an institution does not
agree with an examiner's classification of an asset, it may appeal this
determination to the Regional Director of the OCC. Certain loans delinquent less
than 90 days are categorized as Special Mention. As a result of management's
review of its assets, at December 31, 1999, the Company had categorized $724,000
of its assets as Special Mention, $766,000 as Substandard, and none as Doubtful
or Loss. The Company's classified assets consist of non-performing loans and
certain loans delinquent less than 90 days.
NON-PERFORMING ASSETS
Real estate loans are placed on non-accrual status when either principal or
interest is 90 days or more past due unless, in the judgment of management,
other factors are present to justify the accrual of interest. Interest accrued
and unpaid at the time a loan is placed on non-accrual status is charged against
interest income. Subsequent payments are either applied to the outstanding
principal balance or recorded as interest income, depending on the assessment of
the ultimate collectibility of the loan.
Loans which are considered to be impaired are reduced to the present value of
expected future cash flows or to the fair value of the related collateral, by
allocating a portion of the allowance to such loans. If these allocations cause
the allowance for possible loan and lease losses to require an increase, such
increase is reported as a provision for possible loan and lease losses charged
to expense. Loans are evaluated for impairment when payments are delinquent 90
days or more, or when management downgrades the loan classification to doubtful.
- --------------------------------------------------------------------------------
15
The table below sets forth the amounts and categories of non-performing assets
in the Company's loan portfolio. Loans are placed on non-accrual status when the
collection of principal and/or interest becomes doubtful. For all years
presented, the Company has had no impaired loans or troubled debt restructurings
(which involve forgiving a portion of interest or principal on any loans or
making loans at a rate materially less than that of market rates).
-----------------------------December 31,-----------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in Thousands)
Non-accruing loans
One-to-four family $ 766 $ 996 $ -- $ -- $ 531
Commercial real estate loans -- -- -- -- --
Multi-family loans -- -- -- -- --
Construction loans -- -- -- -- --
Commercial loans -- -- -- -- --
Commercial leases -- -- -- -- --
Consumer -- 25 -- 95 --
---------- ---------- ---------- ---------- ----------
Total 766 1,021 -- 95 531
Accruing loans delinquent 90 days or more
One-to-four family -- -- 1,137 599 --
Commercial real estate loans -- -- -- -- --
Multi-family loans -- -- -- -- --
Construction loans -- -- -- -- --
Commercial loans -- -- -- -- --
Commercial leases -- -- -- -- --
Consumer -- -- 167 162 150
---------- ---------- ---------- ---------- ----------
Total -- -- 1,304 761 150
---------- ---------- ---------- ---------- ----------
Total non-performing loans $ 766 $ 1,021 $ 1,304 $ 856 $ 681
========== ========== ========== ========== ==========
Total non-performing loans
to net loans 0.17% 0.25% 0.35% 0.25% 0.21%
========== ========== ========== ========== ==========
Total non-performing loans
as percentage of assets 0.14% 0.19% 0.22% 0.16% 0.11%
========== ========== ========== ========== ==========
Management has considered the Company's non-performing assets in establishing
its Allowance for Possible Loan and Lease Losses.
As of December 31, 1999, there were no other loans not included on the table or
discussed above where known information about the possible credit problems of
borrowers caused management to have serious doubts as to the ability of the
borrower to comply with present loan repayment terms.
- --------------------------------------------------------------------------------
16
ALLOWANCE FOR POSSIBLE LOAN AND LEASE LOSSES
On a quarterly basis, management of the Bank meets to review the adequacy of the
allowance for possible loan and lease losses. Each loan officer grades these
individual commercial credits and the Company's outsourced loan review function
validates the officers' grades. In the event that loan review downgrades 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.).
During 1999, the loan portfolio continued its migration from a lower risk single
family residential loan portfolio to a higher risk commercial loan portfolio.
There have been substantial increases in the multi-family, construction,
commercial real estate and commercial loan portfolios. The methodology used to
determine the adequacy of the allowance for possible loan and lease losses is
consistent with prior years, although there were reallocations of the allowance
based on the change in composition of the portfolio.
- --------------------------------------------------------------------------------
17
The following table sets forth an analysis of the Company's allowance for
possible loan and lease losses:
----------------------Year Ended December 31,--------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in Thousands)
Balance at beginning of year $ 4,312 $ 3,977 $ 1,424 $ 1,379 $ 1,520
Charge-offs
One-to-four family 107 38 -- -- --
Commercial real estate loans -- -- -- -- --
Multi-family loans -- -- -- -- --
Construction loans -- -- -- -- --
Commercial loans 399 -- -- -- --
Commercial leases -- -- -- -- --
Consumer 195 1,355 1,615 1,497 903
--------- --------- --------- --------- ---------
Total charge-offs 701 1,393 1,615 1,497 903
Recoveries
One-to-four family -- -- -- -- --
Commercial real estate loans -- -- -- -- --
Multi-family loans -- -- -- -- --
Construction loans -- -- -- -- --
Commercial loans -- -- -- -- --
Commercial leases -- -- -- -- --
Consumer 90 161 96 145 118
--------- --------- --------- --------- ---------
Total Recoveries 90 161 96 145 118
--------- --------- --------- --------- ---------
Net charge-offs 611 1,232 1,519 1,352 785
--------- --------- --------- --------- ---------
Additions charged to operations 1,132 1,567 4,072 1,397 644
--------- --------- --------- --------- ---------
Balance at end of year $ 4,833 $ 4,312 $ 3,977 $ 1,424 $ 1,379
========= ========= ========= ========= =========
Ratio of net charge-offs during the
year to average loans outstanding
during the year 0.15% 0.37% 0.42% 0.39% 0.20%
========= ========= ========= ========= =========
Ratio of allowance to non-performing loans 6.31x 4.22x 3.05x 1.66x 2.02x
========= ========= ========= ========= =========
Because some loans may not be repaid in full, an allowance for possible loan and
lease losses is recorded. Increases to the allowance are recorded by a provision
for possible loan and lease losses charged to expense. Estimating the risk of
the loss and the amount of loss on any loan is necessarily subjective.
Accordingly, the allowance is maintained by management at a level considered
adequate to cover possible losses that are
- --------------------------------------------------------------------------------
18
currently anticipated based on past loss experience, general economic
conditions, information about specific borrower situations including their
financial position and collateral values, and other factors and estimates which
are subject to change over time. While management may periodically allocate
portions of the allowance for specific problem loan situations, the entire
allowance is available for any loan charge-offs that occur. A loan is charged
off against the allowance by management as a loss when deemed uncollectible,
although collection efforts continue and future recoveries may occur.
The distribution of the Company's allowance for possible loan and lease losses
at the dates indicated is summarized as follows:
-----------------------------------------December 31,----------------------------------------
-------1999------ ------1998------- ------1997------- ------1996------- ------1995-------
---- ---- ---- ---- ----
Percent Percent Percent Percent Percent
Allowance of Allowance of Allowance of Allowance of Allowance of
for Loans for Loans for Loans for Loans for Loans
Possible in Each Possible in Each Possible in Each Possible in Each Possible in Each
Loan Category Loan Category Loan Category Loan Category Loan Category
and to and to and to and to and to
Lease Total Lease Total Lease Total Lease Total Lease Total
Losses Loans Losses Loans Losses Loans Losses Loans Losses Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
One-to-four family loans $ 390 27.91% $ 387 37.94% $ 100 61.76% $ 250 74.21% $ 600 83.10%
Commercial loans and leases 738 8.41 412 10.64 76 4.40 -- 2.10 -- --
Commercial real estate, construction,
and multi-family 3,274 52.70 2,953 40.11 2,180 18.30 285 6.93 44 0.66
Consumer loans 431 10.98 560 11.31 1,621 15.54 889 16.76 735 16.24
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total $ 4,833 100.00% $ 4,312 100.00% $ 3,977 100.00% $ 1,424 100.00% $ 1,379 100.00%
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Note: In 1997 and 1996, management made a decision to re-allocate $150,000 and
$350,000 to the Allowance on Consumer Loans from the Allowance on One-to-Four
Family Loans, as no losses were realized on this portfolio during those years.
In 1998, management re-allocated $837,000 from the Allowance on Consumer Loans
after the sale of the credit card portfolio in November, 1998. $551,000 of this
amount was re-allocated to the Allowance for Losses on Commercial and Commercial
Real Estate Loans and $286,000 was re-allocated to the Allowance for Losses on
One-to-Four Family Loans. In 1999, management re-allocated $220,000 from the
Allowance on Consumer Loans and $203,000 from the Allowance on One-to-Four
Family Loans to the Allowance for Losses on Commercial Loans. During 1999, the
Company incurred $399,000 of losses on commercial loans.
Management regularly reviews its loan portfolio and charge-off experience to
maintain the allowance at a level management feels is adequate.
- --------------------------------------------------------------------------------
19
SECURITIES ACTIVITIES
The Company invests in high quality short- and medium-term securities, including
U.S. government and agency securities, municipal bonds and, to a lesser extent,
marketable equity securities.
The following table sets forth the composition of the Company's securities
portfolio at the dates indicated. All items in the table are included at fair
value.
-----------------------------Year Ended December 31,------------------------------
----------1999---------- ----------1998---------- ----------1997----------
Fair % of Fair % of Fair % of
Value Total Value Total Value Total
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
U.S. Treasury $ -- --% $ -- --% $ 11,013 6.71%
U.S. government agency 34,580 44.92 30,041 34.13 19,991 12.18
Marketable equity securities 1,271 1.65 853 0.97 408 0.25
Municipal bonds 15,851 20.59 13,872 15.76 4,428 2.70
FHLMC mortgage-backed
and related 15,375 19.97 22,194 25.22 58,000 35.33
GNMA mortgage-backed
and related -- -- 7,325 8.32 4,594 2.80
FNMA mortgage-backed
and related 3,384 4.39 5,353 6.08 57,513 35.03
CMO mortgage-related -- -- -- -- 646 0.39
---------- ---------- ---------- ---------- ---------- ----------
Subtotal 70,461 91.52 79,638 90.48 156,593 95.39
FRB stock 469 0.61 469 0.53 469 0.29
FHLB stock 6,060 7.87 7,910 8.99 7,110 4.32
---------- ---------- ---------- ---------- ---------- ----------
Total securities
and stock $ 76,990 100.00% $ 88,017 100.00% $ 164,172 100.00%
========== ========== ========== ========== ========== ==========
Average remaining life
of non-mortgage-backed
securities 3.79 years 3.55 years 2.45 years
The composition and contractual maturities of the securities portfolio at
December 31, 1999, excluding mortgage-backed securities, Federal Reserve Bank of
Chicago stock, FHLB of Chicago stock, and marketable equity securities, is
indicated in the following table.
----------------------Due In-----------------------
Less than 1 to 5 5 to 10 Over 10 Total
1 Year Years Years Years Securities
--------- --------- --------- --------- ----------
(Dollars in Thousands)
U.S. Treasury $ -- $ -- $ -- $ -- $ --
U.S. government agency 4,986 21,348 7,012 1,234 34,580
Municipal bonds 3,607 9,267 2,977 -- 15,851
--------- --------- --------- --------- ---------
Total securities $ 8,593 $ 30,615 $ 9,989 $ 1,234 $ 50,431
========= ========= ========= ========= =========
Weighted average yield 5.85% 5.95% 5.92% 7.18% 5.96%
========= ========= ========= ========= =========
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20
SOURCES OF FUNDS
GENERAL
Deposit accounts have traditionally been the principal source of the Company's
funds for use in lending and for other general business purposes. In addition to
deposits, the Company derives funds from borrowings, loan repayments and cash
flows generated from operations. Scheduled loan payments are a relatively stable
source of funds, while loan prepayments and deposit flows are greatly influenced
by general interest rates, and competition.
The Company faces substantial competition in attracting deposits from other
savings institutions, commercial banks, securities firms, money market and
mutual funds, and credit unions. The ability of the Company to attract and
retain deposits depends on its ability to provide an investment opportunity that
satisfies the requirements of investors as to rate of return, liquidity, risk
and other factors. The Company competes for these deposits by offering a variety
of deposit accounts at competitive rates, convenient business hours and a
customer oriented staff. In 1999, the Company increased its reliance on
purchased money deposits as a source of funds.
The primary source of borrowings has been the FHLB of Chicago. The Company has
regularly used this as an alternative source of funding. At December 31, 1999,
the Company had outstanding borrowings of $104 million from the FHLB of Chicago.
The Company has also utilized credit lines with other financial institutions for
short term funding needs. Two additional non-deposit sources of funds which the
Company used during 1999 are the Treasury Tax and Loan Option Account and the
Retail Repurchase Agreement. The Treasury Tax and Loan Option Account enables
the U. S. Treasury to keep tax dollars with the Company at a floating interest
rate, and the Retail Repurchase Agreement allows customers to lend the Company
money which is secured by a security that the Bank owns.
DEPOSITS
The Company attracts both short-term and long-term deposits from the Company's
primary market area by offering a wide assortment of accounts and rates. The
Company offers checking accounts (both interest bearing and non-interest
bearing), preferred and regular money market accounts, savings accounts, fixed
interest rate certificates of deposits with varying maturities, and individual
retirement accounts.
Deposit account terms vary, according to the minimum balance required, the time
period the funds must remain on deposit and the interest rate, among other
factors. In setting rates, the Company regularly evaluates (i) its investment
and lending opportunities, (ii) its internal costs of funds, (iii) the rates
offered by competing institutions and (iv) its liquidity position. In order to
decrease the volatility of its deposits, the Company imposes penalties on early
withdrawal on its certificates of deposit.
The Company believes that non-certificate accounts can provide relatively low
cost funds and accordingly, the Company introduces promotions to attract new
checking and money market accounts. The Company has offered new services to make
its checking accounts more desirable, such as Telephone Access Banking and Debit
Card, both of which have been extensively utilized by customers. PC Banking was
introduced in 1998. In 1999, the Company introduced Gold Star Checking, a high
interest checking account requiring a minimum balance of $3,500. It also
launched the Diamond Club, which requires a minimum deposit balance of $100,000,
a Gold Star Checking account, a preferred money market account, and provides
additional benefits and services to the customer.
The Company also solicits deposits from outside its primary market area.
Purchased money deposits became an increasingly important source of funds during
1999, and as of December 31, 1999, amounted to $44.2 million. These deposits
replaced long term borrowings called by the FHLB of Chicago.
- --------------------------------------------------------------------------------
21
The following table sets forth the deposit flows experienced by the Company
during the periods indicated:
-------------Year Ended December 31,------------
(Dollars in Thousands)
1999 1998 1997
---- ---- ----
Deposit balance at January 1 $ 364,535 $ 371,752 $ 402,090
Deposits 1,154,544 756,327 594,060
Withdrawals (1,136,343) (779,139) (641,008)
Interest credited 15,319 15,595 16,610
------------ ------------ ------------
Deposit balance at December 31 $ 398,055 $ 364,535 $ 371,752
============ ============ ============
Net increase/(decrease) $ 33,520 $ (7,217) $ (30,338)
============ ============ ============
Percent increase/(decrease) 9.20% (1.94)% (7.55)%
============ ============ ============
The following table sets forth the dollar amount of deposits in the various
types of deposit programs offered by the Company for the periods indicated:
-----------------------------Year Ended December 31,------------------------------
----------1999---------- ----------1998---------- ----------1997----------
% of % of % of
Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
Checking accounts $ 41,621 10.46% $ 38,823 10.65% $ 35,265 9.49%
Money market accounts 88,779 22.30 85,209 23.37 57,158 15.37
Saving accounts 49,700 12.48 52,990 14.54 59,562 16.02
---------- ---------- ---------- ---------- ---------- ----------
Total non-certificates 180,100 45.24 177,022 48.56 151,985 40.88
Certificates of deposit
0.00 - 2.99% -- -- 120 0.03 27 0.01
3.00 - 3.99% -- -- -- -- 18 0.01
4.00 - 4.99% 44,903 11.28 47,612 13.06 5,663 1.52
5.00 - 5.99% 96,758 24.31 101,385 27.81 149,140 40.12
6.00 - 6.99% 69,524 17.47 30,738 8.43 43,665 11.75
7.00 - 7.99% 6,676 1.68 7,630 2.09 14,379 3.86
8.00 - 8.99% 79 0.02 14 0.01 3,218 0.87
9.00 - 9.99% 15 -- 14 0.01 3,657 0.98
---------- ---------- ---------- ---------- ---------- ----------
Total certificates 217,955 54.76 187,513 51.44 219,767 59.12
---------- ---------- ---------- ---------- ---------- ----------
Total deposits $ 398,055 100.00% $ 364,535 100.00% $ 371,752 100.00%
========== ========== ========== ========== ========== ==========
- --------------------------------------------------------------------------------
22
The following table shows rate and maturity information for the Company's
certificates of deposit as of December 31, 1999. The table below details the
scheduled maturities of certificates of deposit:
2000 2001 2002 2003 2004 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
(In Thousands)
0.0 - 2.99% $ -- $ -- $ -- $ -- $ -- $ --
3.00 - 3.99% -- -- -- -- -- --
4.00 - 4.99% 39,125 3,191 1,195 687 550 155 44,903
5.00 - 5.99% 83,545 8,815 2,146 1,464 236 552 96,758
6.00 - 6.99% 41,184 14,745 13,556 3 -- 36 69,524
7.00 - 7.99% 3,714 3 2,959 -- -- -- 6,676
8.00 - 8.99% 75 4 -- -- -- -- 79
9.00 - 9.99% 15 -- -- -- -- -- 15
--------- --------- --------- --------- --------- --------- ---------
$ 167,658 $ 26,758 $ 19,856 $ 2,154 $ 786 $ 743 $ 217,955
========= ========= ========= ========= ========= ========= =========
The following table indicates the amount of the Company's certificates of
deposit by time remaining until maturity as of December 31, 1999.
---------------------------Maturity--------------------------
3 Months 3 to 6 6 to 12 Over 12
or Less Months Months Months Total
--------- --------- --------- --------- ---------
(In Thousands)
Certificates of deposit less than $100,000 $ 38,743 $ 32,095 $ 55,950 $ 28,182 $ 154,970
Certificates of deposit of $100,000 or more(1) 12,537 8,890 19,443 22,115 62,985
--------- --------- --------- --------- ---------
Total certificates of deposit $ 51,280 $ 40,985 $ 75,393 $ 50,297 $ 217,955
========= ========= ========= ========= =========
(1) Includes "Jumbo" certificates of $8,204,000.
"Jumbo" certificates are a deposit product for deposits of over $100,000 which
carry a rate and term negotiated between the Bank and the depositor at the time
of issuance. Not all certificates of deposit with balances in excess of $100,000
are "Jumbo".
- --------------------------------------------------------------------------------
23
BORROWINGS
The Company's other available sources of funds include advances from the FHLB of
Chicago, daily advances under credit lines with other financial institutions,
and collateralized borrowings. As a member of the FHLB of Chicago, the Company
is required to own stock in the FHLB of Chicago and is authorized to apply for
advances from the FHLB of Chicago. Each FHLB credit program has its own interest
rate, which may be fixed or variable, and range of maturities. The FHLB of
Chicago may prescribe the acceptable uses for these advances, as well as
limitations on the size of the advances and repayment provisions. The Company
had $104 million of FHLB advances outstanding at December 31, 1999, secured by
residential mortgage loans and $13 million in mortgage backed securities.
The following table sets forth the maximum month-end balance, average balance,
and weighted average rates of borrowings for the periods indicated:
1999 1998 1997
---- ---- ----
(Dollars in Thousands)
Maximum month-end balances
FHLB advances $ 120,000 $ 120,000 $ 135,000
Securities sold under repurchase agreements 5,734 3,774 14,292
Other 26,311 2,981 10,000
Average balances
FHLB advances 113,589 154,644 71,956
Securities sold under repurchase agreements 3,750 3,365 12,781
Other 8,855 6,993 3,497
Weighted average rates at end of year
FHLB advances 5.50% 5.56% 5.99%
Securities sold under repurchase agreements 4.71 5.14 5.22
Other 5.44 5.16 5.30
- --------------------------------------------------------------------------------
24
SUPERVISION AND REGULATION
GENERAL
Financial institutions and their holding companies are extensively regulated
under federal and state law. As a result, the growth and earnings performance of
the Company can be affected not only by management decisions and general
economic conditions, but also by the requirements of applicable state and
federal statutes and regulations and the policies of various governmental
regulatory authorities, including the Office of the Comptroller of the Currency
(the "OCC"), the Board of Governors of the Federal Reserve System (the "Federal
Reserve"), the Federal Deposit Insurance Corporation (the "FDIC"), the Internal
Revenue Service and state taxing authorities and the Securities and Exchange
Commission (the "SEC"). The effect of applicable statutes, regulations and
regulatory policies can be significant, and cannot be predicted with a high
degree of certainty.
Federal and state laws and regulations generally applicable to financial
institutions, such as the Company and its subsidiaries, regulate, among other
things, the scope of business, investments, reserves against deposits, capital
levels relative to operations, the nature and amount of collateral for loans,
the establishment of branches, mergers, consolidations and dividends. The system
of supervision and regulation applicable to the Company and its subsidiaries
establishes a comprehensive framework for their respective operations and is
intended primarily for the protection of the FDIC's deposit insurance funds and
the depositors, rather than the shareholders, of financial institutions.
The following is a summary of the material elements of the regulatory framework
that applies to the Company and its subsidiaries. It does not describe all of
the statutes, regulations and regulatory policies that apply to the Company and
its subsidiaries, nor does it restate all of the requirements of the statutes,
regulations and regulatory policies that are described. As such, the following
is qualified in its entirety by reference to the applicable statutes,
regulations and regulatory policies. Any change in applicable law, regulations
or regulatory policies may have a material effect on the business of the Company
and its subsidiaries.
RECENT REGULATORY DEVELOPMENTS
PENDING LEGISLATION
On November 12, 1999, President Clinton signed legislation that will allow bank
holding companies to engage in a wider range of nonbanking activities, including
greater authority to engage in securities and insurance activities. Under the
Gramm-Leach-Bliley Act (the "Act"), a bank holding company that elects to become
a financial holding company may engage in any activity that the Federal Reserve,
in consultation with the Secretary of the Treasury, determines by regulation or
order is (i) financial in nature, (ii) incidental to any such financial
activity, or (iii) complementary to any such financial activity and does not
pose a substantial risk to the safety or soundness of depository institutions or
the financial system generally. The Act specifies certain activities that are
deemed to be financial in nature, including lending, exchanging, transferring,
investing for others, or safeguarding money or securities; underwriting and
selling insurance; providing financial, investment, or economic advisory
services; underwriting, dealing in or making a market in, securities; and any
activity currently permitted for bank holding companies by the Federal Reserve
under section 4(c)(8) of the Bank Holding Company Act. A bank holding company
may elect to be treated as a financial holding company only if all depository
institution subsidiaries of the holding company are well-capitalized,
well-managed and have at least a satisfactory rating under the Community
Reinvestment Act.
National banks are also authorized by the Act to engage, through "financial
subsidiaries," in any activity that is permissible for a financial holding
company (as described above) and any activity that the Secretary of the
Treasury, in consultation with the Federal Reserve, determines is financial in
nature or incidental to any such financial activity, except (i) insurance
underwriting, (ii) real estate development or real estate investment activities
- --------------------------------------------------------------------------------
25
(unless otherwise permitted by law), (iii) insurance company portfolio
investments and (iv) merchant banking. The authority of a national bank to
invest in a financial subsidiary is subject to a number of conditions,
including, among other things, requirements that the bank must be well-managed
and well-capitalized (after deducting from capital the bank's outstanding
investments in financial subsidiaries). The Act provides that state banks may
invest in financial subsidiaries (assuming they have the requisite investment
authority under applicable state law) subject to the same conditions that apply
to national bank investments in financial subsidiaries.
At this time, the Company is unable to predict the impact the Act may have on
the Company and the Bank. Various bank regulatory agencies have begun issuing
proposed regulations as mandated by the Act. On January 19, 1999, the Federal
Reserve issued an interim rule, which sets forth procedures by which bank
holding companies may become financial holding companies, the criteria necessary
for such a conversion, and the Federal Reserve's enforcement powers should a
holding company fail to maintain compliance with the criteria. That same day the
Office of the Comptroller of the Currency issued a proposed rule discussing the
procedures by which national banks may establish financial subsidiaries as well
as the qualifications and safeguards that will be required. Both rules become
effective on March 11, 2000, the effective day of the Act.
THE COMPANY
GENERAL
The Company, as the sole shareholder of the Bank, is a bank holding company. As
a bank holding company, the Company is registered with, and is subject to
regulation by, the Federal Reserve under the Bank Holding Company Act, as
amended (the "BHCA"). In accordance with Federal Reserve policy, the Company is
expected to act as a source of financial strength to the Bank and to commit
resources to support the Bank in circumstances where the Company might not
otherwise do so. Under the BHCA, the Company is subject to periodic examination
by the Federal Reserve. The Company is also required to file with the Federal
Reserve periodic reports of the Company's operations and such additional
information regarding the Company and its subsidiaries as the Federal Reserve
may require.
INVESTMENTS AND ACTIVITIES
Under the BHCA, a bank holding company must obtain Federal Reserve approval
before: (i) acquiring, directly or indirectly, ownership or control of any
voting shares of another bank or bank holding company if, after the acquisition,
it would own or control more than 5% of the shares of the other bank or bank
holding company (unless it already owns or controls the majority of such
shares); (ii) acquiring all or substantially all of the assets of another bank;
or (iii) merging or consolidating with another bank holding company. Subject to
certain conditions (including certain deposit concentration limits established
by the BHCA), the Federal Reserve may allow a bank holding company to acquire
banks located in any state of the United States without regard to whether the
acquisition is prohibited by the law of the state in which the target bank is
located. In approving interstate acquisitions, however, the Federal Reserve is
required to give effect to applicable state law limitations on the aggregate
amount of deposits that may be held by the acquiring bank holding company and
its insured depository institution affiliates in the state in which the target
bank is located (provided that those limits do not discriminate against
out-of-state depository institutions or their holding companies) and state laws
which require that the target bank have been in existence for a minimum period
of time (not to exceed five years) before being acquired by an out-of-state bank
holding company.
The BHCA also generally prohibits the Company from acquiring direct or indirect
ownership or control of more than 5% of the voting shares of any company which
is not a bank and from engaging in any business other than that of banking,
managing and controlling banks or furnishing services to banks and their
subsidiaries. This general prohibition is subject to a number of exceptions. The
principal exception allows bank holding companies to engage in, and to own
shares of companies engaged in, certain businesses found by the Federal Reserve
to be "so closely related to banking ... as to be a proper incident thereto."
Under current regulations of the Federal Reserve, the Company and its non-bank
subsidiaries are permitted to engage in a variety of banking-related businesses,
including the operation of a thrift, sales and consumer finance, equipment
leasing, the operation of a computer
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26
service bureau (including software development), and mortgage banking and
brokerage. The BHCA generally does not place territorial restrictions on the
domestic activities of non-bank subsidiaries of bank holding companies.
Federal law also prohibits any person or company from acquiring "control" of a
bank or a bank holding company without prior notice to the appropriate federal
bank regulator. "Control" is defined in certain cases as the acquisition of 10%
of the outstanding shares of a bank or bank holding company.
CAPITAL REQUIREMENTS
Bank holding companies are required to maintain minimum levels of capital in
accordance with Federal Reserve capital adequacy guidelines. If capital falls
below minimum guideline levels, a bank holding company, among other things, may
be denied approval to acquire or establish additional banks or non-bank
businesses.
The Federal Reserve's capital guidelines establish the following minimum
regulatory capital requirements for bank holding companies: a risk-based
requirement expressed as a percentage of total risk-weighted assets, and a
leverage requirement expressed as a percentage of total assets. The risk-based
requirement consists of a minimum ratio of total capital to total risk-weighted
assets of 8%, at least one-half of which must be Tier 1 capital. The leverage
requirement consists of a minimum ratio of Tier 1 capital to total assets of 3%
for the most highly rated companies, with a minimum requirement of 4% for all
others. For purposes of these capital standards, Tier 1 capital consists
primarily of permanent stockholders' equity less intangible assets (other than
certain mortgage servicing rights and purchased credit card relationships).
Total capital consists primarily of Tier 1 capital plus certain other debt and
equity instruments which do not qualify as Tier 1 capital and a portion of the
company's allowance for loan and lease losses.
The risk-based and leverage standards described above are minimum requirements.
Higher capital levels will be required if warranted by the particular
circumstances or risk profiles of individual banking organizations. For example,
the Federal Reserve's capital guidelines contemplate that additional capital may
be required to take adequate account of, among other things, interest rate risk,
or the risks posed by concentrations of credit, nontraditional activities or
securities trading activities. Further, any banking organization experiencing or
anticipating significant growth would be expected to maintain capital ratios,
including tangible capital positions (i.e., Tier 1 capital less all intangible
assets), well above the minimum levels.
As of December 31, 1999, the Company had regulatory capital in excess of the
Federal Reserve's minimum requirements, with a risk-based capital ratio of
13.3%.
DIVIDENDS
The Delaware General Corporation Law (the "DGCL") allows the Company to pay
dividends only out of its surplus (as defined and computed in accordance with
the provisions of the DGCL) or if the Company has no such surplus, out of its
net profits for the fiscal year in which the dividend is declared and/or the
preceding fiscal year. Additionally, the Federal Reserve has issued a policy
statement with regard to the payment of cash dividends by bank holding
companies. The policy statement provides that a bank holding company should not
pay cash dividends which exceed its net income or which can only be funded in
ways that weaken the bank holding company's financial health, such as by
borrowing. The Federal Reserve also possesses enforcement powers over bank
holding companies and their non-bank subsidiaries to prevent or remedy actions
that represent unsafe or unsound practices or violations of applicable statutes
and regulations. Among these powers is the ability to proscribe the payment of
dividends by banks and bank holding companies.
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27
FEDERAL SECURITIES REGULATION
The Company's common stock is registered with the SEC under the Securities Act
of 1933, as amended, and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Consequently, the Company is subject to the information, proxy
solicitation, insider trading and other restrictions and requirements of the SEC
under the Exchange Act.
THE BANK
GENERAL
The Bank is a national bank, chartered by the OCC under the National Bank Act.
The deposit accounts of the Bank are insured by the FDIC's Savings Association
Insurance Fund ("SAIF"), and the Bank is a member of the Federal Reserve System.
As a SAIF-insured national bank, the Bank is subject to the examination,
supervision, reporting and enforcement requirements of the OCC, as the
chartering authority for national banks, and the FDIC, as administrator of the
SAIF. The Bank is also a member of the Federal Home Loan Bank System, which
provides a central credit facility primarily for member institutions.
DEPOSIT INSURANCE
As an FDIC-insured institution, the Bank is required to pay deposit insurance
premium assessments to the FDIC. The FDIC has adopted a risk-based assessment
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their respective
levels of capital and results of supervisory evaluations. Institutions
classified as well-capitalized (as defined by the FDIC) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (as defined by the FDIC) and considered of substantial supervisory
concern pay the highest premium. Risk classification of all insured institutions
is made by the FDIC for each semi-annual assessment period.
During the year ended December 31, 1999, SAIF assessments ranged from 0% of
deposits to 0.27% of deposits. For the semi-annual assessment period beginning
January 1, 2000, SAIF assessment rates will continue to range from 0% of
deposits to 0.27% of deposits.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution (i)
has engaged or is engaging in unsafe or unsound practices, (ii) is in an unsafe
or unsound condition to continue operations or (iii) has violated any applicable
law, regulation, order, or any condition imposed in writing by, or written
agreement with, the FDIC. The FDIC may also suspend deposit insurance
temporarily during the hearing process for a permanent termination of insurance
if the institution has no tangible capital. Management of the Company is not
aware of any activity or condition that could result in termination of the
deposit insurance of the Bank.
FICO ASSESSMENTS
Since 1987, a portion of the deposit insurance assessments paid by SAIF members
has been used to cover interest payments due on the outstanding obligations of
the Financing Corporation ("FICO"). FICO was created in 1987 to finance the
recapitalization of the Federal Savings and Loan Insurance Corporation, the
SAIF's predecessor insurance fund. As a result of federal legislation enacted in
1996, beginning as of January 1, 1997, both SAIF members and members of the
FDIC's Bank Insurance Fund ("BIF") became subject to assessments to cover the
interest payments on outstanding FICO obligations. These FICO assessments are in
addition to amounts assessed by the FDIC for deposit insurance. Between January
1, 2000 and the final maturity of the outstanding FICO obligations in 2019, BIF
members and SAIF members will share the cost of the interest on the FICO bonds
on a PRO RATA basis. During the year ended December 31, 1999, the FICO
assessment rate for SAIF members ranged between approximately 0.058% of deposits
and approximately 0.061% of deposits, while the FICO assessment rate for BIF
members ranged between approximately 0.0116% of deposits and approximately
0.0122% of deposits. During the year ended December 31, 1999, the Bank paid FICO
assessments totaling $210,895.
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28
SUPERVISORY ASSESSMENTS
National banks are required to pay supervisory assessments to the OCC to fund
the operations of the OCC. The amount of the assessment is calculated using a
formula which takes into account the bank's size and its supervisory condition
(as determined by the composite rating assigned to the bank as a result of its
most recent OCC examination). During the year ended December 31, 1999, the Bank
paid supervisory assessments to the OCC totaling $118,553.
CAPITAL REQUIREMENTS
The OCC has established the following minimum capital standards for national
banks, such as the Bank: a leverage requirement consisting of a minimum ratio of
Tier 1 capital to total assets of 3% for the most highly-rated banks with a
minimum requirement of at least 4% for all others, and a risk-based capital
requirement consisting of a minimum ratio of total capital to total
risk-weighted assets of 8%, at least one-half of which must be Tier 1 capital.
For purposes of these capital standards, Tier 1 capital and total capital
consist of substantially the same components as Tier 1 capital and total capital
under the Federal Reserve's capital guidelines for bank holding companies (SEE
"--The Company--Capital Requirements").
The capital requirements described above are minimum requirements. Higher
capital levels will be required if warranted by the particular circumstances or
risk profiles of individual institutions. For example, the regulations of the
OCC provide that additional capital may be required to take adequate account of,
among other things, interest rate risk or the risks posed by concentrations of
credit , nontraditional activities or securities trading activities.
During the year ended December 31, 1999, the Bank was not required by the OCC to
increase its capital to an amount in excess of the minimum regulatory
requirement. As of December 31, 1999, the Bank exceeded its minimum regulatory
capital requirements with a risk-based capital ratio of 12.8%.
Federal law provides the federal banking regulators with broad power to take
prompt corrective action to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized," in each case as defined by regulation. Depending upon the
capital category to which an institution is assigned, the regulators' corrective
powers include: requiring the institution to submit a capital restoration plan;
limiting the institution's asset growth and restricting its activities;
requiring the institution to issue additional capital stock (including
additional voting stock) or to be acquired; restricting transactions between the
institution and its affiliates; restricting the interest rate the institution
may pay on deposits; ordering a new election of directors of the institution;
requiring that senior executive officers or directors be dismissed; prohibiting
the institution from accepting deposits from correspondent banks; requiring the
institution to divest certain subsidiaries; prohibiting the payment of principal
or interest on subordinated debt; and ultimately, appointing a receiver for the
institution. As of December 31, 1999, the Bank was "well capitalized", as
defined by OCC regulations.
DIVIDENDS
The National Bank Act imposes limitations on the amount of dividends that may be
paid by a national bank, such as the Bank. Generally, a national bank may pay
dividends out of its undivided profits, in such amounts and at such times as the
bank's board of directors deems prudent. Without prior OCC approval, however, a
national bank may not pay dividends in any calendar year which, in the
aggregate, exceed the bank's year-to-date net income plus the bank's retained
net income for the two preceding years.
The payment of dividends by any financial institution or its holding company is
affected by the requirement to maintain adequate capital pursuant to applicable
capital adequacy guidelines and regulations, and a financial institution
generally is prohibited from paying any dividends if, following payment thereof,
the institution would be undercapitalized. As described above, the Bank exceeded
its minimum capital requirements under applicable guidelines as of December 31,
1999. As of December 31, 1999, approximately $195,000 was available to be paid
as dividends to the Company by the Bank. Notwithstanding the availability of
funds for dividends, however, the
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29
OCC may prohibit the payment of any dividends by the Bank if the OCC determines
such payment would constitute an unsafe or unsound practice.
INSIDER TRANSACTIONS
The Bank is subject to certain restrictions imposed by federal law on extensions
of credit to the Company and its subsidiaries, on investments in the stock or
other securities of the Company and its subsidiaries and the acceptance of the
stock or other securities of the Company or its subsidiaries as collateral for
loans. Certain limitations and reporting requirements are also placed on
extensions of credit by the Bank to its directors and officers, to directors and
officers of the Company and its subsidiaries, to principal stockholders of the
Company, and to "related interests" of such directors, officers and principal
stockholders. In addition, federal law and regulations may affect the terms upon
which any person becoming a director or officer of the Company or one of its
subsidiaries or a principal stockholder of the Company may obtain credit from
banks with which the Bank maintains a correspondent relationship.
SAFETY AND SOUNDNESS STANDARDS
The federal banking agencies have adopted guidelines which establish operational
and managerial standards to promote the safety and soundness of federally
insured depository institutions. The guidelines set forth standards for internal
controls, information systems, internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth, compensation, fees
and benefits, asset quality and earnings. Since the fourth quarter of 1998, and
through the first quarter of 2000, the federal banking regulators have issued
safety and soundness standards for achieving Year 2000 compliance, including
standards for developing and managing Year 2000 project plans, testing
remediation efforts and planning for contingencies.
In general, the safety and soundness guidelines prescribe the goals to be
achieved in each area, and each institution is responsible for establishing its
own procedures to achieve those goals. If an institution fails to comply with
any of the standards set forth in the guidelines, the institution's primary
federal regulator may require the institution to submit a plan for achieving and
maintaining compliance. If an institution fails to submit an acceptable
compliance plan, or fails in any material respect to implement a compliance plan
that has been accepted by its primary federal regulator, the regulator is
required to issue an order directing the institution to cure the deficiency.
Until the deficiency cited in the regulator's order is cured, the regulator may
restrict the institution's rate of growth, require the institution to increase
its capital, restrict the rates the institution pays on deposits or require the
institution to take any action the regulator deems appropriate under the
circumstances. Noncompliance with the standards established by the safety and
soundness guidelines may also constitute grounds for other enforcement action by
the federal banking regulators, including cease and desist orders and civil
money penalty assessments.
BRANCHING AUTHORITY
National banks headquartered in Illinois, such as the Bank, have the same
branching rights in Illinois as banks chartered under Illinois law. Illinois law
grants Illinois-chartered banks the authority to establish branches anywhere in
the State of Illinois, subject to receipt of all required regulatory approvals.
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Riegle-Neal Act"), both state and national banks are allowed to establish
interstate branch networks through acquisitions of other banks, subject to
certain conditions, including certain limitations on the aggregate amount of
deposits that may be held by the surviving bank and all of its insured
depository institution affiliates. The establishment of new interstate branches
or the acquisition of individual branches of a bank in another state (rather
than the acquisition of an out-of-state bank in its entirety) is allowed by the
Riegle-Neal Act only if specifically authorized by state law. The legislation
allowed individual states to "opt-out" of certain provisions of the Riegle-Neal
Act by enacting appropriate legislation prior to June 1, 1997. Illinois has
enacted legislation permitting interstate mergers beginning on June 1, 1997,
subject to certain conditions, including a prohibition against interstate
mergers involving an Illinois bank that has been in existence and continuous
operation for fewer than five years.
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30
FEDERAL RESERVE SYSTEM
Federal Reserve regulations, as presently in effect, require depository
institutions to maintain non-interest earning reserves against their transaction
accounts (primarily NOW and regular checking accounts), as follows: for
transaction accounts aggregating $44.3 million or less, the reserve requirement
is 3% of total transaction accounts; and for transaction accounts aggregating in
excess of $44.3 million, the reserve requirement is $1.329 million plus 10% of
the aggregate amount of total transaction accounts in excess of $44.3 million.
The first $5.0 million of otherwise reservable balances are exempted from the
reserve requirements. These reserve requirements are subject to annual
adjustment by the Federal Reserve. The Bank is in compliance with the foregoing
requirements.
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EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company, each of whom is also an executive officer
of the Bank, are identified below. The executive officers of the Company are
elected annually by the Company's Board of Directors.
Name Position with Company Position with Bank
- --------------------- ---------------------------------------- ---------------------------------------------
James L. Roberts President and Chief Executive Officer President and Chief Executive Officer
Paul A. Larsen Executive Vice President, Treasurer, Executive Vice President, Treasurer,
Chief Financial Officer, and Corporate Chief Financial Officer, and Corporate
Secretary Secretary
Joseph H. Tillotson Executive Vice President Executive Vice President, Retail Banking
Barbara A. Buscemi Senior Vice President Senior Vice President, Human Resources
Joseph J. Gillings Senior Vice President Senior Vice President, Commercial Banking
Michael A. Sykes Senior Vice President Senior Vice President, Commercial Real Estate
James L. Roberts, age 57, was elected as the Company's President and Chief
Executive Officer on January 21, 1999. Prior to joining the Bank, Mr. Roberts
was President and CEO of Perpetual Midwest Financial, Inc. of Cedar Rapids, Iowa
from 1993 through 1998. He has over 30 years of experience in the financial
services industry.
Paul A. Larsen, age 50, was named an Executive Vice President, Chief Financial
Officer and Treasurer of the Company and the Bank in April, 1999. He joined the
Company in March, 1995 as Senior Vice President, Chief Financial Officer and
Treasurer. Mr. Larsen has over 25 years of financial management and treasury
operations experience within the commercial banking environment.
Joseph H. Tillotson, age 55, was named an Executive Vice President of the
Company and the Bank in April, 1999. He joined the Bank in March, 1993 as
Lending Manager. Since June 1997, Mr. Tillotson has been managing Retail
Banking. Mr. Tillotson has over 25 years of lending and operations experience in
banking.
Barbara A. Buscemi, age 45, was named Senior Vice President of the Company and
the Bank in April, 1999. She joined the Bank in November, 1996 as Manager of the
Human Resources Department. Prior to joining the Bank, she was employed by
LaSalle Bank, Illinois as Manager of Employment/Employee Relations since 1990.
Ms. Buscemi has over 15 years experience in human resource management.
Joseph J. Gillings, age 58, was named Senior Vice President and Senior
Commercial Lending Officer of the Company and the Bank in April, 1999. He joined
the Bank in October, 1997 as a Vice President in the Commercial Banking
Department. Mr. Gillings was a Sales and Marketing Agent for Northwestern Mutual
Life Insurance from 1992 until 1997. Prior to joining Northwestern Mutual, Mr.
Gillings had over 25 years experience in commercial banking.
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32
Michael A. Sykes, age 36, was named Senior Vice President and Senior Mortgage
Lending Officer of the Company and the Bank in April, 1999. He also manages the
Mortgage Center. He joined the Bank in August, 1997 as a Vice President in the
Commercial Real Estate Department. Prior to joining the Bank, Mr. Sykes had been
a Vice President in the Commercial Real Estate Division at Banco Popular in 1996
and 1997, and at LaSalle Bank from 1993 until 1996. Mr. Sykes has over 15 years
experience in commercial real estate.
ITEM 2. PROPERTIES
The Company owns the building and land for its headquarters, which is located at
749 Lee Street, Des Plaines, Illinois, and which opened in 1954. At December 31,
1999, this property had 19,575 square feet and a net book value of approximately
$3.3 million. The Company also owns the land for its employee parking lot
located at 761 Graceland Street, Des Plaines, Illinois.
In March, 1994, the Company acquired the Arlington Heights branch of the former
Irving Federal Bank, F.S.B. from the Resolution Trust Corporation. The building
contains approximately 14,260 square feet. At December 31, 1999, the net book
value of the land and the building was approximately $2.5 million.
In March of 1995, the Company opened a new branch office in Schaumburg,
Illinois. The office has approximately 9,800 square feet of space and is
situated on a 1.6 acre parcel. At December 31, 1999 the net book value of the
land and the building was approximately $2.8 million.
On February 12, 1998, the Company entered into a lease arrangement for 2,100
square feet at 1771 North Richmond Road, McHenry, Illinois. The term of the
lease is five years with two additional five year options. This location houses
the Mortgage Center. Building improvements at this facility had a book value of
approximately $0.1 million as of December 31, 1999.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are involved as plaintiff or defendant in
various legal actions arising in the normal course of their businesses. While
the ultimate outcome of these various legal proceedings cannot be predicted with
certainty, it is the opinion of management that the resolution of these legal
actions should not have a material effect on the Company's consolidated
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the solicitation
of proxies or otherwise, during the quarter ended December 31, 1999.
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33
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCK HOLDER MATTERS
As of March 3, 2000, there were approximately 670 holders of record of CoVest
Bancshares, Inc. Common Stock, and an estimated 1,700 holders of its stock in
"street name."
The Common Stock of CoVest Bancshares, Inc. is traded on the Nasdaq Stock Market
National Market System under the symbol COVB.
The table below shows the reported high and low sales prices and dividends
(split adjusted) during the periods indicated. The Common Stock began trading on
June 30, 1992.
1999 Dividend High Low 1998 Dividend High Low
- ---- -------- ---- --- ---- -------- ---- ---
1st Qtr. $.08 $15.38 $11.25 1st Qtr. $.08 $19.75 $14.50
2nd Qtr. .08 14.88 11.13 2nd Qtr. .08 20.75 17.38
3rd Qtr. .08 15.50 13.25 3rd Qtr. .08 18.75 12.75
4th Qtr. .08 13.81 10.75 4th Qtr. .08 15.13 11.38
Year end closing price = $13.31 Year end closing price = $12.25
The Annual Meeting of Stockholders of CoVest Bancshares, Inc. will be held at
9:00 a.m. on Tuesday, April 25, 2000 at the following location:
Casa Royale
783 Lee Street
Des Plaines, Illinois 60016
Stockholders are welcome to attend.
Investor information is available without charge by writing to Paul A. Larsen,
Executive Vice President and Treasurer, at the corporate office:
CoVest Bancshares, Inc.
P.O. Box 94242
Palatine, Illinois 60094-4242
(847) 294-6500
The following companies make a market in COVB Common Stock:
Stifel Nicolaus & Co., Inc Howe Barnes Investments, Inc.
ABN AMRO Corporation Herzog, Heine, Geduld, Inc.
Sandler O'Neill Partners, L.P.
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34
The dividend reinvestment and stock purchase plan offers stockholders an
opportunity to automatically make full or partial dividend reinvestments and
make optional cash purchases between $25 and $5,000 each quarter, with no
commission charges.
Inquiries regarding stock transfer, registration, lost certificates or changes
in name and address should be directed to the stock transfer agent and registrar
by writing:
Harris Trust and Savings Bank
Shareholder Communications Team
P. O. Box A 3504
Chicago, Illinois 60690-3504
(312) 360-5106
Corporate Office: CoVest Bancshares, Inc.
749 Lee Street
Des Plaines, Illinois 60016
(847) 294-6500
Corporate Counsel: Barack Ferrazzano Kirschbaum Perlman & Nagelberg
333 W. Wacker Drive Suite 2700
Chicago, Illinois 60606
Independent Auditor: Crowe, Chizek and Company LLP
One Mid America Plaza Suite 700
Oak Brook, Illinois 60522
Internet address: http://www.covestbanc.com
CoVest Banc Branch
Offices:
749 Lee Street
Des Plaines, Illinois 60016
(847) 294-6500
770 W. Dundee Road
Arlington Heights, Illinois 60004
(847) 577-8100
2601 W. Schaumburg Road
Schaumburg, Illinois 60194
(847) 798-2800
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35
CoVest Banc
Mortgage Center:
1771 N. Richmond Rd.
McHenry, Illinois 60050
(800) 995-6750
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36
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL INFORMATION
As of December 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In Thousands)
Selected financial condition data
Total assets $ 568,496 $ 548,697 $ 582,722 $ 541,169 $ 622,500
Loans receivable, net 462,697 402,329 377,509 338,545 331,017
Total securities 76,990 88,017 164,172 172,876 255,418
Non-interest earning assets 18,192 18,674 17,571 16,911 18,716
Deposits 398,055 364,535 371,752 402,090 454,656
Borrowings 114,004 126,755 151,956 78,690 97,835
Non-interest bearing liabilities 10,163 10,456 10,720 10,445 12,332
Stockholders' equity 46,274 46,951 48,294 49,944 57,678
Selected operations data
Total interest income $ 38,561 $ 40,943 $ 39,364 $ 42,377 $ 40,854
Total interest expense 22,225 24,739 23,914 29,241 26,727
---------- ---------- ---------- ---------- ----------
Net interest income 16,336 16,204 15,450 13,136 14,127
Provision for possible loan and
lease losses 1,132 1,567 4,072 1,397 644
---------- ---------- ---------- ---------- ----------
Net interest income after provision 15,204 14,637 11,378 11,739 13,483
Total non interest income 4,037 5,579 3,672 4,241 1,217
Special SAIF assessment -- -- -- 3,033 --
Total non interest expense 13,259 14,245 11,305 10,818 10,722
---------- ---------- ---------- ---------- ----------
Income before income taxes 5,982 5,971 3,745 2,129 3,978
Income tax provision 2,047 2,100 1,135 540 1,367
---------- ---------- ---------- ---------- ----------
Net income $ 3,935 $ 3,871 $ 2,610 $ 1,589 $ 2,611
========== ========== ========== ========== ==========
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37
SELECTED FINANCIAL RATIOS AND OTHER DATA
Year Ended December 31; 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Performance ratios:
Return on assets (ratio of net income to
average total assets) 0.72% 0.67% 0.48% 0.26% 0.46%
Interest rate spread information
Average during year 2.70% 2.53% 2.42% 1.72% 2.08%
End of year 2.60% 2.67% 2.52% 2.41% 1.86%
Interest margin 3.18% 2.96% 2.94% 2.22% 2.59%
Ratio of operating expenses to average
total assets 2.43% 2.47% 2.08% 2.29% 1.90%
Ratio of net interest income to non-interest
expenses 1.23x 1.14x 1.37x 0.95x 1.32x
Basic earnings per share $ 0.96 $ 0.92 $ 0.61 $ 0.34 $ 0.51
Diluted earnings per share $ 0.93 $ 0.87 $ 0.58 $ 0.32 $ 0.50
Return on stockholders' equity (ratio of
net income to average total equity) 8.49% 8.15% 5.40% 2.94% 4.67%
Dividend payout ratio 33.70% 35.55% 47.70% 82.22% 40.30%
Asset quality ratios:
Non-performing assets to total assets at
end of year 0.14% 0.19% 0.22% 0.16% 0.11%
Allowance for possible loan and lease losses
to non-performing loans 6.31x 4.22x 3.05x 1.66x 2.02x
Capital ratios:
Stockholders' equity to total assets at
end of year 8.14% 8.56% 8.29% 9.23% 9.27%
Average stockholders' equity to
average assets 8.49% 8.25% 8.88% 8.92% 9.92%
Ratio of average interest-earning assets to
average interest-bearing liabilities 1.11x 1.10x 1.12x 1.10x 1.11x
Other data
Facilities
Number of full-service offices 3 3 3 3 3
Number of mortgage centers 1 2 -- -- --
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38
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
FINANCIAL OVERVIEW
The Company's assets increased 4% to $568.5 million as of December 31, 1999,
from $548.7 million at December 31, 1998. At December 31, 1999, loans receivable
represented 81.4% of total assets, while securities represented 13.5%, compared
to 73.3% and 16.0% as of December 31, 1998. The increase was funded by deposit
growth of $33.5 million, offsetting a decrease in borrowings of $12.8 million.
These additional funds, along with an $11.0 million decrease in securities and a
$29.0 million decrease in cash and cash equivalents, were used to fund net loan
growth of $60.9 million. Increases were achieved in: commercial loans, $9.3
million; commercial real estate loans, $7.6 million; multi family loans, $70.4
million; construction loans, $5.6 million, and consumer loans, $5.3 million.
Mortgage loans and commercial leases declined $24.2 million and $13.1 million.
For the year ended December 31, 1999, the Company earned $3,935,000, an increase
of $64,000 from December 31, 1998. Without the effect of a non-recurring gain in
1998 of $672,000 from the sale of the Company's credit card portfolio, as well
as 1998 security gains totaling $225,000, net income for 1999 would have
increased $613,000, compared to 1998.
STOCK REPURCHASE PROGRAM AND DIVIDENDS
The Company paid regular quarterly dividends during 1999 of $.08 per share. The
Company has also announced an $.08 per share dividend payable March 31, 2000, to
shareholders of record on March 15, 2000.
The Company completed its 15th, 16th, and 17th stock repurchase plans for
100,000 shares each on March 25, 1999, June 30, 1999, and February 3, 2000
respectively. On February 3, 2000, the Company announced its 18th stock
repurchase plan, enabling the Company to repurchase up to 100,000 shares in the
open market or through privately negotiated transactions. The Company has
repurchased 39,822 shares to date under this latest stock repurchase plan.
GENERAL
On June 30, 1992, the Bank converted from a federally chartered mutual savings
bank to a federally chartered stock savings bank. As part of the conversion,
proceeds were used to purchase the stock of the Bank. In August, 1997 the Bank
was converted to a national bank.
The Company's business activities currently consist of ownership of the Bank.
The Bank's principal business activities consist of attracting deposits from the
public and investing these deposits, together with funds generated from
operations and borrowings, primarily in commercial and commercial real estate
loans, mortgage loans, consumer loans, and securities. In addition, the Bank has
a subsidiary which provides insurance and brokerage services. The Bank's deposit
accounts are insured to the maximum allowable by 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 other income consisting of service
charges, loan origination and servicing fees, mortgage center fees, and fees
from the sale of annuity and insurance products. Operating expenses of the Bank
include employee compensation and benefits, commissions and incentives,
occupancy and equipment costs, federal deposit insurance premiums, data
processing, advertising, 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 the federal government, and
actions of regulatory authorities.
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39
The Company's basic mission is to continue to serve its local communities by
offering profitable financial services. In seeking to accomplish this mission,
management is committed to (i) maintaining tangible capital in excess of
regulatory requirements, (ii) maintaining high asset quality, (iii) maximizing
interest rate spread, and (iv) managing exposure to interest rate risk.
The following information for the Company is presented on a consolidated basis.
Except as the context otherwise requires, references to the "Company" refer to
the Company, the Bank, and the Bank's subsidiary, CoVest Investments, Inc. The
discussion and analysis that follows should be read in conjunction with the
consolidated financial statements, notes, and tables presented herein. The
information provided below has been rounded in order to simplify presentation.
However, ratios and percentages are calculated using the detailed financial
information.
BUSINESS STRATEGY
Management of the Company has accomplished much of the restructuring necessary
to fully transform the balance sheet to that of a full service commercial bank.
In 1996, the Company sold over $93 million of securitized 15 and 30 year fixed
rate mortgage-backed securities and replaced most of those fixed rate assets
with shorter term floating rate instruments. In December, 1996, the Company
securitized $61 million in fixed rate long-term mortgages and seven to ten year
balloon mortgages with the FHLMC. These securities were classified as
available-for-sale mortgage backed securities. Some of these were sold in 1997
to reduce interest rate risk and provide additional funding for commercial
related loans. In 1997, the Company securitized $17.8 million of residential
fixed rate mortgages that were not scheduled to reprice in the next five years.
Additional securitized loans were sold in 1998 and 1999 to provide liquidity and
fund commercial, multi-family, construction, and commercial real estate loan
originations. In 1998, the Company opened mortgage centers in McHenry and
Aurora, Illinois. These offices were subsequently consolidated in McHenry. The
Mortgage Center concentrates on mortgage loan originations and sales. The loans
are sold on a service released basis to mortgage buyers for which the Company
receives a fee and has no additional rights.
These changes allow the Company to concentrate on filling the void left by the
consolidation of competing financial institutions in its marketplace and to
serve, "on a timely basis", those commercial lending prospects who may need a
commercial loan, a commercial real estate loan, a construction loan or
multi-family loan. The Company's ability to serve this market helped to expand
the commercial related portfolio by $79.8 million during 1999. Most of this
increase came in multi-family loans, which increased by $70.4 million, followed
by increases of $9.3 million in commercial loans, $7.6 million in commercial
real estate loans and $5.6 million in construction lending. Leases outstanding
decreased by $13.1 million.
Changing the Bank's name in June, 1997 from First Federal Bank to CoVest Banc
and changing the Bank's charter affiliation in August, 1997 from a thrift to a
national bank helped attract customers who may not have previously associated
with First Federal Bank because of the perception that the Bank was a savings
and loan whose core business was limited to first mortgages and certificates of
deposits to the retail sector.
Total deposits increased 9% to $398.1 million from $364.5 million at December
31, 1998. The deposit base of the organization is also undergoing a
transformation, as non interest bearing deposits increased by $4.7 million, or
31% from December 31, 1998. In addition, certificates of deposit increased by
$30.5 million, or 16%, as a result of purchased money deposits. The Company's
other core deposits, interest bearing checking, money market accounts and
savings accounts have remained relatively constant from year to year.
In 1999, the Company began soliciting deposits from outside its primary market
area. Purchased money deposits became an increasingly important source of funds
during 1999, and as of December 31, 1999, amounted to $44 million. These
deposits replaced long term borrowings called by the Federal Home Loan Bank and
had a lower cost than borrowings for a similar time period offered by the
Federal Home Loan Bank.
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40
The Company continues to strive to build the volume of non-interest bearing
checking accounts coupled with a "direct deposit" function. This transaction
account is another core account of a community bank. From the Company's
perspective it also helps improve non-interest income and will help to improve
the net interest margin. The Company offers promotions to attract new checking
accounts and provides additional services to make these accounts more desirable.
These services include telephone banking and a Debit Card. PC Banking was
introduced in 1998. In 1999, the Company introduced Gold Star Checking, a high
interest checking account requiring a minimum balance of $3,500. It also
launched the Diamond Club, which requires a minimum deposit balance of $100,000,
a Gold Star Checking account, a preferred money market account, and provides
additional benefits and services to its members.
Certificates of deposit have increased from $187.5 million at December 31, 1998
to $218.0 on December 31, 1999. This increase was primarily due to the Company's
increased reliance on purchased money deposits. In setting rates, the Company
regularly evaluates (i) its investment and lending opportunities, (ii) its
internal cost of funds, (iii) the rates being offered by competing institutions
and (iv) its liquidity position. In order to decrease the volatility of its
deposits, the Company imposes penalties on early withdrawal of its certificates
of deposit.
At December 31, 1999, total non-performing assets amounted to $0.8 million, or
0.17% of net loans receivable compared to $1.0 million, or 0.25% of net loans
receivable at December 31, 1998.
At December 31, 1999, the allowance for possible loan and lease losses amounted
to $4.8 million, or 6.31x non-performing loans as compared to 4.22x coverage at
December 31, 1998.
Stockholders' equity in CoVest Bancshares, Inc. totaled $46.3 million at
December 31, 1999. The number of common shares outstanding was 4,104,007 and the
book value per common share outstanding was $11.28 as of December 31, 1999. At
March 3, 2000, 60,178 shares remained to be repurchased under the 18th stock
repurchase program.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
GENERAL
The Company earned $3,935,000 for the year ended December 31, 1999, versus
$3,871,000 for the year ended December 31, 1998. This represented $0.96 (basic)
and $0.93 (diluted) earnings per share versus $0.92 (basic) and $0.87 (diluted)
earnings per share for the twelve months of 1998, an increase of 4% and 7%
respectively from 1998.
Cash earnings for 1999, consisting of net earnings of $3,935,000 and the after
tax affect of goodwill of $126,000 were $4,061,000, or $0.99 (basic) and $0.95
(diluted) earnings per share, compared to $3,997,000 or $0.95 (basic) and $0.89
(diluted) earnings per share in 1998.
Returns on average equity and average assets for the year ended December 31,
1999, were 8.49% and 0.72% compared to 8.15% and 0.67% in 1998. Cash earnings
for 1999 represented returns on average equity and average tangible assets of
8.77% and 0.74%, compared to 8.41% and 0.69% for 1998.
INTEREST INCOME
Interest income for 1999 decreased by $2.4 million from 1998. The 1999 decline
was primarily due to a reduction of $30 million in average earning assets as
compared to 1998. The overall yield on earning assets decreased 1 basis point,
from 7.43% in 1998 to 7.42% in 1999.
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41
INTEREST EXPENSE
The interest expense for the same periods decreased from $24.7 million in 1998
to $22.2 million in 1999. This $2.5 million decrease resulted from a decrease of
$33.9 million in funding liabilities and an 18 basis point reduction in cost of
funds. Management anticipates its cost of funds to increase in 2000.
NET INTEREST INCOME
Net interest income increased by $132,000 or 1% in 1999 versus 1998, even though
average earning assets were $30 million less in 1999 versus 1998. In 1999,
average loans receivable were $419 million versus $407 million in 1998. Higher
yielding multi family loans continued to increase while mortgage loans
outstanding decreased. Lower yielding investments, including securities and
overnight deposits, averaged $105 million in 1999 versus $147 million in 1998.
The Company's net interest rate spread and margin averaged 2.70% and 3.18%
during 1999, a 17 basis point increase in the net interest rate spread and 22
basis point increase in the net interest rate margin from 2.53% and 2.96% during
1998. This represented an increase of 7% in both net interest rate spread and
net interest rate margin. Due to anticipated higher costs of funds, the Company
does not expect this rate of growth to continue during the next year.
PROVISION FOR POSSIBLE LOAN AND LEASE LOSSES
The provision for possible loan and lease losses decreased $435,000, or 28% in
1999 versus 1998. This decrease was because the Company sold its credit card
portfolio in the fourth quarter of 1998. During 1998, the Company experienced
net loan losses from its credit card portfolio of $1.1 million out of total net
chargeoffs of $1.2 million.
NON-INTEREST INCOME
Non-interest income declined $1,542,000, or 28%, versus 1998. This decrease was
primarily due to the following 1998 events: the Company recognized $672,000 in
non-recurring income related to the sale of the credit card portfolio and
security gains of $225,000. During 1999, security losses of $10,000 were
recognized. The Company also recognized a $94,000 gain on a sale of other real
estate owned in 1999. During 1999, net Mortgage Center income declined $257,000,
as volume dropped in response to increases in mortgage interest rates. In
addition, insurance and discount brokerage income declined $178,000 in 1999
versus 1998, as annuity and security sale volume declined by $3 million and
customers migrated to products offering lower commissions. Loan prepayment fees
declined $232,000 in 1999 versus 1998, and other loan servicing fees decreased
$314,000 as a result of the sale of the credit card portfolio in 1998 and
reduction in mortgage loans outstanding.
NON-INTEREST EXPENSE
Operating expenses decreased 7% or $1.0 million. Compensation and benefits
expense and commissions and incentives decreased $850,000. During the first
quarter of 1999, certain employee positions were eliminated to bring operating
costs more in line with the revenues of the Bank. Additionally, in 1999 the
Company deferred $403,000 more in compensation expenses associated with loan
origination, as required by FASB 91, than during the same period in 1998. This
coincides with the net loan growth of $60.9 million during 1999. These decreases
were offset by advertising expenses in 1999 exceeding the 1998 level by
$177,000, as the Company initiated several advertising campaigns to generate
additional deposits. Also in 1998, the Company recognized $137,000 of additional
expense related to the sale of the credit card portfolio.
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42
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
GENERAL
Net income for the year ended December 31, 1998 was $3,871,000 compared to
$2,610,000 for the year ended December 31, 1997, an increase of 48%.
In the fourth quarter of 1997, the Company reevaluated its loan mix, rescored
its credit card portfolio, assessed its recent loan loss experience, and decided
to provide an extra $2.4 million in loan loss provision. Without this additional
provision, net income for 1997 would have been $4,080,000.
Returns on average assets and average stockholders' equity during 1998 were
0.67% and 8.15%, respectively, compared to 0.48% and 5.40% in 1997.
CoVest Bancshares, Inc. had earnings of $0.92 (basic) for the full year of 1998.
This compared with $0.61 (basic) for the comparable period in 1997. Fully
diluted earnings per share was $0.87 per share in 1998 versus $0.58 in 1997.
INTEREST INCOME
Interest income for 1998 increased by $1.6 million from 1997. The balance sheet
averaged $28 million more in average earning assets when compared to 1997,
resulting in an additional $3.8 million in income in 1998. Some of this increase
was offset by a decrease of $21.1 million in investment volume, resulting in a
reduction of $2.2 million in 1998 income. In addition, the overall yield on
earning assets decreased 6 basis points, from 7.49% in 1997 to 7.43% in 1998.
INTEREST EXPENSE
The interest expense increased from $23.9 million in 1997 to $24.7 million in
1998. This $.8 million increase in funding cost resulted from an increase in
funding liability volume of over $33.4 million offset in part by reduced
interest costs of 20 basis points.
NET INTEREST INCOME
Net interest income increased by nearly 5% or $.8 million. The interest rate
spread and margin averaged 2.53% and 2.96%, during 1998, an 11 basis point
increase and 2 basis point increase from 2.42% and 2.94%, during 1997. During
1998, commercial, construction, and commercial real estate loans became a larger
percentage of the overall loan portfolio and asset mix. However, since many of
these loans were adjustable rate, yields dropped in conjunction with an overall
drop in rates experienced during 1998.
PROVISION FOR POSSIBLE LOAN AND LEASE LOSSES
The provision for possible loan and lease losses decreased from $4,072,000 for
1997 to $1,567,000 in 1998. During the fourth quarter of 1997, the Company
provided an extra $2.4 million in loan loss provision after evaluating its loan
mix, rescoring its credit card portfolio, and reviewing its recent loan loss
experience. The credit card loan portfolio experienced continuing losses from
bankruptcy and was sold in November, 1998. The commercial related loan portfolio
that represents commercial, commercial real estate, construction and
multi-family lending increased in total volume by almost $120 million during
1998, or almost 140% in one year.
NON-INTEREST INCOME
Non-interest income, excluding gains from sales of securities of $225,000 and a
non-recurring gain from the sale of the credit card loan portfolio of $672,000,
increased 93%, or $2,257,000 from 1997. Mortgage Center
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43
service release and other fees contributed $1,712,000 in non-interest income.
Loan charges and servicing fees increased $459,000, primarily due to collection
of loan prepayment penalties. Deposit related fees increased by $126,000.
Net gains from the sale of securities were $225,000. This included a net loss of
$560,000 recognized in November, 1998 to unwind an arbitrage transaction.
During the fourth quarter of 1997, the Bank entered into an arbitrage
transaction. Using FHLB borrowings of $50 million that matured in late 1998, the
Bank purchased two large mortgage-backed security pools that were structured as
3/1 adjustable rate mortgages ("ARMs"). A 3/1 ARM is an adjustable rate mortgage
that is fixed for the first three year period and then reprices at a spread over
the one year constant maturity term treasury. The transaction was projected to
have an average spread of 72 basis points and employ excess capital, thus
improving the return on average equity for the period of the transaction.
However, interest rates dropped dramatically, with the 30 year treasury rate
falling from 6.04% at the end of November 1997 to a historic low of 4.72% on
October 5, 1998. Borrowers who had previously financed their mortgage loans
using this type of lending structure refinanced their outstanding balances in
record numbers and prepayment speeds reached record levels, which was
detrimental to this transaction.
Since the two mortgage-backed securities were purchased at a premium,
amortization of the premium accelerated, which caused an overall reduction in
the projected spread from 72 basis points down to a negative 34 basis points.
Additionally, a liquidity crisis reportedly caused by instability in Russia and
Brazil caused spreads between all financial instruments and treasury securities
to widen to historic levels in November, 1998 when the borrowings with the FHLB
matured and the securities were sold to repay the borrowings.
In November 1998, the Bank sold its credit card portfolio and recognized a gain
of $672,000 before termination expenses of $137,000. The size of the credit card
portfolio had decreased one-third over the last several years to approximately
$11 million, at the time of the sale. The portfolio was not attracting new
customers and was declining in size as customers took advantage of "teaser"
rates, "rebates" and "rewards" programs offered by the industry giants.
The level of losses related to the credit card portfolio also entered into the
decision to sell the portfolio. Losses from both bankruptcy and credit losses
over the three year period ending December 31, 1998 topped at least $1.1 million
annually, while operating costs continued to increase.
NON-INTEREST EXPENSE
Other operating expenses increased 26% or $2,940,000. The largest increase came
in salaries and benefits that jumped $1,876,000 or 34.7%. Additional staff was
added to serve both commercial and retail customers in providing prompt loan and
deposit related request responses. Additionally, in 1998 the Bank paid $699,000
in commission and incentive payments, primarily to Mortgage Center personnel.
Occupancy and equipment expenses increased by 17.6% or $307,000 due to extensive
remodeling of the three branches and purchase of new furniture. Expenses were
also incurred to provide facilities and equipment for Mortgage Center employees.
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44
NET INTEREST INCOME ANALYSIS
The following table presents, for the periods indicated, on a fully tax
equivalent basis, the total dollar amount of interest income from average
interest-earning assets and the resultant yields, as well as interest expense on
average interest-bearing liabilities, expressed both in dollars and rates.
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
(Dollars in Thousands)
Average Interest Average Interest Average Interest
Annual Earned/ Yield/ Annual Earned/ Yield/ Annual Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
------- ---- ------ ------- ---- ---- ------- ---- ----
Interest-earning assets
Commercial loans (1) (2) $ 12,445 $ 853 6.85% $ 7,055 $ 642 9.11% $ 1,607 $ 179 11.13%
Commercial real estate loans (2) 67,067 5,627 8.39 62,174 5,182 8.22 31,540 2,698 8.44
Multi-family loans 89,329 7,034 7.87 27,059 2,120 7.73 754 62 8.15
Construction loans 42,722 3,860 9.03 23,463 2,208 9.28 7,187 603 8.28
Commercial/municipal leases 29,701 1,869 6.29 31,877 2,093 6.56 9,169 630 6.87
Mortgage (1) (2) 132,217 9,554 7.23 193,552 14,335 7.41 247,945 18,412 7.43
Consumer loans (1) 45,864 3,921 8.55 61,314 5,418 8.84 59,265 5,602 9.46
Mortgage-backed securities 23,204 1,591 6.86 90,136 5,725 6.35 99,891 7,018 7.03
Securities 68,625 3,995 5.82 46,676 2,866 6.14 58,150 3,740 6.40
Other investments 12,871 603 4.68 10,423 538 5.09 10,321 437 4.23
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total interest-earning assets 524,045 38,907 7.42% 553,729 41,127 7.43% 525,829 39,381 7.49%
Non-interest earning assets 21,481 22,291 18,713
-------- -------- --------
TOTAL ASSETS $545,526 $576,020 $544,542
======== ======== ========
Interest-bearing liabilities
Savings accounts $ 51,740 1,291 2.50% $ 55,525 1,389 2.50% $ 62,297 1,574 2.53%
NOW accounts 22,261 236 1.06 21,907 266 1.21 21,798 390 1.79
Money Market accounts 84,642 3,869 4.57 74,576 3,494 4.69 50,372 2,439 4.84
Certificates 186,063 9,923 5.33 187,810 10,446 5.56 248,676 14,347 5.77
FHLB advances 113,589 6,248 5.50 154,644 8,595 5.56 71,956 4,233 5.99
Other borrowed money 12,605 658 5.22 10,358 549 5.30 16,278 931 5.26
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total interest-bearing liabilities 470,900 22,225 4.72% 504,820 24,739 4.90% 471,377 23,914 5.07%
Other Liabilities 28,301 23,682 24,824
-------- -------- --------
TOTAL LIABILITIES 499,201 528,502 496,201
Stockholders' equity 46,325 47,518 48,341
-------- -------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $545,526 $576,020 $544,542
======== ======== ========
Net interest income $ 16,682 $ 16,388 $ 15,467
======== ======== ========
Net interest spread 2.70% 2.53% 2.42%
Net earning assets $ 53,145 $ 48,909 $ 54,452
Net yield on average interest-
earning assets 3.18% 2.96% 2.94%
Average interest-earning assets to
average interest-bearing
liabilities 1.11X 1.10X 1.12X
(1) Includes cash basis loans.
(2) Includes deferred fees/costs.
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45
The following table sets forth the weighted average yields on the Company's
interest-earning assets, the weighted average interest rates on interest-bearing
liabilities, and the interest rate spread between the weighted average yields
and rates at the dates indicated:
At December 31,
---------------
1999 1998 1997
---- ---- ----
Weighted average yield on
Commercial loans 7.70% 8.67% 9.39%
Commercial real estate loans 8.23 8.01 8.78
Multi-family loans 8.16 7.76 8.41
Construction loans 9.20 8.75 9.06
Commercial leases 6.25 6.44 7.32
Mortgage 7.26 7.33 7.48
Consumer loans 8.81 8.16 9.39
Mortgage-backed securities 6.97 6.44 6.90
Securities 6.24 6.07 6.42
Other investments 5.34 5.09 5.93
Combined weighted average yield on interest-earning assets 7.76 7.33 7.59
Weighted average rates paid on
Savings accounts 2.50 2.50 2.50
NOW accounts 1.11 1.06 1.80
Money market accounts 5.20 4.33 4.97
Certificates 5.77 5.39 5.73
FHLB advances 5.95 5.34 5.72
Other borrowed money 5.69 4.64 5.28
Combined weighted average rate paid on interest-bearing liabilities 5.16 4.66 5.07
Net interest rate spread 2.60 2.67 2.52
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46
VOLUME/RATE ANALYSIS
The following schedule presents the dollar amount of changes in interest income
and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the increase related to
higher outstanding balances and that due to changes in interest rates. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to: (1) changes in volume (i.e.,
changes in volume multiplied by old rate) and (2) changes in rate (i.e., changes
in rate multiplied by old volume). For purposes of this table, changes
attributable to both rate and volume which cannot be segregated have been
allocated proportionately to both changes.
1999 vs. 1998 1998 vs. 1997
------Increase (Decrease) Due To:------- ------Increase (Decrease) Due To:-------
Total Total
Increase Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ----------
(In Thousands)
Interest-earning assets
Loans receivable $ 896 $ (176) $ 720 $ 4,198 $ (385) $ 3,813
Mortgage-backed securities (4,251) 117 (4,134) (659) (634) (1,293)
Securities and other
investments 1,478 (284) 1,194 (633) (307) (940)
---------- ---------- ---------- ---------- ---------- ----------
Total interest-earning
assets (1,877) (343) (2,220) 2,906 (1,326) 1,580
---------- ---------- ---------- ---------- ---------- ----------
Interest-bearing liabilities
NOW accounts (4) 34 30 (2) 126 124
Savings accounts 98 -- 98 185 -- 185
Money markets (472) 97 (375) (1,172) 117 (1,055)
Certificates 74 449 523 3,515 386 3,901
FHLB advances 2,282 65 2,347 (4,917) 555 (4,362)
Other borrowed money (125) 16 (109) 50 332 382
---------- ---------- ---------- ---------- ---------- ----------
Total interest-bearing
liabilities 1,853 661 2,514 (2,341) 1,516 (825)
---------- ---------- ---------- ---------- ---------- ----------
Net change in interest
income $ (24) $ 318 $ 294 $ 565 $ 189 $ 754
========== ========== ========== ========== ========== ==========
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47
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
The Company's primary sources of funds are deposits, principal and interest
payments on loans and to a lesser extent mortgage-backed securities, and funds
provided by other operations. While scheduled loan and mortgage-backed
securities repayments and maturities of short-term investments are a relatively
predictable source of funds, deposit flows and loan prepayments are greatly
influenced by general interest rates, economic conditions, competition and the
restructuring occurring in the banking industry.
The Company's cash flows are a result of three principal activities: operating
activities, investing activities and financing activities. Net cash received in
operating activities, primarily interest on loans and investments, less interest
paid on deposits and borrowed funds, and the net change in mortgage loans held
for sale, was $9.2 million for the year ended December 31, 1999. Net cash used
in investing activities was $56.2 million for the year ended December 31, 1999.
Securities sales and maturities generated $40.8 million while principal payments
on mortgage-backed and related securities amounted to $9.2 million. Purchases of
securities were $42.7 million, and loan originations, net of principal payments,
were $65.0 million for the year. Net cash provided by financial activities
amounted to $18.0 million for the year ended December 31, 1999, due to a $33.5
million increase in deposits offset by a $12.8 million decrease in borrowings.
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 December 31,
1999, the Company had approved and accepted commitments to originate loans
totaling $3.0 million, and its customers had approved but unused lines of credit
totaling $85.5 million. Additionally, the Company had $10.1 million in letters
of credit and credit enhancements outstanding. 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.
CAPITAL RESOURCES
At December 31, 1999, the Bank had total risk based capital of $49.9 million.
This was approximately $10.9 million above the 10% ratio required to be "well
capitalized." Tier 1 risk based capital was $45.1 million. This was
approximately $21.8 million or 5.6% above the required ratio of 6%. The Tier 1
capital leverage ratio was 8.30%. This was approximately $17.9 million or 3.3%
above the required ratio of 5%.
YEAR 2000 COMPLIANCE
In 1998 and 1999, the Company devoted significant resources to minimize the risk
of potential disruption from the Y2K problem. The Company developed, completed
and tested a six-phase plan to solve Y2K issues and address contingency plans to
respond to corresponding possible points of failure. Due to the successful
completion of the Company plan, especially the systems testing and customer
awareness programs, the Company experienced business as usual results during the
Y2K event period, without disruption to customers or internal operations.
The Company's cumulative costs of the Year 2000 project through the end of 1999
were approximately $85,000. This included costs to upgrade equipment
specifically for the purpose of Year 2000 compliance as well as certain
administrative expenditures.
Among the benefits derived from the time, effort and costs related to Year 2000
was a complete review and update of the Company's disaster recovery and
contingency plans. As a result, the Company is now better prepared to deal with
technical or natural disasters which could threaten the Company's operations.
The Company will continue to remain aware of dates during 2000 which are
considered critical, such as 2/29/2000 and 10/10/2000, and will address issues,
should they arise.
- --------------------------------------------------------------------------------
48
ACCOUNTING MATTERS
NEW ACCOUNTING STANDARDS
Beginning January 1, 2001, Statement of Financial Accounting Standards
(Statement) No. 133 will require all derivatives to be recorded at fair value in
the balance sheet. Unless designated as hedges, changes in these fair values
will be recorded in the income statement. Fair value changes involving hedges
will generally be recorded by offsetting gains and losses on the hedge and on
the hedged item, even if the fair value of the hedged item is not otherwise
recorded. Since the Company has no significant derivative instruments or hedging
activities, adoption of Statement 133 is not expected to have a material effect
on the Company's financial statements, but the effect will depend on derivative
holdings when this standard applies.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In an attempt to manage the Company's exposure to changes in interest rates,
management closely monitors interest rate risk. Management has an
Asset/Liability Committee, consisting of senior officers, which meets monthly to
review the interest rate risk position and make recommendations for adjusting
such position. In addition, the Board reviews the position on a monthly basis,
including simulations of the effect on the Company's capital of various interest
rate scenarios.
In managing its asset/liability mix, the Company may place greater or less
emphasis on maximizing net interest margin than on better matching the interest
rate sensitivity of its assets and liabilities in an effort to improve its
capital, depending on the relationship between long and short-term interest
rates, market conditions, and consumer preferences. Management believes that the
increased net income resulting from a mismatch in the maturity of its assets and
liability portfolios can, during periods of declining or stable interest rates,
provide high enough returns to justify the increased exposure to sudden and
unexpected increases in interest rates which can result from such a mismatch. As
a result, the Company may be somewhat more exposed to rapid increases in
interest rates than some other institutions which concentrate principally on
matching the duration of their assets and liabilities.
The business of the Company and the composition of its balance sheet consists of
investments in interest-earning assets (primarily loans and securities) which
are primarily funded by interest-bearing liabilities (deposits and borrowings).
Such financial instruments have varying levels of sensitivity to changes in
market interest rates resulting in market risk. Other than loans which are
originated and held for sale, all of the financial instruments of the Company
are for other than trading purposes.
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. Purchased money deposits are also
utilized. 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.
- --------------------------------------------------------------------------------
49
SIGNIFICANT ASSUMPTIONS UTILIZED IN MANAGING INTEREST RATE RISK
Managing the Company's exposure to interest rate risk involves significant
assumptions about the prepayments of loans or early withdrawal of deposits and
the relationship of various interest rate indices of certain financial
instruments.
A substantial portion of the Company's retail loans and mortgage-backed
securities are dependent on residential mortgage loans which permit the borrower
to prepay the principal balance of the loan prior to maturity ("prepayments")
without penalty. A loan's propensity for prepayment is dependent upon a number
of factors, including the current interest rate and interest rate index (if any)
on the loan, the financial ability of the borrower to refinance, the economic
benefit to be obtained from refinancing, availability of refinancing at
attractive terms, as well as economic and other factors in specific geographic
areas which affect the sales and price levels of residential property. In a
changing interest rate environment, prepayments may increase or decrease on
fixed-and adjustable-rate loans depending on the current relative levels and
expectations of future short- and long-term interest rates. Prepayments on ARM
loans generally increase when long-term interest rates fall or are at
historically low levels relative to short-term interest rates making fixed-rate
loans more desirable.
Commercial borrowers may also prepay loans for various reasons, but prepayment
penalties are assessed in accordance with terms of the loan agreement.
Securities, other than those with early call provisions, generally repay
pursuant to specific terms until maturity. While savings and checking deposits
generally may be withdrawn upon the customer's request without prior notice, a
continuing relationship with customers resulting in future deposits and
withdrawals is generally predictable resulting in a dependable and
uninterruptible source of funds. Time deposits generally have early withdrawal
penalties, while term FHLB Advances have prepayment penalties, which discourage
customer withdrawal of time deposits and prepayment of FHLB Advances prior to
maturity.
The Company's ARM loans are primarily indexed to the One Year Constant Maturity
Treasury Index. When such loans and mortgage-backed securities are funded by
interest-bearing liabilities which are determined by other indices, primarily
deposits and FHLB Advances, a changing interest rate environment may result in
different levels of change in the different indices leading to disproportionate
changes in the value of, and the net earnings generated from, the Company's
financial instruments. Each index is unique and is influenced by different
external factors, therefore, the historical relationships in various indices may
not necessarily be indicative of the actual change which may result in a
changing interest rate environment.
INTEREST RATE RISK MEASUREMENT
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") which measures the
Company'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.
- --------------------------------------------------------------------------------
50
The following table presents the Company's current exposure to hypothetical
changes in interest rates as of December 31,
1999 1998
---- ----
Changes in Percent Change Percent Change in Percent Change Percent Change
Interest Rates in Net Interest MV of Portfolio in Net Interest in MV of
(basis points) Income Equity Income Portfolio Equity
- -------------- --------------- ----------------- --------------- ----------------
+200 -12% -17% -11% -23%
+100 -6 -9 -5 -12
0 0 0 0 0
-100 +6 +9 +5 +13
-200 +13 +21 +11 +27
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.
- --------------------------------------------------------------------------------
51
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
CoVest Bancshares, Inc.
Des Plaines, Illinois
We have audited the accompanying consolidated statements of financial condition
of CoVest Bancshares, Inc. as of December 31, 1999 and 1998, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CoVest Bancshares,
Inc. as of December 31, 1999 and 1998, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1999, in
conformity with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Oak Brook, Illinois
January 29, 2000
- --------------------------------------------------------------------------------
52
COVEST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------
1999 1998
---- ----
ASSETS
Cash and cash equivalents
Cash on hand and in banks $ 9,027 $ 18,395
Interest-bearing deposits in other financial institutions 1,590 21,282
--------- ---------
10,617 39,677
Securities
Securities available-for-sale 51,702 44,766
Mortgage-backed and related securities available-for-sale 18,759 34,872
Federal Home Loan Bank stock and Federal Reserve Bank stock 6,529 8,379
--------- ---------
76,990 88,017
Loans and leases receivable, net
Loans receivable 467,530 406,641
Less allowance for possible loan and lease losses 4,833 4,312
--------- ---------
462,697 402,329
Accrued interest receivable 3,437 3,280
Premises and equipment 10,669 11,372
Other assets 4,086 4,022
--------- ---------
$ 568,496 $ 548,697
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest-bearing $ 19,691 $ 14,998
Interest-bearing checking 21,930 23,825
Money market accounts 88,779 85,209
Savings accounts 49,700 52,990
Certificates of deposit 217,955 187,513
--------- ---------
398,055 364,535
Short-term borrowings 85,004 6,755
Long-term borrowings from Federal Home Loan Bank 29,000 120,000
Advances from borrowers for taxes and insurance 4,640 3,637
Accrued expenses and other liabilities 5,523 6,819
--------- ---------
522,222 501,746
Stockholders' equity
Preferred stock - par value $.01 per share; 100,000 authorized shares;
no shares outstanding -- --
Common stock - par value $.01 per share; 7,500,000 authorized shares;
4,403,803 shares issued 44 44
Additional paid-in capital 17,919 18,967
Retained earnings 33,514 30,905
Treasury stock, 1999 - 299,796 shares; 1998 - 193,188 shares (4,312) (3,017)
Unearned stock awards (14) (73)
ESOP loan -- (161)
Accumulated other comprehensive income (loss) (877) 286
--------- ---------
46,274 46,951
--------- ---------
$ 568,496 $ 548,697
========= =========
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
53
COVEST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
Interest income
Loans and leases receivable $ 32,718 $ 31,998 $ 28,186
Mortgage-backed and related securities 1,591 5,725 7,018
Securities
Taxable 2,977 1,724 3,173
Exempt from federal income taxes 672 358 34
Other interest and dividend income 603 1,138 953
-------- -------- --------
38,561 40,943 39,364
Interest expense
Deposits 15,319 15,595 18,750
Advances from Federal Home Loan Bank 6,248 8,595 4,308
Other borrowed funds 658 549 856
-------- -------- --------
22,225 24,739 23,914
-------- -------- --------
NET INTEREST INCOME 16,336 16,204 15,450
Provision for possible loan and lease losses 1,132 1,567 4,072
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE
LOAN AND LEASE LOSSES 15,204 14,637 11,378
Noninterest income
Loan charges and servicing fees 998 1,544 1,085
Mortgage center fees 1,455 1,712 --
Deposit related charges and fees 1,021 968 842
Gain (loss) on sales of securities (10) 225 1,247
Gain on sales of credit card loans -- 672 --
Other 573 458 498
-------- -------- --------
4,037 5,579 3,672
Noninterest expense
Compensation and benefits 6,187 7,286 5,410
Commissions and incentives 948 699 --
Occupancy and equipment 2,082 2,047 1,740
Federal deposit insurance premium 211 222 203
Data processing 960 1,047 1,000
Advertising 561 384 640
Other 2,310 2,560 2,312
-------- -------- --------
13,259 14,245 11,305
-------- -------- --------
INCOME BEFORE INCOME TAXES 5,982 5,971 3,745
Income tax provision 2,047 2,100 1,135
-------- -------- --------
NET INCOME $ 3,935 $ 3,871 $ 2,610
======== ======== ========
Earnings per common share
Basic $ .96 $ .92 $ .61
======== ======== ========
Diluted $ .93 $ .87 $ .58
======== ======== ========
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
54
COVEST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
Accumulated
Other Total
Additional Unearned Compre- Stock-
Common Paid-In Retained Treasury Stock ESOP hensive holders'
Stock Capital Earnings Stock Awards Loan Income (Loss) Equity
----- ------- -------- ----- ------ ---- ------------- ------
Balance at
January 1, 1997 $ 34 $ 22,155 $ 33,990 $ (5,838) $ (73) $ (858) $ 534 $ 49,944
Cash dividend ($.28 per share) -- -- (1,245) -- -- -- -- (1,245)
Issuance of stock in connection
with exercise of stock options -- -- (882) 1,783 -- -- -- 901
Purchase of stock -- -- -- (5,302) -- -- -- (5,302)
Issuance of stock in connection
with three-for-two stock
split with cash paid on
fractional shares 10 (3,304) (6,063) 9,357 -- -- -- --
Payment on ESOP loan -- -- -- -- -- 347 -- 347
Tax benefits related to
employee stock plans -- 514 -- -- -- -- -- 514
Comprehensive income
Net income -- -- 2,610 -- -- -- -- 2,610
Net increase in fair value of
securities classified as
available-for-sale,
net of income taxes
and reclassification
adjustments -- -- -- -- -- -- 525 525
--------
Total comprehensive
income 3,135
-------- -------- -------- -------- -------- -------- -------- --------
Balance at
December 31, 1997 44 19,365 28,410 -- (73) (511) 1,059 48,294
Cash dividend ($.32 per share) -- -- (1,376) -- -- -- -- (1,376)
Issuance of stock in connection
with exercise of stock options -- (914) -- 2,062 -- -- -- 1,148
Purchase of stock -- -- -- (5,079) -- -- -- (5,079)
Payment on ESOP loan -- -- -- -- -- 350 -- 350
Tax benefits related to
employee stock plans -- 516 -- -- -- -- -- 516
Comprehensive income
Net income -- -- 3,871 -- -- -- -- 3,871
Net decrease in fair value of
securities classified as
available-for-sale,
net of income taxes
and reclassification
adjustments -- -- -- -- -- -- (773) (773)
--------
Total comprehensive
income 3,098
-------- -------- -------- -------- -------- -------- -------- --------
Balance at
December 31, 1998 44 18,967 30,905 (3,017) (73) (161) 286 46,951
- --------------------------------------------------------------------------------
(Continued)
55
COVEST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
Accumulated
Other Total
Additional Unearned Compre- Stock-
Common Paid-In Retained Treasury Stock ESOP hensive holders'
Stock Capital Earnings Stock Awards Loan Income (Loss) Equity
----- ------- -------- ----- ------ ---- ------------- ------
Balance at
December 31, 1998 $ 44 $ 18,967 $ 30,905 $ (3,017) $ (73) $ (161) $ 286 $ 46,951
Cash dividend ($.32 per share) -- -- (1,326) -- -- -- -- (1,326)
Issuance of stock in connection
with exercise of stock options -- (1,335) -- 3,007 -- -- -- 1,672
Purchase of stock -- -- -- (4,302) -- -- -- (4,302)
Payment on ESOP loan -- -- -- -- -- 161 -- 161
Tax benefits related to
employee stock plans -- 287 -- -- -- -- -- 287
Stock awards earned -- -- -- -- 59 -- -- 59
Comprehensive income
Net income -- -- 3,935 -- -- -- -- 3,935
Net decrease in fair value of
securities classified as
available-for-sale,
net of income taxes
and reclassification
adjustments -- -- -- -- -- -- (1,163) (1,163)
--------
Total comprehensive
income 2,772
-------- -------- -------- -------- -------- -------- -------- --------
Balance at
December 31, 1999 $ 44 $ 17,919 $ 33,514 $ (4,312) $ (14) $ -- $ (877) $ 46,274
======== ======== ======== ======== ======== ======== ======== ========
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
56
COVEST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(IN THOUSANDS)
- --------------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,935 $ 3,871 $ 2,610
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation 1,031 993 864
Amortization of intangible assets 205 206 206
Deferred income taxes 18 557 927
Net change in real estate loans originated for sale 4,188 (4,294) --
Deferred loan origination costs, net (669) (6) (341)
Provision for possible loan and lease losses 1,132 1,567 4,072
Net (gain) loss on sales of securities 10 (225) (1,247)
Gain on sale of credit card loans -- (672) --
Stock award earned 59 -- --
Change in
Other assets 1 (911) 127
Accrued interest receivable (157) 207 120
Accrued expenses and other liabilities (561) (316) (102)
--------- --------- ---------
Net cash provided by operating
activities 9,192 977 7,236
CASH FLOWS FROM INVESTING ACTIVITIES
Net loan principal originations (65,019) (32,892) (60,477)
Proceeds from sale of credit card loans -- 11,477 --
Purchase of securities available-for-sale (42,721) (94,416) (99,662)
Proceeds from sales of securities available-
for-sale 29,549 119,434 69,897
Proceeds from maturities of securities
available-for-sale 11,295 13,970 21,258
Proceeds from repayment of securities
available-for-sale 9,145 36,707 37,673
(Purchase) sale of Federal Home Loan Bank
stock and Federal Reserve Bank stock 1,850 (800) (389)
Purchase of office properties and equipment (328) (1,598) (1,722)
--------- --------- ---------
Net cash provided by (used in)
investing activities (56,229) 51,882 (33,422)
- --------------------------------------------------------------------------------
(Continued)
57
COVEST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(IN THOUSANDS)
- --------------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits $ 33,520 $ (7,217) $ (30,338)
Net increase (decrease) in mortgage escrow
funds 1,003 723 (810)
Short-term borrowings, net 78,249 (70,201) 23,266
Proceeds from long-term borrowings 9,000 45,000 50,000
Repayments of long-term borrowings (100,000) -- --
Proceeds from exercise of stock options,
net of treasury shares issued 1,672 1,148 901
Payment received on loan to ESOP 161 350 347
Purchase of treasury stock (4,302) (5,079) (5,302)
Cash dividends paid (1,326) (1,376) (1,245)
--------- --------- ---------
Net cash provided by (used in)
financing activities 17,977 (36,652) 36,819
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents (29,060) 16,207 10,633
Cash and cash equivalents at beginning of year 39,677 23,470 12,837
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 10,617 $ 39,677 $ 23,470
========= ========= =========
Supplemental disclosures of cash flow information
Cash paid for
Interest $ 22,053 $ 24,959 $ 23,900
Income taxes 2,340 1,760 1,100
Securitization of portfolio loans -- -- 17,782
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
58
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
(TABLE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS: CoVest Bancshares, Inc. (the "Company") is a bank holding
company organized under the laws of the state of Delaware. The Company provides
a full line of financial services to corporate and individual customers in
northern Illinois from its four locations. These services include demand, time,
and savings deposits; lending; mortgage banking; and insurance products.
BASIS OF PRESENTATION: The accompanying consolidated financial statements
include the accounts of the Company; CoVest Banc (the "Bank"); and the Bank's
wholly-owned subsidiary, CoVest Investments, Inc. All significant intercompany
transactions and balances are eliminated in consolidation.
The preparation of financial statements in conformity with generally accepted
accounting principles and with general practices within the banking industry
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
income and expenses during the reporting period. Actual results could differ
from these estimates.
SECURITIES: Securities are classified as available-for-sale since the Company
may decide to sell those securities in response to changes in market interest
rates, liquidity needs, changes in yields or alternative investments, and for
other reasons. These securities are carried at fair value with unrealized gains
and losses, net of income taxes, reported in other comprehensive income (loss).
Federal Home Loan Bank and Federal Reserve Bank stock are carried at cost.
Realized gains and losses on disposition are based on the net proceeds and the
adjusted carrying amounts of the securities sold, using the specific
identification method. Interest income, adjusted for amortization of premium and
accretion of discount, is included in earnings.
LOANS AND LOAN INCOME: Loans are reported net of the allowance for possible loan
and lease losses and unamortized capitalized loan origination costs. Interest on
loans is included in interest income over the term of the loan based upon the
principal balance outstanding. Loan fees and direct loan origination costs are
deferred and amortized over the term of the loan as a yield adjustment.
The Company, through its mortgage center, originates fixed rate and variable
rate residential mortgage loans for sale into the secondary market. Servicing
rights are not retained on loans originated and sold by the mortgage center. The
loans held for sale are carried at the lower of aggregate cost or market value.
The servicing release premiums, application fees, and documentation preparation
fees are classified as mortgage center fees in the "consolidated statements of
income." When a loan is sold or securitized and servicing retained, a separate
asset is recognized for the mortgage servicing rights. This asset is amortized
over the life of the underlying loans.
- --------------------------------------------------------------------------------
(Continued)
59
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
(TABLE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
ALLOWANCE FOR POSSIBLE LOAN AND LEASE LOSSES: An allowance for possible loan and
lease losses has been established to provide for the probability that some loans
may not be repaid in their entirety. The allowance is increased by provisions
for possible loan and lease losses charged to expense and decreased by
charge-offs, net of recoveries. Although a loan is charged off by management
when deemed uncollectible, collection efforts may continue and future recoveries
may occur.
The allowance is maintained by management at a level considered adequate to
cover losses that are currently anticipated based on past loss experience,
general economic conditions, information about specific borrower situations
(including their financial position and collateral values), and other factors
and estimates which are subject to change over time. Estimating the risk of loss
and the amount of loss on any loan is necessarily subjective and ultimate losses
may vary from current estimates. These estimates are reviewed periodically, and
as adjustments become necessary, they are reported in earnings in the periods in
which they become known.
Loans are considered impaired if it is probable that full principal or interest
payments will not be collected per the loan agreement. Each impaired loan is
carried at the present value of expected cash flows discounted at the loan's
effective interest rate or at the fair value of the collateral if the loan is
collateral dependent. A portion of the allowance for possible loan and lease
losses is allocated to an impaired loan if the present value of cash flows or
collateral value indicate the need for an allowance.
Smaller balance homogeneous loans are evaluated for impairment in total. Such
loans include residential first mortgage loans secured by one-to-four-family
residences; residential construction loans; and automobile, home equity, and
second mortgage loans. Commercial loans, leases, and mortgage loans secured by
other properties are evaluated individually for impairment.
PREMISES AND EQUIPMENT: Bank premises and equipment are stated at cost, less
accumulated depreciation and amortization. Provisions for depreciation and
amortization, included in operating expenses, are computed on the straight-line
method over the estimated useful lives of the assets. The cost of maintenance
and repairs is charged to income as incurred while significant repairs are
capitalized.
INTANGIBLE ASSETS: Goodwill and core deposit intangibles of $3,040,000 are being
amortized over 10 to 15 years, using the straight-line method. The unamortized
premium balances of $1,749,000 and $1,954,000 are included in other assets in
the December 31, 1999 and 1998 consolidated statements of financial condition.
INCOME TAXES: The provision for income taxes is based on an asset and liability
approach. The asset and liability approach requires the recognition of deferred
tax liabilities and assets for the expected future tax consequences of temporary
differences between the carrying amounts and the tax bases of assets and
liabilities.
- --------------------------------------------------------------------------------
(Continued)
60
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
(TABLE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
COMPREHENSIVE INCOME (LOSS): Comprehensive income (loss) includes both net
income and other comprehensive income (loss) elements, including the change in
unrealized gains and losses on securities available-for-sale, net of tax.
EARNINGS PER SHARE: Basic earnings per share is based on weighted average common
shares outstanding. Diluted earnings per share further assumes the issuance of
any potentially dilutive common shares.
DIVIDEND RESTRICTION: Banking regulations require the maintenance of certain
capital levels and may limit the amount of dividends which may be paid by the
Bank to the Company or by the Company to stockholders.
STATEMENT OF CASH FLOWS: For the purpose of this statement, cash and cash
equivalents is defined to include cash on hand, demand balances, and
interest-bearing deposits with financial institutions with original maturities
of three months or less. The Company reports net cash flows for customer loan
and deposit transactions, mortgage escrow funds, and short-term borrowings.
NEW ACCOUNTING PRONOUNCEMENTS: Beginning January 1, 2001, a new accounting
standard will require all derivatives to be recorded at fair value. Unless
designated as hedges, changes in fair value will be recorded in the consolidated
statements of income. Fair value changes involving hedges will generally be
recorded by offsetting gains and losses on the hedge and on the hedged item.
This is not expected to have a material effect but will depend on derivative
holdings when this standard applies.
RECLASSIFICATIONS: Certain items in the financial statements as of and for the
years ended December 31, 1998 and 1997 have been reclassified, with no effect on
net income, to conform with the current year presentation.
NOTE 2 - EARNINGS PER SHARE
------Year Ended December 31,-------
1999 1998 1997
---- ---- ----
Earnings per share
Net income $ 3,935 $ 3,871 $ 2,610
======== ======== ========
Weighted average common shares
outstanding 4,119 4,192 4,285
======== ======== ========
Basic earnings per share $ .96 $ .92 $ .61
======== ======== ========
- --------------------------------------------------------------------------------
(Continued)
61
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
(TABLE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 2 - EARNINGS PER SHARE (Continued)
Earnings per share assuming dilution
Net income $3,935 $3,871 $2,610
====== ====== ======
Weighted average common shares
outstanding 4,119 4,192 4,285
Add dilutive effect of assumed exercises of
stock options and Bank incentive plan 129 277 199
------ ------ ------
Weighted average common and dilutive
potential common shares outstanding 4,248 4,469 4,484
====== ====== ======
Diluted earnings per share $ .93 $ .87 $ .58
====== ====== ======
At December 31, 1999, options to purchase 320,000 shares of common stock at an
average price of $15.46 were outstanding but were not included in the
calculation of diluted earnings per share because the option exercise price was
greater than the average market price of the common stock and was, therefore,
anti-dilutive.
NOTE 3 - SECURITIES
The amortized cost and fair value of securities available-for-sale are as
follows:
--------------December 31, 1999---------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Securities
U.S. government agencies $ 35,807 $ -- $ (1,227) $ 34,580
Marketable equity securities 1,039 457 (225) 1,271
States and political subdivisions 16,217 -- (366) 15,851
-------- -------- -------- --------
53,063 457 (1,818) 51,702
Mortgage-backed securities
Federal Home Loan Mortgage Corporation 15,418 53 (96) 15,375
Federal National Mortgage Association 3,411 -- (27) 3,384
-------- -------- -------- --------
18,829 53 (123) 18,759
Federal Home Loan Bank stock 6,060 -- -- 6,060
Federal Reserve Bank stock 469 -- -- 469
-------- -------- -------- --------
$ 78,421 $ 510 $ (1,941) $ 76,990
======== ======== ======== ========
- --------------------------------------------------------------------------------
(Continued)
62
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
(TABLE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 3 - SECURITIES (Continued)
--------------December 31, 1998---------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Securities
U.S. government agencies $ 29,987 $ 97 $ (43) $ 30,041
Marketable equity securities 994 9 (150) 853
States and political subdivisions 13,743 129 -- 13,872
-------- -------- -------- --------
44,724 235 (193) 44,766
Mortgage-backed securities
Federal Home Loan Mortgage Corporation 21,695 499 -- 22,194
Government National Mortgage Association 7,383 -- (58) 7,325
Federal National Mortgage Association 5,368 -- (15) 5,353
-------- -------- -------- --------
34,446 499 (73) 34,872
Federal Home Loan Bank stock 7,910 -- -- 7,910
Federal Reserve Bank stock 469 -- -- 469
-------- -------- -------- --------
$ 87,549 $ 734 $ (266) $ 88,017
======== ======== ======== ========
Proceeds from sales of securities available-for-sale in 1999, 1998, and 1997 and
gross realized gains and losses are as follows:
1999 1998 1997
---- ---- ----
Proceeds from sales $ 29,549 $ 119,434 $ 69,897
Gross realized gains 12 882 1,422
Gross realized losses (22) (657) (175)
At December 31, 1999 and 1998, securities with an approximate carrying value of
$57,321,000 and $59,297,000 were pledged to secure deposits, Federal Home Loan
Bank advances, and other borrowings.
- --------------------------------------------------------------------------------
(Continued)
63
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
(TABLE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 3 - SECURITIES (Continued)
The amortized cost and fair value of securities available-for-sale at December
31, 1999, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
Amortized Fair
Cost Value
---- -----
Securities available-for-sale
- -----------------------------
Due in one year or less $ 8,617 $ 8,593
Due after one year through five years 31,491 30,615
Due after five years through ten years 10,635 9,989
Due after ten years 1,281 1,234
Mortgage-backed securities 18,829 18,759
Federal Home Loan Bank stock 6,060 6,060
Federal Reserve Bank stock 469 469
Marketable equity securities 1,039 1,271
------- -------
$78,421 $76,990
======= =======
NOTE 4 - LOANS RECEIVABLE
Loans receivable at December 31 are summarized as follows:
1999 1998
---- ----
Commercial loans and leases
Commercial loans $ 17,207 $ 8,035
Construction 46,177 40,572
Commercial real estate 73,596 66,776
Multi-family loans 126,109 55,661
Commercial leases 22,029 35,166
--------- ---------
285,118 206,210
Net deferred loan origination costs (fees) 907 (28)
--------- ---------
Total commercial loans and leases 286,025 206,182
--------- ---------
Mortgage loans
Secured by one-to-four-family residences 130,129 149,888
Loans held for sale 106 4,294
--------- ---------
130,235 154,182
Net deferred loan origination costs 31 297
--------- ---------
Total mortgage loans 130,266 154,479
--------- ---------
Consumer loans
Automobile 21,387 21,036
Home equity and improvement 27,786 22,654
Other 2,066 2,290
--------- ---------
51,239 45,980
--------- ---------
$ 467,530 $ 406,641
========= =========
- --------------------------------------------------------------------------------
(Continued)
64
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
(TABLE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 4 - LOANS RECEIVABLE (Continued)
Loans serviced for the Federal Home Loan Mortgage Corporation (FHLMC)
approximated $88,372,000, $118,800,000, and $170,113,000 at December 31, 1999,
1998, and 1997.
The Bank had lending transactions with directors and executive officers of the
Company and the Bank and their associates which totaled approximately $272,000
and $360,000 at December 31, 1999 and 1998.
The Company did not have any loans which were impaired either at or during the
years ended December 31, 1999, 1998, or 1997.
Activity in the allowance for possible loan and lease losses is summarized as
follows for the years ended December 31:
1999 1998 1997
---- ---- ----
Balance at beginning of year $ 4,312 $ 3,977 $ 1,424
Provision 1,132 1,567 4,072
Recoveries 90 161 96
Loans charged-off (701) (1,393) (1,615)
------- ------- -------
Net charge-offs (611) (1,232) (1,519)
------- ------- -------
Balance at end of year $ 4,833 $ 4,312 $ 3,977
======= ======= =======
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment at December 31 are summarized as follows:
1999 1998
---- ----
Cost
Land $ 1,656 $ 1,656
Buildings 10,029 9,992
Furniture, fixtures, and equipment 5,039 4,811
------- -------
16,724 16,459
Less accumulated depreciation and amortization 6,055 5,087
------- -------
$10,669 $11,372
======= =======
- --------------------------------------------------------------------------------
(Continued)
65
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
(TABLE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 6 - DEPOSITS
Certificates of deposit accounts of $100,000 and over totaled $62,985,000 and
$34,208,000 at December 31, 1999 and 1998. At December 31, 1999, stated
maturities of all certificates of deposit were:
2000 $167,658
2001 26,758
2002 19,856
2003 2,154
2004 and thereafter 1,529
--------
$217,955
========
At December 31, 1999, the Company had $44,173,000 of purchased money deposits.
NOTE 7 - BORROWINGS
Borrowings at December 31 are summarized as follows:
------1 9 9 9---- ------1 9 9 8------
Weighted Weighted
Average Average
Rate Amount Rate Amount
---- ------ ---- ------
Short-term borrowings
Advances from the Federal Home
Loan Bank due in less than
one year 6.05% $75,000 --% $ --
Securities sold under
repurchase agreements 5.43 4,504 5.14 3,774
Other borrowings 4.52 5,500 5.06 2,981
------- -------
$85,004 $ 6,755
======= =======
- --------------------------------------------------------------------------------
(Continued)
66
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
(TABLE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 7 - BORROWINGS (Continued)
------1 9 9 9----- -------1 9 9 8-------
Weighted Weighted
Average Average
Rate Amount Rate Amount
---- ------ ---- ------
Long-term borrowings
Advances from Federal Home
Loan Bank due
2000 --% $ -- 6.19% $ 25,000
2001 6.22 9,000 -- --
2002 -- -- 5.35 50,000
2008 4.98 20,000 4.87 45,000
-------- --------
$ 29,000 $120,000
======== ========
The Bank maintains a collateral pledge agreement covering secured advances
whereby the Bank has specifically pledged $76,029,000 of first mortgages on
improved residential property, free of all other pledges, liens, and
encumbrances (not more than 90 days delinquent). Various securities are also
pledged as collateral.
As of December 31, 1999 and 1998, advances having a call option by the Federal
Home Loan Bank were $20 million and $95 million.
Securities sold under repurchase agreements either carry a fixed rate for the
term of the agreement and generally mature within 90 to 180 days from the
transaction date or reprice weekly. Physical control is maintained over the
collateral pledged in the agreements.
Other borrowings consisted of a Treasury tax and loan option which allows the
Company to accept U.S. Treasury deposits of excess funds along with deposits of
customer taxes. This borrowing has an interest rate which adjusts weekly.
Various securities are pledged as collateral.
- --------------------------------------------------------------------------------
(Continued)
67
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
(TABLE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 8 - INCOME TAXES
The income tax provision for the years ended December 31 is summarized as
follows:
1999 1998 1997
---- ---- ----
Current
Federal $ 1,765 $ 2,268 $ 1,875
State 300 389 187
Deferred (18) (557) (927)
------- ------- -------
$ 2,047 $ 2,100 $ 1,135
======= ======= =======
Total income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 34% to income before income taxes as a result of the
following:
1999 1998 1997
---- ---- ----
Expected income tax expense at federal
tax rate $ 2,034 $ 2,030 $ 1,273
State income tax, net of federal tax benefit 162 198 (12)
Tax exempt interest income on securities
and loans (176) (96) (10)
Increase in cash surrender value of director
life insurance (25) (1) (82)
Other 52 (31) (34)
------- ------- -------
$ 2,047 $ 2,100 $ 1,135
======= ======= =======
The net deferred tax assets and liabilities, included in other assets in the
accompanying consolidated statements of financial condition, consisted of the
following at December 31, 1999 and 1998:
1999 1998
---- ----
Gross deferred tax assets
Bad debt deduction $1,069 $ 667
Deferred compensation and employee benefits 829 828
Unrealized loss on securities available-for-sale 554 --
Other 68 111
------ ------
2,520 1,606
- --------------------------------------------------------------------------------
(Continued)
68
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
(TABLE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 8 - INCOME TAXES (Continued)
1999 1998
---- ----
Gross deferred tax liabilities
Unrealized gain on securities available-for-sale $ -- $ (182)
Depreciation (532) (449)
FHLB stock dividends (176) (176)
Deferred loan fees (791) (511)
Mortgage servicing rights (57) (78)
------- -------
(1,556) (1,396)
------- -------
Net deferred tax asset $ 964 $ 210
======= =======
NOTE 9 - COMMITMENTS, CONTINGENT LIABILITIES, AND CONCENTRATIONS
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers and
to reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit and previously approved unused
lines of credit. Those instruments involve, to varying degrees, elements of
credit and interest-rate risk in excess of the amount recognized in the
consolidated statements of financial condition.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
previously approved unused lines of credit is represented by the contractual
amount of those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for loans recorded in the
consolidated statements of financial condition.
At December 31, 1999 and 1998, these financial instruments are summarized as
follows:
------Amount------
1999 1998
---- ----
Off-balance-sheet financial instruments whose contract
amounts represent credit risk
Commitments to extend credit
Fixed rate $ -- $ 5,475
Variable rate 2,967 13,323
Letters of credit 3,303 3,619
Unused lines of credit 85,466 72,365
Credit enhancements 6,753 6,978
- --------------------------------------------------------------------------------
(Continued)
69
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
(TABLE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 9 - COMMITMENTS, CONTINGENT LIABILITIES, AND CONCENTRATIONS
(Continued)
The fixed rate commitments have rates ranging from 7.00% to 9.25% at December
31, 1998. Since certain commitments to make loans and fund lines of credit and
loans in process expire without being used, the above amounts do not necessarily
represent future cash commitments. No losses are anticipated as a result of
these transactions.
The Company's principal loan customers are located in northern Illinois and most
loans are secured by specific collateral including residential and commercial
real estate.
The Company entered into a credit enhancement agreement with a local
municipality to guarantee the repayment of an amount not exceeding $7.2 million
of municipal revenue bonds which are secured by a first mortgage on real estate.
In the event of default on the bonds, the Company's maximum liability is the
amount of the credit guaranty.
NOTE 10 - CAPITAL REQUIREMENTS
The Company is subject to regulatory capital requirements administered by
federal banking agencies. Capital adequacy guidelines and prompt corrective
action regulations involve quantitative measures of assets, liabilities, and
certain off-balance-sheet items calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to qualitative
judgments by regulators about components, risk weightings, and other factors,
and the regulators can lower classifications in certain cases. Failure to meet
various capital requirements can initiate regulatory action that could have a
direct material effect on the financial statements.
The prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If undercapitalized, capital
distributions are limited, as is asset growth and expansion, and plans of
capital restoration are required.
At December 31, 1999 and 1998, the Bank's and Company's regulators categorized
the Bank and Company as well capitalized. There are no conditions or events
since that notification that management believes have changed the institution's
category. Actual capital levels (in millions) and minimum required levels were:
- --------------------------------------------------------------------------------
(Continued)
70
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
(TABLE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 10 - CAPITAL REQUIREMENTS (Continued)
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purpose Action Provisions
------ ---------------- -----------------
1999 Amount Ratio Amount Ratio Amount Ratio
- ---- ------ ----- ------ ----- ------ -----
Total capital
(to risk-weighted assets)
Company $ 52.0 13.3% $ 31.3 8.0% $ 39.1 10.0%
Bank 49.9 12.8 31.2 8.0 39.0 10.0
Tier 1 capital
(to risk-weighted assets)
Company 47.2 12.1 15.6 4.0 23.4 6.0
Bank 45.1 11.6 15.6 4.0 23.3 6.0
Tier 1 capital
(to average assets)
Company 47.2 8.6 21.8 4.0 27.3 5.0
Bank 45.1 8.3 21.7 4.0 27.2 5.0
1998
- ----
Total capital
(to risk-weighted assets)
Company $ 49.0 13.7% $ 28.6 8.0% $ 35.7 10.0%
Bank 47.2 13.3 28.4 8.0 35.5 10.0
Tier 1 capital
(to risk-weighted assets)
Company 44.7 12.5 14.3 4.0 21.4 6.0
Bank 42.9 12.1 14.2 4.0 21.3 6.0
Tier 1 capital
(to average assets)
Company 44.7 8.0 22.4 4.0 27.9 5.0
Bank 42.9 7.7 22.3 4.0 27.8 5.0
The Office of the Comptroller of Currency regulations limit capital
distributions by national banks. Generally, capital distributions are limited to
the current year to date undistributed net income and prior two years'
undistributed net income, as long as the institution remains well capitalized
after the proposed distribution. At January 1, 2000, approximately $195,000 is
available to pay dividends from the Bank to the Company.
NOTE 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Companies are required to disclose fair value information about their financial
instruments. The fair value of financial instruments is defined as the amount at
which the instruments could be exchanged in a current transaction between
willing parties, other than in a forced or liquidation sale. The methods and
assumptions used to determine fair values for each class of financial
instruments are presented below.
- --------------------------------------------------------------------------------
(Continued)
71
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
(TABLE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The estimated fair value for cash and cash equivalents; interest-bearing
deposits with financial institutions; Federal Home Loan Bank and Federal Reserve
Bank stock; accrued interest receivable; NOW, money market, and savings
deposits; short-term borrowings; and accrued interest payable are considered to
approximate their carrying values. The estimated fair value for securities
available-for-sale is based on quoted market values for the individual
securities or for equivalent securities. The estimated fair value for loans is
based on estimates of the rate the Company would charge for similar loans at
December 31, 1999 and 1998, applied for the time period until estimated
repayment. The estimated fair value of certificates of deposit is based on
estimates of the rate the Company would pay on such deposits at December 31,
1999 and 1998, applied for the time period until maturity. The estimated fair
value of Federal Home Loan Bank advances and other borrowings is based on the
estimate of the rate the Company would pay for such borrowings at December 31,
1999 and 1998 for a time period until maturity. Loan commitments are not
included in the table below as their estimated fair value is immaterial.
At December 31, 1999 At December 31, 1998
--------------------- ---------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
Financial instrument assets
Cash on hand and in banks $ 9,027 $ 9,027 $ 18,395 $ 18,395
Interest-bearing deposits in other
financial institutions 1,590 1,590 21,282 21,282
Securities available-for-sale 76,990 76,990 88,017 88,017
Loans receivable, net 462,697 460,033 402,329 403,362
Accrued interest receivable 3,437 3,437 3,280 3,280
Financial instrument liabilities
NOW, money market, and
passbook savings 180,100 180,100 177,022 177,022
Certificates of deposits 217,955 218,068 187,513 189,109
Short-term borrowings 85,004 85,004 6,755 6,755
Long-term borrowings from
Federal Home Loan Bank 29,000 25,516 120,000 120,000
Advances from borrowers for
taxes and insurance 4,640 4,640 3,637 3,637
Accrued interest payable 909 909 737 737
- --------------------------------------------------------------------------------
(Continued)
72
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
(TABLE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Other assets and liabilities of the Company that are not defined as financial
instruments, such as property and equipment, are not included in the above
disclosures. Also not included are nonfinancial instruments typically not
recognized in financial statements such as loan servicing rights, customer
goodwill, and similar items.
While the above estimates are based on management's judgment of the most
appropriate factors, there is no assurance that were the Company to have
disposed of these items on December 31, 1999 and 1998, the fair values would
have been achieved, because the market value may differ depending on the
circumstances. The estimated fair values at December 31, 1999 and 1998 should
not necessarily be considered to apply at subsequent dates.
NOTE 12 - EMPLOYEE BENEFIT PLANS
Defined Contribution Plan
The Company has a defined contribution plan covering all of its eligible
employees. Employees are eligible to participate in the plan after attainment of
age 21. Eligible employees enter the plan the beginning of the month following
employment. The Company matches an amount equal to the employee's contribution,
up to a maximum of 2.5% of annual compensation. The expense recorded in 1999,
1998, and 1997 was $87,000, $85,000, and $65,000.
Stock Option Plan
The Company's Board of Directors has adopted various stock option and incentive
plans that were ratified by the stockholders. Under the stock option plan, stock
options, stock appreciation rights, and restricted stock awards, up to an
aggregate of 1,908,000 shares at the market price of the Company's common stock
on the date of grant, were available to be granted to the directors, officers,
and employees of the Company or the Bank. The options have an exercise period of
ten years from the date of grant.
During 1999, options for 302,750 shares were granted at exercise prices of
$12.06 to $14.13 per share and are fully vested after varying lengths of time
(immediate - 6 years). During 1998, options for 99,000 shares were granted at
$12.72 to $18.30 per share and are fully vested after six years. During 1997,
options for 409,500 shares were granted at exercise prices of $11.21 to $17.67
per share and are fully vested after six years.
Statement of Financial Accounting Standards No. 123 requires pro forma
disclosures for companies that do not adopt its fair value accounting method for
stock-based employee compensation. Accordingly, the following pro forma
information presents net income and earnings per share had the fair value method
been used to measure compensation cost for stock option plans. Compensation cost
actually recognized for stock options was $0 for 1999, 1998, and 1997.
- --------------------------------------------------------------------------------
(Continued)
73
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
(TABLE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 12 - EMPLOYEE BENEFIT PLANS (Continued)
Stock Option Plan (Continued)
1999 1998 1997
---- ---- ----
Net income as reported $ 3,935 $ 3,871 $ 2,610
Pro forma net income 3,708 3,660 2,243
Basic earnings per share as reported $ .96 $ .92 $ .61
Pro forma basic earnings per share .90 .87 .52
Diluted earnings per share as reported $ .93 $ .87 $ .58
Diluted earnings per share .87 .82 .50
The activity in the stock option plans for 1999, 1998, and 1997 is summarized as
follows:
Weighted
Number Average
of Exercise
Options Price
------- -----
Outstanding at January 1, 1997 1,073,610 $ 7.65
Granted 409,500 14.52
Exercised (158,242) (5.70)
Forfeited (60,750) (8.86)
---------- ----------
Outstanding at December 31, 1997 1,264,118 9.91
Granted 99,000 16.25
Exercised (158,017) (6.42)
Forfeited (192,931) (9.82)
---------- ----------
Outstanding at December 31, 1998 1,012,170 11.09
Granted 302,750 13.50
Exercised (128,750) (9.68)
Forfeited (207,000) (13.26)
---------- ----------
Outstanding at December 31, 1999 979,170 $ 11.78
========== ==========
- --------------------------------------------------------------------------------
(Continued)
74
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
(TABLE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 12 - EMPLOYEE BENEFIT PLANS (Continued)
Stock Option Plan (Continued)
Options exercisable at year end are as follows:
Weighted
Number Average
of Exercise
Options Price
------- -----
December 31, 1997 431,618 $ 6.47
December 31, 1998 268,170 7.79
December 31, 1999 418,670 9.59
For options granted during the year, the weighted average fair values at grant
date are as follows:
Weighted
Average
Number of Exercise Fair
Options Price Value
------- ----- -----
1997 409,500 $ 14.52 $ 4.89
1998 99,000 16.25 2.11
1999 302,750 13.50 2.06
The fair value of options granted during 1999, 1998, and 1997 is estimated using
the following weighted average information:
1999 1998 1997
---- ---- ----
Risk free interest rate 5.5% 4.5% 6.5%
Expected life 6 years 6 years 6 years
Expected volatility of stock price 3.243% 5.893% 16.624%
Expected dividend 2.3% 2.5% 2.5%
At year-end 1999, options outstanding were as follows:
Outstanding Exercisable
----------- -----------
Weighted Average Weighted
Range of Remaining Average
Exercise Contractual Exercise
Prices Number Life Number Price
------ ------ ---- ------ -----
$ 4.44 - $ 6.66 116,920 3 years 116,920 $ 4.44
6.67 - 10.00 168,000 7 years 116,500 8.80
10.01 - 15.00 554,750 8 years 140,250 12.25
15.01 - 18.75 139,500 7 years 45,000 16.78
------------ --------------- --------- ----------
Outstanding at year end 979,170 7 years 418,670 $ 9.59
============ =============== ========= ==========
- --------------------------------------------------------------------------------
(Continued)
75
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
(TABLE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 12 - EMPLOYEE BENEFIT PLANS (Continued)
Bank Incentive Plan
The Bank has established a Bank Incentive Plan ("BIP") in order to provide
persons in key management positions with an ownership interest in the Company.
Under the BIP, 194,676 shares have been awarded to key personnel. The stock
granted under the BIP is restricted as to certain rights at the date of issue.
These restrictions are removed over a period of years. During 1999, 12,500
shares were granted. The shares vest over a three-year period. During 1998 and
1997, no shares were granted or vested. The market value of the shares,
determined at the date of grant, are charged to expense over the vesting period.
Employee Stock Ownership Plan
The Company's Board of Directors adopted an Employee Stock Ownership Plan
("ESOP") for the benefit of all employees of the Bank. On June 30, 1992, in
conjunction with the Bank's mutual to stock conversion, the ESOP acquired
579,600 shares of Company stock at $4.44 per share for a total of $2,576,000. To
fund the acquisition of Company stock, the ESOP borrowed $2,576,000 from the
Company. The loan was paid in full during 1999. The Company makes annual
contributions to the ESOP and recognizes compensation expense equal to the
amount of cash contributed to the ESOP. ESOP contributions were $112,000,
$236,000, and $267,000 for 1999, 1998, and 1997. The ESOP shares as of December
31 were as follows:
1999 1998
---- ----
Allocated shares 365,000 305,887
Committed to be released -- 46,411
Suspense shares -- 34,784
------- -------
Total ESOP shares 365,000 387,082
======= =======
Other Benefit Plan
The Company provides certain postretirement health care benefits for employees,
as well as a Directors' deferred compensation plan. Employees may become
eligible based on the number of years of service and if they reach normal
retirement age while working for the Company. In accordance with Statement of
Financial Accounting Standards No. 106, "Employers Accounting for Postretirement
Benefits Other Than Pensions," the Company has elected to amortize the
accumulated postretirement benefit obligation ("APBO") over 20 years. At
December 31, 1999, 1998, and 1997, the APBO for all of the plans was $957,000,
$867,000, and $973,000, and the postretirement benefit cost for each of the
years ended December 31, 1999, 1998, and 1997 was $123,000, $116,000, and
$106,000. The annual rate of increase in the per capita cost of covered health
care is assumed to be 11.5% for three years and 5.5% thereafter. The other
related disclosures are not considered significant to the consolidated financial
statements.
- --------------------------------------------------------------------------------
(Continued)
76
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
(TABLE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 12 - EMPLOYEE BENEFIT PLANS (Continued)
Other Benefit Plan (Continued)
The Company and most of its outside directors have entered into various deferred
compensation agreements. These agreements provide for guaranteed payments for a
specified period (ranging from 60 to 180 months) after a specified age is
attained (ranging from age 60 to age 81). The liability for each covered
director is being accrued over the vesting period. Expense of $150,000,
$150,000, and $11,000 has been included in compensation and benefits in the
accompanying consolidated statements of income for the years ended December 31,
1999, 1998, and 1997. During 1997, the Company received insurance proceeds of
$187,000 due to the death of a director. The Company is the beneficiary of life
insurance policies on the directors with an aggregate face value of
approximately $2,618,000 at December 31, 1999 and 1998. In addition, the
policies had aggregate cash surrender values of approximately $625,000 and
$551,000 at December 31, 1999 and 1998.
NOTE 13 - PARENT COMPANY ONLY FINANCIAL STATEMENTS
Presented below are the condensed balance sheets, condensed statements of
income, and condensed statements of cash flows for CoVest Bancshares, Inc.
CONDENSED BALANCE SHEETS
December 31, 1999 and 1998
1999 1998
---- ----
ASSETS
Cash in banks $ 282 $ 208
Securities 1,271 853
Investment in Bank 44,044 45,242
Other assets 885 738
-------- --------
$ 46,482 $ 47,041
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 208 $ 90
Stockholders' equity
Common stock 44 44
Additional paid in capital 17,919 18,967
Retained earnings 33,514 30,905
Treasury stock, at cost (4,312) (3,017)
Unearned stock awards (14) (73)
ESOP loan -- (161)
Accumulated other comprehensive income (loss) (877) 286
-------- --------
46,274 46,951
-------- --------
$ 46,482 $ 47,041
======== ========
- --------------------------------------------------------------------------------
(Continued)
77
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
(TABLE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 13 - PARENT COMPANY ONLY FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF INCOME
Years ended December 31, 1999, 1998, and 1997
1999 1998 1997
---- ---- ----
Operating income
Interest on investments $ 9 $ 7 $ 33
Dividends received from subsidiary 3,936 4,000 2,000
Net gains on sale of investments 10 55 1,148
Other 5 31 53
------ ------ ------
3,960 4,093 3,234
Operating expenses 219 223 829
------ ------ ------
INCOME BEFORE EQUITY IN UNDISTRIBUTED EARNINGS
OF SUBSIDIARY 3,741 3,870 2,405
Equity in undistributed earnings of subsidiary 194 1 205
------ ------ ------
NET INCOME $3,935 $3,871 $2,610
====== ====== ======
- --------------------------------------------------------------------------------
(Continued)
78
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
(TABLE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 13 - PARENT COMPANY ONLY FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999, 1998, and 1997
1999 1998 1997
---- ---- ----
OPERATING ACTIVITIES
Net income $ 3,935 $ 3,871 $ 2,610
Adjustments to reconcile net income to
net cash provided by operating activities
Equity (excess) in undistributed
earnings of subsidiary (194) (1) (205)
Net gains on sales of securities (10) (55) (1,148)
Change in
Other assets 678 379 (20)
Other liabilities (505) (347) 1,098
------- ------- -------
Net cash provided by operating activities 3,904 3,847 2,335
INVESTING ACTIVITIES
Purchase of securities (75) (779) (100)
Proceeds from sales of securities 40 167 4,103
------- ------- -------
Net cash provided by (used in)
investing activities (35) (612) 4,003
FINANCING ACTIVITIES
Proceeds from exercise of stock options,
net of treasury shares issued 1,672 1,148 901
Payment received on loan to ESOP 161 350 347
Purchase of treasury stock (4,302) (5,079) (5,302)
Cash dividend paid, net of dividend
reinvestments (1,326) (1,376) (1,245)
------- ------- -------
Net cash used in financing activities (3,795) (4,957) (5,299)
------- ------- -------
Net increase (decrease) in cash and cash equivalents 74 (1,722) 1,039
Cash and cash equivalents at beginning of year 208 1,930 891
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 282 $ 208 $ 1,930
======= ======= =======
- --------------------------------------------------------------------------------
(Continued)
79
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
- --------------------------------------------------------------------------------
NOTE 14 - OTHER COMPREHENSIVE INCOME (LOSS)
Changes in other comprehensive income (loss) components and related taxes are as
follows:
---Years Ended December 31,---
1999 1998 1997
---- ---- ----
Change in unrealized gains (losses)
on securities available-for-sale $(1,909) $(1,035) $2,103
Less reclassification adjustment for gains
(losses) recognized in income (10) 225 1,247
------- ------- ------
Net unrealized gains (losses) (1,899) (1,260) 856
Tax expense (benefit) (736) (487) 331
------- ------- ------
Other comprehensive income (loss) $(1,163) $ (773) $ 525
======= ======= ======
NOTE 15 - COMMON STOCK AND TREASURY STOCK
On December 1, 1997, the Company's Board of Directors declared a three-for-two
split of its common stock, to be effected by means of a 100% stock distribution.
All share and per share amounts have been restated to reflect the stock split.
An analysis of changes in the number of shares of common stock and treasury
stock outstanding follows:
1999 1998 1997
---- ---- ----
Common Stock
Balance at January 1 4,403,803 4,365,761 3,406,616
Distribution of three-for-two stock split -- -- 959,145
Shares issued for stock options -- 38,042 --
---------- ---------- ----------
Balance at December 31 4,403,803 4,403,803 4,365,761
========== ========== ==========
Treasury Stock
Balance at January 1 193,188 -- 514,950
Distribution of three-for-two stock split -- -- (744,059)
Stock options exercised (191,180) (119,978) (158,242)
Treasury stock purchases 297,788 313,166 387,351
---------- ---------- ----------
Balance at December 31 299,796 193,188 --
========== ========== ==========
- --------------------------------------------------------------------------------
(Continued)
80
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
- --------------------------------------------------------------------------------
NOTE 16 - SEGMENT INFORMATION
In February 1998, the Company opened a mortgage center to originate and sell
mortgage loans with servicing released into the secondary market. The mortgage
center operations and the banking operations are considered to be reportable
segments during 1999 and 1998. Loans, investments, and deposits provide the
revenues in the banking operation, and servicing release fees and loan sales
provide the revenues in mortgage banking. All operations are domestic.
The accounting policies used are the same as those described in the summary of
significant accounting policies except that income taxes are not allocated to
the mortgage banking operations. Information reported internally for performance
assessment as of December 31, 1999 and 1998 follows.
Mortgage Consolidated
Banking Banking Total
1999
- ----
Net interest income $ 16,153 $ 183 $ 16,336
Other revenue 2,582 1,455 4,037
Other expense 10,291 1,937 12,228
Noncash items:
Depreciation 998 33 1,031
Provision for loan loss 1,132 -- 1,132
Segment profit (loss), before income taxes 6,314 (332) 5,982
Segment assets 568,190 306 568,496
1998
- ----
Net interest income $ 15,826 $ 378 $ 16,204
Other revenue 3,867 1,712 5,579
Other expense 11,708 1,544 13,252
Noncash items:
Depreciation 977 16 993
Provision for loan loss 1,567 -- 1,567
Segment profit, before income taxes 5,441 530 5,971
Segment assets 543,793 4,904 548,697
- --------------------------------------------------------------------------------
(Continued)
81
COVEST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
- --------------------------------------------------------------------------------
NOTE 17 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
--------------Three Months Ended---------------
1999 March 31 June 30 September 30 December 31
---- -------- ------- ------------ -----------
Interest income $ 9,250 $ 9,343 $ 9,595 $10,373
Interest expense 5,334 5,353 5,433 6,105
------- ------- ------- -------
NET INTEREST INCOME 3,916 3,990 4,162 4,268
Provision for possible loan and lease losses 99 288 454 291
Noninterest income 1,046 1,210 949 832
Noninterest expense 3,673 3,344 3,032 3,210
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 1,190 1,568 1,625 1,599
Income tax provision 404 529 557 557
------- ------- ------- -------
NET INCOME $ 786 $ 1,039 $ 1,068 $ 1,042
======= ======= ======= =======
EARNINGS PER COMMON SHARE
Basic $ .19 $ .25 $ .26 $ .26
Diluted .18 .24 .25 .26
--------------Three Months Ended---------------
1998 March 31 June 30 September 30 December 31
---- -------- ------- ------------ -----------
Interest income $10,447 $10,151 $10,524 $ 9,821
Interest expense 6,403 6,179 6,349 5,808
------- ------- ------- -------
NET INTEREST INCOME 4,044 3,972 4,175 4,013
Provision for possible loan and lease losses 399 769 399 --
Noninterest income 1,186 1,578 1,322 1,493
Noninterest expense 3,292 3,304 3,739 3,910
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 1,539 1,477 1,359 1,596
Income tax provision 530 505 460 605
------- ------- ------- -------
NET INCOME $ 1,009 $ 972 $ 899 $ 991
======= ======= ======= =======
EARNINGS PER COMMON SHARE
Basic $ .24 $ .23 $ .22 $ .24
Diluted .22 .21 .20 .23
- --------------------------------------------------------------------------------
82
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors of the Company is incorporated herein by
reference from the Company's definitive Proxy Statement for the 2000 Annual
Meeting of Stockholders. Information concerning the executive officers of the
Company is discussed in Item 1 of this Report, "Business--Executive Officers of
the Company."
Section 16(a) of the Securities Exchange Act of 1934 requires that the Company's
executive officers and directors and persons who own more than 10% of the
Company Common Stock file reports of ownership and changes in ownership with the
Securities and Exchange Commission and with the exchange on which the Company's
shares of Company Common Stock are traded. Such persons are also required to
furnish the Company with copies of all Section 16(a) forms they file. Based
solely on the Company's review of the copies of such forms furnished to the
Company and, if appropriate, representations made to the Company by any such
reporting person the Company is not aware that any of its directors and
executive officers or 10% stockholders failed to comply with the filing
requirements of Section 16(a) during the period commencing January 1, 1999
through December 31, 1999.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein by
reference from the Company's definitive Proxy Statement for the 2000 Annual
Meeting of Stockholders, except for information contained under the heading
"Compensation Committee Report on Executive Compensation" and "Performance
Graph."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the Company's definitive
Proxy Statement for the 2000 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and transactions is incorporated
herein by reference from the Company's definitive Proxy Statement for the 2000
Annual Meeting of Stockholders.
- --------------------------------------------------------------------------------
83
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
A report on Form 8-K was filed on November 15, 1999 to report under Item 5,
Other Events, that the Company issued a press release pertaining to third
quarter 1999 results.
A report on Form 8-K was filed on November 23, 1999 to report under Item 5,
Other Events, that the Company announced a regular quarterly dividend.
- --------------------------------------------------------------------------------
84
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ James L. Roberts By: /s/ Paul A. Larsen
------------------------------ -------------------------------
James L. Roberts, Paul A. Larsen,
President and Executive Vice President,
Chief Executive Officer Treasurer and Chief Financial Officer
Date: March 3, 2000 Date: March 3, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
By: /s/ Frank A. Svoboda By: /s/ James L. Roberts
-------------------------------- -------------------------------
Frank A. Svoboda, Jr., James L. Roberts, President,
Chairman of the Board Chief Executive Officer and Director
Date: March 3, 2000 Date: March 3, 2000
By: /s/ George T. Drost By: /s/ David M. Miller
-------------------------------- -------------------------------
George T. Drost, Director David M. Miller, Director
Date: March 3, 2000 Date: March 3, 2000
By: /s/ Gerald T. Niedert By: /s/ David B. Speer
-------------------------------- -------------------------------
Gerald T. Niedert, Director David B. Speer, Director
Date: March 3, 2000 Date: March 3, 2000
- --------------------------------------------------------------------------------
85
COVEST BANCSHARES, INC.
Exhibit Index
To
Annual Report of Form 10-K
EXHIBIT DESCRIPTION INCORPORATED HEREIN BY FILED SEQUENTIAL
NO. REFERENCE HEREWITH PAGE NO.
3.1 Certificate of Exhibit 3.1 to the
Incorporation of CoVest Registration Statement on
Bancshares, Inc. Form S-1 filed with the
Commission by CoVest
Bancshares, Inc. on April 1,
1992, as amended (SEC File
No. 33-46909)
3.2 Amendment to Certificate Exhibit 3.2 to the 1997
of Incorporation of CoVest 10-K filed with the Commission
Bancshares, Inc. by CoVest Bancshares, Inc. on
March 24, 1998
(Commission File No. 000-20160)
3.3 Bylaws of CoVest Exhibit 3.2 to the
Bancshares, Inc. Registration Statement of
Form S-1 filed with the Commission
by CoVest Bancshares, Inc. on
April 1, 1992, as amended
(SEC File No. 33-46909)
4.1 Specimen Stock Certificate Exhibit 4.1 to the 1997
of CoVest Bancshares, 10-K filed with the Commission
Inc. by CoVest Bancshares, Inc. on
March 24, 1998
(Commission File No. 000-20160)
10.1 Stock Option and Incentive Exhibit 10.1 to the
Plan Registration Statement of
Form S-1 filed with the Commission
by CoVest Bancshares, Inc. on
April 1, 1992, as amended
(SEC File No. 33-46909)
EXHIBIT DESCRIPTION INCORPORATED HEREIN BY FILED SEQUENTIAL
NO. REFERENCE HEREWITH PAGE NO.
10.2 Form of Change of Exhibit 10.3 to the 1997
Control Agreement for 10-K filed with the Commission
Paul A. Larsen by CoVest Bancshares, Inc. on
Joseph H. Tillotson March 24, 1998
Vernon J. Wiggenhauser (Commission File No. 000-20160)
10.3 Bank Incentive Plan and Exhibit 10.4 to the
Trusts Registration Statement of
Form S-1 filed with the Commission
by CoVest Bancshares, Inc. on
April 1, 1992, as amended
(SEC File No. 33-46909)
10.4 Employee Stock Exhibit 10.5 to the
Ownership Plan Registration Statement of
Form S-1 filed with the Commission by
CoVest Bancshares, Inc. on April 1, 1992,
as amended (SEC File No. 33-46909)
10.5 Profit Sharing/401(k) Plan Exhibit 10.1 and 10.2 to the
and Trust Agreement March 31, 1995 10-Q, filed
with the Commisssion by
CoVest Bancshares, Inc. on
May 11, 1995 (Commission
File No. 0-20160)
10.6 Amendment 1995-1 to Exhibit 10.1 to the June 30,
CoVest Bancshares, Inc. 1995 10-Q, filed with the
1992 Stock Option and Commission by CoVest
Incentive Plan Bancshares, Inc. on August 8,
1995 (Commission File
No. 0-20160)
2
EXHIBIT DESCRIPTION INCORPORATED HEREIN BY FILED SEQUENTIAL
NO. REFERENCE HEREWITH PAGE NO.
10.7 Amendment 1997-1 to Exhibit 10.9 to the 1997
CoVest Bancshares, Inc. 10-K filed with the Commission
1992 Stock Option and by CoVest Bancshares, Inc. on
Incentive Plan March 24, 1998
(Commission File No. 000-20160)
10.8 1996 Stock Option and Exhibit 10.10 to the 1997
Incentive Plan 10-K filed with the Commission
by CoVest Bancshares, Inc. on
March 24, 1998
(Commission File No. 000-20160)
10.9 Amendment 1997-1 to Exhibit 10.11 to the 1997
1996 Stock Option and 10-K filed with the Commission
Incentive Plan by CoVest Bancshares, Inc. on
March 24, 1998
(Commission File No. 000-20160)
10.10 Employment Agreement Exhibit 10.11 to the 1998 10-K filed
between CoVest with the Commission by CoVest
Bancshares, Inc. Bancshares, Inc. on March 22, 1999
and James L. Roberts, (Commission File No. 000-20160)
dated January 20, 1999
10.11 Non-Qualified Stock Exhibit 10.12 to the 1998 10-K filed
Option Agreement between with the Commission by CoVest
CoVest Bancshares, Inc. Bancshares, Inc. on March 22, 1999
and James L. Roberts, (Commission File No. 000-20160)
dated January 20, 1999
10.12 Agreement Regarding Exhibit 10.13 to the 1998 10-K filed
Post Employment with the Commission by CoVest
Restrictive Covenants Bancshares, Inc. on March 22, 1999
between CoVest Bancshares, (Commission File No. 000-20160)
Inc., CoVest Banc,
National Association,
and James L. Roberts,
dated January 20, 1999.
10.13 Employment Agreement X
between CoVest Bancshares,
Inc. and Paul A. Larsen,
dated April 27, 1999
3
EXHIBIT DESCRIPTION INCORPORATED HEREIN BY FILED SEQUENTIAL
NO. REFERENCE HEREWITH PAGE NO.
10.14 Agreement Regarding Post X
Employment Restrictive
Covenants between CoVest
Bancshares, Inc., CoVest
Banc, National Association,
and Paul A. Larsen, dated
April 27, 1999
10.15 Employment Agreement X
between CoVest Bancshares,
Inc. and Joseph H. Tillotson,
dated April 27, 1999
10.16 Agreement Regarding Post X
Employment Restrictive
Covenants between CoVest
Bancshares, Inc., CoVest
Banc, National Association,
and Joseph H. Tillotson,
dated April 27, 1999
10.17 Employment Agreement X
between CoVest Bancshares,
Inc. and J. Stuart Boldrey,
Jr., dated December 31,
1999
10.18 Agreement Regarding Post X
Employment Restrictive
Covenants between CoVest
Bancshares, Inc., CoVest
Banc, National Association,
and J. Stuart Boldrey, Jr.,
dated December 31, 1999
21.1 Subsidiaries of the Exhibit 21.1 to the 1997
Registrant 10-K filed with the Commission
by CoVest Bancshares, Inc. on
March 24, 1998
(Commission File No. 000-20160)
23.1 Consent of Crowe Chizek X
99.1 Proxy Statement and proxy Schedule 14A filed with the
(except such portions Commission on March 21, 2000.
incorporated by reference
into this Form 10-K, such
materials shall not be
deemed to be "filed" with
the Commission)
27.1 Financial Data Schedule
4